SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 COMMISSION FILE NO. 0-21039 STRAYER EDUCATION, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER) Maryland 52-1975978 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification organization) No.) 1100 Wilson Blvd., Suite 2500 Arlington, VA 22209 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (703) 247-2500 INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES /X/ NO / / AS OF OCTOBER 22, 2004, THERE WERE OUTSTANDING 14,669,437 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE OF THE REGISTRANT. 1 STRAYER EDUCATION, INC. INDEX FORM 10-Q PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets at December 31, 2003 and September 30, 2004......................................... 3 Unaudited Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2003 and 2004........... 4 Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2003 and 2004.................................................................... 4 Unaudited Condensed Statement of Stockholders' Equity for the nine month period ended September 30, 2004............................................ 5 Unaudited Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2003 and 2004..................... 6 Notes to Unaudited Condensed Consolidated Financial Statements................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................... 20 Item 4. Controls and Procedures.......................................................... 20 PART II -- OTHER INFORMATION Items 1-6 and Exhibits........................................................................ 21 SIGNATURES...................................................................................... 23 2 STRAYER EDUCATION, INC. UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data) ASSETS December 31, September 30, 2003 2004 --------------- ----------------- Current assets: Cash and cash equivalents ................................................... $ 82,089 $ 85,823 Marketable securities available for sale, at fair value ..................... 25,951 25,835 Income taxes receivable ..................................................... -- 1,259 Tuition receivable, net of allowances for doubtful accounts ................. 35,997 47,315 Student loans receivable, held for sale ..................................... 65 22 Other current assets ........................................................ 1,656 3,671 --------- --------- Total current assets .................................................... 145,758 163,925 Property and equipment, net .................................................... 35,930 39,957 Restricted cash ................................................................ 500 500 Other assets ................................................................... 368 343 --------- --------- Total assets ............................................................ $ 182,556 $ 204,725 ========= ========= LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 5,127 $ 6,402 Accrued expenses ............................................................ 2,329 1,985 Income taxes payable ........................................................ 2,898 -- Dividends payable ........................................................... 1,510 -- Unearned tuition ............................................................ 39,134 51,941 --------- --------- Total current liabilities .............................................. 50,998 60,328 Deferred income taxes .......................................................... 228 959 Long-term liabilities .......................................................... 2,666 4,575 --------- --------- Total liabilities ...................................................... 53,892 65,862 --------- --------- Commitments and contingencies Mandatorily redeemable convertible Series A preferred stock, par value $.01; 6,000,000 shares authorized; 3,899,944 shares issued and outstanding at December 31, 2003 ....................... 95,686 -- Stockholders' equity: Common Stock, par value $.01; 20,000,000 shares authorized; 10,703,395 and 14,669,437 shares issued and outstanding at December 31, 2003 and September 30, 2004, respectively ................ 107 147 Additional paid-in capital .................................................. 59,838 141,035 Retained earnings (accumulated deficit) ..................................... (26,918) (2,218) Accumulated other comprehensive income (loss) ............................... (49) (101) --------- --------- Total stockholders' equity ............................................ 32,978 138,863 --------- --------- Total liabilities and stockholders' equity ............................ $ 182,556 $204,725 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 3 STRAYER EDUCATION, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) For the three months For the nine months ended September 30, ended September 30, --------------------------- --------------------------- 2003 2004 2003 2004 ------------ ----------- ------------ ------------ Revenues $ 29,993 $ 38,009 $ 103,652 $ 130,926 Costs and expenses: Instruction and educational support..................... 12,236 14,889 38,324 46,613 Selling and promotion................................... 7,104 9,159 16,940 21,564 General and administrative.............................. 5,085 6,124 14,687 18,041 Gain on sale of asset........................................ 1,772 -- 1,772 -- ------------ ----------- ------------ ------------ Income from operations........................... 7,340 7,837 35,473 44,708 Investment and other income................................. 688 376 1,850 1,058 ------------ ----------- ------------ ------------ Income before income taxes....................... 8,028 8,213 37,323 45,766 Provision for income taxes................................... 3,174 3,123 14,753 17,808 ------------ ----------- ------------ ------------ Net income........................................ 4,854 5,090 22,570 27,958 Preferred stock dividends and accretion...................... 1,287 -- 3,843 1,389 ------------ ----------- ------------ ------------ Net income available to common stockholders...................................... $ 3,567 $ 5,090 $ 18,727 $26,569 ============ =========== ============ ============ Basic net income per share................................... $ 0.33 $ 0.35 $ 1.75 $ 1.99 ============ =========== ============ ============ Diluted net income per share................................. $ 0.32 $ 0.34 $ 1.53 $ 1.85 ============ =========== ============ ============ STRAYER EDUCATION, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) For the three months For the nine months ended September 30, ended September 30, ------------------------------- ------------------------------- 2003 2004 2003 2004 ------------- ------------- --------------- -------------- Net income................................................. $4,854 $ 5,090 $ 22,570 $ 27,958 Other comprehensive income: Unrealized gain (loss) on investments, net of taxes......................................... (222) 49 (54) (52) ------------- ------------- ------------- -------------- Comprehensive income....................................... $4,632 $ 5,139 $ 22,516 $ 27,906 ============= ============= ============= ============== The accompanying notes are an integral part of these consolidated financial statements. 4 STRAYER EDUCATION, INC. UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Amounts in thousands, except share data) Common Stock Retained Accumulated ------------ Additional Earnings Other Paid-in (Accumulated Comprehensive Shares Amount Capital Deficit) Income Total ------ ------ ------- -------- ------ ----- Balance at 12/31/03.............................. 10,703,395 $ 107 59,838 $ (26,918) $ (49) $32,978 Exercise of stock options........................ 335,416 3 11,945 -- -- 11,948 Tax benefit from exercise of stock options..................................... -- -- 9,855 -- -- 9,855 Issuance of common stock for redemption of preferred stock............... 3,977,120 40 96,166 -- -- 96,206 Repurchase of common stock....................... (346,494) (3) (36,769) -- -- (36,772) Preferred stock dividends and accretion.......... -- -- -- (1,389) -- (1,389) Common stock dividends........................... -- -- -- (1,869) -- (1,869) Change in net unrealized gains (losses) on marketable securities, net of income tax -- -- -- -- (52) (52) Net income....................................... -- -- -- 27,958 -- 27,958 ---------- ------ --------- ----------- ------- -------- Balance at 9/30/04............................... 14,669,437 $ 147 $ 141,035 $ (2,218) $ (101) $ 138,863 ========== ====== ========= ============ ======= ========= The accompanying notes are an integral part of these consolidated financial statements. 5 STRAYER EDUCATION, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Amounts in thousands) For the nine months ended September 30, --------------------------------------- 2003 2004 -------- -------- Cash flows from operating activities: Net income.................................................................. $22,570 $27,958 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of deferred rent.......................................... 198 442 Gain on sale of marketable securities.................................. (135) -- Gain on sale of property and equipment................................. (1,772) -- Depreciation and amortization.......................................... 3,235 3,971 Provision for student loan losses and indemnification.................. 141 (182) Deferred income taxes.................................................. 1 (69) Changes in assets and liabilities: Tuition receivable, net................................................ (11,013) (11,318) Other current assets................................................... (444) (762) Restricted cash........................................................ (500) -- Other assets........................................................... (57) 25 Accounts payable....................................................... 858 1,275 Accrued expenses....................................................... 401 (344) Income taxes payable................................................... (2,638) 6,271 Unearned tuition....................................................... 13,086 12,807 Student loans originated.................................................... (6,460) (1,088) Collections on student loans receivable and held for sale................... 6,100 1,235 ------- ------- Net cash provided by operating activities.......................... 23,571 40,221 ------- ------- Cash flows from investing activities: Proceeds from sale of property and equipment............................... 5,150 -- Proceeds from sale of marketable equipment................................. 26,135 -- Purchases of property and equipment........................................ (4,349) (7,998) Purchases of marketable securities......................................... (34,000) -- ------- ------- Net cash used in investing activities.............................. (7,064) (7,998) ------- ------- Cash flows from financing activities: Deferred lease incentives.................................................. 11 582 Common stock dividends paid................................................ (2,080) (2,564) Preferred stock dividends paid............................................. (2,445) (1,684) Repurchase of common stock ................................................ -- (36,772) Proceeds from exercise of stock options.................................... 2,807 11,949 ------- ------- Net cash used in financing activities.............................. (1,707) (28,489) ------- ------- Net increase in cash and cash equivalents.......................... 14,800 3,734 Cash and cash equivalents - beginning of period............................... 49,135 82,089 ------- ------- Cash and cash equivalents - end of period..................................... $63,935 $85,823 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 6 STRAYER EDUCATION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Information as of September 30, 2003 and 2004 and for the three-month and nine-month periods ended September 30, 2003 and 2004 is unaudited. 1. BASIS OF PRESENTATION The financial statements are presented on a consolidated basis. The accompanying financial statements include the accounts of Strayer Education, Inc. (the Company), Strayer University, Inc. (the University) and Education Loan Processing, Inc. (ELP), collectively referred to herein as the "Company" or "Companies." The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full fiscal year. All information as of September 30, 2004, and for the three and nine months ended September 30, 2003 and 2004 is unaudited but, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of the Company. The Company's educational programs are offered on a quarterly basis. Approximately 96% of the Company's revenues during the nine months ended September 30, 2004 consisted of tuition revenue. Tuition revenue is deferred at the time of registration and is recognized in the quarter of instruction. Tuition revenue is shown net of any refunds, withdrawals or corporate discounts. Beginning in the first quarter 2004, the Company began recording employee tuition discounts and scholarships & awards as a reduction to revenue as well. In the prior year, these items (totaling $541,000 and $1,604,000 for the three and nine months ended September 30, 2003, respectively) were treated as an operating expense. Revenues also include application fees, commencement fees, placement test fees, withdrawal fees, loan service and origination fees, and other income which are recognized when incurred. Beginning in the first quarter 2004, the Company also began recording textbook-related income as revenue. In the prior year, this income ($145,000 and $383,000 for the three and nine months ended September 30, 2003, respectively) was included in Investment and other income. This change in classification, as well as the one referenced above, had no impact on net income and is immaterial in amount. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 2. NATURE OF OPERATIONS The Company, a Maryland corporation, conducts its operations through its subsidiaries. The University is an accredited institution of higher education that provides undergraduate and graduate degrees in various fields of study through its thirty campuses in Pennsylvania, Maryland, Washington, D.C., Virginia, North Carolina, South Carolina, Tennessee, and 7 Georgia and worldwide via the Internet through Strayer University Online. ELP originates student loans for the University's students, which loans are held for sale. 3. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows: For the three months For the nine months ended September 30, ended September 30, ---------------------------- -------------------------- (in thousands) (in thousands) 2003 2004 2003 2004 ---------- ---------- -------------------------- Weighted average shares outstanding used to compute basic net income per share... 10,727 14,743 10,682 13,340 Incremental shares issuable upon the assumed conversion of preferred stock........ 3,864 -- 3,828 1,398 Incremental shares issuable upon the assumed exercise of stock options............ 378 278 286 354 ---------- ---------- ---------- ---------- Shares used to compute diluted net income per share.................................... 14,969 15,021 14,796 15,092 ========== ========== ========== ========== For additional information regarding total potential share issuance, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Set forth below is a reconciliation of net income used to compute net income per share: For the three months For the nine months ended September 30, ended September 30, ----------------------------- --------------------------- (in thousands) (in thousands) 2003 2004 2003 2004 ------------- ----------- ------------ ----------- Net income available to common stockholders used $ 3,567 $ 5,090 $ 18,727 $ 26,569 to compute basic earnings per share............. Plus: Impact of assumed preferred stock conversion: Preferred stock dividends and accretion...... 1,287 -- 3,843 1,389 ------------- ----------- ------------ ----------- Net income used to compute diluted net income per share...................................... $ 4,854 $ 5,090 $ 22,570 $ 27,958 ============= =========== ============ =========== 4. CREDIT FACILITIES The Company maintains two credit facilities from two banks in the amount of $10.0 million each. Interest on any borrowings under the facilities will accrue at an annual rate of 0.75% above the London Interbank Offered Rate. There is no outstanding balance and no fees payable on either facility as of September 30, 2004. 8 5. STOCKHOLDERS' EQUITY Secondary Offering In the first quarter of 2004, the Company completed its previously announced secondary offering of common stock. The Company received none of the proceeds from the secondary offering except for proceeds related to the exercise of options by management to fulfill the over-allotment obligation. The 3,450,000 shares sold in the offering were issued following the conversion of convertible preferred stock (3,102,000 shares) and the partial exercise of an option on existing shares of common stock (233,000 shares) held by New Mountain Partners, L.P., New Mountain Strayer Trust and MidOcean Capital Investors, L.P., as well as the exercise of options (115,000 shares) held by certain of the Company's management. Common Stock A total of 20,000,000 shares of common stock, par value $0.01, have been authorized. As of December 31, 2003 and September 30, 2004, the Company had 10,703,395 and 14,669,437 shares of common stock issued and outstanding, respectively. Commencing in the third quarter of 2004, the Company increased the annual common stock cash dividend to $0.50 per share or $0.125 per share quarterly. However, with the rescheduling this year of the third quarter dividend payment from October to December (in connection with a general change in timing of such dividend to occur in March, June, September and December of each year), the $0.50 per share annual dividend is being prorated over a five month period instead of three, resulting in a dividend payment of $0.21 per share instead of a quarterly payment of $0.125 per share. Series A Convertible Redeemable Preferred Stock A total of 6,000,000 shares of Series A Convertible Redeemable Preferred Stock, par value $0.01, have been authorized. As of December 31, 2003, 3,899,944 shares of Series A Convertible Redeemable Preferred Stock were issued and outstanding. During the nine months ended September 30, 2004, the Company recorded 77,176 shares as accrued in-kind dividends. In March 2004, 3,102,000 shares of Series A Convertible Redeemable Preferred Stock were converted into common stock on a 1 for 1 basis and, pursuant to the registration rights agreement with the Company, were sold in a registered secondary offering by the holders thereof. In June 2004, the Company converted all of its remaining outstanding Series A Preferred Shares (including all shares accrued thereon through June 28, 2004) on a 1 for 1 basis into common shares. The Series A Preferred Stockholders received an aggregate of 875,120 common shares of the Company as a result of the conversion. The following table reflects all Preferred Stock activity from December 31, 2003 to September 30, 2004: 9 Series A Convertible Redeemable Preferred Stock -------------------- (in thousands) Balance, December 31, 2003..................................... $95,686 Dividends - accrued in-kind shares............................. 1,058 Shares converted into common shares............................ (96,206) Accretion of carrying value.................................... (538) ------- Balance, September 30, 2004.................................... $ -- ======= For a more detailed description of the terms of the Series A Convertible Redeemable Preferred Stock, see Note 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Stock Options In July 1996, the Company's stockholders approved 1,500,000 shares of common stock for grants under the Company's 1996 Stock Option Plan. This Plan was amended by the stockholders at the May 2001 Annual Stockholder's Meeting to increase the shares authorized for issuance thereunder by 1,000,000 (as amended, the "Plan") to 2,500,000. The Plan provides for the grant of options intended to qualify as incentive stock options, and also provides for the grant of non-qualifying options to employees and directors of the Company. Options may be granted to eligible employees or directors of the Company at the discretion of the Board of Directors, at option prices based at or above the fair market value of the shares at the date of grant. Vesting provisions are at the discretion of the Board of Directors. The maximum term of the options was five years before the amendment and ten years after the amendment. The table below sets forth the stock option activity for the nine months ended September 30, 2004: Weighted-Average Number of shares Exercise Price ---------------- -------------- Balance, December 31, 2003........................ 1,131,667 $ 41.05 Grants............................................ 85,000 113.54 Exercises......................................... (335,416) 35.62 Forfeitures....................................... (16,667) 53.61 --------- ------- Balance, September 30, 2004....................... 864,584 $ 50.03 ========= ======= Of the 864,584 total stock options that have been issued and remain outstanding, 536,248 are exercisable as of September 30, 2004. A total of 266,072 shares remain authorized but unissued under the Plan. As of September 30, 2004, the weighted average contractual life of outstanding stock options is 4.0 years. The Company uses the intrinsic-value-based method of accounting for its stock options plan. Under this method, compensation expense is the excess, if any, of the quoted 10 market price of the stock at grant date over the amount an employee must pay to acquire the stock. Had compensation expense been determined based on the fair value of the options at grant dates computed by the Black-Scholes methodology, the pro forma amounts would be as follows: For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 2003 2004 2003 2004 ---- ---- ---- ---- In thousands (except per share data) Net income........................................ $ 4,854 $ 5,090 $ 22,570 $ 27,958 Stock-based compensation expense, net of tax...... 849 472 2,983 1,746 -------- -------- -------- -------- Pro forma net income.............................. $ 4,005 $ 4,618 $ 19,587 $ 26,212 ======== ======== ======== ======== Net income available to common stockholders....... $ 3,567 $ 5,090 $ 18,727 $ 26,569 Stock-based compensation expense, net of tax...... 849 472 2,983 1,746 -------- -------- -------- -------- Pro forma net income available to common stockholders................................... $ 2,718 $ 4,618 $ 15,744 $ 24,823 ======== ======== ======== ======== Net income per share: As reported: Basic................................... $ 0.33 $ 0.35 $ 1.75 $ 1.99 Diluted................................. $ 0.32 $ 0.34 $ 1.53 $ 1.85 Pro forma: Basic................................... $ 0.25 $ 0.31 $ 1.47 $ 1.86 Diluted................................. $ 0.27 $ 0.31 $ 1.32 $ 1.74 The table below sets forth the assumptions used to estimate fair value as of the date of grant using the Black-Scholes option pricing model: 2003 2004 ---- ---- Dividend yield ...................................................... 0.5% 0.24% Risk-free interest rates ............................................ 3.0% 3.8% Volatility .......................................................... 40% 34% Expected option term (years) ........................................ 5.2 6.1 Weighted average fair value of options granted during the year ...... $21.88 $45.23 6. INVESTMENTS IN MARKETABLE SECURITIES The Company's investments in marketable securities consist solely of publicly traded securities and are recorded at fair value based on the quoted market prices. The investments are considered "available-for-sale" as they are not held for trading and will not be held to maturity, in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company records the net unrealized gains and losses for changes in fair value as a component of accumulated other comprehensive income in stockholders' equity (deficit). Realized gains and losses from the sale of marketable securities are based on the specific identification method. 11 7. RECENT ACCOUNTING PRONOUNCEMENTS In December 2003, the FASB issued FASB Interpretation No. 46 - An Interpretation of ARB 51 (revised December 2003) ("FAS 46R"), Consolidation of Variable Interest Entities. FIN 46R addresses consolidation by business enterprises of variable interest entities. FIN 46R is effective for periods ending after March 15, 2004 and did not have a material impact on the Company's financial statements. 8. LEASE AGREEMENTS During 2004, the Company executed leases for new campuses as follows: Lease Commencement Average Annual Campus Square Feet Date Term Payment ------------------------------- ---------------- --------------------- ---------------- ----------------- Chamblee County, GA 17,000 05/15/04 128 months $339,000 Cobb County, GA 15,700 06/15/04 96 months $434,000 King of Prussia, PA 12,600 08/01/04 87 months $257,000 Tampa, FL (Tampa East) 13,900 01/01/05 87 months $231,000 Tampa, FL (Tampa West) 14,000 02/01/05 84 months $365,000 Other Properties ------------------------------- Newington, VA 14,900 01/01/05 72 months $254,000 9. LONG-TERM LIABILITIES Lease Incentives In conjunction with the opening of new campuses, the Company was reimbursed by the lessors for improvements made to the leased properties. In accordance with Financial Accounting Standards Board Technical Bulletin No. 88-1, these reimbursements were capitalized as leasehold improvements and a long-term liability was established. The Company recorded $828,000 and $1,546,000 in lease incentives for several of its campuses for the three and nine months ended September 30, 2004. The leasehold improvements and the long-term liability will be amortized on a straight-line basis over the corresponding lease terms, which range from five to ten years. As of December 31, 2003 and September 30, 2004, the Company had deferred lease incentives of $1,513,000 and $2,744,000, respectively. Lease Obligations In accordance with the FASB Technical Bulletin No. 85-3, "Accounting for Operating Leases with Schedule Rent Increases", the Company records rent expense on a straight-line basis over the initial term of a lease. The difference between the rent payment and the straight-line rent expense is recorded as a long-term liability. As of December 31, 2003 and September 30, 2004, the Company had deferred lease obligations of $820,000 and $1,576,000, respectively. 12 Indemnification on the Sale of Student Loans In 2003, the Company sold its student loan portfolio to a national student loan marketing organization. Under the terms of the Indemnification Agreement, the Company has provided an indemnification to the purchaser of the student loans for claims that may arise due to loan documentation, regulatory compliance, and loan servicing for the student loans that were sold. As of December 31, 2003 and September 30, 2004, the Company had recorded a liability of $333,000 and $255,000, respectively, for the indemnification. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS Certain of the statements included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as elsewhere in this report on Form 10-Q are forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are based on the Company's current expectations and are subject to a number of assumptions, risks and uncertainties. In accordance with the safe harbor provisions of the Reform Act, the Company has identified important factors that could cause the actual results to differ materially from those expressed in or implied by such statements. The assumptions, uncertainties and risks include the pace of growth of student enrollment, our continued compliance with Title IV of the Higher Education Act, and the regulations thereunder, as well as state and regional regulatory requirements, competitive factors, risks associated with the opening of new campuses, risks associated with the offering of new educational programs and adapting to other changes, risks associated with the acquisition of existing educational institutions, risks relating to the timing of regulatory approvals, our ability to continue to implement our growth strategy, and general economic and market conditions. Further information about these and other relevant risks and uncertainties may be found in the Company's annual report on Form 10-K and its other filings with the Securities and Exchange Commission. The Company undertakes no obligation to update or revise forward looking statements. ADDITIONAL INFORMATION We maintain a website at http://www.strayereducation.com. The information on our website is not incorporated by reference in this Quarterly Report on Form 10-Q and our web address is included as an inactive textual reference only. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. 13 THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003 Enrollment at Strayer University for the 2004 summer term increased 22% to 17,028 students compared to 13,928 for the same term in 2003. Across the Strayer University campus network, both new student enrollments and continuing student enrollments increased 22%. Out-of-area online students increased 63%, while students taking 100% of their classes online (including campus-based students) increased 47%. STUDENT ENROLLMENT Summer Summer % 2003 2004 Change ------------- ------------ ------------ Campus Based Students: New Campuses (13 in operation 3 or less years) Classroom 681 1,412 107% Online 723 1,778 146% ------------- ------------ Total New Campus Students 1,404 3,190 127% ------------- ------------ Mature Campuses (16 in operation 4 or more years) Classroom 7,165 6,652 -7% Online 4,248 5,370 26% ------------- ------------ Total Mature Campus Students 11,413 12,022 5% ------------- ------------ Total Campus Based Students 12,817 15,212 19% Online Based Students (out-of-area) 1,111 1,816 63% ------------- ------------ Total Students 13,928 17,028 22% ============= ============ Total Students Taking 100% of Courses Online 6,082 8,964 47% Total Students Taking at Least 1 Course Online 7,503 10,775 44% Revenues. Revenues increased 27% from $30.0 million in the third quarter of 2003 to $38.0 million in the third quarter of 2004, principally due to a 22% increase in student enrollments and a 5% tuition increase effective for 2004. Instruction and educational support expenses. Instruction and educational support expenses increased $2.7 million, or 22%, from $12.2 million in the third quarter of 2003 to $14.9 million in the third quarter of 2004. This increase was principally due to the direct costs necessary to support the increase in student enrollments including faculty compensation, related academic staff salaries, campus facility costs and financial aid processing costs. These costs as a percentage of revenues decreased to 39.2% in the third 14 quarter of 2004 from 40.8% in the third quarter of 2003 as strong revenue growth more than offset the cost increases described above. Selling and promotion expenses. Selling and promotion expenses increased $2.1 million, or 29%, from $7.1 million in the third quarter of 2003 to $9.2 million in the third quarter of 2004. This increase was principally due to marketing expenses associated with opening one new campus for 2004 fall term in Philadelphia, Pennsylvania, as well as ongoing marketing expenses for the four other new campuses (one in Greenville, South Carolina, one in Memphis, Tennessee, and two in Atlanta, Georgia) opened earlier in 2004. The addition of admissions staff at these new campuses and at Strayer University Online also contributed to the increase. These expenses as a percentage of revenues increased to 24.1% in the third quarter of 2004 from 23.7% in the third quarter of 2003. General and administrative expenses. General and administrative expenses increased $1.0 million, or 20%, from $5.1 million in the third quarter of 2003 to $6.1 million in the third quarter of 2004. This increase was principally due to increased employee compensation and related expenses as well as the addition of five new campuses since the third quarter of 2003. General and administrative expenses as a percentage of revenue decreased to 16.1% in the third quarter of 2004 from 17.0% in the third quarter of 2003 as strong revenue growth more than offset the cost increase described above. Gain on sale of asset. In the third quarter of 2003, the Company sold its Washington, D.C. campus building for $5.2 million and signed a lease for space in a nearby building. This transaction resulted in a gain of $1.8 million before tax. Income from operations. Operating income increased $0.5 million, or 7%, from $7.3 million in the third quarter of 2003 to $7.8 million in the third quarter of 2004. The increase was due to the aforementioned factors. Excluding the gain from the sale of the Washington, D.C. campus building in the third quarter of 2003, operating income for the third quarter of 2004 increased $2.3 million, or 41%. Management believes that excluding this asset sale provides a useful indicator of the Company's underlying operating performance. Investment and other income. Investment and other income decreased $0.3 million, or 45%, from $0.7 million in the third quarter of 2003 to $0.4 million in the third quarter of 2004. The decrease was principally due to a shift of underlying investments from a short-term corporate bond fund and money market funds to a short-term tax-exempt bond fund and tax-exempt money market funds which had lower yields, partly offset by a higher average cash balance. Net income. Net income was $5.1 million in the third quarter of 2004 compared to $4.9 million for the same period in 2003, an increase of $0.2 million, or 5%, because of factors discussed above. The impact of the gain from the sale of the Washington, D.C. campus building on net income was $1.1 million in the third quarter of 2003. Excluding the gain from the third quarter of 2003, net income for the third quarter of 2004 increased $1.3 million or 34%. Management believes that excluding this asset sale provides a useful indicator of the Company's underlying operating performance. 15 NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 Revenues. Revenue increased 26% from $103.7 million in the nine months ended September 30, 2003 to $130.9 million in the nine months ended September 30, 2004, principally due to an average 22% increase in student enrollments and a 5% tuition increase effective for 2004. Instruction and educational support expenses. Instruction and educational support expenses increased $8.3 million, or 22%, from $38.3 million in the nine months ended September 30, 2003 to $46.6 million in the nine months ended September 30, 2004. This increase was principally due to the direct costs necessary to support the increase in student enrollments including faculty compensation, related academic staff salaries, campus facility costs and financial aid processing costs. These costs as a percentage of revenues decreased to 35.6% in the nine months ended September 30, 2004 from 37.0% in the nine months ended September 30, 2003 as strong revenue growth more than offset the cost increases described above. Selling and promotion expenses. Selling and promotion expenses increased $4.6 million, or 27%, from $17.0 million in the nine months ended September 30, 2003 to $21.6 million in the nine months ended September 30, 2004. This increase was principally due to marketing expenses associated with opening five new campuses, one in Tennessee and one in South Carolina for 2004 spring term, two in Georgia for 2004 summer term, and one in Pennsylvania for 2004 fall term. The addition of admissions representatives at these new campuses and at Strayer University Online also contributed to the increase. These expenses as a percentage of revenues increased slightly to 16.5% in the nine months ended September 30, 2004 from 16.3% in the nine months ended September 30, 2003. General and administrative expenses. General and administrative expenses increased $3.3 million, or 23%, from $14.7 million in the nine months ended September 30, 2003 to $18.0 million in the nine months ended September 30, 2004. This increase was principally due to increased employee compensation and related expenses as well as the addition of five new campuses since September 30, 2003. General and administrative expenses as a percentage of revenues decreased slightly to 13.8% for the nine months ended September 30, 2004 from 14.2% for the nine months ended September 30, 2003. Gain on sale of asset. In the third quarter of 2003, the Company sold its Washington, D.C. campus building for $5.2 million and signed a lease for space in a nearby building. This transaction resulted in a gain of $1.8 million before tax. Income from operations. Operating income increased $9.2 million, or 26%, from $35.5 million in the nine months ended September 30, 2003 to $44.7 million in the nine months ended September 30, 2004. The increase was due to the aforementioned factors. Excluding the gain from the sale of the Washington, D.C. campus building from the nine months ended September 30, 2003, operating income for the nine months ended September 30, 2004 increased $11.0 million, or 33%. Management believes that excluding this asset sale provides a useful indicator of the Company's underlying operating performance. Investment and other income. Investment and other income decreased $0.8 million, or 43%, from $1.9 million in the nine months ended September 30, 2003 to $1.1 million in the nine months ended September 30, 2004. The decrease was principally due to a shift of 16 underlying investments from a short-term corporate bond fund and money market funds to a short-term tax-exempt bond fund and tax-exempt money market funds which had lower yields, partly offset by a higher average cash balance. Net income. Net income was $28.0 million in the nine months ended September 30, 2004 compared to $22.6 million for the same period in 2003, an increase of $5.4 million, or 24%, because of factors discussed above. The impact of the gain from the sale of the Washington, D.C. campus building on net income was $1.1 million in the third quarter of 2003. Excluding the gain on sale from the nine months ended September 30, 2003, net income for the nine months ended September 30, 2004 increased $6.5 million or 30%. Management believes that excluding this asset sale provides a useful indicator of the Company's underlying operating performance. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, the Company had cash, cash equivalents and marketable securities available for sale of $111.7 million compared to $108.0 million at December 31, 2003 and $90.0 million at September 30, 2003. Beginning in the third quarter of 2002, the Company began investing in a diversified no load, short-term, investment grade corporate bond fund in an effort to generate a somewhat higher yield on its short-term, liquid assets than its holdings in bank overnight deposits and money market funds, but taking only limited credit and interest rate risk. In the third quarter of 2003, this $26.1 million investment was liquidated, generating a gain from sale of marketable securities of $0.1 million before tax. Most of the proceeds were re-invested in a diversified, shorter term, investment grade tax-exempt bond fund to further reduce the Company's interest rate risk and to benefit from the tax efficiency of the fund's underlying securities. As of September 30, 2004, the Company had invested a total of $25.8 million in this fund. At September 30, 2004, the 470 issues in this fund had an average credit rating of Aa1, an average maturity of 1.1 years and an average duration of 1.0 years, as well as an average yield to maturity of 1.5%. For the nine months ended September 30, 2004, the Company generated $40.2 million in net cash from operating activities compared to $23.6 million for the same period in 2003. The increase is largely attributable to the increase in net income as well as lower income taxes payable resulting from tax deductions for stock option exercises. Capital expenditures were $8.0 million for the nine months ended September 30, 2004 compared to $4.3 million for the same period in 2003. Capital expenditures for the year ended December 31, 2004 are expected to be in the range of $9.0 to $12.0 million. In the nine months ended September 30, 2004, the Company also paid $4.2 million in dividends, $1.5 million to its preferred stockholders and $2.7 million to its common stockholders. During this period, the Company repurchased 346,494 shares of common stock at an average price of $106.13 per share or an aggregate of $36.8 million, utilizing its remaining share repurchase authorization. In October 2004, the Company's Board of Directors authorized an additional $25 million for the repurchase of common stock under the existing share repurchase program. For the third quarter 2004, bad debt expense as a percentage of revenue was 2.5% compared to 1.7% for the same period in 2003. Days sales outstanding, adjusted to exclude tuition 17 receivable related to future quarters, was nine days at the end of the third quarter 2004, compared to seven days for the same period in 2003. Currently, the Company invests its cash in bank overnight deposits, money market funds and a short-term, tax-exempt bond fund. In addition, the Company has available two $10 million credit facilities from two banks, under which no amounts were outstanding as of September 30, 2004. The Company believes that existing cash, cash equivalents, and marketable securities, cash generated from operating activities, and if necessary, cash borrowed under the credit facilities, will be sufficient to meet the Company's requirements for at least the next 12 months. CAMPUSES The Company opened its third campus in the Philadelphia, Pennsylvania area for the 2004 fall term. This new Pennsylvania campus, together with two new campuses opened in Atlanta in the summer term and one campus opened in each of Memphis, Tennessee and Greenville, South Carolina, completed the Company's goal of five new campuses in 2004. Strayer University now has 30 campuses. The Company has obtained approval from the State of Florida to open two new campuses in the Tampa area in 2005. COMMON STOCK CASH DIVIDEND The Company announced in August 2004 that, commencing with the third quarter dividend, it is increasing its annual common stock dividend to $0.50 per share from $0.26 per share. This increase in annual dividend will result in a quarterly dividend payment of $0.125 per share. The Company also reported that it is changing the timing of its dividend announcements and subsequent payment dates to correspond with its quarterly earnings releases. As a result, the 2004 third quarter dividend, which was declared on October 26, 2004, will now be paid on December 10 instead of in October. The Company intends to make subsequent dividend payments on a quarterly basis on March 10, June 10, September 10, and December 10 of each year. The dividend record date will be announced in the quarterly earnings release and will precede the dividend payment date by approximately two weeks. With the rescheduling this year of the third quarter dividend payment from October to December, the $0.50 annual dividend will be prorated over a five month period instead of three, resulting in a dividend payment of $0.21 per share on December 10, 2004 to shareholders of record as of November 26, 2004. 18 TOTAL POTENTIAL SHARE ISSUANCE The Company's total current and potential common shares outstanding are as follows (in thousands): Current ------- Common shares issued and outstanding at 9/30/04 ..................... 14,669 Issued stock options using Treasury Stock Method .................... 278 ----------- Total current ................................................. 14,947 ----------- Potential --------- Total issued stock options, less options accounted for using the Treasury Stock Method above ................................. 587 Authorized but unissued options...................................... 266 ----------- Total potential ............................................... 853 ----------- Total current and potential common shares ..................... 15,800 =========== 19 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the impact of interest rate changes and may be subject to changes in the market values of its future investments. The Company invests its excess cash in bank overnight deposits, money market funds and a short-term tax-exempt bond fund. The Company has not used derivative financial instruments in its investment portfolio. Earnings from investments in bank overnight deposits, money market mutual funds, and short-term tax-exempt bond funds may be adversely affected in the future should interest rates decline. The Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. As of September 30, 2004, a 10% increase or decline in interest rates would not have a material impact on the Company's future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities. ITEM 4: CONTROLS AND PROCEDURES a) The Registrant's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Registrant's disclosure controls and procedures as of September 30, 2004. Based upon such review, the Chief Executive Officer and Chief Financial Officer have concluded that the Registrant has in place, as of September 30, 2004, effective controls and procedures designed to ensure that information required to be disclosed by the Registrant (including consolidated subsidiaries) in the reports it files or submits under the Securities Exchange Act of 1934, as amended, and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to the Registrant's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. During the quarter, the Company used $15.6 million to repurchase shares of common stock under its repurchase program announced in November 2003. The original amount authorized for this program was $15 million which was increased to $40 million in May 2004 as was publicly announced. On October 26, 2004, the Company's Board of Directors amended the Company's share repurchase program to authorize the repurchase of an additional $25 million in value of the Company's common stock. A summary of the Company's share repurchases during the quarter is set forth below: Shares Average Price Authorization Repurchased Per Share Remaining ($ mil) ----------------- ------------------ ------------------- Beginning Balance (at 6/30/04) $15.6 August 165,926 $94.06 (15.6) ----------------- ------------------ ------------------- Total (at 9/30/04) 165,926 $94.06 -- ================= ================== =================== Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matter to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits. Exhibit 31.01 ------------- Certification of Chief Executive Officer pursuant to Rule 13a -14(a) of the Securities Exchange Act. Exhibit 31.02 ------------- Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act. 21 Exhibit 32.01 ------------- Certification pursuant to Rule 13b - 14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. STRAYER EDUCATION, INC. By: /s/ Mark C. Brown -------------------------------------- Mark C. Brown Senior Vice President and Chief Financial Officer Date: October 29, 2004 23 EXHIBIT INDEX Exhibit Description - ------- ----------- 31.01 Certification of Chief Executive Officer pursuant to Rule 13a -14(a) of the Securities Exchange Act. 31.02 Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act. 32.01 Certification pursuant to Rule 13b - 14(b) of the Securities Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 24
Strategic Education (STRA)
Filed: 29 Oct 04, 12:00am