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 three month period ended September 30, 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
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X
---
Number of shares of Common Stock, $0.01 par value, outstanding at
October 28, 2002: 69,926,447
Total number of pages: 28
2
DeVRY INC.
FORM 10-Q INDEX
For the Quarter Ended September 30, 2002
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
September 30, 2002, June 30, 2002,
and September 30, 2001 3-4
Consolidated Statements of Income
for the quarters ended
September 30, 2002, and 2001 5
Consolidated Statements of Cash
Flows for the three months ended
September 30, 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 16-20
Item 4. Controls and Procedures 21
Part II. Other Information
Item 6. Other Information 22
Item 7. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 25-28
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, June 30, September 30,
2002 2002 2001
------------ --------- ------------
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $ 97,046 $ 59,685 $ 50,127
Restricted Cash 25,894 19,264 25,060
Accounts Receivable, Net 54,149 26,054 67,936
Inventories 3,347 4,907 3,593
Deferred Income Taxes 5,448 5,448 5,221
Prepaid Expenses and Other 4,176 2,469 5,211
-------- -------- --------
Total Current Assets 190,060 117,827 157,148
-------- -------- --------
Land, Buildings and Equipment
Land 58,937 58,928 58,881
Buildings 174,890 174,344 169,190
Equipment 179,503 173,115 151,865
Construction In Progress 823 1,626 2,937
-------- -------- --------
414,153 408,013 382,873
Accumulated Depreciation (155,231) (150,386) (127,899)
-------- -------- --------
Land, Buildings and
Equipment, Net 258,922 257,627 254,974
-------- -------- --------
Other Assets
Intangible Assets, Net 35,510 35,692 31,881
Goodwill 42,391 42,391 46,825
Deferred Income Taxes 1,504 1,801 3,955
Perkins Program Fund, Net 10,617 10,180 9,858
Other Assets 2,084 2,110 2,312
-------- -------- --------
Total Other Assets 92,106 92,174 94,831
-------- -------- --------
TOTAL ASSETS $541,088 $467,628 $506,953
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, June 30, September 30,
2002 2002 2001
------------ --------- ------------
(Unaudited) (Unaudited)
LIABILITIES
Current Liabilities
Accounts Payable $ 30,173 $ 36,284 $ 36,446
Accrued Salaries, Wages &
Benefits 35,983 27,595 30,159
Accrued Expenses 20,522 11,643 18,462
Advance Tuition Payments 12,893 15,883 8,078
Deferred Tuition Revenue 66,336 12,287 62,817
-------- -------- --------
Total Current Liabilities 165,907 103,692 155,962
-------- -------- --------
Other Liabilities
Revolving Loan - - 40,000
Deferred Rent and Other 10,593 10,390 12,290
-------- -------- --------
Total Other Liabilities 10,593 10,390 52,290
-------- -------- --------
TOTAL LIABILITIES 176,500 114,082 208,252
-------- -------- --------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
69,922,793, 69,898,540 and
69,791,039, Shares Issued and
Outstanding at September 30,
2002, June 30, 2002 and
September 30, 2001,
Respectively 700 700 698
Additional Paid-in Capital 66,478 66,345 64,773
Retained Earnings 296,983 285,827 232,850
Accumulated Other Comprehensive
Income 427 674 380
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 364,588 353,546 298,701
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $541,088 $467,628 $506,953
======== ======== ========
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 Ended
September 30,
2002 2001
-------- --------
REVENUES:
Tuition $151,155 $144,759
Other Educational 12,029 9,681
Interest 85 192
------- -------
Total Revenues 163,269 154,632
------- -------
COSTS AND EXPENSES:
Cost of Educational Services 92,171 83,127
Student Services and
Administrative Expense 52,457 48,116
Interest Expense 47 310
------- -------
Total Costs and Expenses 144,675 131,553
------- -------
Income Before Income Taxes 18,594 23,079
Income Tax Provision 7,438 9,001
------- -------
NET INCOME $ 11,156 $ 14,078
======= =======
EARNINGS PER COMMON SHARE
Basic $0.16 $0.20
===== =====
Diluted $0.16 $0.20
===== =====
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 Quarter
Ended September 30,
2002 2001
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $11,156 $14,078
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 8,603 7,510
Amortization of Intangible Assets 182 146
Amortization of Other Assets 10 11
Provision for Refunds and
Uncollectible Accounts 9,034 8,530
Deferred Income Taxes 297 703
Loss on Disposals and Adjustments to
Land, Buildings and Equipment 146 199
Changes in Assets and Liabilities:
Restricted Cash (6,630) (4,576)
Accounts Receivable (37,013) (50,773)
Inventories 1,560 1,306
Prepaid Expenses And Other (2,041) (2,534)
Accounts Payable (6,111) 1,873
Accrued Salaries, Wages,
Expenses and Benefits 17,267 13,948
Advance Tuition Payments (2,990) (6,101)
Deferred Tuition Revenue 54,049 51,860
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 47,519 36,180
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (10,044) (55,218)
------ ------
NET CASH USED IN INVESTING ACTIVITIES: (10,044) (55,218)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 133 292
Proceeds From Revolving Credit Facility - 55,000
Repayments Under Revolving Credit Facility - (15,000)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 133 40,292
Effects of Exchange Rate Differences (247) (340)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 37,361 20,914
Cash and Cash Equivalents at Beginning
of Period 59,685 29,213
------ ------
Cash and Cash Equivalents at End of Period $97,046 $50,127
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $49 $ 250
Income Tax Payments During the Period, Net 30 1,600
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter Ended September 30, 2002
----------
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, 2002 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 as filed with the Securities and
Exchange Commission for the fiscal year ended June 30, 2002.
The results of operations for the three months ended September 30, 2002, are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
- -------------------------
Included in the reported cash balance is $17.7, $17.2 million and $16.4
million at September 30, 2002, June 30, 2002 and September 30, 2001,
respectively, for checks issued but not yet cleared through the Company's
bank accounts. These amounts are also included in accounts payable.
Intangible Assets and Goodwill
- ------------------------------
Intangible assets relate mainly to acquired business operations. These
assets consist of the fair value of certain identifiable assets acquired.
Goodwill represents the excess of the purchase price over the fair value
of assets acquired and liabilities assumed.
Goodwill and indefinite lived intangibles are reviewed annually for
impairment, or more frequently if circumstances arise indicating 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.
Amortization of intangible assets with finite lives will continue over the
expected economic lives of the intangible assets, generally six to 15 years.
Amortization of all intangible assets and goodwill is being deducted for tax
reporting purposes over statutory lives.
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development costs that are
amortized using the straight line method over the estimated lives of the
software not to exceed five years. Capitalized costs include external direct
costs of materials and services consumed in developing or obtaining internal-
use software and payroll and payroll related costs for employees who are
directly associated with the internal software development project.
Capitalization of such costs ceases no later than the point at which the
project is substantially complete and ready for its intended purpose.
Capitalized software development costs for projects not yet complete, which
are included as Equipment in the Land, Buildings and Equipment section of the
Consolidated Balance Sheets, were $8,500,000, $6,862,000 and $3,346,000 as of
September 30, 2002, June 30, 2002 and September 30, 2001, respectively.
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 69,910,000 and 69,778,000 for the first quarters
ended September, 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 70,323,000 and 70,711,000 for the first
quarters ended September 30, 2002 and 2001, respectively. Excluded from the
September 30, 2002 and 2001 computations of diluted earnings per share were
options to purchase 1,358,000 and 42,000 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.
Stock-based Compensation
- ------------------------
In July and August 2002, the Company granted options to purchase up to 402,000
shares of the Company's common stock under the 1999 Stock Incentive Plan.
Comprehensive Income
- --------------------
The Company's only item that meets the definition for adjustment to arrive at
Comprehensive Income is the change in cumulative translation adjustment.
This change was immaterial for the quarter ended September 30, 2002 and 2001.
Reclassifications
- -----------------
Certain previously reported amounts have been reclassified to conform to
current presentation format, with no effect on reported net income.
9
NOTE 3: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of September 30, 2002
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non Compete
Agreements $2,600,000 $(1,372,000)
Class Materials 2,900,000 (350,000)
Other 600,000 (325,000)
--------- ---------
Total $6,100,000 $(2,047,000)
========= =========
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, 2002
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non Compete
Agreements $2,600,000 $(1,265,000)
Class Materials 2,900,000 (300,000)
Other 600,000 (300,000)
--------- ---------
Total $6,100,000 $(1,865,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,645,000
Trade Names 15,872,000
Intellectual Property 13,940,000
----------
Total $31,457,000
==========
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NOTE 3: INTANGIBLE ASSETS, continued
As of September 30, 2001
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non Compete
Agreements $2,500,000 $ (941,000)
Class Materials 500,000 (110,000)
Other 600,000 (225,000)
--------- ---------
Total $3,600,000 $(1,276,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,645,000
Trade Names 13,972,000
Intellectual Property 13,940,000
----------
Total $29,557,000
==========
Amortization expense for amortized intangible assets was $182,000 and
$146,000 for the three months ended September 30, 2002 and 2001,
respectively. Estimated amortization expense for amortized intangible assets
for the next five fiscal years ended June 30, is as follows:
Fiscal Year
2003 $730,000
2004 730,000
2005 730,000
2006 230,000
2007 210,000
The original weighted-average amortization period for amortized intangible
assets is six years for License and Non Compete Agreements, 14 years for
Class Materials and six years for Other as of September 30, 2002.
Indefinite lived intangible assets related to Trademarks, Trade Names and
Intellectual Property are not amortized as there is no legal, regulatory,
contractual, economic or other factors that limit the useful life of these
intangible assets to the reporting entity. As of the end of fiscal 2002,
there was no impairment loss associated with these indefinite lived
intangible assets as fair value exceeded the carrying amount.
11
NOTE 3: INTANGIBLE ASSETS, continued
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 the
end of fiscal 2002. The carrying amount of goodwill related to the DeVry
University reportable segment at September 30, 2002 and 2001 was
unchanged at $22,195,000. The carrying amount of goodwill related to
Professional and Training reportable segment was $24,630,000 at September 30,
2001 and $20,196,000 at September 30, 2002. The decrease is the result of
the finalization of the allocation of the Stalla Seminars ("Stalla") purchase
price as described below.
During fiscal 2002, the Company finalized the allocation of the purchase
price of Stalla. The goodwill from this acquisition that was recorded at
June 30, 2001, 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 Indefinite-Lived 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.
NOTE 4: SEGMENT INFORMATION
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,
2002. The Company presents two reportable segments: the DeVry University
undergraduate and graduate operations (DeVry University) and the professional
examination review and training operations including Becker Conviser
Professional Review and Center for Corporate Education (Professional and
Training).
12
NOTE 4: SEGMENT INFORMATION, continued
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, 2002.
The segments as described above have changed from those previously reported.
In February 2002, the Higher Learning Commission of the North Central
Association approved the merger of DeVry Institutes (undergraduate programs)
and Keller Graduate School of Management (graduate programs) into a single
educational institution with the name of DeVry University. The North
Central Association is one of six regional bodies that make up the nation's
system for accrediting colleges and universities. In support of the
transition to DeVry University, the Company's resources and organization
have been restructured to better serve the needs of its students, employers
and shareholders and achieve the University's strategic goals. Accordingly,
the reportable segments of the Company have been realigned to reflect this
combination.
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.
13
NOTE 4: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the periods
ended September 30, 2002 and 2001. Corporate information is included where it
is needed to reconcile segment data to the consolidated financial statements.
For the Quarter Ended
September 30,
---------------------------
2002 2001
---- ----
Revenues:
DeVry University $154,458,000 $146,257,000
Professional and Training 8,811,000 8,375,000
--------------------------
Total Consolidated Revenues $163,269,000 $154,632,000
--------------------------
Operating Income:
DeVry University $17,086,000 $21,525,000
Professional and Training 1,927,000 2,188,000
Reconciling Items:
Amortization Expense (192,000) (157,000)
Interest Expense (47,000) (310,000)
Depreciation and Other (180,000) (167,000)
--------------------------
Total Consolidated Income
before Income Taxes $18,594,000 $23,079,000
--------------------------
Segment Assets:
DeVry University $447,276,000 $416,406,000
Professional and Training 74,754,000 68,490,000
Corporate 19,058,000 22,057,000
--------------------------
Total Consolidated Assets $541,088,000 $506,953,000
--------------------------
Additions to Long-lived Assets:
DeVry University $10,030,000 $54,969,000
Professional and Training 14,000 249,000
--------------------------
Total Consolidated Additions
to Long-lived Assets $10,044,000 $55,218,000
--------------------------
Depreciation Expense:
DeVry University $8,314,000 $7,196,000
Professional and Training 94,000 121,000
Corporate 195,000 193,000
--------------------------
Total Consolidated Depreciation $8,603,000 $7,510,000
--------------------------
Amortization Expense:
DeVry University $ 8,000 $ 8,000
Professional and Training 184,000 149,000
--------------------------
Total Consolidated Amortization $192,000 $157,000
--------------------------
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NOTE 4: 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 5% of total revenues for
the periods ended September 30, 2002 and 2001. Revenues and long-lived assets
by geographic area are as follows:
For the Quarter Ended
September 30,
---------------------------
2002 2001
---------------------------
Revenues from Unaffiliated Customers:
Domestic Operations $158,281,000 $148,233,000
International Operations 4,988,000 6,399,000
--------------------------
Consolidated $163,269,000 $154,632,000
==========================
Long-lived Assets:
Domestic Operations $341,467,000 $338,909,000
International Operations 9,561,000 10,896,000
--------------------------
Consolidated $351,028,000 $349,805,000
==========================
No one customer accounted for more than 10% of the Company's consolidated
revenues.
NOTE 5: 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. These are described in "Item 5 - Other Information" later in
this report. 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.
The following updates the status of litigation and claims previously disclosed:
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.
15
NOTE 5: COMMITMENTS AND CONTINGENCIES, continued
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by 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. The
complaint was amended and has subsequently been refiled.
In January 2002, a graduate of one of DeVry University'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.
In November 2000, three 1999 graduates of one of DeVry University'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 student from a second Chicago-
area campus.
The Company has recorded approximately $1 million associated with estimated
loss contingencies at June 30, 2002. While the ultimate outcome of these
contingencies is difficult to estimate at this time, the Company does intend
to vigorously defend itself with respect to these claims.
In conjunction with the required annual review procedures for fiscal year
2001 related to its administration of financial aid programs under the
Ontario Student Aid Program, the Toronto-area DeVry campuses engaged in
discussions with the Ontario Ministry of Education relating to certain
additional information requirements. These additional information
requirements could be interpreted as the basis for a Ministry claim for the
return of some amounts of financial aid disbursed to students attending these
campuses. Discussions with the Ministry as to the extent and purpose of the
information requirements resulted in the submission of additional data.
Based upon its discussions to-date, the Company believes that its discussions
with the Ministry with respect to these requests have been successfully
concluded and that there should be no monetary liability.
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. Forward-looking
statements are based upon the Company's current expectations and beliefs
about future events. Such statements are inherently uncertain and may
involve risks that could cause future results to differ materially from
the forward-looking statements. Potential risks and uncertainties
include, but are not limited to, undergraduate program concentration in
selected areas of technology, dependence on student financial aid,
dependence on state and provincial approvals and licensing requirements,
dependence on continued accreditation for DeVry University and other
factors detailed in the Company's Securities and Exchange Commission
filings, including those discussed under the heading entitled "Risk
Factors" in the Company's Registration Statement on Form S-3 (No. 333-
22457).
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, 2002. The Company's annual report on Form 10-K includes a
description of significant accounting policies and estimates and
assumptions used in the preparation of the Company's financial statements
including, but not limited to, revenue recognition, useful lives of
equipment and facilities, useful lives of acquired finite-lived
intangible assets, valuation of goodwill and indefinite-lived intangible
assets, losses on the collection of student receivable balances,
settlements of law suits and health care costs for incurred but not yet
paid medical services.
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.
Copies of the Company's annual and quarterly reports on Form 10-K and
Form 10-Q as filed with the Securities and Exchange Commission may be
obtained at the Company's website, www.devry.com.
Results of Operations
- ---------------------
The Company's total consolidated revenues increased by $8.6 million, or
5.6%, compared to the first quarter of last year. Tuition revenue, which
is the largest component of revenue representing over 92% of total
revenue, increased by 4.4% because of higher enrollments in DeVry
University's graduate programs and Becker Conviser Professional Review
plus tuition increases in all of the Company's operations compared to
last year.
17
Other Educational Revenues, which are composed primarily of the sale of
books, supplies, fee charges and interest or payment deferral charges in
the Company's educational programs, increased by $2.3 million, or 24.2%,
from last year primarily because of the Technology and Software Supplies
charge billed each term to most DeVry University undergraduate students.
This charge was first assessed last November to provide undergraduate
students with current technology in their classrooms and laboratories and
to provide them with their own suite of software so that when they
graduate they have both current software and technology expertise. At
the start of the current fiscal year, a total of 13 of the DeVry
University undergraduate campus bookstores were outsourced to Follett
compared to 11 at the start of last year. Sales of books and supplies at
the remaining stores managed by the Company were almost unchanged from
the previous year.
DeVry University segment revenues increased by $8.2 million, or 5.6%,
because higher graduate program enrollments, the undergraduate program
Technology and Software Supplies charge and approximately 6% tuition rate
increases compared to last year more than offset the lower enrollment in
undergraduate programs. For the undergraduate academic term which began
in July, total enrollment declined by 4.1% to 43,342 compared to 45,204
last year while the number of coursetakers in graduate school programs
for the academic term that began in June increased by 22.8% to 8,209 vs.
6,683 last year.
Professional and Training segment revenues increased by $0.4 million, or
5.2%, from last year because of a price increase and an increased number
of students enrolled in the Becker Conviser CPA Review course in
preparation for the November CPA examination.
The Company's Cost of Educational Services increased by $9.0 million, or
10.9%, from last year. Cost increases were incurred throughout all of
the Company's operations. In particular, at DeVry University there were
two new undergraduate campus locations and six more graduate teaching
centers in operation than at the start of the previous year. Also,
expanded operations in the undergraduate online and University Center
programs contributed to the increased costs. Depreciation expense, most
of which is included in Cost of Educational Services, increased by $0.9
million in connection with the new facilities and their associated
equipment plus the depreciation on improvements to existing facilities
and new equipment required to support the Company's educational programs.
Student Services and Administrative Expense increased by $4.3 million, or
9.0%, from the first quarter of last year. Increased advertising,
particularly for DeVry University's undergraduate programs contributed to
the increase in this expense category. The increased advertising was
directed at reversing the decline in new student enrollments during the
previous three terms by creating new and improved advertising messages
and increasing the frequency at which such ads are run.
Also contributing to the increases in this expense category was the
continued spending on a new student information system to provide better
support for educational processes and related activities. Information
system development costs related to this project, and to other system
support and improvement initiatives, have increased from last year. In
accordance with accounting principles for internal software development
costs, certain
18
wage and outside consulting service costs are being capitalized. During
the quarter, the Company capitalized $1.7 million while charging $1.4
million directly to expense and amortizing $0.1 million of previously
capitalized expense.
The total Cost of Educational Services and Student Services and
Administrative Expense increased from last year by 10.2% for reasons
explained above. This increase in spending vs. the prior year is the
smallest rate of increase in seven of the last eight quarters as the
Company initiated staff and budget reductions to better match expenses to
revenues. During the quarter, the Company eliminated about 70 staffed
and 100 unfilled positions and further reduced discretionary spending.
Reduced spending from these actions will benefit future periods and help
offset a portion of the cost increases associated with the previously
discussed new DeVry University undergraduate campuses and graduate
teaching centers opened during the past year.
In the DeVry University segment, operating income declined by $4.4
million, or 20.6%. Contributing to the decline in income was a rate of
revenue growth that was less than revenue growth rates in previous years
as total summer term undergraduate enrollments were lower than last year.
Expenses, as described above, affected by both higher levels of
advertising and the added costs of geographic expansion, increased at a
faster rate than the rate of revenue growth.
In the Professional and Training segment, operating income declined by
$0.3 million as higher course delivery costs more than offset the
increase in revenues. For the balance of the year, however, the Company
does not believe that operating income in this segment will be below the
level of the prior year.
Interest expense was $0.2 million less than last year as there were no
borrowings under the Company's revolving line of credit agreement in the
first quarter of this year compared to last year when there were
borrowings during the entire first quarter, principally to provide funds
for the first quarter acquisition of two DeVry University undergraduate
campuses.
Taxes on income for the quarter were 40.0% compared to 39.0% during the
first quarter of last year. The higher rate reflects an increase in the
weighted average state income tax rate on the Company's U.S. operations
caused by changes in the rules by which taxable income is determined in
some states and because of a higher relative proportion of U.S. vs.
foreign based income compared to last year.
Net income for the quarter was $11.2 million, or $0.16 per share,
compared to $14.1 million, or $0.20 per share last year.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations reached $47.5 million in the first
quarter, an increase of $11.3 million or more than 31%, from the first
quarter of last year. Higher non-cash charges for depreciation, refunds
and bad debt, plus lower levels of accounts receivable more than offset
lower net income in the quarter, which declined $2.9 million from last
19
year. The reduction in accounts receivable is primarily attributable to
an approximately $9.1 million reduction in the amount of money owed to
DeVry University under various state and federal financial aid programs
as a result of improved financial aid application processing and more
timely requests for the funds owed. Approximately 65% of the collections
of U.S undergraduate revenues come from federal and state financial aid
programs. Also contributing to the reduced level of accounts receivable
was an improved collection performance on amounts owed by undergraduate
students who were attending the academic term that began in July.
Capital spending for the quarter was $10.0 million, compared to $55.2
million in the first quarter of last year. Included in the capital
spending during last year's first quarter was the purchase of two DeVry
University undergraduate campuses, one in Pomona, California, and the
other in Addison, Illinois, for $37.8 million. Previously, these
campuses had been occupied under lease. Both operating and capital
expenditures are under review to better match spending to revenues in the
coming quarters. Capital spending for the balance of the year is
expected to remain at levels significantly below the record $85.9 million
spending level of fiscal 2002.
The Company did not make any borrowings under its revolving line of
credit agreement during the first quarter. Cash balances at the end of
last fiscal year and cash generated from operations during the first
quarter were sufficient to meet requirements for both operating and
capital needs. There were approximately $2.7 million in outstanding
letters of credit under the revolving line during the quarter. These
were issued in conjunction with DeVry University's participation in
federal financial aid programs, various insurance coverage policies and a
rental agreement on a leased teaching facility.
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 otherwise a
party to any off-balance sheet financing or contingent payment
arrangements. The Company has not entered into any synthetic leases and
there are no residual purchase or value commitments related to any lease.
The Company has not entered into any derivative, swap, futures contract,
put, call, hedge or non-exchange traded contract.
The principal source of the Company's liquidity is its operating cash
flow that is significantly dependent upon DeVry University's
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 almost 70% or its undergraduate
student and approximately 40% of its graduate student tuition, bookstore
and fee revenues have been financed by government-provided financial aid
to students. These financial aid and assistance programs are subject to
political and governmental budgetary considerations. There is no
assurance that such funding will be maintained.
In conjunction with the required annual review procedures for fiscal year
2001 related to its administration of financial aid programs under the
Ontario Student Aid Program, the Toronto-area DeVry campuses have engaged
in discussions with the Ontario Ministry of Education relating to certain
20
additional information requirements. These additional information
requirements could be interpreted as the basis for a Ministry claim for
the return of some amounts of financial aid disbursed to students
attending these campuses. Based upon its discussions with the Ministry
to-date as to the purpose of the information requirements, the Company
has provided to the Ministry certain additional information and believes
that there will be no further action with respect to funds disbursed to
students in prior years. The Company believes that its discussions with
the Ministry have been successfully concluded and that there should be no
monetary liability related to this issue.
The Company believes that current balances of unrestricted cash, cash
generated from operations and, if needed, borrowings under its revolving
loan facility will be sufficient to fund its current operations and plans
for the foreseeable future.
21
Item 4 - Controls and Procedures
- --------------------------------
The Company's Chief Executive Officer and its Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and internal control procedures upon which these financial
statements and management discussion are based. This review was made within
90 days of the filing date of this quarterly report. Based upon this
evaluation, and with the participation of management, the above named officers
have concluded that these controls and procedures are effective and appropriate
to ensure the correctness and completeness of this report.
There were no significant changes in internal controls, procedures or other
factors that could significantly affect these controls subsequent to the date
of their evaluation that would indicate the existence of a material weakness
or the need for corrective action.
22
Item 6 - Other Information
- --------------------------
On October 16th, 2002, Dr. Ewen Akin, a member of the Company's Board of
Directors since 1997, passed away. Dr. Akin was a member of the
Company's Audit Committee and chairman of its Academic Committee. His
presence and participation will be missed.
The following updates the status of litigation and claims previously
disclosed:
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.
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by 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. The complaint was amended and has subsequently been refiled.
In January 2002, a graduate of one of DeVry University'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.
In November 2000, three 1999 graduates of one of DeVry University'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 student from a second Chicago-area campus.
The Company has recorded approximately $1 million associated with
estimated loss contingencies at June 30, 2002. While the ultimate
outcome of these contingencies is difficult to estimate at this time, the
Company does intend to vigorously defend itself with respect to these
claims.
In conjunction with the required annual review procedures for fiscal year
2001 related to its administration of financial aid programs under the
Ontario Student Aid Program, the Toronto-area DeVry campuses engaged in
discussions with the Ontario Ministry of Education relating to certain
additional information requirements. These additional information
requirements could be interpreted as the basis for a Ministry claim for
the return of some amounts of financial aid disbursed to students
attending these campuses. Discussions with the Ministry as to the extent
and purpose of the information requirements resulted in the submission of
additional data. Based upon its discussions to-date, the Company
believes that its discussions with the Ministry with respect to these
requests have been successfully concluded and that there should be no
monetary liability.
23
Item 7 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(b) Reports on Form 8-K
On October 4th, 2002, the Company filed a report on Form 8-K, including as an
exhibit its press release of October 3, 2002, announcing that expected first
quarter earnings would be between $0.13 and $0.16 per share, which was lower
than analyst consensus earnings estimates.
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: November 6, 2002 /s/Ronald L. Taylor
-----------------------------
Ronald L. Taylor
President and Chief Operating
Officer
Date: November 6, 2002 /s/Norman M. Levine
-----------------------------
Norman M. Levine
Senior Vice President Finance and
Chief Financial Officer
25
CERTIFICATIONS
--------------
I, Norman M. Levine, certify that:
1. I have reviewed this quarterly report on Form 10-Q of DeVry Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
26
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 6, 2002
----------------
/s/Norman M.Levine
-----------------------
Senior Vice President &
Chief Financial Officer
27
CERTIFICATIONS
--------------
I, Dennis J. Keller, certify that:
1. I have reviewed this quarterly report on Form 10-K of DeVry Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
28
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 6, 2002
----------------
/s/Dennis J. Keller
----------------------------
Chairman and Chief Executive
Officer