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, 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 APRIL 30, 2005, THERE WERE OUTSTANDING 14,641,955 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, 2004 and March 31, 2005 ................................3
Unaudited Condensed Consolidated Statements of Income
for the three month periods ended March 31, 2004 and 2005............4
Unaudited Condensed Consolidated Statements of Comprehensive Income
for the three month periods ended March 31, 2004 and 2005............4
Unaudited Condensed Statement of Stockholders' Equity for the
three month period ended March 31, 2005..............................5
Unaudited Condensed Consolidated Statements of Cash Flows
for the three month periods ended March 31, 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.......................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........18
Item 4. Controls and Procedures.............................................18
PART II -- OTHER INFORMATION
Items 1-6, Exhibits and Reports on Form 8-K.................................19
SIGNATURES....................................................................21
CERTIFICATIONS
2
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, March 31,
2004 2005
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 97,004 $ 109,884
Marketable securities available for sale, at fair value ........................... 25,753 25,621
Tuition receivable, net of allowances for doubtful accounts of $1,301
and $1,551 at December 31, 2004 and March 31, 2005, respectively ................ 41,669 45,420
Student loans receivable, held for sale ........................................... 29 7
Other current assets .............................................................. 3,679 3,724
------------ ------------
Total current assets .......................................................... 168,134 184,656
Property and equipment, net .......................................................... 41,137 42,717
Restricted cash ...................................................................... 500 500
Other assets ......................................................................... 343 343
------------ ------------
Total assets .................................................................. $ 210,114 $ 228,216
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. $ 4,971 $ 7,238
Accrued expenses .................................................................. 2,318 929
Income taxes payable .............................................................. 6,060 9,240
Unearned tuition .................................................................. 42,059 47,215
------------ ------------
Total current liabilities .................................................... 55,408 64,622
Deferred income taxes ................................................................ 1,077 802
Long-term liabilities ................................................................ 4,707 4,686
------------ ------------
Total liabilities ............................................................ 61,192 70,110
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common Stock, par value $.01; 20,000,000 shares
authorized; 14,669,487 and 14,641,955 shares issued and outstanding
at December 31, 2004 and March 31, 2005, respectively ......................... 147 147
Additional paid-in capital ........................................................ 140,943 137,952
Retained earnings ................................................................. 7,983 20,240
Accumulated other comprehensive income (loss) ..................................... (151) (233)
------------ ------------
Total stockholders' equity .................................................. 148,922 158,106
------------ ------------
Total liabilities and stockholders' equity .................................. $ 210,114 $ 228,216
============ ============
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,
---------------------------
2004 2005
----------- -----------
Revenues .................................... $ 46,106 $ 56,153
----------- -----------
Costs and expenses:
Instruction and educational support ....... 15,191 18,459
Selling and promotion ..................... 6,084 8,663
General and administration ................ 6,319 6,543
----------- -----------
Total costs and expenses .................... 27,594 33,665
----------- -----------
Income from operations .................. 18,512 22,488
Investment and other income ................. 318 610
----------- -----------
Income before income taxes .............. 18,830 23,098
Provision for income taxes .................. 7,362 9,007
----------- -----------
Net income .............................. 11,468 14,091
Preferred stock dividends and accretion ..... 1,110 --
----------- -----------
Net income available to common
stockholders .......................... $ 10,358 $ 14,091
=========== ===========
Net income per share:
Basic ................................... $ 0.92 $ 0.96
Diluted ................................. $ 0.76 $ 0.94
Weighted average shares outstanding
Basic ................................... 11,304 14,661
Diluted ................................. 15,091 14,950
STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
For the three months
ended March 31,
---------------------------
2004 2005
----------- -----------
Net income .................................. $ 11,468 $ 14,091
Other comprehensive income:
Unrealized loss on investment,
net of taxes ....................... (19) (82)
----------- -----------
Comprehensive income ........................ $ 11,449 $ 14,009
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
STRAYER EDUCATION, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 .................. (27,532) -- (2,991) -- -- (2,991)
Common stock dividends ...................... -- -- -- (1,834) -- (1,834)
Change in net unrealized gains (losses) on
marketable securities, net of income tax .. -- -- -- -- (82) (82)
Net income .................................. -- -- -- 14,091 -- 14,091
---------- ----------- ----------- ----------- ----------- -----------
Balance at 3/31/05 .......................... 14,641,955 $ 147 $ 137,952 $ 20,240 $ (233) $ 158,106
========== =========== =========== =========== =========== ===========
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)
For the three months
ended March 31,
-------------------------------
2004 2005
------------ ------------
Cash flows from operating activities:
Net income .............................................................. $ 11,468 $ 14,091
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred rent ...................................... 135 (7)
Depreciation and amortization ...................................... 1,242 1,501
Provision for student loan losses .................................. (35) (21)
Deferred income taxes .............................................. (18) (49)
Changes in assets and liabilities:
Tuition receivable, net ............................................ (5,742) (3,751)
Other current assets ............................................... (732) (682)
Other assets ....................................................... 10 --
Accounts payable ................................................... (509) 778
Accrued expenses ................................................... (777) (1,389)
Income taxes payable ............................................... 4,177 2,857
Unearned tuition ................................................... 6,477 5,156
Deferred lease incentives .......................................... -- 800
Student loans originated ................................................ (439) (336)
Collections on student loans receivable and held for sale ............... 554 365
------------ ------------
Net cash provided by operating activities ...................... 15,811 19,313
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment .................................... (2,151) (1,608)
------------ ------------
Net cash used in investing activities .......................... (2,151) (1,608)
------------ ------------
Cash flows from financing activities:
Common dividends paid .................................................. (695) (1,834)
Preferred dividends paid ............................................... (1,332) --
Proceeds from exercise of stock options ................................ 4,243 --
Repurchase of common stock ............................................ -- (2,991)
------------ ------------
Net cash provided by (used in) financing activities ........... 2,216 (4,825)
------------ ------------
Net increase in cash and cash equivalents ...................... 15,876 12,880
Cash and cash equivalents - beginning of period ........................... 82,089 97,004
------------ ------------
Cash and cash equivalents - end of period ................................. $ 97,965 $ 109,884
============ ============
Non-cash transactions:
Purchases of property and equipment included in accounts payable ...... $ 129 $ 1,489
============ ============
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 MARCH 31, 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" or
"Companies."
The results of operations for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full fiscal year.
All information as of March 31, 2005 and for the three months ended March 31,
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 three months ended
March 31, 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 months ended March 31, 2004 on 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 34 campuses in Pennsylvania, Maryland, Washington, D.C., Virginia,
North Carolina, South Carolina, Tennessee, Georgia, and Florida 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 March 31, 2005, the Company
had 55,000 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:
For the three months
ended March 31,
-------------------------
(in thousands)
2004 2005
---------- ---------
Weighted average shares outstanding
used to compute basic net income per share................ 11,304 14,661
Incremental shares issuable upon the
assumed conversion of preferred stock..................... 3,362 --
Incremental shares issuable upon the
assumed exercise of stock options......................... 425 289
---------- ---------
Shares used to compute diluted net income per share............ 15,091 14,950
========== =========
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)
2004 2005
---------- ---------
Net income available to common stockholders
used to compute basic earnings per share.................. $ 10,358 $ 14,091
Plus: Impact of assumed preferred stock conversion:
Preferred stock dividends and accretion.................. 1,110 --
---------- ---------
Net income used to compute diluted net income per share........ $ 11,468 $ 14,091
========== =========
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, 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 March 31, 2005, the Company had
14,669,487 and 14,641,955 shares of common stock issued and outstanding,
respectively. Commencing in the third quarter of 2004, the Company increased the
annual common stock cash dividend to $0.50 per share or $0.125 per share
quarterly. However, with the rescheduling of the 2004 third quarter dividend
payment from October to December (in connection with a general change in timing
of such dividend to occur in March, June, September and December of each year),
the $0.50 per share annual dividend was prorated over a five month period
instead of three, resulting in a dividend payment of $0.21 per share instead of
a quarterly payment of $0.125 per share for the fourth quarter of 2004.
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 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 granted under the Plan is
ten years after the amendment.
The table below sets forth the stock option activity for the three months ended
March 31, 2005:
Weighted-Average
Number of shares Exercise Price
---------------- ----------------
Balance, December 31, 2004.............. 854,584 $ 49.22
Grants.................................. 227,083 107.28
Exercises............................... -- --
Forfeitures............................. -- --
---------------- ----------------
Balance, March 31, 2005................. 1,081,667 $ 61.41
================ ================
Of the 1,081,667 total stock options that have been issued and remain
outstanding, 592,913 are exercisable as of March 31, 2005. A total of 48,989
shares were authorized but unissued
9
under the Plan as of March 31, 2005. As of March 31, 2005, the weighted average
contractual life of outstanding stock options is 4.2 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:
For the three months ended
March 31,
--------------------------
2004 2005
---------- ----------
In thousands (except per share)
Net income..................................................... $ 11,468 $ 14,091
Stock-based compensation expense, net of tax................... 802 525
---------- ----------
Pro forma net income........................................... $ 10,666 $ 13,566
========== ==========
Net income available to common stockholders.................... $ 10,358 $ 14,091
Stock-based compensation expense, net of tax................... 802 525
---------- ----------
Pro forma net income available to common stockholders.......... $ 9,556 $ 13,566
========== ==========
Net income per share:
As reported:
Basic................................................ $ 0.92 $ 0.96
Diluted.............................................. $ 0.76 $ 0.94
Pro forma:
Basic................................................ $ 0.85 $ 0.93
Diluted.............................................. $ 0.71 $ 0.91
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:
For the three months ended
March 31,
--------------------------
2004 2005
---------- ----------
Dividend yield .................................................... 0.24% 0.48%
Risk-free interest rate ........................................... 3.4% 3.8%
Volatility ........................................................ 36% 34%
Expected option term (years) ...................................... 6.1 6.1
Weighted average fair value of options granted during the year .... $47.33 $41.18
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
10
net unrealized gains and losses for changes in fair value as a component of
accumulated other comprehensive income in stockholders' equity (deficit).
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 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 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 March 31, 2005, the Company had deferred lease incentives of
$2,669,000 and $2,529,000, respectively.
11
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 March 31, 2005, the Company had
deferred lease obligations of $1,823,000 and $1,956,000, 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 March 31, 2005, the Company had recorded a liability of
$215,000 and $201,000, respectively, for the indemnification.
12
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 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). 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 first quarter of 2005, the Company generated $56.2 million in revenue, a
22% increase compared to the same period in 2004, as a result of average
enrollment growth of 18% and a 5% tuition increase at the beginning of 2005.
Income from operations was $22.5 million for the first quarter of 2005, an
increase of 21% compared to the same period in 2004. Net income was $14.1
million, an increase of 23% in the first quarter of 2005 compared to the same
period in 2004. Earnings per diluted share was $0.94 in the first quarter of
2005 compared to $0.76 in the same period in 2004.
13
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Enrollment. Enrollment at Strayer University for the 2005 winter term,
which began January 10, 2005 and ended March 28, 2005, increased 18% to 23,815
students compared to 20,110 for the same term in 2004. Across the Strayer
University campus network, new student enrollments increased 22% and continuing
student enrollments increased 18%. Out of Area Online enrollments increased 53%,
while students taking 100% of their classes at Strayer University Online
(including campus based students) increased 35%. 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 winter quarter was 14,891.
STUDENT ENROLLMENT
------------------
Winter Winter %
2004 2005 Change
------------- ----------- -----------
New Campuses (13 in operation 3 or less years)
Campus Based Students 1,097 2,018 84%
Online Based Students 1,314 2,479 89%
------------- -----------
Total New Campus Students 2,411 4,497 87%
------------- -----------
Mature Campuses (17 in operation 4 or more years)
Campus Based Students 9,945 9,521 -4%
Online Based Students 6,085 7,240 19%
------------- -----------
Total Mature Campus Students 16,030 16,761 5%
------------- -----------
Out of Area Online Students 1,669 2,557 53%
------------- -----------
Total University Enrollment 20,110 23,815 18%
============= ===========
Total Students Taking 100% Courses Online 9,068 12,276 35%
Total Students Taking At Least 1 Course Online 11,173 14,891 33%
Revenues. Revenues increased 22% from $46.1 million in the first quarter of
2004 to $56.2 million in the first quarter of 2005 principally due to an 18%
increase in the average enrollment and a 5% tuition increase in 2005.
Instruction and educational support expenses. Instruction and educational
support expenses increased $3.3 million, or 22%, from $15.2 million in the first
quarter of 2004 to $18.5 million in the first 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, $0.6 million, and $0.7
million, respectively. These costs as a percentage of revenues were 33% in the
first quarter of 2005, the same as in the first quarter of 2004.
14
Selling and promotion expenses. Selling and promotion expenses increased
$2.6 million, or 42%, from $6.1 million in the first quarter of 2004 to $8.7
million in the first 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% in the
first quarter of 2004 to 15% in the first quarter of 2005, which was largely
attributable to both marketing costs and staffing costs growing faster than
tuition revenue.
General and administration expenses. General and administration expenses
increased $0.2 million, or 4%, from $6.3 million in the first quarter of 2004 to
$6.5 million in the first quarter of 2005. This increase was principally due to
higher bad debt expense, which increased $0.5 million, partially offset by the
timing of compensation-related expenses. General and administration expenses as
a percentage of revenues decreased to 12% in the first quarter of 2005 from 14%
in the first quarter of 2004 primarily due to greater revenues being spread over
the largely fixed costs of various centralized functions.
Income from operations. Income from operations increased $4.0 million, or
21%, from $18.5 million in the first quarter of 2004 to $22.5 million in the
first quarter of 2005 due to the aforementioned factors.
Investment and other income. Investment and other income increased $0.3
million, or 92%, from $0.3 million in the first quarter of 2004 to $0.6 million
in the first quarter of 2005. The increase was attributable to an increase in
investment yields and a higher average cash balance.
Provision for income taxes. Income tax expense increased $1.6 million, or
22%, from $7.4 million in the first quarter of 2004 to $9.0 million in the first
quarter of 2005 primarily due to the increase in income before taxes
attributable to the factors discussed above. The Company's effective tax rate
was 39.0% for the first quarter of 2005 compared to 39.1% for the first quarter
of 2004.
Net income. Net income increased $2.6 million, or 23%, from $11.5 million
in the first quarter of 2004 to $14.1 million in the first quarter of 2005
because of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company had cash, cash equivalents and marketable
securities of $135.5 million compared to $122.8 million at December 31, 2004 and
$123.9 million at March 31, 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 March
31, 2005, the Company had a total of $25.6 million invested in the short-term
tax exempt bond fund. At March 31, 2005, the 425 issues in this fund had an
average credit rating of AA+, an average maturity of 1.1 years and an average
duration of 1.0 years, as well as an average yield to maturity of 2.4%. The
Company had no debt as of December 31, 2004 or March 31, 2005.
15
For the quarter ended March 31, 2005, the Company generated $19.3 million net
cash from operating activities compared to $15.8 million for the same period in
2004. The increase resulted mostly from higher net income.
Capital expenditures were $3.1 million for the quarter ended March 31, 2005
compared to $2.3 million for the same period in 2004. For the quarter ended
March 31, 2005, we paid $1.8 million in cash dividends to our common
stockholders. As a result of the conversion of our remaining preferred stock
into common stock in June 2004, no further preferred stock dividends are
payable. During the three months ended March 31, 2005, the Company spent $3.0
million for the repurchase of approximately 27,500 shares of common stock at an
average price of $109 per share as part of a previously announced common stock
repurchase authorization. The Company's remaining authorization for common stock
repurchases was $22 million at March 31, 2005.
In the first quarter of 2005, bad debt expense as a percentage of revenue was
2.2% compared to 1.5% for the same period in 2004. Days sales outstanding,
adjusted to exclude tuition receivable related to future quarters, was nine days
at the end of the first quarter of 2005, unchanged from 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 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.
The table below sets forth our contractual commitments associated with operating
leases as of March 31, 2005. 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 $80,774 $9,713 $19,394 $18,447 $33,220
NEW CAMPUSES
The Company opened two new campuses in Tampa, Florida for the spring term 2005.
The Company recently opened two more new campuses for the summer term 2005 - one
in Greensboro, North Carolina and one in Columbia, South Carolina.
16
TOTAL POTENTIAL SHARE ISSUANCE
The Company's total current and potential common shares outstanding are as
follows (in thousands):
Current
-------
Common shares issued and outstanding at 3/31/05 .......... 14,642
Issued stock options using Treasury Stock Method ......... 289
---------
Total current ....................................... 14,931
---------
Potential
---------
Total issued stock options, less options accounted for using
the Treasury Stock Method above ......................... 793
Authorized but unissued options............................ 49 (a)
--------
Total potential ...................................... 842
--------
Total current and potential common shares ............ 15,773
========
-------------
(a) Excludes authorization of 500,000 additional shares for future issuance
approved by the stockholders on May 3, 2005.
17
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 March 31, 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 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, 2005. Based
upon such review, the Chief Executive Officer and Chief Financial Officer
have concluded that the Registrant has in place, as of March 31, 2005,
effective 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 Control Over Financial Reporting. There have not been any changes
in the Company's internal control over financial reporting during the
quarter ended March 31, 2005 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
During the quarter, the Company used $3.0 million to repurchase shares
of common stock under its repurchase program. The Company's remaining
authorization for common stock repurchases was $22 million at March 31,
2005. A summary of the Company's share repurchases during the quarter
is set forth below:
Shares Average Price Authorization
Repurchased Per Share Remaining
($ mil)
---------------- ---------------- ----------------
Beginning Balance (at 12/31/04) $25.0
January -- -- --
February -- -- --
March 27,532 $108.66 (3.0)
-------- ------- ------
Total (at 3/31/05) 27,532 $108.66 $22.0
======== ======= ======
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:
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.
19
b) Reports on Form 8-K:
On February 23, 2005, the Registrant filed a Current Report on Form 8-K
announcing that the Board of Directors of Strayer Education, Inc. approved
stock option grants to the Company's named executive officers pursuant to
the 1996 stock option plan, as amended.
20
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 5, 2005
21
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
22
