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, 2003
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 / / THE REGISTRANT BECAME SUBJECT
TO SUCH FILING REQUIREMENTS ON JULY 25, 1996.
AS OF JUNE 30, 2003, THERE WERE OUTSTANDING 10,715,098 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, 2002 and June 30, 2003 .................................. 3
Unaudited Condensed Consolidated Statements of Income
for the three and six month periods ended June 30, 2002 and 2003 ..... 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three and six month periods ended June 30, 2002 and 2003 ..... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 2002 and 2003 ............... 5
Notes to Unaudited Condensed Consolidated Financial Statements ....... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................ 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risk ........................................ 16
Item 4. Controls and Procedures ................................................... 17
PART II-- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K ....................................... 18
SIGNATURES .......................................................................... 20
2
STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31,
2002 June 30, 2003
------------ -------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .................................................. $ 49,135 $ 57,415
Marketable securities available for sale, at fair value .................... 18,121 26,401
Tuition receivable, net of allowances for doubtful accounts ................ 25,759 25,696
Other current assets ....................................................... 773 961
--------- ---------
Total current assets ................................................... 93,788 110,473
Student loans receivable, net of allowances for losses ........................ 9,453 9,503
Property and equipment, net ................................................... 36,571 36,820
Other assets .................................................................. 312 312
--------- ---------
Total assets ........................................................... $ 140,124 $ 157,108
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 3,534 $ 3,814
Accrued expenses ........................................................... 1,181 920
Income taxes payable ....................................................... 1,812 1,689
Dividends payable .......................................................... 1,507 1,511
Unearned tuition ........................................................... 29,853 28,922
--------- ---------
Total current liabilities ............................................. 37,887 36,856
Deferred income taxes ......................................................... 70 65
Long-term liabilities ......................................................... 1,985 2,086
--------- ---------
Total liabilities ..................................................... 39,942 39,007
--------- ---------
Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock, par value $.01;
6,000,000 shares authorized; 3,758,456 and 3,827,972 shares issued and
outstanding at December 31, 2002 and June 30, 2003, respectively ........ 93,807 94,733
Stockholders' equity:
Common stock, par value $.01; 20,000,000 shares
authorized; 10,652,412 and 10,715,098 shares issued and outstanding
at December 31, 2002 and June 30, 2003, respectively .................... 107 107
Additional paid-in capital ................................................. 58,868 61,924
Retained earnings (accumulated deficit) .................................... (52,674) (38,905)
Accumulated other comprehensive income 74 242
--------- ---------
Total stockholders' equity ........................................... 6,375 23,368
--------- ---------
Total liabilities and stockholders' equity ........................... $ 140,124 $ 157,108
========= =========
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,
--------------------- ---------------------
2002 2003 2002 2003
-------- -------- -------- --------
Revenues ................................ $29,823 $36,965 $59,521 $73,659
------- ------- ------- -------
Costs and expenses:
Instruction and educational support 10,356 13,261 19,998 26,092
Selling and promotion .............. 3,760 4,947 7,493 9,836
General and administration ......... 3,997 4,724 8,503 9,601
------- ------- ------- -------
18,113 22,932 35,994 45,529
------- ------- ------- -------
Income from operations ....... 11,710 14,033 23,527 28,130
Investment and other income ............ 395 587 758 1,162
------- ------- ------- -------
Income before income taxes ... 12,105 14,620 24,285 29,292
Provision for income taxes .............. 4,721 5,779 9,472 11,579
------- ------- ------- -------
Net income ................... 7,384 8,841 14,813 17,713
Preferred stock dividends and accretion . 2,025 1,281 4,041 2,555
------- ------- ------- -------
Net income available to common
stockholders ................. $ 5,359 $ 7,560 $10,772 $15,158
======= ======= ======= =======
Basic net income per share .............. $ 0.64 $ 0.71 $ 1.29 $ 1.42
======= ======= ======= =======
Diluted net income per share ............ $ 0.51 $ 0.60 $ 1.03 $ 1.20
======= ======= ======= =======
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,
--------------------- ---------------------
2002 2003 2002 2003
-------- -------- -------- --------
Net income ................................. $ 7,384 $ 8,841 $ 14,813 $ 17,713
Other comprehensive income:
Unrealized gain (loss) on investments,
net of taxes ......................... (28) 133 (28) 242
-------- -------- -------- --------
Comprehensive income ....................... $ 7,356 $ 8,974 $ 14,785 $ 17,955
======== ======== ======== ========
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,
----------------------
2002 2003
-------- --------
Cash flow from operating activities:
Net income ........................................................... $ 14,813 $ 17,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent ................................... (84) 101
Depreciation and amortization ................................... 1,712 2,136
Provision for student loan losses ............................... 81 72
Deferred income taxes ........................................... (34) (81)
Changes in assets and liabilities:
Tuition receivable, net ......................................... 1,504 63
Other current assets ............................................ (953) (224)
Other assets .................................................... 29 --
Accounts payable ................................................ (242) 280
Accrued expenses ................................................ 298 (261)
Income taxes payable ............................................ (1,229) 822
Unearned tuition ................................................ (2,000) (931)
Student loans originated ............................................. (4,027) (4,288)
Collections on student loans receivable .............................. 3,752 4,166
-------- --------
Net cash provided by operating activities ................... 13,620 19,568
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................................. (14,631) (2,385)
Purchases of marketable securities .................................. (6,000) (8,000)
-------- --------
Net cash used in investing activities ....................... (20,631) (10,385)
-------- --------
Cash flows from financing activities:
Deferred lease incentives ........................................... 250 --
Common dividends paid ............................................... (1,086) (1,384)
Preferred dividends paid ............................................ (2,624) (1,630)
Proceeds from exercise of stock options ............................. -- 2,111
Issuance cost of preferred stock .................................... (29) --
-------- --------
Net cash used in financing activities ....................... (3,489) (903)
-------- --------
Net increase (decrease) in cash and cash equivalents ........ (10,500) 8,280
Cash and cash equivalents - beginning of period ........................ 58,705 49,135
-------- --------
Cash and cash equivalents - end of period .............................. $ 48,205 $ 57,415
======== ========
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, 2002 AND 2003 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, 2003 are
not necessarily indicative of the results to be expected for the full fiscal
year. All information as of June 30, 2003, and for the three and six months
ended June 30, 2002 and 2003 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, 2002.
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-five campuses in Maryland, North Carolina, Pennsylvania,
Tennessee, Virginia and Washington, D.C. 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. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net income by
the weighted average common and potentially dilutive common equivalent shares
outstanding, determined as follows:
6
For the three months For the six months
ended June 30, ended June 30,
-------------------- -------------------
(in thousands) (in thousands)
2002 2003 2002 2003
------ ------ ------ ------
Weighted average shares outstanding
used to compute basic net income per share ...... 8,352 10,666 8,352 10,659
Incremental shares issuable upon the
assumed conversion of preferred stock ........... 5,950 3,828 5,924 3,811
Incremental shares issuable upon the
assumed exercise of stock options ............... 213 285 172 239
------ ------ ------ ------
Shares used to compute diluted net income per share .. 14,515 14,779 14,448 14,709
====== ====== ====== ======
For additional information regarding total potential share issuance, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Set forth below is a reconciliation of net income used to compute net income per
share:
For the three months For the six months
ended June 30, ended June 30,
-------------------- -------------------
(in thousands) (in thousands)
2002 2003 2002 2003
------ ------ ------ ------
Net income available to common stockholders used
to compute basic earnings per share ................ $ 5,359 $ 7,560 $10,772 $15,158
Plus: Impact of assumed preferred stock
conversion:
Preferred stock dividends and accretion ......... 2,025 1,281 4,041 2,555
------- ------- ------- -------
Net income used to compute diluted net income
per share ......................................... $ 7,384 $ 8,841 $14,813 $17,713
======= ======= ======= =======
4. CREDIT FACILITIES
The Company maintains two credit facilities from two banks in the amount of
$10.0 million each. Interest on any borrowings under the facilities will accrue
at an annual rate of 0.75% above the London Interbank Offered Rate. There is no
outstanding balance and no fees payable on either facility as of June 30, 2003.
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, 2002 and June 30, 2003, the Company had
10,652,412 and 10,715,098 shares of common stock issued and outstanding,
respectively. For the three months ended June 30, 2003, the Company
declared a quarterly cash dividend of $0.065 per common share. The dividend
was payable on July 23, 2003 to common stockholders of record on July 9,
2003.
Preferred Stock / Series A Convertible Redeemable 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 Convertible Redeemable Preferred Stock, including shares reserved
for accrue in-kind dividends on
7
the Series A Convertible Redeemable Preferred Stock. The following table
reflects all Preferred Stock activity from December 31, 2002 to June 30,
2003:
Series A Convertible
Redeemable Preferred
Stock
---------------------
(in thousands)
Balance, December 31, 2002......................... $93,807
Dividends - accrue in-kind shares.................. 911
Accretion of carrying value........................ (451)
-------
Balance, March 31, 2003............................ $94,267
Dividends - accrue in-kind shares.................. 927
Accretion of carrying value........................ (461)
-------
Balance, June 30, 2003............................. $94,733
=======
On January 1, 2003, the Company recorded 34,456 shares of Series A
Convertible Redeemable Preferred Stock as accrued in-kind dividends and
paid a quarterly cash dividend of $0.8 million. On April 1, 2003 the
Company recorded 35,059 shares of Series A Convertible Redeemable Preferred
Stock as accrued in-kind dividends and paid a quarterly cash dividend of
$0.8 million.
From the original issuance date until May 15, 2006, dividends accrue on the
Series A Convertible Redeemable Preferred Stock at an annual rate of 7%,
with 3.5% payable in cash and the remaining 3.5% accruing in additional
shares of Series A Convertible Redeemable Preferred Stock. After May 15,
2006, dividends accrue at an annual rate of 3.0%, all of which are payable
in cash. The Series A Convertible Redeemable Preferred Stock dividends and
accretion are recorded based on an effective yield of 5.43% applied to the
carrying value of the Series A Convertible Redeemable 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
Convertible Redeemable Preferred Stock. For a more detailed description of
the terms of the Series A Convertible Redeemable Preferred Stock, see Note
6 of the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Stock Options
In July 1996, the Company's stockholders approved 1,500,000 shares of
common stock for grants under the Company's 1996 Stock Option Plan. This
Plan was amended by the stockholders at the May 2001 Annual Stockholder's
Meeting to increase the shares authorized for issuance thereunder by
1,000,000 (as amended, the "Plan") to 2,500,000. The Plan provides for the
grant of options intended to qualify as incentive stock options, and also
provides for the grant of non-qualifying options to employees and directors
of the Company. Options may be granted to eligible employees or directors
of the Company at the discretion of the Board of Directors, at option
prices based at or above the fair market value of the shares at the date of
grant. Vesting provisions are at the discretion of the Board of Directors.
The maximum term of options granted under the Plan is 10 years.
8
The table below sets forth the stock option activity for the six months
ended June 30, 2003:
Weighted-Average
Number of shares Exercise Price
------------------ ----------------
Balance, December 31, 2002............................. 970,000 $37.09
Grants................................................. 245,000 $54.19
Exercises.............................................. (62,686) $71.85
Forfeitures............................................ -- --
--------- ------
Balance, June 30, 2003................................. 1,152,314 $40.91
========= ======
Of the 1,152,314 total stock options that have been issued and are
outstanding, 498,976 are exercisable as of June 30, 2003. A total of
334,405 shares remain authorized but unissued under the Plan. As of June
30, 2003, the weighted average contractual life of outstanding stock
options is 4.9 years.
The Company uses the intrinsic-value-based method of accounting for its
stock options plan. Under this method, compensation expense is the excess,
if any, of the quoted market price of the stock at grant date over the
amount an employee must pay to acquire the stock. Had compensation expense
been determined based on the fair value of the options at grant dates
computed by the Black-Scholes methodology, the pro forma amounts would be
as follows:
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
2002 2003 2002 2003
------- ------- ------- -------
In thousands (except per share)
Net income ........................................ $ 7,384 $ 8,841 $14,813 $17,713
Stock-based compensation expense, net of tax ...... 623 1,126 1,219 2,134
------- ------- ------- -------
Pro forma net income .............................. $ 6,761 $ 7,715 $13,594 $15,579
======= ======= ======= =======
Net income available to common stockholders ....... $ 5,359 $ 7,560 $10,772 $15,158
Stock-based compensation expense, net of tax ...... 623 1,126 1,219 2,134
------- ------- ------- -------
Pro forma net income available to common
stockholders ...................................... $ 4,736 $ 6,434 $ 9,553 $13,024
======= ======= ======= =======
Net income per share:
As reported:
Basic.................................... $0.64 $0.71 $1.29 $1.42
Diluted.................................. $0.51 $0.60 $1.03 $1.20
Pro forma:
Basic.................................... $0.57 $0.60 $1.14 $1.22
Diluted.................................. $0.47 $0.52 $0.94 $1.06
9
The table below sets forth the assumptions used to estimate fair value as
of the date of grant using the Black-Scholes option pricing model:
2002 2003
---- ----
Dividend yield ...................................... 0.5% 0.5%
Risk-free interest rates ............................ 4.8% 3.0%
Volatility .......................................... 43% 40%
Expected option term (years) ........................ 5.9 5.2
Weighted average fair value of options
granted during the year ....................... $23.65 $21.88
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.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of intangible long-lived assets and related asset retirement costs.
The adoption of SFAS 143 on January 1, 2003 did not have a material impact on
the consolidated financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity Including Certain Costs
Incurred in a Restructuring. Under EITF 94-3, a liability for an exit activity
was recognized at the date of an entity's commitment to an exit plan. SFAS 146
required that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. The adoption of SFAS 146
on January 1, 2003 did not have a material impact on the consolidated financial
statements.
In November 2002, the FASB approved FASB Interpretation No. 45 ("FIN 45")
Guarantor's Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing
disclosure requirement for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
is effective on a prospective basis to guarantees issued or modified after
December 31, 2002. FIN 45 is effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of FIN 45 as of
December 31, 2002 did not have a material impact on the consolidated financial
statements.
10
8. LEASE AGREEMENTS
During the second quarter of 2003, the Company executed lease agreements for two
Pennsylvania campuses, one existing Maryland campus to be relocated and one
regional office in North Carolina. The table below sets forth additional
information regarding these leases:
Lease Average
Commencement Annual
Campus Square Feet Date Term Payment
- ----------------------- ----------- ------- ------------ ---------
Bensalem, PA 12,500 8/01/03 84 mos. $265,000
Springfield, PA 13,100 8/01/03 84 mos. $302,000
Charlotte, NC 2,200 8/01/03 36 mos. $ 45,000
Anne Arundel County, MD 18,000 2/01/04 156 mos. $443,000
9. LONG-TERM LIABILITY
In conjunction with the opening of new campuses in Chesapeake, Virginia, and
Newport News, Virginia during 2001 and in Charlotte, North Carolina (two
campuses), Cary, North Carolina, and corporate offices in Arlington, Virginia
during 2002, the Company was reimbursed by the lessors for improvements made to
the leased properties in the amount of $763,000 and $1,313,000 in 2001 and 2002,
respectively. There were no such reimbursements during the three and six months
ended June 30, 2003. In accordance with Financial Accounting Standards Board
Technical Bulletin No. 88-1, these reimbursements were capitalized as leasehold
improvements and a long-term liability established. The leasehold improvements
and the long-term liability will be amortized on a straight-line basis over the
corresponding lease terms, which range from five to ten years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS
Certain of the statements included in this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" as well as elsewhere in this
report on Form 10-Q are forward-looking statements made pursuant to the Private
Securities Litigation Reform Act of 1995 ("Reform Act"). These statements are
based on the Company's current expectations and are subject to a number of
assumptions, risks and uncertainties. In accordance with the Safe Harbor
provisions of the Reform Act, the Company has identified important factors that
could cause the actual results to differ materially from those expressed in or
implied by such statements. The assumptions, uncertainties and risks include the
pace of growth of student enrollment, our continued compliance with Title IV of
the Higher Education Act, and the regulations thereunder, as well as state and
regional regulatory requirements, competitive factors, risks associated with the
opening of new campuses, risks associated with the offering of new educational
programs and adapting to other changes, risks associated with the acquisition of
existing educational institutions, risks relating to the timing of regulatory
approvals, our ability to continue to
11
implement our growth strategy, and general economic and market conditions.
Further information about these and other relevant risks and uncertainties may
be found in the Company's annual report on Form 10-K and its other filings with
the Securities and Exchange Commission. The Company undertakes no obligation to
update or revise forward looking statements.
ADDITIONAL INFORMATION
We maintain a website at http://www.strayereducation.com. The information on our
website is not incorporated by reference in this Quarterly Report on Form 10-Q
and our web address is included as an inactive textual reference only. We make
available, free of charge through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Enrollment. Enrollment at Strayer University for the 2003 spring term,
which began March 31, 2003 and ended June 16, 2003, increased 17% to 16,772
students compared to 14,335 for the same term in 2002. Across the Strayer
University campus network, new student enrollments increased 16% and continuing
student enrollments increased 18%. Strayer University Online enrollments
increased 69% to 6,372 students from 3,772. The total number of students taking
courses online (including students at brick and mortar campuses taking at least
one online course) in the spring 2003 quarter was 8,033.
STUDENT ENROLLMENT
Spring Spring %
2002 2003 Change
------ ------ ------
New Campuses (9 in operation 3 or less years)
Campus Based Students 938 1,395 49%
Online Based Students 505 1,400 177%
------ ------
Total New Campus Students 1,443 2,795 94%
------ ------
Mature Campuses (13 in operation 4 or more years)
Campus Based Students 9,625 9,005 - 6%
Online Based Students 2,563 3,767 47%
------ ------
Total Mature Campus Students 12,188 12,772 5%
------ ------
Out-of-Area Online Students 704 1,205 71%
------ ------
Total University Enrollment 14,335 16,772 17%
====== ======
Total Students Taking 100% Courses Online 3,772 6,372 69%
Total Students Taking At Least 1 Course Online 4,970 8,033 62%
12
Revenues. Revenue increased 24% from $29.8 million in the second quarter
of 2002 to $37.0 million in the second quarter of 2003, principally due to a 17%
increase in student enrollments and a 5% tuition increase effective for 2003.
Instruction and educational support expenses. Instruction and educational
support expenses increased $2.9 million, or 28%, from $10.4 million in the
second quarter of 2002 to $13.3 million in the second quarter of 2003. This
increase was principally due to the direct costs necessary to support the
increase in student enrollments including faculty compensation, related academic
staff salaries, campus facility costs and financial aid processing costs. These
costs as a percentage of revenues increased to 35.9% in the second quarter of
2003 from 34.7% in the second quarter of 2002 primarily due to the addition of
three new campuses which generally operate at a loss or at lower profitability
in the first year of operation.
Selling and promotion expenses. Selling and promotion expenses increased
$1.1 million, or 32%, from $3.8 million in the second quarter of 2002 to $4.9
million in the second quarter of 2003. This increase was principally due to
marketing expenses associated with opening three new campuses, two in Tennessee
for spring term 2003 and one in North Carolina for summer term 2003, as well as
ongoing marketing expenses for the three new campuses opened in North Carolina
for the summer term in 2002. The addition of admissions representatives at these
new campuses and at Strayer University Online also contributed to the increase.
These expenses as a percentage of revenues increased to 13.4% in the second
quarter of 2003 from 12.6% as a result of the aforementioned factors.
General and administration expenses. General and administration expenses
increased $0.7 million, or 18%, from $4.0 million in the second quarter of 2002
to $4.7 million in the second quarter of 2003. This increase was principally due
to increased employee compensation and related expenses as well as the addition
of three new campuses, two in Tennessee for the spring term 2003 and one in
North Carolina for the summer term 2003. Ongoing general and administration
expenses related to the three new campuses opened for the summer term 2002 in
North Carolina also contributed to the increase. General and administrative
expenses as a percentage of revenues decreased to 12.8% in the second quarter of
2003 from 13.4% in the second quarter of 2002 primarily due to greater revenues
being spread over the fixed costs of various centralized functions.
Income from operations. Operating income increased $2.3 million, or 20%,
from $11.7 million in the second quarter of 2002 to $14.0 million in the second
quarter of 2003. The increase was due to the aforementioned factors.
Investment and other income. Investment and other income increased $0.2
million, or 49%, from $0.4 million in the second quarter of 2002 to $0.6 million
in the second quarter of 2003. The increase was principally due to investments
in marketable securities beginning in the second quarter of 2002 which had a
higher yield than money market funds and bank overnight deposits. The Company
also had, on average, a higher cash balance.
Net income. Net income was $8.8 million in the second quarter of 2003
compared to $7.4 million for the same period in 2002, an increase of $1.4
million, or 20%, because of factors discussed above.
13
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Revenues. Revenue increased 24% from $59.5 million in the six months ended
June 30, 2002 to $73.7 million in the six months ended June 30, 2003,
principally due to an average 17% increase in student enrollments and a 5%
tuition increase effective for 2003.
Instruction and educational support expenses. Instruction and educational
support expenses increased $6.1 million, or 31%, from $20.0 million in the six
months ended June 30, 2002 to $26.1 million in the six months ended June 30,
2003. This increase was principally due to the direct costs necessary to support
the increase in student enrollments including faculty compensation, related
academic staff salaries, campus facility costs and financial aid processing
costs. These costs as a percentage of revenues increased to 35.4% in the six
months ended June 30, 2003 from 33.6% in the six months ended June 30, 2002
primarily due to the addition of new campuses which generally operate at a loss
or at lower profitability in the first year of operation.
Selling and promotion expenses. Selling and promotion expenses increased
$2.3 million, or 31%, from $7.5 million in the six months ended June 30, 2002 to
$9.8 million in the six months ended June 30, 2003. This increase was
principally due to marketing expenses associated with opening three new
campuses, two in Tennessee for spring term 2003 and one in North Carolina for
summer term 2003, as well as ongoing marketing expenses for the three new
campuses opened in North Carolina for the summer term in 2002. The addition of
admissions representatives at these new campuses and at Strayer University
Online also contributed to the increase. These expenses as a percentage of
revenues increased to 13.4% in the six months ended June 30, 2003 from 12.6% in
the six months ended June 30, 2002 as a result of the aforementioned factors.
General and administration expenses. General and administration expenses
increased $1.1 million, or 13%, from $8.5 million in the six months ended June
30, 2002 to $9.6 million in the six months ended June 30, 2003. This increase
was principally due to increased employee compensation and related expenses as
well as the addition of three new campuses in 2003 and the ongoing general and
administration expenses related to the three new campuses opened for summer term
2002. General and administrative expenses as a percentage of revenues decreased
to 13.0% for the six months ended June 30, 2003 from 14.3% in the six months
ended June 30, 2002 primarily due to greater revenues being spread over the
fixed costs of various centralized functions.
Income from operations. Operating income increased $4.6 million, or 20%,
from $23.5 million in the six months ended June 30, 2002 to $28.1 million in the
six months ended June 30, 2003. The increase was due to the aforementioned
factors.
Investment and other income. Investment and other income increased $0.4
million, or 53%, from $0.8 million in the six months ended June 30, 2002 to $1.2
million in the six months ended June 30, 2003. The increase was principally due
to investments in marketable securities beginning in the second quarter of 2002
which had a higher yield than money market funds and bank overnight deposits.
The Company also had, on average, a higher cash balance.
Net income. Net income was $17.7 million in the six months ended June 30,
2003 compared to $14.8 million for the same period in 2002, an increase of $2.9
million, or 20%, because of factors discussed above.
14
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, we had cash, cash equivalents and marketable securities of
$83.8 million compared to $67.3 million at December 31, 2002 and $54.2 million
at June 30, 2002. Beginning in the second quarter of 2002, we began investing in
a diversified no load, short-term, investment grade corporate bond fund in an
effort to generate a somewhat higher yield on our short-term, liquid assets than
our holdings in bank overnight deposits and money market funds, but taking only
limited credit and interest rate risk. As of June 30, 2003, we had a total of
$26.4 million invested in this fund. At June 30, 2003, the 513 issues in this
fund had an average credit rating of Aa3, an average maturity of 2.6 years and
an average duration of 2.0 years, as well as an average yield of 2.99%. We had
no debt as of June 30, 2003 or December 31, 2002. For the six months ended June
30, 2003, we generated $19.6 million net cash from operating activities compared
to $13.6 million for the same period in 2002. Capital expenditures were $2.4
million for the six months ended June 30, 2003 compared to $14.6 million for the
same period in 2002, $12.0 million of which was for the purchase of three
existing campus facilities.
For the six months ended June 30, 2003, we paid $3.0 million in cash dividends,
$1.6 million to our preferred stockholders and $1.4 million to our common
stockholders.
For the second quarter 2003, bad debt expense as a percentage of revenue was
1.9% compared to 1.3% for the same period in 2002. Days sales outstanding,
adjusted to exclude tuition receivable related to future quarters, was seven
days at the end of the second quarter 2002 and 2003.
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. The Company believes
that existing cash, cash equivalents, and marketable securities, cash generated
from operating activities, and if necessary, cash borrowed under the credit
facilities, will be sufficient to meet the Company's requirements for at least
the next 12 months.
The table below sets forth our contractual commitments associated with operating
leases and preferred stock cash dividends as of June 30, 2003. Although they
have historically been paid by the Company, common stock dividend payments are
not a contractual commitment and, therefore, have been excluded from this table.
Payments Due By Period (In Thousands)
----------------------------------------------------
Within 1 Year 2-3 Years 4-5 Years After 5 Years
------------- --------- --------- -------------
Operating Leases $5,171 $9,814 $7,427 $ 19,907
Preferred Stock Cash Dividends 3,257 6,514 4,127 13,068
------ ------- ------- --------
Total $8,428 $16,328 $11,554 $ 32,975
====== ======= ======= ========
CAMPUSES
Strayer University successfully opened its second campus in Raleigh, NC for the
summer 2003 term, with classes commencing on June 30. The company will open two
campuses in the Philadelphia area for the fall 2003 term. Leases have been
executed, and fit out is currently underway for campus facilities in
Springfield, Pa. and Bensalem, Pa. Marketing
15
and recruiting activities commenced on July 1 in the Philadelphia market. First
classes will be held on September 22.
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 Redeemable
Preferred Stock 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:
Current
Weighted average common shares outstanding for the three months
ended 6/30/03 .................................................. 10,666,147
Series A Convertible Redeemable Preferred Stock, convertible on a
1:1 basis (outstanding or recorded) at 6/30/03.................. 3,827,972
Issued stock options using Treasury Stock Method.................... 284,512
----------
Total current................................................. 14,778,631
----------
Potential
Accrual of required PIK dividends on Series A Convertible
Redeemable Preferred Stock through May 2006..................... 493,985 (a)
Total issued stock options, less options accounted for using
the Treasury Stock Method above................................. 916,753
Authorized but unissued options .................................... 334,405
----------
Total potential............................................... 1,745,143
----------
Total current and potential common shares..................... 16,523,774
==========
- ------------------------
(a) This number may be smaller as it does 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. Of the 493,985
shares, 129,926 would potentially accrue through May 15, 2004.
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 bank overnight deposits, money market funds and a short-term
corporate bond fund. The Company has not used derivative financial instruments
in its investment portfolio.
Earnings from investments in bank overnight deposits, money market mutual funds,
and short-term corporate bond funds may be adversely affected in the future
should interest rates decline. The Company's future investment income may fall
short of expectations due to changes in interest rates or the Company may suffer
losses in principal if forced to sell securities that have declined in market
value due to changes in interest rates. As of June 30, 2003, a 10% increase or
decline in interest rates will not have a material impact on the
16
Company's future earnings, fair values, or cash flows related to investments in
cash equivalents or interest earning marketable securities.
ITEM 4: CONTROLS AND PROCEDURES
(a) 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
Exchanges 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 change in our internal accounting controls or
in other factors that could significantly affect those controls.
17
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 7, 2003, the
following matters were submitted to a vote of our common stockholders:
Proposal
1. Election of Common Stock Directors:
No
For Against Abstain Vote
--- ------- ------- ----
Robert S. Silberman 10,056,186 77,430 0 0
Dr. Charlotte F. Beason 10,095,411 38,205 0 0
William E. Brock 10,095,313 38,303 0 0
Gary Gensler 10,095,336 38,280 0 0
Todd A. Milano 9,961,622 171,994 0 0
Robert L. Johnson 10,095,336 38,280 0 0
G. Thomas Waite, III 10,095,336 38,280 0 0
2. Ratification of Appointment of Pricewaterhouse Coopers LLP to serve
as independent public accountants for the fiscal year ending
December 31, 2003:
For Against Abstain No Vote
--- ------- ------- -------
10,021,335 100,560 11,721 0
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits:
Exhibit 99.01
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
18
Exhibit 99.02
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b) Reports on Form 8-K:
On May 9, 2003, the Registrant filed a Current Report on Form 8-K
announcing its First Quarter 2003 financial results.
On May 29, 2003, the Registrant filed a Current Report on Form 8-K
announcing that it had declared its regular quarterly common stock
dividend for the second quarter in the amount of $0.065 per share
payable on July 23, 2003 to all holders of record on July 9, 2003.
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: August 4, 2003
20
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.01 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
99.02 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002