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 period ended March 31, 2005
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
April 27, 2005: 70,426,329
Total number of pages: 44
2
DeVRY INC.
FORM 10-Q INDEX
For the Third Quarter Ended March 31, 2005
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
March 31, 2005, June 30, 2004,
and March 31, 2004 3-4
Consolidated Statements of Income
for the quarter and nine months ended
March 31, 2005 and 2004 5
Consolidated Statements of Cash
Flows for the nine months ended
March 31, 2005 and 2004 6
Notes to Consolidated Financial
Statements 7-24
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 25-34
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 34-35
Item 4. Controls and Procedures 35-36
Part II. Other Information
Item 1. Legal Proceedings 36-37
Item 5. Other Information 37-38
Item 6. Exhibits and Reports on Form 8-K 38
SIGNATURES 39
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, June 30, March 31,
2005 2004 2004
--------- --------- --------
ASSETS
Current Assets
Cash and Cash Equivalents $138,187 $146,227 $147,203
Restricted Cash 33,175 13,457 29,998
Accounts Receivable, Net 119,012 28,150 87,206
Inventories 160 3,281 1,978
Deferred Income Taxes 9,395 7,619 9,944
Prepaid Expenses and Other 9,974 10,141 6,900
------- ------- -------
Total Current Assets 309,903 208,875 283,229
------- ------- -------
Land, Buildings and Equipment
Land 64,583 64,256 60,306
Buildings 205,042 203,651 199,341
Equipment 233,133 222,898 219,921
Construction In Progress 21,475 6,214 3,477
------- ------- -------
524,233 497,019 483,045
Accumulated Depreciation (237,651) (210,132) (202,036)
------- ------- -------
Land, Buildings and
Equipment, Net 286,582 286,887 281,009
------- ------- -------
Other Assets
Intangible Assets, Net 76,350 86,346 89,862
Goodwill 289,863 284,397 285,841
Perkins Program Fund, Net 12,847 12,247 11,991
Other Assets 4,871 5,380 4,682
------- ------- -------
Total Other Assets 383,931 388,370 392,376
------- ------- -------
TOTAL ASSETS $980,416 $884,132 $956,614
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, June 30, March 31,
2005 2004 2004
--------- --------- ---------
LIABILITIES
Current Liabilities
Current Maturities of
Revolving Loan $ - $ 35,000 $ -
Accounts Payable 22,433 27,349 17,732
Accrued Salaries, Wages &
Benefits 32,551 31,041 30,203
Accrued Expenses 30,002 24,610 26,755
Advance Tuition Payments 10,238 16,819 8,900
Deferred Tuition Revenue 149,729 21,830 153,948
------- ------- -------
Total Current Liabilities 244,953 156,649 237,538
------- ------- -------
Non-Current Liabilities
Revolving Loan 70,000 90,000 105,000
Senior Debt 125,000 125,000 125,000
Deferred Income Taxes 22,120 17,660 13,429
Deferred Rent and Other 18,232 16,566 15,504
------- ------- -------
Total Non-Current
Liabilities 235,352 249,226 258,933
------- ------- -------
TOTAL LIABILITIES 480,305 405,875 496,471
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,378,969, 70,331,323 and
70,281,623, Shares Issued and
Outstanding at March 31, 2005,
June 30, 2004 and
March 31, 2004, Respectively 705 704 703
Additional Paid-in Capital 72,057 71,797 69,426
Retained Earnings 427,139 405,036 389,340
Accumulated Other Comprehensive
Income 210 720 674
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 500,111 478,257 460,143
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $980,416 $884,132 $956,614
======= ======= =======
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,
----------------------- -------------------------
2005 2004 2005 2004
----------------------- -------------------------
REVENUES:
Tuition $190,713 $185,673 $552,824 $550,553
Other Educational 11,068 11,077 31,731 34,141
Interest 149 50 293 148
------- ------- ------- -------
Total Revenues 201,930 196,800 584,848 584,842
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 110,605 105,114 328,326 314,199
Student Services and
Administrative Expense 73,472 67,045 223,743 205,150
Interest Expense 2,309 1,885 6,391 6,013
------- ------- ------- -------
Total Costs and Expenses 186,386 174,044 558,460 525,362
------- ------- ------- -------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 15,544 22,756 26,388 59,480
Income Tax Provision 3,597 6,461 6,095 17,115
------- ------- ------- -------
Income Before Cumulative Effect
of Change in Accounting 11,947 16,295 20,293 42,365
Cumulative Effect of Change in
Accounting, Net of Tax - - 1,810 -
------- ------- ------- -------
NET INCOME $ 11,947 $ 16,295 $ 22,103 $ 42,365
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic
Income Before Cumulative
Effect of Change in Accounting $0.17 $0.23 $0.29 $0.60
Cumulative Effect of Change
in Accounting - - 0.02 -
----- ----- ----- -----
Net Income $0.17 $0.23 $0.31 $0.60
===== ===== ===== =====
Diluted
Income Before Cumulative
Effect of Change in Accounting $0.17 $0.23 $0.29 $0.60
Cumulative Effect of Change
in Accounting - - 0.02 -
----- ----- ----- -----
Net Income $0.17 $0.23 $0.31 $0.60
===== ===== ===== =====
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,
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $22,103 $42,365
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 30,369 30,158
Amortization 11,735 10,968
Provision for Refunds and
Uncollectible Accounts 31,538 25,564
Deferred Income Taxes 2,684 1,794
Loss on Disposals of Land, Buildings
and Equipment 638 336
Changes in Assets and Liabilities, net of
Effects from Acquisition of Business:
Restricted Cash (19,652) (15,946)
Accounts Receivable (121,618) (88,375)
Inventories 3,137 2,337
Prepaid Expenses And Other 765 807
Accounts Payable (5,403) (1,134)
Accrued Salaries, Wages,
Expenses and Benefits 5,979 (5,600)
Advance Tuition Payments (6,761) (1,668)
Deferred Tuition Revenue 126,946 137,657
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 82,460 139,263
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (30,561) (26,149)
Payments for Purchase of Businesses,
net of Cash Acquired (4,861) (1,493)
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (35,422) (27,642)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 261 2,140
Proceeds From Revolving Credit Facility 10,000 -
Repayments Under Revolving Credit Facility (65,000) (60,000)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (54,739) (57,860)
Effects of Exchange Rate Differences (339) (29)
------- -------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (8,040) 53,732
Cash and Cash Equivalents at Beginning
of Period 146,227 93,471
------- -------
Cash and Cash Equivalents at End of Period $138,187 $147,203
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $4,920 $ 5,562
Income Tax Payments During the Period, Net 4,760 22,044
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, 2005
----------
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, 2004 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, 2004 and in conjunction with the
Company's quarterly reports on Form 10-Q for the quarters ended
September 30, 2004 and December 31, 2004, each as filed with the
Securities and Exchange Commission.
The results of operations for the nine months ended March 31, 2005, 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 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 current 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 short-
term LIBOR 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
$568,000. 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, 2005, $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 $312,000 and the $320,000 expensed as
interest. For the quarter ended March 31, 2005, a loss of $20,000
was recorded as Other Comprehensive Income and interest expense of
$100,000 was charged to earnings for these interest rate caps. For
the nine months ended March 31, 2005, a loss of $10,000 was
recorded as Other Comprehensive Income and interest expense of
$230,000 was charged to earnings for these interest rate caps.
For the quarter and nine months ended March 31, 2005, 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. 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 $557,000, $3,120,000 and $4,880,000 as of March 31,
2005, June 30, 2004 and March 31, 2004, 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
$20,605,000, $16,431,000 and $14,255,000 at March 31, 2005, June
30, 2004, and March 31, 2004, respectively.
Post-employment Benefits
- ------------------------
The Company's employment agreements with its Chairman of the
Board of Directors and its Chief Executive Officer provide
certain post-employment benefits that require accrual over the
expected future service period beginning with the second
quarter of fiscal 2003. For the nine months ended March 31,
2005 and 2004, the Company recognized expense of approximately
$1,939,000 and $1,030,000, respectively, related to these
agreements. The amounts provided are 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 5.50% rate and using the sinking fund
accrual method.
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Earnings Per Common Share
- -------------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
period. Shares used in this computation were 70,374,000 and 70,187,000
for the third quarters ended March 31, 2005 and 2004, respectively and
70,364,000 and 70,088,000 for the nine months ended March 31, 2005 and
2004, 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 70,547,000 and 70,885,000 for
the third quarters ended March 31, 2005 and 2004, respectively and
70,567,000 and 70,703,000 for the nine months ended March 31, 2005
and 2004, respectively. Excluded from the computations of diluted
earnings per share were options to purchase 2,203,000 and
2,201,000 shares of common stock for the third quarter and nine
months ended March 31, 2004, respectively, and 601,000 and
1,092,000 shares of common stock, for the third quarter and nine
months ended March 31, 2004, respectively. 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, 2005, the Company granted
options at fair market value to purchase up to 655,000 shares of
the Company's common stock under the 1999 and 2003 Stock Incentive
Plans.
As permitted under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123"), as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"), the Company
has elected to continue to account for stock-based employee
compensation under the intrinsic value method of APB Opinion No.
25. Under this method, the Company generally recognizes no compensation
expense with respect to such awards, since the exercise price of the
common stock options awarded is equal to the fair market value of
the underlying security on the date of the grant.
Pro forma information regarding net income and earnings per share
is required by SFAS 123 for awards granted after June 30, 1995, as
if the Company had accounted for its stock-based awards under the
fair value method of SFAS 123. Prior to fiscal 2005, the fair
value of the Company's stock-based awards was estimated as of the
date of grant using the Black-Scholes option pricing model ("Black-
Scholes model"). The Black-Scholes model was developed to estimate
the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. This model also requires highly
subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the
calculated grant date fair value.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based Compensation, continued
- -----------------------------------
Beginning with all options granted in the first quarter of fiscal
2005, the fair value of the Company's stock-based awards is
estimated using a binomial model. This model uses cancellation
and historical exercise experience of the Company to determine the
option value. It also takes into account the illiquid nature of
employee options during the vesting period, something that the
Black-Scholes model does not consider. For these reasons, Company
management believes that the binomial model provides a fair value
that is more representative of actual experience and future
expected experience than the value calculated in previous years,
using the Black-Scholes model.
The weighted average estimated grant date fair values, as defined
by SFAS 123, for options granted at market price under the
Company's stock option plans during the first nine months of
fiscal 2005 and 2004 were $9.09 and $17.15, per share,
respectively. The fair values of the Company's stock option
awards for the first nine months of fiscal 2005 and 2004, were
estimated assuming no expected dividends and the following
weighted average assumptions:
Fiscal Year,
2005 2004
---- ----
Expected Life (in Years) 6.69 7.50
Expected Volatility 41.41% 58.16%
Risk-free Interest Rate 3.83% 3.75%
Pre-vesting Forfeiture Rate 4.00% -
The use of a pre-vesting forfeiture rate is optional under SFAS
123, however, it is an important element of option valuation and,
accordingly, has been included in option valuation using the
binomial model.
11
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based Compensation, continued
- -----------------------------------
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123, to stock-based employee
compensation. The change from the Black-Scholes valuation model
to a binomial model had no significant effect on the pro forma
amounts presented below.
For the Quarter Ended For the Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------- ------- ------- -------
Net Income:
Net Income as Reported $11,947 $16,295 $22,103 $42,365
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (734) (840) (3,412) (2,506)
------ ------ ------ ------
Pro Forma Net Income $11,213 $15,455 $18,691 $39,859
====== ====== ====== ======
Earnings per Common Share:
Basic as Reported $0.17 $0.23 $0.31 $0.60
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 Basic $0.16 $0.22 $0.27 $0.57
==== ==== ==== ====
Diluted as Reported $0.17 $0.23 $0.31 $0.60
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) (0.05) (0.04)
---- ---- ---- ----
Pro Forma Diluted $0.16 $0.22 $0.26 $0.56
==== ==== ==== ====
On July 1, 2005, FASB Statement of Financial Accounting Standards
No. 123R, "Share Based Payment" (SFAS 123R) becomes effective and
the cost of these share based payments will be charged to the
income statement.
12
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 Comprehensive Income. The amounts recorded as Other
Comprehensive Income are losses of $20,000 and $10,000 for the
quarters ended March 31, 2005 and 2004, respectively, and a loss
of $10,000 and a gain of $8,000 for the nine months ended March
31, 2005 and 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 a loss of $17,000 and
income of $49,000, for the quarters ended March 31, 2005 and 2004,
respectively, and losses of $500,000 and $37,000 for the nine
months ended March 31, 2005 and 2004, respectively.
The Accumulated Other Comprehensive Income balance at March 31,
2005, is composed of the $8,000 gain related to the cash flow
hedge and a cumulative translation gain of $202,000. At March 31,
2004, this balance is composed of the $8,000 gain related to the
cash flow hedge and a cumulative translation gain of $666,000.
NOTE 3: SHAREHOLDER RIGHTS PLAN
On November 24, 2004, the Company adopted a shareholder rights
plan. In connection with this plan, the Company's Board of
Directors declared a dividend of one Common Stock Purchase Right
("Right" or "Rights") for each outstanding share of DeVry Inc.
Common Stock. The dividend was distributed on December 6, 2004 to
shareholders of record on that date. Each shareholder is
automatically entitled to the Rights and no physical distribution
of new certificates was made.
Each Right, as represented by the Company's Common Stock
certificates, currently entitles the holder to buy one one-
thousandth of a share of the Company's Common Stock at an exercise
price of $75 subject to adjustment, e.g. for stock splits or stock
dividends. However, following the acquisition of 15% or more of
DeVry Inc. Common Stock by a person or group, the holders of the
Rights (other than the acquiring person or group) will be entitled
to purchase shares of DeVry Inc. Common Stock at half-price.
Further, in the event of a subsequent merger or other acquisition
of the Company, the holder of the Rights (other than the acquiring
person or group) will be entitled to buy shares of common stock of
the acquiring entity at one-half of the market price of these
shares.
The Rights are redeemable for $.001 per Right, subject to
adjustment, before the acquisition by a person or group of 15% or
more of the Company's Common Stock. The Rights will expire on
December 6, 2014.
13
NOTE 4: REDUCTION IN WORKFORCE CHARGES
During the second quarter of fiscal 2005, the Company offered a
voluntary separation plan (VSP) to its employees with more than 20
years of service. As of December 31, 2004, 39 employees had
accepted this separation plan. The Company recorded a pre-tax
charge of $2.2 million in the second quarter of the current fiscal
year. This charge consists of severance pay and extended medical
and dental benefits coverage. No cash payments were made in the
second quarter in relation to these charges.
In January 2005, an additional 45 employees accepted the VSP. Also
in the third quarter of fiscal 2005, the Company implemented an
involuntary reduction in force that reduced its workforce by
approximately 75 positions at its educational facilities and
corporate office. These third quarter work force reductions
resulted in the Company recording a charge in the third quarter of
fiscal 2005 of $3.0 million. These charges consist of severance
pay and extended medical and dental benefits coverage for the VSP
reductions and severance pay for the involuntary reductions. Cash
payments for the VSP and the involuntary reduction in force were
$4.23 million in the third quarter of fiscal 2005. Payments will
continue into the fourth quarter of this fiscal year.
In April 2005, the Company offered another voluntary separation
plan (VSPII) to its faculty employees with more than 15 years of
service. This will result in the Company recording an additional
charge in the fourth quarter of fiscal 2005. This charge will
consist of severance pay and extended medical and dental benefits
coverage. Cash payments for the VSPII will generally occur in the
fourth quarter of this fiscal year.
The workforce reductions relate to actions across several of the
company's businesses resulting from process improvements and its
continuing efforts to realign costs with revenues. The majority of
the workforce reductions are in the U.S. and include managerial,
professional, clerical and instructor roles.
NOTE 5: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY
Prior to July 1, 2004, the accounts of Becker Professional Review
were consolidated based on an April 30 fiscal year end, which
management believed was its natural year-end based on its then
business cycle. As a result of a change in the CPA exam schedule,
the Company has aligned the Becker fiscal year end to that of
DeVry Inc. The results of operations for the two-month period
from May 1, 2004 through June 30, 2004, are included as a
cumulative effect of change in accounting in the Consolidated
Statements of Income for the first quarter of fiscal 2005. The
cumulative effect of this change in accounting added $1,810,000,
or $0.02 per share to net income for the first quarter. This
amount is net of income tax expense of $1,189,000.
14
NOTE 5: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY, continued
Net Income and basic and diluted earnings per share for the three
and nine months ended March 31, 2005 and 2004 are set forth below
as if the consolidation of the Becker operations had been
accounted for in the same manner for all periods presented.
Proforma
(In Thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
---- ---- ---- ----
Net Income $11,947 $19,782 $20,293 $42,692
Earnings per Share
Basic $0.17 $0.28 $0.29 $0.61
Diluted $0.17 $0.28 $0.29 $0.60
NOTE 6: BUSINESS COMBINATIONS
Deaconess College of Nursing
- ----------------------------
On March 24, 2005, Ross University School of Nursing and Health
Sciences, a newly formed, wholly owned subsidiary of the Company,
acquired the operations of Deaconess College of Nursing
(Deaconess) for $5,391,000 in cash, subject to purchase price
adjustments. Funding was provided from the Company's existing
operating cash balances.
Located in St. Louis, Missouri, Deaconess has approximately 450
students enrolled and offers associate and bachelor's degree
programs in nursing. In addition, Deaconess offers a bachelor's
degree completion program designed for registered nurses who have
previously completed an associate degree program. Classes are
offered days, evenings and weekends with non-clinical coursework
offered both on campus and online. The addition of Deaconess will
further diversify the Company's curricula and help maintain a
leadership position in career-focused education.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition.
At March 24, 2005
(In Thousands)
Current Assets $ 659
Property and Equipment 37
Intangible Assets 915
Goodwill 5,466
-----
Total Assets Acquired 7,077
Current Liabilities Assumed 1,686
-----
Net Assets Acquired $5,391
=====
15
NOTE 6: BUSINESS COMBINATIONS
Deaconess College of Nursing, continued
- ---------------------------------------
Of the $915,000 of acquired intangible assets, $480,000 was
assigned to the value of the Deaconess Title IV financial aid
eligibility and $175,000 was assigned to accreditations, both of
which are not subject to amortization, and $260,000 was assigned
to student relationships that have an average useful life of
approximately 18 months. The Company determined this allocation
based upon a number of factors, including a preliminary valuation
analysis prepared by an independent professional valuation
specialist. The $5,466,000 of goodwill was all assigned to the
Deaconess operating segment.
The amounts recorded at March 31, 2005, relating to the
acquisition are subject to adjustment as the Company has not yet
completed the final allocation of purchase price. The purchase
price is still subject to final closing adjustments. The Company
expects to finalize the purchase price and complete the
allocations no later than the fourth quarter of fiscal 2005.
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 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 fiscal 2004. Based upon a number of
factors, including a valuation analysis prepared by an independent
professional valuation specialist, the Company determined the
final purchase price allocation for acquired intangible assets
totaled $66,700,000. Of this amount $5,100,000 was assigned to
the value of trade names, $14,100,000 was assigned to the value of
the Ross Medical and Veterinary Schools' U.S. Title IV financial
aid eligibility and accreditations, all of which are not subject
to amortization, and $47,500,000
was assigned to student relationships that have an initial average
useful life of approximately five years. The goodwill balance of
$239,408,000 was all assigned to the Ross University operating
segment. None of the intangible assets or goodwill is expected to
be deductible for U.S. tax reporting purposes.
16
NOTE 6: BUSINESS COMBINATIONS, continued
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. Funding was provided from the Company's existing
operating cash balances. 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.
In the third quarter of fiscal 2004, the Company allocated the
purchase price of Person/Wolinsky, based on an analysis performed
for the Company by independent professional valuation specialists,
as follows:
Amortized Intangible Assets:
Trade Names $110,000
Non-compete Agreement 50,000
Other 20,000
-------
Total $180,000
=======
Goodwill $2,520,000
---------
17
NOTE 7: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of March 31, 2005
------------------------------
Gross Carrying Accumulated
Amount Amortization
------------------------------
Amortized Intangible Assets:
Student Relationships $47,760,000 $(25,068,000)
License and Non Compete
Agreements 2,650,000 (2,454,000)
Class Materials 2,900,000 (850,000)
Trade Names 110,000 (41,000)
Other 620,000 (589,000)
---------- ----------
Total $54,040,000 $(29,002,000)
========== ==========
Indefinite-lived Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
And Accreditations 14,100,000
Deaconess Title IV
Eligibility And
Accreditations 655,000
Intellectual Property 13,940,000
----------
Total $51,312,000
==========
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 (480,000)
---------- ----------
Total $53,780,000 $(14,575,000)
========== ==========
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
==========
18
NOTE 7: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was
$3,637,000 and $10,911,000 for the quarter and nine months ended
March 31, 2005, respectively, and $3,409,000 and $10,178,000 for
the quarter and nine months ended March 31, 2004, respectively.
Estimated amortization expense for amortized intangible assets
for the next five fiscal years ending June 30, is as follows:
Fiscal Year
2005 $14,116,000
2006 10,030,000
2007 6,804,000
2008 3,598,000
2009 203,000
The weighted-average amortization period for amortized intangible
assets is five years for Ross Student Relationships, 18 months for
Deaconess 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. These intangible assets are
being amortized on a straight-line basis except for the Ross
Student Relationships. The amount being amortized for the Ross
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, beginning with May 2003, 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 year 2004, there was no impairment loss associated with
these indefinite-lived intangible assets as fair value exceeds
the carrying amount.
The Company determined that as of the end of fiscal 2004, there
was no impairment in the value of the Company's goodwill for any
reporting units. This determination was made after considering a
number of factors including a valuation analysis prepared by an
independent professional valuation specialist. The carrying
amount of goodwill related to the DeVry University reportable
segment at March 31, 2005 and June 30, 2004 was unchanged at
$22,195,000. The carrying amount of goodwill related to
Professional and Training reportable segment at March 31, 2005 and
June 30, 2004 was unchanged at $22,716,000. The carrying amount
of goodwill related to the Ross University segment was
$244,952,000 at March 31, 2005 and $239,486,000 at June 30, 2004.
This increase of $5,466,000 relates to the goodwill recorded in
the Deaconess acquisition.
19
NOTE 8: INCOME TAXES
The principal operating subsidiaries of DMI are Ross University
School of Medicine (the Medical School) incorporated under the
laws of the Commonwealth 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, 2005 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, 2005 and 2004, cumulative
undistributed earnings were approximately $27.9 million and $12.7
million, respectively.
It is the Company's intention for the foreseeable future to use
accumulated cash balances at the Medical and Veterinary Schools
plus subsequent earnings and cash flow to service outstanding
debt, and reinvest remaining balances to 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 and will
not be subject to U.S. taxation.
NOTE 9: 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. This long-term debt consists
of the following at March 31, 2005:
Effective
Outstanding Interest Rate at
Debt March 31, 2005
------------ ----------------
Revolving Credit Agreement:
DeVry Inc. as borrower $ 50,000,000 4.30%
GEI as borrower 20,000,000 4.31%
-----------
Total $ 70,000,000 4.30%
-----------
Senior Notes:
DeVry Inc. as borrower $ 75,000,000 3.98%
GEI as borrower 50,000,000 3.98%
-----------
Total $125,000,000 3.98%
-----------
Total long-term debt $230,000,000 4.10%
-----------
20
NOTE 10: 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, 2004. 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 and Deaconess College of Nursing
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, 2004.
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.
21
NOTE 10: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the
quarters and for the nine months ended March 31, 2005 and 2004.
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,
------------------- -------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues:
DeVry University $167,977 $172,999 $486,668 $497,531
Professional and Training 10,785 1,924 31,738 25,935
Ross University 23,168 21,877 66,442 61,376
------- ------- ------- -------
Total Consolidated Revenues $201,930 $196,800 $584,848 $584,842
------- ------- ------- -------
Operating Income:
DeVry University $ 9,369 $24,243 $11,491 $48,378
Professional and Training 3,066 (4,815) 8,481 3,612
Ross University 9,302 8,870 24,495 24,353
Reconciling Items:
Amortization Expense (3,637) (3,419) (10,911) (10,209)
Interest Expense (2,309) (1,885) (6,391) (6,013)
Depreciation and Other (247) (238) (777) (641)
------ ------ ------ ------
Total Consolidated Income
before Income Taxes $15,544 $22,756 $26,388 $59,480
------ ------ ------ ------
Segment Assets:
DeVry University $509,541 $495,980 $509,541 $495,980
Professional and Training 70,883 68,647 70,883 68,647
Ross University 380,695 377,331 380,695 377,331
Corporate 19,297 14,656 19,297 14,656
------- ------- ------- -------
Total Consolidated Assets $980,416 $956,614 $980,416 $956,614
------- ------- ------- -------
Additions to Long-lived Assets:
DeVry University $ 6,644 $ 7,701 $25,398 $20,477
Professional and Training 89 729 291 3,099
Ross University 7,263 1,976 9,733 4,066
------ ------ ------ ------
Total Consolidated Additions
to Long-lived Assets $13,996 $10,406 $35,422 $27,642
------ ------ ------ ------
Depreciation Expense:
DeVry University $ 9,094 $ 9,514 $26,700 $27,561
Professional and Training 133 109 399 266
Ross University 958 625 2,529 1,695
Corporate 247 243 741 636
------ ------ ------ ------
Total Consolidated Depreciation $10,432 $10,491 $30,369 $30,158
------ ------ ------ ------
Intangible Asset Amortization Expense:
DeVry University $ - $ 7 $ - $ 23
Professional and Training 193 209 580 577
Ross University 3,444 3,203 10,331 9,609
----- ----- ------ ------
Total Consolidated Amortization $3,637 $3,419 $10,911 $10,209
----- ----- ------ ------
22
NOTE 10: 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, 2005 and 2004. Revenues and
long-lived assets by geographic area are as follows:
For the Quarter For the Nine Months
Ended March 31, Ended March 31,
-------------------- -------------------
2005 2004 2005 2004
-------------------- -------------------
Revenues from Unaffiliated Customers:
Domestic Operations $175,878 $171,169 $508,885 $511,118
International Operations:
Dominica and St. Kitts/Nevis 23,168 21,877 66,442 61,376
Other 2,884 3,754 9,521 12,348
------- ------- ------- -------
Total International 26,052 25,631 75,963 73,724
------- ------- ------- -------
Consolidated $201,930 $196,800 $584,848 $584,842
------- ------- ------- -------
Long-lived Assets:
Domestic Operations $352,259 $355,660 $352,259 $355,660
International Operations:
Dominica and St. Kitts/Nevis 317,621 316,557 317,621 316,557
Other 628 1,168 628 1,168
------- ------- ------- -------
Total International 318,249 317,725 318,249 317,725
------- ------- ------- -------
Consolidated $670,508 $673,385 $670,508 $673,385
------- ------- ------- -------
No one customer accounted for more than 10% of the Company's
consolidated revenues.
NOTE 11: 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.
23
NOTE 11: COMMITMENTS AND CONTINGENCIES, continued
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 following updates the
status of claims and litigations previously disclosed.
In September 2003, the Company received a notice from Acacia
Research Corporation claiming patent-infringement. The notice
alleges that the Company has infringed upon several Acacia
patents relating to streaming audio and video technology. This
technology was allegedly 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 validity of the Acacia patents is being contested in a third
party suit which the Company is monitoring. Indications are that
the court will not uphold the patents. The Company believes that
the likelihood of loss is remote.
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. The complaint was amended
and subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation
session was held in August 2004 resulting in a tentative
agreement to settle the matter. An agreement was finalized
subsequent to the end of the first quarter of the Company's
fiscal year 2005. In January 2005, the court approved a
settlement in an amount for which the Company had previously
accrued and the initial payment required under this settlement
has been made.
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. During the first quarter of the Company's
fiscal year 2004, a new complaint was filed by another plaintiff
with the same general allegations and by the same plaintiffs
attorneys. Discovery continues but there is no determinable date
at which this matter may be brought to conclusion.
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. Discovery continues but there is no determinable
date at which this matter may be brought to conclusion. The
Company has accrued $0.5 million representing the estimated
minimum amount to resolve the two class-action claims. The
Company does not believe the eventual outcomes of these matters to
be materially different in amount than that for which it has
currently provided.
24
NOTE 11: COMMITMENTS AND CONTINGENCIES, continued
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 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. The Company's Toronto-area campus has not
accepted new student admission since November 2003 and is being
operated under an agreement with RCC College of Technology.
Accordingly, the Company is no longer participating in these
financial aid programs. Final discussions with the Ministry are
now underway and the Company has provided an amount, less than
$100,000, equal to the expected final resolution.
The Company had recorded a $2.5 million accrual representing the
estimated loss for the above items as of December 31, 2004. No
further provisions were recorded in the third quarter and the
estimated loss accrual has been reduced only for the initial
payment under the terms of the Becker CPA antitrust suit resulting
in an accrual of $1.1 at March 31, 2005. While the ultimate
outcome of the remaining contingencies is difficult to estimate at
this time, the Company does intend to vigorously defend itself
with respect to these claims. 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.
25
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
- -----------------------------------------------------------
Certain information contained in this quarterly report on Form
10-Q 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, the Company's
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
University and Ross University, increasing competition for the
recruitment of new students, applicant interest in careers in
areas not covered by the Company's educational programs and other
factors detailed in the Company's Securities and Exchange
Commission ("SEC") filings, including those discussed under the
heading entitled "Risk Factors" in the Company's Registration
Statement on Form S-3 (No. 333-22457) as updated for current risks
and uncertainties in various sections of the Company's quarterly
reports on Form 10-Q for the quarters ended September 30, 2004 and
December 31, 2004 and in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 2004, each 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, 2004 and December 31, 2004
and in the Company's annual report on Form 10-K for the fiscal
year ended June 30, 2004. The Company's annual report on Form 10-K
includes a detailed description of critical accounting
policies, estimates and assumptions used in the preparation of
the Company's financial statements. These include, but are 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, costs associated with
pending legal matters 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 quarterly period in the preceding year.
Copies of the Company's annual and quarterly reports on Form 10-
K, Form 10-Q and other reports filed with the Securities and
Exchange Commission may be obtained without charge at the
Company's website, www.devry.com.
26
Results of Operations
- ---------------------
The Company's financial performance in the third quarter improved
from results reported in the first and second quarters of this
fiscal year, but both the third quarter and first nine months of
this fiscal year remain negatively affected by several factors.
These factors include lower DeVry undergraduate total student
enrollments for all three semesters that began in this fiscal
year, the summer term that is the start of the fiscal year, the
fall term and the spring term that concludes the fiscal year.
This decline in total student enrollments is the result of prior
period underperformance in new student recruiting, particularly
in technology programs that had been the largest part of the
undergraduate student enrollment.
Student enrollments in undergraduate technology programs continue
to decline from the level of previous years, with new
undergraduate student enrollments in technology programs
declining 14% from last spring. While this represents yet a
further decline in technology enrollments, the rate of decline
has lessened by half from the 30% decline in new student
undergraduate enrollments in this year's fall term compared to
the fall term a year ago. Offsetting the decline in new student
enrollments in our undergraduate technology programs were new
student enrollments in business and healthcare programs that
continue to increase, up more than 20% this spring from the year-
ago period. For the spring term, total undergraduate student
enrollment in business and healthcare programs is approximately
equal to total enrollments in technology programs.
Tuition revenues remain affected by the decline in enrollments at
our campuses while enrollments at our DeVry University Centers
and in online programs continued to increase. This shift in
enrollment has increased the proportion of our undergraduate
students attending on a part-time basis. These part-time
students pay a lesser tuition amount than do the full-time
students that typically enroll at our campus locations.
To further diversify undergraduate program offerings, the Company
completed the acquisition of Deaconess College of Nursing several
days before the end of the third quarter. Deaconess offers
associate and bachelor's degree programs in nursing. Deaconess
is located in St. Louis, Missouri and currently enrolls
approximately 450 students. The acquisition is consistent with
our plan to develop and acquire high quality educational programs
that can benefit from affiliation with Ross University's
offerings in medical programs and also with the potential to be
co-located at existing DeVry University locations, thereby improving
capacity utilization at those sites.
In addition to the effects on revenue described above, expenses
have increased from last year because of the hiring of additional
faculty and staff to support the growing number of DeVry
University Center locations and increased enrollments in our
online programs. We are also enhancing our advertising messages
to aid recruiting efforts and have added additional enrollment
counselors in the last year, predominantly to serve applicants to
the online programs. The increase in spending in these areas has
raised our overall level of spending compared to last year even
as we search for further ways to reduce spending in areas that
are less critical to our success. We believe that in the longer
term, investments in staff and service to students will allow us
to serve larger numbers of students in technology, business or
healthcare related programs - full-time or part-time - in
master's, bachelor's or associate degree programs or in one of
our exam preparation courses, whether on our campuses, University
Centers or online.
27
In January 2005, the Company announced that it had completed a
workforce reduction plan that included a voluntary separation
plan, an involuntary general reduction in force and further
decided to leave approximately 100 currently open positions
unfilled. The actions were taken to reduce the size of the work
force to better match current lower levels of undergraduate
enrollments as well as the evolving demands of the business. A
further workforce reduction plan was announced in April of this
fiscal year and is expected to result in additional charges
during the fourth quarter for severance and related costs. The
wage savings from these new reductions is not expected to yield
much cost saving benefit until the first quarter of next fiscal
year.
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 first nine months for both the current
and prior year. Percents may not add due to rounding.
Quarter Ended Nine Months Ended
March 31 March 31
--------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Educational Services 54.8% 53.4% 56.1% 53.7%
Student Services & Admin. Exp. 36.4% 34.1% 38.3% 35.1%
Interest Expense 1.1% 1.0% 1.1% 1.0%
------ ------ ------ ------
Total Costs and Expenses 92.3% 88.4% 95.5% 89.8%
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 7.7% 11.6% 4.5% 10.2%
Income Tax Provision 1.8% 3.3% 1.0% 2.9%
------ ------ ------ ------
Income Before Cumulative
Effect of Change in
Accounting 5.9% 8.3% 3.5% 7.2%
Cumulative Effect of
Change in Accounting - - 0.3% -
------ ------ ------ ------
NET INCOME 5.9% 8.3% 3.8% 7.2%
====== ====== ====== ======
28
The Company's total consolidated revenues increased by $5.1
million, or 2.6%, for the third quarter of the fiscal year
compared to the year ago period. For the first nine months,
total revenues were unchanged from last year. Tuition revenue,
which is the largest component of total revenues, represented
over 94% of total revenue in every period.
Contributing to the increase in total Company revenues for the
quarter was an increase of $8.9 million in the Professional and
Training segment. Revenue in the third quarter of last year was
adversely affected by the change in the CPA exam schedule that
has been previously described. In addition, revenues at the Ross
University segment increased by $1.3 million, or 5.9%. However,
revenues at the DeVry University segment continued to lag the
prior year levels for both the third quarter and nine month
periods. The revenue decline occurred because of lower total
undergraduate student enrollments for the fall and spring terms
compared to last year and because of a greater proportion of
students enrolled on less than a full-time basis, particularly at
the Company's DeVry University Centers and DeVry Online programs.
Students enrolled on less than a full-time basis pay a lower
amount of tuition than do full-time students. However, while
these part-time students may pay less tuition per term, the time
to completion of their program of study is longer and additional
revenue may be realized from these students in later terms.
For the fall term that represents the base from which revenue is
determined for two of the three months in the third quarter,
total undergraduate enrollments were 39,603. This compares to
43,001 a year ago. For the spring term that represents the base
from which revenue is determined for the final month of the third
quarter and all three months of the fourth quarter, total
undergraduate enrollments were 38,083, a decline of 6.8% from the
spring term last year. The decline in enrollment is the result
of fewer students enrolled in technology programs taught at
DeVry's large campus sites.
Partly offsetting the decline in undergraduate enrollments and
the increased proportion of part-time students has been a tuition
price increase of approximately 5-6% implemented in November 2004
for undergraduate students. The previous price increase, of
approximately the same percent, was implemented in March 2004.
Keller Graduate School enrollments in DeVry University continue
to increase, also offsetting a part of the decline in revenues
from undergraduate students. For the graduate terms that began
in January and March, total course takers increased from last
year by 5.8% in each term. In the March term, a total of 12,496
course takers were enrolled. A tuition price increase for
graduate students of approximately 5% was implemented for the
term that began in January 2005.
In the first quarter of this fiscal year, the Company completed
an agreement with Follett Higher Education Group ("Follett") to
manage the nine remaining DeVry University campus bookstores not
previously managed by Follett. The transition to Follett
management at these bookstores occurred at the end of the first
quarter of this fiscal year and is now completed. As a result of
this agreement, the Company no longer reports sales revenue at
these stores but reports instead the commission income it
receives on the sales made by Follett to DeVry University
students. On an annual basis, the Company believes that this
change will reduce reported Other Educational Revenues by
approximately $10 million but will have no significant effect on
29
income as the commission earned from Follett will approximate the
profits previously generated by these bookstores when they were
under Company management.
At Becker Professional Review in the Professional and Training
segment, the change in the schedule of CPA exam administration
has resulted in the re-alignment of the fiscal year for this
business from its previous April year-end to a June year-end,
consistent with the year-end for the rest of the Company. This
change in accounting was made effective with the first quarter of
this fiscal year. A decline in the number of CPA exam takers
following the change in exam format and twice a year scheduling
and, correspondingly, a decline in the number of students
enrolled in the Becker CPA Review course, caused revenues to
decline by 12.7% for the first half of this year compared to
reported revenues in the same fiscal period last year. In the
third quarter of last year, following the last administration of
the old format exam and before the new format exam was available
to exam takers, revenues declined to $1.9 million. This year,
with the new format exam offered on a regular schedule in each
quarter of the year, revenues in the third quarter were $10.8
million, approximately the same as in each of the first two
quarters. Because of the change in fiscal year for this
operation as described above, the third quarter of last year
represented the months of November through January and the first
nine months represented the months of May through January.
At Ross University, revenues increased by $1.3 million, or 5.9%,
and by $5.1 million, or 8.3%, from the third quarter and first
nine months of last year, respectively. The increase in revenues
stems largely from higher enrollments at both the medical and
veterinary schools, up 5.6% from last year in the fall term that
began in September and a tuition price increase that was
implemented in January 2005. For the Ross semester that began in
January, total enrollment of 3,122 decreased by 3.3% from last
January. The decline in enrollments in the January term was the
result of changes to admissions standards for new students and
satisfactory academic progress policies for continuing students
to ensure that Ross graduates will be high caliber, qualified
physicians and veterinarians.
The Company's Cost of Educational Services increased by $5.5
million, or 5.2%, from the third quarter of last year. For the
first nine months, the Cost of Educational Services increased by
$14.1 million, or 4.5%, from the corresponding period last year.
Although spending restraint and cost reductions in areas that do
not affect the quality of student services remain a high priority
throughout the organization, there have been cost increases to
support the expanding number of DeVry University Centers and the
growth in the DeVry University Online operations. For the term
that began in March, courses were being taught at eight new DeVry
University Centers compared to the year-ago period. Expanding
enrollments in the online educational programs, both
undergraduate and graduate, have also generated additional costs
as faculty and staff are added to support this growing method of
course delivery. For the term that began in March, the number of
online course takers increased by 79% from last year to 19,759.
This compares to only 12,590 online course takers as recently as
the term that began in July and 11,032 coursetakers in March of
last year.
Included in the Cost of Educational Services in the third quarter
are expenses of approximately $2.0 million for work force
reduction charges related to employees whose wages were included
in this cost category and who 1) subsequent to the end of
December, had accepted the terms of the Company's voluntary
separation plan or 2) were involuntarily separated during the
third quarter. This brings total work force reduction charges
30
for the first nine months of this year in this expense category
to approximately $3.6 million. The Company has initiated further
work force reduction actions in the fourth quarter and expects to
record a further charge in the fourth quarter.
Depreciation expense, most of which is included in Cost of
Educational Services, increased to $30.4 million for the first
nine months, approximately $0.2 million higher than last year.
The increase in depreciation expense is attributable to the
increased investment throughout the Company for new and improved
laboratory and computer equipment, improvements to facilities
and for expansion of operations. Capital spending on
improvements, including instructional technology, and on
expansion in selected operations is an integral component of the
Company's operating strategy.
Student Services and Administrative Expense increased by $6.4
million, or 9.6%, from the third quarter of last year. For the
first nine months, this expense category increased by $18.6
million, or 9.1%, from the same period last year. The Company
continues to incur higher costs for student recruitment in the form of
advertising and selling in support of its efforts to enroll more new
students, particularly into full-time academic programs at its
undergraduate campus locations. To further these efforts, the
Company has increased the number of its admissions advisors at
its campuses, DeVry University Centers and online operations.
Also, additional admissions advisors have been added at Ross
University to increase enrollments at both the medical and
veterinary schools.
Also included in this expense category for the third quarter is
an approximately $0.8 million expense provision for work force
reduction charges as previously discussed and related to
employees whose wages were included in this cost category. This
brings total work force reduction charges for the first nine
months of this year in this expense category to approximately
$1.4 million. The Company has initiated further work force
reduction actions in the fourth quarter that are primarily
expected to be included in the Cost of Educational Services
expense category.
The primary development work on the DeVry University new student
information system has now been completed, and the system
functionality is largely deployed. This new student information
system provides 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 were capitalized. For the first six
months of the year, approximately $0.5 million was capitalized
for this project. With development work now essentially
complete, there was no further amount capitalized in the third
quarter. Cumulatively, a total of $20.6 million has been
capitalized for this project. In the third quarter and first
nine months, $1.1 million and $3.2 million, respectively, of
previously capitalized costs have been amortized to expense.
These amounts compare to $4.5 million that was capitalized and
$1.4 million of previously capitalized costs that were amortized
to expense in the first three quarters of last year.
Included in the Student Services and Administrative Expense
category was $3.6 million for the third quarter and $10.9 million
for the first nine months of amortization of finite-lived
intangible assets, mostly associated with the acquisition of Ross
31
University. This represents an increase of approximately $0.7
million from the amortization expense in the first three quarters
of last year.
The DeVry University segment had a much improved operating
income, equal to $9.4 million for the third quarter, compared to
$3.0 million in the second quarter and a $0.9 million operating
loss in the first quarter of this fiscal year. However,
operating results still lag the year-ago periods. As discussed
above, the lower operating income stems in part from lower total
undergraduate enrollments and an increased proportion of part-
time students that result in less tuition revenue than last year,
more than offsetting the higher graduate school enrollments and
tuition price increases. Costs have increased in support of new
DeVry University operating locations and increased online
enrollments and for additional student recruiting efforts, aimed
primarily at
increasing the numbers of new full-time day enrollments at the
large campus locations. In addition, operating income in both
the second and third quarter of this year was affected by the
provision for the work force reduction programs and will be
further affected in the fourth quarter as discussed above.
In the Professional and Training segment, operating income of
$3.1 million in the third quarter compares to a loss of $4.8
million in the third quarter of last year. As described above,
operations of the Becker CPA review program were disrupted by
last year's change to the scheduling and format changes to the
CPA certification exam. Similarly, for the first nine months,
operating income this year equaled $8.5 million compared to $3.6
million last year.
At Ross University, operating income increased by $0.4 million
from the third quarter of last year, although the operating
margin declined slightly from 40.5% to 40.1%. For the first
nine months of the year, the operating margin also declined, from
39.7% last year to 36.9% this year. The lower operating margins
result from higher faculty wages and higher clinical training
expenses, particularly those paid to the U.S. veterinary school
clinical affiliates for Ross students in attendance for the
clinical training portion in the latter part of their educational
program. Further contributing to the lower operating margins has
been a lesser total student enrollment for the term that began in
January and a slowing in the rate of growth in revenues from
changes to the admissions and academic progression policies as
discussed above while expenses have increased to better support
the student learning process and ensure the quality of education.
For the Ross semester that began this past January, total
enrollment decreased by 3.3% from January of a year ago, after
having increased from the year before by 5.6% in the September
semester. In response to the changes in academic policies and
their resultant effect on enrollments, several additional
admissions counselors have been hired to reverse the decline and
caused selling expense to increase. To expand its program
offerings in the health care field, the Company acquired the
Deaconess College of Nursing at the end of the third quarter as
described above. Future operating results for Deaconess will be
included in this segment.
Interest Expense increased by $0.4 million in the third quarter
compared to last year and by $0.3 million for the first nine
months. Interest expense has not declined even though the total
amount of debt outstanding at December 31st this fiscal year was
$190 million, down $50 million from the same date last year and
the total amount of debt outstanding at March 31st this year was
$195 million, down $35 million from a year ago. The interest
32
rate on all of the Company's debt is floating rate, based upon
short-term interest rates. Interest rates have continued to
increase through the fiscal year.
Taxes on income were 23.1% of pretax income for the third quarter
and first nine months, compared to an effective composite tax
rate of 28.8% through the first three quarters of last year. The
lower effective tax rate this year reflects the greater
proportion of Ross University's earnings with their single digit
tax rate compared to the earnings from the Company's other
operations that are subject to higher domestic federal and state
tax rates.
Included in the Company's first half earnings is $1.8 million,
net of taxes, from a Cumulative Effect of Change in Accounting
for the alignment of the Professional and Training Segment's
fiscal year to the same June-end fiscal year as the rest of the
Company. Because of the change to the CPA exam schedule from a
twice a year November and May schedule to a nearly continuous
exam administration schedule, the Company believes that the
historical Becker operating year
that ended in April is no longer the most appropriate fiscal year-
end. Effective with the start of the Company's fiscal 2005, the
Becker fiscal year is now aligned with the June 30th year-end of
DeVry Inc. and the cumulative effect of this change in
accounting, representing the months of May and June 2004, was
reported in the first quarter of this fiscal year as a Cumulative
Effect of Change in Accounting.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations during the first nine months of
this fiscal year was $82.5 million, compared to $139.3 million in
the same period last year. Primarily contributing to the lower
cash flow this year was an increase in accounts receivable of
$29.0 million caused by a slowdown in processing of financial aid
for students enrolled in the DeVry University spring term and
also increased receivables at Becker, up $5.8 million from last
year when enrollments and revenues were affected by the
previously discussed change in CPA exam schedule. Further
contributing to the reduced cash flow from operations was lower
net income, down $20.2 million compared to last year.
Capital spending for the first nine months was $30.6 million, up
$4.4 million from the same period last year. Spending to-date
includes the continued funding for construction of dormitory
facilities located on the DeVry University Fremont, California,
undergraduate campus and the acquisition, for approximately $8.1
million, of office facilities to house the expanding online
education sales and administrative staff. For the year, total
capital spending is expected to be in the range of $40 - $45
million, approximately the same level as last year.
In addition to spending on capital additions, the Company used
$4.9 million of its existing cash balances for the initial
payment on the purchase of Deaconess College of Nursing. Subject
to determination of actual assets and liabilities acquired, a
further payment, currently estimated at less than $1.0 million,
may be required in the fourth quarter.
The Company repaid a net of $55 million in borrowings from its
revolving loan agreement in the first nine months of this year
33
using existing cash balances and cash flow generated from
operations. During the first nine months of last fiscal year,
the Company repaid $60 million of borrowings.
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 last 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's significant 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, including the recently renewed agreement with
eCollege for the technology base supporting the DeVry University
online course offerings. 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. 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 more than 60% of its DeVry University
undergraduate and graduate student revenues, and approximately
70% of Ross University student revenues are funded by these
programs. The reauthorization of the Higher Education Act is
currently being considered by Congress after having been tabled
last year. Various proposals within the bill as currently
presented may have a favorable impact on the amount of federal
aid available in the future to the Company's students. However,
as the bill moves towards final approval, there may be proposals
for changes that could adversely affect the amount of student
financial aid available to the Company's 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 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.
34
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 Grant ("TAP") requirements for the
three year period ending June 2002. Fieldwork was completed in
June 2003 and a preliminary report was issued in July 2003. The
Company responded to the preliminary report, disagreeing with
some of the findings in the report. Subsequently, the Company
received an amended report and responded again. In the first
quarter of fiscal 2005, the Company received the final report and
determination of disallowance that resulted in financial
liability to the Company. The final liability was in an amount
for which the Company had previously accrued. The Company has
remitted the required claim of disallowance and the matter is now
closed.
In connection with the discontinuance of the original Denver
Technical College educational programs and its separate
eligibility for student financial aid, the Company is completing
an audit of its participation in these financial aid programs.
Approximately $430,000 of remaining financial aid funds were
identified as a part of this audit needing to be returned to the
appropriate federal and state funding sources. Most of the
amounts owed have already been returned and the last part of the
return is currently being completed. This settles all remaining
liability under these programs. The Company had previously
accrued for the estimated amount required for resolution and
there should be no further liability affecting the Company's
financial statements.
In December 2004, the Texas Workforce Commission conducted a
visit to the DeVry University campus in Irving, Texas, for the
purpose of determining compliance with the veterans' educational
benefit approval criteria in the Code of Federal Regulations.
The review was completed and there were no discrepancies noted.
Included in the Company's consolidated cash balances of $138.2
million at March 31, 2005, is approximately $50.0 million of cash
attributable to the Ross University operations. It is the
Company's intention for the foreseeable future to use this cash
plus subsequent earnings and cash flow to service outstanding
debt, and reinvest remaining balances to 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 and the Deaconess College of
Nursing.
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 one particular or group of
commodities.
35
The financial position and results of operations of Ross
University's Caribbean operations are measured using the U.S.
dollar as the functional currency. Substantially 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 its 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% of total
Company assets, changes in currency value within the range of
changes recently experienced, 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 $195 million in Company debt outstanding at March 31,
2005, $70 million matures on July 1, 2009 and $125 million
matures on April 30, 2010. Future investment opportunities may
affect future debt repayments 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 third quarter, a 1% increase in
short-term interest rates would result in $1.9 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
expire in August and September 2005 and do not provide protection
from increases in short-term interest rates of less than 0.6%
from current rates.
Item 4 - Controls and Procedures
- --------------------------------
The Company is continuing with its efforts to fully comply with
Section 404 of the Sarbanes-Oxley Act of 2002. The effort
includes both evaluating its disclosure controls and procedures
and its internal controls over financial reporting by expanding
and improving the design, documentation and testing of
effectiveness of internal controls. During the course of this
work, the Company has identified certain areas that management
believes need to be improved and efforts have been undertaken to
complete these improvements and retest them for compliance.
Further testing and review continue, but to date the Company has
not identified any material weaknesses in internal controls over
financial reporting as defined by the Public Accounting Oversight
Board. However, the Company can not provide absolute assurance
that in future periods it will be able to make the required
management certifications or that its Independent Auditors will
be able to attest as to whether they believe we maintained, in
all material respects, effective internal control over financial
reporting in conjunction with the Company's financial statements
for the fiscal year ending June 30, 2005.
36
Evaluations required by Rule 13a - 15 of the Securities Exchange
Act of 1934 of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a - 15(e) under the
Securities Exchange Act of 1934) as of the end of the period
covered by this Report have been carried out under the
supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief
Financial Officer. Based upon such evaluations, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no changes in the Company's internal controls
over financial reporting during the period covered by this report
that were identified in connection with the evaluation referred
to above that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over
financial reporting.
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 following updates the
status of claims and litigations previously disclosed.
In September 2003, the Company received a notice from Acacia
Research Corporation claiming patent-infringement. The notice
alleges that the Company has infringed upon several Acacia
patents relating to streaming audio and video technology. This
technology was allegedly 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 validity of the Acacia patents is being contested in a third
party suit which the Company is monitoring. Indications are that
the court will not uphold the patents. The Company believes that
the likelihood of loss is remote.
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. The complaint was amended
and subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation
session was held in August 2004 resulting in a tentative
agreement to settle the matter. An agreement was finalized
subsequent to the end of the first quarter of the Company's
fiscal year 2005. In January 2005, the court approved a
settlement in an amount for which the Company had previously
accrued and the initial payment required under this settlement
has been made.
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. During the first quarter of the Company's
fiscal year 2004, a new complaint was filed by another plaintiff
37
with the same general allegations and by the same plaintiffs
attorneys. Discovery continues but there is no determinable date
at which this matter may be brought to conclusion.
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. Discovery continues but there is no
determinable date at which this matter may be brought to
conclusion. The Company has accrued $0.5 million representing
the estimated minimum amount to resolve the two class-action
claims. The Company does not believe the eventual outcomes of
these matters to be materially different in amount than that for
which it has currently provided.
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 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. The Company's Toronto-area campus has not
accepted new student admission since November 2003 and is being
operated under an agreement with RCC College of Technology.
Accordingly, the Company is no longer participating in these
financial aid programs. Final discussions with the Ministry are
now underway and the Company has provided an amount, less than
$100,000, equal to the expected final resolution.
The Company had recorded a $2.5 million accrual representing the
estimated loss for the above items as of December 31, 2004. No
further provisions were recorded in the third quarter and the
estimated loss accrual has been reduced only for the initial
payment under the terms of the Becker CPA antitrust suit
resulting in a remaining accrual of $1.1 million at the end of
the third quarter. While the ultimate outcome of the remaining
contingencies is difficult to estimate at this time, the Company
does intend to vigorously defend itself with respect to these
claims. 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.
Item 5 - Other Information
- --------------------------
In January 2005, the Company announced that John Holbrook joined
DeVry University as vice president of new student recruitment
responsible for field and campus admissions recruiting. John
Holbrook has extensive leadership in higher education recruiting,
starting as a recruiting advisor with DeVry University in 1974
and rising to the position of national director. John left DeVry
in 1995. Before his return to DeVry, John held senior recruiting
management roles with other national educational organizations.
In January 2005, DeVry University announced two programmatic
expansions to its undergraduate educational offerings. First,
the associate degree program in health information technology
will now be available through DeVry University Online, starting
38
in the spring 2005 semester. Also, DeVry University is
introducing a new bachelor of science degree program in game and
simulation programming to be offered initially at its Phoenix,
Arizona, and Fremont, California, campuses for the summer 2005
semester.
In March 2005, the Company announced the acquisition of Deaconess
College of Nursing. Deaconess, located in St. Louis, Missouri,
offers associate and bachelor's degree programs in nursing to
approximately 450 currently enrolled students.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Sequentially
Exhibit # Description Numbered Page
--------- ----------- -------------
31 Rule 13a-14(a)/15d-14(a)Certifications 40-43
32 Section 1350 Certifications 44
(b) Reports on Form 8-K:
1. January 27, 2005, reporting revenues and earnings for the
Company's second quarter of fiscal year 2005.
2. March 15, 2005, announcing that the Company had signed a
definitive purchase agreement to acquire the assets of Deaconess
College of Nursing.
3. March 30, 2005, announcing that the Company had completed
its acquisition of the assets of Deaconess College of Nursing.
4. March 30, 2005, disclosing the various agreements relating
to the acquisition of the assets of Deaconess College of Nursing.
39
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 6, 2005 /s/Ronald L. Taylor
-----------------------
Ronald L. Taylor
Chief Executive Officer
Date: May 6, 2005 /s/Norman M. Levine
------------------------
Norman M. Levine
Senior Vice President and
Chief Financial Officer