<PAGE> 1
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 QUARTER ENDED SEPTEMBER 30, 1998
STRAYER EDUCATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN THIS CHARTER)
<TABLE>
<S> <C>
Maryland 52-1975978
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1025 15th Street, N.W.
Washington, DC 20005 20005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (202) 408-2400
</TABLE>
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / THE REGISTRANT BECOME
SUBJECT TO SUCH FILING REQUIREMENTS ON JULY 25, 1996.
AS OF SEPTEMBER 30, 1998, THERE WERE OUTSTANDING 15,696,526 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.
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STRAYER EDUCATION, INC.
INDEX
FORM 10-Q
PART 1 - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1997 and September 30, 1998. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
for the three and nine month periods ended September 30, 1997 and 1998. . . . . . . . . 4
Condensed Statements of Comprehensive Income
for the three and nine month periods ended September 30, 1997 and 1998. . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the nine month periods ended September 30, 1997 and 1998. . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative
Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 10
PART II - OTHER INFORMATION
Items 1-6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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STRAYER EDUCATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
----------------- -----------------
<S> <C> <C>
Current Assets: (Unaudited)
Cash and cash equivalents $15,934 $21,821
Marketable securities available for sale, at market 5,018 6,555
Short-term investments - restricted 879 912
Tuition receivable, net of allowances for doubtful accounts 10,063 13,863
Inventories 1,018 ---
Income taxes receivable --- 392
Other current assets 725 402
-------- --------
Total current assets 33,637 43,945
Student loans receivable, net of allowances for losses 4,438 5,281
Property and equipment, net 8,113 13,720
Marketable securities available for sale, at market 31,877 34,704
Other assets 232 243
-------- --------
Total assets $78,297 $97,893
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $380 $260
Accrued expenses 829 3,851
Unearned tuition 11,779 17,739
-------- --------
Total current liabilities 12,988 21,850
Deferred income taxes 186 9
-------- --------
Total liabilities 13,174 21,859
-------- --------
Stockholders' equity:
Common Stock - Par value $.01; 50,000,000 shares authorized; 156 157
15,542,105 and 15,696,526 shares issued and outstanding in 1997 and
1998, respectively
Additional paid-in capital 48,762 49,774
Retained earnings 15,922 26,092
Unrealized gain on investments, net of taxes 283 11
-------- --------
Total stockholders' equity 65,123 76,034
-------- --------
Total liabilities and stockholders' equity $78,297 $97,893
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
---------- ---------- ---------- ----------
Revenues $10,030 $11,783 $37,442 $45,007
Costs and Expenses:
Instruction and educational support 4,737 5,283 14,172 16,173
Selling and promotion 1,886 2,037 4,127 4,665
General and administration 1,967 2,185 5,157 6,472
---------- ---------- ---------- ----------
8,590 9,505 23,456 27,310
---------- ---------- ---------- ----------
Income from operations 1,440 2,278 13,986 17,697
Investment and other income 1,093 838 2,218 2,223
---------- ---------- ---------- ----------
Income before income taxes 2,533 3,116 16,204 19,920
Provision for income taxes: 880 1,226 6,203 7,729
---------- ---------- ---------- ----------
Net income $1,653 $1,890 $10,001 $12,191
========== ========== ========== ==========
Basic net income per share $0.11 $0.12 $0.67 $0.78
========== ========== ========== ==========
Diluted net income per share $0.10 $0.12 $0.64 $0.76
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $1,653 $1,890 $10,001 $12,191
Other comprehensive income:
Unrealized gain (loss) on investments, net of taxes 196 (681) 305 (272)
-------- -------- --------- ---------
Comprehensive income $1,849 $1,209 $10,306 $11,919
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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STRAYER EDUCATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months September 30,
-------------------------------------
Cash flows from operating activities 1997 1998
----- ----
<S> <C> <C>
Net income $10,001 $12,191
Adjustments to reconcile net income to net cash provided by activities:
Deferred tax expense (147) ---
Depreciation and amortization 895 1,174
Changes in assets and liabilities
Short-term investments - restricted (62) (33)
Tuition receivable, net (1,257) (3,800)
Inventories 435 1,018
Other current assets 13 323
Trade accounts payable (159) (120)
Accrued expenses (276) 3,023
Income taxes payable (receivable) 490 (392)
Unearned tuition 4,262 5,960
Other current liabilities 1,171 ---
Student loans originated (3,209) (3,302)
Collections on student loans receivable 1,733 2,459
Other assets --- (11)
--------- ---------
Net cash provided by operating activities 13,890 18,490
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,859) (6,781)
Purchases of marketable securities (27,647) (13,441)
Maturities of marketable securities 9,868 8,628
Increase in deposits (175) ---
--------- ---------
Net cash used in investing activities (19,813) (11,594)
--------- ---------
Cash flows from financing activities:
Net proceeds from stock issuance 15,790 1,012
Dividends paid (1,820) (2,021)
Other 84 ---
--------- ---------
Net cash provided by (used in) financing activities 14,054 (1,009)
--------- ---------
Net increase in cash 8,131 5,887
Cash and cash equivalents - beginning of period 11,777 15,934
--------- ---------
Cash and cash equivalents - end of period $19,908 $21,821
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED.
1. BASIS OF PRESENTATION
The financial statements are presented on a consolidated basis. The
accompanying 1997 and 1998 financial statements include the accounts
of Strayer Education, Inc. (the Company), Strayer University, Inc.
(the University), Education Loan Processing, Inc. (ELP) and
Professional Education, Inc. (Pro Ed), collectively referred to herein
as the "Company" or "Companies."
During 1997, the Company's Board of Directors approved a 3-for-2 stock
split effected by way of a 50 percent stock dividend. The stock
dividend was paid on November 18, 1997 to stockholders of record on
November 4, 1997. All share and per share information in this report
has been changed to give effect to this stock split.
The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year. All information as of September
30, 1998, and for the three and nine month periods ended September 30,
1997 and 1998 is unaudited but, in the opinion of management contains
all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the condensed consolidated financial
position, results of operations and cash flows of the Companies.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included
in the Company's December 31, 1997 Annual Report on Form 10-K.
On June 15, 1998, the Financial Accounting Standards Board issued FAS
No. 133, "Accounting For Derivative Instruments and Hedging
Activities", which establishes a new model for accounting for
derivatives and hedging activities. FAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company plans to
adopt FAS No. 133 during 1999. The adoption of FAS No. 133 will not
have a material impact on the Company's financial statements.
2. NATURE OF OPERATIONS
The University is a proprietary accredited institution of higher
education that provides undergraduate and graduate degrees in various
fields of study through its ten campuses in the District of Columbia,
Maryland and Virginia. In January 1998, Strayer College, Inc. was
granted University status by the Education Licensure Committee of The
District of Columbia. Subsequently, Strayer College changed its name
to Strayer University.
ELP is a finance company that purchases and services student loans,
principally for the University. For purposes of the consolidated
balance sheets, all of ELP's assets and liabilities have been
classified as current assets and liabilities with the exception of
student loans receivable, which have been classified as noncurrent
consistent with industry practice.
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STRAYER EDUCATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INFORMATION AS OF SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED
3. INCOME PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (FAS 128) effective December 31, 1997. All
prior period net income per share amounts have been restated to comply
with the provisions of FAS 128. Basic earnings per share is computed
by dividing net income by the weighted average number of shares of
common stock outstanding. Diluted earnings per share is computed by
dividing net income by the weighted average common and potentially
dilutive common equivalent shares outstanding, determined as follows.
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding used to
compute basic earnings per share........... 15,403 15,639 14,879 15,586
Incremental shares issuable upon the
assumed exercise of stock options.......... 593 424 639 471
------ ------ ------ ------
Shares used to compute diluted earnings per
share...................................... 15,996 16,063 15,518 16,057
====== ====== ====== ======
</TABLE>
Incremental shares issuable upon the assumed exercise of outstanding
stock options are computed using the treasury stock method based on
the average market price during the related periods.
4. CREDIT FACILITY
The Company maintains a credit facility from a bank in the amount of
$10.0 million. Interest on any borrowings under the facility will
accrue at an annual rate not to exceed 0.75% above the London
Interbank Offered Rate. The Company does not pay a fee for this
facility, but in the event of any borrowings, an origination fee of 1%
will be due on the amounts borrowed from time to time thereunder.
5. SUBSEQUENT EVENTS
The Company's Board of Directors declared a dividend of $.05 per share
to shareholders of record as of October 12, 1998.
On October 2, 1998, The Company's Board of Directors authorized a
common stock repurchase program of up to five percent of its
outstanding common stock over the next two years not to exceed an
aggregate cost of $24 million.
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ITEM 2: MANAGEMENTS'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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenue increased 17.0% from $10.0 million in the third
quarter of 1997 to $11.8 million in the third quarter of 1998, principally due
to an increase in student enrollments and a 5% tuition increase effective for
1998.
Instruction and educational support expenses. Instruction and
educational support expenses increased 12.0% from $4.7 million in the third
quarter of 1997 to $5.3 million in the third quarter of 1998. A salary
increase of 5% effective in 1998 and the addition of new faculty due to
enrollment growth contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses
increased 8.0% from $1.9 million in the third quarter of 1997 to $2.0 million
in the third quarter of 1998, principally due to a small increase in
advertising costs related to the new campus in Richmond, Virginia, increased
advertising for the Distance Learning Program and increases in the number of
admissions representatives in Maryland and personnel in the University's
Corporate Outreach Program.
General and administration expenses. General and administration
expenses increased 11.0% from $2.0 million in the third quarter of 1997 to $2.2
million in the third quarter of 1998, principally due to costs associated with
opening new campuses in Montgomery County, Maryland and Richmond, Virginia and
salary increases for administrative personnel.
Income from operations. Operating income increased 58.0%, from $1.4
million in the third quarter of 1997 to $2.3 million in the third quarter of
1998. The increase was due to the aforementioned factors.
Investment and other income. Investment and other income decreased
23.0%, from $1.1 million in the third quarter of 1997 to $838,000 in the third
quarter of 1998. The decrease was due to lower performance of the investment
portfolio in 1998, principally due to lower interest rates.
Net income. Net income increased $14.0%, from $1.7 million in the
third quarter of 1997 to $1.9 million in the third quarter of 1998.
Comprehensive income. Comprehensive income decreased 35.0% from $1.8
million in the third quarter of 1997 to $1.2 million in the third quarter of
1998 due to the performance of the Company's investments in marketable
securities.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues. Revenue increased 20.0% from $37.4 million for the nine
months ended September 30, 1997 to $45.0 million for the corresponding period
in 1998, principally due to an increase in student enrollments and a 5% tuition
increase effective for 1998.
Instruction and educational support expenses. Instruction and
educational support expenses increased 14.0% from $14.2 million for the nine
months ended September 30, 1997 to $16.2 million for the corresponding period
in 1998. A salary increase of 5% effective in 1998 and the addition of new
faculty due to enrollment growth contributed to the increase.
Selling and promotion expenses. Selling and promotion expenses
increased 13.0% from $4.1 million for the nine months ended September 30, 1997
to $4.7 million for the corresponding period in 1998, principally due to a
small increase in advertising costs related to the new campus in Richmond,
Virginia, increased advertising for the Distance Learning Program, increases in
the number of admissions representatives in Maryland and personnel in the
University's Corporate Outreach Program.
General and administration expenses. General and administration
expenses increased 25.0% from $5.2 million for the nine months ended September
30, 1997 to $6.5 million for the corresponding period in 1998, principally due
to costs associated with opening new campuses in Montgomery County and Richmond
and salary increases for administrative personnel.
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ITEM 2: MANAGEMENTS'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.
Income from operations. Operating income increased 27.0%, from $14.0
million for the nine months ended September 30, 1997 to $17.7 million for the
corresponding period in 1998. The increase was due to the aforementioned
factors.
Investment and other income. Investment and other income remained
relatively unchanged, at $2.2 million for the nine months ended September 30,
1997 and the corresponding period in 1998. The effects of lower interest rates
in 1998 offset the increase in investment in marketable securities.
Net income. Net income increased 22.0%, from $10.0 million for the
nine months ended September 30, 1997 to $12.2 million for the corresponding
period in 1998.
Comprehensive income. Comprehensive income increased 16.0% from
$10.3 million in the third quarter of 1997 to $11.9 million in the third
quarter of 1998 due to the aforementioned factors offset by the performance of
the Company's investments in marketable securities.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company generated
cash from operating activities of $18.5 million. Net cash used in investing
activities was $11.6 million, principally for property and equipment
acquisitions. Dividends accounted for substantially all of the cash used in
financing activities. The Company believes that existing cash, cash
equivalents and marketable securities aggregating $63.0 million, cash generated
from operating activities and, if necessary, cash borrowed under the credit
facility will be sufficient to meet the Company's requirements for at least the
next 24 months. If the University decides to purchase additional campus
facilities, it may finance such acquisitions with indebtedness.
During the nine months ended September 30, 1998, the University ceased
operations of its bookstore. Bookstore services are now performed by an
outside internet based vendor. The result was the elimination of the Company's
inventories.
On October 2, 1998, the Board of Directors approved a stock repurchase
program of up to 5% of the Company's outstanding common stock over the next two
years, not to exceed an aggregate cost of $24.0 million. Management believes
its current cash reserves and those generated from future operations will be
adequate to cover the repurchase program. Any shares of common stock
repurchased will be subsequently retired.
YEAR 2000
The year 2000 issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from
the application of computer programs that have been written using six digits
(e.g., 12/31/99), rather than eight (e.g., 12/31/1999), to define the
applicable year of business.
The Company has completed the identification and assessment of most of
its IT systems, and those systems have been modified by the suppliers of those
systems to address Year 2000 issues. In addition to its internal systems, the
Company has begun to assess the level of Year 2000 issues with its suppliers.
The Company has also started its identification and assessment of its non-IT
systems, which include its telephone systems, heating and air-conditioning,
elevators and other business equipment.
The Company's costs to date for its Year 2000 compliance project,
excluding the salaries of its employees, has not been material. In fact, the
Company's IT systems have been modified by the suppliers of those systems and
such modifications were included as part of normal upgrades of those systems.
Although the Company has not completed its assessment, it does not currently
believe that the future costs associated with its remaining IT systems or its
non-IT systems will be material.
The Company cannot determine currently its most likely worst case
scenario, as it has not identified and assessed all of its systems,
particularly its non-IT systems. As the Company completes its identification
and assessment of internal and third party systems, it expects to develop
contingency plans for various worst-case scenarios. A failure to address Year
2000 issues successfully could have a material adverse effect on the Company's
business, financial condition and/or results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable
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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.
In order to present a proposal at the 1999 Annual Meeting of
Stockholders, a Strayer stockholder must provide written
notice of the proposal to the Company no later than February
24, 1999. The Company intends to use discretionary voting
authority with respect to any matter brought before the 1999
Annual Meeting of Stockholders of which the Company has not
received written notice by February 24, 1999. The address to
which such a written notice must be sent is Strayer Education,
Inc., 3045 Columbia Pike, Arlington, Virginia 22304, Attn:
Investor Relations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: The following are annexed as Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27.2 Financial Data Schedule
</TABLE>
b) Reports on Form 8-K:
None
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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.
/s/ Harry Wilkins
---------------------------------
Chief Financial Officer
Date: November 1, 1998
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS NUMBER DESCRIPTION PAGE
- --------------- ----------- ----
<S> <C> <C>
27.2 Financial Data Schedule 14
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,821
<SECURITIES> 41,259
<RECEIVABLES> 19,688
<ALLOWANCES> 544
<INVENTORY> 0
<CURRENT-ASSETS> 43,945
<PP&E> 14,894
<DEPRECIATION> 1,174
<TOTAL-ASSETS> 97,893
<CURRENT-LIABILITIES> 21,850
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 75,877
<TOTAL-LIABILITY-AND-EQUITY> 97,893
<SALES> 0
<TOTAL-REVENUES> 11,783
<CGS> 0
<TOTAL-COSTS> 9,505
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 424
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,116
<INCOME-TAX> 1,226
<INCOME-CONTINUING> 1,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,890
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12<F1>
<FN>
<F1>EPS Primary Should Read Eps-Basic.
</FN>
</TABLE>
