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, 2005
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 [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [X] NO [ ]
AS OF JULY 25, 2005, THERE WERE OUTSTANDING 14,390,717 SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.
STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets at
December 31, 2004 and June 30, 2005 ...................................... 3
Unaudited Condensed Consolidated Statements of Income
for the three and six month periods ended June 30, 2004 and 2005 ......... 4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three and six month periods ended June 30, 2004 and 2005 ......... 4
Unaudited Condensed Consolidated Statement of Stockholders' Equity
for the six month period ended June 30, 2005 ............................. 5
Unaudited Condensed Consolidated Statements of Cash Flows
for the six month periods ended June 30, 2004 and 2005 ................... 6
Notes to Unaudited Condensed Consolidated Financial Statements ........... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 17
Item 4. Controls and Procedures ................................................... 17
PART II - OTHER INFORMATION
Item 2. Changes in Securities...................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........................ 18
Item 6. Exhibits .................................................................. 19
SIGNATURES .......................................................................... 20
CERTIFICATIONS
</TABLE>
2
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
December 31, June 30,
2004 2005
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents ...................................................... $ 97,004 $ 85,601
Marketable securities available for sale, at fair value ........................ 25,753 25,670
Income taxes receivable ........................................................ - 858
Tuition receivable, net allowances for doubtful accounts of $1,301 and $1,376 at
December 31, 2004 and June 30, 2005, respectively ........................... 41,669 46,563
Student loans receivable, held for sale ........................................ 29 6
Other current assets ........................................................... 3,679 4,531
--------- ---------
Total current assets ....................................................... 168,134 163,229
Property and equipment, net ....................................................... 41,137 45,898
Restricted cash ................................................................... 500 500
Other assets ...................................................................... 343 343
--------- ---------
Total assets ............................................................... $210,114 $209,970
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................... $ 4,971 $ 6,770
Accrued expenses ............................................................... 2,318 1,362
Income taxes payable ........................................................... 6,060 -
Unearned tuition ............................................................... 42,059 47,631
--------- ---------
Total current liabilities ................................................. 55,408 55,763
Deferred income taxes ............................................................. 1,077 1,107
Long-term liabilities ............................................................. 4,707 6,256
--------- ---------
Total liabilities ......................................................... 61,192 63,126
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01; 20,000,000 shares
authorized; 14,669,487 and 14,390,717 shares issued and outstanding
at December 31, 2004 and June 30, 2005, respectively ........................ 147 144
Additional paid-in capital ..................................................... 140,943 115,948
Retained earnings .............................................................. 7,983 30,952
Accumulated other comprehensive income (loss) .................................. (151) (200)
--------- ---------
Total stockholders' equity ............................................... 148,922 146,844
--------- ---------
Total liabilities and stockholders' equity ............................... $210,114 $209,970
========= =========
</TABLE>
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)
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2004 2005 2004 2005
-------- -------- -------- --------
Revenues .............................. $46,811 $55,249 $92,917 $111,402
-------- -------- -------- --------
Costs and expenses:
Instruction and educational support . 16,533 20,032 31,724 38,491
Selling and promotion ............... 6,320 8,653 12,404 17,316
General and administration .......... 5,596 7,072 11,916 13,615
-------- -------- -------- --------
Total costs and expenses............... 28,449 35,757 56,044 69,422
-------- -------- -------- --------
Income from operations ............ 18,362 19,492 36,873 41,980
Investment and other income ........... 364 795 682 1,405
-------- -------- -------- --------
Income before income taxes ........ 18,726 20,287 37,555 43,385
Provision for income taxes ............ 7,323 7,762 14,685 16,769
-------- -------- -------- --------
Net income ........................ 11,403 12,525 22,870 26,616
Preferred stock dividends and accretion 279 - 1,389 -
-------- -------- -------- --------
Net income available to common
stockholders ..................... $11,124 $12,525 $21,481 $26,616
======== ======== ======== ========
Net income per share:
Basic ............................. $ 0.80 $ 0.86 $ 1.70 $ 1.82
Diluted ........................... $ 0.75 $ 0.85 $ 1.51 $ 1.79
Weighted average shares outstanding:
Basic ............................. 13,957 14,531 12,631 14,596
Diluted ........................... 15,164 14,791 15,128 14,870
</TABLE>
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2004 2005 2004 2005
-------- -------- -------- --------
Net income ............................... $ 11,403 $ 12,525 $ 22,870 $ 26,616
Other comprehensive income:
Unrealized gain (loss) on investment,
net of taxes ................... (120) 33 (101) (49)
-------- -------- -------- --------
Comprehensive income ..................... $ 11,283 $ 12,558 $ 22,769 $ 26,567
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
Accumulated
Common Stock Additional Other
------------------------- Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
---------- ----------- ----------- ----------- ------------- -----------
Balance at 12/31/04 ......................... 14,669,487 $ 147 $ 140,943 $ 7,983 $ (151) $ 148,922
Repurchase of common stock .................. (278,770) (3) (24,995) - - (24,998)
Common stock dividends ..................... - - - (3,647) - (3,647)
Change in net unrealized gains (losses)
on marketable securities, net of income tax - - - - (49) (49)
Net income .................................. - - - 26,616 - 26,616
---------- ----------- ----------- ----------- ----------- -----------
Balance at 6/30/05 .......................... 14,390,717 $ 144 $ 115,948 $ 30,952 $ (200) $ 146,844
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
For the six months
ended June 30,
--------------------
2004 2005
-------- --------
Cash flows from operating activities:
Net income ....................................................... $22,870 $26,616
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent ............................... 327 74
Depreciation and amortization ............................... 2,564 3,197
Provision for student loan losses ........................... (147) (63)
Deferred income taxes ....................................... (124) (33)
Changes in assets and liabilities:
Tuition receivable, net ..................................... 353 (4,894)
Other current assets ........................................ (1,155) (751)
Other assets ................................................ 10 -
Accounts payable ............................................ 128 1,618
Accrued expenses ............................................ (757) (956)
Income taxes payable ........................................ 3,307 (6,906)
Unearned tuition ............................................ (1,954) 5,572
Deferred lease incentives ................................... - 1,531
Student loans originated ......................................... (723) (571)
Collections on student loans receivable and held for sale ........ 879 601
-------- --------
Net cash provided by operating activities ............... 25,578 25,035
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ............................. (4,384) (7,793)
-------- --------
Net cash used in investing activities ................... (4,384) (7,793)
-------- --------
Cash flows from financing activities:
Common dividends paid ........................................... (1,600) (3,647)
Preferred dividends paid ........................................ (1,510) -
Repurchase of common stock ...................................... (21,166) (24,998)
Proceeds from exercise of stock options ......................... 11,949 -
-------- --------
Net cash used in financing activities ................... (12,327) (28,645)
-------- --------
Net increase (decrease) in cash and cash equivalents .... 8,867 (11,403)
Cash and cash equivalents - beginning of period .................... 82,089 97,004
-------- --------
Cash and cash equivalents - end of period .......................... $90,956 $85,601
======== ========
Non-cash transactions:
Purchases of property and equipment included in accounts payable $ 683 $ 181
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 2004 AND 2005 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."
The results of operations for the three months and six months ended June 30,
2005 are not necessarily indicative of the results to be expected for the full
fiscal year. All information as of June 30, 2005 and for the three and six
months ended June 30, 2004 and 2005 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 Company.
The Company's educational programs are offered on a quarterly basis.
Approximately 96.5% of the Company's revenues during the six months ended June
30, 2005 consisted of tuition revenue. Tuition revenue is deferred at the time
of registration and is recognized in the quarter of instruction. Tuition revenue
is shown net of any refunds, withdrawals, corporate discounts, scholarships and
employee tuition discounts. Revenues also include application fees, commencement
fees, placement test fees, withdrawal fees, loan service and origination fees,
textbook-related income and other income which are recognized when incurred.
Purchases of property and equipment and changes in accounts payable for the
three and six months ended June 30, 2004 and 2005 in the Unaudited Condensed
Consolidated Statements of Cash Flows have been adjusted to exclude non-cash
purchases of property and equipment transactions during that period. In 2004,
non-cash transactions were included in these line items. This change in
classification had no impact on net increase (decrease) in cash and cash
equivalents, and is immaterial to prior periods.
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, 2004.
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 35 campuses in 8 states and Washington, D.C. in the eastern United
States and worldwide via the Internet through Strayer University Online. ELP
originates student loans for the University's students, which loans are held for
sale.
7
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. Stock options are not included in the computation of diluted
earnings per share when the stock option exercise price of an individual grant
exceeds the average market price for the period. At June 30, 2005, the Company
had 282,083 issued and outstanding stock options that were excluded from the
calculation.
Set forth below is a reconciliation of shares used to compute net income per
share:
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
(in thousands) (in thousands)
2004 2005 2004 2005
------ ------ ------ ------
Weighted average shares outstanding
used to compute basic net income per share ... 13,957 14,531 12,631 14,596
Incremental shares issuable upon the
assumed conversion of preferred stock ........ 848 - 2,105 -
Incremental shares issuable upon the
assumed exercise of stock options ............ 359 260 392 274
------ ------ ------ ------
Shares used to compute diluted net income per share 15,164 14,791 15,128 14,870
====== ====== ====== ======
</TABLE>
Set forth below is a reconciliation of net income used to compute net income per
share:
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
(in thousands) (in thousands)
2004 2005 2004 2005
------- ------- ------- -------
Net income available to common stockholders
used to compute basic earnings per share ........ $11,124 $12,525 $21,481 $26,616
Plus: Impact of assumed preferred stock conversion:
Preferred stock dividends and accretion ......... 279 - 1,389 -
------- ------- ------- -------
Net income used to compute diluted net income per
share .......................................... $11,403 $12,525 $22,870 $26,616
======= ======= ======= =======
</TABLE>
4. CREDIT FACILITIES
The Company maintains two credit facilities from two banks in the amount of $10
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 there are no fees payable on either facility as of June
30, 2005.
8
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, 2004 and June 30, 2005, the Company had
14,669,487 and 14,390,717 shares of common stock issued and outstanding,
respectively. Commencing in the third quarter of 2004, the Company increased the
annual common stock cash dividend from $0.26 per share to $0.50 per share, or
$0.125 per share quarterly.
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 and at
the May 2005 Annual Stockholder's Meeting to increase the shares authorized for
issuance thereunder by 1,000,000 and 500,000, respectively (as amended, the
"Plan"). A total of 3,000,000 shares have been approved for grants under the
Plan. 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, officers and directors of the Company. Options may be
granted to eligible employees, officers 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
granted under the Plan is ten years after the amendment.
The table below sets forth the stock option activity for the six months ended
June 30, 2005:
<TABLE>
Weighted-
Number of Average
shares Exercise Price
--------- --------------
Balance, December 31, 2004 854,584 $ 49.22
Grants ................... 227,083 107.28
Exercises ................ - -
Forfeitures .............. - -
---------
Balance, June 30, 2005 ... 1,081,667 $ 61.41
=========
</TABLE>
Of the 1,081,667 total stock options that have been issued and remain
outstanding, 599,580 are exercisable as of June 30, 2005. A total of 548,989
shares were authorized but unissued under the Plan as of June 30, 2005. As of
June 30, 2005, the weighted average contractual life of outstanding stock
options is 4.0 years.
The Company uses the intrinsic-value-based method of accounting for stock
options granted under the 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
<TABLE>
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2004 2005 2004 2005
------- ------- ------- -------
In thousands (except per share data)
Net income ............................................ $11,403 $12,525 $22,870 $26,616
Stock-based compensation expense, net of tax .......... 459 637 1,261 1,176
------- ------- ------- -------
Pro forma net income .................................. $10,944 $11,888 $21,609 $25,440
======= ======= ======= =======
Net income available to common stockholders ........... $11,124 $12,525 $21,481 $26,616
Stock-based compensation expense, net of tax .......... 459 637 1,261 1,176
------- ------- ------- -------
Pro forma net income available to common stockholders . $10,665 $11,888 $20,220 $25,440
======= ======= ======= =======
Net income per share:
As reported:
Basic ......................................... $0.80 $0.86 $1.70 $1.82
Diluted ....................................... $0.75 $0.85 $1.51 $1.79
Pro forma:
Basic ......................................... $0.76 $0.82 $1.60 $1.74
Diluted ....................................... $0.72 $0.80 $1.43 $1.71
</TABLE>
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:
<TABLE>
2004 2005
--------- ---------
Dividend yield ............................................... 0.24% 0.48%
Risk-free interest rate ...................................... 3.8% 3.8%
Volatility ................................................... 34% 34%
Expected option term (years) ................................. 6.1 6.1
Weighted average fair value of options granted during the year $47.70 $41.18
</TABLE>
6. INVESTMENTS IN MARKETABLE SECURITIES
The Company's investments in marketable securities consist solely of publicly
traded securities and are recorded at fair value based on the quoted market
prices. The investments are considered "available-for-sale" as they are not held
for trading and will not be held to maturity, in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The Company records the net unrealized gains and
losses for changes in fair value as a component of accumulated other
comprehensive income in stockholders' equity. Realized gains and losses from the
sale of marketable securities are based on the specific identification method.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment ("SFAS No. 123(R)"), which requires the
compensation cost related to share-based payments, such as stock options and
employee stock purchase
10
plans, be recognized in the financial statements. In April 2005, the Securities
and Exchange Commission ruled that SFAS No. 123(R) is effective for all annual
periods beginning after June 15, 2005, and thus, will be effective for the
Company beginning with the first quarter of 2006. The Company is currently
evaluating the impact of SFAS No. 123(R) on its financial condition and results
of operations. See Note 5 for information related to the pro forma effects on
the Company's reported net income and net income per share of applying the fair
value recognition provisions of the previous Statement of Financial Accounting
Standards 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
8. LONG-TERM LIABILITIES
Lease Incentives
In conjunction with the opening of new campuses, the Company, in some instances,
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 improvements were capitalized as leasehold improvements and a
long-term liability was established for the reimbursements. 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, 2004 and June 30, 2005, the Company had deferred lease
incentives of $2,669,000 and $3,857,000, 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, 2004 and June 30, 2005, the Company had
deferred lease obligations of $1,823,000 and $2,240,000, respectively.
Indemnification on the Sale of Student Loans
In 2003, the Company sold substantially all of its student loan portfolio to a
national student loan marketing organization. Under the terms of the
Indemnification Agreement, the Company has indemnified 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, 2004 and June 30, 2005, the Company had recorded a liability of
$215,000 and $159,000, 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 (the "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 regional
accreditation standards and 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 "SEC" or
"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.
RESULTS OF OPERATIONS
In the second quarter of 2005, the Company generated $55.2 million in revenues,
an 18% increase compared to the same period in 2004, as a result of average
enrollment growth of 15% and a 5% tuition increase at the beginning of 2005.
Income from operations was $19.5 million for the second quarter of 2005, an
increase of 6% compared to the same period in 2004. Net income was $12.5
million, an increase of 10% in the second quarter of 2005 compared to the same
period in 2004. Earnings per diluted share was $0.85 in the second quarter of
2005 compared to $0.75 in the same period in 2004.
12
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
Enrollment. Enrollment at Strayer University for the 2005 spring term
increased 15% to 23,733 students compared to 20,681 for the same term in 2004.
For the 2005 spring term, as compared to the 2004 spring term, Strayer
University's rate of growth of continuing students was 18%, and its rate of
growth of new students was 0%. Out-of-area online students increased 42%, while
students taking 100% of their classes at Strayer University Online (including
campus based students) increased 26%. The total number of students taking any
courses online (including students at brick and mortar campuses taking at least
one online course) in the 2005 spring term is 15,246.
Revenues. Revenues increased 18% from $46.8 million in the second quarter
of 2004 to $55.2 million in the second quarter of 2005, principally due to a 15%
increase in student enrollments and a 5% tuition increase effective for 2005.
Instruction and educational support expenses. Instruction and educational
support expenses increased $3.5 million, or 21%, from $16.5 million in the
second quarter of 2004 to $20.0 million in the second quarter of 2005. This
increase was principally due to direct costs necessary to support the increase
in student enrollments, including faculty compensation, related academic staff
salaries, and campus facility costs, which increased $1.4 million, $0.8 million,
and $0.8 million, respectively. These costs as a percentage of revenues
increased from 35.3% in the second quarter of 2004 to 36.3% in the second
quarter of 2005.
Selling and promotion expenses. Selling and promotion expenses increased
$2.4 million, or 37%, from $6.3 million in the second quarter of 2004 to $8.7
million in the second quarter of 2005. This increase was principally due to the
direct costs required to generate leads for enrollment growth and the addition
of admissions personnel, particularly at new campuses and at Strayer University
Online. These expenses as a percentage of revenues increased from 13.5% in the
second quarter of 2004 to 15.7% in the second quarter of 2005, which was largely
attributable to both marketing costs and staffing costs growing faster than
tuition revenue as the Company continues to invest for growth.
General and administration expenses. General and administration expenses
increased $1.5 million, or 26%, from $5.6 million in the second quarter of 2004
to $7.1 million in the second quarter of 2005. This increase was principally due
to higher compensation costs and higher bad debt expense, which increased $0.8
million and $0.3 million, respectively. General and administration expenses as a
percentage of revenues increased to 12.8% in the second quarter of 2005 from
12.0% in the second quarter of 2004 primarily due to lower than expected
revenues during the second quarter of 2005 being spread over the largely fixed
costs of various centralized functions.
Income from operations. Income from operations increased $1.1 million, or
6%, from $18.4 million in the second quarter of 2004 to $19.5 million in the
second quarter of 2005 due to the aforementioned factors.
Investment and other income. Investment and other income increased $0.4
million, or 100%, from $0.4 million in the second quarter of 2004 to $0.8
million in the second quarter of 2005. The increase was primarily attributable
to an increase in investment yields.
13
Provision for income taxes. Income tax expense increased $0.5 million,
or 6%, from $7.3 million in the second quarter of 2004 to $7.8 million in the
second quarter of 2005 primarily due to the increase in income before taxes
discussed above. The Company's effective tax rate was 38.3% for the second
quarter of 2005 compared to 39.1% for the second quarter of 2004. The decrease
in the Company's effective tax rate is primarily attributable to the increase in
the Company's investment income from tax-exempt funds.
Net income. Net income increased $1.1 million, or 10%, from $11.4
million in the second quarter of 2004 to $12.5 million in the second quarter of
2005 because of the factors discussed above.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Revenues. Revenues increased 20% from $92.9 million in the six months
ended June 30, 2004 to $111.4 million in the six months ended June 30, 2005,
principally due to a 17% average increase in student enrollments and a 5%
tuition increase effective for 2005.
Instruction and educational support expenses. Instruction and
educational support expenses increased $6.8 million, or 21%, from $31.7 million
in the six months ended June 30, 2004 to $38.5 million in the six months ended
June 30, 2005. This increase was principally due to direct costs necessary to
support the increase in student enrollments, including faculty compensation,
related academic staff salaries, and campus facility costs, which increased $2.8
million, $1.4 million, and $1.5 million, respectively. These expenses as a
percentage of revenues increased from 34.1% in the six months ended June 30,
2004 to 34.6% in the six months ended June 30, 2005.
Selling and promotion expenses. Selling and promotion expenses
increased $4.9 million, or 40%, from $12.4 million in the six months ended June
30, 2004 to $17.3 million in the six months ended June 30, 2005. This increase
was principally due to the direct costs required to generate leads for
enrollment growth and the addition of admissions personnel, particularly at new
campuses and at Strayer University Online. These expenses as a percentage of
revenues increased from 13.3% in the six months ended June 30, 2004 to 15.5% in
the six months ended June 30, 2005, which was largely attributable to both
marketing costs and staffing costs growing faster than tuition revenue as the
Company continues to invest for growth.
General and administration expenses. General and administration
expenses increased $1.7 million, or 14%, from $11.9 million in the six months
ended June 30, 2004 to $13.6 million in the six months ended June 30, 2005. This
increase was principally due to higher bad debt expense, which increased $0.9
million. General and administration expenses as a percentage of revenues
decreased to 12.2% in the six months ended June 20, 2005 from 12.8% in the six
months ended June 30, 2004 primarily due to greater revenues being spread over
the largely fixed costs of various centralized functions.
Income from operations. Income from operations increased $5.1 million,
or 14%, from $36.9 million in the six months ended June 30, 2004 to $42.0
million in the six months ended June 30, 2005 due to the aforementioned factors.
Investment and other income. Investment and other income increased $0.7
million, or 106%, from $0.7 million in the six months ended June 30, 2004 to
$1.4 million in the six
14
months ended June 30, 2005. The increase was primarily attributable to an
increase in investment yields and a higher average cash balance.
Provision for income taxes. Income tax expense increased $2.1 million,
or 14%, from $14.7 million in the six months ended June 30, 2004 to $16.8
million in the six months ended June 30, 2005 primarily due to the increase in
income before taxes discussed above. The Company's effective tax rate was 38.7%
for the six months ended June 30, 2005 compared to 39.1% for the six months
ended June 30, 2004. The decrease in the Company's effective tax rate is
primarily attributable to the increase in the Company's investment income from
tax-exempt funds.
Net income. Net income increased $3.7 million, or 16%, from $22.9
million in the six months ended June 30, 2004 to $26.6 million in the six months
ended 2005 because of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, the Company had cash, cash equivalents and marketable
securities of $111.3 million compared to $122.8 million at December 31, 2004 and
$116.7 million at June 30, 2004. Most of the Company's excess cash is invested
in tax-exempt money market funds and a diversified, short-term, investment
grade, tax-exempt bond fund to minimize the Company's principal risk and to
benefit from the tax efficiency of the fund's underlying securities. As of June
30, 2005, the Company had a total of $25.7 million invested in the short-term
tax-exempt bond fund. At June 30, 2005, the 431 issues in this fund had an
average credit rating of AA+, an average maturity of 1.1 years and an average
duration of 1.1 years, as well as an average yield to maturity of 2.7%. The
Company had no debt as of December 31, 2004 or June 30, 2005.
For the six months ended June 30, 2005, the Company generated $25.0 million net
cash from operating activities compared to $25.6 million for the same period in
2004. The decrease is primarily attributable to higher net income offset by
higher income tax payments.
Capital expenditures were $7.8 million for the six months ended June 30, 2005
compared to $4.4 million for the same period in 2004. For the six months ended
June 30, 2005, the Company paid $3.6 million in cash dividends to the Company's
common stockholders. As a result of the conversion of the Company's remaining
preferred stock into common stock in June 2004, no further preferred stock
dividends are payable. During the six months ended June 30, 2005, the Company
spent $25 million for the repurchase of approximately 278,800 shares of common
stock at an average price of $89.67 per share, utilizing its remaining share
repurchase authorization. In July 2005, the Company's Board of Directors
authorized an additional $25 million for the repurchase of common stock under
the existing share repurchase program.
In the second quarter of 2005, bad debt expense as a percentage of revenue was
2.5% compared to 2.2% for the same period in 2004. Days sales outstanding,
adjusted to exclude tuition receivable related to future quarters, was eight
days at the end of the first quarter of 2005, compared to nine days for the same
period in 2004.
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. There have been no
borrowings by the Company under
15
these credit facilities. 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.
NEW CAMPUSES
The Company opened two new campuses for the spring term 2005 - one in
Greensboro, North Carolina and one in Columbia, South Carolina. The Company
recently opened one more new campus in Atlanta, Georgia, its third campus in
that market, for fall term 2005. The Company has opened a total of five new
campuses in 2005 and now has a total of 35 campuses.
TOTAL POTENTIAL SHARE ISSUANCE
The Company's total current and potential common shares outstanding are as
follows (in thousands):
<TABLE>
Current
-------
Common shares issued and outstanding at 6/30/05 .................... 14,391
Issued stock options using Treasury Stock Method ................... 260
-----------
Total current ................................................ 14,651
-----------
Potential
---------
Total issued stock options, less options accounted for using
the Treasury Stock Method above ................................ 822
Authorized but unissued options..................................... 549
-----------
Total potential .............................................. 1,371
-----------
Total current and potential common shares .................... 16,022
===========
</TABLE>
16
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 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 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 June 30, 2005, a 10% increase or
decrease in interest rates would 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.
ITEM 4. CONTROLS AND PROCEDURES
a) Disclosure Controls and Procedures. The Company's Chief Executive Officer
and Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures as of June 30, 2005. Based
upon such review, the Chief Executive Officer and Chief Financial Officer
have concluded that the Company has in place, as of June 30, 2005,
effective controls and procedures designed to ensure that information
required to be disclosed by the Company (including consolidated
subsidiaries) in the reports it files or submits under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), 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 Exchange Act is accumulated and
communicated to the Company'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 Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting during the
quarter ended June 30, 2005 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
During the quarter, the Company used $22.0 million, its remaining
authorization, to repurchase shares of common stock under its repurchase
program. The total amount authorized for share repurchases under this
program was $65 million as of June 30, 2005. On July 26, 2005, the
Company's Board of Directors amended the Company's share repurchase
program to authorize the repurchase of an additional $25 million in
value of the Company's common stock. A summary of the Company's share
repurchases during the quarter is set forth below:
<TABLE>
Shares Average Price Authorization
Repurchased Per Share ($ mil)
--------------- --------------- ----------------
Beginning Balance (at 4/1/05) $22.0
April - - -
May 198,488 $87.36 (17.3)
June 52,750 $88.46 (4.7)
-------- -------
Total (at 6/30/05) 251,238 $87.59 $ -
======== ========
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of our Stockholders held on May 3, 2005, the
following matters were submitted to a vote of our common stockholders:
18
Proposal
1. Election of Common Stock Directors:
For Withheld
--- --------
Robert S. Silberman 13,886,309 98,916
Dr. Charlotte F. Beason 13,938,504 46,721
William E. Brock 13,942,929 42,296
David A. Coulter 13,943,479 41,746
Gary Gensler 13,943,259 41,966
Robert R. Grusky 13,943,279 41,946
Robert L. Johnson 13,802,293 182,932
Steven B. Klinsky 13,943,582 41,643
Todd A. Milano 13,797,318 187,907
G. Thomas Waite, III 13,938,807 46,418
J. David Wargo 13,801,790 183,435
2. Ratification of Appointment of PricewaterhouseCoopers LLP to serve as
the Company's independent registered public accounting firm for the
fiscal year ending December 31, 2005:
For Against Abstain
--- ------- -------
13,912,395 70,911 1,919
3. Amendment to the Employee Stock Option Plan:
For Against Abstain
--- ------- -------
8,471,852 1,862,380 1,434,637
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of
the Securities Act of 1933, as amended (the "Securities Act").
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of
the Securities Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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: July 28, 2005
20
EXHIBIT INDEX
Exhibit Description
------- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Act.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
