10-Q 1 q103.txt FORM 10-Q FOR 1ST QTR FISCAL 2003 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the three month period ended September 30, 2002 Commission file number 0-12751 DeVRY INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-3150143 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Tower Lane, Oakbrook Terrace, Illinois 60181 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) (630) 571-7700 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X --- Number of shares of Common Stock, $0.01 par value, outstanding at October 28, 2002: 69,926,447 Total number of pages: 28 2 DeVRY INC. FORM 10-Q INDEX For the Quarter Ended September 30, 2002 Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets at September 30, 2002, June 30, 2002, and September 30, 2001 3-4 Consolidated Statements of Income for the quarters ended September 30, 2002, and 2001 5 Consolidated Statements of Cash Flows for the three months ended September 30, 2002, and 2001 6 Notes to Consolidated Financial Statements 7-15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16-20 Item 4. Controls and Procedures 21 Part II. Other Information Item 6. Other Information 22 Item 7. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 CERTIFICATIONS 25-28 3 PART I - Financial Information Item 1 - Financial Statements DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, June 30, September 30, 2002 2002 2001 ------------ --------- ------------ (Unaudited) (Unaudited) ASSETS Current Assets Cash and Cash Equivalents $ 97,046 $ 59,685 $ 50,127 Restricted Cash 25,894 19,264 25,060 Accounts Receivable, Net 54,149 26,054 67,936 Inventories 3,347 4,907 3,593 Deferred Income Taxes 5,448 5,448 5,221 Prepaid Expenses and Other 4,176 2,469 5,211 -------- -------- -------- Total Current Assets 190,060 117,827 157,148 -------- -------- -------- Land, Buildings and Equipment Land 58,937 58,928 58,881 Buildings 174,890 174,344 169,190 Equipment 179,503 173,115 151,865 Construction In Progress 823 1,626 2,937 -------- -------- -------- 414,153 408,013 382,873 Accumulated Depreciation (155,231) (150,386) (127,899) -------- -------- -------- Land, Buildings and Equipment, Net 258,922 257,627 254,974 -------- -------- -------- Other Assets Intangible Assets, Net 35,510 35,692 31,881 Goodwill 42,391 42,391 46,825 Deferred Income Taxes 1,504 1,801 3,955 Perkins Program Fund, Net 10,617 10,180 9,858 Other Assets 2,084 2,110 2,312 -------- -------- -------- Total Other Assets 92,106 92,174 94,831 -------- -------- -------- TOTAL ASSETS $541,088 $467,628 $506,953 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
September 30, June 30, September 30, 2002 2002 2001 ------------ --------- ------------ (Unaudited) (Unaudited) LIABILITIES Current Liabilities Accounts Payable $ 30,173 $ 36,284 $ 36,446 Accrued Salaries, Wages & Benefits 35,983 27,595 30,159 Accrued Expenses 20,522 11,643 18,462 Advance Tuition Payments 12,893 15,883 8,078 Deferred Tuition Revenue 66,336 12,287 62,817 -------- -------- -------- Total Current Liabilities 165,907 103,692 155,962 -------- -------- -------- Other Liabilities Revolving Loan - - 40,000 Deferred Rent and Other 10,593 10,390 12,290 -------- -------- -------- Total Other Liabilities 10,593 10,390 52,290 -------- -------- -------- TOTAL LIABILITIES 176,500 114,082 208,252 -------- -------- -------- SHAREHOLDERS' EQUITY Common Stock, $0.01 par value, 200,000,000 Shares Authorized, 69,922,793, 69,898,540 and 69,791,039, Shares Issued and Outstanding at September 30, 2002, June 30, 2002 and September 30, 2001, Respectively 700 700 698 Additional Paid-in Capital 66,478 66,345 64,773 Retained Earnings 296,983 285,827 232,850 Accumulated Other Comprehensive Income 427 674 380 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 364,588 353,546 298,701 -------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $541,088 $467,628 $506,953 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 DEVRY INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Except for Per Share Amounts) (Unaudited)
For The Quarter Ended September 30, 2002 2001 -------- -------- REVENUES: Tuition $151,155 $144,759 Other Educational 12,029 9,681 Interest 85 192 ------- ------- Total Revenues 163,269 154,632 ------- ------- COSTS AND EXPENSES: Cost of Educational Services 92,171 83,127 Student Services and Administrative Expense 52,457 48,116 Interest Expense 47 310 ------- ------- Total Costs and Expenses 144,675 131,553 ------- ------- Income Before Income Taxes 18,594 23,079 Income Tax Provision 7,438 9,001 ------- ------- NET INCOME $ 11,156 $ 14,078 ======= ======= EARNINGS PER COMMON SHARE Basic $0.16 $0.20 ===== ===== Diluted $0.16 $0.20 ===== =====
The accompanying notes are an integral part of these consolidated financial statements. 6 DEVRY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
For The Quarter Ended September 30, 2002 2001 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $11,156 $14,078 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 8,603 7,510 Amortization of Intangible Assets 182 146 Amortization of Other Assets 10 11 Provision for Refunds and Uncollectible Accounts 9,034 8,530 Deferred Income Taxes 297 703 Loss on Disposals and Adjustments to Land, Buildings and Equipment 146 199 Changes in Assets and Liabilities: Restricted Cash (6,630) (4,576) Accounts Receivable (37,013) (50,773) Inventories 1,560 1,306 Prepaid Expenses And Other (2,041) (2,534) Accounts Payable (6,111) 1,873 Accrued Salaries, Wages, Expenses and Benefits 17,267 13,948 Advance Tuition Payments (2,990) (6,101) Deferred Tuition Revenue 54,049 51,860 ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 47,519 36,180 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (10,044) (55,218) ------ ------ NET CASH USED IN INVESTING ACTIVITIES: (10,044) (55,218) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Exercise of Stock Options 133 292 Proceeds From Revolving Credit Facility - 55,000 Repayments Under Revolving Credit Facility - (15,000) ------ ------ NET CASH PROVIDED BY FINANCING ACTIVITIES 133 40,292 Effects of Exchange Rate Differences (247) (340) ------ ------ NET INCREASE IN CASH AND CASH EQUIVALENTS 37,361 20,914 Cash and Cash Equivalents at Beginning of Period 59,685 29,213 ------ ------ Cash and Cash Equivalents at End of Period $97,046 $50,127 ====== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid During the Period $49 $ 250 Income Tax Payments During the Period, Net 30 1,600
The accompanying notes are an integral part of these consolidated financial statements. 7 DEVRY INC. Notes to Consolidated Financial Statements For the Quarter Ended September 30, 2002 ---------- NOTE 1: INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements include the accounts of DeVry Inc. (the Company) and its wholly-owned subsidiaries. These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial condition and results of operations of the Company. The June 30, 2002 data which is presented is derived from audited financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the fiscal year ended June 30, 2002. The results of operations for the three months ended September 30, 2002, are not necessarily indicative of results to be expected for the entire fiscal year. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents ------------------------- Included in the reported cash balance is $17.7, $17.2 million and $16.4 million at September 30, 2002, June 30, 2002 and September 30, 2001, respectively, for checks issued but not yet cleared through the Company's bank accounts. These amounts are also included in accounts payable. Intangible Assets and Goodwill ------------------------------ Intangible assets relate mainly to acquired business operations. These assets consist of the fair value of certain identifiable assets acquired. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed. Goodwill and indefinite lived intangibles are reviewed annually for impairment, or more frequently if circumstances arise indicating impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the "implied fair value" of the reporting unit goodwill is less than the carrying amount of the goodwill. For indefinite lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. Amortization of intangible assets with finite lives will continue over the expected economic lives of the intangible assets, generally six to 15 years. Amortization of all intangible assets and goodwill is being deducted for tax reporting purposes over statutory lives. 8 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Internal Software Development Costs ----------------------------------- The Company capitalizes certain internal software development costs that are amortized using the straight line method over the estimated lives of the software not to exceed five years. Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal- use software and payroll and payroll related costs for employees who are directly associated with the internal software development project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized software development costs for projects not yet complete, which are included as Equipment in the Land, Buildings and Equipment section of the Consolidated Balance Sheets, were $8,500,000, $6,862,000 and $3,346,000 as of September 30, 2002, June 30, 2002 and September 30, 2001, respectively. Earnings Per Common Share ------------------------- Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Shares used in this computation were 69,910,000 and 69,778,000 for the first quarters ended September, 2002 and 2001, respectively. Diluted earnings per share is computed by dividing net income by the weighted average number of shares assuming dilution. Dilutive shares reflect the additional shares that would be outstanding if dilutive stock options were exercised during the period. Shares used in this computation were 70,323,000 and 70,711,000 for the first quarters ended September 30, 2002 and 2001, respectively. Excluded from the September 30, 2002 and 2001 computations of diluted earnings per share were options to purchase 1,358,000 and 42,000 shares of common stock, respectively. These outstanding options were excluded because the option exercise prices were greater than the average market price of the common shares and therefore, their effect would be anti-dilutive. Stock-based Compensation ------------------------ In July and August 2002, the Company granted options to purchase up to 402,000 shares of the Company's common stock under the 1999 Stock Incentive Plan. Comprehensive Income -------------------- The Company's only item that meets the definition for adjustment to arrive at Comprehensive Income is the change in cumulative translation adjustment. This change was immaterial for the quarter ended September 30, 2002 and 2001. Reclassifications ----------------- Certain previously reported amounts have been reclassified to conform to current presentation format, with no effect on reported net income. 9 NOTE 3: INTANGIBLE ASSETS Intangible assets consist of the following: As of September 30, 2002 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $2,600,000 $(1,372,000) Class Materials 2,900,000 (350,000) Other 600,000 (325,000) --------- --------- Total $6,100,000 $(2,047,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 15,872,000 Intellectual Property 13,940,000 ---------- Total $31,457,000 ========== As of June 30, 2002 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $2,600,000 $(1,265,000) Class Materials 2,900,000 (300,000) Other 600,000 (300,000) --------- --------- Total $6,100,000 $(1,865,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 15,872,000 Intellectual Property 13,940,000 ---------- Total $31,457,000 ========== 10 NOTE 3: INTANGIBLE ASSETS, continued As of September 30, 2001 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $2,500,000 $ (941,000) Class Materials 500,000 (110,000) Other 600,000 (225,000) --------- --------- Total $3,600,000 $(1,276,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 13,972,000 Intellectual Property 13,940,000 ---------- Total $29,557,000 ========== Amortization expense for amortized intangible assets was $182,000 and $146,000 for the three months ended September 30, 2002 and 2001, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ended June 30, is as follows: Fiscal Year 2003 $730,000 2004 730,000 2005 730,000 2006 230,000 2007 210,000 The original weighted-average amortization period for amortized intangible assets is six years for License and Non Compete Agreements, 14 years for Class Materials and six years for Other as of September 30, 2002. Indefinite lived intangible assets related to Trademarks, Trade Names and Intellectual Property are not amortized as there is no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity. As of the end of fiscal 2002, there was no impairment loss associated with these indefinite lived intangible assets as fair value exceeded the carrying amount. 11 NOTE 3: INTANGIBLE ASSETS, continued Based upon the valuation analysis performed for the Company by independent professional valuation specialists, there was no impairment in the value of the Company's goodwill for any reporting units as of the end of fiscal 2002. The carrying amount of goodwill related to the DeVry University reportable segment at September 30, 2002 and 2001 was unchanged at $22,195,000. The carrying amount of goodwill related to Professional and Training reportable segment was $24,630,000 at September 30, 2001 and $20,196,000 at September 30, 2002. The decrease is the result of the finalization of the allocation of the Stalla Seminars ("Stalla") purchase price as described below. During fiscal 2002, the Company finalized the allocation of the purchase price of Stalla. The goodwill from this acquisition that was recorded at June 30, 2001, was reduced by $4,434,000 and reallocated as follows: Amortized Intangible Assets: Class Materials $2,400,000 Non-compete Agreement 100,000 Other 34,000 --------- Total $2,534,000 ========= Unamortized Indefinite-Lived Intangible Assets: Trade Name $1,900,000 ========= The $34,000 of Other amortized intangible assets was subsequently written-off to expense as a part of the allocation process. NOTE 4: SEGMENT INFORMATION The Company's principal business is providing post-secondary education. The services of our operations are described in more detail under "Nature of Operations" in Note 1 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. The Company presents two reportable segments: the DeVry University undergraduate and graduate operations (DeVry University) and the professional examination review and training operations including Becker Conviser Professional Review and Center for Corporate Education (Professional and Training). 12 NOTE 4: SEGMENT INFORMATION, continued These segments are based on the method by which management evaluates performance and allocates resources. Such decisions are based upon each segment's operating income, which is defined as income before interest expense, amortization and income taxes. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are the same as those described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. The segments as described above have changed from those previously reported. In February 2002, the Higher Learning Commission of the North Central Association approved the merger of DeVry Institutes (undergraduate programs) and Keller Graduate School of Management (graduate programs) into a single educational institution with the name of DeVry University. The North Central Association is one of six regional bodies that make up the nation's system for accrediting colleges and universities. In support of the transition to DeVry University, the Company's resources and organization have been restructured to better serve the needs of its students, employers and shareholders and achieve the University's strategic goals. Accordingly, the reportable segments of the Company have been realigned to reflect this combination. The consistent measure of segment profit excludes interest expense, amortization and certain corporate related depreciation. As such, these items are reconciling items in arriving at income before income taxes. The consistent measure of segment assets excludes deferred income tax assets and certain depreciable corporate assets. Additions to long-lived assets have been measured in this same manner. Reconciling items are included as corporate assets. 13 NOTE 4: SEGMENT INFORMATION, continued Following is a tabulation of business segment information for the periods ended September 30, 2002 and 2001. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements.
For the Quarter Ended September 30, --------------------------- 2002 2001 ---- ---- Revenues: DeVry University $154,458,000 $146,257,000 Professional and Training 8,811,000 8,375,000 -------------------------- Total Consolidated Revenues $163,269,000 $154,632,000 -------------------------- Operating Income: DeVry University $17,086,000 $21,525,000 Professional and Training 1,927,000 2,188,000 Reconciling Items: Amortization Expense (192,000) (157,000) Interest Expense (47,000) (310,000) Depreciation and Other (180,000) (167,000) -------------------------- Total Consolidated Income before Income Taxes $18,594,000 $23,079,000 -------------------------- Segment Assets: DeVry University $447,276,000 $416,406,000 Professional and Training 74,754,000 68,490,000 Corporate 19,058,000 22,057,000 -------------------------- Total Consolidated Assets $541,088,000 $506,953,000 -------------------------- Additions to Long-lived Assets: DeVry University $10,030,000 $54,969,000 Professional and Training 14,000 249,000 -------------------------- Total Consolidated Additions to Long-lived Assets $10,044,000 $55,218,000 -------------------------- Depreciation Expense: DeVry University $8,314,000 $7,196,000 Professional and Training 94,000 121,000 Corporate 195,000 193,000 -------------------------- Total Consolidated Depreciation $8,603,000 $7,510,000 -------------------------- Amortization Expense: DeVry University $ 8,000 $ 8,000 Professional and Training 184,000 149,000 -------------------------- Total Consolidated Amortization $192,000 $157,000 --------------------------
14 NOTE 4: SEGMENT INFORMATION, continued The Company conducts its educational operations in the United States, Canada, Europe, the Middle East and the Pacific Rim. International revenues, which are derived principally from Canada, were less than 5% of total revenues for the periods ended September 30, 2002 and 2001. Revenues and long-lived assets by geographic area are as follows:
For the Quarter Ended September 30, --------------------------- 2002 2001 --------------------------- Revenues from Unaffiliated Customers: Domestic Operations $158,281,000 $148,233,000 International Operations 4,988,000 6,399,000 -------------------------- Consolidated $163,269,000 $154,632,000 ========================== Long-lived Assets: Domestic Operations $341,467,000 $338,909,000 International Operations 9,561,000 10,896,000 -------------------------- Consolidated $351,028,000 $349,805,000 ==========================
No one customer accounted for more than 10% of the Company's consolidated revenues. NOTE 5: COMMITMENTS AND CONTINGENCIES The Company is subject to occasional lawsuits, regulatory reviews associated with financial assistance programs and claims arising in the normal conduct of its business. These are described in "Item 5 - Other Information" later in this report. The Company has accrued amounts it believes are appropriate to vigorously pursue its defense in these matters. At this time, the Company does not believe that the outcome of current claims, regulatory reviews and lawsuits will have a material effect on its results of operations or financial position. The following updates the status of litigation and claims previously disclosed: In March 2002, the Company received notice of a class-action complaint filed under the Fair Labor Standards Act by several former field sales representatives seeking overtime compensation for services rendered during their period of employment. 15 NOTE 5: COMMITMENTS AND CONTINGENCIES, continued In January 2002, the Company received notice of an antitrust complaint concerning the alleged monopoly by operations of its Becker CPA Review Corp. subsidiary in California. This complaint was filed in federal district court by the trustee in bankruptcy of a failed CPA review provider seeking a substantial amount of damages. On April 15, 2002, this complaint was voluntarily dismissed by the plaintiff without prejudice. The complaint was amended and has subsequently been refiled. In January 2002, a graduate of one of DeVry University's Los Angeles-area campuses filed a class-action complaint on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In November 2000, three 1999 graduates of one of DeVry University's Chicago- area campuses filed a class-action complaint that alleges DeVry graduates do not have appropriate skills for employability in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and refiled, this time including a student from a second Chicago- area campus. The Company has recorded approximately $1 million associated with estimated loss contingencies at June 30, 2002. While the ultimate outcome of these contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect to these claims. In conjunction with the required annual review procedures for fiscal year 2001 related to its administration of financial aid programs under the Ontario Student Aid Program, the Toronto-area DeVry campuses engaged in discussions with the Ontario Ministry of Education relating to certain additional information requirements. These additional information requirements could be interpreted as the basis for a Ministry claim for the return of some amounts of financial aid disbursed to students attending these campuses. Discussions with the Ministry as to the extent and purpose of the information requirements resulted in the submission of additional data. Based upon its discussions to-date, the Company believes that its discussions with the Ministry with respect to these requests have been successfully concluded and that there should be no monetary liability. 16 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition ---------------------------------------------------------------------- Certain information contained in this quarterly report may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current expectations and beliefs about future events. Such statements are inherently uncertain and may involve risks that could cause future results to differ materially from the forward-looking statements. Potential risks and uncertainties include, but are not limited to, undergraduate program concentration in selected areas of technology, dependence on student financial aid, dependence on state and provincial approvals and licensing requirements, dependence on continued accreditation for DeVry University and other factors detailed in the Company's Securities and Exchange Commission filings, including those discussed under the heading entitled "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333- 22457). The following discussion of the Company's results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto as included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2002. The Company's annual report on Form 10-K includes a description of significant accounting policies and estimates and assumptions used in the preparation of the Company's financial statements including, but not limited to, revenue recognition, useful lives of equipment and facilities, useful lives of acquired finite-lived intangible assets, valuation of goodwill and indefinite-lived intangible assets, losses on the collection of student receivable balances, settlements of law suits and health care costs for incurred but not yet paid medical services. Because of the somewhat seasonal pattern of the Company's enrollments and its educational program starting dates, which affect the results of operations and the timing of cash inflows, the Company's management believes that comparisons of its results of operations should be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding interim quarterly period in the preceding year. Copies of the Company's annual and quarterly reports on Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission may be obtained at the Company's website, www.devry.com. Results of Operations --------------------- The Company's total consolidated revenues increased by $8.6 million, or 5.6%, compared to the first quarter of last year. Tuition revenue, which is the largest component of revenue representing over 92% of total revenue, increased by 4.4% because of higher enrollments in DeVry University's graduate programs and Becker Conviser Professional Review plus tuition increases in all of the Company's operations compared to last year. 17 Other Educational Revenues, which are composed primarily of the sale of books, supplies, fee charges and interest or payment deferral charges in the Company's educational programs, increased by $2.3 million, or 24.2%, from last year primarily because of the Technology and Software Supplies charge billed each term to most DeVry University undergraduate students. This charge was first assessed last November to provide undergraduate students with current technology in their classrooms and laboratories and to provide them with their own suite of software so that when they graduate they have both current software and technology expertise. At the start of the current fiscal year, a total of 13 of the DeVry University undergraduate campus bookstores were outsourced to Follett compared to 11 at the start of last year. Sales of books and supplies at the remaining stores managed by the Company were almost unchanged from the previous year. DeVry University segment revenues increased by $8.2 million, or 5.6%, because higher graduate program enrollments, the undergraduate program Technology and Software Supplies charge and approximately 6% tuition rate increases compared to last year more than offset the lower enrollment in undergraduate programs. For the undergraduate academic term which began in July, total enrollment declined by 4.1% to 43,342 compared to 45,204 last year while the number of coursetakers in graduate school programs for the academic term that began in June increased by 22.8% to 8,209 vs. 6,683 last year. Professional and Training segment revenues increased by $0.4 million, or 5.2%, from last year because of a price increase and an increased number of students enrolled in the Becker Conviser CPA Review course in preparation for the November CPA examination. The Company's Cost of Educational Services increased by $9.0 million, or 10.9%, from last year. Cost increases were incurred throughout all of the Company's operations. In particular, at DeVry University there were two new undergraduate campus locations and six more graduate teaching centers in operation than at the start of the previous year. Also, expanded operations in the undergraduate online and University Center programs contributed to the increased costs. Depreciation expense, most of which is included in Cost of Educational Services, increased by $0.9 million in connection with the new facilities and their associated equipment plus the depreciation on improvements to existing facilities and new equipment required to support the Company's educational programs. Student Services and Administrative Expense increased by $4.3 million, or 9.0%, from the first quarter of last year. Increased advertising, particularly for DeVry University's undergraduate programs contributed to the increase in this expense category. The increased advertising was directed at reversing the decline in new student enrollments during the previous three terms by creating new and improved advertising messages and increasing the frequency at which such ads are run. Also contributing to the increases in this expense category was the continued spending on a new student information system to provide better support for educational processes and related activities. Information system development costs related to this project, and to other system support and improvement initiatives, have increased from last year. In accordance with accounting principles for internal software development costs, certain 18 wage and outside consulting service costs are being capitalized. During the quarter, the Company capitalized $1.7 million while charging $1.4 million directly to expense and amortizing $0.1 million of previously capitalized expense. The total Cost of Educational Services and Student Services and Administrative Expense increased from last year by 10.2% for reasons explained above. This increase in spending vs. the prior year is the smallest rate of increase in seven of the last eight quarters as the Company initiated staff and budget reductions to better match expenses to revenues. During the quarter, the Company eliminated about 70 staffed and 100 unfilled positions and further reduced discretionary spending. Reduced spending from these actions will benefit future periods and help offset a portion of the cost increases associated with the previously discussed new DeVry University undergraduate campuses and graduate teaching centers opened during the past year. In the DeVry University segment, operating income declined by $4.4 million, or 20.6%. Contributing to the decline in income was a rate of revenue growth that was less than revenue growth rates in previous years as total summer term undergraduate enrollments were lower than last year. Expenses, as described above, affected by both higher levels of advertising and the added costs of geographic expansion, increased at a faster rate than the rate of revenue growth. In the Professional and Training segment, operating income declined by $0.3 million as higher course delivery costs more than offset the increase in revenues. For the balance of the year, however, the Company does not believe that operating income in this segment will be below the level of the prior year. Interest expense was $0.2 million less than last year as there were no borrowings under the Company's revolving line of credit agreement in the first quarter of this year compared to last year when there were borrowings during the entire first quarter, principally to provide funds for the first quarter acquisition of two DeVry University undergraduate campuses. Taxes on income for the quarter were 40.0% compared to 39.0% during the first quarter of last year. The higher rate reflects an increase in the weighted average state income tax rate on the Company's U.S. operations caused by changes in the rules by which taxable income is determined in some states and because of a higher relative proportion of U.S. vs. foreign based income compared to last year. Net income for the quarter was $11.2 million, or $0.16 per share, compared to $14.1 million, or $0.20 per share last year. Liquidity and Capital Resources ------------------------------- Cash generated from operations reached $47.5 million in the first quarter, an increase of $11.3 million or more than 31%, from the first quarter of last year. Higher non-cash charges for depreciation, refunds and bad debt, plus lower levels of accounts receivable more than offset lower net income in the quarter, which declined $2.9 million from last 19 year. The reduction in accounts receivable is primarily attributable to an approximately $9.1 million reduction in the amount of money owed to DeVry University under various state and federal financial aid programs as a result of improved financial aid application processing and more timely requests for the funds owed. Approximately 65% of the collections of U.S undergraduate revenues come from federal and state financial aid programs. Also contributing to the reduced level of accounts receivable was an improved collection performance on amounts owed by undergraduate students who were attending the academic term that began in July. Capital spending for the quarter was $10.0 million, compared to $55.2 million in the first quarter of last year. Included in the capital spending during last year's first quarter was the purchase of two DeVry University undergraduate campuses, one in Pomona, California, and the other in Addison, Illinois, for $37.8 million. Previously, these campuses had been occupied under lease. Both operating and capital expenditures are under review to better match spending to revenues in the coming quarters. Capital spending for the balance of the year is expected to remain at levels significantly below the record $85.9 million spending level of fiscal 2002. The Company did not make any borrowings under its revolving line of credit agreement during the first quarter. Cash balances at the end of last fiscal year and cash generated from operations during the first quarter were sufficient to meet requirements for both operating and capital needs. There were approximately $2.7 million in outstanding letters of credit under the revolving line during the quarter. These were issued in conjunction with DeVry University's participation in federal financial aid programs, various insurance coverage policies and a rental agreement on a leased teaching facility. The Company's long-term contractual obligations consist only of its revolving line of credit, operating leases on facilities and equipment and agreements for various services. The Company is not otherwise a party to any off-balance sheet financing or contingent payment arrangements. The Company has not entered into any synthetic leases and there are no residual purchase or value commitments related to any lease. The Company has not entered into any derivative, swap, futures contract, put, call, hedge or non-exchange traded contract. The principal source of the Company's liquidity is its operating cash flow that is significantly dependent upon DeVry University's participation in and compliance with federal, state and provincial financial aid programs. The Company is highly dependent upon the timely receipt of these financial aid funds in both its U.S. and Canadian operations. The Company estimates that almost 70% or its undergraduate student and approximately 40% of its graduate student tuition, bookstore and fee revenues have been financed by government-provided financial aid to students. These financial aid and assistance programs are subject to political and governmental budgetary considerations. There is no assurance that such funding will be maintained. In conjunction with the required annual review procedures for fiscal year 2001 related to its administration of financial aid programs under the Ontario Student Aid Program, the Toronto-area DeVry campuses have engaged in discussions with the Ontario Ministry of Education relating to certain 20 additional information requirements. These additional information requirements could be interpreted as the basis for a Ministry claim for the return of some amounts of financial aid disbursed to students attending these campuses. Based upon its discussions with the Ministry to-date as to the purpose of the information requirements, the Company has provided to the Ministry certain additional information and believes that there will be no further action with respect to funds disbursed to students in prior years. The Company believes that its discussions with the Ministry have been successfully concluded and that there should be no monetary liability related to this issue. The Company believes that current balances of unrestricted cash, cash generated from operations and, if needed, borrowings under its revolving loan facility will be sufficient to fund its current operations and plans for the foreseeable future. 21 Item 4 - Controls and Procedures -------------------------------- The Company's Chief Executive Officer and its Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and internal control procedures upon which these financial statements and management discussion are based. This review was made within 90 days of the filing date of this quarterly report. Based upon this evaluation, and with the participation of management, the above named officers have concluded that these controls and procedures are effective and appropriate to ensure the correctness and completeness of this report. There were no significant changes in internal controls, procedures or other factors that could significantly affect these controls subsequent to the date of their evaluation that would indicate the existence of a material weakness or the need for corrective action. 22 Item 6 - Other Information -------------------------- On October 16th, 2002, Dr. Ewen Akin, a member of the Company's Board of Directors since 1997, passed away. Dr. Akin was a member of the Company's Audit Committee and chairman of its Academic Committee. His presence and participation will be missed. The following updates the status of litigation and claims previously disclosed: In March 2002, the Company received notice of a class-action complaint filed under the Fair Labor Standards Act by several former field sales representatives seeking overtime compensation for services rendered during their period of employment. In January 2002, the Company received notice of an antitrust complaint concerning the alleged monopoly by operations of its Becker CPA Review Corp. subsidiary in California. This complaint was filed in federal district court by the trustee in bankruptcy of a failed CPA review provider seeking a substantial amount of damages. On April 15, 2002, this complaint was voluntarily dismissed by the plaintiff without prejudice. The complaint was amended and has subsequently been refiled. In January 2002, a graduate of one of DeVry University's Los Angeles-area campuses filed a class-action complaint on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In November 2000, three 1999 graduates of one of DeVry University's Chicago-area campuses filed a class-action complaint that alleges DeVry graduates do not have appropriate skills for employability in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and refiled, this time including a student from a second Chicago-area campus. The Company has recorded approximately $1 million associated with estimated loss contingencies at June 30, 2002. While the ultimate outcome of these contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect to these claims. In conjunction with the required annual review procedures for fiscal year 2001 related to its administration of financial aid programs under the Ontario Student Aid Program, the Toronto-area DeVry campuses engaged in discussions with the Ontario Ministry of Education relating to certain additional information requirements. These additional information requirements could be interpreted as the basis for a Ministry claim for the return of some amounts of financial aid disbursed to students attending these campuses. Discussions with the Ministry as to the extent and purpose of the information requirements resulted in the submission of additional data. Based upon its discussions to-date, the Company believes that its discussions with the Ministry with respect to these requests have been successfully concluded and that there should be no monetary liability. 23 Item 7 - Exhibits and Reports on Form 8-K ----------------------------------------- (b) Reports on Form 8-K On October 4th, 2002, the Company filed a report on Form 8-K, including as an exhibit its press release of October 3, 2002, announcing that expected first quarter earnings would be between $0.13 and $0.16 per share, which was lower than analyst consensus earnings estimates. 24 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 6, 2002 /s/Ronald L. Taylor ----------------------------- Ronald L. Taylor President and Chief Operating Officer Date: November 6, 2002 /s/Norman M. Levine ----------------------------- Norman M. Levine Senior Vice President Finance and Chief Financial Officer 25 CERTIFICATIONS -------------- I, Norman M. Levine, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DeVry Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 26 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 ---------------- /s/Norman M.Levine ----------------------- Senior Vice President & Chief Financial Officer 27 CERTIFICATIONS -------------- I, Dennis J. Keller, certify that: 1. I have reviewed this quarterly report on Form 10-K of DeVry Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 28 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 ---------------- /s/Dennis J. Keller ---------------------------- Chairman and Chief Executive Officer