1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly and nine month period ended March 31, 2006
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
April 28, 2006: 70,740,311
Total number of pages: 47
2
DeVry Inc.
FORM 10-Q INDEX
For the Quarter and Nine Months Ended March 31, 2006
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
March 31, 2006, June 30, 2005,
and March 31, 2005 3-4
Consolidated Statements of Income
for the Quarter and Nine months ended
March 31, 2006 and 2005 5
Consolidated Statements of Cash
Flows for the Nine months ended
March 31, 2006 and 2005 6
Notes to Consolidated Financial
Statements 7-24
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 25-36
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 36-37
Item 4. Controls and Procedures 37
PART II. Other Information
Item 1. Legal Proceedings 38-39
Item 1A. Risk Factors 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)
March 31, June 30, March 31,
2006 2005 2005
--------- --------- ---------
Restated Restated
ASSETS
Current Assets
Cash and Cash Equivalents $162,355 $161,823 $138,187
Restricted Cash 52,523 13,935 33,175
Accounts Receivable, Net 90,089 39,226 119,012
Inventories 104 164 160
Deferred Income Taxes 19,811 17,142 9,395
Prepaid Expenses and Other 13,154 10,048 9,974
------- ------- -------
Total Current Assets 338,036 242,338 309,903
------- ------- -------
Land, Buildings and Equipment
Land 67,653 68,013 64,583
Buildings 219,899 212,428 205,042
Equipment 241,736 234,201 233,133
Construction In Progress 7,207 15,813 21,475
------- ------- -------
536,495 530,455 524,233
Accumulated Depreciation (262,871) (243,688) (237,651)
------- ------- -------
Land, Buildings and
Equipment, Net 273,624 286,767 286,582
------- ------- -------
Other Assets
Intangible Assets, Net 65,956 73,699 76,350
Goodwill 291,113 289,308 289,863
Perkins Program Fund, Net 13,290 13,290 12,847
Other Assets 4,180 4,633 4,871
------- ------- -------
Total Other Assets 374,539 380,930 383,931
------- ------- -------
TOTAL ASSETS $986,199 $910,035 $980,416
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
March 31, June 30, March 31,
2006 2005 2005
--------- --------- ---------
Restated Restated
LIABILITIES
Current Liabilities
Current Maturities of Debt $ 50,000 $ 50,000 $ -
Accounts Payable 30,016 30,681 22,433
Accrued Salaries, Wages &
Benefits 31,679 34,071 32,551
Accrued Expenses 35,521 34,462 30,002
Advance Tuition Payments 8,533 14,685 10,238
Deferred Tuition Revenue 151,413 22,823 149,729
------- ------- -------
Total Current Liabilities 307,162 186,722 244,953
------- ------- -------
Other Liabilities
Revolving Loan - 50,000 70,000
Senior Notes 95,000 125,000 125,000
Deferred Income Taxes 14,628 15,949 18,384
Accrued Post-employment
Agreements 6,382 6,352 5,618
Deferred Rent and Other 12,742 12,629 12,614
------- ------- -------
Total Other Liabilities 128,752 209,930 231,616
------- ------- -------
TOTAL LIABILITIES 435,914 396,652 476,569
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,661,000, 70,475,000 and
70,378,000, Shares Issued and
Outstanding at March 31,
2006, June 30, 2005 and
March 31, 2005,
Respectively 708 706 705
Additional Paid-in Capital 119,566 113,571 104,318
Retained Earnings 430,082 398,840 398,614
Accumulated Other Comprehensive
Income (Loss) (71) 266 210
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 550,285 513,383 503,847
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $986,199 $910,035 $980,416
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
(Unaudited)
For The Quarter For The Nine Months
Ended March 31, Ended March 31,
--------------------- ----------------------
2006 2005 2006 2005
--------------------- ----------------------
Restated Restated
REVENUES:
Tuition $203,299 $190,713 $582,384 $552,824
Other Educational 15,771 11,068 42,477 31,731
Interest 1,136 149 1,994 293
------- ------- ------- -------
Total Revenues 220,206 201,930 626,855 584,848
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 115,483 111,014 338,209 329,968
Student Services and
Administrative Expense 80,999 74,341 238,776 227,235
Interest Expense 2,490 2,309 7,751 6,391
------- ------- ------- -------
Total Costs and Expenses 198,972 187,664 584,736 563,594
------- ------- ------- -------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 21,234 14,266 42,119 21,254
Income Tax Provision 5,552 3,385 10,877 5,381
------- ------- ------- -------
Income Before Cumulative Effect
of Change in Accounting 15,682 10,881 31,242 15,873
Cumulative Effect of Change in
Accounting, Net of Tax - - - 1,810
------- ------- ------- -------
NET INCOME $ 15,682 $ 10,881 $ 31,242 $ 17,683
======= ======= ======= =======
EARNINGS PER COMMON SHARE
Basic
Income Before Cumulative
Effect of Change in Accounting $0.22 $0.15 $0.44 $0.23
Cumulative Effect of Change
in Accounting - - - 0.02
----- ----- ----- -----
Net Income $0.22 $0.15 $0.44 $0.25
===== ===== ===== =====
Diluted
Income Before Cumulative
Effect of Change in Accounting $0.22 $0.15 $0.44 $0.23
Cumulative Effect of Change
in Accounting - - - 0.02
----- ----- ----- -----
Net Income $0.22 $0.15 $0.44 $0.25
===== ===== ===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
6
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Nine Months
Ended March 31,
2006 2005
-------- --------
Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 31,242 $ 17,683
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Share-Based Compensation Charge 3,286 5,134
Depreciation 28,043 30,369
Amortization 8,104 11,735
Provision for Refunds and
Uncollectible Accounts 39,570 31,538
Deferred Income Taxes (4,025) 1,780
(Gain) Loss on Disposals of Land, Buildings
and Equipment (390) 638
Changes in Assets and Liabilities, net of
Effects from Acquisition of Business:
Restricted Cash (38,649) (19,652)
Accounts Receivable (90,802) (121,618)
Inventories 66 3,137
Prepaid Expenses and Other (2,881) 765
Accounts Payable (460) (5,403)
Accrued Salaries, Wages,
Expenses and Benefits (313) 5,979
Advance Tuition Payments (6,126) (6,761)
Deferred Tuition Revenue 128,713 126,946
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 95,378 82,270
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (16,283) (30,561)
Net Proceeds from Sale of Land and Building 1,798 -
Payments for Purchases of Businesses, net of
Cash Acquired (2,530) (4,861)
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (17,015) (35,422)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options 2,433 261
Excess Tax Benefit from Share-Based Payments - 190
Proceeds From Revolving Credit Facility - 10,000
Repayments Under Revolving Credit Facility (80,000) (65,000)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (77,567) (54,549)
Effects of Exchange Rate Differences (264) (339)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 532 (8,040)
Cash and Cash Equivalents at Beginning
of Period 161,823 146,227
------- -------
Cash and Cash Equivalents at End of Period $162,355 $138,187
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $ 6,951 $4,920
Income Tax Payments During the Period, Net 14,861 4,760
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter and Nine Months Ended March 31, 2006
----------
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 reports on Form 10-Q for the quarters ended
September 30, 2005 and December 31, 2005, each as filed with the
Securities and Exchange Commission.
The results of operations for the three and nine months ended
March 31, 2006, 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 three and nine months
ended March 31, 2005, 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 March 31, 2006, these cap
agreements had expired so there is no effect on Accumulated Other
Comprehensive Income in the Consolidated Balance Sheets. As of
March 31, 2005, $8,000 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 $312,000 and the $320,000 expensed as
interest. For the nine months ended March 31, 2006, a gain of
$12,000 was recorded as Other Comprehensive Income. For the nine
months ended March 31, 2005, a loss of $10,000 was recorded as
Other Comprehensive Income. Interest expense of $73,000 and
$230,000 was charged to earnings for these interest rate caps for
the nine months ended March 31, 2006 and 2005, respectively. For
the nine months ended March 31, 2006 and 2005, there was no
ineffectiveness related to these agreements.
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development
costs that are amortized using the straight line method over the
estimated useful lives of the software, not to exceed five years.
Capitalized costs include external direct costs of materials and
services consumed in developing or obtaining internal-use software
and payroll and payroll related costs for employees who are
directly associated with the internal software development
project. 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 $557,000 as of March 31, 2005. As of March 31, 2006
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 March 31, 2006,
June 30, 2005, and March 31, 2005.
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 nine months ended March 31, 2006
and 2005, the Company recognized expense of approximately
$31,000 and $1,939,000, respectively, related to these agreements.
The amounts provided are based on recording, over the period of
active service that ended June 30, 2005, the amount that represents
the present value of the obligation, discounted using a 6.00% rate
as of March 31, 2006, 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 70,604,000 and
70,374,000 for the third quarters ended March 31, 2006 and 2005,
respectively and 70,550,000 and 70,364,000 for the nine months
ended March 31, 2006 and 2005, 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 70,913,000
and 70,547,000 for the third quarters ended March 31, 2006 and 2005,
respectively and 70,739,000 and 70,567,000 for the nine months ended
March 31, 2006 and 2005, respectively. Excluded from the computations
of diluted earnings per share were options to purchase 1,719,000 and
2,711,000 shares of common stock for the third quarter and nine
months ended March 31, 2006, respectively, and 2,203,000 and
2,201,000 shares of common stock, for the third quarter and nine
months ended March 31, 2005, 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 a gain of $12,000 for the nine months
ended March 31, 2006 and a loss of $10,000 for the nine months
ended March 31, 2005. The Company's only other item that meets the
definition for adjustment to arrive at Comprehensive Income is the
change in cumulative translation adjustment. The amounts recorded
in Other Comprehensive Income for the changes in translation rates
were a gain of $2,000 and a loss of $17,000, for the quarters
ended March 31, 2006 and 2005, respectively, and losses of
$349,000 and $500,000 for nine months ended March 31, 2006 and
2005, respectively.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Comprehensive Income, continued
- -------------------------------
The Accumulated Other Comprehensive Income balance at March 31,
2006 is composed entirely of a cumulative translation loss of
$71,000. This balance at March 31, 2005, is composed of a $8,000
gain related to the cash flow hedge and a cumulative translation
gain of $202,000.
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 March 31, 2006, 7,551,615 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 nine months
ended March 31, 2005:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Options Exercise Contractual Value
Outstanding Price Life ($000)
----------- -------- ----------- ---------
Outstanding at July 1, 2005 3,814,339 $22.37
Options Granted 86,500 $21.73
Options Exercised (182,661) $12.87
Options Canceled (170,744) $25.04
---------
Outstanding at March 31, 2006 3,547,434 $22.72 6.42 $4,172
========= ======
Exercisable at March 31, 2006 2,504,306 $22.75 6.63 $3,282
========= ======
The total intrinsic value of options exercised for the nine months
ended March 31, 2006 and 2005 was $1,690,000 and $690,000, 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 nine months of
fiscal 2006 and 2005 were $10.13 and $9.92, per share,
respectively. The fair values of the Company's stock option
awards for the first nine 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 Nine Months
Ended March 31, Ended March 31,
2006 2005 2006 2005
---- ---- ---- ----
Cost of Educational Services $ 335 $ 409 $1,051 $1,642
Student Services and Administrative
Expense 712 869 2,235 3,492
Income Tax Benefit 274 212 848 714
---- ----- ----- -----
Net Stock-based Compensation Expense $ 773 $1,066 $2,438 $4,420
==== ===== ===== =====
As of March 31, 2006, $8.46 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be
recognized over a weighted average period of 2.7 years. The total
fair value of options vested during the nine months ended March
31, 2006 and 2005 was $3,529,000 and $4,551,000, respectively.
There were no capitalized stock-based compensation costs at March
31, 2006 and 2005.
The Company has a policy of issuing new shares of common stock to
satisfy share option 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 Nine Months
ended ended
March 31, 2005 March 31, 2005
-------------------- --------------------
As As
Previously Previously
Restated Reported Restated Reported
-------------------- --------------------
CONSOLIDATED STATEMENTS OF INCOME:
Total Costs and Expenses $187,664 $186,386 $563,594 $558,460
Income before Income Taxes and
Cumulative Effect of Change
In Accounting 14,266 15,544 21,254 26,388
Income Tax Provision 3,385 3,597 5,381 6,095
Income before Cumulative Effect
Of Change in Accounting 10,881 11,947 15,873 20,293
Net Income 10,881 11,947 17,683 22,103
EARNINGS PER COMMON SHARE:
Basic
Income before Cumulative Effect
Of Change in Accounting $0.15 $0.17 $0.23 $0.29
Net Income $0.15 $0.17 $0.25 $0.31
Diluted
Income before Cumulative Effect
Of Change in Accounting $0.15 $0.17 $0.23 $0.29
Net Income $0.15 $0.17 $0.25 $0.31
14
NOTE 3: STOCK-BASED COMPENSATION, continued
For the Nine Months Ended
March 31, 2005
-------------------------
As
Previously
Restated Reported
--------------------
CASH FLOW RELATED TO NINE MONTHS
ENDED MARCH 31, 2005
Net Income $ 17,683 $ 22,103
Share Based Compensation Charge 5,134 -
Deferred Income Taxes 1,108 2,684
Net Cash Provided by Operating
Activities 82,270 82,460
Excess Tax Benefits from Share
Based Payments 190 -
Net Cash Used in Financing
Activities (54,549) (54,739)
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 nine months ended March 31, 2005. 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 nine months ended March 31, 2005 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 Nine Months Ended
March 31, March 31,
2005 2005
---- ----
Net Income $10,881,000 $15,873,000
Earnings per Share
Basic $0.15 $0.23
Diluted $0.15 $0.23
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. 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 has further diversified 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. These amounts were finalized along with the purchase
price during the third quarter of fiscal 2006. This resulted in no
change to the purchase price; however, Current Assets decreased by
$460,000, Current Liabilities Assumed decreased by $655,000, and
goodwill was reduced by $195,000.
At March 24, 2005
(In Thousands)
Current Assets $ 199
Property and Equipment 37
Intangible Assets 1,470
Goodwill 4,716
-----
Total Assets Acquired 6,422
Current Liabilities Assumed 1,031
-----
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 valuation analysis prepared by an independent
professional valuation specialist. The $4,716,000 of goodwill was
all assigned to the Medical & Healthcare operating segment.
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 March 31, 2006
--------------------------------
Gross Carrying Accumulated
Amount Amortization
--------------------------------
Amortized Intangible Assets:
Student Relationships $47,770,000 $(35,623,000)
License and Non Compete
Agreements 2,650,000 (2,591,000)
Class Materials 2,900,000 (1,050,000)
Trade Names 110,000 (69,000)
Other 620,000 (618,000)
---------- -----------
Total $54,050,000 $(39,951,000)
========== ===========
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 March 31, 2005
--------------------------------
Gross Carrying Accumulated
Amount Amortization
--------------------------------
Amortized Intangible Assets:
Student Relationships $47,760,000 $(25,068,000)
License and Non Compete
Agreements 2,650,000 (2,454,000)
Class Materials 2,900,000 (850,000)
Trade Names 110,000 (41,000)
Other 620,000 (589,000)
---------- -----------
Total $54,040,000 $(29,002,000)
========== ===========
Unamortized Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
And Accreditations 14,100,000
Deaconess Title IV
Eligibility and
Accreditations 655,000
Intellectual Property 13,940,000
----------
Total $51,312,000
==========
18
NOTE 6: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was
$2,582,000 and $7,743,000 for the quarter and nine months ended
March 31, 2006, respectively, and $3,637,000 and $10,911,000 for
the quarter and nine months ended March 31, 2005, 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 March
31, 2006 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 March 31, 2006
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
$244,202,000 at March 31, 2006 and $244,397,000 June 30,
2005. The decrease of $195,000 was the result of purchase
price allocation adjustments recorded in the second and third
quarters 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 net 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 $250,000 the
third quarter of fiscal 2006 and $2,550,000 for the nine months
ended March 31, 2006. Of the total amount accrued for these
events, approximately $800,000 remained to be paid as of March 31,
2006. Payments will continue into the fourth 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 nine months ended March 31,
2006 for the Medical or Veterinary Schools.
The Company has not recorded a tax provision for the
undistributed earnings of the Medical and Veterinary Schools for
the period after the acquisition. It is the Company's intention
to indefinitely reinvest post-acquisition undistributed earnings
and profits to service debt, improve the facilities and
operations of the Schools and pursue future opportunities outside
of the United States. As of March 31, 2006 and 2005, cumulative
undistributed earnings were approximately $52.0 million and $27.9
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 March 31, 2006:
Effective
Outstanding Interest Rate at
Debt March 31, 2006
------------ ----------------
Revolving Credit Agreement:
DeVry Inc. as borrower $ 20,000,000 6.07%
GEI as borrower -
-----------
Total $ 20,000,000 6.07%
-----------
Senior Notes:
DeVry Inc. as borrower $ 75,000,000 5.92%
GEI as borrower 50,000,000 5.92%
-----------
Total $125,000,000 5.92%
-----------
Total outstanding debt $145,000,000 5.94%
Current Maturities of Debt $ 50,000,000 5.98%
-----------
Total Long-term debt $ 95,000,000 5.92%
-----------
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 was stayed
pending the outcome of the initial matter. The parties have now
reached an agreement in principle and a settlement is in the
process of being finalized and subject to judicial approval. The
Company has accrued $0.75 million representing the estimated
amount agreed upon 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 which the court may
attempt to resolve by mediation.
A former student of Ross University Veterinary School of Medicine
was dismissed from the school and denied re-enrollment. In June
2005, the student claims that the dismissal was based upon her
handicap and is seeking compensatory damages for economic and non-
economic harm, punitive damages, cost of the suit, attorney's
fees and other relief deemed appropriate by the Court. The
Company filed a motion to dismiss the suit. The Plaintiff has
agreed to stay discovery until the motion to dismiss is denied.
Plaintiff has also filed a motion to add an additional party to
the suit.
In April 2006, the general contractor that built the student
dormitory building on the DeVry University Fremont, California,
campus has placed a lien on the site and filed a counterclaim to
the Company's claim for contract breach, alleging that the
Company has failed to pay for extra work done in building the
dormitory. In addition, some of the sub-contractors have also
filed liens on the site, seeking additional payments owed to them
by the general contractor.
22
NOTE 11: COMMITMENTS AND CONTINGENCIES, continued
The amount claimed by the general contractor for the alleged
extra work is approximately $2.8 million. Additional costs of
construction, if any, would generally be capitalized as a part of
the cost of the building and would not result in any immediate
additional expense. No accrual has been made for the resolution
of this claim.
The total accrual for the resolution of all pending legal
claims at the end of the third quarter was $1.4 million.
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
financial statements 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 nine months ended March 31, 2006 and 2005. Where
applicable, the March 31, 2005, 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 Nine Months
Ended March 31, Ended March 31,
------------------- -------------------
2006 2005 2006 2005
---- ---- ---- ----
Revenues:
DeVry University $174,504 $167,977 $506,899 $486,668
Professional and Training 15,063 10,785 37,296 31,738
Medical & Healthcare 30,639 23,168 82,660 66,442
------- ------- ------- -------
Total Consolidated Revenues $220,206 $201,930 $626,855 $584,848
------- ------- ------- -------
Operating Income:
DeVry University $ 8,492 $8,195 $15,155 $ 6,772
Professional and Training 5,707 3,002 12,612 8,228
Medical & Healthcare 12,360 9,262 30,612 24,333
Reconciling Items:
Amortization Expense (2,582) (3,637) (7,743) (10,911)
Interest Expense (2,490) (2,309) (7,751) (6,391)
Depreciation and Other (253) (247) (766) (777)
------ ------ ------ ------
Total Consolidated Income
before Income Taxes and
Cumulative Effect of
Change in Accounting $21,234 $14,266 $42,119 $21,254
------ ------ ------ ------
Segment Assets:
DeVry University $485,131 $509,541 $485,131 $509,541
Professional and Training 82,025 70,883 82,025 70,883
Medical & Healthcare 390,318 380,695 390,318 380,695
Corporate 28,725 19,297 28,725 19,297
------- ------- ------- -------
Total Consolidated Assets $986,199 $980,416 $986,199 $980,416
------- ------- ------- -------
Additions to Long-lived Assets:
DeVry University $3,311 $ 6,644 $10,703 $25,398
Professional and Training 31 89 179 291
Medical & Healthcare 2,095 7,263 7,401 9,733
----- ------ ------ ------
Total Consolidated Additions
to Long-lived Assets $5,437 $13,996 $18,283 $35,422
----- ------ ------ ------
Depreciation Expense:
DeVry University $8,067 $ 9,094 $24,045 $26,700
Professional and Training 120 133 348 399
Medical & Healthcare 981 958 2,909 2,529
Corporate 247 247 741 741
----- ------- ------ ------
Total Consolidated Depreciation $9,415 $10,432 $28,043 $30,369
----- ------ ------ ------
Intangible Asset Amortization Expense:
DeVry University $ - $ - $ - $ -
Professional and Training 67 193 200 580
Medical & Healthcare 2,515 3,444 7,543 10,331
----- ----- ----- ------
Total Consolidated Amortization $2,582 $3,637 $7,743 $10,911
----- ----- ----- ------
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 March 31, 2006 and 2005. Revenues and
long-lived assets by geographic area are as follows:
<CAPTION
For the Quarter For the Nine Months
Ended March 31, Ended March 31,
-------------------- -------------------
2006 2005 2006 2005
---- ---- ---- ----
Revenues from Unaffiliated Customers:
Domestic Operations $184,450 $175,878 $537,368 $508,885
International Operations:
Dominica and St. Kitts/Nevis 32,748 23,168 81,176 66,442
Other 3,008 2,884 8,311 9,521
------- ------- ------- -------
Total International 35,756 26,052 89,487 75,963
------- ------- ------- -------
Consolidated $220,206 $201,930 $626,855 $584,848
------- ------- ------- -------
Long-lived Assets:
Domestic Operations $341,495 $352,259 $341,495 $352,259
International Operations:
Dominica and St. Kitts/Nevis 306,371 317,621 306,371 317,621
Other 297 628 297 628
------- ------- ------- -------
Total International 306,668 318,249 306,668 318,249
------- ------- ------- -------
Consolidated $648,163 $670,508 $648,163 $670,508
------- ------- ------- -------
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
- --------------------------
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.
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 quarters ended September
30, 2005 and December 31, 2005. The Company's annual report on
Form 10-K includes a detailed description of critical accounting
policies and 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.
The somewhat seasonal pattern of the Company's enrollments and
its educational program starting dates affect the results of
operations and the timing of cash flows. Therefore, 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.
26
Results of Operations
- ---------------------
The following table presents information with respect to the
relative size to revenue of each item in the statement of income
for the third quarter and first nine months of both the current
and prior year. Percents may not add due to rounding.
Quarter Ended Nine Months Ended
------------- -----------------
March 31
-------------------------------------
2006 2005 <FN>1 2006 2005 <FN>1
(Restated) (Restated)
---------------- ---------------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Educational Services 52.4% 55.0% 53.9% 56.4%
Student Services & Admin. Ex 36.8% 36.8% 38.1% 38.9%
Interest Expense 1.1% 1.1% 1.2% 1.1%
------ ------ ------ ------
Total Costs and Expenses 90.4% 92.9% 93.3% 96.4%
Income Before Income Taxes
and Cumulative Effect of
Change in Accounting 9.6% 7.1% 6.7% 3.6%
Income Tax Provision 2.5% 1.7% 1.7% 0.9%
------ ------ ------ ------
Income Before Cumulative
Effect of Change in Accounting 7.1% 5.4% 5.0% 2.7%
Cumulative Effect of
Change in Accounting - - - 0.3%
------ ------ ------ ------
NET INCOME 7.1% 5.4% 5.0% 3.0%
------ ------ ------ ------
<FN>
<FN>1 Quarter and nine months ended March 31, 2005, restated for the
adoption of SFAS 123R using the modified retrospective approach.
</FN>
The Company's financial performance in both the third quarter and
nine months of this year improved from the results in the
corresponding periods of the previous fiscal year. Fiscal 2005
financial results have 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 both DeVry University's graduate and undergraduate
programs, increased tuition rates for both undergraduate and
graduate programs, an increase in new student enrollments and
higher tuition rates at Ross University, an increase in
27
enrollments in the Professional and Training segment's Becker
Professional Review operations, wage savings from the workforce
reductions implemented last year and continued cost control in
spending in other areas of operation.
Total DeVry University undergraduate enrollments in fall 2005
were 38,546, or 2.3% lower than enrollments a year ago. Although
total undergraduate enrollments were lower than in the previous
year, the fall term marked the third consecutive term in which
new undergraduate student enrollments increased from the year-ago
level, contributing to a lesser rate of year-over-year decline in
total enrollments. For spring 2006, total DeVry University
undergraduate enrollments were 38,523 or 1.2% higher than
enrollments a year ago. Spring marked the fourth consecutive
term in which new undergraduate student enrollments increased
from the year ago level and was also the first term since spring
of 2002 that total undergraduate student enrollments increased
from the prior year. Third quarter financial results include
revenue from both the fall and spring enrollment periods.
The Company believes that the increasing new student enrollments
are the result of better integration of marketing and recruiting
functions, an improved overall marketing communication plan and
better management of lead flow. Also, the Company believe that
demand for technology graduates continues to improve, positively
influencing career decisions of new students towards this field
of study. Further diversification of programs has offered another
avenue for enrollment growth. DeVry University announced a new
online specialty within its bachelor of science in technical
management degree program, called Health Information Management
("HIT"). This new specialty provides an opportunity for those
who hold an associate degree in health information, such as
graduates of DeVry's HIT program, to move seamlessly to a
bachelor's degree and advance within this field.
Coursetaker enrollments at DeVry University's Keller Graduate
School of Management increased 9.4% in the January session and
increased 12.3% for the March session compared to the same
sessions in the previous year. The Company believes that efforts
at Keller to create new brand awareness through improved
messaging have produced positive results and will continue to
focus on further improvements in the future.
At Ross University in the Medical and Healthcare segment, for the
term that started in January, new student enrollments increased
to 387, up 67.5% from last year, and total student enrollments
increased to 3,264, an increase of 4.5% from last year.
The Company's total consolidated revenue increased by $18.3
million, or 9.1%, in the third quarter compared to last year.
Revenue growth in the third quarter improved when compared to
lesser rates of increase of 7.9% and 4.5% in the second and first
quarters, respectively. Tuition revenue, which is the largest
component of total revenue, represented over 92% of total revenue
for both the third quarter and first nine months of fiscal 2006.
All three of the Company's segments: DeVry University, Medical
and Healthcare and the Professional and Training segment,
contributed to the increased revenue for the quarter and year-to-
date periods.
DeVry University
- ----------------
At DeVry University, total third quarter revenues increased by
approximately $6.5 million, after increasing by approximately
$9.7 million and $4.0 million in the second and first quarters,
28
respectively. As discussed above, contributing to the higher
revenues in both the third quarter and nine months were the
higher DeVry University total student enrollments in spring 2006
and the lessening rate of decline in the total student enrollment
in the fall. Third quarter revenues for the undergraduate
operations reflect two months of revenue from the fall term
(January and February 2006) and one month of revenue from the
spring term (March 2006). Further contributing to the increased
segment revenues were increased coursetaker enrollments at Keller
Graduate School in the January and March sessions that began in
the third quarter. Also, higher tuition rates 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 2005 session following a
similar increase in January 2005.
Contributing to higher Total Revenues in this segment, Other
Educational Revenue increased by approximately $2.8 million in
the third quarter and $6.7 million in the first nine months of
the year, partly from sales of electronic textbook materials
("eBooks").
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 already managed by Follett. As a result, reported bookstore
sales revenue was lower than it had been in previous periods.
However, DeVry University sales of eBooks in selected graduate
and undergraduate online and on-site courses beginning in the
latter part of fiscal 2005 has more than offset the reduction in
revenues from the bookstores previously managed by the Company.
The Company reports the sale of eBooks at their full selling
price which is a higher unit price sale than the commission
income it reports on book and supply sales by Follett.
Further contributing to the increase in Other Educational Revenue
was a higher interest charge on undergraduate student accounts
receivable. These receivables are generally subject to a monthly
interest charge of one percent under the Company's EDUCARD
revolving charge plan for financing students' education. While
these charges generated approximately $0.2 million more in
student financing charges in the third quarter, for the year-to-
date period they generated approximately $2.3 million more income
than in the year-to-date period last year.
Partly offsetting the increases in revenue from improved
enrollments and higher tuition rates is 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 online programs and at programs offered at
DeVry University Centers. These part-time students pay a 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 a greater proportion of part-time students.
Professional and Training
- -------------------------
In the Professional and Training segment, third quarter revenues
increased by approximately $4.3 million from the third quarter of
last year. For the first nine months, revenues continued to
grow, rising $5.6 million above those of the previous year. The
Company believes that higher revenues from increased enrollment,
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 and from an increased demand for CPA's by
public accounting and consulting firms. Not only have on-site
course enrollments increased, but demand for the review courses
online and on CD-ROM have increased, contributing approximately
29
$1.9 million of the total Company increase in Other Educational
Revenues in the third quarter and $4.6 million for the first nine
months of the year. Further contributing to the year-to-date
revenue growth in this segment was 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 Level 1 of the exam has been offered in December. Third
quarter results also reflect increasing Stalla CFA review course
revenues as candidates prepare for the June exam. To further
strengthen Becker Professional Review results in future periods,
the Company hired a new director of international operations and
two directors of business operations responsible for sales and
marketing of all Becker products in Canada and in the heavily
populated east coast market.
In July 2005, which is the first quarter of the current fiscal
year, the Company completed the acquisition of Gearty CPE. 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 is being integrated into the Becker
operations in other appropriate markets across the country but
has not yet contributed significantly to the revenues or
operating income of the Professional and Training segment.
Medical and Healthcare
- ----------------------
In the Medical and Healthcare segment, revenues increased by
approximately $7.5 million, or 32.2%, in the third quarter and
$16.2 million, or 24.4%, in the first three quarters compared to
last year. Included in this segment are $1.5 million in revenues
for the third quarter and $4.1 million for the first nine months
at Deaconess College of Nursing. Deaconess was not acquired by
the Company until the latter part of fiscal 2005 and did not
contribute revenues or income during this period last year.
At Ross University, although total enrollments during the first
and second quarter of this year were lower than a year ago, a
tuition price increase of approximately 5% effective with the
September 2005 semester, and 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 during the
first six months. However, for the Ross class that began in
January, the start of the fiscal third quarter, both new and
total student enrollments increased from the year-ago level as
described above and revenue growth for the third quarter was at a
faster pace than in the first half. To prepare for future
enrollment growth, medical school student capacity is being
expanded with the leasing of additional space adjacent to the
campus to be used as another auditorium for approximately 400
students.
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 third quarter and first nine
months 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
30
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's 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 $4.4
million, or 4.0%, from the third quarter of last year. For the
first three quarters of the year, these costs increased by $8.2
million, or 2.5%, from last year. Contributing most of the
higher cost for the year-to-date was an increase of $5.6 million
in the provision for doubtful accounts, primarily in the DeVry
University undergraduate operations, as student receivables
increased from last year through the summer and fall semesters.
However, at the start of the spring semester in March, the
timeliness of receivable collections improved from prior periods
as the result of internal process improvements and student
receivables at the end of the quarter were lower than they were
at this time last year.
Also, cost increases were incurred in support of the higher
number of DeVry University Centers and expanding online program
enrollments. For the March 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 was 21,068, increasing to 24,357 for the November session
and increasing further in the March 2006 session to 28,912, up
46.3% from last year. Cost of Educational Services is now
included in the Company's financial statements from Deaconess
College of Nursing which was not included in the Company results
through the first three quarters of last year.
Partly offsetting these increases were the wage savings from
workforce reductions implemented last year and continued spending
restraint in operations during the current year. In the third
quarter of last year, the Company recognized a $2.8 million pre-
tax charge, of which approximately $2.0 million was included in
Cost of Educational Services, as the first of several work force
reductions was being implemented. Last year-to-date, these
charges included in Cost of Educational Services totaled
approximately $3.6 million. There are no corresponding charges
for work force reduction in the current year.
31
Also, lower capital spending during each of the past several
years has resulted in $28.0 million of depreciation expense for
the first nine months compared to $30.4 million last year,
producing a $2.4 million savings. Most depreciation expense is
included in the Cost of Educational Services. Further savings in
Cost of Educational Services were generated by lower expense
attributed to share-based awards as fewer new option grants have
been issued this year compared to the comparable period last
year. For the first three quarters this expense was
approximately $1.1 million compared to approximately $1.6 million
last year.
Student Services and Administrative Expense
- -------------------------------------------
Student Services and Administrative Expense increased by $6.7
million, or 9.0%, from the third quarter of last year. For the
first nine months, these costs increased by $11.5 million, or
5.1%, from the first nine months of a year ago. The increased
cost primarily reflects efforts to generate higher new student
enrollments in all of the Company's educational programs through
improved and more efficient 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. Costs were also recognized for the Deaconess
College of Nursing that were not included in the Company's
financial results last year. Increased new student enrollments,
as described above, 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 third quarter,
amortization expense for finite-lives intangible assets was $2.6
million compared to $3.6 million in the third quarter of a year
ago. For the first nine months, this amortization expense was
$7.7 million compared to $10.9 million last year.
Work force reduction costs included in the Student Services and
Administrative Expense category, as discussed above in Cost of
Educational Services, totaled $0.8 million in the third quarter
of last year and $1.4 million for the first nine months of last
year. There are no corresponding work force reduction programs
or charges in the current year.
Lower expense attributed to share-based awards, as described
above, that is included in the Student Services expense category
helped to partially offset the increases in student recruitment
spending. Share-based award expense in the third quarter was
approximately $0.7 million for the current year, compared to
approximately $0.9 million in the third quarter of last year.
Share-based award expense declined from $3.5 million in the first
nine months of last year to $2.2 million in the first nine months
of this year. In addition, there was less than $0.1 million of
post-employment benefit cost in the first three quarters of this
year relating to agreements with each of the Company's Chairman
and CEO, compared to approximately $1.9 million of expense
accrued for these agreements in the first three quarters of last
year. The required period of active service, over which the
present value cost of these future 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 generated operating
income of approximately $6.7 million in the second quarter,
increasing to $8.5 million in the third quarter. For the first
nine months, this segment had operating income of $15.2 million
compared to $6.8 million last year. The improvement in operating
income was the result of improving enrollments, higher tuition
rates and lower spending described above. The Company realized
additional savings from the consolidation of its 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 three quarters of last year, DeVry University incurred
operating losses of approximately $2.6 million at its Canadian
operation. In the current year, the Canadian operations had a
reduced operating loss of approximately $0.3 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. Revenues and
operating income increased again in the third quarter, up
approximately $4.3 million and $2.7 million, respectively. The
exam review course continues to be updated and improved with good
student response, which, in conjunction with increasing demand
for CPA's by accounting and consulting firms, we believe is
attracting more students than before. Although a small part of
the total segment operations, Stalla Review for the CFA Exam also
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 third quarter
operating income by $3.1 million, or 33.4%, from last year. At
Ross University, which is the dominant portion of this segment,
an increase in student enrollments in January 2006 and tuition
increases combined to produce the higher revenues and operating
income for the quarter and nine months compared to last year even
as faculty, staff and facilities are being added to accommodate
future enrollment growth.
Deaconess College of Nursing contributed approximately $1.5
million of revenue to the segment in the third quarter and
approximately $0.1 million of operating income. Deaconess
College was acquired by the Company in the latter part of fiscal
2005 and its results were not included through this period last
year. At Deaconess, the position of division general manager was
filled to focus on expansion opportunities. Deaconess College of
Nursing has received approval from the State of Ohio to offer
associate and bachelor's degree programs in nursing. The College
plans to co-locate its Ohio programs with the Columbus campus of
DeVry University.
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 appealed this determination and this program now has
conditional approval status pending final approval, and the
program continues to be offered. The State Board decision only
affects the ASN Online
program and does not affect the ASN on-site or other online or on-
site programs. The contribution to revenues and operating income
from the ASN online program is not a material part of the
Company's overall financial results.
Interest Expense
- ----------------
Interest expense on the Company's borrowings in the third quarter
was $2.5 million compared to $2.3 million in the third quarter of
last year. For the first three quarters, interest expense has
increased from $6.4 million last year to $7.8 million this year.
Although borrowings have been 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 this March, the interest rate on the Company's
Revolving Loan was approximately 6.1% compared to 4.30% last
March.
Taxes on Income
- ---------------
Taxes on income for the third quarter of this fiscal year were
26.1% of pre-tax income compared to 23.7% in the third quarter of
last year. The effective tax rate reflects the Company's current
estimates of the proportion of earnings attributable to Ross
University offshore operations compared to Company earnings from
its DeVry University and Becker Professional Review operations
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.
During the third quarter of fiscal 2006, the Internal Revenue
Service began an audit of the Company's consolidated federal
income tax returns for the fiscal years 2003 and 2004 and certain
refund claims for prior years. No deficiencies have been
proposed through the date of this report.
In addition, two states in which the Company has operations have
proposed assessments for prior tax years still open to statute.
The Company believes these proposed assessments to be in error
and is currently appealing both at the respective administrative
levels of appeal. The Company intends to vigorously defend
itself if agreements can not be reached at the current level of
appeal.
Based upon the most current information, the Company believes
that it has sufficient reserves to adequately settle these claims
with no material effect on the Company's results of operations or
liquidity and capital resources should these claims be settled
adversely.
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
34
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 nine months was
$95.4 million, compared to $82.3 million in the same period last
year. Contributing to the higher cash flow was a $13.6 million
increase in net income and an approximately $19.9 million
reduction in accounts receivable, net of increases in the related
Restricted Cash and Provision for Refunds and Uncollectible
Accounts. Partly offsetting these gains was a $7.8 million
reduction in non-cash charges contributing to the higher Net
Income. The lower non-cash charges were for share-based
compensation, depreciation and amortization. Also partly
offsetting some of the higher cash flow was an approximately $5.0
million use of cash compared to last year for changes in levels
of Prepaid Expenses, Accounts Payable and Accrued Expenses.
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.
Capital spending for the first three quarters of fiscal 2006 was
$16.3 million, compared to $30.6 million in the first three
quarters of last year. There are no major capital projects
underway or currently planned. 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, the Company paid $2.0 million for the
acquisition of Gearty CPE and in the third quarter of this year
made the final payment completing the 2005 acquisition of
Deaconess College of Nursing.
During the second quarter of this year, 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 had offered for sale its campus located
in West Hills California. Proceeds from a sale would be used for
general corporate purposes and further debt reduction. DeVry
University plans to continue offering educational programs in the
San Fernando Valley area and is evaluating other new facilities
in the vicinity to meet current and future student demand.
During the first nine months of this fiscal year, the Company
repaid $80 million in borrowings from its revolving loan
agreement using existing cash balances and cash flow generated
from operations. During the first nine months of last year, the
Company repaid a net of $55 million of its borrowings. In April
2006, the Company prepaid without penalty $10 million of its
Senior Note 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.
35
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 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 primary 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.
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 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 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.
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 approximately $66 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 remainder of 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
36
Ross University will not be available for general Company
purposes such as at DeVry University or Becker Professional
Review.
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 should arise that
are similar in size or nature to the acquisition of Ross
University.
Item 3 - Qualitative and Quantitative Disclosures About Market
Risk
------------------------------------------------------
The nature of the Company's operations does not subject it to a
concentration of risk or dependency upon the price levels or
fluctuations in pricing of any one particular or group of
commodities.
The financial position and results of operations of Ross
University's Caribbean operations are measured using the U.S.
dollar as the functional currency. Substantially all Ross
University financial transactions are transacted 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 in Calgary, Alberta.
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 total 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. Increasingly,
DeVry University students receive tuition reimbursement benefits
from their employers but the underlying responsibility for the
tuition payment remains with the student. Becker Professional
Review courses for CPA exam candidates are being sold in
increasing number to the larger, national practice public
accounting firms. The Company believes that the financial
stability of these firms poses little risk of non-payment for
courses taken by employees of these firms.
The Company's cash is held in accounts at various financial
institutions in the United States, Canada and the Caribbean. 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 March 31,
37
2006, a 1.0% increase in short-term interest rates would result
in $1.45 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 changes in interest rates in future periods.
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
in 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.
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 disclosures 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 third quarter and first nine
months 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
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Item 1 - Legal Proceedings
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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 was
stayed pending the outcome of the Gardner matter. The parties
have now reached an agreement in principle and a settlement is in
the process of being finalized and subject to judicial approval.
The Company has accrued $0.75 million representing the estimated
amount agreed upon 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 which the court may attempt to resolve by mediation.
Brigette Dean Hines, a former student of Ross University
Veterinary School of Medicine was dismissed from the school and
denied re-enrollment. The student claims that the dismissal was
based upon her handicap and she is seeking compensatory damages
for economic and non-economic harm, punitive damages, cost of the
suit, attorney's fees and other relief deemed appropriate by the
Court. The Company filed a motion to dismiss the suit. The
Plaintiff has agreed to stay discovery until the motion to
dismiss is denied. Plaintiff has also filed a motion to add an
additional party to the suit.
Sierra Bay Contractors, the contractor that built the student
dormitory building on the DeVry University Fremont, California,
campus has placed a lien on the site and filed a counterclaim to
the Company's claim for contract breach, alleging that the
Company has failed to pay for extra work done in building the
dormitory. In addition, some of the sub-contractors have also
filed liens on the site, seeking additional payments owed to them
by the general contractor. The amount claimed by the general
contractor for the alleged extra work is approximately $2.8
million. Additional costs of construction, if any are owed,
would generally be capitalized as a
39
part of the cost of the building and would not result in any
immediate additional expense. Accordingly, no accrual has been
made for the resolution of this claim.
The total accrual for the resolution of all pending legal claims
at the end of the third quarter was $1.4 million. 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, administrative proceedings, regulatory reviews
and lawsuits will have a material effect on its cash flows,
results of operations or financial position.
Item 1A - Risk Factors
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Potential risks and uncertainties related to various aspects of
the Company's business include, but is 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 to which it does not adequately respond.
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.
Business interruption resulting from inclement weather such as
hurricanes, tornadoes or winter storms that cause school closings
and/or loss of student recruiting opportunities in these regions.
40
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".
41
Item 6 - Exhibits
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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: May 9, 2006 /s/Ronald L. Taylor
-----------------------
Ronald L. Taylor
Chief Executive Officer
Date: May 9, 2006 /s/Norman M. Levine
-------------------------
Norman M. Levine
Senior Vice President and
Chief Financial Officer