SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2004
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 APRIL 30, 2004, THERE WERE OUTSTANDING 13,920,395 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, 2003 and March 31, 2004 .......................................... 3
Unaudited Condensed Consolidated Statements of Income
for the three month periods ended March 31, 2003 and 2004 ..................... 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three month periods ended March 31, 2003 and 2004 ..................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 2003 and 2004 ..................... 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 ................................................. 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, EXCEPT SHARE DATA)
December 31, March 31,
2003 2004
------------ --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 82,089 $ 97,965
Marketable securities available for sale, at fair value ................................. 25,951 25,951
Tuition receivable, net of allowances for doubtful accounts ............................. 35,997 41,739
Student loans receivable, held for sale ................................................. 65 5
Other current assets .................................................................... 1,656 2,508
--------- ---------
Total current assets ................................................................ 145,758 168,168
Property and equipment, net ................................................................ 35,930 36,968
Restricted cash ............................................................................ 500 500
Other assets ............................................................................... 368 358
--------- ---------
Total assets ........................................................................ $ 182,556 $ 205,994
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 5,127 $ 4,747
Accrued expenses ........................................................................ 2,329 1,552
Income taxes payable .................................................................... 2,898 4,092
Dividends payable ....................................................................... 1,510 1,082
Unearned tuition ........................................................................ 39,134 45,611
--------- ---------
Total current liabilities .......................................................... 50,998 57,084
Deferred income taxes ...................................................................... 228 392
Long-term liabilities ...................................................................... 2,666 2,821
--------- ---------
Total liabilities .................................................................. 53,892 60,297
--------- ---------
Commitments and contingencies
Mandatorily redeemable convertible Series A preferred stock, par value $.01;
6,000,000 shares authorized; 3,899,944 and 858,766 shares issued and
outstanding at December 31, 2003 and March 31, 2004, respectively .................... 95,686 20,979
Stockholders' equity:
Common Stock, par value $.01; 20,000,000 shares
authorized; 10,703,395 and 13,920,395 shares issued and outstanding
at December 31, 2003 and March 31, 2004, respectively ................................ 107 139
Additional paid-in capital .............................................................. 59,838 142,073
Retained earnings (accumulated deficit) ................................................. (26,918) (17,464)
Accumulated other comprehensive income (loss) ........................................... (49) (30)
--------- ---------
Total stockholders' equity ........................................................ 32,978 124,718
--------- ---------
Total liabilities and stockholders' equity ........................................ $ 182,556 $ 205,994
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the three months
ended March 31,
--------------------
2003 2004
------- -------
Revenues ...................................... $36,694 $46,106
------- -------
Costs and expenses:
Instruction and educational support ...... 12,831 15,191
Selling and promotion .................... 4,889 6,084
General and administration ............... 4,877 6,319
------- -------
22,597 27,594
------- -------
Income from operations ............ 14,097 18,512
Investment and other income .................. 574 318
------- -------
Income before income taxes ........ 14,671 18,830
Provision for income taxes .................... 5,799 7,362
------- -------
Net income ........................ 8,872 11,468
Preferred stock dividends and accretion ....... 1,275 1,110
------- -------
Net income available to common
stockholders ...................... $ 7,597 $10,358
======= =======
Basic net income per share .................... $ 0.71 $ 0.92
======= =======
Diluted net income per share .................. $ 0.61 $ 0.76
======= =======
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
--------------------
2003 2004
-------- --------
Net income .................................... $ 8,872 $ 11,468
Other comprehensive income:
Unrealized gain (loss) on investment,
net of taxes ........................ 109 (19)
-------- --------
Comprehensive income .......................... $ 8,981 $ 11,449
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
--------------------
2003 2004
-------- --------
Cash flow from operating activities:
Net income ........................................................ $ 8,872 $ 11,468
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent ................................ 63 135
Depreciation and amortization ................................ 1,012 1,242
Provision for student loan losses ............................ 46 (35)
Deferred income taxes ........................................ (36) (18)
Changes in assets and liabilities:
Tuition receivable, net ...................................... (4,079) (5,742)
Other current assets ......................................... (548) (732)
Other assets ................................................. (1) 10
Accounts payable ............................................. 554 (380)
Accrued expenses ............................................. (671) (777)
Income taxes payable ......................................... 3,794 4,177
Unearned tuition ............................................. 4,773 6,477
Student loans originated .......................................... (2,459) (439)
Collections on student loans receivable and held for sale ......... 2,074 554
-------- --------
Net cash provided by operating activities ................ 13,394 15,940
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .............................. (692) (2,280)
Purchases of marketable securities ............................... (6,000) --
-------- --------
Net cash used in investing activities .................... (6,692) (2,280)
-------- --------
Cash flows from financing activities:
Common dividends paid ............................................ (692) (695)
Preferred dividends paid ......................................... (815) (1,332)
Proceeds from exercise of stock options .......................... -- 4,243
-------- --------
Net cash provided by (used in) financing
activities ............................................ (1,507) 2,216
-------- --------
Net increase in cash and cash equivalents ................ 5,195 15,876
Cash and cash equivalents - beginning of period ..................... 49,135 82,089
-------- --------
Cash and cash equivalents - end of period ........................... $ 54,330 $ 97,965
======== ========
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 MARCH 31, 2003 AND 2004 IS UNAUDITED.
1. BASIS OF PRESENTATION
The financial statements are presented on a consolidated basis. The accompanying
financial statements include the accounts of Strayer Education, Inc. (the
Company), Strayer University, Inc. (the University) and Education Loan
Processing, Inc. (ELP), collectively referred to herein as the "Company" or
"Companies."
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results to be expected for the full fiscal year.
All information as of March 31, 2004, and for the three months ended March 31,
2003 and 2004 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.
Beginning in the first quarter 2004, the Company began recording employee
tuition discounts and scholarships & awards as a reduction to revenue. In the
prior year, these items (totaling $576,000 for the three months ended March 31,
2003) were recorded as operating expenses. Beginning in the first quarter 2004,
the Company also began recording textbook-related income as revenue. In the
prior year, this income ($136,000 for the three months ended March 31, 2003) was
recorded as Investment & Other Income. These changes in classification have no
impact on net income and are immaterial in amount.
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, 2003.
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 Pennsylvania, Maryland, Washington, D.C.,
Virginia, North Carolina and Tennessee and worldwide via the internet through
Strayer University Online. ELP originates student loans for the University's
students which are held for sale.
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
ended March 31,
--------------------
(in thousands)
2003 2004
------ ------
Weighted average shares outstanding
used to compute basic net income per share .......... 10,652 11,304
Incremental shares issuable upon the
assumed conversion of preferred stock ............... 3,793 3,362
Incremental shares issuable upon the
assumed exercise of stock options ................... 194 425
------ ------
Shares used to compute diluted net income per share ...... 14,639 15,091
====== ======
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
ended March 31,
--------------------
(in thousands)
2003 2004
------- -------
Net income available to common stockholders
used to compute basic earnings per share ............... $ 7,597 $10,358
Plus: Impact of assumed preferred stock conversion:
Preferred stock dividends and accretion ................ 1,275 1,110
------- -------
Net income used to compute diluted net income per share .. $ 8,872 $11,468
======= =======
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 March 31, 2004.
5. STOCKHOLDERS' EQUITY
Secondary Offering
In the first quarter of 2004, the Company completed its previously announced
secondary offering of common stock. The Company received none of the proceeds
from the secondary offering except for proceeds related to the exercise of
options by management to fulfill the over-allotment obligation. The 3,450,000
shares sold in the offering were issued following the conversion of
convertible preferred stock (3,102,000 shares) and the partial exercise of an
option on existing shares of common stock (233,000 shares) held by New
Mountain Partners, L.P., New Mountain Strayer Trust and MidOcean Capital
Investors, L.P., as well as the exercise of options (115,000 shares) held by
certain of the Company's management.
7
Common Stock
A total of 20,000,000 shares of common stock, par value $0.01, have been
authorized. As of December 31, 2003 and March 31, 2004, the Company had
10,703,395 and 13,920,395 shares of common stock issued and outstanding,
respectively. For the three months ended March 31, 2004, the Company declared
a quarterly cash dividend of $0.065 per common share. The dividend was
payable on April 20, 2004 to common stockholders of record on April 6, 2004.
Series A Convertible Redeemable Preferred Stock
A total of 6,000,000 shares of Series A Convertible Redeemable Preferred
Stock, par value $0.01, have been authorized. The following table reflects
all Preferred Stock activity from December 31, 2003 to March 31, 2004:
Series A Convertible
Redeemable Preferred
Stock
--------------------
(in thousands)
Balance, December 31, 2003 ...................... $ 95,686
Dividends - accrue in-kind shares ............... 845
Shares converted into common shares ............. (75,122)
Accretion of carrying value ..................... (430)
--------
Balance, March 31, 2004 ......................... $ 20,979
========
In March 2004, 3,102,000 shares of the Series A Convertible Redeemable
Preferred Stock shares were converted into common stock on a 1 for 1 basis
and, pursuant to the registration rights agreement with the Company, were
sold in a registered secondary offering by the Investors.
On January 1, 2004, the Company recorded 36,932 shares of Series A
Convertible Redeemable Preferred Stock as accrued in-kind dividends and paid
a quarterly cash dividend of $0.8 million. On March 15, 2004, the Company
recorded 23,892 shares of Series A Convertible Redeemable Preferred Stock as
accrued-in-kind dividends and paid a dividend of $0.5 million for shares
converted to common. On April 1, 2004, the Company recorded 8,197 shares of
Series A Convertible Redeemable Preferred Stock as accrued in-kind dividends
and paid a quarterly cash dividend of $0.2 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% accrues 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 is 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
8
for 20 consecutive trading days at any time after May 15, 2004, the Company
may force 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 7 of the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
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 the
options was five years before the amendment and ten years after the
amendment.
The table below sets forth the stock option activity for the three months
ended March 31, 2004:
Number of Weighted-Average
shares Exercise Price
---------- -----------------
Balance, December 31, 2003 ............. 1,131,667 $ 41.05
Grants ................................. 20,000 $118.00
Exercises .............................. (115,000) $ 36.90
Forfeitures ............................ -- --
---------- -------
Balance, March 31, 2004 ................ 1,036,667 $ 42.99
========== =======
Of the 1,036,667 total stock options that have been issued and are
outstanding, 456,660 are exercisable as of March 31, 2004. A total of 314,405
shares remain authorized but unissued under the Plan. As of March 31, 2004,
the weighted average contractual life of outstanding stock options is 4.2
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:
9
For the three months ended
March 31,
--------------------------
2003 2004
------- -------
In thousands (except per share)
Net income .................................................... $ 8,872 $11,468
Stock-based compensation expense, net of tax .................. 1,009 802
------- -------
Pro forma net income .......................................... $ 7,863 $10,666
======= =======
Net income available to common stockholders ................... $ 7,597 $10,358
Stock-based compensation expense, net of tax .................. 1,009 802
------- -------
Pro forma net income available to common stockholders ......... $ 6,588 $ 9,556
======= =======
Net income per share:
As reported:
Basic................................................ $ 0.71 $ 0.92
Diluted.............................................. $ 0.61 $ 0.76
Pro forma:
Basic................................................ $ 0.62 $ 0.85
Diluted.............................................. $ 0.54 $ 0.71
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 2004
------ ------ ------
Dividend yield ...................................................... 0.5% 0.5% 0.24%
Risk-free interest rates ............................................ 4.8% 3.0% 3.4%
Volatility .......................................................... 43% 40% 36%
Expected option term (years) ........................................ 5.9 5.2 6.1
Weighted average fair value of options granted during the year ...... $23.65 $21.88 $47.33
6. INVESTMENTS IN MARKETABLE SECURITIES
The Company has invested some of its excess cash in a diversified, no load,
short-term, investment grade, tax-exempt 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 December 2003, the FASB issued FASB Interpretation No. 46 - An Interpretation
of ARB 51 (revised December 2003) ("FAS 46R"), Consolidation of Variable
Interest Entities. FIN 46R addresses consolidation by business enterprises of
variable interest entities. FIN 46R is effective for periods ending after March
15, 2004 and did not have a material impact on our financial statements.
10
8. LEASE AGREEMENTS
During the first quarter of 2004, the company executed a lease for a new campus
in Georgia, as follows:
Lease Commencement Average Annual
Campus Square Feet Date Term Payment
- --------------- ----------- ------------------ --------- --------------
Cobb County, GA 15,700 06/15/04 96 months $434,000
9. LONG-TERM LIABILITIES
Lease Incentives
In conjunction with the opening of new campuses, the Company was reimbursed by
the lessors for improvements made to the leased properties. 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. As of December 31, 2003 and March 31, 2004,
the Company had deferred lease incentives of $1,513,000 and $1,430,000,
respectively.
Lease Obligations
In accordance with the FASB Technical Bulletin No. 85-3, "Accounting for
Operating Leases with Schedule Rent Increases", the Company records rent expense
on a straight-line basis over the initial term of a lease. The difference
between the rent payment and the straight-line rent expense is recorded as a
long-term liability. As of December 31, 2003 and March 31, 2004, the Company had
deferred lease obligations of $820,000 and $1,038,000, respectively.
Indemnification on the Sale of Student Loans
In 2003, the Company sold its student loan portfolio to a national student loan
marketing organization. Under the terms of the Indemnification Agreement, the
Company has provided an indemnification to the purchaser of the student loans
for claims that may arise due to loan documentation, regulatory compliance, and
loan servicing for the student loans that were sold. As of December 31, 2003 and
March 31, 2004, the Company had recorded a liability of $333,000 and $353,000,
respectively, for the indemnification.
11
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 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 MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Enrollment. Enrollment at Strayer University for the 2004 winter term,
which began January 5, 2004 and ended March 22, 2004, increased 21% to 20,110
students compared to 16,558 for the same term in 2003. Across the Strayer
University campus network, new student enrollments increased 25% and continuing
student enrollments increased 21%. Strayer University Online enrollments
increased 56% to 9,068 students from 5,810. The total number of students taking
courses online (including students at brick and mortar campuses taking at least
one online course) in the winter 2004 quarter was 11,173.
12
STUDENT ENROLLMENT
Winter Winter %
2003 2004 Change
------ ------ ------
Campus Based Students:
New Campuses (11 in operation 3 or less years)
Classroom 1,026 2,049 100%
Online 802 2,113 164%
------ ------
Total New Campus Students 1,828 4,162 128%
------ ------
Mature Campuses (14 in operation 4 or more years)
Classroom 9,722 8,993 -7%
Online 3,917 5,061 29%
------ ------
Total Mature Campus Students 13,639 14,054 3%
------ ------
Total Campus Based Students 15,467 18,216 18%
------ ------
Online-Based Students (out of area) 1,091 1,894 74%
------ ------
Total Students 16,558 20,110 21%
====== ======
Total Students Taking 100% Courses Online 5,810 9,068 56%
Total Students Taking At Least 1 Course Online 7,356 11,173 52%
Revenues. Revenue increased 26% from $36.7 million in the first quarter of
2003 to $46.1 million in the first quarter of 2004, principally due to a 21%
increase in student enrollments and a 5% tuition increase effective for 2004.
Instruction and educational support expenses. Instruction and educational
support expenses increased $2.4 million, or 18%, from $12.8 million in the first
quarter of 2003 to $15.2 million in the first quarter of 2004. 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 decreased to 33% in the first quarter of 2004 from 35% in
the first quarter of 2003 as strong revenue growth more than offset the cost
increases described above.
Selling and promotion expenses. Selling and promotion expenses increased
$1.2 million, or 24%, from $4.9 million in the first quarter of 2003 to $6.1
million in the first quarter of 2004. This increase was principally due to
marketing expenses associated with opening two new campuses for spring term
2004, one in South Carolina and one in Tennessee, as well as ongoing marketing
expenses for the two new campuses opened in Pennsylvania for the fall term in
2003. The addition of admissions staff at these new campuses and at Strayer
University Online also contributed to the increase. These expenses as a
percentage of revenues remained at 13% in the first quarter of 2004, the same
percentage as the first quarter of 2003.
13
General and administration expenses. General and administration expenses
increased $1.4 million, or 30%, from $4.9 million in the first quarter of 2003
to $6.3 million in the first quarter of 2004. This increase was principally due
to increased employee compensation and related expenses as well as the addition
of five new campuses in 2003. General and administrative expenses as a
percentage of revenue increased to 14% in the first quarter of 2004 from 13% in
the first quarter of 2003.
Income from operations. Operating income increased $4.4 million, or 31%,
from $14.1 million in the first quarter of 2003 to $18.5 million in the first
quarter of 2004. The increase was due to the aforementioned factors.
Investment and other income. Investment and other income decreased $0.3
million, or 45%, from $0.6 million in the first quarter of 2003 to $0.3 million
in the first quarter of 2004. The decrease was principally due to a shift of
underlying investments from a short-term corporate bond fund and money market
funds to a short-term tax-exempt bond fund and tax-exempt money market funds
which had lower yields. Lower interest rates, compared to the same period in
2003, partly offset by a larger average cash balance also contributed to the
decrease.
Net income. Net income was $11.5 million in the first quarter of 2004
compared to $8.9 million for the same period in 2003, an increase of $2.6
million, or 29%, because of factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had cash, cash equivalents and marketable securities of
$123.9 million compared to $108.0 million at December 31, 2003 and $78.5 million
at March 31, 2004. 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. In the third quarter of 2003, this $26.1
million investment was liquidated generating a gain from sale of marketable
securities of $0.1 million before tax. Most of the proceeds were re-invested in
a diversified, shorter term, investment grade tax-exempt bond fund to further
reduce the Company's interest rate risk and to benefit from the tax efficiency
of the fund's underlying securities. As of March 31, 2004, we had invested a
total of $26.0 million in this fund. At March 31, 2004, the 475 issues in this
fund had an average credit rating of Aa1, an average maturity of 1.2 years and
an average duration of 1.2 years, as well as an average yield to maturity of
1.3%.
For the three months ended March 31, 2004, we generated $15.9 million in net
cash from operating activities compared to $13.4 million for the same period in
2003. Capital expenditures were $2.3 million for the three months ended March
31, 2004 compared to $0.7 million for the same period in 2003.
In the first quarter 2004, we also paid $2.0 million in dividends, $1.3 million
to our preferred stockholders and $0.7 million to our common stockholders.
For the first quarter 2004, bad debt expense as a percentage of revenue was 1.5%
compared to 1.6% for the same period in 2003. Days sales outstanding, adjusted
to exclude tuition
14
receivable related to future quarters, was nine days at the end of the first
quarter 2004, compared to seven days for the same period in 2003.
Currently, the Company invests its cash in bank overnight deposits, money market
funds and a short-term, tax-exempt 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 March 31, 2004. 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)
--------------------------------------------------------
2-3 4-5
Total Within 1 Year Years Years After 5 Years
------ ------------- ------ ------ -------------
Operating Leases 61,260 7,354 14,285 11,562 28,059
Preferred Stock Cash
Dividends (a) 5,410 566 1,423 1,479 1,942
------ ------ ------ ------ ------
Total 66,670 7,920 15,708 13,041 30,001
====== ====== ====== ====== ======
- -----------------------------------
(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 Convertible Redeemable
Preferred Stock into common shares by the end of the second quarter 2004.
Of the $5.4 million in dividends, $0.2 million would potentially accrue
through the end of the second quarter 2004.
CAMPUSES
The Company has opened two new campuses for the 2004 spring term. One campus is
located in Greenville, South Carolina, the Company's first campus in this state.
The other new campus is located in Memphis, Tennessee, the Company's second in
this city and third in the state.
The Company also intends to open two campuses in the Atlanta, Georgia area for
the summer term 2004. In addition, the Company intends to open a third campus in
the Philadelphia area for the fall term.
SECONDARY OFFERING
In the first quarter of 2004, the Company completed its previously announced
secondary offering of common stock. The Company received none of the proceeds
from the secondary offering except for proceeds related to the exercise of
options by management to fulfill the over-allotment obligation. The 3.45 million
shares sold in the offering were issued following the conversion of convertible
preferred stock and the partial exercise of an option held by New Mountain
Partners, L.P., New Mountain Strayer Trust and MidOcean Capital Investors, L.P.,
as well as the exercise of options held by certain of the Company's management.
15
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 (in thousands):
Current
-------
Common shares issued and outstanding at 3/31/04 ........................... 13,920
Series A Convertible Redeemable Preferred Stock, convertible on a
1:1 basis (outstanding or recorded), at 3/31/04 ....................... 859
Issued stock options using Treasury Stock Method .......................... 425
------
Total current ....................................................... 15,204
------
Potential
---------
Accrual of required PIK dividends on Series A Convertible
Redeemable Preferred Stock through June 2004 .......................... 17(a)
Total issued stock options, less options accounted for using
the Treasury Stock Method above ....................................... 612
Authorized but unissued options ........................................... 314
------
Total potential ..................................................... 943
------
Total current and potential common shares ........................... 16,147
======
------------------------
(a) This number assumes that the Company will force conversion of all
remaining Series A Convertible Redeemable Preferred Stock into common
stock by the end of the second quarter 2004. An additional 72,000 shares
would potentially accrue should the Series A Convertible Redeemable
Preferred Stock remain outstanding through May 2006.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is subject to the impact of interest rate changes and may be subject
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
tax-exempt 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 tax-exempt 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 March 31, 2004, a 10% increase or
decline in interest rates will not have a material impact on the Company's
future earnings, fair values, or cash flows related to investments in cash
equivalents or interest earning marketable securities.
16
ITEM 4: CONTROLS AND PROCEDURES
a) The Registrant's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of March 31, 2004. Based upon such review, the Chief Executive
Officer and Chief Financial Officer have concluded that the Registrant has
in place, as of March 31, 2004, appropriate controls and procedures designed
to ensure that information required to be disclosed by the Registrant
(including consolidated subsidiaries) 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 Over Financial Reporting. There have not been any changes
in the Company's internal controls over financial reporting during the
quarter ended March 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
With reference to the Company's Stock Repurchase Plan announced on
November 3, 2003, the Company did not repurchase any shares of common
stock during the three months ended March 31, 2004. The amount available
for future repurchases under this plan is $11,780,000. See Note 10 of
the Company's Annual Report on Form 10-K for the year ended December 31,
2003 for more information.
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:
Exhibit 31.01
Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 31.02
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
Exhibit 32.01
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K:
On February 3, 2004, the Registrant filed a Current Report on
Form 8-K announcing the filing of a registration statement on
Form S-3 for a proposed 3 million share secondary offering for
certain shareholders.
On March 9, 2004, the Registrant filed a Current Report on Form
8-K announcing the pricing of a 3.0 million common share
secondary offering.
18
On March 15, 2004, the Registrant filed a Current Report on Form
8-K announcing the closing of a 3.45 million common share
secondary offering.
On March 16, 2004, the Registrant filed a Current Report on Form
8-K announcing that it had declared its regular quarterly common
stock cash dividend for the First Quarter in the amount of $0.065
per share payable on April 20, 2004 to all holders of record on
April 6, 2004.
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: May 6, 2004
20
EXHIBIT INDEX
Exhibit Description
- ------- -----------
31.01 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.02 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.01 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
21