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 period ended March 31, 2002
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
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(630) 571-7700
----------------------------------------------------
(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
April 15, 2002: 69,892,822
Total number of pages: 23
2
DeVRY INC.
FORM 10-Q INDEX
For the Quarter and Nine Months ended March 31, 2002
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
March 31, 2002, June 30, 2001,
and March 31, 2001 3-4
Consolidated Statements of Income
for the quarter and nine months ended
March 31, 2002, and 2001 5
Consolidated Statements of Cash Flows
for the nine months ended
March 31, 2002, and 2001 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 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, June 30, March 31,
2002 2001 2001
----------- ---------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $ 78,297 $ 29,213 $ 26,868
Restricted Cash 50,820 20,484 58,345
Accounts Receivable, Net 105,186 25,664 115,049
Inventories 3,085 4,899 4,130
Deferred Income Taxes 5,221 5,221 3,526
Prepaid Expenses and Other 2,723 3,146 3,451
------- ------- -------
Total Current Assets 245,332 88,627 211,369
------- ------- -------
Land, Buildings and Equipment
Land 58,892 42,583 42,501
Buildings 172,685 122,433 119,728
Equipment 166,165 147,437 137,422
Construction In Progress 383 20,808 10,128
------- ------- -------
398,125 333,261 309,779
Accumulated Depreciation (144,436) (125,796) (117,829)
------- ------- -------
Land, Buildings and
Equipment, Net 253,689 207,465 191,950
------- ------- -------
Other Assets
Intangible Assets, Net 35,919 32,027 32,525
Goodwill 42,391 46,825 47,328
Deferred Income Taxes 3,413 4,658 1,166
Perkins Program Fund, Net 10,201 9,753 9,746
Other Assets 2,155 2,320 1,679
------- ------- -------
Total Other Assets 94,079 95,583 92,444
------- ------- -------
TOTAL ASSETS $593,100 $391,675 $495,763
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, June 30, March 31,
2002 2001 2001
----------- ---------- -----------
LIABILITIES
Current Liabilities
Accounts Payable $ 38,399 $ 34,573 $ 33,039
Accrued Salaries, Wages &
Benefits 31,789 23,782 30,725
Accrued Expenses 9,896 10,891 8,646
Advance Tuition Payments 8,833 14,179 9,382
Deferred Tuition Revenue 143,646 10,957 130,684
------- ------- -------
Total Current Liabilities 232,563 94,382 212,476
------- ------- -------
Other Liabilities
Revolving Loan 14,000 - -
Deferred Income Tax Liability - - -
Deferred Rent and Other 10,372 12,622 12,425
------- ------- -------
Total Other Liabilities 24,372 12,622 12,425
------- ------- -------
TOTAL LIABILITIES 256,935 107,004 224,901
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
69,885,847, 69,755,491 and
69,742,851, Shares Issued and
Outstanding at March 31,
2002, June 30, 2001 and
March 31, 2001,
Respectively 699 698 698
Additional Paid-in Capital 65,454 64,481 63,893
Retained Earnings 269,636 218,772 204,921
Accumulated Other Comprehensive
Income 376 720 1,350
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 336,165 284,671 270,862
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $593,100 $391,675 $495,763
======= ======= =======
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 Nine Months
Ended March 31, Ended March 31,
--------------------- ----------------------
2002 2001 2002 2001
--------------------- ----------------------
REVENUES:
Tuition $151,775 $133,001 $450,261 $385,969
Other Educational 12,954 11,120 35,449 33,973
Interest 85 242 411 817
------- ------- ------- -------
Total Revenues 164,814 144,363 486,121 420,759
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 87,827 76,446 261,089 226,781
Student Services and
Administrative Expense 46,536 41,325 140,506 121,893
Interest Expense 143 89 744 278
------- ------- ------- -------
Total Costs and Expenses 134,506 117,860 402,339 348,952
------- ------- ------- -------
Income Before Income Taxes 30,308 26,503 83,782 71,807
Income Tax Provision 11,941 10,466 32,918 27,882
------- ------- ------- -------
NET INCOME $ 18,367 $ 16,037 $ 50,864 $ 43,925
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic $0.26 $0.23 $0.73 $0.63
==== ==== ==== ====
Diluted $0.26 $0.23 $0.72 $0.62
==== ==== ==== ====
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 Nine Months
Ended March 31,
---------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 50,864 $ 43,925
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 24,163 20,656
Amortization of Intangible Assets and Goodwill 542 2,833
Amortization of Other Assets 33 52
Provision for Refunds and
Uncollectible Accounts 26,126 21,742
Deferred Income Taxes 1,245 866
Loss on Disposals and Adjustments to
Land, Buildings and Equipment 287 282
Changes in Assets and Liabilities:
Restricted Cash (30,336) (38,950)
Accounts Receivable (105,555) (111,197)
Inventories 1,814 2,261
Prepaid Expenses And Other 562 (2,929)
Accounts Payable 3,826 1,212
Accrued Salaries, Wages,
Expenses and Benefits 7,012 6,661
Advance Tuition Payments (5,346) (6,125)
Deferred Tuition Revenue 132,689 120,589
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 107,926 61,878
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (73,472) (54,087)
Payments for Purchase of Business,
Net of Cash Acquired - (8,572)
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (73,472) (62,659)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 974 882
Proceeds From Revolving Credit Facility 55,000 24,000
Repayments Under Revolving Credit Facility (41,000) (24,000)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,974 882
Effects of Exchange Rate Differences (344) 916
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 49,084 1,017
Cash and Cash Equivalents at Beginning
of Period 29,213 25,851
------- -------
Cash and Cash Equivalents at End of Period $ 78,297 $ 26,868
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $ 741 $ 237
Income Tax Payments During the Period, Net 35,228 29,700
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter and Nine Months Ended March 31, 2002
(Unaudited)
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 reports on Form 10-Q for the
quarters ended September 30, 2001 and December 31, 2001, each as filed with the
Securities and Exchange Commission.
The results of operations for the quarter and nine months ended March 31, 2002,
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 SFAS 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 intangible
asset.
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 March 31, 2002
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non-compete
Agreements $2,600,000 $(1,153,000)
Class Materials 2,900,000 (210,000)
Other 600,000 (275,000)
--------- ---------
Total $6,100,000 $(1,638,000)
========= =========
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 March 31, 2001
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non-compete
Agreements $2,500,000 $ (735,000)
Class Materials 500,000 (95,000)
Other 610,000 (175,000)
--------- ---------
Total $3,610,000 $(1,005,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,661,000
Trade Names 14,146,000
Intellectual Property 14,113,000
----------
Total $29,920,000
==========
Amortization expense for amortized intangible assets was $137,000 and $542,000
for the three and nine months ended March 31, 2002, respectively. Amortization
expense was $503,000 and $1,509,000 for both amortized and unamortized
intangible assets for the three and nine months ended March 31, 2001,
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 March 31, 2002.
Based upon the valuation analysis performed for the Company by independent
professional valuation specialists, there was no 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 March 31, 2002 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 March 31, 2002. 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 SFAS 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 Nine Months Ended
March 31, March 31,
--------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
NET INCOME:
Net Income as reported $18,367 $16,037 $50,864 $43,925
Goodwill amortization - 304 - 810
Trademark, Trade Name and
Intellectual Property
Amortization - 220 - 670
Change in useful life of
Class Materials - (3) - (9)
------ ------ ------ ------
Adjusted Net Income $18,367 $16,558 $50,864 $45,396
====== ====== ====== ======
EARNINGS PER COMMON SHARE:
Basic Earnings per Common
Share as reported $0.26 $0.23 $0.73 $0.63
Aggregate Changes in
Amortization Expense - .01 - .02
------ ------ ------ ------
Adjusted Basic Earnings per
Common Share $0.26 $0.24 $0.73 $0.65
====== ====== ====== ======
Diluted Earnings per Common
Share as reported $0.26 $0.23 $0.72 $0.62
Aggregate Changes in
Amortization Expense - - - .02
------ ------ ------ ------
Adjusted Diluted Earnings per
Common Share $0.26 $0.23 $0.72 $0.64
====== ====== ====== ======
12
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 69,855,000 and 69,721,000 for the third quarters
ended March 31, 2002 and 2001, respectively and 69,810,000 and 69,689,000 for
the nine months ended March 31, 2002 and 2001, 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 70,611,000 and 70,697,000 for the
third quarters ended March 31, 2002 and 2001, respectively and 70,618,000 and
70,678,000 for the nine months ended March 31, 2002 and 2001, respectively.
Excluded from the third quarter and nine month ended March 31, 2002
computations of diluted earnings per share were options to purchase 677,000 and
604,000 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 March 31, 2002.
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 nine month periods ended March 31, 2002 and 2001. 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 Nine Months
Ended March 31, Ended March 31,
------------------ -------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Undergraduate $142,057 $126,243 $416,572 $364,836
Graduate and Professional 22,752 18,566 70,613 56,819
Intersegment Elimination 5 (446) (1,064) (896)
------- ------- ------- -------
Total Consolidated Revenue $164,814 $144,363 $486,121 $420,759
======= ======= ======= =======
Operating Income:
Undergraduate $ 26,181 $ 24,706 $ 69,631 $ 64,986
Graduate and Professiona 4,612 3,050 16,025 10,508
Reconciling Items:
Amortization Expense (148) (1,021) (575) (2,885)
Interest Expense (143) (89) (744) (278)
Depreciation and Other (194) (143) (555) (524)
------- ------- ------- -------
Total Consolidated Income before
Income Taxes $ 30,308 $ 26,503 $ 83,782 $ 71,807
======= ======= ======= =======
Segment Assets:
Undergraduate $490,562 $403,147 $490,562 $403,147
Graduate and Professional 81,423 73,471 81,423 73,471
Corporate 21,115 19,145 21,115 19,145
------- ------- ------- -------
Total Consolidated Assets $593,100 $495,763 $593,100 $495,763
======= ======= ======= =======
Additions to Long-lived Assets:
Undergraduate $ 10,614 $ 14,332 $ 72,059 $ 52,861
Graduate and Professional 370 345 1,413 1,226
------- ------- ------- -------
Total Consolidated Additions
to Long-lived Assets $ 10,984 $ 14,677 $ 73,472 $ 54,087
======= ======= ======= =======
Depreciation Expense:
Undergraduate $ 7,852 $ 6,917 $ 22,433 $ 18,917
Graduate and Professional 397 437 1,150 1,160
Corporate 193 193 580 579
------- ------- ------- -------
Total Consolidated Depreciation $ 8,442 $ 7,547 $ 24,163 $ 20,656
======= ======= ======= =======
Amortization Expense:
Undergraduate $ 8 $ 271 $ 23 $ 815
Graduate and Professional 140 750 552 2,070
------- ------- ------- -------
Total Consolidated
Amortization $ 148 $ 1,021 $ 575 $ 2,885
======= ======= ======= =======
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 nine months ended March 31, 2002 and 2001. Revenues
and long-lived assets by geographic area are as follows:
(Dollars in thousands)
For the Quarter For the Nine Months
Ended March 31, Ended March 31,
------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues from Unaffiliated Customers:
Domestic Operations $159,130 $138,427 $468,106 $402,793
International Operations 5,684 5,936 18,015 17,966
------- ------- ------- -------
Consolidated $164,814 $144,363 $486,121 $420,759
======= ======= ======= =======
Long-lived Assets:
Domestic Operations $337,724 $274,016 $337,724 $274,016
International Operations 10,044 10,378 10,044 10,378
------- ------- ------- -------
Consolidated $347,768 $284,394 $347,768 $284,394
======= ======= ======= =======
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. The Company has accrued amounts it believes are appropriate to
vigorously pursue its defense in these matters. 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. The
Company's annual report on Form 10-K 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 reports on
Form 10-Q for the quarters ended September 30, 2001, and December 31, 2001,
each as filed with the Securities and Exchange Commission.
Because of the somewhat seasonal pattern of the Company's enrollments and its
educational program 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 interim
quarterly period in the preceding year.
Results of Operations
- ---------------------
The Company's total consolidated revenues increased from last year by $20.5
million and $65.4 million for the third quarter and first three quarters of
the fiscal year, respectively. Tuition revenues, the largest component of
revenue, representing over 92% of total revenues, increased by $18.8 million,
or 14.1% for the third quarter compared to the third quarter of last year.
For the first nine months, the increase in tuition revenues was $64.3 million,
or 16.7%. 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, which are composed primarily of the sales of books
and supplies and fee charges in all of the Company's educational operations,
increased by $1.8 million and $1.5 million for the third quarter and nine
months, respectively. Further outsourcing of some Undergraduate segment
bookstore operations compared to the third quarter of last year, discussed in
more detail below, limited increases in this revenue category for both the
quarter and year to-date, as expected. This was more than offset by a new
17
Technology and Software Supplies charge, which is being billed each term, to
DeVry Institute students to provide them with current technology in their
classrooms and laboratories and their own suite of software to help ensure
that DeVry graduates have both current software and technology expertise.
This charge is recognized ratably into income over the applicable academic
term, similar to the recognition of tuition revenue. In the Graduate and
Professional segment, book sales to greater numbers of enrolled students
attending the Keller Graduate School programs and sales of the Becker CD-ROM
and other study materials continue to increase.
Interest income on the Company's short-term investments of cash balances
declined slightly in the quarter and first nine months from the corresponding
periods of a year ago because of lower prevailing interest rates earned on
these balances and somewhat lower balances being invested during the period.
Undergraduate segment revenues increased by $15.8 million, or 12.5%, for the
third quarter compared to last year. For the first three quarters, revenues
increased by $51.7 million, or 14.2%, from last year. Total student
enrollment at the DeVry Institutes for the fall term that began in November
2001 increased by 3.5% from last year to 48,698. In addition, tuition pricing
was increased by approximately 6% from last year effective with the summer
term that began in July. 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. Contributing to the
record 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. Undergraduate enrollments for the spring term that began in
March 2002 were 46,210, compared to 46,792 last year including the remaining
enrollments of certain discontinued Denver Technical College programs still
being taught to program completion. 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 lesser rate of increase
in Other Educational revenues compared to the rate of increase in Tuition
revenues from last year. At the end of March last year, a total of 9
bookstores had been outsourced.
In the Graduate and Professional segment, revenues increased by $4.2 million,
or 22.5%, from the third quarter of last year. For the first three quarters,
revenues increased by $13.8 million, or 24.3%, from last year. At Keller
Graduate School, total course enrollment for the term that began in November
increased by 19.9% from the same term a year ago and course enrollment for the
term that began in February 2002 increased by 22.9%. Enrollment increases at
Becker Conviser and higher sales of their CD-ROM and online products 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 Conviser.
The Company's Cost of Educational Services increased by $11.4 million, or
14.9%, from last year. For the first nine months, these costs increased by
$34.3 million, or 15.1%. 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 and third quarters the Company incurred the
incremental cost of acquiring and distributing individual software licenses
for undergraduate students in most of DeVry Institute's programs. These
software costs, in conjunction with the Technology and Software Supplies
charge, are an expansion of DeVry's commitment to educational program
18
support. Depreciation expense, most of which is included in Cost of
Educational Services, increased by 17% from last year to $24.2 million for the
first three quarters. 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 $5.2 million, or
12.6%, in the third quarter compared to last year. For the first nine months,
these costs increased by $18.6 million, or 15.3%, from last year. In the
second quarter, the pace of advertising for student recruitment was pared back
and the advertising was re-timed to occur in the third quarter. In the third
quarter, and contributing to the year-to-date spending increase, the Company
incurred the higher student recruitment advertising expense in the
Undergraduate segment in response to an increasingly competitive environment
and the depressed technology sector that apparently continues to affect the
career choices of potential applicants.
The Company is continuing its development of 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 third quarter, the Company capitalized $1.9 million. For the first
nine months, the total amount capitalized was $3.9 million while an additional
$3.0 million was charged directly to Student Services and Administrative
expense during the period. One of the Company's Directors is also a director
of a consulting firm engaged by the Company to assist with system development
projects, including the new student information system. Fees paid to this
consulting firm during the first nine months of fiscal 2002 totaled $2.2
million.
Partly offsetting the increased student recruitment expenses and information
system development costs during the first nine months was a reduction of $2.3
million in amortization expense of intangible assets and goodwill compared to
the same period a year ago as a result of 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 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" 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 the reporting units represented by the Company's three
operating segments.
19
In the Undergraduate segment, although the amount of operating income
increased from the levels of a year-ago, operating margins as a percent of
revenues of 18.4% and 16.7% for the second quarter and nine months,
respectively, were both approximately 1.1% lower than for the corresponding
periods last year. The increased level of spending on student recruitment,
the opening of two new undergraduate locations and a lesser number of new
student enrollments in the fall and spring term all contributed to the lower
operating margin.
In the Graduate and Professional segment, operating margins for the quarter
were 20.2%, up from 16.4% in the third quarter of last year. For the nine
months, operating margins of 22.7% increased similarly from the year-ago
period. 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.
Interest expense of $0.1 million in the quarter increased only slightly from
the third quarter of last year. For the first nine months, interest expense
was $0.7 million compared to less than $0.3 million last year. The higher
interest expense for the nine months reflects borrowings under the Company's
revolving line of credit through the first three quarters to meet both
cyclical operating needs and to fund the purchase of two DeVry Institute
campuses in the first quarter that were formerly occupied under operating
leases.
Taxes on income were 39.4% of pre-tax income for the third quarter, almost
equal to the tax rate in the third quarter of last year. For the first nine
months, the rate on pre-tax income was 39.3% compared to 38.8% last year.
The higher year-to-date effective tax rate reflects an increase to the
weighted average state income tax rate on the Company's U.S. operations and
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 third quarter in the Company's history. Net
Income increased by 14.5% from last year. For the first three quarters, Net
Income increased by 15.8% from last year to $50.9 million or $0.72 per share
(diluted), a record for any first three quarter period in the Company's
history. The prior year third quarter and first nine months 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 $107.9 million for the first nine
months, up more than 70% 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 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 plus a strong start to the
collection process for amounts owed by undergraduate students who are
attending the term that began in March. Federal and state financial aid
programs represent over 60% of the collections for U.S. DeVry Institute
revenues.
20
Capital spending for the first nine months reached a record high of $73.5
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 50% of the total
spending year-to-date. Capital spending on improvements and expansion
throughout all of the Company's educational operations is an integral part of
the Company's operating strategy. Capital spending in future periods is
expected to be maintained in full support of this strategy.
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.
In the third quarter, the Company repaid an additional $11 million of the
borrowings, reducing the outstanding borrowing to $14 million. In addition,
there were approximately $2.2 million in outstanding letters of credit issued
in conjunction with the Company's participation in federal financial aid
programs and property insurance coverage policies. Subsequent to the end of
the third quarter, the Company repaid the entire amount of its borrowings
except for the outstanding letters of credit.
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 cyclical operating requirements and 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, operating leases on facilities and equipment and agreements
for various services. The Company is not a party to any other long-term
contractual or off-balance sheet financing arrangements nor are there any
unconsolidated subsidiaries of the Company.
The principal source of the Company's liquidity is operating cash flow that 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. In
21
April 2002, the Company received notice from the Office of Postsecondary
Education of the United States Department of Education of a limited scope
program review of federally funded student financial assistance programs
administered by the DeVry Institutes. Such program reviews may be conducted
at any educational institution at any time and have been conducted in the past
at various DeVry Institutes. Previous program reviews at DeVry Institutes
have not resulted in significant findings or adjustments.
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.
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
Item 5 - Other Information
In February 2002, the Company announced that the Higher Learning Commission of
the North Central Association approved the merger of DeVry Institutes and
Keller Graduate School of Management into a single educational institution
with the name DeVry University. The DeVry University designation represents a
clear statement of the kind of comprehensive higher education system that the
Company has become.
In March 2002, the Company announced that it leased land to build an
approximately 72,000 square foot undergraduate campus in the NorthRidge
Business Park in Westminster (Denver), Colorado. Courses are expected to be
offered for the March 2003 term. The current campuses in Denver and Colorado
Springs will remain open during the construction and selected programs are
expected to continue to be offered at these locations in the future.
In March 2002, the Company received notice of a class-action complaint filed
under the Fair Labor Standards Act by several former field sales
representatives seeking overtime compensation for services rendered during
their period of employment. The Company does not believe that there is merit
to this claim and intends to vigorously defend itself.
The following updates the status of litigation and claims previously
disclosed:
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. On April 15, 2002, this complaint was voluntarily dismissed by the
plaintiff without prejudice.
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.
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 March 31, 2002.
23
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: MAY 1, 2002 /s/Ronald L. Taylor
-----------------------------
Ronald L. Taylor
President and Chief Operating
Officer
Date: MAY 1, 2002 /s/Norman M. Levine
---------------------------------
Norman M. Levine
Senior Vice President Finance and
Chief Financial Office