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, 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 (I.R.S. Employer
incorporation 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 [ ]
AS OF SEPTEMBER 30, 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 September 30, 2002 3
Unaudited Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three and nine month periods ended September 30, 2001 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 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 18
Item 4. Controls and Procedures 18
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K 19
SIGNATURES 20
Certifications 20
2
STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 31, September 30,
2001 2002
------------ -------------
Current Assets: (Unaudited)
Cash and cash equivalents $ 57,659 $ 44,695
Short-term investments - restricted 1,046 1,053
Marketable securities available for
sale, at fair value - 12,075
Income taxes receivable - 2,494
Tuition receivable, net of
allowances for doubtful accounts 19,012 27,635
Other current assets 879 1,759
-------- --------
Total current assets 78,596 89,711
Student loans receivable, net of
allowances for losses 8,392 9,251
Property and equipment, net 23,100 36,530
Other assets 400 414
-------- --------
Total assets $110,488 $135,906
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 1,882 $ 3,744
Accrued expenses 562 919
Income taxes payable 1,247 -
Dividends payable 1,855 1,855
Unearned tuition 23,204 34,528
-------- --------
Total current liabilities 28,750 41,046
-------- --------
Deferred lease incentives 763 1,911
-------- --------
Total liabilities 29,513 42,957
-------- --------
Preferred Stock, par value $.01; 8,000,000 shares
authorized; 5,845,676 and 6,003,869 shares of
Series A mandatorily redeemable convertible
preferred stock issued and outstanding or
recorded at December 31, 2001 and September 30,
2002, respectively 148,347 150,485
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 September 30, 2002 83 83
Additional paid-in capital 1,759 1,759
Retained earnings (accumulated deficit) (69,214) (59,423)
Accumulated other comprehensive income - 45
-------- --------
Total stockholders' equity (deficit) (67,372) (57,536)
-------- --------
Total liabilities and stockholders'
equity (deficit) $110,488 $135,906
======== ========
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,
-------------------- ---------------------
2001 2002 2001 2002
------- ------- ------- -------
Revenues $18,222 $23,026 $65,692 $82,547
------- ------- ------- -------
Costs and Expenses:
Instruction and educational support 8,057 9,770 24,119 29,768
Selling and promotion 3,890 5,044 8,727 12,537
General and administration 3,531 4,254 9,381 12,757
------- ------- ------- -------
15,478 19,068 42,227 55,062
------- ------- ------- -------
Income from operations 2,744 3,958 23,465 27,485
Investment and other income 548 484 3,407 1,242
------- ------- ------- -------
Income before income taxes 3,292 4,442 26,872 28,727
Provision for income taxes 1,284 1,732 10,479 11,203
------- ------- ------- -------
Net income 2,008 2,710 16,393 17,524
Preferred stock dividends and accretion 1,997 2,035 2,952 6,076
======= ======= ------- -------
Net income available to common stockholders $ 11 $ 675 $13,441 $11,448
======= ======= ======= =======
Basic net income per share $ 0.00 $ 0.08 $ 1.13 $ 1.37
======= ======= ======= =======
Diluted net income per share $ 0.14 $ 0.19 $ 1.10 $ 1.21
======= ======= ======= =======
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,
--------------------- ----------------------
2001 2002 2001 2002
-------- -------- -------- --------
Net income $ 2,008 $ 2,710 $ 16,393 $ 17,524
Other comprehensive income:
Unrealized gains on investments, net of taxes - 73 - 45
Reclassification adjustment for realized
gains included in net income - - (403) -
-------- -------- -------- --------
Comprehensive income $ 2,008 $ 2,783 $ 15,990 $ 17,569
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
For the nine months ended
September 30,
--------------------------
2001 2002
--------- ---------
Cash flows from operating activities:
Net income $ 16,393 $ 17,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred lease incentives - (165)
Depreciation and amortization 1,944 2,652
Gain on sale of marketable securities (887) -
Changes in assets and liabilities:
Short-term investments - restricted (32) (7)
Tuition receivable, net (6,063) (8,623)
Other current assets (548) (880)
Other assets (91) (74)
Accounts payable 99 1,891
Accrued expenses 143 357
Income taxes payable / receivable 1,212 (3,741)
Unearned tuition 9,598 11,324
Student loans originated (5,551) (6,270)
Collections on student loans receivable 4,627 5,411
--------- ---------
Net cash provided by operating activities 20,844 19,399
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (5,074) (16,082)
Purchases of marketable securities - (12,000)
Maturities of and proceeds from marketable securities 50,384 -
--------- ---------
Net cash provided by (used in) investing activities 45,310 (28,082)
--------- ---------
Cash flows from financing activities:
Deferred lease incentives - 1,313
Exercise of stock options 1,434 -
Repurchase of common stock (179,375) -
Common dividends paid (2,539) (1,628)
Preferred dividends paid (663) (3,937)
Issuance of convertible Series A preferred stock 150,000 -
Payments of costs of tender offer and
issuance of preferred stock (5,788) (29)
--------- ---------
Net cash used in financing activities (36,931) (4,281)
--------- ---------
Net increase (decrease) in cash and cash equivalents 29,223 (12,964)
Cash and cash equivalents - beginning of period 25,190 57,659
--------- ---------
Cash and cash equivalents - end of period $ 54,413 $ 44,695
========= =========
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 AND FOR PERIODS ENDED SEPTEMBER 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 nine months ended September 30, 2002
are not necessarily indicative of the results to be expected for the full fiscal
year. All information as of September 30, 2002, and for the three and nine
months ended September 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 September 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 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 nine months
ended September 30, ended September 30,
-------------------- -------------------
(in thousands) (in thousands)
2001 2002 2001 2002
------- ------- ------- -------
Weighted average shares
outstanding used to compute basic earnings
per share 8,342 8,352 11,851 8,352
Incremental shares issuable upon the
assumed conversion of preferred stock 5,795 6,004 2,925 5,951
Incremental shares issuable upon the
assumed exercise of stock options 139 200 71 182
------- ------- ------- -------
Shares used to compute diluted earnings
per share 14,276 14,556 14,847 14,485
======= ======= ======= =======
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 earnings per
share:
For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
(in thousands) (in thousands)
2001 2002 2001 2002
------- ------- ------- -------
Net income available to common stockholders used
to compute basic earnings per share $ 11 $ 675 $13,441 $11,448
Plus: Impact of assumed preferred stock
conversion:
Preferred stock dividends and accretion 1,997 2,035 2,952 6,076
------- ------- ------- -------
Net income used to compute diluted earnings
per share $ 2,008 $ 2,710 $16,393 $17,524
======= ======= ======= =======
4. CREDIT FACILITY
The Company maintains two credit facilities from two banks in the amount of
$10.0 million each. Interest on any borrowings under these 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, 2002.
5. STOCKHOLDERS' EQUITY
Common Stock
On October 8, 2002, the Company filed a registration statement with the SEC for
a proposed offering of up to 2.3 million shares of common stock. The Company
will not receive any of the proceeds of the offering. The common shares proposed
to be offered for sale will be issued upon the conversion of Series A
convertible preferred stock currently held by New Mountain Partners, L.P., a
private equity firm, and DB Capital Partners, Inc., an affiliate of Deutsche
Bank. This proposed offering is being made pursuant to the exercise of existing
registration rights held by New Mountain Partners and DB Capital.
7
A registration statement relating to the proposed common stock offering has been
filed with the Securities and Exchange Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This document
shall not constitute an offer to sell or the solicitation or an offer to buy nor
shall there be any sale of these securities in any state in which such offer,
solicitation or sales would be unlawful prior to registration or qualification
under the securities laws of any such state.
A total of 20,000,000 shares of common stock, par value $0.01, have been
authorized. As of December 31, 2001 and September 30, 2002, the Company had
8,352,412 shares of common stock issued and outstanding. For the three months
ended September 30, 2002, the Company declared a quarterly cash dividend of
$0.065 per common share. The dividend was paid on October 22, 2002 to common
stockholders of record on October 8, 2002.
Preferred Stock/Series A Mandatorily Redeemable Convertible Preferred Stock
A total of 8 million shares of Preferred Stock, par value $0.01, have been
authorized. Of these preferred shares, 6,000,000 have been designated as Series
A Mandatorily Redeemable Convertible Preferred Stock, including shares to be
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 September 30, 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
Dividends - paid-in-kind shares 1,394
Accretion of carrying value (682)
----------------
Balance June 30, 2002 $149,762
Dividends - paid-in-kind shares 1,419
Accretion of carrying value (696)
----------------
Balance, September 30, 2002 $150,485
================
On January 1, 2002 the Company recorded 51,819 shares of Series A Preferred
Stock that had been accrued as pay-in-kind dividends as of December 31, 2001. On
April 1, 2002 the Company recorded 52,726 shares of Series A Preferred Stock
that had been accrued as pay-in-kind dividends as of March 31, 2002. On July 1,
2002 the Company recorded 53,648 shares of Series A Preferred Stock that had
been accrued as pay-in-kind dividends as of June 30, 2002. The number of shares
of Series A Preferred Stock outstanding and/or recorded as of September 30, 2002
was 6,003,869. On October 1, 2002, the Company recorded 54,587 shares of Series
A Preferred Stock that had been accrued as pay-in-kind dividends as of September
30, 2002.
8
From the original issuance date until May 15, 2006, dividends accrue on the
Series A Preferred Stock at an annual rate of 7%, with 3.5% payable in cash and
the remaining 3.5% payable in additional shares of Series A Preferred Stock.
After May 15, 2006, dividends accrue at an annual rate of 3.0%, all of which is
payable in cash. 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 currently 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 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. 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.
The table below sets forth the stock option activity for the nine months ended
September 30, 2002:
Number of Weighted-Average
shares Exercise Price
---------------- ---------------
Balance, December 31, 2001 930,000 $36.43
Grants -- --
Exercises -- --
Forfeitures -- --
---------- ---------
Balance, March 31, 2002 930,000 $36.43
Grants 50,000 51.83
Exercises -- -
Forfeitures -- -
---------- ---------
Balance, June 30, 2002 980,000 $37.22
Grants -- --
Exercises -- --
Forfeitures (10,000) (49.33)
---------- ---------
Balance, September 30, 2002 970,000 $37.09
========== =========
In the third quarter of 2002, no stock options were granted and 10,000 stock
options were forfeited. Of the 970,000 total stock options that have been issued
and are outstanding, 293,333 are exercisable as of September 30, 2002. A total
of 579,405 shares remain authorized but unissued under the Plan.
9
As of September 30, 2002, the weighted average contractual life of outstanding
stock options is 5.6 years.
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 nine months ended September 30, 2002 would have been decreased as indicated
in the pro forma section below (in thousands):
For the three months For the nine months
ended September 30, ended September 30,
------------------------ ------------------------
2001 2002 2001 2002
---- ---- ---- ----
As Reported:
Net income available to all shareholders $ 2,008 $ 2,710 $16,393 $ 17,524
Net income available to common shareholders $ 11 $ 675 $13,441 $ 11,448
Net income per common share -Basic $ -- $ 0.08 $ 1.13 $ 1.37
Net income per common share-Diluted $ 0.14 $ 0.19 $ 1.10 $ 1.21
Proforma:
Net income available to all shareholders $ 1,500 $ 2,087 $15,377 $ 15,682
Net income available to common shareholders $ (497) $ 52 $12,425 $ 9,606
Net income per common share-Basic $ (0.06) $ 0.01 $ 0.91 $ 1.15
Net income per common share-Diluted $ 0.11 $ 0.14 $ 1.03 $ 1.08
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 diversified, no load, short-term, investment grade
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 (net of taxes) are reported as a component of accumulated comprehensive
income (loss) in stockholders' equity (deficit).
10
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 table below sets forth additional information
regarding these leases:
Lease Commencement Average Annual
Campus Square Feet Date Term Payment
------------------- ---------- ----------------- ------- --------------
South Charlotte, NC 12,500 5/15/02 60 mos. $ 143,000
Raleigh-Durham, NC 12,900 5/20/02 60 mos. $ 166,000
North Charlotte, NC 13,600 6/15/02 100 mos. $ 194,000
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 was reimbursed by the lessors for improvements made
to the leased property in the amount of $1,063,000 in the three months ended
September 30, 2002 primarily in conjunction with the opening of the Company's
three North Carolina campuses. 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,
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 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, 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.strayereducation.com. The
Company undertakes no obligation to update or revise forward looking statements.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Revenue increased 26% from $18.2 million in the third quarter of
2001 to $23.0 million in the third 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 $8.1 million in the third quarter of 2001 to
$9.8 million in the third quarter of 2002. The addition of new faculty due to
enrollment growth, salary increases, and new campus openings - three in 2002 -
contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
30% from $3.9 million in the third quarter of 2001 to $5.0 million in the third
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 University 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 2002.
General and administration expenses. General and administration expenses
increased 20% from $3.5 million in the third quarter of 2001 to $4.3 million in
the third quarter of 2002 due to the addition of three new campuses in 2002, an
increase in administrative personnel to support the enrollment growth, and
salary increases.
Income from operations. Operating income increased 44% from $2.7 million
in the third quarter of 2001 to $4.0 million in the third quarter of 2002. The
increase was due to the aforementioned factors.
12
Investment and other income. Investment and other income decreased 12%
from $.55 million in the third quarter of 2001 to $0.48 million in the third
quarter of 2002. The decline was due to the overall reduction in the amount of
cash and marketable securities outstanding and lower interest rates in 2002.
Net income. Net income increased 35% from $2.0 million for the three
months ended September 30, 2001 to $2.7 million for the corresponding period in
2002 because of factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Revenue increased 26% from $65.7 million for the nine months
ended September 30, 2001 to $82.5 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 23% from $24.1 million for the nine months ended
September 30, 2001 to $29.8 million for the corresponding period in 2002. The
addition of new faculty due to enrollment growth, salary increases, and new
campus openings contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses increased
44% from $8.7 million for the nine months ended September 30, 2001 to $12.5
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 University Online activities, and
increases in the number of admissions representatives.
General and administration expenses. General and administration expenses
increased 36% from $9.4 million for the nine months ended September 30, 2001 to
$12.8 million for the corresponding period in 2002, principally due to the
addition of three new campuses, an increase in administrative personnel, and
salary increases.
Income from operations. Operating income increased 17% from $23.5 million
for the nine months ended September 30, 2001 to $27.5 million for the
corresponding period in 2002. The increase was due to the aforementioned
factors.
Investment and other income. Investment and other income decreased 64% from
$3.4 million for the nine months ended September 30, 2001 to $1.2 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 7% from $16.4 million for the nine months
ended September 30, 2001 to $17.5 million for the corresponding period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had cash, cash equivalents and marketable
securities of $56.8 million compared to $57.7 million at December 31, 2001 and
no debt. Beginning in the second quarter of 2002, the Company began investing in
a diversified, no load, short-term, investment grade corporate bond fund
13
in an effort to generate a somewhat higher yield on its liquid assets than its
holdings in overnight and money market funds, but take only limited credit and
interest rate risks . At September 30, 2002 the Company had invested $12 million
in this fund. As of September 30, 2002, the 425 issues in this fund had an
average credit rating of Aa3, an average maturity of 2.7 years and an average
duration of 2.2 years as well as an average yield of 4.3%.
The Company generated $19.4 million from operating activities in the first nine
months of 2002. Capital expenditures for the nine months were $16.1 million, of
which $12 million was in the first quarter for the purchase of three campus
facilities.
In the third quarter, bad debt expense increased from 0.9% of revenue in 2001 to
1.3% for the same period in 2002. Days sales outstanding, adjusted to exclude
tuition receivable related to future quarters, was 7 days in the third 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 short-term corporate bond fund. In addition, the Company has
available two $10 million credit facilities from two banks under which there is
no outstanding balance drawn. The Company believes that existing cash and cash
equivalents, short-term corporate bond fund, cash generated from operating
activities, and if necessary, cash borrowed under its credit facilities, 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 September 30, 2002:
Payments Due By Period (In Thousands)
---------------------------------------------
Within After
1 Year 2-3 Years 4-5 Years 5 Years
--------- --------- --------- ---------
Operating Leases $ 5,264 $ 8,036 $ 5,421 $16,343
Preferred Stock Cash Dividends* 5,250 10,500 10,590 21,065
------- ------- ------- -------
Total $10,514 $18,536 $16,011 $37,408
======= ======= ======= =======
- ---------------
*Common stock dividend payments, while not a contractual commitment, have
historically been paid by the Company.
STUDENT ENROLLMENT
Enrollment at Strayer University for the 2002 fall term increased 18% to 16,532
students compared to 14,009 for the same term in 2001. Across the Strayer
University campus network, new student enrollments increased 15% and continuing
student enrollments increased 20%. Strayer University Online enrollments
increased 90% to 5,401 students from 2,836. The total number of students taking
courses online (including students at brick and mortar campuses taking at least
one online course) in the fall 2002 quarter was 6,822.
14
STUDENT ENROLLMENT
Fall Fall %
2001 2002 Change
-------- -------- --------
New Campuses (7 in operation 3 or less years)
Campus Students 515 1,141 122%
Online Students 296 988 234%
------ ------
Total New Campus Students 811 2,129 163%
------ ------
Mature Campuses (13 in operation 4 or more years)
Campus Students 10,658 9,990 -6%
Online Students 1,819 3,335 83%
------ ------
Total Mature Campus Students 12,477 13,325 7%
------ ------
Out of Area Online Students 721 1,078 50%
------ ------
Total University Enrollment 14,009 16,532 18%
====== ======
Total Students Taking 100% Courses Online 2,836 5,401 90%
Total Students Taking At Least 1 Course Online 3,672 6,822 86%
NEW CAMPUS/STATE OPENINGS
Due to strong demand at its Raleigh-Durham, N.C. campus, the Company announced
its intention to open a second campus in the Raleigh-Durham area by fall 2003.
The Company also announced that in the third quarter Strayer University received
approval from the South Carolina Commission on Higher Education to offer its
academic programs at up to three campuses in the State of South Carolina. The
Company also announced that in October the Committee on Post-Secondary
Educational Institutions of the Tennessee Higher Education Commission voted
unanimously to recommend authorization of Strayer University to operate two new
campuses in the State of Tennessee. This recommendation is subject to review and
final approval by the full Commission. The Company also announced that Strayer
University had made applications to operate in the states of Pennsylvania and
Delaware and will pursue approval in these states as part of a multiyear
expansion plan. The Company reiterated its intention to open two to three new
campuses by the fall term 2003.
EXPANDED ONLINE COURSE OFFERINGS
Strayer University began an asynchronous course pilot program in 2001, which
featured five classes in the initial summer 2001 quarter rollout. Strayer
University Online is currently offering 295 asynchronous classes in the fall
2002 quarter, and all academic programs are now available asynchronously.
15
CORPORATE/GOVERNMENT SPONSORSHIPS
Also during the third quarter, Strayer University continued to expand the scope
of its existing corporate and governmental sponsorship arrangements and added
new sponsorship agreements with Meridian KSI, Inc. and the U.S. Department of
Defense Acquisition University. The Company's total number of
corporate/government sponsorship arrangements is now 87.
SECONDARY OFFERING
On October 8, 2002, the Company filed a registration statement with the SEC for
a proposed offering of up to 2.3 million shares of common stock. The Company
will not receive any of the proceeds of the offering. The common shares proposed
to be offered for sale will be issued upon the conversion of Series A
convertible preferred stock currently held by New Mountain Partners, L.P., a
private equity firm, and DB Capital Partners, Inc., an affiliate of Deutsche
Bank.
This proposed offering is being made pursuant to the exercise of existing
registration rights held by New Mountain and DB Capital. After giving effect to
the offering, New Mountain will beneficially own in excess of 25% of Strayer's
equity securities.
A registration statement relating to the proposed common stock offering has been
filed with the Securities and Exchange Commission but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This document
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any state in which such offer,
solicitation or sales would be unlawful prior to registration or qualification
under the securities laws of any such state.
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 common shares outstanding are as
follows:
16
Current
- -------
Common shares issued and outstanding at 9/30/02 8,352,412
Convertible Series A Preferred Stock, convertible on a
1:1 basis (outstanding or recorded) at 9/30/02 6,003,869
Authorized, issued and outstanding options using Treasury
Stock Method 200,250
----------
Subtotal 14,556,531
Potential
- ---------
Accrual of required PIK dividends on Convertible Series A
Preferred Stock through May 2006 962,924(a)
Total issued stock options, less options accounted for using
the Treasury Stock Method above 769,750
Authorized but unissued options 579,405
----------
Subtotal 2,312,079
----------
Total current and potential common shares 16,868,610
==========
(a) This number may be smaller as it does not reflect the possible
reduction of Series A PIK dividends that would be associated with the
consummation of the proposed 2.3 million common share Secondary
Offering which the Company currently expects to close in the fourth
quarter of 2002. In addition, these potential numbers do not reflect
that the Company has the right to force conversion of all remaining
Series A preferred shares into common shares after May 15, 2004 if the
Company's common stock price trades above $52.00 per share for twenty
consecutive trading days.
BUSINESS OUTLOOK
Based on the strong enrollment growth announced for the fall term, the Company
estimates fourth quarter diluted EPS will be in the range of $0.57 - $0.59,
before the effect of expenses associated with the Company's announced Secondary
Offering, currently estimated to be approximately $.02 per diluted share. Based
on its fourth quarter estimates, the Company expects to be at the high end of
its previously announced full year 2002 diluted EPS estimates of $1.76 - $1.80,
before the effect of expenses associated with the Company's announced Secondary
Offering, currently estimated to be approximately $.02 per diluted share. Based
on the strong enrollment results for the fall 2002 term, the Company is
providing the following full year 2003 estimates:
Enrollment: 14% - 16% increase
Revenue: $138 - $142 million
Operating Margin: 34.5% - 35.5%
Diluted EPS: $2.12 - $2.16
Diluted Shares Outstanding: 14,775,000
17
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 September 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 $12 million was invested in a diversified, no load, short-term,
investment grade 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 September 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
September 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.
ITEM 4: CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. The Registrant's Chief Executive
Officer and Chief Financial Officer have evaluated the Registrant's
disclosure controls and procedures within the 90 days prior to the date of
filing of this Quarterly Report on Form 10-Q. Based upon such review, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Registrant has in place appropriate controls and procedures designed to
ensure that information required to be disclosed by the Registrant 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 controls. Since the date of the evaluation described above, there
have not been any significant changes in our internal accounting controls
or in other factors that could significantly affect those controls.
18
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 August 2, 2002, the Company filed a Current Report on Form 8-K
to report its financial results for the six months ended June 30,
2002.
On August 22, 2002, the Company filed a Current Report on Form
8-K to report its regular quarterly common stock cash dividend
would be paid in October.
On October 8, 2002, the Company filed a Current Report on Form 8-K
to report a proposed secondary offering of up to 2.3 million
shares of common stock.
19
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: November 1, 2002
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
CERTIFICATIONS
I, Robert S. Silberman, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strayer Education,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
20
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002 /s/ Robert S. Silberman
-----------------------
Robert S. Silberman
President and Chief Executive Officer
21
I, Mark C. Brown, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strayer Education,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect
22
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 1, 2002
/s/ Mark C. Brown
------------------
Mark C. Brown
Senior Vice President and
Chief Financial Officer
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
CERTIFICATIONS
The undersigned Chief Executive 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
President and Chief Executive
Officer
Date: November 1, 2002
The undersigned 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/ Mark C. Brown
------------------
Mark C. Brown
Senior Vice President and
Chief Financial Officer
Date: November 1, 2002
23