<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended June 30, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
Commission File Number: 0-21039
-------
Strayer Education, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Maryland 52-1975978
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 15th Street, NW
Washington, DC 20005 20005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 408-2400
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
</TABLE>
Common Stock, $.01 par value
Title of Class
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 / / No /X/ The Registrant
became subject to such filing requirements on July 25, 1996.
As of August 23, 1996, there were outstanding 9,450,000 shares of Common Stock,
par value $.01 per share, of the Registrant.
<PAGE> 2
STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Strayer Education, Inc.:
-----------------------
Balance sheets at May 15, 1996
and June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . 4
Strayer College, Inc. and Affiliate:
-----------------------------------
Condensed Combined Balance Sheets at
December 31, 1995 and June 30, 1996 . . . . . . . . . . . . . . . . . 5
Condensed Combined Statements of Income
for the three and six month periods
ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . 6
Condensed Combined Statements of Cash Flows
for the six month periods ended June 30, 1995 and 1996 . . . . . . . 7
Notes to Condensed Combined Financial Statements . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
Item 1-6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
STRAYER EDUCATION, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
May 15, June 30,
1996 1996
-------- --------
(unaudited)
<S> <C> <C>
Cash $ 1,000 $ 1,000
------------ ----------
Total current assets $ 1,000 $ 1,000
============ ==========
STOCKHOLDERS' EQUITY
Stockholders' Equity:
Preferred stock, 5,000,000 shares authorized; no shares
issued or outstanding --- ---
Common stock, par value $.01, 20,000,000 shares authorized;
1,000 shares issued and outstanding $ 10 $ 10
Additional paid-in capital 990 990
--------------- -----------
Total stockholders' equity $ 1,000 $ 1,000
============== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
- 3 -
<PAGE> 4
STRAYER EDUCATION, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION
Strayer Education, Inc. (Company) was formed on May 10, 1996, as a
Maryland corporation, and was capitalized on May 15, 1996 with cash
of $1,000. The Company commenced operations on July 25, 1996.
2. SUBSEQUENT EVENTS
On July 30, 1996, the Company completed an initial public offering of
its common stock. The Company sold 3,450,000 shares in the Offering
at a price of $10 per share. Net proceeds to the Company were
approximately $31,332,000. Prior to the closing of the Offering, the
Company exchanged 5,999,000 shares of its common stock for 100% of the
outstanding common stock of Strayer College, Inc. (the College). The
College is a proprietary accredited institution of higher education
that provides undergraduate and graduate degrees in various fields of
study through its eight campuses in the District of Columbia and
Virginia.
Approximately $19,838,000 of the net proceeds of the Offering were
paid to the stockholders of the College as a distribution of earnings
on which the stockholders had previously paid income taxes during the
period the College was an S Corporation.
Contemporaneously with the closing of the initial public offering, the
Company acquired Education Loan Processing, Inc. (ELP) at a purchase
price of $1,059,000, ELP's net book value. ELP was wholly owned by a
stockholder of the Company and was established to purchase and service
student loans from the College. Under generally accepted accounting
principles, ELP's basis in its assets and liabilities will be carried
over to the Company and the operations of ELP and the Company will be
retroactively combined in a manner similar to a pooling of interest,
because this acquisition is a combination of entities under common
control.
The Company set aside 1,000,000 shares of common stock for shares to
be issued under an incentive stock option plan established in July
1996. Options may be granted to eligible employees of the Company at
the option of the Board of Directors, at option prices based on the
fair market value of the shares at the date of grant. Vesting
provisions are at the discretion of the Board of Directors.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), which encourages companies to adopt a
fair value method of accounting for employee stock options and similar
equity instruments. The fair value method requires compensation cost
to be measured at the grant date based on the value of the award and
is recognized over the service period. Alternatively, SFAS No. 123
requires pro forma disclosures of net income and earnings per share as
if the fair value method had been adopted when the fair value method
is not reflected in the financial statements. The Company has not yet
determined which method it will follow. The requirements of SFAS No.
123 are effective for financial statements for fiscal years beginning
after December 15, 1995.
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<PAGE> 5
STRAYER COLLEGE, INC. AND AFFILIATE
CONDENSED COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,992 $ 12,943
Investments in marketable securities
available for sale, at market 1,742 541
Short term investments - restricted 720 779
Tuition receivable, net 7,873 5,529
Inventories 725 616
Other current assets 58 73
--------------- -------------
Total current assets 20,110 20,481
Student loans receivable, net 932 1,544
Property and equipment, net 2,874 3,113
Investments in marketable securities
available for sale, at market 1,890 3,740
Other assets 72 246
--------------- -------------
Total assets $ 25,878 $ 29,124
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 360 $ 348
Accrued expenses 542 492
Unearned tuition 9,504 6,900
Other current liabilities 133 219
--------------- -------------
Total current liabilities 10,539 7,959
=============== =============
Stockholders' Equity:
Common Stock 4 4
Additional paid-in capital 2,100 1,142
Retained earnings 13,077 19,766
Net unrealized gain on investments 158 253
--------------- -------------
Total stockholders' equity 15,339 21,165
--------------- -------------
Total liabilities and stockholders' equity $ 25,878 $ 29,124
============== ============
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
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<PAGE> 6
STRAYER COLLEGE, INC. AND AFFILIATE
CONDENSED COMBINED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months For the six months
ended June 30, ended June 30,
------------------------ ----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Tuition $ 9,366 $ 11,034 $ 19,355 $ 22,604
Fees and other 336 580 982 1,425
---------- --------- --------- ---------
9,702 11,614 20,337 24,029
---------- --------- --------- ---------
Costs and Expenses:
Instruction and education support 3,683 4,521 7,725 9,098
Selling and promotion 851 755 1,687 1,729
General and administration 3,219 1,904 6,032 4,140
---------- --------- --------- ---------
7,753 7,180 15,444 14,967
---------- --------- --------- ---------
Income from operations 1,949 4,434 4,893 9,062
Investment and other income 184 269 332 377
---------- --------- --------- ---------
Net Income $ 2,133 $ 4,703 $ 5,225 $ 9,439
========= ======== ======== ========
Pro forma information (Note 3):
- ------------------------------
Income taxes $ 1,839 $ 3,691
----- -----
Net income $ 2,864 $ 5,748
===== =====
Net income per share $ 0.39 $ 0.78
Weighted average shares outstanding 7,401 7,401
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
- 6 -
<PAGE> 7
STRAYER COLLEGE, INC. AND AFFILIATE
CONDENSED COMBINED STATEMENTS OF CASH FLOW
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the six months
ended June 30,
----------------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,225 $ 9,439
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 324 374
Changes in assets and liabilities 3,660 (375)
Student loans originated or acquired (538) (1,505)
Collections on student loans receivable 304 681
Proceeds from sale of loans --- 212
--------------- --------------
Net cash provided by operating activities 8,975 8,826
--------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (646) (613)
Purchases of marketable securities (5,277) (1,805)
Sales of marketable securities 1,873 1,251
--------------- ---------------
Net cash used in investing activities (4,050) (1,167)
--------------- ---------------
Cash flows from financing activities:
Distributions to stockholders (1,950) (3,708)
Capital contributions 1,100 ---
--------------- --------------
Net cash used in financing activities (850) (3,708)
--------------- --------------
Net increase in cash 4,075 3,951
Cash and cash equivalents - beginning of period 5,564 8,992
-------------- --------------
Cash and cash equivalents - end of period $ 9,639 $ 12,943
------------- -------------
</TABLE>
The accompanying notes are an integral part
of these combined financial statements.
- 7 -
<PAGE> 8
STRAYER COLLEGE, INC. AND AFFILIATE
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
INFORMATION AS OF JUNE 30, 1996 IS UNAUDITED
(AMOUNTS IN THOUSANDS)
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of Strayer
College, Inc. and Education Loan Processing, Inc. (collectively "the
Companies"), both of which are under the common control of Mr. and
Mrs. Ron K. Bailey. All significant intercompany accounts and
transactions have been eliminated.
The results of operations for the three and six months ended June 30,
1995 and 1996 are not necessarily indicative of the result to be
expected for the full fiscal year. All information as of June 30,
1996 and for the three and six month periods ended June 30, 1995 and
1996 is unaudited but, in the opinion of management, contains all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the combined financial position, results
of operations and cash flows of the Companies.
2. NATURE OF OPERATIONS
Strayer College, Inc. ("the College") is a proprietary accredited
institution of higher education that provides undergraduate and
graduate degrees in various fields of study. The College has eight
campuses located in the District of Columbia and Virginia.
Education Loan Processing, Inc. (ELP) is a finance company that
purchases and services student loans, principally for the College.
ELP was incorporated in December 1994 and began operations in January
1995.
3. INCOME TAXES AND PRO FORMA INFORMATION (UNAUDITED)
The financial statements of the Companies do not include a provision
for income taxes because the taxable income of the Companies was
included in the income tax returns of the stockholders under the S
Corporation elections.
In connection with the formation of Strayer Education, Inc. ("the
Company"), the initial public offering of the Company's common stock
("the Offering"), and the acquisition of the Companies by the Company
(see Note 8), the Companies filed elections with the IRS to terminate
their status as S Corporation for tax purposes in July 1996. The
Company will be subject to federal and state income taxes and will
recognize deferred taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires companies subject to income taxes to
adjust their deferred tax assets and liabilities based on temporary
differences between financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse. Based upon temporary differences
existing as of December 31, 1995 and June 30, 1996, the net deferred
income tax assets are insignificant individually and in total.
The effective pro forma income tax rate differs from the 34% statutory
federal rate principally as a result of state income taxes.
- 8 -
<PAGE> 9
For informational purposes, the condensed combined statements of
income for the three and six months ended June 30, 1996 include pro
forma information reflecting the following adjustments.
- Pro forma income taxes reflect the application of statutory
corporate income tax rates to the net income of the Companies
as if the termination of the Corporation status of the
Companies had occurred on January 1, 1996. The effective
derived income tax rate for the three and six month periods
ended June 30, 1996 was 39.1%.
- Pro forma net income per share and weighted average shares
outstanding reflect the acquisition of the College by the
Company in exchange for 5,999,000 shares of common stock, as
if it had occurred on January 1, 1996. Subsequent to the
closing of the Offering, the Company made a distribution to
the stockholders of the College in respect of earnings
previously subject to income tax during the College's period
as an S Corporation (the "S Corp Distribution" - see Note 8).
Therefore, pro forma earnings per share and weighted average
shares outstanding also give effect to the increase in the
number of shares which, when multiplied by the net per share
proceeds of the Offering, would have been necessary to fund
distributions to the stockholders, including the S Corp
Distribution, during the previous months, to the extent that
such distributions exceeded net income during the same 12
months. Historical net income per share of the Companies have
not been presented because such amounts are not meaningful in
light of the transactions described above.
4. CONTINGENCIES
Federal Financial Assistance Programs
The College participates in various federal student financial
assistance programs which are subject to audit. Management believes
that the potential effects of any future audit adjustments will not
have a material adverse effect on the Companies' financial position,
results of operations or cash flows.
5. SUBSEQUENT EVENTS
Immediately prior to the closing of the Company's initial public
offering on July 30, 1996, the Company acquired the common stock of
the College from the former stockholders in exchange for 5,999,000
shares of the Company's common stock. The Company made the S Corp
Distribution of $19,838,000 from the proceeds of the Offering to the
former stockholders of the College representing the amount of
accumulated earnings of the College during its period as an S
Corporation. An additional $1,059,000 from the proceeds of the
Offering was paid to the former stockholders in connection with the
acquisition of ELP.
- 9 -
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain of the statements included in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as
elsewhere in this report on Form 10-Q are forward-looking statements. These
statements involve risks and uncertainties that could cause the actual results
to differ materially from those expressed in or implied by such statements.
These statements should be read in the context of those factors discussed under
the heading "Risk Factors" in the Company's Registration Statement on Form S-1
(File No. 333-3967) declared effective by the Securities and Exchange
Commission on July 25, 1996.
THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Revenues. Tuition revenue increased 17.8% from $9.4 million in the
second quarter of 1995 to $11.0 million for the second quarter of 1996, due to
a 10% increase in the number of students and a 7% tuition increase effective
for 1996. Fees and other revenue increased 72.6% from $.3 million in the 1995
quarter to $.5 million in the 1996 quarter, principally as a result of the
increase in the number of students in the 1996 quarter.
Instruction and educational support expense. Instruction and
educational support expense increased 22.7% from $3.7 million in the second
quarter of 1995 to $4.5 million in the second quarter of 1996. The increase
was primarily attributable to an increase in library costs associated with a
new computer system providing students with access to substantially more
resource materials, increased financial aid costs due to the engagement of an
outside contractor to manage the student loan default rate and improve
financial aid administration and increased physical plant and occupancy costs
resulting from the relocation of the Woodbridge campus to a new and larger
facility with a higher lease rate.
Selling and promotion expense. Selling and promotion expense
decreased 11.4% from $.9 million in the second quarter of 1995 to $.8 million
in the second quarter of 1996, due to lower advertising costs, particularly for
television advertising.
General and administration expense. General and administration
expense decreased 40.8% from $3.2 million in the second quarter of 1995 to $1.9
million in the second quarter of 1996, due principally to the elimination of
bonuses payable to Ron K. Bailey, president of the Company. Prior to 1996,
general and administrative expense included bonuses paid to Mr. Bailey in
amounts sufficient to pay the income taxes of Mr. and Mrs. Bailey as sole
shareholders of the Company while it was a Subchapter S corporation for income
tax purposes. Beginning in 1996, these amounts were paid to Mr. and Mrs.
Bailey as distributions to shareholders (not reflected in general and
administrative expense) and not to Mr. Bailey as bonuses. Excluding the bonus
of $1.8 million paid to Mr. Bailey in the second quarter of 1995, general and
administration expense would have increased 30.3% from $1.5 million in the 1995
quarter to $1.9 million in the 1996 quarter. The principal reasons for the
change were the addition of personnel in the areas of human resources,
facilities management and administration and the effects of a 7% pay increase
implemented in the fourth quarter of 1995.
Income from operations. Income from operations increased 127.6% from
$1.9 million in the second quarter of 1995 to $4.4 million in the second
quarter of 1996. Excluding the bonus of $1.8 million paid to Mr. Bailey in the
1995 quarter, income from operations would have increased 19.9% from the 1995
quarter to the 1996 quarter.
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<PAGE> 11
Net income. Net income increased 120.5% from $2.1 million in the
second quarter of 1995 to $4.7 million in the second quarter of 1996.
Excluding the bonus of $1.8 million paid to Mr. Bailey in the 1995 quarter, net
income would have increased 21.1% from the 1995 quarter to the 1996 quarter.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Tuition revenue increased 16.8% from $19.4 million in the
six months ended June 30, 1995 to $22.6 million in the six months ended June
30, 1996, due to a 9% increase in the number of students and a 7% tuition
increase effective for 1996. Fees and other revenue increased 45.1% from $1.0
million in the 1995 period to $1.4 million in the 1996 period, principally as a
result of the increase in the number of students in the 1996 period.
Instruction and educational support expense. Instruction and
educational support expense increased 17.8% from $7.7 million in the 1995
period to $9.1 million in the 1996 period. The increase was primarily
attributable to an increase in library costs associated with a new computer
system providing students with access to substantially more resource materials,
increased financial aid costs due to the engagement of an outside contractor to
manage the student loan default rate and improve financial aid administration
and increased physical plant and occupancy costs resulting from the relocation
of the Woodbridge campus to a new and larger facility with a higher lease rate.
Selling and promotion expense. Selling and promotion expense was
relatively unchanged from the 1995 period to the 1996 period.
General and administration expense. General and administration
expense decreased 31.4% from $6.0 million in the 1995 period to $4.1 million in
the 1996 period, due principally to the elimination of bonuses payable to Ron
K. Bailey, as discussed above. Excluding the bonus of $3.4 million paid to Mr.
Bailey in the 1995 period, general and administration expenses would have
increased 57.3% from $2.6 million in the 1995 period to $4.1 million in the
1996 period. The principal reasons for the change were the addition of
personnel in the areas of human resources, facilities management and
administration and the effects of a 7% pay increase implemented in the fourth
quarter of 1995.
Income from operations. Income from operations increased 85.2% from
$4.9 million in the 1995 period to $9.1 million in the 1996 period. Excluding
the bonus of $3.4 million paid to Mr. Bailey in the 1995 period, income from
operations would have increased 9.2% from the 1995 period to the 1996 period.
Net income. Net income increased 80.7% from $5.2 million in the 1995
period to $9.4 million in the 1996 period. Excluding the bonus of $3.4 million
paid to Mr. Bailey in the 1995 period, net income would have increased 9.4%
from the 1995 period to the 1996 period.
LIQUIDITY AND CAPITAL RESOURCES
Since its acquisition by Ron K. Bailey in 1989, the Company has
financed its activities through cash generated from operations. At June 30,
1996, the College had available cash, cash equivalents and marketable
securities of $17.2 million. On July 30, 1996, the Company completed an
initial public offering of its common stock, resulting in net proceeds to the
Company of approximately $31.3 million. After application of the proceeds, the
Company had available cash, cash equivalents and marketable securities of $27.5
million. The Company believes that this amount, together with cash generated
from operations, will be sufficient to meet its anticipated operating cash
requirements, including the funding of student loans and any acquisition of
campuses, for at least the next 24 months. If the College determines to
acquire a campus facility, it may finance the acquisition with indebtedness.
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<PAGE> 12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following are annexed as Exhibits:
Exhibit Number Description
-------------- -----------
27.2 Financial Data Schedule
(b) Reports on Form 8-K:
None
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRAYER EDUCATION, INC.
Date: September 4, 1996 By: /s/ Harry T, Wilkins
-------------------------------
Harry T. Wilkins
Chief Financial Officer
- 13 -
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
<S> <C>
27.2 Financial Data Schedule
</TABLE>
- 14 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,943
<SECURITIES> 4,281
<RECEIVABLES> 5,529
<ALLOWANCES> 0
<INVENTORY> 616
<CURRENT-ASSETS> 20,481
<PP&E> 3,113
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,124
<CURRENT-LIABILITIES> 7,959
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 21,161
<TOTAL-LIABILITY-AND-EQUITY> 29,124
<SALES> 0
<TOTAL-REVENUES> 24,029
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,439
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,439
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
