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 PERIOD ENDED SEPTEMBER 30, 2001
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1025 15th Street, N.W
Washington, DC 20005 20005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 408-2400
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 / / THE REGISTRANT BECAME SUBJECT
TO SUCH FILING REQUIREMENTS ON JULY 25, 1996.
AS OF SEPTEMBER 30, 2001, THERE WERE OUTSTANDING 8,352,412 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE OF THE REGISTRANT.
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STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
PART 1-- FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at
December 31, 2000 and September 30, 2001 3
Unaudited Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30, 2000 and 2001 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three and nine month periods ended September 30, 2000 and 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 2000 and 2001 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 12
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
December 31, September 30,
2000 2001
---------------- ------------------
Current Assets: (Unaudited)
Cash and cash equivalents $ 25,190 $ 54,413
Marketable securities available for sale, at fair value 5,918 --
Short-term investments - restricted 1,008 1,040
Tuition receivable, net of allowances for doubtful accounts 15,264 21,327
Other current assets 757 1,305
---------- -----------
Total current assets 48,137 78,085
Student loans receivable, net of allowances for losses 7,288 8,212
Property and equipment, net 19,469 22,599
Marketable securities available for sale, at fair value 43,982 --
Other assets 263 354
---------- -----------
Total assets $ 119,139 $ 109,250
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 769 $ 868
Accrued expenses 1,325 2,511
Dividends payable 995 1,856
Unearned tuition 17,983 27,581
Income taxes payable 323 1,535
---------- -----------
Total current liabilities 21,395 34,351
---------- -----------
Mandatorily redeemable Series A preferred stock - Par value $.01;
8,000,000 shares authorized; 5,794,749 shares outstanding at
September 30, 2001 -- 147,653
Stockholders' equity (deficit):
Common Stock - Par value $.01; 20,000,000 shares authorized;
15,303,166 and 8,352,412 shares issued and outstanding
at December 31, 2000 and September 30, 2001, respectively 153 83
Additional paid-in capital 33,119 --
Retained earnings (accumulated deficit) 64,069 (72,837)
Accumulated other comprehensive income 403 --
---------- -----------
Total stockholders' equity (deficit) 97,744 (72,754)
---------- -----------
Total liabilities and stockholders' equity (deficit) $ 119,139 $ 109,250
========== ===========
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,
--------------------- ----------------------
2000 2001 2000 2001
--------- --------- --------- ----------
Revenues: $ 14,691 $ 18,222 $ 56,144 $ 65,692
--------- --------- --------- ----------
Costs and Expenses:
Instruction and educational support 6,750 8,057 20,564 24,119
Selling and promotion 2,589 3,890 6,453 8,727
General and administration 3,160 3,531 8,080 9,381
--------- --------- --------- ----------
12,499 15,478 35,097 42,227
--------- --------- --------- ----------
Income from operations 2,192 2,744 21,047 23,465
Investment and other income 1,227 548 3,241 3,407
--------- --------- --------- ----------
Income before income taxes 3,419 3,292 24,288 26,872
Provision for income taxes 1,293 1,284 9,474 10,479
--------- --------- --------- ----------
Net income 2,126 2,008 14,814 16,393
Preferred stock dividends and accretion -- 1,997 -- 2,952
--------- --------- --------- ----------
Net income available to common
stockholders $ 2,126 $ 11 $ 14,814 $ 13,441
========= ========= ========= ==========
Basic net income per share $ 0.14 $ 0.00 $ 0.97 $ 1.13
========= ========= ========= ==========
Diluted net income per share $ 0.14 $ 0.14 $ 0.96 $ 1.10
========= ========= ========= ==========
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,
---------------------- -----------------------
2000 2001 2000 2001
---------- ---------- ---------- -----------
Net income $ 2,126 $ 2,008 $ 14,814 $ 16,393
Other comprehensive income:
Unrealized gains on investments, net of taxes 158 -- 13 --
Reclassification adjustment for realized
gains included in net income -- -- -- (403)
---------- ---------- ---------- -----------
Comprehensive income $ 2,284 $ 2,008 $ 14,827 $ 15,990
========== ========== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
For the nine months ended September 30,
---------------------------------------
Cash flow from operating activities 2000 2001
-------------- --------------
Net income $ 14,814 $ 16,393
Adjustments to reconcile net income to net cash provided by activities:
Deferred income taxes (23) 154
Depreciation and amortization 1,507 1,944
Gain on sale of marketable securities -- (887)
Changes in assets and liabilities
Short-term investments-- restricted (29) (32)
Tuition receivable, net (3,144) (6,063)
Other current assets 116 (702)
Other assets 148 (91)
Accounts payable 149 99
Accrued expenses 1,097 143
Income taxes payable 406 1,212
Unearned tuition 7,078 9,598
Student loans originated (4,089) (5,551)
Collections on student loans receivable 3,507 4,627
-------------- --------------
Net cash provided by operating activities 21,537 20,844
-------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (2,828) (5,074)
Purchases of marketable securities (7,349) --
Maturities of and proceeds from marketable securities 3,784 50,384
-------------- --------------
Net cash provided by (used in) investing activities (6,393) 45,310
-------------- --------------
Cash flows from financing activities:
Exercise of stock options 433 1,434
Repurchase of common stock -- (179,375)
Dividends paid (2,758) (3,202)
Issuance of preferred stock -- 150,000
Payments for costs of tender offer and issuance of preferred stock -- (5,788)
-------------- --------------
Net cash used in financing activities (2,325) (36,931)
-------------- --------------
Net increase in cash and cash equivalents 12,819 29,223
Cash and cash equivalents-- beginning of period 12,213 25,190
-------------- --------------
Cash and cash equivalents-- end of period $ 25,032 $ 54,413
============== ==============
Non-cash investing and financing activities:
Accrued expenses related to tender offer and issuance of preferred stock -- $ 962
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
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STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 2000 AND 2001 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),
Education Loan Processing, Inc. (ELP) and Professional Education, Inc. (Pro
Ed), collectively referred to herein as the "Company" or "Companies."
The results of operations for the three and nine months ended September 30,
2001 are not necessarily indicative of the results to be expected for the
full fiscal year. All information as of September 30, 2001, and for the
three and nine months ended September 30, 2000 and 2001 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 Companies.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements 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,
2000.
2. NATURE OF OPERATIONS
The University is a proprietary accredited institution of higher education
that provides undergraduate and graduate degrees in various fields of study
through its seventeen campuses in the District of Columbia, Maryland and
Virginia. The University also offers online courses via the Internet
through Strayer ONLINE.
ELP is a finance company that purchases and services student loans,
principally for the University. For purposes of the consolidated balance
sheets, all of ELP's assets and liabilities have been classified as current
assets and liabilities with the exception of student loans receivable,
which have been classified as non-current consistent with industry
practice.
3. INCOME 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:
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For the three months For the nine months
ended September 30, ended September 30,
----------------------------- -------------------------------
(in thousands) (in thousands)
2000 2001 2000 2001
-------- -------- -------- --------
Weighted average shares outstanding
used to compute basic earnings per share 15,343 8,342 15,324 11,851
Incremental shares issuable upon the
assumed conversion of preferred stock -- 5,795 -- 2,925
Incremental shares issuable upon the
assumed exercise of stock options 122 139 184 71
-------- -------- -------- --------
Shares used to compute diluted earnings
per share 15,465 14,276 15,508 14,847
======== ======== ======== ========
Incremental shares issuable upon the assumed exercise of outstanding stock
options are computed using the average market price during the related
periods.
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3. INCOME PER SHARE (CONTINUED)
Reconciliation of net income used to compute earnings per share:
For the three months For the nine months
Ended September 30, ended September 30,
----------------------------- ---------------------------
(in thousands) (in thousands)
2000 2001 2000 2001
-------- -------- -------- --------
Net income available to common stockholders used
to compute basic earnings per share $ 2,126 $ 11 $ 14,814 $ 13,441
Plus: Impact of assumed preferred stock conversion:
Preferred stock dividends -- 1,997 -- 2,952
-------- -------- -------- --------
Net income used to compute diluted earnings
per share $ 2,126 $ 2,008 $ 14,814 $ 16,393
======== ======== ======== ========
4. CREDIT FACILITY
The Company maintains a credit facility from a bank in the amount of $10.0
million. Interest on any borrowings under the facility will accrue at an
annual rate not to exceed 0.75% above the London Interbank Offered Rate.
The Company does not pay a fee for this facility, but in the event of any
borrowings, an origination fee of 1% will be due on the amounts borrowed
from time to time thereunder. There is no outstanding balance on this
credit facility as of September 30, 2001.
5. SERIES A CONVERTIBLE PREFERRED STOCK
In May 2001, the Company authorized 6,000,000 shares and issued 5,769,231
shares of mandatorily redeemable Series A preferred stock from the Company.
The preferred stock has a weighted average dividend rate of 5.43% and is
convertible into common stock at a price of $26.00 per share, subject to
adjustment under certain circumstances. The Company used the $150 million,
together with approximately $36.1 million of its cash and marketable
securities, to repurchase 7.175 million shares of outstanding common stock
of the Company from the Company's majority stockholder at $25.00 per share.
For a more detailed description of the terms of the Series A preferred
stock, see the detailed description thereof contained in the proxy
statement dated February 14, 2001 which has been filed with the Commission,
which description is incorporated herein by reference.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141") and Statement of Financial
Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 141 supersedes Accounting Principles Board Opinion No. 16 Business
Combinations. FAS 141 requires the purchase method of accounting be used
for all
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business combinations initiated after June 30, 2001, establishes specific
criteria for the recognition of intangible assets separately from goodwill,
and requires unallocated negative goodwill to be written off immediately as
an extraordinary gain (instead of being deferred and amortized).
FAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible
Assets". FAS 142 addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. Goodwill and indefinite lived
intangible assets can no longer be amortized, must be tested for impairment
at least annually at the reporting unit level, and the amortization period
of intangible assets with finite lives will no longer be limited to forty
years. FAS 142 is effective for fiscal years beginning after December 15,
2001.
The Company has not made any acquisitions after June 30, 2001 and the
Company does not have goodwill or intangible assets. The adoption of FAS
141 and FAS 142 will not have any affect on the consolidated financial
statements.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 risks
and uncertainties. In connection 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 uncertainties and risks include the pace of growth of student
enrollment, our continued compliance with Title IV of the Higher Education Act,
and changes in the economic environment. 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, all of which are incorporated herein by reference and are available
from the Commission and from the Company's world wide web site at
http://www.strayer.edu as well as from other sources. The Company undertakes no
obligation to update or revise forward looking statements.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Revenue increased 24% from $14.7 million in the third quarter of
2000 to $18.2 million in the third quarter of 2001, principally due to an
increase in student enrollments and a 5% tuition increase effective for 2001.
Instruction and educational support expenses. Instruction and educational
support expenses increased 19% from $6.8 million in the third quarter of 2000 to
$8.1 million in the third quarter of 2001. A salary increase of 4% effective in
October 2000, the addition of new faculty due to enrollment growth, and the
addition of three new campuses contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
50% from $2.6 million in the third quarter of 2000 to $3.9 million in the third
quarter of 2001, principally due to increased advertising for the new campus
openings and the Company's Strayer ONLINE activities, and increases in the
number of admissions representatives.
General and administration expenses. General and administration expenses
increased 12% from $3.2 million in the third quarter of 2000 to $3.5 million in
the third quarter of 2001 due to an increase in personnel and the addition of a
new chief executive officer, chief operating officer, general counsel, chief
technology officer, and a new marketing director.
Income from operations. Operating income increased 25%, from $2.2 million
in the third quarter of 2000 to $2.7 million in the third quarter of 2001. The
increase was due to the aforementioned factors.
10
Investment and other income. Investment and other income decreased 55%,
from $1.2 million in the third quarter of 2000 to $0.5 million in the third
quarter of 2001. The decrease was due to a decline in the amount of marketable
securities outstanding and a reduction in interest rates. The marketable
securities were liquidated to help fund the Company's share repurchase. The
decrease is also due in part to shortening the duration of fixed income
securities in anticipation of the tender offer closing.
Net income. Net income was $2.0 million in the third quarter of 2001
compared to $2.1 million for the same period in 2000. This was a result of
strong growth in operating income offset by a reduction in investment income
associated with the successful recapitalization of the Company and a lower
interest rate environment.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenues. Revenue increased 17% from $56.1 million for the nine months
ended September 30, 2000 to $65.7 million for the corresponding period in 2001,
principally due to an increase in student enrollments and a 5% tuition increase
effective for 2001.
Instruction and educational support expenses. Instruction and educational
support expenses increased 17% from $20.6 million for the nine months ended
September 30, 2000 to $24.1 million for the corresponding period in 2001. A
salary increase of 4% effective in October 2000 and the addition of new faculty
due to enrollment growth and the addition of three new campuses contributed to
the increase.
Selling and promotion expenses. Selling and promotion expenses increased
35% from $6.5 million for the nine months ended September 30, 2000 to $8.7
million for the corresponding period in 2001, due to an increase in advertising
costs, specifically television advertising, increased advertising for the new
campus openings and the Company's Strayer Online activities, and increases in
the number of admissions representatives.
General and administration expenses. General and administration expenses
increased 16% from $8.1 million for the nine months ended September 30, 2000 to
$9.4 million for the corresponding period in 2001, principally due to the
addition of new campuses, an increase in administrative personnel and the
addition of a new chief executive officer, chief operating officer, corporate
counsel, chief technology officer, and a new marketing director.
Income from operations. Operating income increased 11%, from $21.0 million
for the nine months ended September 30, 2000 to $23.5 million for the
corresponding period in 2001. The increase was due to the aforementioned
factors.
Investment and other income. Investment and other income increased 5%,
from $3.2 million for the nine months ended September 30, 2000 to $3.4 million
for the corresponding period in 2001. The increase was due to gains of $0.9
million from the liquidation of the majority of the Company's marketable
securities to help fund the Company's tender offer. This increase was partially
offset by lower interest rates and lower marketable securities balances in the
latter half of the period.
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Net income. Net income increased 11%, from $14.8 million for the nine
months ended September 30, 2000 to $16.4 million for the corresponding period in
2001.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2001, the Company generated cash
from operating activities of $20.8 million. Net cash provided by investing
activities was $45.3 million, principally from the sale of marketable
securities. Net cash used in financing activities was $36.9 million, principally
related to the repurchase of common stock, net of the issuance of preferred
stock related to the tender offer.
At September 30, 2001, the Company had cash and cash equivalents of $54.4
million. In addition, the Company has available a $10.0 million credit facility
from a bank. At September 30, 2001, the Company had $21.3 million in net tuition
receivables, consisting of $21.7 million gross tuition receivables less an
allowance for doubtful accounts of $0.4 million. Of the $21.7 million gross
tuition receivables, $1.3 million relates to revenue which has been recognized
and $20.3 million relates to revenue expected to be recognized in future
periods.
The Company used the $150 million proceeds from the sale of its
mandatorily redeemable Series A preferred stock, combined with $36.1 million of
its cash and marketable securities, to effect a tender offer to purchase 7.175
million shares of the Company's common stock at a price of $25.00 per share in
the third quarter of 2001. The Company believes that existing cash and cash
equivalents, marketable securities, cash generated from operating activities
and, if necessary, cash borrowed under the credit facility will be sufficient to
meet the Company's requirements for at least the next 24 months.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes
in the market values of its investments. The Company invests its excess cash in
cash equivalents and marketable securities. At September 30, 2001, the Company's
investments are in cash equivalents including money market funds. The Company
has not used derivative financial instruments in its investment portfolio.
Investments in certificates of deposit and money market funds may
adversely impact future earnings due to a decrease in interest rates. Due in
part to these factors, 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 which have declined in market value
due to changes in interest rates. As of September 30, 2001, a 10% increase or
decline in interest rates will 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.
12
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
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 AND REPORTS ON FORM 8-K
a) Exhibits:
None
b) Reports on Form 8-K:
On June 1, 2001, we filed a Current Report on Form 8-K to report the
consummation of a recapitalization involving the sale of our Series A
convertible preferred stock and the completion of the tender offer for shares of
our common stock. We also announced our regular quarterly common stock cash
dividend of $0.065 per share.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
statement is being signed by a duly authorized officer of the Registrant and in
the capacity as the principal financial officer.
STRAYER EDUCATION, INC.
-------------------------------------
Mark C. Brown
Senior Vice President and Chief Financial Officer
Date: November 7, 2001
14