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 JUNE 30, 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 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 / /
AS OF JUNE 30, 2002, THERE WERE OUTSTANDING 8,352,412 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE OF THE REGISTRANT.
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 June 30, 2002 3
Unaudited Condensed Consolidated Statements of Income
for the three and six month periods ended June 30, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three and six month periods ended June 30, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 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 12
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 15
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K 16
SIGNATURES 18
2
STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31, June 30,
2001 2002
------------------- ------------------
Current Assets: (Unaudited)
Cash and cash equivalents $57,659 $47,155
Short-term investments - restricted 1,046 1,050
Marketable securities available for sale, at fair value
(short-term bond fund) - 5,972
Tuition receivable, net of allowances for doubtful accounts 19,012 17,508
Other current assets 879 1,866
------------------- -------------------
Total current assets 78,596 73,551
Student loans receivable, net of allowances for losses 8,392 8,586
Property and equipment, net 23,100 36,019
Other assets 400 371
------------------- -------------------
Total assets $ 110,488 $ 118,527
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 1,882 $ 1,640
Accrued expenses 562 860
Income taxes payable 1,247 18
Dividends payable 1,855 1,855
Unearned tuition 23,204 21,204
------------------- -------------------
Total current liabilities 28,750 25,577
------------------- -------------------
Deferred lease incentives 763 929
------------------- -------------------
Total liabilities 29,513 26,506
------------------- -------------------
Mandatorily redeemable convertible Series A preferred stock, par value $.01;
8,000,000 shares authorized; 5,845,676 and 5,950,221 shares issued and
outstanding at December 31, 2001 and June 30, 2002, respectively 148,347 149,762
Stockholders' equity (deficit):
Common Stock - Par value $.01; 20,000,000 shares authorized; 8,352,412 shares
issued and outstanding at December 31, 2001 and
June 30, 2002 83 83
Additional paid-in capital 1,759 1,759
Retained earnings (accumulated deficit) (69,214) (59,555)
Accumulated other comprehensive income (loss) - (28)
------------------- -------------------
Total stockholders' equity (deficit) (67,372) (57,741)
------------------- -------------------
Total liabilities and stockholders' equity (deficit) $110,488 $ 118,527
=================== ===================
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 six months
ended June 30, ended June 30,
---------------------------- ------------------------------
2001 2002 2001 2002
-------------- ------------- --------------- --------------
Revenues $23,826 $29,823 $47,470 $59,521
-------------- ------------- --------------- --------------
Costs and Expenses:
Instruction and educational support 8,553 10,356 16,062 19,998
Selling and promotion 2,578 3,760 4,837 7,493
General and administration 3,433 3,997 5,850 8,503
-------------- ------------- --------------- --------------
14,564 18,113 26,749 35,994
-------------- ------------- --------------- --------------
Income from operations 9,262 11,710 20,721 23,527
Investment and other income 956 395 2,859 758
-------------- ------------- --------------- --------------
Income before income taxes 10,218 12,105 23,580 24,285
Provision for income taxes 3,970 4,721 9,195 9,472
-------------- ------------- --------------- --------------
Net income 6,248 7,384 14,385 14,813
Preferred stock dividends and accretion 955 2,025 955 4,041
-------------- ------------- --------------- --------------
Net income available to common stockholders $ 5,293 $ 5,359 $13,430 $10,772
============== ============= =============== ==============
Basic net income per share $ 0.45 $ 0.64 $ 0.98 $ 1.29
============== ============= =============== ==============
Diluted net income per share $ 0.42 $ 0.51 $ 0.95 $ 1.03
============== ============= =============== ==============
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months For the six months
ended June 30, ended June 30,
----------------------------- -----------------------------
2001 2002 2001 2002
------------- ------------- -------------- -------------
Net income $ 6,248 $ 7,384 $14,385 $14,813
Other comprehensive income:
Unrealized loss on investments - (28) - (28)
Reclassification adjustment for realized
gains included in net income - - (403) -
------------- ------------- -------------- -------------
Comprehensive income $ 6,248 $ 7,356 $13,982 $14,785
============= ============= ============== =============
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 six months ended June 30,
---------------------------------------
2001 2002
------------------- ------------------
Cash flow from operating activities:
Net income $14,385 $ 14,813
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,242 1,712
Gain on sale of marketable securities (887) -
Amortization of deferred lease incentives - (84)
Changes in assets and liabilities:
Short-term investments - restricted (24) (4)
Tuition receivable, net 2,020 1,504
Other current assets 186 (987)
Other assets (92) 29
Accounts payable (273) (242)
Accrued expenses (510) 298
Income taxes payable 1,321 (1,229)
Unearned tuition (1,721) (2,000)
Student loans originated (3,165) (3,946)
Collections on student loans receivable 2,711 3,752
------------------- ------------------
Net cash provided by operating activities 15,193 13,616
------------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (4,298) (14,631)
Investment in short-term bond fund - (6,000)
Maturities of and proceeds from marketable securities 45,739 -
------------------- ------------------
Net cash provided by (used in) investing activities 41,441 (20,631)
------------------- ------------------
Cash flows from financing activities:
Deferred lease incentives - 250
Exercise of stock options 1,390 -
Repurchase of common stock (179,375) -
Common dividends paid (1,996) (1,086)
Preferred dividends paid - (2,624)
Issuance of convertible Series A preferred stock 150,000 -
Payments of costs of tender offer and issuance of preferred stock (5,707) (29)
------------------- ------------------
Net cash used in financing activities (35,688) (3,489)
------------------- ------------------
Net increase (decrease) in cash and cash equivalents 20,946 (10,504)
Cash and cash equivalents - beginning of period 25,190 57,659
------------------- ------------------
Cash and cash equivalents - end of period $ 46,136 $ 47,155
=================== ==================
The accompanying notes are an integral part of
these consolidated financial statements.
5
STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 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 and six months ended June
30, 2002 are not necessarily indicative of the results to be expected for the
full fiscal year. All information as of June 30, 2002, and for the three and six
months ended June 30, 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. 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, 2001.
Certain prior period amounts have been reclassified between accounts payable and
accrued expenses on the consolidated balance sheet to conform with June 30, 2002
presentation.
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 Maryland, Washington, D.C., Virginia and
(beginning July 1, 2002) 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 For the six months
ended June 30, ended June 30,
---------------------------------------------------------------------
(in thousands) (in thousands)
2001 2002 2001 2002
-------------- --------------- --------------- -------------
Weighted average shares outstanding 11,879 8,352 13,636 8,352
used to compute basic earnings per
share
Incremental shares issuable upon the
assumed conversion of preferred stock 2,929 5,950 1,472 5,924
Incremental shares issuable upon the
assumed exercise of stock options 160 213 110 172
------------- --------------- --------------- -------------
Shares used to compute diluted earnings
per share 14,968 14,515 15,218 14,448
============= =============== =============== =============
For additional information regarding total potential share issuance, see
Management's Discussion and Analysis section.
7
Set forth below is a reconciliation of net income used to compute earnings per
share:
For the three months For the six months
ended June 30, ended June 30,
---------------------------- ----------------------------
(in thousands) (in thousands)
2001 2002 2001 2002
------------- -------------- ------------- --------------
Net income available to common stockholders used
to compute basic earnings per share $ 5,293 $ 5,359 $13,430 $10,772
Plus: Impact of assumed preferred stock
conversion:
Preferred stock dividends and accretion 955 2,025 955 4,041
------------- -------------- ------------- --------------
Net income used to compute diluted earnings
per share $ 6,248 $ 7,384 $14,385 $14,813
============= ============== ============= ==============
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 June 30, 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 June 30, 2002, the Company had 8,352,412
shares of common stock issued and outstanding. For the three months ended June
30, 2002, the Company declared a quarterly cash dividend of $0.065 per common
share. The dividend was paid on July 23, 2002 to common stockholders of record
on July 9, 2002.
Mandatorily Redeemable Convertible Series A 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 June 30, 2002:
8
Mandatorily
Redeemable
Convertible Series
A 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
Dividends - paid-in-kind shares 1,394
Accretion of carrying value (682)
-----------------
Balance, June 30, 2002 $149,762
=================
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. On April 1, 2002 the Company issued 52,726 shares of Series A Preferred
Stock that had been recorded as paid-in-kind dividends payable as of March 31,
2002. The number of shares of Series A Preferred Stock outstanding as of June
30, 2002 was 5,950,221. A total of 53,648 paid-in-kind preferred shares,
recorded as accrued dividends as of June 30, 2002, were issued on July 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. To the extent the Company's common stock trades
above $52.00 per share for 20 consecutive trading days at any time after May 15,
2004, the Company may cause conversion of the Series A Preferred Stock. For a
more detailed description of the terms of the Series A Preferred Stock, see the
description thereof contained in the Note 6 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001.
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 Stockholders' Meeting to
increase the shares authorized for issuance thereunder by 1,000,000 (as amended,
the "Plan") to 2,500,000 million. 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 5
years before the amendment and 7 years after the amendment.
9
The table below sets forth the stock option activity for the six months ended
June 30, 2002:
Weighted-Average
Number of shares Exercise Price
----------------- -----------------
Balance, December 31, 2001 930,000 $36.43
Grants -- --
Exercises -- --
Forfeitures -- --
----------- -----------
Balance, March 30, 2002 930,000 $36.43
Grants 50,000 51.83
Exercises -- -
Forfeitures -- -
----------- -----------
Balance, June 30, 2002 980,000 $37.22
=========== ===========
In the second quarter of 2002, 50,000 stock options were in total granted to
three new employees and one new member of the Board of Directors. These options
vest over 3 to 4 years with exercise prices ranging from $49.33 to $61.81. All
options granted in 2002 expire in 2009. Of the 980,000 total stock options that
have been issued and are outstanding, 265,000 are exercisable as of June 30,
2002. A total of 569,405 shares remain authorized but unissued under the Plan.
The Company accounts for the fair value of its stock options granted to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
expense has been recognized for the Plan since the exercise price of the options
was equal to the fair value of the underlying common stock on the date of grant.
Had compensation expense been determined based on the fair value of the options
at the grant dates consistent with that method of accounting under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's net income and net income per share for the three
and six months ended June 30, 2002 would have been decreased as indicated in the
pro forma section below (in thousands):
For the three months For the six months
ended June 30, ended June 30,
---------------------- --------------------
2001 2002 2001 2002
---- ---- ---- ----
As Reported:
Net income available to all shareholders $6,248 $7,384 $14,385 $14,813
Net income available to common shareholders $5,293 $5,359 $13,430 $10,772
Net income per common share -Basic $ 0.45 $ 0.64 $ 0.98 $ 1.29
Net income per common share-Diluted $ 0.42 $ 0.51 $ 0.95 $ 1.03
Proforma:
Net income available to all shareholders $5,740 $6,761 $13,877 $13,594
Net income available to common shareholders $4,785 $4,736 $12,922 $ 9,553
Net income per common share-Basic $ 0.40 $ 0.57 $ 0.94 $ 1.14
Net income per common share-Diluted $ 0.38 $ 0.47 $ 0.91 $ 0.94
10
For the purposes of the above presentation, the fair value of each option
granted in 2001 was estimated on the date of grant using the Black-Scholes
option-pricing model using the following assumptions: dividend yield of .7%;
expected volatility of 47%; risk-free interest rate of 4.75% and an expected
term of 5.3 years. The weighted average fair value for the 2001 grants was
$16.68. The fair value of each option granted in 2002 was estimated using the
Black-Scholes option-pricing model using the following assumptions: dividend
yield of .7%; expected volatility of 43%; risk-free interest rate of 4.81%; and
an expected term of 5.9 years. The weighted average fair value for the 2002
grants was $23.65.
6. INVESTMENTS IN MARKETABLE SECURITIES
In the second quarter of 2002, as part of its cash management activities, the
Company began investing in a no load, A2 rated, short-term corporate bond fund.
These marketable securities are considered "available for sale," and as such,
are stated at fair value. The net unrealized gains and losses are reported as a
component of accumulated comprehensive income (loss) in stockholders' equity
(deficit).
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 that it owns and uses to conduct classes for its students. FAS 144 was
adopted on January 1, 2002 with no 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
commenced 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 commenced 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 commenced 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 the Company's new corporate headquarters in
Arlington, VA in 2002, the Company was reimbursed by the lessor for improvements
made to the leased property in the amount of $250,000 in the three months ended
June 30, 2002. The Company also recorded $763,000 in lease incentives for two
new campuses in 2001. In accordance with Financial Accounting Standards Board
Technical Bulletin No. 88-1, these costs were capitalized as leasehold
improvements and the reimbursements were 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.
11
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 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 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 JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Revenues. Revenue increased 25% from $23.8 million in the second quarter
of 2001 to $29.8 million in the second 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 21% from $8.6 million in the second quarter of 2001
to $10.4 million in the second quarter of 2002. The addition of new faculty due
to enrollment growth, salary increases, and new campus openings - three in 2001
and three in 2002 - contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
46% from $2.6 million in the second quarter of 2001 to $3.8 million in the
second quarter of 2002, principally due to an increase in advertising costs,
specifically television advertising, increased advertising for the North
Carolina campus openings and the Company's Strayer ONLINE activities, increases
in the number of admission representatives at existing campuses and ONLINE, and
the addition of admissions personnel at new campuses opened in 2001 and 2002.
General and administration expenses. General and administration expenses
increased 16% from $3.4 million in the second quarter of 2001 to $4.0 million in
the second quarter of 2002 due to the addition of three new campuses in 2001 and
three more in 2002, an increase in administrative personnel to support the
enrollment growth, and salary increases.
Income from operations. Operating income increased 26% from $9.3 million
in the second quarter of 2001 to $11.7 million in the second quarter of 2002.
The increase was due to the aforementioned factors.
Investment and other income. Investment and other income decreased 59%
from $1.0 million in the second quarter of 2001 to $0.4 million in the second
quarter of 2002. The decline was due to the overall reduction in the amount of
cash and marketable securities outstanding and lower
12
interest rates in 2002. In the 2001 period, the marketable securities were
liquidated at a gain of $0.9 million to help fund the Company's share
repurchase.
Net income. Net income was $7.4 million in the second quarter of 2002
compared to $6.2 million for the same period in 2001 because of factors
discussed above.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Revenues. Revenue increased 25% from $47.5 million for the six months ended
June 30, 2001 to $59.5 million for the corresponding period in 2002, principally
due to an increase in student enrollments and 5% tuition increase effective for
2002.
Instruction and educational support expenses. Instruction and educational
support expenses increased 25% from $16.1 million for the six months ended June
30, 2001 to $20.0 million for the corresponding period in 2002.
Selling and promotion expenses. Selling and promotion expenses increased
55% from $4.8 million for the six months ended June 30, 2001 to $7.5 million for
the corresponding period in 2002 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 45% from $5.9 million for the six months ended June 30, 2001 to $8.5
million for the corresponding period in 2002, principally due to the addition of
new campuses, an increase in administrative personnel, the addition of a new
executive team, and salary increases.
Income from operations. Operating income increased 14% from $20.7 million
for the six months ended June 30, 2001 to $23.5 million for the corresponding
period in 2002. The increase was due to the aforementioned factors.
Investment and other income. Investment and other income decreased 73% from
$2.9 million for the six months ended June 30, 2001 to $0.8 million for the
corresponding period in 2002. The decrease was due to the overall reduction in
the amount of cash and marketable securities outstanding and lower interest
rates in 2002. In the 2001 period, the marketable securities were liquidated at
a gain of $0.9 million to help fund the Company's share repurchase.
Net income. Net income increased 3% from $14.4 million for the six months
ended June 30, 2001 to $14.8 million for the corresponding period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had cash, cash equivalents and marketable
securities of $53.2 million compared to $57.7 million at December 31, 2001 and
no debt. In the second quarter, the Company invested $6 million in a no load, A2
rated, short-term corporate bond fund in an effort to diversify its holdings
from overnight and money market funds into investments having a higher yield and
longer maturity. The Company generated $13.6 million from operating activities
in the first six months of 2002. Capital expenditures for the six months were
$14.6 million, of which $12 million was in the first quarter for the purchase of
three campus facilities. In the second quarter, bad debt expense declined from
2.0% of revenue in 2001 to 1.3% for the same period in 2002. Days sales
outstanding, adjusted to exclude tuition receivable related to
13
future quarters, was 7 days in the second quarter of 2002, unchanged compared to
the same period in 2001. Currently, the Company invests its cash in bank
overnight deposits, money market funds and a no load, A2 rated, short-term
corporate bond fund. In addition, the Company has available a $10 million credit
facility from a bank under which there is no outstanding balance drawn. The
Company believes that existing cash and cash equivalents, no load short-term
corporate bond fund, 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 12 months.
The Company has the following contractual commitments associated with operating
leases and preferred stock cash dividends as of June 30, 2002:
Payments Due By Period (In Thousands)
----------------------------------------------------------------------
Within 1 Year 2-3 Years 4-5 Years After 5 Years
------------- --------- --------- -------------
Operating Leases $3,921 $6,667 $4,275 $4,494
Preferred Stock Cash Dividends* 5,250 10,500 10,544 22,423
---------- --------- ----------- -----------
Total $9,171 $17,167 $14,819 $26,917
========== ========= =========== ===========
- ---------------
*Common stock dividend payments, while not a contractual commitment, have
historically been paid by the Company.
TOTAL POTENTIAL SHARE ISSUANCE
Shares used to compute diluted earnings per share include common shares issued
and outstanding, the assumed conversion of Series A Convertible Preferred Shares
outstanding, and the assumed exercise of issued stock options using the Treasury
Stock Method. Our total current and potential shares outstanding is as follows:
Current
-------
Common shares issued and outstanding at 6/30/02 8,352,412
Convertible Series A Preferred Stock, convertible on a
1:1 basis at 6/30/02 5,950,221
Authorized, issued and outstanding options using Treasury
Stock Method 212,765
--------------
Subtotal 14,515,398
Potential
---------
Payment of required PIK dividends on Convertible Series A
Preferred Stock thru May 2006 1,016,572(a)
Balance of authorized, issued and outstanding options not using
the Treasury Stock Method 767,235
Authorized but unissued options 569,405
--------------
Subtotal 2,353,212
--------------
Total current and potential 16,868,610
==============
(a) This number of preferred stock dividends may be smaller as the
Company has the right to cause conversion of the preferred stock
into common stock after May 15, 2004 if the Company's common stock
price trades above $52.00 per share for 20 consecutive days.
14
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 June 30, 2002,
the majority of the Company's investments were in cash and cash equivalents,
including money market mutual funds and bank overnight deposits. Approximately
$6 million was invested in a no load, A2 rated, short-term corporate bond fund.
The Company has not used derivative financial instruments in its investment
portfolio.
Investments in fixed rate interest earning instruments carry a degree of
interest rate risk. These securities may have their fair market value adversely
impacted by a rise in interest rates. Investments in 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 June 30, 2002, 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 money market
funds or interest earning marketable securities. In addition, as of June 30,
2002, a 10% decrease in market values would not have a material impact on the
Company's future earnings, fair values, financial position or cash flows related
to investments in marketable securities.
15
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.
At the Annual Meeting of our Stockholders held on May 1, 2002, the
following matters were submitted to a vote of our common
stockholders:
Proposal
--------
1. Election of Common Stock Directors:
----------------------------------
For Against Abstain No Vote
--- ------- ------- -------
Robert S. Silberman 7,861,555 147,243 0 0
Dr. Charlotte F. Beason 7,977,823 30,975 0 0
William E. Brock 7,977,700 31,098 0 0
Todd A. Milano 7,977,908 30,890 0 0
G. Thomas Waite 7,977,748 31,050 0 0
2. Ratification of Appointment of PricewaterhouseCoopers LLP to serve as
---------------------------------------------------------------------
independent public accountants for the fiscal year ending December 31, 2002:
----------------------------------------------------------------------------
For Against Abstain No Vote
--- ------- ------- -------
7,868,495 126,597 13,706 0
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
None
b) Reports on Form 8-K:
On May 3, 2002, the Company filed a Current Report on Form 8-K to
report its financial results for the three months ended March 31,
2002.
16
On May 23, 2002, the Company filed a Current Report on Form 8-K to report its
regular quarterly common stock cash dividend would be paid in July.
17
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: /s/ Mark C. Brown
------------------------
Mark C. Brown
Senior Vice President and Chief Financial Officer
Date: August 5, 2002
CERTIFICATION:
- -------------
The undersigned Chief Executive Officer and Chief Financial Officer of
Strayer Education, Inc. (the "Registrant") hereby certify that this periodic
report on Form 10-Q fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 and that the information contained in such
periodic report fairly presents, in all material respects, the financial
condition and results of operations of the Registrant.
/s/ Robert S. Silberman
------------------------------
Robert S. Silberman
Chief Executive Officer
Date: August 5, 2002
/s/ Mark C. Brown
------------------------------
Mark C. Brown
Chief Financial Officer
Date: August 5, 2002
18