1
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly and six month period ended December 31, 2001
Commission file number 0-12751
DeVRY INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3150143
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Lane, Oakbrook Terrace, Illinois 60181
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(Address of principal executive offices) (Zip Code)
(630) 571-7700
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(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X
Number of shares of Common Stock, $0.01 par value, outstanding at
January 28, 2002: 69,812,522
Total number of pages: 24
2
DeVRY INC.
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FORM 10-Q INDEX
For the Quarter and Six Months Ended December 31, 2001
Page No.
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PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
December 31, 2001, June 30, 2001,
and December 31, 2000 3-4
Consolidated Statements of Income
for the quarter and six months ended
December 31, 2001, and 2000 5
Consolidated Statements of Cash
Flows for the six months ended
December 31, 2001, and 2000 6
Notes to Consolidated Financial
Statements 7-15
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 16-21
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, June 30, December 31,
2001 2001 2000
------------ ----------- ------------
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 76,108 $ 29,213 $ 47,144
Restricted Cash 28,934 20,484 21,944
Accounts Receivable, Net 65,416 25,664 85,207
Inventories 2,184 4,899 3,354
Deferred Income Taxes 5,221 5,221 3,526
Prepaid Expenses and Other 4,602 3,146 2,658
------- ------- -------
Total Current Assets 182,465 88,627 163,833
------- ------- -------
Land, Buildings and Equipment
Land 58,892 42,583 42,087
Buildings 171,067 122,433 116,206
Equipment 157,131 147,437 133,315
Construction In Progress 237 20,808 6,527
------- ------- -------
387,327 333,261 298,135
Accumulated Depreciation (136,094) (125,796) (113,146)
------- ------- -------
Land, Buildings and
Equipment, Net 251,233 207,465 184,989
------- ------- -------
Other Assets
Intangible Assets, Net 36,056 32,027 33,023
Goodwill 42,391 46,825 39,283
Deferred Income Taxes 3,560 4,658 2,035
Perkins Program Fund, Net 9,958 9,753 9,603
Other Assets 2,225 2,320 1,728
------- ------- -------
Total Other Assets 94,190 95,583 85,672
------- ------- -------
TOTAL ASSETS $527,888 $391,675 $434,494
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, June 30, December 31,
2001 2001 2000
------------ ----------- ------------
(Unaudited) (Unaudited)
LIABILITIES
Current Liabilities
Accounts Payable $ 34,476 $ 34,573 $ 39,861
Accrued Salaries, Wages &
Benefits 26,578 23,782 24,912
Accrued Expenses 7,431 10,891 5,543
Advance Tuition Payments 7,730 14,179 8,664
Deferred Tuition Revenue 99,509 10,957 90,088
------- ------- -------
Total Current Liabilities 175,724 94,382 169,068
------- ------- -------
Other Liabilities
Revolving Loan 25,000 - -
Deferred Income Tax Liability - - -
Deferred Rent and Other 9,890 12,622 11,687
------- ------- -------
Total Other Liabilities 34,890 12,622 11,687
------- ------- -------
TOTAL LIABILITIES 210,614 107,004 180,755
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
69,807,822, 69,755,491 and
69,696,333, Shares Issued and
Outstanding at December 31,
2001, June 30, 2001 and
December 31, 2000,
Respectively 698 698 697
Additional Paid-in Capital 64,924 64,481 63,555
Retained Earnings 251,269 218,772 188,884
Accumulated Other Comprehensive
Income 383 720 603
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 317,274 284,671 253,739
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $527,888 $391,675 $434,494
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
(Unaudited)
For The Quarter For The Six Months
Ended December 31, Ended December 31,
--------------------- ----------------------
2001 2000 2001 2000
--------------------- ----------------------
REVENUES:
Tuition $153,727 $133,871 $298,486 $252,968
Other Educational 12,814 11,757 22,495 22,853
Interest 134 320 326 575
------- ------- ------- -------
Total Revenues 166,675 145,948 321,307 276,396
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 90,135 76,997 173,262 150,335
Student Services and
Administrative Expense 45,854 43,353 93,970 80,568
Interest Expense 291 76 601 189
------- ------- ------- -------
Total Costs and Expenses 136,280 120,426 267,833 231,092
------- ------- ------- -------
Income Before Income Taxes 30,395 25,522 53,474 45,304
Income Tax Provision 11,976 9,800 20,977 17,416
------- ------- ------- -------
NET INCOME $ 18,419 $ 15,722 $ 32,497 $ 27,888
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic $0.26 $0.23 $0.47 $0.40
==== ==== ==== =====
Diluted $0.26 $0.22 $0.46 $0.39
==== ==== ==== =====
The accompanying notes are an integral part of these consolidated
financial statements.
6
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended December 31,
--------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $32,497 $27,888
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 15,721 13,109
Amortization of Intangible Assets and Goodwill 405 1,828
Amortization of Other Assets 22 36
Provision for Refunds and
Uncollectible Accounts 17,267 14,299
Deferred Income Taxes 1,098 (3)
Loss on Disposals and Adjustments to
Land, Buildings and Equipment 201 113
Changes in Assets and Liabilities:
Restricted Cash (8,450) (2,549)
Accounts Receivable (56,990) (73,998)
Inventories 2,715 3,017
Prepaid Expenses And Other (1,224) (3,632)
Accounts Payable (97) 8,034
Accrued Salaries, Wages,
Expenses and Benefits (991) (1,301)
Advance Tuition Payments (6,449) (6,843)
Deferred Tuition Revenue 88,552 79,993
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 84,277 59,991
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (62,488) (39,410)
------ ------
NET CASH USED IN INVESTING ACTIVITIES: (62,488) (39,410)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 443 543
Proceeds From Revolving Credit Facility 55,000 12,000
Repayments Under Revolving Credit Facility (30,000) (12,000)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,443 543
Effects of Exchange Rate Differences (337) 169
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 46,895 21,293
Cash and Cash Equivalents at Beginning
of Period 29,213 25,851
------ ------
Cash and Cash Equivalents at End of Period $76,108 $47,144
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $ 591 $ 154
Income Tax Payments During the Period, Net 24,481 20,461
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter Ended December 31, 2001
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NOTE 1: INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements include the accounts of DeVry
Inc. (the Company) and its wholly-owned subsidiaries. These financial
statements are unaudited but, in the opinion of management, contain all
adjustments, consisting only of normal, recurring adjustments, necessary to
present fairly the financial condition and results of operations of the
Company. The June 30, 2001 data which is presented is derived from audited
financial statements.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001
and in conjunction with the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 2001, each as filed with the Securities and
Exchange Commission.
The results of operations for the six months ended December 31, 2001, are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Combinations and Intangible Assets
- -------------------------------------------
In July 2001, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 141 and 142, entitled
"Business Combinations" ("SFAS 141") and "Goodwill and Other Intangible Assets"
("SFAS 142"), respectively.
SFAS 141 requires companies to use the purchase method of accounting for all
business combinations initiated after June 30, 2001 and eliminates use of the
pooling-of-interests method of accounting for business combinations. All of
the Company's acquisitions to-date have been accounted for using the purchase
method of accounting. SFAS 141 also establishes criteria that must be used to
determine whether acquired intangible assets should be recognized separately
from goodwill in the Company's financial statements.
SFAS 142 details the method by which companies will account for goodwill and
intangible assets after a business combination has been completed. This
accounting standard provides that goodwill and indefinite lived intangibles
arising from a business combination will no longer be amortized and charged to
expense over time. Instead, goodwill and indefinite lived intangibles must be
reviewed annually for impairment, or more frequently if circumstances arise
indicating potential impairment. For goodwill, if the carrying amount of the
reporting unit containing the goodwill exceeds the fair value of that reporting
unit, an impairment loss is recognized to the extent the "implied fair value"
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Business Combinations and Intangible Assets (continued)
- -------------------------------------------------------
of the reporting unit goodwill is less than the carrying amount of the
goodwill. For indefinite lived intangible assets, if the carrying amount
exceeds the fair value, an impairment loss shall be recognized in an amount
equal to that excess. As required by FAS 142, the Company has completed an
assessment of the categorization of its existing intangible assets and goodwill
in accordance with the new criteria and has reported them appropriately on the
Consolidated Balance Sheets. Intangible assets with indefinite lives are not
subject to amortization, but are instead reviewed annually for impairment, or
more frequently if circumstances arise indicating potential impairment.
Indefinite lived intangible assets related to Trademarks, Trade Names and
Intellectual Property are not amortized as there are no legal, regulatory,
contractual, economic or other factors that limit the useful life of these
intangible assets to the reporting entity. As of July 1, 2001, there was no
impairment loss associated with such indefinite lived intangible assets as fair
value exceeds the carrying amount.
Amortization of intangible assets with finite lives will continue over the
expected economic lives of the intangible assets. As part of its assessment of
intangible assets, the company shortened the useful life of the Class Materials
intangible asset and wrote-off the $10,000 cost basis of another.
In the quarter ended December 31, 2001, the Company also finalized the
allocation of the purchase price of the Stalla Seminars acquisition that
occurred in January 2001. The initially recorded goodwill from this
acquisition was reduced by $4,434,000 and reallocated as follows:
Amortized Intangible Assets:
Class Materials $2,400,000
Non-compete Agreement 100,000
Other 34,000
---------
Total $2,534,000
=========
Unamortized Intangible Assets:
Trade Name $1,900,000
=========
The $34,000 of Other amortized intangible assets was subsequently written-off
to expense as a part of the allocation process.
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Business Combinations and Intangible Assets (continued)
- -------------------------------------------------------
Intangible assets consist of the following:
As of December 31, 2001
------------------------------
Gross Carrying Accumulated
Amount Amortization
------------------------------
Amortized Intangible Assets:
License and Non-compete
Agreements $2,600,000 $(1,051,000)
Class Materials 2,900,000 (200,000)
Other 600,000 (250,000)
--------- ---------
Total $6,100,000 $(1,501,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,645,000
Trade Names 15,872,000
Intellectual Property 13,940,000
----------
Total $31,457,000
==========
As of June 30, 2001
------------------------------
Gross Carrying Accumulated
Amount Amortization
------------------------------
Amortized Intangible Assets:
License and Non-compete
Agreements $2,500,000 $ (838,000)
Class Materials 500,000 (100,000)
Other 610,000 (202,000)
--------- ---------
Total $3,610,000 $(1,140,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,645,000
Trade Names 13,972,000
Intellectual Property 13,940,000
----------
Total $29,557,000
==========
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Business Combinations and Intangible Assets (continued)
- -------------------------------------------------------
As of December 31, 2000
------------------------------
Gross Carrying Accumulated
Amount Amortization
------------------------------
Amortized Intangible Assets:
License and Non-compete
Agreements $2,500,000 $(632,000)
Class Materials 500,000 (90,000)
Other 610,000 (151,000)
--------- -------
Total $3,610,000 $(873,000)
========= =======
Unamortized Intangible Assets:
Trademark $ 1,676,000
Trade Names 14,321,000
Intellectual Property 14,289,000
----------
Total $30,286,000
==========
Amortization expense for amortized intangible assets was $259,000 and $405,000
for the three and six months ended December 31, 2001, respectively.
Amortization expense was $505,000 and $1,006,000 for both amortized and
unamortized intangible assets for the three and six months ended December 31,
2000, respectively. Estimated amortization expense for amortized intangible
assets for the next five fiscal years ended June 30, is as follows:
Fiscal Year
2002 $730,000
2003 730,000
2004 730,000
2005 730,000
2006 230,000
The weighted-average amortization period for amortized intangible assets is
6 years for License and Non-compete Agreements, 14 years for Class Materials
and 6 years for Other as of December 31, 2001.
Based upon the valuation analysis performed for the Company by independent
professional valuation specialists, it does not appear that there has been any
impairment in the value of the Company's goodwill for any reporting units as of
July 1, 2001. The carrying amount of goodwill related to the Undergraduate
reportable segment at July 1, 2001 and December 31, 2001 was unchanged at
$22,195,000. The carrying amount of goodwill related to Graduate and
Professional reportable segment was $24,630,000 at July 1, 2001 and $20,196,000
at December 31, 2001. The decrease is the result of the finalization of the
allocation of the Stalla Seminars purchase price as described above.
11
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Business Combinations and Intangible Assets (continued)
- ------------------------------------------------------
As required by FAS 142, the following is the Company's disclosure of what
reported net income would have been in all periods presented, exclusive of
amortization expense (including any related tax effects) recognized in those
periods related to goodwill, intangible assets that are no longer being
amortized and changes in amortization periods for intangible assets that will
continue to be amortized.
(Dollars in thousands except per share amounts)
For the Quarter Ended For the Six Months Ended
December 31, December 31,
--------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET INCOME:
Net Income as reported $18,419 $15,722 $32,497 $27,888
Goodwill amortization - 253 - 506
Trademark, Trade Name and
Intellectual Property
Amortization - 225 - 450
Change in useful life of
Class Materials - (3) - (6)
------ ------ ------ ------
Adjusted Net Income $18,419 $16,197 $32,497 $28,838
====== ====== ====== ======
EARNINGS PER COMMON SHARE:
Basic Earnings per Common
Share as reported $0.26 $0.23 $0.47 $0.40
Aggregate Changes in
Amortization Expense - - - .01
---- ---- ---- ----
Adjusted Basic Earnings per
Common Share $0.26 $0.23 $0.47 $0.41
==== ==== ==== ====
Diluted Earnings per Common
Share as reported $0.26 $0.22 $0.46 $0.39
Aggregate Changes in
Amortization Expense - .01 - .02
---- ---- ---- ----
Adjusted Diluted Earnings per
Common Share $0.26 $0.23 $0.46 $0.41
==== ==== ==== ====
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Earnings Per Common Share
- -------------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Shares used
in this computation were 69,797,000 and 69,688,000 for the second quarters
ended December 31, 2001 and 2000, respectively and 69,788,000 and 69,674,000
for the six months ended December 31, 2001 and 2000, respectively. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares assuming dilution. Dilutive shares reflect the additional
shares that would be outstanding if dilutive stock options were exercised
during the period. Shares used in this computation were 70,545,000 and
70,716,000 for the second quarters ended December 31, 2001 and 2000,
respectively and 70,624,000 and 70,677,000 for the six months ended
December 31, 2001 and 2000, respectively. Excluded from the second quarter and
six month ended December 31, 2001 computations of diluted earnings per share
were options to purchase 685,000 and 412,000 shares of common stock,
respectively. These outstanding options were excluded because the option
exercise prices were greater than the average market price of the common shares
and therefore, their effect would be anti-dilutive.
Comprehensive Income
- --------------------
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive
income and its components in the financial statements. The components of
Comprehensive Income, other than those included in net income, were immaterial
for the quarter ended December 31, 2001.
Reclassifications
- -----------------
Certain previously reported amounts have been reclassified to conform to
current presentation format. This includes tuition refunds, which were
previously reported as a Cost of Educational Services and are now classified as
a reduction in net revenue.
13
NOTE 3: SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") effective with the year ended June 30, 1999. SFAS 131 establishes
standards for the way that public business enterprises report certain
information about operating segments in the financial reports. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated on a regular basis by the
chief operating decision maker, or decision making group, in assessing
performance of the segment and in deciding how to allocate resources to an
individual segment. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company's principal business is providing post-secondary education. The
services of our operations are described in more detail under "Nature of
Operations" in Note 1 to the consolidated financial statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
The Company presents two reportable segments: the undergraduate operations
(Undergraduate) and graduate and professional examination review operations
including Keller Graduate School of Management and Becker Conviser Professional
Review (Graduate and Professional).
These segments are based on the method by which management evaluates
performance and allocates resources. Such decisions are based upon each
segment's operating income, which is defined as income before interest
expense, amortization and income taxes. Intersegment sales are accounted
for at amounts comparable to sales to nonaffiliated customers, and are
eliminated in consolidation. The accounting policies of the segments are
the same as those described in Note 1 - Summary of Significant Accounting
Policies to the consolidated financial statements contained in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 2001.
The consistent measure of segment profit excludes interest expense,
amortization and certain corporate related depreciation. As such, these
items are reconciling items in arriving at income before income taxes. The
consistent measure of segment assets excludes deferred income tax assets and
certain depreciable corporate assets. Additions to long-lived assets have
been measured in this same manner. Reconciling items are included as corporate
assets.
14
NOTE 3: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the quarters and
for the six month periods ended December 31, 2001 and 2000. Corporate
information is included where it is needed to reconcile segment data to the
consolidated financial statements.
(Dollars in thousands)
For the Quarter For the Six Months
Ended December 31, Ended December 31,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Undergraduate $141,146 $125,392 $274,515 $238,593
Graduate and Professional 26,320 20,827 47,861 38,253
Intersegment Elimination (791) (271) (1,069) (450)
------- ------- ------- -------
Total Consolidated Revenue $166,675 $145,948 $321,307 $276,396
------- ------- ------- -------
Operating Income:
Undergraduate $ 24,121 $ 21,703 $ 43,450 $ 40,280
Graduate and Professional 7,029 5,021 11,413 7,458
Reconciling Items:
Amortization Expense (270) (932) (427) (1,864)
Interest Expense (291) (76) (601) (189)
Depreciation and Other (194) (194) (361) (381)
Total Consolidated Income before ------- ------- ------- -------
Income Taxes $ 30,395 $ 25,522 $ 53,474 $ 45,304
------- ------- ------- -------
Segment Assets:
Undergraduate $435,426 $345,910 $435,426 $345,910
Graduate and Professional 77,899 69,355 77,899 69,355
Corporate 14,563 19,229 14,563 19,229
------- ------- ------- -------
Total Consolidated Assets $527,888 $434,494 $527,888 $434,494
------- ------- ------- -------
Additions to Long-lived Assets:
Undergraduate $ 6,748 $ 18,830 $ 61,445 $ 38,529
Graduate and Professional 522 500 1,043 881
------- ------- ------- -------
Total Consolidated Additions
to Long-lived Assets $ 7,270 $ 19,330 $ 62,488 $ 39,410
------- ------- ------- -------
Depreciation Expense:
Undergraduate $ 7,623 $ 6,436 $ 14,581 $ 12,000
Graduate and Professional 394 375 753 723
Corporate 194 193 387 386
------- ------- ------- -------
Total Consolidated Depreciation $ 8,211 $ 7,004 $ 15,721 $ 13,109
------- ------- ------- -------
Amortization Expense:
Undergraduate $ 7 $ 280 $ 15 $ 544
Graduate and Professional 263 652 412 1,320
------- ------- ------- -------
Total Consolidated Amortization $ 270 $ 932 $ 427 $ 1,864
------- ------- ------- -------
15
NOTE 3: SEGMENT INFORMATION, continued
The Company conducts its educational operations in the United States, Canada,
Europe, the Middle East and the Pacific Rim. International revenues, which
are derived principally from Canada, were less than 10% of total revenues for
the quarters and for the six months ended December 31, 2001 and 2000. Revenues
and long-lived assets by geographic area are as follows:
(Dollars in thousands)
For the Quarter For the Six Months
Ended December 31, Ended December 31,
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues from Unaffiliated Customers:
Domestic Operations $160,743 $139,610 $308,976 $264,366
International Operations 5,932 6,338 12,331 12,030
------- ------- ------- -------
Consolidated $166,675 $145,948 $321,307 $276,396
------- ------- ------- -------
Long-lived Assets:
Domestic Operations $334,971 $259,025 $334,971 $259,025
International Operations 10,452 11,636 10,452 11,636
------- ------- ------- -------
Consolidated $345,423 $270,661 $345,423 $270,661
------- ------- ------- -------
No one customer accounted for more than 10% of the Company's consolidated
revenues.
NOTE 4: COMMITMENTS AND CONTINGENCIES
The Company is subject to occasional lawsuits, regulatory reviews associated
with financial assistance programs and claims arising in the normal conduct of
its business. At this time, the Company does not believe that the outcome of
current claims, regulatory reviews and lawsuits will have a material effect on
its results of operations or financial position.
16
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
- -----------------------------------------------------------
Certain information contained in this quarterly report may
constitute forward looking statements made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such statements may involve risks and uncertainties
that could cause actual results to differ materially from the
forward-looking statements. Potential risks and uncertainties
include, but are not limited to, dependence on student financial
aid, state and provincial approval and licensing requirements,
and other factors detailed in the Company's Securities and
Exchange Commission ("SEC") filings, including those discussed
under the heading entitled "Risk Factors" in the Company's
Registration Statement on Form S-3 (No. 333-22457) filed with the SEC.
The following discussion of the Company's results of operations
and financial condition should be read in conjunction with the
consolidated financial statements of the Company and the notes
thereto as included in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 2001, that includes a
description of significant accounting policies including, but not
limited to, accounting policies on revenue recognition,
depreciation methods, asset impairment recognition and
capitalization of internal software development costs. The
following discussion of the Company's results of operations and
financial condition should also be read in conjunction with the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2001, each as filed with the Securities and
Exchange Commission.
Because of the somewhat seasonal pattern of the Company's
enrollments and its term starting dates, which affect the results
of operations and the timing of cash inflows, the Company's
management believes that comparisons of its results of operations
should be made to the corresponding period in the preceding year.
Comparisons of financial position should be made to both the end
of the previous fiscal year and to the end of the corresponding
period in the preceding year.
Results of Operations
- ---------------------
The Company's total consolidated revenues increased by $20.7
million and $44.9 million for the second quarter and first half
of the fiscal year, respectively. Tuition revenues, the largest
component representing over 92% of total revenues, increased by
$19.9 million, or 14.8% for the second quarter compared to the
second quarter of last year. For the first six months, the
increase in tuition revenues was $45.5 million, or 18.0%. The
increases in tuition revenue were produced by several positive
factors including higher student enrollments and increased
tuition pricing at all of the Company's operations.
Other Educational Revenues, that are composed primarily of the
sales of books and supplies and fee charges in all of the
Company's educational operations, increased by $1.1 million in
the second quarter but trailed the first half level of the prior
year by $0.4 million. In the Graduate and Professional segment,
book sales to higher levels of enrolled students attending the
Keller Graduate School programs and sales of the Becker CD-ROM
and other study materials continue to increase. Further
outsourcing of some Undergraduate segment bookstore operations,
discussed in more detail below, produced declines in this revenue
category during the quarter, as expected. This decline was more
than offset by a new Technology and Software Supplies charge to
be billed each term for DeVry Institute students to provide them
17
with current technology in their classrooms and laboratories and
their own suite of software to help ensure that DeVry graduates
have both the software and technology expertise they expect.
This charge is recognized ratably into income over the applicable
academic term, similar to the recognition of tuition revenue.
Interest income on the Company's short-term investments of cash
balances declined slightly in the quarter and first half from the
corresponding periods of a year ago because of lower prevailing
interest rates earned on these balances and somewhat lower
balances available for investment during the period.
Undergraduate segment revenues increased by $15.8 million, or
12.6%, for the second quarter compared to last year. For the
first half, revenues increased by $35.9 million, or 15.1%, from
the first half of last year. Total student enrollment at the
DeVry Institutes for the summer term that began in July increased
by more than 9% from last year to 47,415. In addition, tuition
pricing was increased by approximately 6% from last year.
Tuition rates at the more recently opened Institute locations
have been generally higher than the system average, further
contributing to the overall rate of revenue increase.
Enrollments for the fall term that began in November at the
Company's undergraduate schools increased to 48,698, an increase
of 3.5% from last year including the remaining enrollments of
certain discontinued Denver Technical College programs still
being taught to program completion. Contributing to the record
enrollments and revenues were the opening of a new DeVry
Institute campus in the Seattle, Washington, area in July and a
new campus in the Washington, DC, area in November. At the start
of the current fiscal year, 11 of the DeVry Institute bookstores
were outsourced and a 12th store was outsourced in the second
quarter, contributing to the decline in first half Other
Educational revenues in the Undergraduate segment. At the end of
December last year, a total of 9 bookstores had been outsourced.
In the Graduate and Professional segment, revenues increased by
$5.5 million, or 26.4%, from the second quarter of last year.
For the first half, revenues increased by $9.6 million, or 25.1%,
from last year. At Keller Graduate School, total course
enrollment for the term that began in September increased by more
than 24% from the same term a year ago and course enrollment for
the term that began in November increased by more than 19%.
Enrollment increases at Becker Conviser and higher sales of their
CD-ROM product further contributed to the increased revenues in
this segment as did tuition price increases implemented during
the past year at both Keller Graduate School and Becker.
The Company's Cost of Educational Services increased by $13.1
million, or 17.1%, from last year. For the first half, these
costs increased by $22.9 million, or 15.3%. Costs increased in
support of increased enrollments and new operating locations.
The opening of new locations contributes greater increases to
cost than to revenue in their early terms of operation. In
addition, during the second quarter the Company incurred the
incremental cost of acquiring and distributing individual
software licenses for undergraduate students in most of DeVry
Institute's programs, in conjunction with the Technology and
Software Supplies charge, as an expansion to its educational
program support. Depreciation expense, most of which is
18
included in Cost of Educational Services, increased by 20% from
last year to $15.7 million for the first six months. The
increase in depreciation expense reflects the continued high
level of capital spending on expansion and improvement throughout
all of the Company's operations.
Partly offsetting the rate of increase in spending on educational
operations is the expanded outsourcing of Undergraduate segment
bookstore operations. The Company does not report bookstore
revenue or cost of books sold at the outsourced locations,
reporting instead the commission income based upon the level of
sales at these locations. This change in operation has the
effect, slowing somewhat now as the rate of new outsourcing
slows, of increasing the reported percentage operating margins
within the Undergraduate segment and for the Company as a whole.
Student Services and Administrative Expense increased by $2.5
million, or 5.8%, in the second quarter compared to last year.
For the first half, these costs increased by $13.4 million, or
16.6%, from the first half of last year. In the first quarter,
and contributing to the first half increase, the Company incurred
higher student recruitment expense in the Undergraduate segment
in response to an increasingly competitive environment and the
events of September 11th which diverted applicant attention at a
critical point in the recruiting process for the new academic
term that began in November. In the second quarter, the rate of
spending on student recruitment expense was pared back and
portions of it are expected to occur in the third quarter to
better match the rate of student inquiry and applications that
precede the start of the March undergraduate term.
The Company is continuing its efforts at developing a new student
information system to better support its educational processes
and related activities. In accordance with accounting principles
for internal software development costs, certain wage and outside
consulting service costs are being capitalized. During the
second quarter, the Company capitalized an additional $1.1
million. For the first half, the total amount capitalized was
$2.0 million while an additional $1.9 million was charged to
Student Services and Administrative expense during the period.
Partly offsetting the increased student recruitment expenses and
information system development costs during the first half was a
reduction of $648,000 and $1,423,000 for the second quarter and
first half, respectively, in amortization expense of intangible
assets and goodwill compared to the same periods a year ago in
conjunction with the Company's adoption of Statement of Financial
Accounting Standard No. 142, entitled "Goodwill and Other
Intangible Assets". Goodwill and indefinite lived intangible
assets arising from a business combination will no longer
amortized and charged to expense over time. Instead, goodwill
and indefinite lived intangibles must be reviewed annually for
impairment, or more frequently if circumstances arise indicating
potential impairment. For goodwill, if the carrying amount of
the reporting unit containing the goodwill exceeds the fair value
of that reporting unit, an impairment loss is recognized to the
extent the "implied fair value" of the reporting unit goodwill is
less than the carrying amount of the goodwill. For indefinite
lived intangible assets, if the carrying amount exceeds the fair
value, an impairment loss shall be recognized in an amount equal
to that excess. As of July 1, 2001, there was no impairment loss
associated with the Company's indefinite lived intangible assets
or goodwill associated with it's reporting units which are
comprised of the Company's three operating segments.
In the Undergraduate segment, operating margins of 17.1% were
approximately equal to the margin in the second quarter last
year. For the first half, however, operating margins of 15.8%
19
remained below the level of the first six months of last year
because of the increased level of spending on student recruitment
in the first quarter as discussed above.
In the Graduate and Professional segment, operating margins for
the quarter increased to 26.7%, up from 24.1% in the second
quarter of last year. The increased margins reflect the
operating efficiencies from higher enrollments and higher tuition
pricing at both the Keller Graduate School and Becker Conviser
Professional Review. This continues the pattern of first quarter
performance, resulting in first half operating margins of 23.8%,
up from 19.5% in the first half of last year.
Interest expense increased to $0.3 million from less than $0.1
million in the second quarter of last year. For the first six
months, interest expense was $0.6 million compared to less than
$0.2 million last year. The higher interest expense reflects
borrowings under the Company's revolving line of credit
throughout the first and second quarter to meet both cyclical
operating needs and the purchase of two DeVry Institute campuses
in the first quarter that were formerly occupied under operating
leases.
Taxes on income increased to 39.4% of pre-tax income during the
second quarter and 39.2% for the first six months compared to
38.4% for the second quarter and first half of last year. The
higher effective tax rate reflects an increase to the weighted
average state income tax rate on the Company's U.S. operations
and further downward adjustments to the value of the Company's
Canadian tax loss carryforward benefits based on tax rate
reductions in the expected future utilization periods.
Reported Net Income for the quarter totaled $18.4 million or
$0.26 per share (diluted), a record for any first quarter in the
Company's history. Net Income increased by 17.2% from last year.
For the first half, Net Income increased by 16.5% from last year
to $32.5 million or $0.46 per share (diluted), a record for any
first half in the Company's history. The prior year second
quarter and first half diluted earnings per share would have been
$0.01 and $0.02 per share higher, respectively, without the
expense associated with goodwill and indefinite lived intangible
assets that are no longer being amortized in accordance with SFAS 142.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations reached $84.3 million for the
first six months, up more than 40% from the same period a year
ago. Contributing to this increase in cash flow was a reduction
in the level of accounts receivable, higher net income and the
increased non-cash charges for depreciation, refunds and bad debt
included in this net income. The reduction in accounts
receivable is almost entirely attributable to a reduction in the
amount of money owed to the Company under various state and
federal financial aid programs as a result of more timely
requests for the funds owed and improved cash management in the
student financial aid process. Federal and state financial aid
programs represent over 60% of the collections for U.S. DeVry
Institute revenues.
20
Capital spending for the first six months reached a record high
of $62.5 million. Contributing to the record spending level was
the first quarter purchase of two DeVry Institute campuses, in
Pomona, California, and Addison, Illinois, both formerly occupied
under operating leases. These purchases totaled approximately
$37.8 million, or approximately 60% of the total spending year-
to-date. Capital spending, on improvements and expansion
throughout all of the Company's educational operations for the
balance of the year is expected to continue at a rate similar to
that in the first half of the year excluding the purchase of the
two campuses.
In the first quarter, the Company borrowed $55 million under its
revolving line of credit agreement to fund the record capital
spending and to meet cyclical operating needs. Using cash
generated from the cyclical inflow following the start of the
DeVry Institute summer term, the Company repaid $15 million of
the borrowings before the end of the first quarter. In the
second quarter, the Company repaid an additional $15 million
using cash generated from the cyclical inflow following the start
of the DeVry Institute fall term. Subsequent to the end of the
second quarter, in January 2002, the Company repaid an additional
$6 million of the borrowings, reducing the outstanding borrowing
to $19 million.
In December 2001, the Company and its banks amended the $85
million revolving loan agreement under which the Company has
issued letters of credit and borrowed to meet cash requirements
for capital spending and acquisitions. The term of the agreement
was extended to February 1, 2004. In addition, the covenant
limiting capital expenditures was removed and the fixed charge
covenant was modified to provide improved flexibility for the
Company's future operations.
The Company's long-term contractual obligations consist only of
its revolving line of credit and its operating leases on
facilities and equipment. The Company is not a party to any
other long-term contractual or off-balance sheet financing
arrangements.
The principal source of the company's liquidity is operating cash
flow which is significantly dependent upon the Company's
continued participation in and compliance with federal, state and
provincial financial aid programs. The Company is highly
dependent upon the timely receipt of these financial aid funds in
both its U.S. and Canadian operations. The Company estimates
that historically, approximately 70% of its Undergraduate
segment's tuition, bookstore and fee revenues have been financed
by government-provided financial aid to students. More recently,
Keller Graduate School students have begun to make increased use
of student loan offerings that now represent over 30% of Keller's
revenues. These financial aid and assistance programs are
subject to political and governmental budgetary considerations.
There is no assurance that such funding will be maintained.
Extensive and complex regulations in the United States and Canada
govern all of the government financial assistance programs in
which the Company's students participate. The Company's
administration of these programs is periodically reviewed by
various regulatory agencies. Any regulatory violation could be
the basis for disciplinary action, including initiation of a
suspension, limitation or termination proceeding against the
Company.
The Company believes that current balances of unrestricted cash,
cash generated from operations and, if needed, its revolving loan
facility will be sufficient to fund its current operations and
growth plans for the foreseeable future.
21
Adoption of New Accounting Standards
- ------------------------------------
In July 2001, the Financial Accounting Standard Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs.
This statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses
financial accounting and reporting for the impairment or disposal
of long-lived assets. This statement is effective for financial
statements issued for fiscal years beginning after December 15, 2001.
The Company does not expect that there will be any immediate
impact on its financial statements upon adoption of SFAS No. 143
or SFAS No. 144, however, the Company has not yet completed its
full analysis of these new standards.
22
PART II - Other information
- ---------------------------
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Company's regular annual meeting of stockholders was held in
Chicago, Illinois, on Tuesday, November 13, 2001, pursuant to
notice duly given. Proxies for the meeting were solicited in
accordance with the Securities Exchange Act of 1934 and there was
no solicitation in opposition to those of management.
At the meeting, four Directors of the Company were elected to
serve as Class I Directors to hold office until 2004 or until
their respective successors are elected and qualified. The
results of the voting for Directors, whether in person or by
proxy, were as follows:
Class III For Against Withheld
--------- --- ------- --------
Ewen M. Akin 55,927,704 - 549,760
Thurston E. Manning 55,925,613 - 551,851
Hugo J. Melvoin 56,105,763 - 371,701
Harold T. Shapiro 55,940,509 - 536,955
The terms of office of the following Directors continued after
the meeting: Charles A. Bowsher, David S. Brown, Dennis J.
Keller, Robert E. King, Frederick A. Krehbiel, Robert C.
McCormack, Julie A. McGee and Ronald L. Taylor.
Shareholders voted on and approved the Amended and Restated DeVry
Inc. 1999 Stock Incentive Plan. The following table presents the
results of stockholders' vote on this matter:
For Against Withheld
--- ------- --------
53,477,229 2,934,860 65,374
Also submitted to a vote of the stockholders at this meeting was
a proposal for the ratification of the appointment of
PricewaterhouseCoopers LLP as independent public accountants for
the Company for the current fiscal year. The following table
presents the results of the stockholders' vote on this matter:
For Against Withheld
--- ------- --------
56,415,305 45,837 16,321
23
Item 5 - Other Information
- --------------------------
In December 2001, the Company announced the appointment of three
new DeVry Institute campus presidents. Dr. Diane Engelhardt was
appointed president of the DeVry Long Island City campus in New
York. Barbara Hurley was appointed president of the
Philadelphia-area campus expected to open in July 2002. Julio
Torres as appointed president of the Miramar (South Florida)
campus expected to open in November 2002.
In January 2002, the Company received notice of an antitrust
complaint concerning the operations of its Becker CPA Review
Corp. subsidiary in California. This complaint was filed in
federal district court by the trustee in bankruptcy of a failed
CPA review provider seeking a substantial amount of damages. The
Company does not believe that there is any merit to the claim and
intends to vigorously defend itself.
In January 2002, a graduate of one of DeVry Institute's Los
Angeles-area campuses filed a class-action complaint on behalf of
all students enrolled in the post-baccalaureate degree program in
Information Technology. The suit alleges that the program
offered by DeVry did not conform to the program as it was
presented in the advertising and other marketing materials. The
Company does not believe that there is any merit to the claim and
intends to vigorously defend itself.
As previously disclosed, in November 2000, three graduates of one
of DeVry Institute's Chicago-area campuses filed a class-action
complaint that alleges DeVry graduates do not have appropriate
skills for employability in the computer information systems
field. The complaint was subsequently dismissed by the court,
but was amended and refiled, this time including a current
student from a second Chicago-area campus. The Company does not
believe that there is any merit to the claim and intends to
vigorously defend itself.
Item 6 - Exhibits and Reports on Form 8-K
- ----------------------------------------
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended December 31, 2001.
24
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.
Date: FEBRUARY 7, 2002 /s/ Ronald L. Taylor
-----------------------------
Ronald L. Taylor
President and Chief Operating
Officer
Date: FEBRUARY 7, 2002 /s/Norman M. Levine
-----------------------------
Norman M. Levine
Senior Vice President Finance
and Chief Financial Office