-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITl70r5EAEdHsNgF+Knn8sHQ1OZCgQVuDu+3GB8YrgYk0xhvnYSb1ApvJQCfOexK KK1atxn0sKA/abIyjcujBw== 0000730464-04-000004.txt : 20040210 0000730464-04-000004.hdr.sgml : 20040210 20040210124119 ACCESSION NUMBER: 0000730464-04-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEVRY INC CENTRAL INDEX KEY: 0000730464 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 363150143 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13988 FILM NUMBER: 04580789 BUSINESS ADDRESS: STREET 1: ONE TOWER LN STREET 2: SUITE 1000 CITY: OAKBROOK TERRACE STATE: IL ZIP: 60181 BUSINESS PHONE: 6305717700 MAIL ADDRESS: STREET 1: ONE TOWER LANE CITY: OAKBROOK STATE: IL ZIP: 60181 10-Q 1 q204.txt 2ND QUARTER FISCAL 2004 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly and six month period ended December 31, 2003 Commission file number 1-13988 DeVRY INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 36-3150143 - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Tower Lane, Oakbrook Terrace, Illinois 60181 - -------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (630) 571-7700 --------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X Number of shares of Common Stock, $0.01 par value, outstanding on January 30, 2004: 70,098,104 Total number of pages: 40 2 DeVRY INC. ---------- FORM 10-Q INDEX For the Quarter and Six Months Ended December 31, 2003 Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets at December 31, 2003, June 30, 2003, and December 31, 2002 3-4 Consolidated Statements of Income for the quarter and six months ended December 31, 2003 and 2002 5 Consolidated Statements of Cash Flows for the six months ended December 31, 2003 and 2002 6 Notes to Consolidated Financial Statements 7-21 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 22-28 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28-29 Item 4. Controls and Procedures 29 Part II. Other Information Item 1. Legal Proceedings 30 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33 3 PART I - Financial Information Item 1 - Financial Statements DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
December 31, June 30, December 31 2003 2003 2002 ------------ ------------ ------------ (Unaudited) (Unaudited) ASSETS Current Assets Cash and Cash Equivalents $126,417 $108,699 $134,575 Restricted Cash 21,476 14,052 41,173 Accounts Receivable, Net 75,705 24,275 46,845 Inventories 2,241 4,315 3,022 Prepaid Income Taxes - - 11,101 Deferred Income Taxes 9,944 11,358 5,448 Prepaid Expenses and Other 7,963 6,988 4,036 ------- ------- ------- Total Current Assets 243,746 169,687 246,200 ------- ------- ------- Land, Buildings and Equipment Land 60,300 59,888 58,936 Buildings 198,428 188,320 175,564 Equipment 216,753 207,405 188,842 Construction In Progress 3,198 12,662 989 ------- ------- ------- 478,679 468,275 424,331 Accumulated Depreciation (197,046) (182,921) (165,391) ------- ------- ------- Land, Buildings and Equipment, Net 281,633 285,354 258,940 ------- ------- ------- Other Assets Intangible Assets, Net 93,091 103,330 35,330 Goodwill 285,670 280,979 42,391 Perkins Program Fund, Net 11,861 11,291 10,617 Other Assets 5,264 6,003 2,007 ------- ------- ------- Total Other Assets 395,886 401,603 90,345 ------- ------- ------- TOTAL ASSETS $921,265 $856,644 $595,485 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
December 31, June 30, December 31 2003 2003 2002 ------------ ------------ ------------ (Unaudited) (Unaudited) LIABILITIES Current Liabilities Current Maturities of Revolving Loan $ - $ 15,000 $ - Accounts Payable 35,714 34,094 31,285 Accrued Salaries, Wages & Benefits 31,759 30,791 31,288 Accrued Expenses 20,310 31,767 11,945 Advance Tuition Payments 6,546 10,568 19,211 Deferred Tuition Revenue 116,021 16,291 97,355 ------- ------- ------- Total Current Liabilities 210,350 138,511 191,084 ------- ------- ------- Non-Current Liabilities Revolving Loan 115,000 150,000 - Senior Debt 125,000 125,000 - Deferred Income Taxes 13,432 13,049 4,888 Deferred Rent and Other 15,196 14,417 11,849 ------- ------- ------- Total Non-Current Liabilities 268,628 302,466 16,737 ------- ------- ------- TOTAL LIABILITIES 478,978 440,977 207,821 ------- ------- ------- SHAREHOLDERS' EQUITY Common Stock, $0.01 par value, 200,000,000 Shares Authorized, 70,058,125, 70,021,513 and 69,928,447, Shares Issued and Outstanding at December 31, 2003, June 30, 2003 and December 31, 2002, Respectively 701 701 700 Additional Paid-in Capital 67,906 67,288 66,481 Retained Earnings 373,045 346,975 319,934 Accumulated Other Comprehensive Income 635 703 549 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY 442,287 415,667 387,664 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $921,265 $856,644 $595,485 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 DEVRY INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Except for Per Share Amounts) (Unaudited)
For The Quarter For The Six Months Ended December 31, Ended December 31, --------------------- ---------------------- 2003 2002 2003 2002 --------------------- ---------------------- REVENUES: Tuition $187,286 $159,159 $364,880 $310,314 Other Educational 11,479 13,272 23,064 25,301 Interest 41 117 98 202 ------- ------- ------- ------- Total Revenues 198,806 172,548 388,042 335,817 ------- ------- ------- ------- COSTS AND EXPENSES: Cost of Educational Services 104,635 93,480 209,085 185,651 Student Services and Administrative Expense 70,156 55,271 138,105 107,728 Interest Expense 1,972 47 4,128 94 ------- ------- ------- ------- Total Costs and Expenses 176,763 148,798 351,318 293,473 ------- ------- ------- ------- Income Before Income Taxes 22,043 23,750 36,724 42,344 Income Tax Provision 6,465 8,949 10,654 16,387 Non-Recurring Tax Benefits - (8,150) - (8,150) ------- ------- ------- ------- NET INCOME $ 15,578 $ 22,951 $ 26,070 $ 34,107 ======= ======= ======= ======= EARNINGS PER COMMON SHARE Basic $0.22 $0.33 $0.37 $0.49 ===== ===== ===== ===== Diluted $0.22 $0.33 $0.37 $0.49 ===== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements. 6 DEVRY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
For The Six Months Ended December 31, 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 26,070 $ 34,107 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 19,667 18,666 Amortization of Intangible Assets 6,769 362 Amortization of Other Assets 527 22 Provision for Refunds and Uncollectible Accounts 17,461 17,931 Deferred Income Taxes 1,797 6,689 Loss on Disposals of Land, Buildings and Equipment 147 128 Changes in Assets and Liabilities: Restricted Cash (7,424) (21,909) Accounts Receivable (68,891) (38,606) Inventories 2,074 1,885 Prepaid Expenses And Other (632) (11,681) Accounts Payable 1,620 (4,999) Accrued Salaries, Wages, Expenses and Benefits (10,489) 3,995 Advance Tuition Payments (4,022) 3,328 Deferred Tuition Revenue 99,730 85,068 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 84,404 94,986 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (16,093) (20,107) Payments for Purchases of Businesses, net of Cash Acquired (1,143) - ------- ------- NET CASH USED IN INVESTING ACTIVITIES: (17,236) (20,107) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Exercise of Stock Options 618 136 Repayments Under Revolving Credit Facility (50,000) - ------- ------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (49,382) 136 Effects of Exchange Rate Differences (68) (125) ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 17,718 74,890 Cash and Cash Equivalents at Beginning of Period 108,699 59,685 ------- ------- Cash and Cash Equivalents at End of Period $126,417 $134,575 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid During the Period $3,923 $93 Income Tax Payments During the Period, Net 21,729 14,552
The accompanying notes are an integral part of these consolidated financial statements. 7 DEVRY INC. Notes to Consolidated Financial Statements For the Quarter and Six Months Ended December 31, 2003 ---------- NOTE 1: INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements include the accounts of DeVry Inc. (the Company) and its wholly-owned subsidiaries. These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial condition and results of operations of the Company. The June 30, 2003 data, which is presented, is derived from audited financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003 and in conjunction with the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003, each as filed with the Securities and Exchange Commission. The results of operations for the six months ended December 31, 2003, 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 accounts payable balance is $20.3, $15.2 and $18.4 million at December 31, 2003, June 30, 2003 and December 31, 2002, respectively, for checks issued but not yet cleared through the Company's bank accounts. 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. 8 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Derivative Instruments and Hedging Activities, continued - -------------------------------------------------------- During the first quarter of fiscal 2004, the Company entered into several interest rate cap agreements to protect approximately $100,000,000 of its current borrowings from sharp increases in short-term interest rates upon which its borrowings are based. The Company intends to periodically evaluate the need for interest rate protection in light of projected changes in interest rates and borrowing levels. These interest rate cap agreements are designated as cash flow hedging instruments and are intended to protect the portion of the Company's debt that is covered by these agreements from increases in short-term interest rates above 3.5%. These cap agreements were purchased at fair market values totaling $512,000. This cost has been capitalized and is being amortized to earnings and recorded as interest expense over the 24-month term of the agreements. Differences between the changes in fair value of the interest rate caps and the amount being amortized to earnings are reported as a component of Other Comprehensive Income. These amounts will be reclassified and recognized into earnings over the 24-month term of the agreements. As of December 31, 2003, $18,000 is recorded as Other Comprehensive Income in the Consolidated Balance Sheet. This represents the cumulative difference between the decline in the fair market value of the interest rate caps of $12,000 and the $30,000 expensed as interest during the six months ended December 31, 2003. For the quarter and six months ended December 31, 2003, 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 $9,702,000, $12,349,000 and $9,861,000 as of December 31, 2003, June 30, 2003 and December 31, 2002, respectively. The gross capitalized software development costs for completed projects, which are also included as Equipment in the Land, Building and Equipment section of the Consolidated Balance Sheets, were $7,962,000, $2,305,000 and $1,849,000 at December 31, 2003, June 30, 2003, and December 31, 2002, respectively. 9 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Post-employment Benefits - ------------------------ The Company's employment agreements with its co-Chief Executive Officers provide certain post-employment benefits that require accrual over the expected future service period beginning with the second quarter of fiscal 2002. The Company recorded expense accruals of approximately $808,000 for the six months ended December 31, 2003 and $1.1 million for the six months ended December 31, 2002, related to these agreements. This accrual is based on recording, over the period of active service, the amount that will represent the present value of the obligation through the date the executive attains full eligibility for the benefits, discounted using a 5.25% rate and using the sinking fund accrual method. Guarantees - ---------- The Company adopted the accounting requirements of Financial Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," for guarantees issued or modified after December 31, 2002. The adoption did not have an impact on the Company's financial statements as of December 31, 2003 or June 30, 2003. Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences while the officer or director is performing at its request in such capacity. The indemnification agreement period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company estimates the fair value of these indemnification agreements is minimal. Earnings Per Common Share - ------------------------- Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Shares used in this computation were 70,047,000 and 69,927,000 for the second quarters ended December 31, 2003 and 2002, respectively and 70,038,000 and 69,919,000 for the six months ended December 31, 2003 and 2002, 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 70,626,000 and 70,227,000 for the second quarters ended December 31, 2003 and 2002, respectively and 70,625,000 and 70,269,000 for the six months ended December 31, 2003 and 2002, respectively. Excluded from the computations of 10 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Earnings Per Common Share, continued - ------------------------------------ diluted earnings per share were options to purchase 1,168,000 and 1,180,000 shares of common stock for the second quarter and six months ended December 31, 2003, respectively, and 1,708,000 shares of common stock, for the second quarter and six months ended December 31, 2002. These outstanding options were excluded because the option exercise prices were greater than the average market price of the common shares during these periods and therefore, their effect would be anti-dilutive. Stock-based Compensation - ------------------------ During the six months ended December 31, 2003, the Company granted options at fair market value to purchase up to 570,000 shares of the Company's common stock under the 1999 Stock Incentive Plan. The Company accounts for its stock option plan using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure," to stock-based employee compensation. 11 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Stock-based Compensation, continued - -----------------------------------
(Dollars in thousands, except per share amounts) For the Quarter Ended For the Six Months Ended December 31, December 31, 2003 2002 2003 2002 ------- ------- ------- ------- Net Income: Net Income as Reported $15,578 $22,951 $26,070 $34,107 Stock based employee compensation expense had the fair value method been applied to all options awarded, net of income tax expense (920) (629) (1,695) (1,204) ------ ------ ------ ------ Pro Forma Net Income $14,658 $22,322 $24,375 $32,903 ====== ====== ====== ====== Earnings per Common Share: Basic as Reported $0.22 $0.33 $0.37 $0.49 Stock based employee compensation expense had the fair value method been applied to all options awarded, net of income tax expense (0.01) (0.01) (0.02) (0.02) ---- ---- ---- ---- Pro Forma Basic $0.21 $0.32 $0.35 $0.47 ==== ==== ==== ==== Diluted as Reported $0.22 $0.33 $0.37 $0.49 Stock based employee compensation expense had the fair value method been applied to all options awarded, net of income tax expense (0.01) (0.01) (0.02) (0.02) ---- ---- ---- ---- Pro Forma Diluted $0.21 $0.32 $0.35 $0.47 ==== ==== ==== ====
12 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Comprehensive Income - -------------------- The differences between changes in the fair values of the cash flow hedging instruments described above in "Derivative Instruments and Hedging Activities", and the amount of these instruments being amortized to earnings are reported as a component of Accumulated Other Comprehensive Income. The amount recorded as Accumulated Other Comprehensive Income was $18,000 for the quarter and six months ended December 31, 2003. 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 an expense of $84,000 and income of $122,000, for the quarters ended December 31, 2003 and 2002, respectively, and expense of $86,000 and $125,000 for six months ended December 31, 2003 and 2002, respectively. NOTE 3: BUSINESS COMBINATIONS Ross University - --------------- On May 16, 2003, the Company acquired all of the outstanding shares of capital stock of Dominica Management, Inc. (DMI) for $329,259,000 in cash which includes approximately $4,175,000 of acquisition related fees. The results of DMI's operations have been included in the consolidated financial statements of the Company since that date. DMI owns and operates Ross University School of Medicine and Ross University School of Veterinary Medicine. With campuses located in the Caribbean countries of Dominica and St. Kitts/Nevis, Ross University is one of the world's largest providers of medical and veterinary education with more than 2,800 students. The acquisition gives the Company entry into a growing sector of the higher education market. The addition of Ross University will further diversify the Company's curricula and help maintain a leadership position in career-focused education. During the first six months of fiscal 2004, the Company recorded an adjustment to the purchase price of DMI based on a settlement of final working capital balances. This adjustment resulted in a reduction of $1,207,000 to the goodwill balance recorded for this acquisition. The Company also finalized the allocation of the purchase price of DMI in the first quarter of 2004. Based on a final purchase price allocation analysis performed for the Company by independent professional valuation specialists, the goodwill from this acquisition that was recorded at June 30, 2003, was increased by $3,470,000. Also, the Student Relationships amortizable intangible assets were reduced by $5,200,000 and the Ross Title IV Eligibility and Accreditations indefinite-lived intangible assets were increased by $1,730,000. 13 NOTE 3: BUSINESS COMBINATIONS, continued Ross University, continued - -------------------------- The following unaudited pro forma financial information presents the results of operations of the Company and DMI as if the acquisition had occurred at the beginning of fiscal 2003. The pro forma information is based on historical results of operations and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the combined enterprises: For the Quarter Ended For the Six Months Ended December 31, 2002 December 31, 2002 (Unaudited) (Unaudited) --------------------- ------------------------ Revenues $189,205,000 $367,046,000 Net Income 23,882,000 35,111,000 Earnings per Common Share: Basic $0.34 $0.50 Diluted $0.34 $0.50 Person/Wolinsky - --------------- On October 21, 2003, Becker Professional Review, a wholly owned subsidiary of the Company, acquired certain tangible operating assets, trademarks and trade names of Person/Wolinsky CPA Review ("Person/Wolinsky"). These assets were purchased for $2.35 million in cash. Person/Wolinsky is a training firm preparing students to pass the CPA exam. Founded in 1967, its primary locations include New York City, Philadelphia and Washington, D.C. Pending the final allocation of the purchase price, all amounts paid for this acquisition are recorded as goodwill as of December 31, 2003. Funding for the acquisition was provided from the Company's existing operating cash balances. 14 NOTE 4: INTANGIBLE ASSETS Intangible assets consist of the following: As of December 31, 2003 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: Student Relationships $47,500,000 $ (8,211,000) License and Non Compete Agreements 2,600,000 (1,905,000) Class Materials 2,900,000 (600,000) Other 600,000 (450,000) ---------- ---------- Total $53,600,000 $(11,166,000) ========== ========== Indefinite-lived Intangible Assets: Trade Names $20,972,000 Trademark 1,645,000 Ross Title IV Eligibility And Accreditations 14,100,000 Intellectual Property 13,940,000 ---------- Total $50,657,000 ========== As of December 31, 2002 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $2,600,000 $(1,477,000) Class Materials 2,900,000 (400,000) Other 600,000 (350,000) --------- ---------- Total $6,100,000 $(2,227,000) ========= ========== Indefinite-lived Intangible Assets: Trademark $ 1,645,000 Trade Names 15,872,000 Intellectual Property 13,940,000 ---------- Total $31,457,000 ========== 15 NOTE 4: INTANGIBLE ASSETS, continued Amortization expense for amortized intangible assets was $3,384,000 and $6,769,000 for the quarter and six months ended December 31, 2003, respectively, and $180,000 and $362,000 for the quarter and six months ended December 31, 2002, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ending June 30, is as follows: Fiscal Year 2004 $13,840,000 2005 14,030,000 2006 9,820,000 2007 6,720,000 2008 3,580,000 The original weighted-average amortization period for amortized intangible assets is five years for Student Relationships, six years for License and Non- compete Agreements, 14 years for Class Materials and six years for Other as of December 31, 2003. These intangible assets are being amortized on a straight- line basis except for the Student Relationships. The amount being amortized for these Student Relationships is based on the estimated progression of the students through the respective medical and veterinary programs, giving consideration to the revenue and cash flow associated with both existing students and new applicants. This results in the amount being amortized at an annual rate for each of the five years of estimated economic life as follows: Year 1 27.4% Year 2 29.0% Year 3 21.0% Year 4 14.5% Year 5 8.1% Indefinite-lived intangible assets related to Trademarks, Trade Names, Title IV Eligibility, Accreditation and Intellectual Property are not amortized as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity. As of the end of fiscal years 2003 and 2002, there was no impairment loss associated with these indefinite-lived intangible assets as fair value exceeds the carrying amount. The Company performs an annual analysis of potential impairment with the assistance of independent professional valuation specialists. Based on the results of this analysis, there was no impairment in the value of the Company's goodwill for any reporting units as of the end of fiscal 2003 or 2002. The carrying amount of goodwill related to the DeVry University reportable segment at December 31, 2003 and 2002 was unchanged at $22,195,000. The carrying 16 NOTE 4: INTANGIBLE ASSETS, continued amount of goodwill related to the Professional and Training reportable segment at December 31, 2003 was $22,546,000. This is an increase of $2,350,000 from the balance of $20,196,000 at June 30, 2003. This change represents the purchase price of Person/Wolinsky in October 2003 (See Note 2-Business Combinations). The carrying amount of goodwill related to the Ross University segment was $240,930,000 at December 31, 2003. This is an increase of $2,342,000 from the balance at June 30, 2003. This change is comprised of the following: Final Allocation of Purchase Price (Note 3) $3,470,000 Adjustment to Purchase Price (Note 3) (1,207,000) Additional Acquisition Related Costs 79,000 --------- Total Adjustments $2,342,000 ========= NOTE 5: INCOME TAXES The principal operating subsidiaries of DMI are Ross University School of Medicine (the Medical School) incorporated under the laws of the 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 second quarter or six months ended December 31, 2003 for the Medical or Veterinary Schools. The Company has not recorded a tax provision for the undistributed earnings of the Medical and Veterinary Schools for the period after the acquisition. It is the Company's intention to indefinitely reinvest post-acquisition undistributed earnings and profits to service debt, improve the facilities and operations of the Schools and pursue future opportunities outside of the United States. As of December 31, 2003, cumulative undistributed earnings were approximately $8.2 million. 17 NOTE 6: LONG-TERM DEBT All of the Company's borrowings and letters of credit under its long-term debt agreements are through DeVry Inc. and Global Education International, Inc. (GEI), a subsidiary newly formed in relation to the acquisition of DMI (Note 3). This long-term debt consists of the following at December 31, 2003: Effective Outstanding Interest Rate at Debt December 31, 2003 Revolving Credit Agreement: ------------ ----------------- DeVry Inc. as borrower $ 70,000,000 2.67% GEI as borrower 45,000,000 2.67% ----------- Total $115,000,000 2.67% Senior Notes: DeVry Inc. as borrower $ 75,000,000 2.41% GEI as borrower 50,000,000 2.41% ----------- Total $125,000,000 2.41% ----------- Total long-term debt $240,000,000 2.54% =========== NOTE 7: SEGMENT INFORMATION The Company's principal business is providing post-secondary education. The services of our operations are described in more detail under "Nature of Operations" in Note 1 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The Company presents three reportable segments: the DeVry University undergraduate and graduate operations (DeVry University), the professional examination review and training operations including Becker Professional Review and Center for Corporate Education (Professional and Training) and the Ross University medical and veterinary school operations (Ross University). These segments are based on the method by which management evaluates performance and allocates resources. Such decisions are based upon each segment's operating income, which is defined as income before interest expense, amortization and income taxes. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are the same as those described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The consistent measure of segment profit excludes interest expense, amortization and certain corporate related depreciation. As such, these items are reconciling items in arriving at income before income taxes. The consistent measure of segment assets excludes deferred income tax assets and certain depreciable corporate assets. Additions to long-lived assets have been measured in this same manner. Reconciling items are included as corporate assets. 18 NOTE 7: SEGMENT INFORMATION, continued Following is a tabulation of business segment information for the quarters and for the six months ended December 31, 2003 and 2002. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements.
For the Quarter For the Six Months Ended December 31, Ended December 31, ------------------- ------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Revenues: DeVry University $164,483 $159,103 $324,532 $313,561 Professional and Training 13,709 13,445 24,011 22,256 Ross University 20,614 - 39,499 - ------- ------- ------- ------- Total Consolidated Revenues $198,806 $172,548 $388,042 $335,817 ------- ------- ------- ------- Operating Income: DeVry University $14,029 $18,170 $24,135 $35,256 Professional and Training 5,771 6,014 8,427 7,941 Ross University 7,822 - 15,483 - Reconciling Items: Amortization Expense (3,394) (192) (6,790) (384) Interest Expense (1,972) (47) (4,128) (94) Depreciation and Other (213) (195) (403) (375) ------- ------- ------- ------- Total Consolidated Income before Income Taxes $22,043 $23,750 $36,724 $42,344 ------- ------- ------- ------- Segment Assets: DeVry University $451,163 $497,311 $451,163 $497,311 Professional and Training 72,098 69,714 72,098 69,714 Ross University 394,236 - 394,236 - Corporate 3,768 28,460 3,768 28,460 ------- ------- ------- ------- Total Consolidated Assets $921,265 $595,485 $921,265 $595,485 ------- ------- ------- ------- Additions to Long-lived Assets: DeVry University $6,630 $10,021 $12,776 $20,051 Professional and Training 2,361 42 2,370 56 Ross University 566 - 2,090 - ------- ------- ------- ------- Total Consolidated Additions to Long-lived Assets $9,557 $10,063 $17,236 $20,107 ------- ------- ------- ------- Depreciation Expense: DeVry University $ 9,684 $ 9,770 $18,047 $18,084 Professional and Training 77 97 157 191 Ross University 589 - 1,070 - Corporate 198 196 393 391 ------- ------- ------- ------- Total Consolidated Depreciation $10,548 $10,063 $19,667 $18,666 ------- ------- ------- ------- Amortization Expense: DeVry University $ 8 $ 7 $ 16 $ 15 Professional and Training 183 185 368 369 Ross University 3,203 - 6,406 - ------- ------- ------- ------- Total Consolidated Amortization $3,394 $192 $6,790 $384 ------- ------- ------- -------
19 NOTE 7: SEGMENT INFORMATION, continued The Company conducts its educational operations in the United States, Canada, the Caribbean countries of Dominica and St. Kitts/Nevis, Europe, the Middle East and the Pacific Rim. Other international revenues, which are derived principally from Canada were less than 5% of total revenues for the quarters and six months ended December 31, 2003 and 2002. Revenues and long-lived assets by geographic area are as follows:
For the Quarter For the Six Months Ended December 31, Ended December 31, -------------------- -------------------- 2003 2002 2003 2002 -------------------- -------------------- Revenues from Unaffiliated Customers: Domestic Operations $173,902 $167,072 $339,949 $325,353 International Operations: Dominica and St. Kitts/Nevis 20,614 - 39,499 - Other 4,290 5,476 8,594 10,464 ------- ------- ------- ------- Total International 24,904 5,476 48,093 10,464 ------- ------- ------- ------- Consolidated $198,806 $172,548 $388,042 $335,817 ======= ======= ======= ======= Long-lived Assets: Domestic Operations $359,703 $346,931 $359,703 $346,931 International Operations: Dominica and St. Kitts/Nevis 316,455 - 316,455 - Other 1,361 2,354 1,361 2,354 ------- ------- ------- ------- Total International 317,816 2,354 317,816 2,354 ------- ------- ------- ------- Consolidated $677,519 $349,285 $677,519 $349,285 ======= ======= ======= =======
No one customer accounted for more than 10% of the Company's consolidated revenues. NOTE 8: COMMITMENTS AND CONTINGENCIES In October 2003, the Company announced that its subsidiary, DeVry Canada LLC, had signed an agreement with RCC College of Technology ("RCC") that will enable DeVry to phase out its operations at its Toronto campus commencing with the term that began in November 2003. Based in Vaughn, Ontario, RCC provides career- focused electronics and computer technology diploma programs. Under the terms of the agreement, which has been approved by the Ontario Provincial Ministry, DeVry College of Technology has contracted with RCC to manage the completion of programs of study for DeVry's current student body in Toronto. DeVry's Toronto campus will no longer admit new students. RCC will use existing DeVry curricula to deliver courses that allow current DeVry students to earn DeVry diplomas and certificates. The agreement also makes provisions for the acquisition of DeVry assets by RCC and the use of certain portions of DeVry curriculum under the RCC brand name. 20 NOTE 8: COMMITMENTS AND CONTINGENCIES, continued In the second quarter of fiscal 2004, the Company recognized an approximately $0.5 million pre-tax asset impairment loss in accordance with SFAS 144 on the furniture and laboratory equipment associated with the Company's Toronto-area operations. This equipment may become the future property of RCC and will have no further use at DeVry beyond the period of the teachout of DeVry's current student body. The Company is subject to occasional lawsuits, regulatory reviews associated with financial assistance programs and claims arising in the normal conduct of its business. In September 2003, the Company received a notice claiming patent-infringement from Acacia Research Corporation. The notice alleges that the Company has infringed upon several Acacia patents relating to streaming audio and video technology. This technology is used by the Company through its online education platform provider and is also used by many other companies in the delivery of online programs. In March 2002, the Company received notice of a class-action complaint filed under the Fair Labor Standards Act by several former field sales representatives seeking overtime compensation for services rendered during their period of employment. In March 2003, the Company participated in a required mediation session but no resolution was reached. The action was subsequently dismissed but an appeal has been filed. 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 re-filed. In January 2002, a graduate of one of DeVry University's Los Angeles-area campuses filed a class-action complaint on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In March 2003, the complaint was dismissed by the court with limited right to amend and re- file. The complaint was subsequently amended and re-filed. In November 2000, three 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 re-filed, this time including a then current student from a second Chicago-area campus. 21 NOTE 8: COMMITMENTS AND CONTINGENCIES, continued The Company has recorded approximately $1 million associated with estimated loss contingencies at December 31, 2003. While the ultimate outcome of these contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect to these claims. In conjunction with the required annual review procedures related to its administration of financial aid programs under the Ontario Student Aid Program, the Toronto-area DeVry campuses had engaged in discussions with the Ontario Ministry of Education relating to certain additional information requirements. These additional information requirements could serve as the basis for a Ministry claim for the return of some amounts of financial aid disbursed to students attending these campuses. Discussions continue on a periodic basis but the Company believes that there will be no significant monetary liability. At this time, the Company does not believe that the outcome of current claims, regulatory reviews and lawsuits will have a material effect on its results of operations or financial position. 22 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition - ----------------------------------------------------------- Certain information contained in this quarterly report on Form 10- K may constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current expectations and beliefs about future events. Such statements are inherently uncertain and may involve risks that could cause future results to differ materially from the forward-looking statements. Potential risks and uncertainties include, but are not limited to, undergraduate program concentration in selected areas of technology, dependence on student financial aid, dependence on state and provincial approvals and licensing requirements, dependence on continued accreditation for DeVry and Ross University and other factors detailed in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission. The following discussion of the Company's results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto as included in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2003 and the Company's annual report on Form 10-K for the fiscal year ended June 30, 2003. The Company's annual report on Form 10-K includes a detailed description of the method of application for critical accounting policies, estimates and assumptions used in the preparation of the Company's financial statements including, but not limited to, revenue recognition, useful lives of equipment and facilities, valuation of goodwill and indefinite-lived intangible assets, valuation and useful lives of acquired finite- lived intangible assets, pattern of amortization of finite-lived intangible assets over their economic lives, losses on the collection of student receivable balances, resolution of law suits and health care costs for incurred but not yet paid medical services. Because of the somewhat seasonal pattern of the Company's enrollments and its educational program starting dates, which affect the results of operations and the timing of cash inflows, the Company's management believes that comparisons of its results of operations should be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding interim quarterly period in the preceding year. Copies of the Company's annual and quarterly reports on Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission may be obtained without charge at the Company's website, www.devry.com. Results of Operations - --------------------- The Company's total consolidated revenues increased by $26.3 million, or 15.2%, and by $52.2 million, or 15.6%, for the second quarter and first half of the fiscal year, respectively. Tuition revenue, which is the largest component of total revenues, represents over 92% of total revenues. 23 Second quarter and first half revenues include $20.6 and $39.5 million, respectively, of revenues from Dominica Management, Inc. ("DMI") that was acquired in May 2003 and not included in the Company's financial results in the first half of last year. DMI owns and operates the Ross University School of Medicine and the Ross University School of Veterinary Medicine ("Ross University"). Revenues also increased from the corresponding periods last year because of higher enrollments and price increases at Becker Professional Review in the Professional and Training segment and similarly at Keller Graduate School within DeVry University. Higher revenues at Becker Professional Review resulted, in part, from additional Stalla seminar classes taught during the first half of the year leading to the December CFA level 1 exam. This is the first time that the level 1 exam has been administered in December. Effective with calendar year 2004, the twice a year, paper and pencil CPA exam format will no longer be offered. Instead, the exam will be available on demand in a new computer based format. This new exam format will be offered for the first time in April. The Company believes that some CPA candidates may have accelerated their exam preparation to take the last administration of the old exam format, contributing some additional revenues in the first half of this fiscal year. Further, some exam candidates may delay taking the new exam so as to benefit from the experiences of the first new exam takers, reducing enrollments in the Becker CPA Review courses in the second half of the fiscal year until later quarters, which would be in the Company's fiscal 2005 year. In October 2003, the Company acquired the assets of Person/Wolinsky CPA Review. Person/Wolinsky conducts CPA exam preparation classes in the metropolitan areas of Boston, New York City and Philadelphia as well as in Albany and Rochester, N.Y. Arlington, VA. and Hartford, CT. This acquisition is not expected to have a material effect on fiscal 2004 or future period revenues or earnings. At Keller Graduate School, revenues were higher than last year, in part, because of the July conversion in course length from ten weeks to eight weeks as the graduate program academic calendar was aligned with the DeVry University calendar. This change increases the number of terms each year from five to six, and correspondingly increases revenue by 20% in each quarter and for the total year assuming that all students proceed through the year with continuous enrollment at the accelerated pace. Enrollments for the Keller term that began in September 2003 increased by 3.9% from last year and by 4.8% for the term that began in November, further contributing to the revenue increase. For the second quarter and first half of the year, revenues from undergraduate DeVry University programs were slightly below the level of revenues last year. Undergraduate total student enrollments for the term that began in July were 5.2% lower than last year and undergraduate total student enrollments for the term that began in November were 4.0% lower than last year. Although new student enrollments increased from last year in both of these terms, the increased new student enrollments have been for online programs and programs at DeVry University Center locations that primarily serve working adult students with a greater proportion enrolled for less than a full-time academic load, and accordingly, who pay a lesser tuition. Partly offsetting the lower enrollments was a tuition price increase of 5-6% effective in July. 24 The Company's Cost of Educational Services increased by $11.2 million, or 11.9%, from the second quarter of last year. For the first half, Cost of Educational Services increased by $23.4 million, or 12.6%, from last year. The increase includes the cost of operation at Ross University which was not a part of the Company's operations last year. Cost increases were also incurred throughout all of the Company's continuing operations, including its new DeVry University Centers and the undergraduate Houston campus opened in September. At the new DeVry undergraduate campus in Philadelphia that was opened in the first half of last year, additional faculty and staff have been hired as students progress into higher terms of their educational programs. For the Keller Graduate School term that began in November, courses were taught in six new locations compared to last year. In addition, expanding enrollments in the Company's online educational programs, both undergraduate and graduate, have generated additional costs as faculty and staff are added to support this growing method of course delivery. During the second quarter, the Company recognized an approximately $0.5 million asset impairment loss in accordance with SFAS 144 on the furniture and laboratory equipment associated with the Company's Toronto-area operations. In connection with its agreement with RCC for the teachout of the remaining DeVry student programs, this equipment may become the future property of RCC and will have no further useful life for DeVry beyond the period of the teachout. Depreciation expense, most of which is included in Cost of Educational Services, increased by $0.5 million in the second quarter and by $1.0 million in the first half of the year. This increase in depreciation expense is entirely attributable to depreciation expense of the acquired Ross University operations. Student Services and Administrative Expense increased by $14.9 million, or 26.9%, in the second quarter and by $30.4 million, or 28.2%, in the first half. The increased cost includes the costs of marketing and administration at Ross University which was not a part of the Company last year. In addition, the Company incurred higher advertising and selling costs associated with efforts to generate more new student enrollments, primarily in the Company's undergraduate educational programs. For the undergraduate term that began in November, new student enrollments increased by 3.2% from last year, the second consecutive term with an increase in new student enrollments after five consecutive terms of declining new student enrollment. Information systems development costs are included in Student Services and Administrative Expense. These costs, related to the development of the new student information system and to other system initiatives and support have increased by $0.6 million from the first half of last year. A major component of the information system expense is the Company's continued investment in a new student information system to provide better support for the educational processes and related student services. In accordance with accounting principles for internal software development costs, certain wage and outside consulting costs are being capitalized. During the second quarter, the Company capitalized $1.6 million, bringing to $3.0 million the amount capitalized year-to-date. For the second quarter and first half of last year, the Company capitalized $1.4 million and $3.1 million, respectively. Cumulatively since the inception of this project, the Company has capitalized $17.6 million. In the second quarter, the Company charged $1.5 million of indirect project costs directly to expense. For the first six months, indirect costs charged directly to expense were $3.1 million compared to $2.6 million charged directly to expense in the first half of last year. In the second quarter, $0.4 million of previously capitalized costs were amortized to expense, bringing to $0.6 million the amount amortized in the first half. 25 In the first half of last year, $0.2 million of previously capitalized costs were amortized to expense. As additional parts of this system are placed into service over the coming quarters, amortization expense of previously capitalized amounts will increase somewhat. Also included in the Student Services and Administration Expense category was $3.4 million in the second quarter and $6.8 million in the first half of amortization of finite-lived intangible assets, mostly associated with the acquisition of Ross University. This compares to $0.2 million and $0.4 million of amortization in the second quarter and first half of last year, respectively. Spending for Student Services and Administrative Expense, excluding this amortization, was 33.6% and 33.8% of revenue for the second quarter and first half, respectively. This compares to 33.7% in the second half of last fiscal year during which time spending on undergraduate student marketing had been increased to current levels to produce the new student enrollment gains reported for the July and November terms. In the DeVry University segment, both operating income and operating margin as a percent of revenue in the second quarter continued to trail last year but did improve significantly from the first quarter. While historically the second quarter has reflected increased revenues and earnings because of higher fall term student enrollments, the rate of increase from the first to second quarter this year is greater than during the corresponding period last year. For the second quarter of this year, operating income was $14.0 million and the operating margin was 8.5%. This compares to operating income of $10.1 million and an operating margin of 6.3% in the first quarter. In the second quarter of last year, operating income was $18.2 million and the operating margin was 11.4%, up from 11.1% in the first quarter of last year. Contributing to this year's lower operating income and margins are the lesser total undergraduate student enrollments discussed above and increased spending on undergraduate new student recruiting to increase future term enrollments. Expenses have also increased because of new teaching locations and educational operations to support increased enrollments in online programs. Also contributing to the increased cost and lower earnings was the recognition of a $0.5 million pre-tax asset impairment loss on the Toronto-area furniture and laboratory equipment used in conjunction with the teachout agreement with RCC. This agreement is expected to reduce the Company's operating losses at the Toronto campus below what such losses would have been if the Company continued to manage the educational process and services through the period of teach out. The Company believes that operating losses incurred during each year of the teach out period should not exceed $3 million pre-tax which is less than the loss experienced from operations in fiscal 2003. Partly offsetting these factors are higher enrollments at Keller Graduate School and the effect on revenues and earnings of the conversion to an eight-week term length aligned with the common DeVry University calendar. Additionally, price increases across all of DeVry University of approximately 5-6% were implemented in July. In the Professional and Training segment, operating income for the second quarter was almost equal to that reported last year. For the first half, operating income increased by $0.5 million with an operating margin about equal to last year. The higher first half operating income reflects higher tuition rates and the increased enrollments in the CPA and CFA review programs discussed above while costs increased somewhat for development of the new CPA exam format course materials. 26 The Ross University segment was first incorporated into the Company's financial results in the fourth quarter of fiscal 2003, following completion of the acquisition in May. For the second quarter, Ross contributed $7.8 million of operating income for a 37.9% margin. In the first half, Ross had operating income of $15.5 million and an operating margin of 39.2%. Interest expense increased by $1.9 million in the second quarter and by $4.0 million in the first half compared to last year. The increased expense is attributable to the fourth quarter of fiscal 2003 borrowings for the acquisition of Ross University. During the first six months, borrowings were reduced by $50 million to $240 million using existing cash balances and cash generated from operations. Short-term interest rates, that serve as the basis for the interest rate on this debt, have not increased during this period. If short-term interest rates rise in the coming quarters, then interest expense may increase from current levels, depending upon the amount of debt outstanding at that time. Taxes on income were 29.3% of pretax income in the second quarter, compared to 28.5% in the first quarter. Last year, the tax rate on first half pretax income was 19.5%. In the second quarter of last year, the Company recognized non-recurring tax benefits of $8.2 million associated with the restructuring of its Canadian operations. Without this non-recurring benefit, the tax rate for the first half of last year would have been 38.7%. The Company's tax rate on income is the composite of state and federal taxes on operations other than Ross University and a single digit tax rate on the earnings of Ross University, most of which is earned offshore in jurisdictions where the Company has agreements with the governments that exempt these earnings from local taxes. The higher composite tax rate in the second quarter, compared to the first quarter, reflects an increase in the earnings from operations other than Ross, e.g. DeVry University and Becker Professional Review, which are taxed at a higher rate. Liquidity and Capital Resources - ------------------------------- Cash generated from operations during the first half of the fiscal year was $84.4 million, compared to $95.0 million last year. Contributing to the lower cash flow in this year's first half was a $20.1 million receivable from federal and state student financial aid programs. This receivable represents amounts disbursed to the accounts of students under various federal and state grant programs for which cash has not yet been received by the Company. Most of the amount owed to the Company at December 31, 2003, was received in January. While there have been amounts owed to the Company from these student financial aid programs in previous periods, there was no amount owed at the corresponding time last year. Net income for the first half of this year was $8.0 million lower than last year, which period last year included $8.2 million of non-recurring tax benefits associated with the Company's Canadian operations. Also, taxes paid on income increased by $7.2 million during the first six months of this year relating to tax liabilities associated with the acquisition of DMI. Also contributing to the lower cash flow was a $21.8 million net receivable from students at Ross University, an increase of approximately $16.0 million during the first six months of this year. Most of this increase in Ross accounts receivable was offset by an increase in the related Ross deferred tuition revenue of $13.9 million in the first half of this year. Ross, acquired in May 2003, was not included in the Company's financial statements for this period last year. 27 Partly offsetting the negative effect of these items on cash flow was an increase in the non-cash charges for depreciation and amortization totaling approximately $7.4 million, lower levels of receivables from students at DeVry University reflecting improved collections and processing of financial aid and a decrease of $14.5 million in the amount of cash restricted under state and federal financial aid programs. Capital spending for the first six months was $16.1 million, down $4.0 million from last year. In the second half of this fiscal year, construction is expected to commence on dormitory facilities located on the DeVry University Fremont, California and Kansas City, Missouri undergraduate campus sites. However, with no new large undergraduate campuses scheduled for construction, a much lesser cost associated with the opening of each new DeVry University Center and completion of the new 19,000 square foot Ross University medical school facility in the first half of the year, capital spending for the full year is expected to be in the range of $40 million, approximately the same level of spending as in fiscal 2003. In conjunction with its acquisition of Ross University, the Company entered into two credit agreements to provide the required funding. At June 30, 2003, borrowings under these agreements totaled $290 million. During the first half, the Company repaid $50 million of these borrowings using existing cash balances and cash flow generated from operations. In addition to the remaining $240 million of borrowings, there are approximately $3.7 million of letters of credit issued under these borrowing agreements. These letters of credit were issued in conjunction with DeVry University's participation in student financial aid programs, various business insurance policies and a rental agreement on a leased teaching facility. All of the Company's borrowings are based upon a floating interest rate, generally LIBOR, at the Company's option. During the first quarter, the Company entered into several interest rate cap agreements to protect $100 million of borrowings from sharp increases in the short-term interest rates upon which the borrowings are based. The Company intends to periodically review further debt repayment options and the need for additional interest rate protection in light of projected changes in working capital requirements and future period interest rates. The Company is not a party to any off-balance sheet financing or contingent payment arrangements nor are there any unconsolidated subsidiaries of the Company. The Company's only long-term contractual obligations consist of its revolving line of credit and Senior Notes, operating leases on facilities and equipment and agreements for various services. There are no loans extended to any officer, director or other person affiliated with the Company. The Company has not entered into any synthetic leases and there are no residual purchase or value commitments related to any facility or equipment lease. The Company has not entered into any derivative, swap, futures contract, put, call, hedge or non-exchange traded contract except for the interest rate cap agreements noted above. Under the terms of these cap agreements, the Company is not obligated to any further payment liability beyond their original purchase price. The Company's primary source of liquidity is the cash received from payments for student tuition, books and fees. These payments include funds originating as student and family educational loans; other financial aid from various federal, state and provincial loan and grant programs; and student and family financing resources. Funds originating as student and family educational loans and other forms of financial aid from various sources are dependent upon DeVry and Ross University's continued compliance with and participation in these programs. 28 The Company is highly dependent upon the timely receipt of these financial aid funds because approximately 70% of its undergraduate student revenues, approximately 40% of its graduate student revenues and approximately 70% of Ross University student revenues are funded by these programs. These financial aid and assistance programs are subject to political and governmental budgetary considerations. There is no assurance that such funding will be maintained in the future. Extensive and complex regulations in the United States and Canada govern all of the government financial assistance programs in which the Company's students participate. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for disciplinary action, including initiation of a suspension, limitation or termination proceeding against the Company. In conjunction with the required annual review procedures related to its administration of financial aid programs under the Ontario Student Aid Program, the Toronto-area DeVry campuses had engaged in discussions with the Ontario Ministry of Education relating to certain additional information requirements. These additional information requirements could serve as the basis for a Ministry claim for the return of some amounts of financial aid disbursed to students attending these campuses. Discussions continue on a periodic basis but the Company believes that there will be no significant monetary liability. Included in the Company's consolidated cash balances of $126.4 million at December 31, 2003, is $37.4 million of cash attributable to the Ross University operations. It is the Company's intention to indefinitely reinvest this cash and subsequent earnings and cash flow to service outstanding debt, improve and expand facilities and operations of the schools and pursue future business opportunities outside the United States. In accordance with this plan, cash held by Ross University will not be available for general Company purposes such as at DeVry University. The Company believes that current balances of unrestricted cash, cash generated from operations and borrowings under its financing agreements will be sufficient to fund its current operations and current growth plans for the foreseeable future unless new investment opportunities should arise similar to the recent acquisition of Ross University. Item 3 - Qualitative and Quantitative Disclosures About Market Risk - ------------------------------------------------------------------- The nature of the Company's educational operations does not subject it to a concentration or dependency upon the price levels or fluctuations in pricing of any particular one or group of commodities. The financial position and results of operations of Ross University's Caribbean operations are measured using the U.S. dollar as the functional currency. Almost all Ross University financial transactions are denominated in the U.S. dollar. The financial position and results of operations for the Company's Canadian educational programs are measured using the local currency as the functional currency. The Canadian operations have not entered into any material long term contracts to purchase or sell goods and services, other than lease agreements on teaching facilities. The Company does not have any foreign exchange contracts or derivative financial instruments related to protection from changes in the value of the Canadian 29 dollar. Because the assets and liabilities of the Company's Canadian operations are small relative to those of the Company, currently Canadian assets are less than 3% of total Company assets, changes in currency value would not have a material effect on the Company's results of operations or financial position. Based upon the current value of the net assets in the Canadian operations, a change of $0.01 in the value of the Canadian dollar relative to the U.S. dollar would result in a pre- tax translation adjustment of less than $100,000. Of the $240 million in Company debt outstanding at December 31, 2003, $115 million matures on July 1, 2006 and $125 million matures on April 30, 2010. Future investment opportunities, however, may result in lesser or no debt repayments in the period including and following such investment and could require additional borrowings. The interest rate on the Company's debt is based upon LIBOR interest rates for periods typically ranging from one to three months. Based upon the level of Company borrowings at the end of the second quarter, a 1% increase in short-term interest rates would result in $2.4 million of additional annual interest expense. The Company entered into several interest rate cap agreements to protect $100 million of its borrowings from sharp increases in short-term interest rates. However, these interest rate cap agreements do not provide protection from increases in short-term interest rates of less than 2.35% from current rates. Item 4 - Controls and Procedures - -------------------------------- The Company's management does not believe that any set of disclosure or internal controls can absolutely prevent all fraud and error. Such disclosure and internal controls, including those employed by DeVry Inc., can and should, however, provide reasonable, but not absolute assurance that assets have been safeguarded, used only for their intended purpose and that financial transactions have been properly recorded and reported to permit the preparation of financial statements in conformity with generally accepted accounting principles reported within the timeframes required by the SEC. The Company's co-chief Executive Officers and its Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and internal control procedures upon which these financial statements and management discussion are based. This review included the results of the Company's internal audit procedures. This review was made as of the end of the period covered by this quarterly report. Based upon this evaluation, and with the participation of management, subject to the limitations on absolute prevention of fraud and error, the above named officers have concluded that these controls and procedures are effective and appropriate to ensure the correctness and completeness of this report. There were no changes in internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the Company's second quarter that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 30 Part II - Other Information - --------------------------- Item 1 - Legal Proceedings - -------------------------- The Company is subject to occasional lawsuits, regulatory reviews associated with financial assistance programs and claims arising in the normal conduct of its business. The Company has recorded approximately $1 million associated with estimated loss contingencies at December 31, 2003. While the ultimate outcome of these contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect to these claims. The following updates the status of litigation and claims previously disclosed. In September 2003, the Company received a notice claiming patent- infringement from Acacia Research Corporation. The notice alleges that the Company has infringed upon several Acacia patents relating to streaming audio and video technology. This technology is used by the Company through its online education platform provider and is also used by many other companies in conjunction with the delivery of online programs. In March 2002, the Company received notice of a class-action complaint filed under the Fair Labor Standards Act by several former field sales representatives seeking overtime compensation for services rendered during their period of employment. In March 2003, the Company participated in a required mediation session but no resolution was reached. The action was subsequently dismissed but an appeal has been filed. In January 2002, the Company received notice of an antitrust complaint concerning the alleged monopoly by operations of its Becker CPA Review Corp. subsidiary in California. This complaint was filed in federal district court by the trustee in bankruptcy of a failed CPA review provider seeking a substantial amount of damages. In April 2002, this complaint was voluntarily dismissed by the plaintiff without prejudice. This complaint was amended and has subsequently been re-filed. In January 2002, a graduate of one of DeVry University's Los Angeles-area campuses filed a class-action complaint on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In March 2003, the complaint was dismissed by the court with limited right to amend and re-file. The complaint was subsequently amended and re-filed. In November 2000, three graduates of one of DeVry University's Chicago-area campuses filed a class-action complaint that alleges DeVry graduates do not have appropriate skills for employability in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and re- filed, this time including a then current student from a second Chicago-area campus. 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. 31 Item 4 - Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Company's regular annual meeting of stockholders was held in Chicago, Illinois, on Tuesday, November 18, 2003, pursuant to notice duly given. Proxies for the meeting were solicited in accordance with the Securities Exchange Act of 1934 and there was no solicitation in opposition to those of management. At the meeting, one Director of the Company was elected as a Class II Director to hold office until 2005 or until her successor is elected and qualified and four Directors of the Company were elected to serve as Class III Directors to hold office until 2006 or until their respective successors are elected and qualified. The results of the voting for Directors, whether in person or by proxy, were as follows: No. of Shares No. of Shares Class II Class III Voted For Voted to Withhold -------- --------- ------------- ----------------- Connie R. Curran 59,444,578 337,003 Charles A. Bowsher 59,094,457 687,124 Robert C. McCormack 58,837,872 943,709 Julie A. McGee 59,093,466 688,115 Ronald L. Taylor 59,150,337 631,244 The terms of office of the following Directors continued after the meeting: David S. Brown, Dennis J. Keller, Frederick A. Krehbiel, Thurston E. Manning, Hugo J. Melvoin and Harold T. Shapiro. The DeVry Inc. 2003 Stock Incentive Plan was adopted by the Company's Board of Directors in August 2003 and submitted for stockholder approval at this meeting. The following table presents the results of the stockholder vote on this matter: Broker For Against Abstain Non-Vote --- ------- ------- --------- 48,177,757 5,661,790 58,144 5,883,890 Also submitted to a vote of the stockholders at this meeting was a proposal for the ratification of the appointment of PricewaterhouseCoopers LLP as independent public accountants for the Company for the current fiscal year. The following table presents the results of the stockholders' vote this matter: Broker For Against Abstain Non-Vote --- ------- ------- -------- 58,864,153 865,476 51,952 0 32 Item 5 - Other Information - -------------------------- On January 12, 2004, the Company announced that Ross University president, Timothy E. Foster, was leaving effective January 30, 2004, to pursue other interests. On an interim basis, Dennis J. Keller, DeVry chairman and co-CEO will assume the responsibilities of the president of Ross University. Item 6 - Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits Sequentially Exhibit # Description Numbered Page --------- ----------- ------------- 31 Rule 13a-14(a)/15d-14(a)Certifications 34-39 32 Section 1350 Certifications 40 (b) Reports on Form 8-K During the quarter ended December 31, 2003, the Company filed the following reports on Form 8-K: 1. December 5, 2003, reporting enrollment for fall term at DeVry University and Ross University. 2. October 22, 2003, reporting financial results for first fiscal quarter and the acquisition of Person/Wolinsky CPA Review. 33 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: FEBRUARY 10, 2004 /s/Ronald L. Taylor ------------------- Ronald L. Taylor Co-Chief Executive Officer and President Date: FEBRUARY 10, 2004 /s/Norman M. Levine ------------------- Norman M. Levine Senior Vice President and Chief Financial Officer EX-31 3 ex3124.txt EXHIBIT 31 TO 2ND QUARTER FISCAL 2004 10-Q 34 EXHIBIT #31 CERTIFICATE 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report and based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's last fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 35 b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. February 10, 2004 /s/ Norman M. Levine --------------------- Norman M. Levine Senior Vice President and Chief Finance Officer 36 CERTIFICATE I, Ronald L. Taylor, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DeVry Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report and based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's last fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 37 b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. February 10, 2004 /s/ Ronald L. Taylor -------------------- Ronald L. Taylor President and Co-Chief Executive Officer 38 CERTIFICATE I, Dennis J. Keller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of DeVry Inc.; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b)evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report and based on such evaluation; and c)disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's last fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 39 b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. February 10, 2004 /s/ Dennis J. Keller --------------------- Dennis J. Keller Chairman & Co-Chief Executive Officer EX-32 4 ex3224.txt EXHIBIT 32 TO 2ND QUARTER FISCAL 2003 10-Q 40 EXHIBIT #32 SECTION 906 CERTIFICATION The following statement is provided by undersigned to accompany the Quarterly Report on Form 10-Q for the quarter and six months ended December 31, 2003 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and shall not be deemed filed pursuant to any provision of the Securities Exchange Act of 1934 or any other securities law. Each of the undersigned certifies that the foregoing Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of DeVry Inc. FEBRUARY 10, 2004 /s/Norman M. Levine ------------------- Senior Vice President and Chief Financial Officer FEBRUARY 10, 2004 /s/Ronald L. Taylor ------------------- President and Co-Chief Executive Officer FEBRUARY 10, 2004 /s/Dennis J. Keller ------------------- Chairman and Co-Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----