1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly and six month period ended December 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 a large
accelerated filer, an accelerated filer or a non-accelerated
filer. (as defined in Rule 12b-2 of the Exchange Act).
X LARGE ACCELERATED FILER
---
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
NO X
---
Number of shares of Common Stock, $0.01 par value, outstanding on
January 31, 2006: 70,569,681
Total number of pages: 47
2
DeVry Inc.
FORM 10-Q INDEX
For the Quarter and Six Months Ended December 31, 2005
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
December 31, 2005, June 30, 2005,
and December 31, 2004 3-4
Consolidated Statements of Income
for the quarter and six months ended
December 31, 2005 and 2004 5
Consolidated Statements of Cash
Flows for the six months ended
December 31, 2005 and 2004 6
Notes to Consolidated Financial
Statements 7-24
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 25-35
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 35-36
Item 4. Controls and Procedures 37
PART II. Other Information
Item 1. Legal Proceedings 38-39
Item 4. Submission of Matters to a
Vote of Security Holders 39-40
Item 6. Exhibits 41
SIGNATURES 42
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, June 30, December 31,
2005 2005 2004
----------- ----------- -----------
Restated Restated
ASSETS
Current Assets
Cash and Cash Equivalents $143,765 $161,823 $132,445
Restricted Cash 38,997 13,935 36,224
Accounts Receivable, Net 85,467 39,226 75,323
Inventories 85 164 1,047
Deferred Income Taxes 17,142 17,142 7,821
Prepaid Expenses and Other 15,843 10,048 11,714
------- ------- -------
Total Current Assets 301,299 242,338 264,574
------- ------- -------
Land, Buildings and Equipment
Land 67,633 68,013 65,071
Buildings 219,143 212,428 205,520
Equipment 239,442 234,201 231,387
Construction In Progress 5,508 15,813 17,404
------- ------- -------
531,726 530,455 519,382
Accumulated Depreciation (254,033) (243,688) (230,915)
------- ------- -------
Land, Buildings and
Equipment, Net 277,693 286,767 288,467
------- ------- -------
Other Assets
Intangible Assets, Net 68,538 73,699 79,072
Goodwill 291,306 289,308 284,397
Perkins Program Fund, Net 13,290 13,290 12,697
Other Assets 4,328 4,633 5,165
------- ------- -------
Total Other Assets 377,462 380,930 381,331
------- ------- -------
TOTAL ASSETS $956,454 $910,035 $934,372
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, June 30, December 31,
2005 2004 2004
----------- ----------- -----------
Restated Restated
LIABILITIES
Current Liabilities
Current Maturities of
Revolving Loan $ 35,000 $ 50,000 $ -
Accounts Payable 29,983 30,681 19,527
Accrued Salaries, Wages &
Benefits 33,794 34,071 37,725
Accrued Expenses 26,414 34,462 35,501
Advance Tuition Payments 28,875 14,685 32,185
Deferred Tuition Revenue 110,413 22,823 100,013
------- ------- -------
Total Current Liabilities 264,479 186,722 224,951
------- ------- -------
Other Liabilities
Revolving Loan - 50,000 65,000
Senior Debt 125,000 125,000 125,000
Deferred Income Taxes 16,078 15,949 9,783
Accrued Post-employment
Agreements 6,392 6,352 4,989
Deferred Rent and Other 12,695 12,629 12,670
------- ------- -------
Total Other Liabilities 160,165 209,930 217,442
------- ------- -------
TOTAL LIABILITIES 424,644 396,652 442,393
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,564,000, 70,475,000 and
70,368,000, Shares Issued and
Outstanding at December 31,
2005, June 30, 2005 and
December 31, 2004,
Respectively 706 706 705
Additional Paid-in Capital 116,777 113,571 103,294
Retained Earnings 414,400 398,840 387,733
Accumulated Other Comprehensive
Income (Loss) (73) 266 247
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 531,810 513,383 491,979
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $956,454 $910,035 $934,372
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
(Unaudited)
For The Quarter For The Six Months
Ended December 31, Ended December 31,
--------------------- ----------------------
2005 2004 2005 2004
--------------------- ----------------------
Restated Restated
REVENUES:
Tuition $196,032 $184,127 $379,085 $362,111
Other Educational 13,398 10,311 26,706 20,663
Interest 439 84 858 144
------- ------- ------- -------
Total Revenues 209,869 194,522 406,649 382,918
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 111,017 108,689 222,726 218,954
Student Services and
Administrative Expense 81,887 77,627 157,777 152,894
Interest Expense 2,606 2,091 5,261 4,082
------- ------- ------- -------
Total Costs and Expenses 195,510 188,407 385,764 375,930
------- ------- ------- -------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 14,359 6,115 20,885 6,988
Income Tax Provision 3,531 1,453 5,325 1,996
------- ------- ------- -------
Income Before Cumulative Effect
of Change in Accounting 10,828 4,662 15,560 4,992
Cumulative Effect of Change in
Accounting, Net of Tax - - - 1,810
------- ------- ------- -------
NET INCOME $ 10,828 $ 4,662 $ 15,560 $ 6,802
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic
Income Before Cumulative
Effect of Change in Accounting $0.15 $0.07 $0.22 $0.08
Cumulative Effect of Change
in Accounting - - - 0.02
----- ----- ----- -----
Net Income $0.15 $0.07 $0.22 $0.10
===== ===== ===== =====
Diluted
Income Before Cumulative
Effect of Change in Accounting $0.15 $0.07 $0.22 $0.08
Cumulative Effect of Change
in Accounting - - - 0.02
----- ----- ----- -----
Net Income $0.15 $0.07 $0.22 $0.10
===== ===== ===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
6
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended December 31,
2005 2004
-------- --------
Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15,560 $ 6,802
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Share-Based Compensation Charge 2,239 3,856
Depreciation 18,628 19,937
Amortization 5,402 7,816
Provision for Refunds and
Uncollectible Accounts 23,578 19,768
Deferred Income Taxes 56 (4,723)
(Gain) Loss on Disposals of Land, Buildings
and Equipment (479) 14
Changes in Assets and Liabilities, net of
Effects from Acquisition of Business:
Restricted Cash (25,059) (22,766)
Accounts Receivable (69,800) (66,780)
Inventories 87 2,248
Prepaid Expenses And Other (5,629) (811)
Perkins Program Fund Contribution and Other - (550)
Accounts Payable (727) (7,874)
Accrued Salaries, Wages,
Expenses and Benefits (8,382) 17,415
Advance Tuition Payments 14,152 15,251
Deferred Tuition Revenue 87,590 78,182
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 57,216 67,785
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (10,848) (21,426)
Net Proceeds from Sale of Land and Building 1,798 -
Payment for Purchase of Business (1,998) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (11,048) (21,426)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 1,040 147
Excess Tax Benefit from Share-Based Payments - 34
Repayments Under Revolving Credit Facility (65,000) (60,000)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (63,960) (59,819)
Effects of Exchange Rate Differences (266) (322)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,058) (13,782)
Cash and Cash Equivalents at Beginning
of Period 161,823 146,227
------- -------
Cash and Cash Equivalents at End of Period $143,765 $132,445
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $ 4,512 $3,152
Income Tax Payments During the Period, Net 14,447 409
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter and Six Months Ended December 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, 2005 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, 2005 and in conjunction with the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2005, each as filed with the Securities and
Exchange Commission.
The results of operations for the three and six months ended
December 31, 2005, are not necessarily indicative of results to be
expected for the entire fiscal
year.
The consolidated financial statements that are presented for the
fiscal year ended June 30, 2005 and the six months ended December
31, 2004, have been restated to reflect the adjustments necessary
under the provisions of the modified retrospective application
method of Statement of Financial Accounting Standards No. 123(R),
"Share Based Payments" ("SFAS 123(R)"). SFAS123(R) was adopted in
the first quarter of fiscal 2006 (See Note 3).
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivative Instruments and Hedging Activities
- ---------------------------------------------
The Company uses derivative financial instruments to manage its
exposure to movements in interest rates. The use of these
financial instruments modifies the exposure of these risks with
the intent to reduce the risk to the Company. The Company does not
use financial instruments for trading purposes, nor does it use
leveraged financial instruments. Credit risk related to the
derivative financial instruments is considered minimal and is
managed by requiring high credit standards for its counterparties
and periodic settlements.
All derivative contracts are reported at fair value, with changes
in fair value reported in earnings or deferred, depending on the
nature and effectiveness of the offset or hedging relationship.
Any ineffectiveness in a hedging relationship is recognized
immediately into earnings.
During the first quarter of fiscal 2004, the Company entered into
several interest rate cap agreements to protect approximately
$100,000,000 of its outstanding borrowings from sharp increases
in short-term interest rates upon which its borrowings are based.
These agreements expired in the first quarter of fiscal 2006. The
Company intends to periodically evaluate the need for
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Derivative Instruments and Hedging Activities, continued
- --------------------------------------------------------
interest rate protection in light of projected changes in
interest rates and borrowing levels. These interest rate cap
agreements were designated as cash flow hedging instruments and
were intended to protect the portion of the Company's debt that
is covered by these agreements from short-term interest rates
above 3.5%.
These cap agreements were purchased at fair market values totaling
$568,000. This cost was capitalized and 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 were
reported as a component of Other Comprehensive Income. These
amounts were reclassified and recognized into earnings over the 24-
month term of the agreements. As of December 31, 2005, these cap
agreements had expired so there is no effect on Accumulated Other
Comprehensive Income in the Consolidated Balance Sheets. As of
December 31, 2004, $28,000 was 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 $192,000 and the $220,000 expensed as
interest. For the six months ended December 31, 2005 and 2004,
gains of $12,000 and $10,000, respectively, were recorded as Other
Comprehensive Income. Interest expense of $73,000 and $70,000 was
charged to earnings for these interest rate caps for the six
months ended December 31, 2005 and 2004, respectively. For the six
months ended December 31, 2005 and 2004, there was no
ineffectiveness related to these agreements.
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development
costs that are amortized using the straight line method over the
estimated useful lives of the software, not to exceed five years.
Capitalized costs include external direct costs of materials and
services consumed in developing or obtaining internal-use software
and payroll and payroll related costs for employees who are
directly associated with the internal software development project.
Capitalization of such costs ceases no later than the point at
which the project is substantially complete and ready for its intended
purpose. Capitalized software development costs for projects not
yet complete, which are included as Equipment in the Land,
Buildings and Equipment section of the Consolidated Balance
Sheets, were $286,000 as of December 31, 2004. As of December 31,
2005 and June 30, 2005 there were no capitalized costs for
projects not yet completed. 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 at December 31,
2005, June 30, 2005, and December 31, 2004.
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Post-employment Benefits
- ------------------------
The Company's employment agreements with its Chairman of the
Board of Directors and 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 six months ended December 31, 2005
and 2004, the Company recognized expense of approximately $40,000
and $1,310,000, respectively, related to these agreements. The
amounts provided are based on recording, over the period of active
service that ended in June, 2005, the amount that represents the
present value of the obligation, discounted using a 5.62% rate as
of December 31, 2005, and using the sinking fund accrual method.
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 70,542,000 and
70,368,000 for the second quarters ended December 31, 2005 and 2004,
respectively and 70,524,000 and 70,359,000 for the six months ended
December 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 70,847,000 and 70,507,000 for
the second quarters ended December 31, 2005 and 2004, respectively
and 70,702,000 and 70,583,000 for the six months ended December
31, 2005 and 2004, respectively. Excluded from the computations
of diluted earnings per share were options to purchase 1,773,000 and
2,915,000 shares of common stock for the second quarter and six
months ended December 31, 2005, respectively, and 2,700,000 and
2,274,000 shares of common stock, for the second quarter and six
months ended December 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.
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 in Other
Comprehensive Income are gains of $12,000 and $10,000 for the six
months ended December 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
losses of $4,000 and $243,000, for the quarters ended December 31,
2005 and 2004, respectively, and losses of $351,000 and $483,000
for six months ended December 31, 2005 and 2004, respectively.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Comprehensive Income, continued
- -------------------------------
The Accumulated Other Comprehensive Income balance at December 31,
2005 is composed entirely of a cumulative translation loss of
$73,000. This balance at December 31, 2004, is composed of a
$28,000 gain related to the cash flow hedge and a cumulative
translation gain of $219,000.
NOTE 3: STOCK-BASED COMPENSATION
The Company maintains six stock-based award plans: the Amended and
Restated Stock Incentive Plan, established in 1988, the 1991 Stock
Incentive Plan, the 1994 Stock Incentive Plan, the 1999 Stock Incentive
Plan, the 2003 Stock Incentive Plan and the 2005 Incentive Plan. Under
these plans, directors, key executives and managerial employees are
eligible to receive incentive stock or nonqualified options to
purchase shares of the Company's common stock. The 2005 Incentive
Plan also permits the award of stock appreciation rights,
restricted stock, performance stock and other stock and cash based
compensation. The Amended and Restated Stock Incentive Plan, the
1994, 1999, and 2003 Stock Incentive Plans and the 2005 Incentive
Plan are administered by a Plan Committee of the board of
directors. Plan Committee members are granted automatic,
nondiscretionary annual options. The 1991 Stock Incentive Plan is
administered by the board of directors. Options under all six
plans are granted for terms of up to 10 years and can vest
immediately or over periods of up to five years. The requisite
service period is equal to the vesting period. The option price
under the plans is the fair market value of the shares on the date
of the grant.
The company accounts for options granted to retirement eligible
employees that vest upon an employees' retirement under the non-
substantive vesting period approach to these options. Under this
approach, compensation cost is recognized at the grant date for
options issued to retirement eligible employees where the options
vest upon retirement.
At December 31, 2005, 7,655,690 authorized but unissued shares of
common stock were reserved for issuance under the Company's stock
incentive plans.
Effective July 1,2005, the Company adopted the provisions of SFAS
123(R). SFAS 123(R) establishes accounting for stock-based awards
exchanged for employee services. Accordingly, stock-based
compensation cost is measured at grant date, based on the fair
value of the award, and is recognized as expense over the employee
requisite service period. The Company previously applied
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25")and related Interpretations and
provided the required pro forma disclosures of SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The Company
elected to adopt the modified retrospective application method as
provided by SFAS 123(R) and accordingly, financial statement amounts
for the prior periods presented in this Form 10-Q have been restated
to reflect the fair value method of expensing options as prescribed by
SFAS 123(R).
11
NOTE 3: STOCK-BASED COMPENSATION, continued
The following is a summary of options activity for the six months
ended December 31, 2005:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
Outstanding Price Life ($000)
----------- -------- ----------- ---------
Outstanding at July 1, 2005 3,815,039 $22.37
Options Granted 70,500 $22.27
Options Exercised (89,352) $11.69
Options Canceled (119,948) $24.73
---------
Outstanding at December 31, 2005 3,676,239 $22.56 6.55 $4,212
========= ====== ==== ======
Exercisable at December 31, 2005 2,624,881 $22.48 6.65 $3,558
========= ====== ==== ======
The total intrinsic value of options exercised for the six months
ended December 31, 2005 and 2004 was $803,000 and $620,000, respectively.
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.
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 historical
cancellation and 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(R), for options granted at market price under the
Company's stock option plans during the first six months of fiscal
2006 and 2005 were $10.15 and $9.95, per share, respectively. The
fair values of the Company's stock option awards for the first six
months of fiscal 2006 and 2005, were estimated assuming no
expected dividends and the following weighted average assumptions:
Fiscal Year,
2006 2005
---- ----
Expected Life (in Years) 4.38 6.69
Expected Volatility 41.30% 41.41%
Risk-free Interest Rate 3.80% 3.83%
Pre-vesting Forfeiture Rate 4.00% 4.00%
12
NOTE 3: STOCK-BASED COMPENSATION, continued
The expected life of the options granted is based on the weighted
average exercise life with age and salary adjustment factors from
historical exercise behavior. For fiscal 2006, to date, the
expected life of newly granted options is based on projections
more heavily weighted to current exercise patterns.
The Company's expected volatility is computed by combining and
weighting the implied market volatility, the Company's most recent
volatility over the expected life of the option grant, and the
Company's long-term historical volatility.
The following table shows total stock-based compensation expense
included in the Consolidated Statement of Earnings:
(Dollars in thousands)
For the Quarter For the Six Months
Ended December 31, Ended December 31,
2005 2004 2005 2004
---- ---- ---- ----
Cost of Educational Services $ 350 $ 453 $ 716 $1,233
Student Services and Administrative
Expense 744 964 1,523 2,623
Income Tax Benefit 269 223 571 502
---- ----- ----- -----
Net Stock-based Compensation Expense $ 825 $1,194 $1,668 $3,354
==== ===== ===== =====
As of December 31, 2005, $9.36 million of total pre-tax
unrecognized compensation costs related to non-vested awards is
expected to be recognized over a weighted average period of 2.6
years. The total fair value of options vested during the six
months ended December 31, 2005 and 2004 was $3,458,000 and
$4,466,000, respectively.
There were no capitalized stock-based compensation costs at
December 31, 2005 and 2004.
The Company has a policy of issuing new shares of common stock to
satisfy share options exercises.
As previously discussed, the Company elected to adopt SFAS 123(R)
under the modified retrospective application method. The Company
believes that the modified retrospective application of this
standard achieves the highest level of clarity and comparability
among the presented periods. Accordingly, financial statement
amounts for the prior periods presented in this Form 10-Q have
been restated to reflect the fair value method of expensing prescribed
by SFAS 123(R).
13
NOTE 3: STOCK-BASED COMPENSATION, continued
The following table details the retroactive application impact of
SFAS 123(R) on previously reported results, (dollars in thousands
except per share amounts):
For the Quarter For the Six Months
ended and as of ended
December 31, 2004 December 31, 2004
--------------------- ---------------------
As As
Previously Previously
Restated Reported Restated Reported
--------------------- ---------------------
CONSOLIDATED STATEMENTS OF INCOME:
Total Costs and Expenses $188,407 $186,990 $375,930 $372,074
Income before Income Taxes and
Cumulative Effect of Change
In Accounting 6,115 7,532 6,988 10,844
Income Tax Provision 1,453 1,676 1,996 2,498
Income before Cumulative Effect
Of Change in Accounting 4,662 5,856 4,992 8,346
Net Income 4,662 5,856 6,802 10,156
EARNINGS PER COMMON SHARE:
Basic
Income before Cumulative Effect
Of Change in Accounting $0.07 $0.08 $0.08 $0.12
Net Income $0.07 $0.08 $0.10 $0.14
Diluted
Income before Cumulative Effect
Of Change in Accounting $0.07 $0.08 $0.08 $0.12
Net Income $0.07 $0.08 $0.10 $0.14
June 30, 2004
---------------------
As
Previously
Restated Reported
-------- ----------
CONSOLIDATED BALANCE SHEETS
Deferred Income Taxes $ 9,783 $ 13,675
Total Non-current Liabilities 217,442 221,334
Total Liabilities 442,393 446,285
Additional Paid-in Capital 103,294 71,943
Retained Earnings 387,733 415,192
Total Shareholders' Equity 491,979 488,087
14
NOTE 3: STOCK-BASED COMPENSATION, continued
For the Six Months Ended
December 31, 2004
------------------------
As
Previously
Restated Reported
-------- ----------
CASH FLOW RELATED TO SIX MONTHS
ENDED DECEMBER 31, 2004
Net Income $ 6,802 $ 10,156
Share Based Compensation Charge 3,856 -
Deferred Income Taxes (4,723) (4,187)
Net Cash Provided by Operating
Activities 67,785 67,819
Excess Tax Benefits from Share
Based Payments 34 -
Net Cash Used in Financing
Activities (59,819) (59,853)
June 30, 2005
---------------------
As
Previously
Restated Reported
-------- ----------
CONSOLIDATED BALANCE SHEETS
Deferred Income Taxes $ 15,949 $ 21,408
Total Non-current Liabilities 209,930 215,389
Total Liabilities 396,652 402,111
Additional Paid-in Capital 113,571 73,372
Retained Earnings 398,840 433,580
Total Shareholders' Equity 513,383 507,924
NOTE 4: 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 ended
September 30, 2004 and the six months ended December 31, 2004.
This amount is net of income tax expense of $1,189,000.
15
NOTE 4: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY,continued
Net Income and basic and diluted earnings per share for the three
and six months ended December 31, 2004 is set forth below as if
the consolidation of the Becker operations had been accounted for
in the same manner for all periods presented. These amounts have
been restated to reflect the fair value method of expensing stock-
based compensation as prescribed by SFAS 123(R).
Proforma
Three Months Ended Six Months Ended
December 31, December 31,
2004 2004
---- ----
Net Income $4,662,000 $4,992,000
Earnings per Share
Basic $0.07 $0.08
Diluted $0.07 $0.08
NOTE 5: BUSINESS COMBINATIONS
Gearty CPE
- ----------
In July 2005, the Company signed a definitive agreement to acquire
Gearty CPE for $2.0 million in cash. Gearty CPE, which operates in
the New York/New Jersey metro area, is a provider of continuing
professional education (CPE) programs and seminars in accounting
and finance predominantly serving chief financial officers and
controllers of Fortune 500 companies.
There is no pro forma presentation of prior year operating results
related to this acquisition due to the insignificant effect on
consolidated operations.
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. The results of Deaconess' operations have
been included in the consolidated financial statements of the
Company since the date of acquisition.
Located in St. Louis, Missouri, Deaconess had approximately 450
students enrolled at the date of purchase 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.
16
NOTE 5: BUSINESS COMBINATION, continued
Deaconess College of Nursing, continued
- ---------------------------------------
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 $ 199
Property and Equipment 37
Intangible Assets 1,470
Goodwill 4,909
-----
Total Assets Acquired 6,615
Current Liabilities Assumed 1,224
-----
Net Assets Acquired $5,391
=====
Of the $1,470,000 of acquired intangible assets, $470,000 was
assigned to the value of the Deaconess Title IV financial aid
eligibility and $730,000 was assigned to accreditations, both of
which have been determined to not be subject to amortization, and
$270,000 was assigned to student relationships that have an
average useful life of approximately 3 years. The Company
determined this allocation based upon a number of factors,
including a preliminary valuation analysis prepared by an
independent professional valuation specialist. The $4,909,000 of
goodwill was all assigned to the Medical & Healthcare operating
segment.
The amounts recorded at December 31, 2005, relating to the
acquisition are subject to adjustment, as the purchase price is
still subject to final closing adjustments. The Company expects
to finalize the purchase price during the third quarter of fiscal
2006. There is no pro forma presentation of prior year operating
results related to this acquisition due to the insignificant
effect on consolidated operations.
17
NOTE 6: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of December 31, 2005
----------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------
Amortized Intangible Assets:
Student Relationships $47,770,000 $(33,108,000)
License and Non Compete
Agreements 2,650,000 (2,582,000)
Class Materials 2,900,000 (1,000,000)
Trade Names 110,000 (62,000)
Other 620,000 (617,000)
---------- ----------
Total $54,050,000 $(37,369,000)
========== ==========
Unamortized 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
Deaconess Title IV
Eligibility and
Accreditations 1,200,000
----------
Total $51,857,000
==========
As of December 31, 2004
----------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $(21,624,000)
License and Non Compete
Agreements 2,650,000 (2,345,000)
Class Materials 2,900,000 (800,000)
Trade Names 110,000 (34,000)
Other 620,000 (562,000)
---------- ----------
Total $53,780,000 $(25,365,000)
========== ==========
Unamortized 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 6: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was
$2,580,000 and $5,161,000 for the quarter and six months ended
December 31, 2005, respectively, and $3,637,000 and $7,274,000
for the quarter and six months ended December 31, 2004,
respectively. Estimated amortization expense for amortized
intangible assets for the next five fiscal years ending June 30,
is as follows:
Fiscal Year
2006 $10,036,000
2007 6,807,000
2008 3,598,000
2009 203,000
2010 200,000
The weighted-average amortization period for amortized intangible
assets is three and five years for Deaconess and Ross Student
Relationships, respectively, 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, except for
the Ross Student Relationships, are being amortized on a straight-
line basis. 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
basis 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 2005, 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 2005,
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
December 31, 2005 and June 30, 2005 was unchanged at
$22,195,000. The carrying amount of goodwill related to
Professional and Training reportable segment was $24,716,000
at December 31, 2005 and $22,716,000 at June 30, 2005. The
increase of $2,000,000 is the result of the allocation of the
purchase price for
19
NOTE 6: INTANGIBLE ASSETS, continued
Gearty CPE as described in Note 5 above. The carrying amount
of goodwill related to the Medical & Healthcare segment was
$244,395,000 at December 31, 2005 and $244,397,000 June 30,
2005. The decrease of $2,000 was the result of purchase price
adjustments recorded in the second quarter of fiscal 2006.
NOTE 7: SALE OF FACILITY
In November 2005, a Company owned building in the Denver,
Colorado area was sold for $1,798,000. As a result of this sale,
the Company realized a gain of approximately $450,000. This
building was acquired in 1999 with the acquisition of Denver
Technical College. Although still used partly as classrooms and
offices, this facility was no longer essential to the Company
operations in the Denver-area, having been largely replaced by a
new and larger DeVry University campus serving the Denver market.
This gain is classified as Cost of Educational Services in the
Consolidated Statements of Income and related to the DeVry
University reportable segment.
In December 2005, the Company announced that it plans to offer
for sale its campus located in West Hills, California. DeVry
University plans to remain in the San Fernando Valley area and is
considering other new facilities in the vicinity to meet current
and future student demand. There is no anticipated impairment
loss with this building as its market value exceeds its book
value.
NOTE 8: REDUCTION IN WORKFORCE CHARGES
During the second quarter of fiscal 2005, the Company offered a
voluntary separation plan to its employees with more than 20 years
of service. In the third quarter of fiscal 2005, the Company
implemented an involuntary reduction in force that reduced its
workforce at its educational facilities and corporate office. In
the fourth quarter of fiscal 2005, the Company offered another
voluntary separation plan for its DeVry University faculty
employees with more than 15 years of service and implemented an
involuntary reduction in force of its faculty employees. These
voluntary and involuntary separation plans resulted in workforce
reductions of approximately 230 employees. In addition to these
separation and reduction in force plans, the Company experienced
other involuntary separations during fiscal 2005. In relation to
all of these voluntary and involuntary reductions in force, the
Company recorded pre-tax charges of approximately $8.4 million in
fiscal 2005. These charges consist of severance pay and in some
cases, extended medical and dental benefits coverage. These
charges were classified as Cost of Educational Services and
Student Services and Administrative Expense in the Consolidated
Statements of Income and are related to the DeVry University and
Medical & Healthcare reportable segments.
Cash payments for the voluntary separation plans and all
involuntary reductions in force were approximately $300,000 the
second quarter of fiscal 2006 and $2,300,000 for the six months
ended December 31, 2005. Of the total amount accrued for these
events, approximately $1,300,000 remained to be paid as of
December 31, 2005. Payments will continue into the third quarter
of fiscal 2006.
20
NOTE 9: 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 quarter or six months ended December
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 December 31, 2005 and 2004, cumulative
undistributed earnings were approximately $43.3 million and $23.1
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 10: 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). This long-term debt consists
of the following at December 31, 2005:
Effective
Outstanding Interest Rate at
Debt December 31,2005
------------ ----------------
Revolving Credit Agreement:
DeVry Inc. as borrower $ 30,000,000 5.63%
GEI as borrower 5,000,000 5.75%
-----------
Total $ 35,000,000 5.65%
-----------
Senior Notes:
DeVry Inc. as borrower $ 75,000,000 5.49%
GEI as borrower 50,000,000 5.49%
-----------
Total $125,000,000 5.49%
-----------
Total outstanding debt $160,000,000 5.53%
Current Maturities of Revolving
Credit Agreement $ 35,000,000 5.65%
-----------
Total Long-term debt $125,000,000 5.49%
-----------
21
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company is subject to occasional lawsuits, administrative
proceedings, regulatory reviews associated with financial
assistance programs and other claims arising in the normal
conduct of its business. The following information updates the
status of claims and litigation previously disclosed.
In January 2002, a graduate of one of DeVry University's Los
Angeles-area campuses, filed a class-action complaint against
DeVry Inc. and DeVry University, Inc. in the Superior Court of
the State of California, County of Los Angeles, 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 in the same court by
another plaintiff with the same general allegations and by the
same plaintiffs' attorneys. This subsequent action has been
stayed pending the outcome of the initial matter. Discovery and
settlement discussions continue in the matter and a class action
certification hearing is still pending, but there is no
determinable date at which this matter may be brought to
conclusion.
The alleged class action above seeks money damages of an
indeterminate amount. The Company has accrued $0.75 million
representing the estimated minimum amount to resolve this claim.
In November 2000, three graduates of one of DeVry University's
Chicago-area campuses filed a class-action complaint in the
Circuit Court for Cook County, Illinois that alleges DeVry
graduates do not have appropriate skills for employment in the
computer information systems field. The complaint was
subsequently dismissed by the court, but was amended and re-filed
to include as a plaintiff, a then-current student in another
curriculum from a second Chicago-area campus. In September 2005,
the court denied the plaintiff's motion for class action
certification in its entirety. However, pending claims remain by
each of the named defendants in this action.
In August 2005 counterclaims were filed against the Company's
subsidiary Dominica Management, Inc. and the Ross University
School of Medicine by defendants American University of Antigua
College of Medicine, Neal Simon and Sol Weltman in a case filed
by Dominica Management, Inc. in the U.S. District Court for the
Southern District of New York in September 2004. The original
case filed by Dominica Management, Inc. sought relief primarily
for alleged copyright infringement, misappropriation of trade
secrets and confidential information, and unfair competition.
The counterclaims allege, inter alia, anticompetive behavior,
tortious interference with prospective economic relationships,
and defamation. In October 2005, the Company and American
University of Antigua reached an agreement to resolve this matter
and drop all claims, and the matter is now resolved.
22
NOTE 11: COMMITMENTS AND CONTINGENCIES, continued
At December 31, 2005, the Company has recorded approximately
$1.5 million associated with estimated loss contingencies,
including the amount of approximately $0.6 million in
remaining payments under an anti-trust claim settlement
agreement. While the ultimate outcome of these and other
contingencies is difficult to estimate at this time, the
Company does intend to vigorously defend itself with respect
to the pending 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.
NOTE 12: 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
financialstatements contained in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2005. 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 and Deaconess School of Nursing operations
(Medical & Healthcare).
These segments are based on the method by which management
evaluates performance and allocates resources. Such decisions are
based, in part, 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, 2005.
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.
Following is a tabulation of business segment information for the
quarters and six months ended December 31, 2005 and 2004. Where
applicable, the December 31, 2004, information has been restated
to reflect the adoption of SFAS 123(R) under the modified
retrospective application method. These amounts have been
restated to reflect the fair value method of expensing stock-based
compensation as
23
NOTE 12: SEGMENT INFORMATION, continued
prescribed by SFAS 123(R). Corporate information is included where
it is needed to reconcile segment data to the consolidated
financial statements.
For the Quarter For the Six Months
Ended December 31, Ended December 31,
------------------ ------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues:
DeVry University $171,676 $161,951 $332,395 $318,691
Professional and Training 9,953 10,207 22,233 20,953
Medical & Healthcare 28,240 22,364 52,021 43,274
------- ------- ------- -------
Total Consolidated Revenues $209,869 $194,522 $406,649 $382,918
------- ------- ------- -------
Operating Income:
DeVry University $ 6,737 $ 1,680 $ 6,663 $(1,423)
Professional and Training 2,335 2,313 6,905 5,226
Medical & Healthcare 10,720 8,115 18,252 15,071
Reconciling Items:
Amortization Expense (2,580) (3,637) (5,161) (7,274)
Interest Expense (2,606) (2,091) (5,261) (4,082)
Depreciation and Other (247) (265) (513) (530)
------ ------ ------ ------
Total Consolidated Income
before Income Taxes and
Cumulative Effect of
Change in Accounting $14,359 $ 6,115 $20,885 $ 6,988
------ ------ ------ ------
Segment Assets:
DeVry University $436,330 $451,169 $436,330 $451,169
Professional and Training 76,461 68,574 76,461 68,574
Medical & Healthcare 417,360 396,659 417,360 396,659
Corporate 26,303 17,970 26,303 17,970
------- ------- ------- -------
Total Consolidated Assets $956,454 $934,372 $956,454 $934,372
------- ------- ------- -------
Additions to Long-lived Assets:
DeVry University $4,336 $14,099 $ 7,392 $18,754
Professional and Training 123 120 148 202
Medical & Healthcare 3,823 1,495 5,306 2,470
----- ------ ------ ------
Total Consolidated Additions
to Long-lived Assets $8,282 $15,714 $12,846 $21,426
----- ------ ------ ------
Depreciation Expense:
DeVry University $8,201 $ 9,052 $15,978 $17,606
Professional and Training 114 115 228 266
Medical & Healthcare 973 893 1,928 1,571
Corporate 247 247 494 494
----- ------ ------ ------
Total Consolidated Depreciation $9,535 $10,307 $18,628 $19,937
----- ------ ------ ------
Intangible Asset Amortization Expense:
DeVry University $ - $ - $ - $ -
Professional and Training 67 194 133 387
Medical & Healthcare 2,513 3,443 5,028 6,887
----- ----- ----- -----
Total Consolidated Amortization $2,580 $3,637 $5,161 $7,274
----- ----- ----- -----
24
NOTE 12: 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 six months ended December 31, 2005
and 2004. Revenues and long-lived assets by geographic area are as follows:
For the Quarter For the Six Months
Ended December 31, Ended December 31,
-------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues from Unaffiliated Customers:
Domestic Operations $180,864 $168,670 $352,918 $333,007
International Operations:
Dominica and St. Kitts/Nevis 26,048 22,364 48,428 43,274
Other 2,957 3,488 5,303 6,637
------- ------- ------- -------
Total International 29,005 25,852 53,731 49,911
------- ------- ------- -------
Consolidated $209,869 $194,522 $406,649 $382,918
------- ------- ------- -------
Long-lived Assets:
Domestic Operations $346,973 $355,811 $346,973 $355,811
International Operations:
Dominica and St. Kitts/Nevis 307,754 313,160 307,754 313,160
Other 428 827 428 827
------- ------- ------- -------
Total International 308,182 313,987 308,182 313,987
------- ------- ------- -------
Consolidated $655,155 $669,798 $655,155 $669,798
------- ------- ------- -------
Sales are attributable to geographic areas based on location of
customer. No one customer accounted for more than 10% of the
Company's consolidated revenues.
25
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
- -----------------------------------------------------------
Forward-Looking Statements / Risks and Uncertainties
- ----------------------------------------------------
Certain information contained in this quarterly report on Form
10-Q may constitute forward-looking statements relating to DeVry's
future financial results and strategies, business plans or
objectives and beliefs about future events. They are often
identified by the use of qualifiers in their description such as
"expects", "believes", "is likely", "intends", "estimates",
"forecast", "assumption" or other similar expressions. Such
statements are inherently uncertain and may involve risks and
uncertainties that could cause future results to differ
materially from the forward-looking statements.
Potential risks and uncertainties include, but are not limited
to:
Shifts in applicant career interests away from the concentration
of the Company's undergraduate programs in selected areas of
technology, healthcare and business that the Company does not
adequately anticipate or respond to.
Increased competition in recruiting of new students and retaining
students already enrolled.
Reductions in student financial aid, upon which the Company is
highly dependent for the collection of its billings, because of
changes to program regulations affecting student eligibility or
reductions to federal and state funding levels.
Failure of DeVry University, Ross University or Deaconess College
of Nursing to maintain eligibility for student participation in
financial aid programs.
Reductions in the amount of corporate employee tuition
reimbursement because of changes to tax laws or a lower level of
corporate earnings that affects employee educational benefit
plans.
Loss or limitations in accreditations and licensing approvals
affecting DeVry University, Ross University or Deaconess College
of Nursing.
Changes to laws and regulations that adversely affect the
Company's eligibility to participate in government financial aid
programs, current operations or future growth opportunities.
Ability to hire and retain faculty with appropriate
qualifications such as education and experience.
Reductions in tuition pricing by other educational institutions
that affect the Company's current competitive position and its
ability to maintain and increase tuition rates in the future.
Some of these risks and uncertainties are described more fully in
the sections of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2005 filed with the SEC September 13,
2005, especially in the section entitled "Forward Looking
Statements" at the beginning of Part 1 and in the subsections of
"Item 1 - Business" entitled "Competition," "Student
Recruiting," "Accreditation and Approvals," "Tuition and Fees,"
"Financial Aid and Financing Student Education," "Career
Services," and "Faculty".
26
All forward-looking statements included in this Report are based
upon information presently available, and the Company assumes no
obligation to update any forward-looking statements.
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.devryinc.com.
The following discussion of the Company's results of operations
and financial condition should be read in conjunction with the
consolidated financial statements of the Company and the notes
thereto as included in the Company's annual report on Form 10-K
for the fiscal year ended June 30, 2005 and in the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
2005. 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 and expense 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, health care costs for incurred but not yet
paid medical services and stock based compensation expense.
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 flows,
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.
27
Results of Operations
- ---------------------
The following table presents information with respect to the
relative size to revenue of each item in the statement of income
for the second quarter and first half of both the current and
prior year. Percents may not add due to rounding.
Quarter Ended Six Months Ended
------------- ----------------
December 31
--------------------------------------
2005 2004<FN1> 2005 2004<FN1>
---- ---- ---- ----
(Restated) (Restated)
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Educational Services 52.9% 55.9% 54.8% 57.2%
Student Services & Admin. Exp. 39.0% 39.9% 38.8% 39.9%
Interest Expense 1.2% 1.1% 1.3% 1.1%
------ ------ ------ ------
Total Costs and Expenses 93.2% 96.9% 94.9% 98.2%
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 6.8% 3.1% 5.1% 1.8%
Income Tax Provision 1.7% 0.7% 1.3% 0.5%
------ ------ ------ ------
Income Before Cumulative
Effect of Change in Accounting 5.2% 2.4% 3.8% 1.3%
Cumulative Effect of
Change in Accounting - - - 0.5%
------ ------ ------ ------
NET INCOME 5.2% 2.4% 3.8% 1.8%
====== ====== ====== ======
<FN>
<FN1> Quarter and six months ended December 31, 2004, restated for
the adoption of SFAS 123R using the modified retrospective
approach.
</FN>
The Company's financial performance in both the first and second
quarters of this year improved from the results in the
corresponding quarters of the previous fiscal year. Fiscal 2005
has been restated for the adoption of Statement of Financial
Accounting Standard 123R, Share - Based Payments ("SFAS 123R"),
using the modified retrospective approach.
Factors contributing to the improved revenue and net income
performance compared to last year were continued total enrollment
growth in DeVry University's graduate school programs, increased
tuition rates for both undergraduate and graduate students, an
increase in new student enrollments and higher tuition rates at
Ross University, an increase in enrollments in the Professional
and Training segment's Becker Professional Review operations,
28
wage savings from the workforce reductions implemented last year
and continued restraint in spending in other areas of operation.
Total DeVry University undergraduate enrollments of 36,200 for
the summer term that began in July were 4.8% lower than
enrollments a year ago. In the fall term that began in November,
total undergraduate enrollments were 2.3% lower than enrollments
a year ago. Although total undergraduate enrollments were still
below those of last year, the fall term marked the third
consecutive term in which new undergraduate student enrollments
increased from the year-ago level, contributing to the lessening
rate of year-over-year decline in total enrollments. Coursetaker
enrollments at DeVry University's Keller Graduate School remained
above the year-ago level, for the July session increasing by
11.3% from last year, for the September session increasing by 5%
from last year, and for the November session, increasing by 3.3%
from last November to 12,777 this year.
At Ross University in the Medical and Healthcare segment, for the
term that started in September, new student enrollments increased
by 40.6% from last year to 575 and total student enrollments were
3,227. Although total student enrollments lagged those of last
year by 3.8%, this is an improvement from the year over year
decline of 8.5% in the Ross term that began in May 2005.
The Company's total consolidated revenue increased by $15.3
million, or 7.9%, in the second quarter compared to last year.
The second quarter revenue growth from last year compares to a
lesser 4.5% increase in first quarter revenue compared to last
year. Tuition revenue, which is the largest component of total
revenue, represented over 93% of total revenue for both the
second quarter and first half of the year. Both DeVry University
and the Medical and Healthcare segments contributed to the
revenue increase in the second quarter while all three of the
Company's segments contributed to the increased revenue for the
first half.
DeVry University
- ----------------
At DeVry University, total second quarter revenues increased by
approximately $9.7 million, more than one half of the increase in
second quarter revenues for the total Company. This compares to
a revenue increase of only $4.0 million in the first quarter. As
discussed above, contributing to the higher revenues in both the
second quarter and first half were increased coursetaker
enrollments at Keller Graduate School in each of the three
sessions that began in the first half and higher tuition rates
that were in effect for both the undergraduate and graduate
programs compared to last year. Undergraduate program tuition
increased by approximately 5% in July 2005 following a similar
tuition increase in November 2004. For graduate school programs,
tuition increased by approximately 5% for the September session
following a similar increase in January 2005.
In addition, Other Educational Revenue increased by approximately
$2.3 million in the second quarter and $3.2 million in the first
half of the year, partly from sales of electronic textbook
materials ("eBooks") to students enrolled in selected online and
on-site courses. In the first quarter of fiscal 2005, the
Company completed an agreement with Follett Higher Education
Group ("Follett") to manage the nine remaining U.S. DeVry
University campus bookstores not previously managed by them.
This resulted in a lowering of reported bookstore sales revenue
from what it had been in previous periods. However, DeVry
University sales of eBooks in selected graduate and undergraduate
courses beginning in the latter part of fiscal 2005 has more than
29
offset the reduced revenues from the bookstores previously
managed by the Company. The Company reports the sale of eBooks
at their full selling price which is higher than the commission
income it reports on book and supply sales by Follett.
Also contributing to the increase in Other Educational Revenue
was a higher interest charge on undergraduate student accounts
receivable. These receivables, which are generally subject to a
monthly interest charge of one percent under the Company's
EDUCARD revolving charge plan for financing students' education,
generated approximately $1.2 million more in student financing
charges in the second quarter and $2.1 million more than in the
first half of last year.
Partly offsetting the increases in revenue from improved
enrollments and higher tuition rates was a growing proportion of
working adult undergraduate students who typically enroll for
less than a full-time academic load. These students are
primarily enrolled in the online programs and for program
offerings at DeVry University Centers. These part-time students
pay a somewhat lesser average tuition amount each term than do
full-time students at the undergraduate campus locations.
Therefore, the higher revenue per student resulting from tuition
increases has been partially offset by the greater proportion of
part-time students.
Professional and Training
- -------------------------
In the Professional and Training segment, second quarter revenues
declined by approximately $0.3 million from the second quarter of
last year. For the first half, however, revenues were $1.3
million above those of the previous year. The Company believes
that higher first half revenues from increased enrollment during
the first half of this year, primarily in the Becker Professional
Review's CPA review courses, reflects the market recovery from
the effects of the CPA exam changes in fiscal 2004. Not only have
on-site course enrollments increased, but demand for the review
courses online and on CD-ROM have increased, contributing
approximately $0.9 million of the total Company increase in Other
Educational Revenues in the second quarter and $2.7 million for
the first half of the year. Further contributing to the revenue
growth in this segment is increased enrollment in the Stalla CFA
review course in preparation for the December administration of
the Level 1 exam. This is only the second year in which this
part of the exam has been offered in December.
In July 2005, the Company completed the acquisition of Gearty CPE
by a DeVry Inc. subsidiary. Gearty CPE is a provider of
continuing professional education programs and seminars in
accounting and finance, predominantly serving customers in the
New York/New Jersey metro area. The acquisition complements the
Becker Professional Review CPA exam review business. The
acquisition did not contribute significantly to the revenues or
operating income of the Professional and Training segment during
the second quarter or first half of the current year.
Medical and Healthcare
- ----------------------
In the Medical and Healthcare segment, revenues increased by
approximately $5.9 million, or 26.3%, in the second quarter and
$8.7 million, or 20.2%, in the first half compared to last year.
Included in this segment are $1.7 million in revenues for the
second quarter and $2.6 million for the first six months at
Deaconess College of Nursing that was not acquired by the Company
until the latter part of fiscal 2005. At Ross University,
although total enrollments during the first and second quarter
were lower than a year ago, a tuition price increase of
approximately 5% effective
30
with this September semester, following a price increase of
slightly less than 8% in January 2005, fully offset the effects
of the decline in enrollment and contributed to the revenue
increase.
SFAS 123R
- ---------
The Company adopted Statement of Financial Accounting Standards
123R effective with the start of the first quarter of fiscal
2006. Financial results for the second quarter and first half of
fiscal 2005 have been restated to reflect the modified
retrospective approach of adoption. Accordingly, expenses
relating to share-based awards have been included in the various
expense categories for both years as appropriate.
SFAS 123R establishes the accounting for stock-based awards
issued in exchange for employee services. To-date, all of the
Company's stock-based awards have been granted in the form of
stock options. Stock based compensation is measured at the grant
date of the option, based on the fair value of the award. The
fair value is recognized as expense over the employee requisite
service period which is the period over which these options vest.
From the beginning of fiscal 2005, the Company's stock-based
awards were valued using a binomial model. Previously, these
awards were valued using the Black-Scholes model for purposes of
pro forma disclosure pursuant to SFAS 123 and SFAS 148. The
binomial model requires estimates of several important factors,
e.g. expected life of an option, stock price volatility, risk-
free rate of return, forfeiture rate for options granted and the
stock dividend yield. The expected life of an option takes into
account the contractual term of the option and the effects of the
employees' expected exercise and post-vesting employment
termination behavior. The Company has granted stock options to
hundreds of employees over a period of time that extends back
longer than the maximum ten-year contractual life of most of its
option awards and, therefore, has a history upon which estimates
of the expected life of the option and the forfeiture rate can be
based. The Company's stock has been publicly traded since 1991
and, therefore, there is a history upon which estimates of future
stock price volatility can be determined. In making its
determination of the appropriate estimates, and for computing the
actual valuation in a binomial model, the Company engaged the
assistance of an independent professional actuarial service.
Cost of Educational Services
- ----------------------------
The Company's Cost of Educational Services increased by $2.3
million, or 2.1%, from the second quarter of last year. For the
first half of the year, these costs increased by $3.8 million, or
1.7%, from last year. Contributing most of the higher cost for
the first half was an increase of $3.0 million in the provision
for doubtful accounts, primarily in the DeVry University
undergraduate operations, as student receivables increased from
last year. Also, cost increases were incurred in support of the
higher number of DeVry University Centers and expanding online
program enrollments. For the November session, courses were
being offered at eight new DeVry University locations compared to
a year ago. The number of online coursetakers enrolled in
courses for summer 2005 increased by more than 67% from last year
to 21,068, increasing further to 24,357 for the fall session that
began in November. Costs were also recognized for the Deaconess
College of Nursing that were not included in the Company results
last year.
Partly offsetting these increases were the wage savings from
workforce reductions implemented last year and continued spending
restraint in operations. In the second quarter of last year, the
31
Company recognized a $2.2 million pre-tax charge, of which
approximately $1.5 million was included in Cost of Educational
Services, as the first of several work force reductions was being
implemented. Also, lower capital spending during each of the
past several years has resulted in a $1.3 million lower
depreciation expense in the first half of this year. Most
depreciation expense is included in the Cost of Educational
Services. For the first half, depreciation expense was $18.6
million compared to $19.9 million last year. Also included in
Cost of Educational Services for the first half is $0.7 million
of expense attributed to share-based awards, compared to
approximately $1.2 million in the restated first half of last
year.
Student Services and Administrative Expense
- -------------------------------------------
Student Services and Administrative Expense increased by $4.3
million, or 5.5%, from the second quarter of last year. For the
first half, these costs increased by $4.9 million, or 3.2%, from
the first six months of a year ago. The increased cost reflects
efforts to generate higher new student enrollments in all of the
Company's educational programs through more advertising and
student recruiting. Admissions advisors have been added to
support the growing online program enrollments and newly opened
DeVry University Centers and at Ross University to offset the
previous declines in new student enrollments following changes to
admission standards at the medical school. Costs were also
recognized for the Deaconess College of Nursing that were not
included in the Company results last year. Increased new student
enrollments at DeVry University, Becker Professional Review and
Ross University are believed to be, in part, attributable to the
higher level and effectiveness of this spending.
Largely offsetting these increases in student recruiting expense
was lower amortization of finite-lived intangible assets related
to acquisitions of businesses including, most recently, Ross
University and Deaconess College of Nursing. Amortization
expense is included entirely in the Student Services and
Administrative Expense category. For the second quarter,
amortization expense was $2.6 million compared to $3.6 million in
the second quarter of a year ago. For the first half,
amortization expense was $5.2 million compared to $7.2 million.
Also, lower spending for corporate general and administrative
expense, resulted in savings of approximately $0.7 million and
$1.6 million compared to the second quarter and first half of
last year, respectively. Work force reduction costs included in
the Student Services and Administrative Expense category, as
discussed above in Cost of Educational Services, totaled $0.6
million in the first quarter of last year and another $0.7
million in the second quarter of last year. There were no
corresponding work force reduction programs or charges in the
current year.
Lower expense attributed to share-based awards included in the
Student Services expense category also helped offset the
increases in student recruitment spending. Share-based award
expense in the second quarter was approximately $0.7 million for
the current year, compared to approximately $1.0 million in the
restated second quarter of last year. For the first half, share-
based award expense declined from $2.6 million in the first half
of last year to $1.5 million in the first half of this year
because the Company has issued fewer option awards thus far this
year than it did last year. In addition, there was less than
$0.1 million of post-employment benefit cost in the first half of
this year relating to agreements with the Company's Chairman and
CEO, compared to approximately $1.3 million of expense in the
first half of last year. The required period of active service,
over which the cost of these benefits were recognized, was fully
met at the end of fiscal 2005.
32
DeVry University
- ----------------
After a loss of approximately $0.1 million in the first quarter
of this year, the DeVry University segment had operating income
of approximately $6.7 million in the second quarter. For the
first half, this segment had operating income of $6.6 million
compared to a loss last year of $1.4 million. The transition
from operating loss to operating income was the result of
improving enrollments, tuition rates and lower spending described
above. Some additional savings have resulted from the
consolidation of online operations into a building in Naperville,
Illinois, a nearby suburb to the Company's headquarters location.
The acquisition of this building in fiscal 2005 has permitted the
Company to relinquish some of its higher cost office space at the
headquarters site. In addition, DeVry University's Canadian
operation, which included the teach out cost for the former
undergraduate Toronto-area campuses last year, is no longer
incurring further charges for the teach out activity. In the
first half of last year, DeVry University incurred operating
losses of approximately $1.5 million from its Canadian operation.
For the current year, the Canadian operations had a much reduced
operating loss of approximately $0.2 million.
Professional and Training
- -------------------------
As a result of record revenues for the first quarter, operating
income in the Professional and Training segment for the first
half of the year increased from $5.2 million last year to $6.9
million in the first half of the current year. In the second
quarter, as revenues flattened to the level of the prior year,
operating income remained flat at approximately $2.3 million.
The Company believes that the growth in first quarter revenues
can be attributed to exam candidates who previously
procrastinated and who are now starting to prepare for the CPA
exam. The exam review course continues to be updated and
improved with good student response, which we believe is
attracting more students than before. Although a small part of
the total segment operations, the Stalla CFA exam review
continues to increase its enrollments. Declining CFA exam taker
pass rates may be attracting more students to take review courses
rather than rely on self-study as many have done in the past.
Medical and Healthcare
- ----------------------
The Medical and Healthcare segment increased its operating income
by $2.6 million, or 32.1%, from last year. At Ross University,
which is the dominant portion of this segment, lower enrollments
were more than offset by tuition increases to produce the higher
revenues that generated the higher operating income in the second
quarter and first half compared to last year. A proposed
amendment to the federal budget reconciliation bill could have
affected federal financial aid eligibility for Ross students.
This amendment is no longer a part of the budget reconciliation
package. However, the proposal is still in the Senate version of
the Higher Education Act Reauthorization bill but is not included
in the House of Representatives version. The Company is
continuing to monitor this legislative process.
Deaconess College of Nursing contributed approximately $1.7
million of revenue to the segment in the second quarter and less
than $0.5 million of operating income. Deaconess College was not
acquired by the Company until the latter part of fiscal 2005 and
its results are not included in the first half of last year. At
Deaconess, the position of division general manager has now been
filled to focus on expansion opportunities.
33
For the past three years, Deaconess has offered an online
associate degree in nursing ("ASN"). This program has been
reviewed annually by the Missouri State Board of Nursing, and has
operated on interim approval status since inception. In its most
recent review in December, the Board withdrew its approval. The
decision was based on test performance by students who entered
the program prior to DeVry's acquisition of Deaconess. The
Company has appealed this determination. Pending final action by
the Missouri Administrative Hearing Commission on the Company's
appeal, the ASN program continues to operate as an approved
program, with initial approval status. The State Board decision
only affects the ASN Online program and does not affect the ASN
on-site or BSN online or on-site programs. The revenues and
operating income contribution from the ASN online program are not
a material part of the Company's overall financial results.
Interest Expense
- ----------------
Interest expense on the Company's borrowings was $2.6 million
compared to $2.1 million in the second quarter of last year. For
the first half, interest expense has increased from $4.1 million
last year to $5.3 million this year. Although borrowings have
been regularly reduced, the interest rates on the Company's
borrowings is based upon short-term interest rates, which
increased significantly over the past year. For example, at the
end of December, the interest rate on the Company's Revolving
Loan was 5.63% compared to 3.53% last December.
Taxes on Income
- ---------------
Taxes on income for the second quarter of this fiscal year were
24.6% of pre-tax income compared to 27.5% in the first quarter.
The lower effective tax rate of 24.6% in the second quarter
brings the first half rate to 25.5% and reflects the Company's
current estimates of the proportion of earnings attributable to
Ross University offshore operations compared to Company earnings
that are fully taxable at the appropriate federal and state
income tax rates. Changes to this proportion as the year
progresses could result in a somewhat higher or lower effective
tax rate in future periods.
Cumulative Effect of Change in Accounting
- -----------------------------------------
In the first quarter of last year, the Company recognized $1.8
million of income, 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, the Company believes that
the historical Becker Professional Review 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 was aligned to 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 fiscal 2005.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations for the first half was $57.5
million, compared to $67.8 million in the same period last year.
Contributing to the lower cash flow was a $5.4 million reduction
in non-cash charges included in Net Income. The lower non-cash
34
charges were for share-based compensation, depreciation and
amortization. Reductions in accounts payable and accrued
expenses and an increase in prepaid expenses were a $23.2 million
increase in the use of cash compared to last year. Variations in
the levels of accrued expenses and accounts payable are caused,
in part, by the timing of the quarter-end relative to the
Company's payroll and bill payment cycles. Partly offsetting
these increases in the use of cash were higher net income for the
first half, up $8.8 million, and a $9.4 million increased source
of cash from Deferred Tuition Revenue, which represents the
billed but not earned tuition revenue to be recognized in future
periods as the educational programs to which this revenue relates
are being taught.
Capital spending for the first half was $10.8 million, compared
to $21.4 million in the first half of last year. There are no
major capital projects underway or currently in the late planning
stage so that for the total year, capital spending is expected to
remain below the level of the past several years. In addition
to spending on capital additions and improvements during the
first half, the Company paid $2.0 million for the acquisition of
Gearty CPE. During the second quarter, the Company completed the
sale of a Denver educational facility that had previously been
offered for sale. Cash proceeds from the sale totaled
approximately $1.8 million. Also during the second quarter, the
Company announced that it has offered for sale its campus located
in West Hills California. DeVry University plans to continue
offering educational programs in the San Fernando Valley area and
is considering other new facilities in the vicinity to meet
current and future student demand.
During the first half of this fiscal year, the Company repaid $65
million in borrowings from its revolving loan agreement using
existing cash balances and cash flow generated from operations.
During the first half of last year, the Company repaid $60
million of its borrowings. In January 2006, the Company repaid
an additional $5 million of borrowings. All of the Company's
borrowings are based upon a floating rate, generally LIBOR at the
Company's option. In the first quarter of fiscal 2004, the
Company entered into several interest rate cap agreements to
protect approximately $100,000,000 of its borrowings from sharp
increases in short-term interest rates upon which its borrowings
are based. These interest rate cap agreements expired during the
first quarter of this fiscal year. The company intends to
periodically evaluate the need for future interest rate
protection in light of projected changes in interest rates and
expected borrowing levels.
In early November 2005, the Company's revolving loan agreement
was amended to exclude from the financial covenant computations,
the non-cash effects of accounting for share-based awards in
accordance with SFAS 123R. This amendment was initiated at the
Company's request in accordance with terms of the original
agreement.
The Company's only long-term contractual obligations consist of
its revolving line of credit and senior notes, operating leases
on facilities and equipment, and agreements for various services.
There are no required payments under the Company's borrowing
agreements prior to their maturities in 2009 and 2010. The
Company is not a party to any off-balance sheet financing or
contingent payment agreements, 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 derivative, swap, futures
contract, put, call, hedge or non-exchange traded contract except
for the interest rate cap agreements discussed above.
35
The Company's primary source of liquidity is the cash received
from payments for student tuition, books, educational supplies
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 financial resources.
The Company is highly dependent upon the timely receipt of
financial aid funds at DeVry University, Ross University and
Deaconess College of Nursing. The Company estimates that
historically, more than 60% of its DeVry University undergraduate
students' tuition, book and fee revenues were financed by
government-provided financial aid to students. At Keller
Graduate School, approximately 70% of graduate student revenues
are financed by government-provided financial assistance. At
Ross University, collections from student participation in
federal loan programs are approximately 70% of its revenues. The
financial aid and assistance programs in which the Company's
students participate are subject to political and budgetary
considerations. There is no assurance that such funding will be
maintained in the future. As previously discussed, currently
there are legislative proposals that could adversely affect Ross
University's medical school's participation in federal student
loan programs. However, the Company believes that alternative
lending sources are available in the event such legislative
proposals are enacted. With these alternative lending sources,
the Company believes that there would not be a long-term material
effect on the Company's cash flows, results of operations or
financial position.
Extensive and complex regulations in the United States and Canada
govern all of the government funded 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. Such program reviews may be conducted at any
educational institution at any time and have been conducted in
the past at the Company's educational facilities and headquarters
location. Previous Department of Education and state regulatory
agency program reviews have not resulted in material findings or
adjustments.
Included in the Company's consolidated cash balances at the end
of the quarter is $67.6 million attributable to Ross University
offshore operations. For the foreseeable future, it is the
Company's intention to reinvest this cash and subsequent earnings
and cash flow to service the outstanding debt of Global Education
International (the Corporate parent of Ross University) to
improve and expand facilities and operations of the Ross schools
and pursue future business opportunities outside the United
States. Therefore, 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, if necessary, borrowings
under the revolving loan facility will be sufficient to fund both
its current operations and growth plans for the foreseeable
future, unless future investment opportunities, similar to the
acquisition of Ross University, should arise.
Item 3 - Qualitative and Quantitative Disclosures About Market Risk
- -------------------------------------------------------------------
The nature of the Company's 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.
36
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 a lease
agreement on its principal teaching facility. 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 (Canadian assets are currently less than 2.5% 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.
The Company's customers are principally individual students
enrolled in its various educational programs. Accordingly,
concentration of accounts receivable credit risk is small
relative to total revenues or accounts receivable.
The Company's cash is held in accounts at various financial
institutions. The Company selects the financial institutions
with which it maintains deposits from amongst only those that are
the largest and most financially secure. Therefore, although the
amount on deposit at a given institution will typically exceed
amounts subject to guarantee, the Company has not experienced any
deposit losses to date nor does it expect to incur such losses in
the future.
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 December
31, 2005, a further 1.0% increase in short-term interest rates
would result in $1.6 million of additional annual interest
expense. However, future investment opportunities and cash flow
generated from operations may affect the level of outstanding
borrowings and the effect of a future change in interest rates.
In the first quarter of fiscal 2004, the Company entered into
several interest rate cap agreements to protect a portion of its
borrowings from sharp increases in short-term interest rates.
These agreements had expired by the end of the first quarter of
fiscal year 2006 and no longer afford any protection from changes
interest rates. The Company intends to periodically review
further debt repayment and the need for additional interest rate
protection agreements in light of projected changes in working
capital, investment requirements and expectations about future
period interest rates.
37
Item 4 - Controls and Procedures
- --------------------------------
CEO and CFO Certificates
- ------------------------
The required compliance certificates signed by the Company's CEO
and CFO are included as Exhibits 31 and 32 of this Quarterly
Report on Form 10-Q.
Disclosure Controls and Procedures
- ----------------------------------
Disclosure controls and procedures are designed to help ensure
that all the information required to be disclosed in our reports
filed with the SEC is recorded, processed, summarized and
reported within the time periods specified by the appropriate
rules.
Evaluations required by Rule 13a - 15 of the Securities Exchange
Act of 1934 of the effectiveness of the Company's disclosure and
controls and procedures 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 its Chief Financial Officer. Based
upon these evaluations, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure
controls and procedures were effective as required, and have
attested to this in Exhibit 31 of this Report.
Changes In Internal Control Over Financial Reporting
- ----------------------------------------------------
There were no changes in internal control over financial
reporting that occurred during the second quarter and first half
of fiscal year 2006 that materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
38
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company is subject to occasional lawsuits, administrative
proceedings, regulatory reviews associated with financial
assistance programs and other claims arising in the normal
conduct of its business. The following information updates the
status of claims and litigation previously disclosed.
In January 2002, Royal Gardner, a graduate of one of DeVry
University's Los Angeles-area campuses, filed a class-action
complaint against DeVry Inc. and DeVry University, Inc. in the
Superior Court of the State of California, County of Los Angeles,
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 in the
same court by Gavino Teanio with the same general allegations and
by the same plaintiffs' attorneys. This subsequent action has
been stayed pending the outcome of the Gardner matter. Discovery
and settlement discussions continue in the Gardner matter and a
class action certification hearing is still pending, but there is
no determinable date at which this matter may be brought to
conclusion.
The alleged class action above seeks money damages of an
indeterminate amount. The Company has accrued $0.75 million
representing the estimated minimum amount to resolve this claim.
In November 2000, Afshin Zarinebaf, Ali Mousavi and another
graduate of one of DeVry University's Chicago-area campuses filed
a class-action complaint in the Circuit Court for Cook County,
Illinois that alleges DeVry graduates do not have appropriate
skills for employment in the computer information systems field.
The complaint was subsequently dismissed by the court, but was
amended and re-filed to include as a plaintiff Mark Macenas, a
then-current student in another curriculum from a second Chicago-
area campus. In September 2005, the court denied the plaintiff's
motion for class action certification in its entirety. However,
pending claims remain by each of the named defendants in this
action.
In August 2005 counterclaims were filed against the Company's
subsidiary Dominica Management, Inc. and the Ross University
School of Medicine by defendants American University of Antigua
College of Medicine, Neal Simon and Sol Weltman in a case filed
by Dominica Management, Inc. in the U.S. District Court for the
Southern District of New York in September 2004. The original
case filed by Dominica Management, Inc. sought relief primarily
for alleged copyright infringement, misappropriation of trade
secrets and confidential information, and unfair competition.
The counterclaims allege, inter alia, anticompetive behavior,
tortious interference with prospective economic relationships,
and defamation. In October 2005, the Company and American
University of Antigua reached an agreement to resolve this matter
and drop all claims, and the matter is now resolved.
While the ultimate outcome of these and other contingencies is
difficult to estimate at this time, the Company does intend to
vigorously defend itself with respect
39
to the pending claims. At this time, the Company does not
believe that the outcome of current claims, administrative
proceedings, regulatory reviews and lawsuits will have a material
effect on its cash flows, results of operations or financial
position.
Item 4 - Submission Of Matters To A Vote Of Security Holders
- ------------------------------------------------------------
The Company's regular annual meeting of stockholders was held in
Oakbrook Terrace, Illinois, on Wednesday, November 9, 2005,
pursuant to notice duly given. Proxies for the meeting were
solicited in accordance with the Securities Exchange Act of 1934
and there was no solicitation in opposition to those of
management.
At the meeting, one director of the Company was elected as a
Class III Director to hold office until 2006 or until his
successor is elected and qualified.
No. of Shares No. of Shares
Class I Voted For Voted to Withhold
------- --------- -----------------
William T. Keevan 64,832,866 1,442,534
Four Directors of the Company were elected as Class II Directors
to hold office until 2008 or until their successors are elected
and qualified.
No. of Shares No. of Shares
Class II Voted for Voted to Withhold
-------- --------- -----------------
David S. Brown 64,314,170 1,961,230
Dennis J. Keller 64,288,394 1,987,006
Frederick A. Krehbiel 64,471,790 1,803,610
Fernando Ruiz 64,832,540 1,442,860
The terms of the following Directors continued after the meeting:
Charles A. Bowsher, Robert C. McCormack, Julia A. McGee, Connie
R. Curran, Harold T. Shapiro and Ronald L. Taylor.
In addition to the election of Directors, stockholders approved:
a) the amendment and restatement of the DeVry Inc. Employee
Stock Purchase Plan
No. of Shares No. of Shares No. of Shares
Voted for Voted Against Voted to Abstain
--------- ------------- ----------------
57,589,72 837,424 27,017
40
b) the DeVry Inc. Incentive Plan of 2005;
No. of Shares No. of Shares No. of Shares
Voted for Voted Against Voted to Abstain
--------- ------------- ----------------
49,780,084 8,633,554 40,526
and
c) the selection of PricewaterhouseCoopers LLP as independent
public accountants for the Company for the current fiscal year.
No. of Shares No. of Shares No. of Shares
Voted for Voted Against Voted to Abstain
--------- ------------- ----------------
66,142,321 121,533 11,546
41
Item 6 - Exhibits
- -----------------
Exhibits
Sequentially
Exhibit # Description Numbered Page
--------- ----------- -------------
31 Rule 13a-14(a)/15d-14(a)Certifications 43 - 46
32 Section 1350 Certifications 47
42
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: February 8, 2006 /s/Ronald L. Taylor
-----------------------
Ronald L. Taylor
Chief Executive Officer
Date: February 8, 2006 /s/Norman M. Levine
-------------------------
Norman M. Levine
Senior Vice President and
Chief Financial Officer