1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly and nine month period ended March 31, 2004
Commission file number 1-13988
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 on
March 31, 2004: 70,281,623
Total number of pages: 49
2
DeVRY INC.
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FORM 10-Q INDEX
For the Quarter and Nine Months Ended March 31, 2004
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
March 31, 2004, June 30, 2003,
and March 31, 2003 3-4
Consolidated Statements of Income
for the quarter and nine months ended
March 31, 2004 and 2003 5
Consolidated Statements of Cash
Flows for the nine months ended
March 31, 2004 and 2003 6
Notes to Consolidated Financial
Statements 7-20
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 21-28
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 28-29
Item 4. Controls and Procedures 29
Part II. Other Information
Item 1. Legal Proceedings 30-31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32
SIGNATURES 33
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, June 30, March 31,
2004 2003 2003
----------- --------- -----------
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $147,203 $ 93,471 $140,917
Restricted Cash 29,998 14,052 39,246
Accounts Receivable, Net 87,206 24,275 80,523
Inventories 1,978 4,315 3,234
Prepaid Income Taxes - - 2,321
Deferred Income Taxes 9,944 11,358 5,448
Prepaid Expenses and Other 6,900 6,988 3,890
------- ------- -------
Total Current Assets 283,229 154,459 275,579
------- ------- -------
Land, Buildings and Equipment
Land 60,306 59,888 58,942
Buildings 199,341 188,320 176,336
Equipment 219,921 207,405 194,300
Construction In Progress 3,477 12,662 3,498
------- ------- -------
483,045 468,275 433,076
Accumulated Depreciation (202,036) (182,921) (172,613)
------- ------- -------
Land, Buildings and
Equipment, Net 281,009 285,354 260,463
------- ------- -------
Other Assets
Intangible Assets, Net 89,862 103,330 35,148
Goodwill 285,841 280,979 42,391
Perkins Program Fund, Net 11,991 11,291 10,617
Other Assets 4,682 6,003 2,150
------- ------- -------
Total Other Assets 392,376 401,603 90,306
------- ------- -------
TOTAL ASSETS $956,614 $841,416 $626,348
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, June 30, March 31,
2004 2003 2003
----------- --------- -----------
(Unaudited) (Unaudited)
LIABILITIES
Current Liabilities
Current Maturities of
Revolving Loan $ - $ 15,000 $ -
Accounts Payable 17,732 18,866 13,224
Accrued Salaries, Wages &
Benefits 30,203 30,791 35,922
Accrued Expenses 26,755 31,767 11,616
Advance Tuition Payments 8,900 10,568 5,276
Deferred Tuition Revenue 153,948 16,291 139,860
------- ------- -------
Total Current Liabilities 237,538 123,283 205,898
------- ------- -------
Non-Current Liabilities
Revolving Loan 105,000 150,000 -
Senior Debt 125,000 125,000 -
Deferred Income Taxes 13,429 13,049 4,899
Deferred Rent and Other 15,504 14,417 12,816
------- ------- -------
Total Non-Current
Liabilities 258,933 302,466 17,715
------- ------- -------
TOTAL LIABILITIES 496,471 425,749 223,613
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,281,623, 70,021,513 and
69,953,575, Shares Issued and
Outstanding at March 31,
2004, June 30, 2003 and
March 31, 2003,
Respectively 703 701 700
Additional Paid-in Capital 69,426 67,288 66,561
Retained Earnings 389,340 346,975 334,826
Accumulated Other Comprehensive
Income 674 703 648
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 460,143 415,667 402,735
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $956,614 $841,416 $626,348
======= ======= =======
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,
--------------------- ----------------------
2004 2003 2004 2003
--------------------- ----------------------
REVENUES:
Tuition $185,673 $155,166 $550,553 $465,480
Other Educational 11,077 14,090 34,141 39,391
Interest 50 111 148 313
------- ------- ------- -------
Total Revenues 196,800 169,367 584,842 505,184
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 105,114 88,312 314,199 273,963
Student Services and
Administrative Expense 67,045 56,714 205,150 164,442
Interest Expense 1,885 47 6,013 141
------- ------- ------- -------
Total Costs and Expenses 174,044 145,073 525,362 438,546
------- ------- ------- -------
Income Before Income Taxes 22,756 24,294 59,480 66,638
Income Tax Provision 6,461 9,402 17,115 25,789
Non-Recurring Tax Benefits - - - (8,150)
------- ------- ------- -------
NET INCOME $ 16,295 $ 14,892 $ 42,365 $ 48,999
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic $0.23 $0.21 $0.60 $0.70
===== ===== ===== =====
Diluted $0.23 $0.21 $0.60 $0.70
===== ===== ===== =====
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,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 42,365 $ 48,999
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 30,158 28,108
Amortization of Intangible Assets 10,178 544
Amortization of Other Assets 790 32
Provision for Refunds and
Uncollectible Accounts 25,564 26,566
Deferred Income Taxes 1,794 6,700
Loss on Disposals of Land, Buildings
and Equipment 336 61
Changes in Assets and Liabilities:
Restricted Cash (15,946) (19,982)
Accounts Receivable (88,375) (80,919)
Inventories 2,337 1,673
Prepaid Expenses And Other 807 (1,941)
Accounts Payable (1,134) (5,890)
Accrued Salaries, Wages,
Expenses and Benefits (5,600) 8,300
Advance Tuition Payments (1,668) (10,607)
Deferred Tuition Revenue 137,657 127,573
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 139,263 129,217
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (26,149) (31,005)
Payments for Purchases of Businesses,
net of Cash Acquired (1,493) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (27,642) (31,005)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 2140 216
Repayments Under Revolving Credit Facility (60,000) -
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (57,860) 216
Effects of Exchange Rate Differences (29) (26)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 53,732 98,402
Cash and Cash Equivalents at Beginning
of Period 93,471 42,515
------- -------
Cash and Cash Equivalents at End of Period $147,203 $140,917
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $5,562 $139
Income Tax Payments During the Period, Net 22,044 15,131
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, 2004
----------
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, 2003 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, 2003
and in conjunction with the Company's quarterly reports on Form 10-Q for the
quarters ended September 30, 2003 and December 31, 2003, each as filed with
the Securities and Exchange Commission.
The results of operations for the nine months ended March 31, 2004, are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivative Instruments and Hedging Activities
- ---------------------------------------------
The Company uses derivative financial instruments to manage its exposure to
movements in interest rates. The use of these financial instruments modifies
the exposure of these risks with the intent to reduce the risk to the Company.
The Company does not use financial instruments for trading purposes, nor does
it use leveraged financial instruments. Credit risk related to the derivative
financial instruments is considered minimal and is managed by requiring high
credit standards for its counterparties and periodic settlements. All
derivative contracts are reported at fair value, with changes in fair value
reported in earnings or deferred, depending on the nature and effectiveness of
the offset or hedging relationship. Any ineffectiveness in a hedging
relationship is recognized immediately into earnings.
During the first quarter of fiscal 2004, the Company entered into several
interest rate cap agreements to protect approximately $100,000,000 of its
outstanding borrowings from sharp increases in short-term interest rates upon
which its borrowings are based. The Company intends to periodically evaluate
the need for interest rate protection in light of projected changes in
interest rates and borrowing levels.
These interest rate cap agreements are designated as cash flow hedging
instruments and are intended to protect the portion of the Company's debt
that is covered by these agreements from increases in short-term interest
rates above 3.5%.
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Derivative Instruments and Hedging Activities, continued
- --------------------------------------------------------
These cap agreements were purchased at fair market values totaling $512,000.
This cost has been capitalized and is being amortized to earnings and recorded
as interest expense over the 24-month term of the agreements. Differences
between the changes in fair value of the interest rate caps and the amount
being amortized to earnings are reported as a component of Other Comprehensive
Income. These amounts will be reclassified and recognized into earnings over
the 24-month term of the agreements. As of March 31, 2004, $8,000 is recorded
as Other Comprehensive Income in the Consolidated Balance Sheet. This
represents the cumulative difference between the decline in the fair market
value of the interest rate caps of $42,000 and the $50,000 expensed as interest
during the nine months ended March 31, 2004. For the quarter ended March 31,
2004, the decline in fair market value was $30,000 and the amount expensed as
interest was $20,000. For the quarter and nine months ended March 31, 2004,
there was no ineffectiveness related to these agreements.
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development costs that are
amortized using the straight line method over the estimated useful 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 $4,880,000, $12,349,000 and $11,029,000 as
of March 31, 2004, June 30, 2003 and March 31, 2003, respectively. The gross
capitalized software development costs for completed projects, which are also
included as Equipment in the Land, Building and Equipment section of the
Consolidated Balance Sheets, were $14,255,000, $2,305,000 and $1,901,000 at
March 31, 2004, June 30, 2003, and March 31, 2003, respectively.
Post-employment Benefits
- ------------------------
The Company's employment agreements with its co-Chief Executive Officers
provide certain post-employment benefits that require accrual over the
expected future service period beginning with the second quarter of fiscal
2002. The Company recorded expense accruals of approximately $1,030,000
for the nine months ended March 31, 2004 and $1,744,000 for the nine
months ended March 31, 2003, related to these agreements. This accrual is
based on recording, over the period of active service, the amount that
will represent the present value of the obligation through the date the
executive attains full eligibility for the benefits, discounted using a
5.25% rate and using the sinking fund accrual method.
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Guarantees
The Company adopted the accounting requirements of Financial Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," for guarantees issued
or modified after December 31, 2002. The adoption did not have an impact on
the Company's financial statements as of March 31, 2004 or June 30, 2003.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences while the officer or director is
performing at its request in such capacity. The indemnification agreement
period is for the officer's or director's lifetime. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a directors
and officer liability insurance policy with a face amount of $50 million that
limits its exposure and enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company estimates the
fair value of these indemnification agreements is minimal.
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 70,187,000 and 69,943,000 for the third quarters
ended March 31, 2004 and 2003, respectively and 70,088,000 and 69,927,000 for
the nine months ended March 31, 2004 and 2003, respectively. Diluted earnings
per share is computed by dividing net income by the weighted average number of
shares assuming dilution. Dilutive shares are computed using the Treasury Stock
Method and reflect the additional shares that would be outstanding if dilutive
stock options were exercised during the period. Shares used in this
computation were 70,885,000 and 70,278,000 for the third quarters ended
March 31, 2004 and 2003, respectively and 70,703,000 and 70,271,000 for the
nine months ended March 31, 2004 and 2003, respectively. Excluded from the
computations of diluted earnings per share were options to purchase 601,000
and 1,092,000 shares of common stock for the third quarter and nine months
ended March 31, 2004, respectively, and 1,679,000 shares of common stock, for
the third quarter and nine months ended March 31, 2003. These outstanding
options were excluded because the option exercise prices were greater than the
average market price of the common shares during these periods and therefore,
their effect would be anti-dilutive.
Stock-based Compensation
- ------------------------
During the nine months ended March 31, 2004, the Company granted options at
fair market value to purchase up to 576,000 shares of the Company's common
stock under the 1999 Stock Incentive Plan.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based Compensation, continued
- -----------------------------------
The Company accounts for its stock option plan using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results
in no charge to earnings when options are issued at fair market value. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," to stock-based employee
compensation. (Dollars in thousands, except per share amounts)
For the Quarter Ended For the Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
------- ------- ------- -------
Net Income:
Net Income as Reported $16,295 $14,892 $42,365 $48,999
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (840) (714) (2,506) (2,095)
------ ------ ------ ------
Pro Forma Net Income $15,455 $14,178 $39,859 $46,904
====== ====== ====== ======
Earnings per Common Share:
Basic as Reported $0.23 $0.21 $0.60 $0.70
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (0.01) (0.01) (0.03) (0.03)
---- ---- ---- ----
Pro Forma Basic $0.22 $0.20 $0.57 $0.67
==== ==== ==== ====
Diluted as Reported $0.23 $0.21 $0.60 $0.70
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (0.01) (0.01) (0.04) (0.03)
---- ---- ---- ----
Pro Forma Diluted $0.22 $0.20 $0.56 $0.67
==== ==== ==== ====
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Comprehensive Income
- --------------------
The differences between changes in the fair values of the cash flow hedging
instruments described above in "Derivative Instruments and Hedging Activities",
and the amount of these instruments being amortized to earnings are reported as
a component of Accumulated Other Comprehensive Income. The amounts recorded in
Other Comprehensive Income were an expense of $10,000 and income of $8,000 for
the quarter and nine months ended March 31, 2004, respectively. The Company's
only other item that meets the definition for adjustment to arrive at
Comprehensive Income is the change in cumulative translation adjustment. The
amounts recorded in Other Comprehensive Income for the changes in translation
rates were income of $49,000 and $99,000, for the quarters ended March 31, 2004
and 2003, respectively, and expense of $37,000 and $26,000 for nine months
ended March 31, 2004 and 2003, respectively.
Reclassifications
- -----------------
Certain previously reported amounts have been reclassified to conform to
current presentation format. These reclassifications had no effect on
reported net income.
NOTE 3: BUSINESS COMBINATIONS
Ross University
- ---------------
On May 16, 2003, the Company acquired all of the outstanding shares of capital
stock of Dominica Management, Inc. (DMI) for $329,259,000 in cash which
includes approximately $4,175,000 of acquisition related fees. The results of
DMI's operations have been included in the consolidated financial statements of
the Company since that date. DMI owns and operates Ross University School of
Medicine and Ross University School of Veterinary Medicine. With campuses
located in the Caribbean countries of Dominica and St. Kitts/Nevis, Ross
University is one of the world's largest providers of medical and veterinary
education with more than 2,800 students. The acquisition gives the Company
entry into a growing sector of the higher education market. The addition of
Ross University will further diversify the Company's curricula and help
maintain a leadership position in career-focused education.
During the first six months of fiscal 2004, the Company recorded an adjustment
to the purchase price of DMI based on a settlement of final working capital
balances. This adjustment resulted in a reduction of $1,207,000 to the
goodwill balance recorded for this acquisition.
The Company also finalized the allocation of the purchase price of DMI in the
first quarter of 2004. Based on a final purchase price allocation analysis
performed for the Company by independent professional valuation specialists,
the goodwill from this acquisition that was recorded at June 30, 2003, was
increased by $3,470,000. Also, the Student Relationships amortizable intangible
assets were reduced by $5,200,000 and the Ross Title IV Eligibility and
Accreditations indefinite-lived intangible assets were increased by $1,730,000.
12
NOTE 3: BUSINESS COMBINATIONS, continued
Ross University, continued
- --------------------------
The following unaudited pro forma financial information presents the results of
operations of the Company and DMI as if the acquisition had occurred at the
beginning of fiscal 2003. The pro forma information is based on historical
results of operations and does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of
operations of the combined enterprises:
For the Quarter Ended For the Nine Months Ended
March 31, 2003 March 31, 2003
(Unaudited) (Unaudited)
--------------------- -------------------------
Revenues $187,876,000 $554,922,000
Net Income 17,232,000 52,343,000
Earnings per Common Share:
Basic $0.25 $0.75
Diluted $0.25 $0.74
Person/Wolinsky
- ---------------
On October 21, 2003, Becker Professional Review, a wholly owned subsidiary of
the Company, acquired certain tangible operating assets and trade names of
Person/Wolinsky CPA Review ("Person/Wolinsky"). These assets were purchased for
$2.7 million in cash. Person/Wolinsky is a training firm preparing students to
pass the CPA exam. Founded in 1967, its primary locations include New York
City, Philadelphia and Washington, D.C.
Based on an analysis performed for the Company by independent professional
valuation specialists, the purchase price of Person/Wolinsky was preliminarily
allocated as follows in the third quarter of 2004:
Amortized Intangible Assets:
Trade Names $110,000
Non-compete Agreement 50,000
Other 20,000
-------
Total $180,000
=======
Goodwill $2,520,000
=========
The Company expects to complete the final valuation allocation of the purchase
price in the fourth quarter of fiscal 2004. Funding for the acquisition was
provided from the Company's existing operating cash balances.
13
NOTE 4: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of March 31, 2004
------------------------------
Gross Carrying Accumulated
Amount Amortization
------------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $(11,414,000)
License and Non Compete
Agreements 2,650,000 (2,017,000)
Class Materials 2,900,000 (650,000)
Trade Names 110,000 (14,000)
Other 620,000 (479,000)
---------- ----------
Total $53,780,000 $(14,574,000)
========== ==========
Indefinite-lived Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
And Accreditations 14,100,000
Intellectual Property 13,940,000
----------
Total $50,657,000
==========
As of March 31, 2003
-----------------------------
Gross Carrying Accumulated
Amount Amortization
-----------------------------
Amortized Intangible Assets:
License and Non Compete
Agreements $2,600,000 $(1,584,000)
Class Materials 2,900,000 (450,000)
Other 600,000 (375,000)
--------- ---------
Total $6,100,000 $(2,409,000)
========= =========
Indefinite-lived Intangible Assets:
Trademark $ 1,645,000
Trade Names 15,872,000
Intellectual Property 13,940,000
----------
Total $31,457,000
==========
14
NOTE 4: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was $3,409,000 and
$10,178,000 for the quarter and nine months ended March 31, 2004,
respectively, and $182,000 and $544,000 for the quarter and nine months ended
March 31, 2003, respectively. Estimated amortization expense for amortized
intangible assets for the next five fiscal years ending June 30, is as
follows:
Fiscal Year
2004 $13,872,000
2005 14,072,000
2006 9,856,000
2007 6,760,000
2008 3,598,000
The original weighted-average amortization period for amortized intangible
assets is five years for Student Relationships, six years for License and Non-
compete Agreements, 14 years for Class Materials, four years for Trade Names
and six years for Other as of December 31, 2003. These intangible assets are
being amortized on a straight-line basis except for the Student Relationships.
The amount being amortized for these Student Relationships is based on the
estimated progression of the students through the respective medical and
veterinary programs, giving consideration to the revenue and cash flow
associated with both existing students and new applicants. This results in the
amount being amortized at an annual rate for each of the five years of
estimated economic life as follows:
Year 1 27.4%
Year 2 29.0%
Year 3 21.0%
Year 4 14.5%
Year 5 8.1%
Indefinite-lived intangible assets related to Trademarks, Trade Names, Title
IV Eligibility, Accreditation 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 the end of fiscal years 2003 and 2002, there was no impairment loss
associated with these indefinite-lived intangible assets as fair value
exceeds the carrying amount.
The Company performs an annual analysis of potential impairment with the
assistance of independent professional valuation specialists. Based on the
results of this analysis, there was no impairment in the value of the Company's
goodwill for any reporting units as of the end of fiscal 2003 or 2002. The
carrying amount of goodwill related to the DeVry University reportable segment
at March 31, 2004 and 2003 was unchanged at $22,195,000. The carrying
15
NOTE 4: INTANGIBLE ASSETS, continued
amount of goodwill related to the Professional and Training reportable segment
at March 31, 2004 was $22,716,000. This is an increase of $2,520,000 from the
balance of $20,196,000 at June 30, 2003. This change represents the purchase
price of Person/Wolinsky in October 2003 (See Note 2-Business Combinations).
The carrying amount of goodwill related to the Ross University segment
was $240,930,000 at March 31, 2004. This is an increase of $2,342,000
from the balance at June 30, 2003. This change is comprised of the
following:
Final Allocation of Purchase
Price (Note 3) $3,470,000
Adjustment to Purchase Price
(Note 3) (1,207,000)
Additional Acquisition Related
Costs 79,000
---------
Total Adjustments $2,342,000
=========
NOTE 5: INCOME TAXES
The principal operating subsidiaries of DMI are Ross University School of
Medicine (the Medical School) incorporated under the laws of the Commonweath
of Dominica and Ross University School of Veterinary Medicine (the Veterinary
School), incorporated under the laws of the Federation of St. Christopher
Nevis, St. Kitts in the West Indies. Both operating companies have agreements
with the respective governments that exempt them from local income taxation
through the years 2043 and 2023, respectively. Accordingly no current
provision for foreign income taxes was recorded in the third quarter or nine
months ended March 31, 2004 for the Medical or Veterinary Schools.
The Company has not recorded a tax provision for the undistributed earnings of
the Medical and Veterinary Schools for the period after the acquisition. It is
the Company's intention to indefinitely reinvest post-acquisition
undistributed earnings and profits to service debt, improve the facilities and
operations of the Schools and pursue future opportunities outside of the
United States. As of March 31, 2004, cumulative undistributed earnings were
approximately $12.7 million.
16
NOTE 6: LONG-TERM DEBT
All of the Company's borrowings and letters of credit under its long-term debt
agreements are through DeVry Inc. and Global Education International, Inc.
(GEI), a subsidiary newly formed in relation to the acquisition of DMI
(Note 3). This long-term debt consists of the following at March 31, 2004:
Effective
Outstanding Interest Rate at
Debt March 31, 2004
------------ ----------------
Revolving Credit Agreement:
DeVry Inc. as borrower $ 65,000,000 2.61%
GEI as borrower 40,000,000 2.61%
-----------
Total $105,000,000 2.61%
-----------
Senior Notes:
DeVry Inc. as borrower $ 75,000,000 2.37%
GEI as borrower 50,000,000 2.37%
-----------
Total $125,000,000 2.37%
-----------
Total long-term debt $230,000,000 2.48%
===========
NOTE 7: 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, 2003.
The Company presents three reportable segments: the DeVry University
undergraduate and graduate operations (DeVry University), the professional
examination review and training operations including Becker Professional Review
and Center for Corporate Education (Professional and Training) and the Ross
University medical and veterinary school operations (Ross University).
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, 2003.
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.
17
NOTE 7: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the quarters and
for the nine months ended March 31, 2004 and 2003. Corporate information is
included where it is needed to reconcile segment data to the consolidated
financial statements.
For the Quarter For the Nine Months
Ended March 31, Ended March 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
DeVry University $172,999 $160,821 $497,531 $474,382
Professional and Training 1,924 8,546 25,935 30,802
Ross University 21,877 - 61,376 -
------- ------- ------- -------
Total Consolidated Revenues $196,800 $169,367 $584,842 $505,184
------- ------- ------- -------
Operating Income:
DeVry University $24,243 $23,880 $48,378 $59,136
Professional and Training (4,815) 873 3,612 8,814
Ross University 8,870 - 24,353 -
Reconciling Items:
Amortization Expense (3,419) (192) (10,209) (576)
Interest Expense (1,885) (47) (6,013) (141)
Depreciation and Other (238) (220) (641) (595)
------ ------ ------ ------
Total Consolidated Income
before Income Taxes $22,756 $24,294 $59,480 $66,638
====== ====== ====== ======
Segment Assets:
DeVry University $495,980 $534,109 $495,980 $534,109
Professional and Training 68,647 72,755 68,647 72,755
Ross University 377,331 - 377,331 -
Corporate 14,656 19,484 14,656 19,484
------- ------- ------- -------
Total Consolidated Assets $956,614 $626,348 $956,614 $626,348
======= ======= ======= =======
Additions to Long-lived Assets:
DeVry University $ 7,701 $10,795 $20,477 $30,846
Professional and Training 729 103 3,099 159
Ross University 1,976 - 4,066 -
------ ------ ------ ------
Total Consolidated Additions
to Long-lived Assets $10,406 $10,898 $27,642 $31,005
====== ====== ====== ======
Depreciation Expense:
DeVry University $ 9,514 $9,152 $27,561 $27,236
Professional and Training 109 95 266 286
Ross University 625 - 1,695 -
Corporate 243 195 636 586
------ ----- ------ ------
Total Consolidated Depreciation $10,491 $9,442 $30,158 $28,108
====== ===== ====== ======
Amortization Expense:
DeVry University $ 7 $ 8 $ 23 $ 23
Professional and Training 209 184 577 553
Ross University 3,203 - 9,609 -
----- --- ------ ---
Total Consolidated Amortization $3,419 $192 $10,209 $576
===== === ====== ===
18
NOTE 7: SEGMENT INFORMATION, continued
The Company conducts its educational operations in the United States, Canada,
the Caribbean countries of Dominica and St. Kitts/Nevis, Europe, the Middle
East and the Pacific Rim. Other international revenues, which are derived
principally from Canada were less than 5% of total revenues for the quarters
and nine months ended March 31, 2004 and 2003. Revenues and long-lived assets
by geographic area are as follows:
For the Quarter For the Nine Months
Ended March 31, Ended March 31,
------------------- -------------------
2004 2003 2004 2003
------------------- -------------------
Revenues from Unaffiliated Customers:
Domestic Operations $171,169 $164,655 $511,118 $490,008
International Operations:
Dominica and St. Kitts/Nevis 21,877 - 61,376 -
Other 3,754 4,712 12,348 15,176
------- ------- ------- -------
Total International 25,631 4,712 73,724 15,176
------- ------- ------- -------
Consolidated $196,800 $169,367 $584,842 $505,184
======= ======= ======= =======
Long-lived Assets:
Domestic Operations $355,660 $348,504 $355,660 $348,504
International Operations:
Dominica and St. Kitts/Nevis 316,557 - 316,557 -
Other 1,168 2,265 1,168 2,265
------- ------- -------- -------
Total International 317,725 2,265 317,725 2,265
------- ------- ------- -------
Consolidated $673,385 $350,769 $673,385 $350,769
======= ======= ======= =======
No one customer accounted for more than 10% of the Company's consolidated
revenues.
NOTE 8: COMMITMENTS AND CONTINGENCIES
In October 2003, the Company announced that its subsidiary, DeVry Canada LLC,
had signed an agreement with RCC College of Technology ("RCC") that will enable
DeVry to phase out its operations at its Toronto campus commencing with the
term that began in November 2003. Based in Vaughn, Ontario, RCC provides
career- focused electronics and computer technology diploma programs.
Under the terms of the agreement, which has been approved by the Ontario
Provincial Ministry, DeVry College of Technology has contracted with RCC to
manage the completion of programs of study for DeVry's current student body in
Toronto. DeVry's Toronto campus will no longer admit new students. RCC will
use existing DeVry curricula to deliver courses that allow current DeVry
students to earn DeVry diplomas and certificates. The agreement also makes
provisions for the acquisition of DeVry assets by RCC and the use of certain
portions of DeVry curriculum under the RCC brand name.
19
NOTE 8: COMMITMENTS AND CONTINGENCIES, continued
In the second quarter of fiscal 2004, the Company recognized an approximately
$0.5 million pre-tax asset impairment loss in accordance with SFAS 144 on the
furniture and laboratory equipment associated with the Company's Toronto-area
operations. This equipment may become the future property of RCC and will have
no further use at DeVry beyond the period of the teachout of DeVry's current
student body.
The Company is subject to occasional lawsuits, regulatory reviews associated
with financial assistance programs and claims arising in the normal conduct
of its business.
In September 2003, the Company received a notice claiming patent-infringement
from Acacia Research Corporation. The notice alleges that the Company has
infringed upon several Acacia patents relating to streaming audio and video
technology. This technology was used by the Company through its online
education platform provider and is also used by many other companies in
conjunction with the delivery of online programs. The Company has had
discussions with Acacia relating to this claim and does not believe that it
has infringed upon the Acacia patents.
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 March 2003, the Company participated in a
required mediation session but no resolution was reached. The action was
subsequently dismissed but an appeal was filed. Discussions are ongoing
about a possible resolution of this issue.
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. In April 2002, this complaint was voluntarily
dismissed by the plaintiff without prejudice. This complaint was amended and
has subsequently been re-filed. The process of discovery, including
depositions, is underway, with a trial date set for October 2004.
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 March
2003, the complaint was dismissed by the court with limited right to amend
and re-file. The complaint was subsequently amended and re-filed.
20
NOTE 8: COMMITMENTS AND CONTINGENCIES, continued
In November 2000, three 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 re-filed, this time including a then current student from a
second Chicago-area campus.
The Company has recorded approximately $1 million associated with
estimated loss contingencies at March 31, 2004. 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 related to its
administration of financial aid programs under the Ontario Student Aid Program,
the Toronto-area DeVry campuses had engaged in discussions with the Ontario
Ministry of Education relating to certain additional information requirements
for the 2001 and 2002 financial aid years. These additional information
requirements could serve as the basis for a Ministry claim for the return of
some amounts of financial aid disbursed to students attending these campuses.
Discussions continue on a periodic basis but the Company believes that there
will be no significant monetary liability.
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 cash flows,
results of operations or financial position.
21
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
- -----------------------------------------------------------
Certain information contained in this quarterly report on Form 10-K
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 and
business, dependence on student financial aid, dependence on
state and provincial approvals and licensing requirements,
dependence on continued accreditation for DeVry and Ross
University, increasing competition for the recruitment of new
students 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 annual report on Form 10-K as 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 quarterly reports on Form 10-Q
for the quarters ended September 30, 2003, December 31, 2003
and the Company's annual report on Form 10-K for the fiscal year
ended June 30, 2003. The Company's annual report on Form 10-K
includes a detailed description of the method of application for
critical accounting policies, 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, valuation of goodwill and indefinite-
lived intangible assets, valuation and useful lives of acquired
finite-lived intangible assets, pattern of amortization of finite-
lived intangible assets over their economic lives, losses on the
collection of student receivable balances, resolution 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 without charge at the Company's
website, www.devry.com.
22
Results of Operations
- ---------------------
The following table presents information with respect to the
relative size to revenue of each item in the statement of income
for the third quarter and nine months year-to-date for both the
current and prior year. Percents may not add due to rounding.
Qtr Ended March 31 Nine Months Ended March 31
------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Educational Services 53.4% 52.1% 53.7% 54.2%
Student Services & Admin. Exp. 34.1% 33.5% 35.1% 32.6%
Interest Expense 1.0% 0.1% 1.0% -
------ ------ ------ ------
Total Costs and Expenses 88.4% 85.7% 89.8% 86.8%
Income Before Taxes 11.6% 14.3% 10.2% 13.2%
Income Tax Provision 3.3% 5.6% 2.9% 5.1%
Non-Recurring Tax Benefits - - - 1.6%
------ ------ ------ ------
Net Income 8.3% 8.8% 7.2% 9.7%
The Company's total consolidated revenues increased by $27.4
million, or 16.2%, and by $79.7 million, or 15.8%, for the third
quarter and first nine months of the fiscal year, respectively.
Tuition revenue, which is the largest component of total
revenues, represented over 94% of total revenues in the current
quarter.
Third quarter and first nine month revenues include $21.9 and
$61.4 million, respectively, of revenues from Dominica
Management, Inc. ("DMI") that was acquired in May 2003 and not
included in the Company's financial results until the fourth
quarter of last year. DMI owns and operates the Ross University
School of Medicine and the Ross University School of Veterinary
Medicine (collectively "Ross University").
Revenues in the DeVry University segment increased from last year
and for the nine months to-date primarily because of higher enrollments
and higher tuition pricing at Keller Graduate School. Revenues at
Keller were higher than last year, in part, because of the July
conversion in course length from ten weeks to eight weeks as the
graduate program academic calendar was aligned with the DeVry
University calendar. This change increases the number of terms
each year from five to six, and correspondingly increases revenue
by 20% in each quarter and for the total year assuming that all
students proceed through the year with continuous enrollment at
the accelerated six term pace. Enrollments for the Keller term
that began in March 2004 increased by 3.5% from the April term of
last year as some previously enrolled students did not maintain
continuous enrollment, partly offsetting increases in enrollment
from new students at both new and existing teaching centers.
23
Revenues for the DeVry University undergraduate operations also
increased slightly from last year in the third quarter but remain
somewhat below last year for the nine months. Undergraduate
total student enrollments for the term that began in November
2003 were 4.0% lower than last year and undergraduate total
student enrollments for the term that began in March 2004 were
4.5% lower than last year. Although new student enrollments
increased from last year in both of these two most recent terms,
the increased new student enrollments have been for online
programs and programs at DeVry University Center locations that
primarily serve working adult students with a greater proportion
enrolled for less than a full-time academic load, and
accordingly, who pay a somewhat lesser tuition amount. Tuition
increases in July 2003 and March 2004 of approximately 5-6% each
offset the effect of the lower total student enrollments compared
to last year in the current quarter.
At Becker Professional Review in the Professional and Training
segment, revenues decreased from the corresponding periods last
year because of lower enrollment. Effective with calendar year
2004, the twice a year, paper and pencil CPA exam format is no
longer being offered. Instead, the exam is now available on
demand almost year-round in a new computer based format.
Candidates may choose to take the exam sections individually and
at different times. While this provides greater flexibility
for candidates sitting for the exam, it extends the timing for
entering and completing exam review courses such as those offered
by Becker. The new exam format was offered for the first time in
April.
The Company believes that some exam candidates delayed taking the
new exam so as to benefit from the experiences of the first new
exam takers, thus reducing enrollments in the Becker CPA Review
courses in the third quarter of the fiscal year until later exam
offering periods. The Company believes that the number of exam
candidates registered for the Becker review courses will increase
from current reduced levels over the period of the next several
quarters.
The Company's Cost of Educational Services increased by $16.8
million, or 19.0%, from the third quarter of last year. For the
first nine months, Cost of Educational Services increased by
$40.2 million, or 14.7%, from last year. The increase includes
the cost of operation at Ross University that was not a part of
the Company's operations last year. Cost increases were also
incurred throughout all of the Company's continuing operations,
including costs associated with new DeVry University Centers and
the undergraduate Houston campus opened in September. At the new
DeVry undergraduate campuses in Philadelphia and South Florida
that were opened in the first half of last fiscal year,
additional faculty and staff are being hired as students progress
into higher terms of their educational programs. For the Keller
Graduate School term that began in March, courses were taught in
eight new locations compared to the February term of last year.
In addition, expanding enrollments in the Company's online
educational programs, both undergraduate and graduate, have
generated additional costs as faculty and staff are added to
support this growing method of course delivery.
Also contributing to the increased costs for the year-to-date,
during the second quarter the Company recognized an approximately
$0.5 million asset impairment loss in accordance with SFAS 144 on
the furniture and laboratory equipment associated with the
Company's Toronto-area operations. In connection with its
agreement with RCC for the teachout of the remaining DeVry
student programs, this equipment may become the future property
of RCC and will have no further useful life for DeVry beyond the
period of the teachout.
24
Depreciation expense, most of which is included in Cost of
Educational Services, increased by $1.0 million in the third
quarter compared to last year and by $2.1 million in the first
nine months of the year. This increase in depreciation expense
is largely attributable to depreciation expense of the acquired
Ross University operations and also reflects the continued
investment at DeVry University for program improvement and
expansion of operations. For the first nine months, additions to
long-lived assets were $27.6 million compared to $31.0 million in
the same period last year.
Student Services and Administrative Expense increased by $10.3
million, or 18.2%, in the third quarter and by $40.7 million, or
24.8%, in the first three quarters. The 18.2% increase in the
third quarter is a lesser rate of increase compared to last year
than in either of the first or second quarters as the Company's
additional commitment to new student acquisition efforts began in
the third quarter of last year. The increased cost also includes
marketing and administration at Ross University, which was not a
part of the Company last year. As discussed above, the Company
incurred higher advertising and selling costs associated with
efforts to generate more new student enrollments, primarily in
the Company's undergraduate educational programs. For the
undergraduate term that began in March, new student enrollments
increased by 3.9% from last year that included new students
admitted to the now discontinued Toronto-area operations. In the
previous term, that began in November, new student enrollments
increased by 3.2% from last year. These are the second and
third consecutive terms with an increase in new student
enrollments after five previous terms of declining new student
enrollment.
Information systems development costs are included in Student
Services and Administrative Expense. These costs, related to the
development of the new student information system and to other
system initiatives and support have increased by $0.9 million
from the first nine months of last year. A major component of the
information system expense is the Company's continued investment
in a new student information system to provide better support for
the educational processes and related student services.
In accordance with accounting principles for internal software
development costs, certain wage and outside consulting costs are
being capitalized. During the third quarter, the Company
capitalized $1.5 million, bringing to $4.5 million the amount
capitalized year-to-date. For the third quarter and nine months
of last year, the Company capitalized $1.2 million and $4.3
million, respectively. Cumulatively since the inception of this
project, the Company has capitalized $19.1 million. In the
third quarter, the Company charged $1.0 million of indirect
project costs directly to expense. For the first nine months,
indirect costs charged directly to expense were $4.1 million
compared to $4.0 million charged directly to expense in the first
nine months of last year. In the third quarter, $0.8 million of
previously capitalized costs were amortized to expense, bringing
to $1.4 million the amount amortized for the year-to-date period.
In the first nine months of last year, $0.3 million of previously
capitalized costs were amortized to expense. As additional parts
of this system are placed into service over the coming quarters,
amortization expense of previously capitalized amounts will
increase somewhat.
Also included in the Student Services and Administration Expense
category was $3.4 million in the third quarter and $10.2 million
in the first three quarters of amortization of finite-lived
intangible assets, mostly associated with the acquisition of Ross
University. This compares to $0.2 million and $0.6 million of
amortization in the corresponding periods of last year,
respectively. Spending for Student Services and Administrative
<PAGE 25)
Expense, excluding this amortization, as a percentage of total
revenue was 32.3% in the third quarter compared to 33.6% in the
second quarter and 33.4% of revenue for the third quarter of last
year during which time spending on undergraduate student marketing
had been increased to produce the new student enrollment gains reported
for the past three terms.
In the DeVry University segment, although operating income
increased slightly from last year's third quarter, operating
margin as a percent of revenue continued to trail last year but
did improve significantly from the second quarter. For the third
quarter of this year, the operating margin was 14.0% compared to
an operating margin of 8.5% in the second quarter. In the third
quarter of last year, the operating margin was 14.8%.
Contributing to this year's lower operating margins are the
lesser total undergraduate student enrollments discussed above
and increased spending on undergraduate new student recruiting to
increase future term enrollments. Expenses have also increased
because of new teaching locations and educational operations to
support increased enrollments in online programs. For the year-
to-date, contributing to the increased cost and lower earnings
was the recognition of a $0.5 million pre-tax asset impairment
loss on the Toronto-area furniture and laboratory equipment used
in conjunction with the teachout agreement with RCC. This
agreement is expected to reduce the Company's operating losses at
the Toronto campus below what such losses would have been if the
Company continued to manage the educational process and services
through the period of teach out. The Company believes that
operating losses incurred during each year of the teach out
period should not exceed $3 million pre-tax which is less than
the loss experienced from operations in fiscal 2003. Partly
offsetting these factors are the positive effects on margin from
higher enrollments at Keller Graduate School and the effect on
revenues and earnings of the conversion to an eight-week term
length aligned with the common DeVry University calendar.
Additionally, price increases across all of DeVry University of
approximately 5-6% were implemented in July 2003 and another
price increase was implemented for the term that began in March
2004.
The Professional and Training segment incurred an operating loss
of $4.8 million for the quarter because of the effects on
enrollment of the change in the CPA exam format and schedule
discussed above. Also, costs increased somewhat for development
of the new CPA exam format course materials. The Company believes
that exam candidates that deferred taking the exam and a review
course will return to register for courses in future periods,
increasing revenues and earnings over the period of the next
several quarters from their current reduced levels.
The Ross University segment was first incorporated into the
Company's financial results in the fourth quarter of fiscal 2003,
following completion of the acquisition in May. For the third
quarter, Ross contributed $8.9 million of operating income for a
40.5% margin. In the first nine months, Ross had operating
income of $24.4 million and an operating margin of 39.7%.
Interest expense increased by $1.8 million in the third quarter
and by $5.9 million in the first nine months compared to last
year. The increased expense is attributable to the fourth
quarter of fiscal 2003 borrowings for the acquisition of Ross
University. During the first nine months, borrowings were
reduced by $60 million to $230 million using existing cash
balances and cash generated from operations. Short-term interest
rates, that serve as the basis for the interest rate
26
on this debt, have remained low during this period. If short-
term interest rates rise in the coming quarters, then interest
expense may increase from current levels, depending upon the
amount of debt outstanding at that time.
Taxes on income were 28.4% of pretax income in the third quarter,
compared to 38.7% in the third quarter of last year. For the
first nine months, taxes on income were 28.8% of pretax income.
Last year, the tax rate on pretax income for the first nine
months was 26.4%. In the second quarter of last year, the
Company recognized non-recurring tax benefits of $8.2 million
associated with the restructuring of its Canadian operations.
Without this non-recurring benefit, the tax rate for the first
nine months of last year would have been 38.7%. The Company's
tax rate on income is the composite of state and federal taxes on
operations other than Ross University and a single digit tax rate
on the earnings of Ross University, most of which is earned
offshore in jurisdictions where the Company has agreements with
those governments that exempt Ross earnings from local income
taxes.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations during the first three quarters of
the fiscal year was $139.3 million, compared to $129.2 million
last year. Contributing to the higher cash flow this year were
the higher non-cash charges for depreciation and amortization
included in net income and a lesser decrease in the amount of
advanced tuition payments from students during this period.
Although accounts receivable were higher than last year,
receivables net of deferred tuition revenue, which billings
create the receivables, and the non-cash provision for refunds
provided a $1.3 million increased source of cash compared to the
first nine months of last year.
Partly offsetting these increases was lower net income in the
nine months, $6.6 million lower than last year. Also, although
pre-tax income was lower than last year, cash used for taxes paid
on income increased by $6.9 million during the first nine months
of this year. The increase in taxes paid relates largely to tax
liabilities associated with the acquisition of DMI.
Capital spending for the first nine months was $26.1 million,
down $4.9 million from last year. Capital spending in the fourth
quarter of this year and in the first two or three quarters of
next year will include funding for construction of dormitory
facilities located on the DeVry University Fremont, California
undergraduate campus site. However, with no new large
undergraduate campuses scheduled for construction, a much lesser
cost associated with the opening of each new DeVry University
Center and completion of the new 19,000 square foot Ross
University medical school facility in the first half of this
fiscal year, capital spending for the full year is expected to be
in the range of $40 million, approximately the same level of
spending as in fiscal 2003.
In conjunction with its acquisition of Ross University, the
Company entered into two credit agreements to provide the
required funding. At June 30, 2003, borrowings under these
agreements totaled $290 million. During the first three
quarters, the Company repaid $60 million of these borrowings
using existing cash balances and cash flow generated from
operations. In late April, the Company repaid an additional $5
million of borrowings. In addition to the remaining $225 million
of borrowings, there are approximately $3.4 million of letters of credit
27
issued under these borrowing agreements. These letters of credit
were issued in conjunction with DeVry University's participation
in student financial aid programs, various business insurance
policies and a rental agreement on a leased teaching facility.
All of the Company's borrowings are based upon a floating
interest rate, generally LIBOR, at the Company's option. During
the first quarter of this fiscal year, the Company entered into
several interest rate cap agreements to protect $100 million of
borrowings from sharp increases in the short-term interest rates
upon which the borrowings are based. The Company intends to
periodically review further debt repayment options and the need
for additional interest rate protection in light of projected
changes in working capital requirements and future period
interest rates.
The Company is not a party to any off-balance sheet financing or
contingent payment arrangements nor are there any unconsolidated
subsidiaries of the Company. The Company's only long-term
contractual obligations consist of its revolving line of credit
and Senior Notes, operating leases on facilities and equipment
and agreements for various services. There are no loans extended
to any officer, director or other person affiliated with the
Company. The Company has not entered into any synthetic leases
and there are no residual purchase or value commitments related
to any facility or equipment lease. The Company has not entered
into any derivative, swap, futures contract, put, call, hedge or
non-exchange traded contract except for the interest rate cap
agreements noted above. Under the terms of these cap agreements,
the Company is not obligated to any further payment liability
beyond their original purchase price.
The Company's primary source of liquidity is the cash received
from payments for student tuition, books and fees. These
payments include funds originating as student and family
educational loans; other financial aid from various federal,
state and provincial loan and grant programs; and student and
family financing resources. Funds originating as student and
family educational loans and other forms of financial aid from
various sources are dependent upon DeVry and Ross University's
continued compliance with and participation in these programs.
The Company is highly dependent upon the timely receipt of these
financial aid funds because approximately 70% of its DeVry
University undergraduate student revenues, approximately 40% of
its graduate student revenues and approximately 70% of Ross
University student revenues are funded by these programs. 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 the future.
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 conjunction with the required annual review procedures related
to its administration of financial aid programs under the Ontario
Student Aid Program, the Toronto-area DeVry campuses had engaged
in discussions with the Ontario Ministry of Education relating to
certain additional information requirements for the 2001 and 2002
financial aid years. These additional information requirements
could serve as the basis for a Ministry claim for the return of
some amounts of financial aid disbursed to students attending
these campuses. Discussions continue on a periodic basis but the
Company believes that there will be no significant monetary
28
liability. The Company's Toronto-area campus does not accept new
students admissions and is being operated in a teachout mode in
conjunction with an agreement with RCC as previously discussed.
Accordingly, the Company is no longer participating in these
financial aid programs.
In January 2003, the New York State Comptroller's Office began an
audit of DeVry New York's compliance with the New York State
Tuition Assistance Program. Preliminary reports have been
received and the Company has responded, disagreeing with some of
the findings in the report. The Company believes that any
disallowance resulting in financial liability to the Company will
not be material in amount and has already been fully reserved.
In March 2004, the California Student Aid Commission ("CSAC")
conducted a review of the Cal Grant program for the Company's
California undergraduate campuses. To-date, no report has been
issued and the Company does not believe that there will be any
significant monetary liability.
The expected outcome of these regulatory reviews will not be
material to cash flows, financial position or results of
operations.
Included in the Company's consolidated cash balances of $147.2
million at March 31, 2004, is $42.5 million of cash attributable
to the Ross University operations. It is the Company's intention
to indefinitely reinvest this cash plus subsequent earnings and
cash flow to service outstanding debt, improve and expand
facilities and operations of the schools and pursue future
business opportunities outside the United States. In accordance
with this plan, cash held by Ross University will not be
available for general Company purposes such as at DeVry
University.
The Company believes that current balances of unrestricted cash,
cash generated from operations and borrowings under its financing
agreements will be sufficient to fund its current operations and
current growth plans for the foreseeable future unless new
investment opportunities should arise similar to the recent
acquisition of Ross University.
Item 3 - Qualitative and Quantitative Disclosures About Market Risk
- -------------------------------------------------------------------
The nature of the Company's educational operations does not
subject it to a concentration or dependency upon the price levels
or fluctuations in pricing of any particular one or group of
commodities.
The financial position and results of operations of Ross
University's Caribbean operations are measured using the U.S.
dollar as the functional currency. Almost all Ross University
financial transactions are denominated in the U.S. dollar.
The financial position and results of operations for the
Company's Canadian educational programs are measured using the
local currency as the functional currency. The Canadian
operations have not entered into any material long term contracts
to purchase or sell goods and services, other than lease
agreements on teaching facilities. The Company does not have any
foreign exchange contracts or derivative financial instruments
related to protection from changes in the value of the Canadian
dollar. Because the assets and liabilities of the Company's
Canadian operations are small relative to those of the Company,
currently Canadian assets are less than 3%
29
of total Company assets, changes in currency value would not have
a material effect on the Company's results of operations or
financial position. Based upon the current value of the net
assets in the Canadian operations, a change of $0.01 in the value
of the Canadian dollar relative to the U.S. dollar would result
in a pre-tax translation adjustment of less than $100,000.
Of the $230 million in Company debt outstanding at March 31,
2004, $105 million matures on July 1, 2006 and $125 million
matures on April 30, 2010. Future investment opportunities,
however, may result in lesser or no debt repayments in the period
including and following such investment and could require
additional borrowings. The interest rate on the Company's debt
is based upon LIBOR interest rates for periods typically ranging
from one to three months. Based upon the level of Company
borrowings at the end of the second quarter, a 1% increase in
short-term interest rates would result in $2.3 million of
additional annual interest expense. The Company entered into
several interest rate cap agreements to protect $100 million of
its borrowings from sharp increases in short-term interest rates.
However, these interest rate cap agreements do not provide
protection from increases in short-term interest rates of less
than 2.4% from current rates.
Item 4 - Controls and Procedures
- -------------------------------
The Company's management does not believe that any set of
disclosure or internal controls can absolutely prevent all fraud
and error. Such disclosure and internal controls, including
those employed by DeVry Inc., can and should, however, provide
reasonable, but not absolute assurance that assets have been
safeguarded, used only for their intended purpose and that
financial transactions have been properly recorded and reported
to permit the preparation of financial statements in conformity
with generally accepted accounting principles reported within the
timeframes required by the SEC.
The Company's co-chief Executive Officers 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 included the results
of the Company's internal audit procedures. This review was made
as of the end of the period covered by this quarterly report.
Based upon this evaluation, and with the participation of
management, subject to the limitations on absolute prevention of
fraud and error, 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 changes in internal control over financial
reporting identified in connection with the evaluation referred
to above that occurred during the Company's third quarter that
materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
30
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings
- --------------------------
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 recorded
approximately $1 million associated with estimated loss
contingencies at March 31, 2004. 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.
The following updates the status of litigation and claims
previously disclosed.
In September 2003, the Company received a notice claiming patent-
infringement from Acacia Research Corporation. The notice
alleges that the Company has infringed upon several Acacia
patents relating to streaming audio and video technology. This
technology was used by the Company through its online education
platform provider and is also used by many other companies in
conjunction with the delivery of online programs. The Company
has had discussions with Acacia relating to this claim and does
not believe that it has infringed upon the Acacia patents.
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
March 2003, the Company participated in a required mediation
session but no resolution was reached. The action was
subsequently dismissed but an appeal was filed. Discussions are
ongoing about a possible resolution of this issue.
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. In April 2002, this complaint was voluntarily dismissed
by the plaintiff without prejudice. This complaint was amended
and has subsequently been re-filed. The process of discovery,
including the taking of depositions, is underway with a trial
date set for October 2004.
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
March 2003, the complaint was dismissed by the court with limited
right to amend and re-file. The complaint was subsequently
amended and re-filed.
In November 2000, three 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 re-
filed, this time including a then current student from a second
Chicago-area campus.
31
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, financial position
or cash flows.
32
Item 5 - Other Information
- --------------------------
In April, the Company announced that Paul Eppen has joined the
Company as Senior Vice President and Chief Marketing Officer.
Eppen has more than 15 years of marketing experience, having
served in senior level marketing positions at Conseco Direct, New
York Life Insurance Company and Spiegel Inc.
The Company has signed a letter of intent with Follett Higher
Education Group relating to the transition of additional DeVry
University bookstores to Follett similar to the agreement
currently in place by which Follett manages a number of DeVry
University undergraduate campus bookstores.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit
Sequentially
Exhibit # Description Numbered Page
--------- ----------- -------------
31 Rule 13a-14(a)/15d-14(a)Certifications 34-39
32 Section 1350 Certifications 40
99 Charter of Audit Committee 41-49
(b) Reports on Form 8-K
During the quarter ended March 31, 2004, the Company filed
the following reports on Form 8-K:
1. January 23, 2004, reporting earnings for the
Company's second fiscal quarter ended December 31, 2003.
33
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 11, 2004 /s/Ronald L. Taylor
-------------------
Ronald L. Taylor
Co-Chief Executive Officer and
President
Date: MAY 11, 2004 /s/Norman M. Levine
-------------------
Norman M. Levine
Senior Vice President and
Chief Financial Officer