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 MARCH 31, 2002
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 (I.R.S. Employer
or organization) Identification 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 / / THE REGISTRANT BECAME SUBJECT
TO SUCH FILING REQUIREMENTS ON JULY 25, 1996.
AS OF MARCH 31, 2002, THERE WERE OUTSTANDING 8,352,412 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, 2001 and March 31, 2002 3
Unaudited Condensed Consolidated Statements of Income
for the three months ended March 31, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three months ended March 31, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2001 and 2002 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
At December 31, March 31,
2001 2002
--------------- -----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 57,659 $ 54,405
Short-term investments - restricted 1,046 1,048
Tuition receivable, net of allowances for doubtful accounts 19,012 21,215
Other current assets 879 1,425
----------- -----------
Total current assets 78,596 78,093
Student loans receivable, net of allowances for losses 8,392 8,917
Property and equipment, net 23,100 35,066
Other assets 400 412
----------- -----------
Total assets $110,488 $122,488
=========== ===========
LIABILITES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 792 $ 320
Accrued expenses 1,652 2,344
Dividends payable 1,855 1,855
Unearned tuition 23,204 26,157
Income taxes payable 1,247 4,557
----------- -----------
Total current liabilities 28,750 35,233
----------- -----------
Deferred lease incentives 763 734
Mandatorily redeemable convertible Series A preferred stock,
par value $.01; 8,000,000 shares authorized; 5,845,676 and
5,897,495 shares issued and outstanding at December 31, 2001
and March 31, 2002, respectively 148,347 149,050
Stockholders' equity (deficit):
Common Stock, par value $.01; 8,352,412
shares issued and outstanding
at December 31, 2001 and March 31, 2002 83 83
Additional paid-in capital 1,759 1,759
Retained earnings (accumulated deficit) (69,214) (64,371)
----------- -----------
Total stockholders' equity (deficit) (67,372) (62,529)
----------- -----------
Total liabilities and stockholders' equity (deficit) $110,488 $122,488
=========== ===========
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
ended March 31,
-----------------------------
2001 2002
----------- -----------
Revenues $ 23,644 $ 29,698
----------- -----------
Costs and expenses:
Instruction and educational support 7,509 9,641
Selling and promotion 2,259 3,733
General and administration 2,417 4,506
----------- -----------
12,185 17,880
----------- -----------
Income from operations 11,459 11,818
Investment and other income 1,903 363
----------- -----------
Income before income taxes 13,362 12,181
Provision for income taxes 5,225 4,751
----------- -----------
Net income 8,137 7,430
Preferred stock dividends and accretion -- 2,016
----------- -----------
Net income available to common stockholders $8,137 $5,414
=========== ===========
Basic net income per share $ 0.53 $ 0.65
=========== ===========
Diluted net income per share $ 0.53 $ 0.52
=========== ===========
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
----------------------------
2001 2002
----------- -----------
Net income $8,137 $7,430
Other comprehensive income:
Reclassification adjustment for realized
Gains included in net income (403) --
----------- -----------
Comprehensive income $7,734 $7,430
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
For the three months ended
March 31,
------------------------------
2001 2002
------------- ------------
Cash flow from operating activities
Net income $8,137 $7,430
Adjustments to reconcile net income to net cash provided by activities
Depreciation and amortization 608 790
Changes in assets and liabilities
Short-term investments - restricted (5) (2)
Tuition receivable, net (2,336) (2,203)
Other current assets (20) (546)
Other assets -- (12)
Accounts payable (64) (472)
Accrued expenses 1,946 692
Income taxes payable 4,952 3,310
Unearned tuition 3,382 2,953
Student loans originated (1,833) (2,290)
Collections on student loans receivable 1,299 1,764
------------- ------------
Net cash provided by operating activities 16,066 11,414
------------- ------------
Cash flows from investing activities
Purchases of property and equipment (2,527) (12,785)
Maturities of and proceeds from marketable securities 49,497 --
------------- ------------
Net cash provided by (used in) investing activities 46,970 (12,785)
------------- ------------
Cash flows from financing activities
Exercise of stock options 1,338 --
Dividends paid (995) (1,855)
Issuance cost of preferred stock (663) (28)
------------- ------------
Net cash used in financing activities (320) (1,883)
------------- ------------
Net increase (decrease) in cash and cash equivalents 62,716 (3,254)
Cash and cash equivalents - beginning of period 25,190 57,659
------------- ------------
Cash and cash equivalents - end of period $87,906 $ 54,405
============= ============
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 MARCH 31, 2001 AND 2002 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 months ended March 31, 2002 are not
necessarily indicative of the results to be expected for the full fiscal year.
All information as of March 31, 2002, and for the three months ended March 31,
2001 and 2002 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, 2001.
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 twenty campuses in the District of Columbia, Maryland, Virginia and
(beginning July 1) North Carolina. ELP provides student loans for the
University's students. 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:
6
For the three months
ended March 31,
----------------------------
(in thousands)
2001 2002
------------- ------------
Weighted average shares outstanding
used to compute basic earnings per share 15,411 8,352
Incremental shares issuable upon the
assumed conversion of preferred stock -- 5,897
Incremental shares issuable upon the
assumed exercise of stock options 59 132
------------- ------------
Shares used to compute diluted earnings per share 15,470 14,381
============= ============
Incremental shares issuable upon the assumed exercise of outstanding stock
options are computed using the average market price during the related periods.
Set forth below is a reconciliation of net income used to compute earnings per
share:
For the three months
ended March 31,
----------------------
(in thousands)
2001 2002
-------- --------
Net income available to common stockholders used to
compute basic earnings per share $8,137 $ 5,414
Plus impact of assumed preferred stock conversion:
Preferred stock dividends and accretion -- 2,016
-------- --------
Net income used to compute diluted earnings per share $8,137 $7,430
======== ========
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. There is no
outstanding balance on this credit facility as of March 31, 2002.
5. STOCKHOLDERS' EQUITY
Common Stock
A total of 20,000,000 shares of common stock, par value $0.01, have been
authorized. As of December 31, 2001 and March 31, 2002, the Company had
8,352,412 shares of common stock issued and outstanding. For the three
months ended March 31, 2002, the Company declared a quarterly cash dividend
of $0.065 per common share. The dividend was payable on April 23, 2002 to
common stockholders of record on April 9, 2002.
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Series A Mandatorily Redeemable Convertible Preferred Stock
A total of 8 million shares of Series A Preferred Stock, par value $0.01,
have been authorized, including shares reserved for the payment of
pay-in-kind dividends on outstanding shares of Series A Preferred Stock.
The following table reflects all Preferred Stock activity from December 31,
2001 to March 31, 2002:
Series A Mandatorily
Redeemable
Convertible Preferred
Stock
-----------------------
Amount
(in thousands)
-----------------------
Balance, December 31, 2001 $148,347
Dividends - paid-in-kind shares 1,371
Accretion of carrying value (668)
-----------
Balance, March 31, 2002 $149,050
===========
On January 1, 2002 the Company issued 51,819 shares of Series A Preferred
Stock that had been recorded as paid-in-kind dividends payable as of
December 31, 2001. The number of shares of Series A Preferred Stock
outstanding as of March 31, 2002 was 5,897,495. A total of 52,726
paid-in-kind preferred shares, recorded as accrued dividends as of March
31, 2002, will be issued on April 1, 2002.
The Series A Preferred Stock dividends and accretion are recorded based on
an effective yield of 5.43% applied to the carrying value of the Series A
Preferred Stock. This stock is convertible into common shares at a price of
$26.00 per share on a one-for-one basis. For a more detailed description of
the terms of the Series A Preferred Stock, see the detailed description
thereof contained in Note 6 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
Stock Options
As set forth in the table below, there were no stock option issuances
during the three months ended March 31, 2002:
Weighted-Average
Number of shares Exercise Price
----------------- -----------------
Balance, December 31, 2001 930,000 $36.43
Grants -- --
Exercises -- --
Forfeitures -- --
----------- -----------
Balance, March 31, 2002 930,000 $36.43
=========== ===========
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In 2001, 930,000 stock options were granted which vest over 3 to 4 years
with exercise prices ranging from $33.69 to $47.44. All options granted in
2001 expire in 2008. For a more detailed description of the stock options
granted in 2001, see the detailed description thereof contained in Note 5
of the Company's Annual Report on Form 10-K for the year ended December
31, 2001.
6. CERTAIN TRANSACTIONS WITH FORMER MANAGEMENT
In February 2002, the Company acquired for cash the Washington, D.C., Manassas,
Virginia, and Woodbridge, Virginia campuses from investment partnerships and
trusts in which Mr. Ron Bailey, the Company's former President and Chief
Executive Officer and former majority stockholder, and his family held interests
for an aggregate payment of $12 million. These three campuses had 74,600
combined total square feet and a 2001 aggregate annual rent of $1,626,000 under
long-term leases.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS
144"). FAS 144 supersedes FASB Statement No. 121 "Accounting for Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of". FAS 144
addresses the financial accounting and reporting for long-lived assets and their
impairment and disposal. The statement is effective for fiscal years beginning
after December 15, 2001. The Company has long-lived assets in the form of
buildings it owns and uses to conduct classes for its students. The adoption of
FAS 144 is not expected to have a material effect on the consolidated financial
statements.
8. LEASE AGREEMENTS
During the first quarter of 2002, the Company executed lease agreements for
three North Carolina campuses. The lease for the campus in South Charlotte
commences on May 15, 2002 with a lease-term of approximately 60 months and
annual lease payments averaging $143,000 per year. The lease for the campus in
Raleigh-Durham commences on May 20, 2002 with a lease term of 60 months and
annual lease payments averaging $166,000 per year. The lease for the campus in
North Charlotte commences on June 15, 2002 with a lease term of approximately
100 months and annual lease payments averaging $199,000 per year.
9. DEFERRED LEASE INCENTIVES
In conjunction with the opening of new campuses in Chesapeake, VA and Newport
News, VA during 2001, the Company was reimbursed by the lessors for improvements
made to the leased properties in the amount of $763,000. In accordance with
Financial Accounting Standards Board Technical Bulletin No. 88-1, these costs
were capitalized as leasehold improvements and the reimbursements recorded as
deferred lease incentives. The leasehold improvements and the deferred lease
incentives are being amortized on a straight-line basis over the corresponding
lease terms, which range from 5 to 10 years.
9
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,
competitive factors, risks associated with the opening of new campuses and the
timing of related regulatory approvals 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, 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.strayeredu.com. The Company
undertakes no obligation to update or revise forward looking statements.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenues. Revenue increased 26% from $23.6 million in the first quarter of
2001 to $29.7 million in the first quarter of 2002, principally due to an
increase in student enrollments and a 5% tuition increase effective for 2002.
Instruction and educational support expenses. Instruction and educational
support expenses increased 28% from $7.5 million in the first quarter of 2001 to
$9.6 million in the first quarter of 2002. The addition of new faculty due to
enrollment growth, salary increases, and the addition of three campuses opened
in 2001 contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
65% from $2.3 million in the first quarter of 2001 to $3.7 million in the first
quarter of 2002, principally due to an increase in advertising costs,
specifically television advertising, increased advertising for the new campus
openings and the Company's Strayer ONLINE activities, increases in number of
admission representatives at existing campuses and ONLINE, and the addition of
admissions personnel at new campuses opened in 2001.
General and administration expenses. General and administration expenses
increased 86% from $2.4 million in the first quarter of 2001 to $4.5 million in
the first quarter of 2002 due to the addition of three new campuses in 2001, an
increase in administrative personnel and the addition of a new senior management
team.
Income from operations. Operating income increased 3%, from $11.5 million
in the first quarter of 2001 to $11.8 million in the first quarter of 2002. The
increase was due to the aforementioned factors.
10
Investment and other income. Investment and other income decreased 81%
from $1.9 million in the first quarter of 2001 to $0.4 million in the first
quarter of 2002. The decline was due to the overall reduction in the amount of
marketable securities outstanding and lower interest rates in 2002. In 2001, the
marketable securities were liquidated to help fund the Company's share
repurchase.
Net income. Net income was $7.4 million in the first quarter of 2002
compared to $8.1 million for the same period in 2001 because of factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had cash and cash equivalents of $54.4 million
compared to $57.7 million at December 31, 2001. Currently, the Company
invests its cash in bank overnight deposits and money market funds. In addition,
the Company has available a $10 million credit facility from a bank. The Company
believes that existing cash and cash equivalents, 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.
The Company has the following contractual commitments associated with operating
leases and preferred stock cash dividends:
Payments Due By Period (In Thousands)
----------------------------------------------------------------------
Within 1 Year 2-3 Years 4-5 Years After 5 Years
------------- --------- --------- -------------
Operating Leases $5,288 $8,679 $6,257 $ 10,512
Preferred Stock Cash Dividends* 5,250 10,500 10,498 23,782
---------- --------- ----------- -----------
Total $10,538 $19,179 $16,755 $ 34,294
========== ========= =========== ===========
- ---------------
*Common stock dividend payments, while not a contractual commitment, have
historically been paid by the Company.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and may be exposed
to changes in the market values of its future investments. The Company invests
its excess cash in cash equivalents and marketable securities. At March 31,
2002, the Company's investments were in cash and cash equivalents including
money market mutual funds and bank CD's. The Company has not used derivative
financial instruments in its investment portfolio.
Investments in money market mutual funds may adversely affect future earnings
should interest rates decline. The Company's future investment income may fall
short of expectations due to changes in interest rates or, with future
investments, 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 March 31, 2002, 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.
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 February 15, 2002, the Company filed a Current Report on Form 8-K to
report its financial results for the three months and year ended
December 31, 2001.
On March 12, 2002, the Company filed a Current Report on Form 8-K to
report its regular quarterly common stock cash dividend would be paid in
April.
On March 18, 2002, the Company filed a Current Report on Form 8-K to
report that it had received regulatory approval to offer its programs in
North Carolina.
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.
By:____________________________________
Mark C. Brown
Senior Vice President and Chief Financial Officer
Date: May 8, 2002
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