-----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, IO+gxt5q5dbzFeVDzQUt75xk+sZ1zn21saf/lPSwuqglPKi9V7NA9137kCOibyLH 6BrqNGvQ54pg3JTVLR/ohw== 0000730464-06-000002.txt : 20060209 0000730464-06-000002.hdr.sgml : 20060209 20060208185700 ACCESSION NUMBER: 0000730464-06-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060209 DATE AS OF CHANGE: 20060208 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: 06590407 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 q206.txt FISCAL 2006 2ND QUARTER FORM 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, 2005 Commission file number 1-13988 DeVry Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 36-3150143 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Tower Lane, Oakbrook Terrace, Illinois 60181 - --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (630) 571-7700 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X --- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (as defined in Rule 12b-2 of the Exchange Act). X LARGE ACCELERATED FILER --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). NO X --- Number of shares of Common Stock, $0.01 par value, outstanding on January 31, 2006: 70,569,681 Total number of pages: 47 2 DeVry Inc. FORM 10-Q INDEX For the Quarter and Six Months Ended December 31, 2005 Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets at December 31, 2005, June 30, 2005, and December 31, 2004 3-4 Consolidated Statements of Income for the quarter and six months ended December 31, 2005 and 2004 5 Consolidated Statements of Cash Flows for the six months ended December 31, 2005 and 2004 6 Notes to Consolidated Financial Statements 7-24 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25-35 Item 3. Quantitative and Qualitative Disclosures About Market Risk 35-36 Item 4. Controls and Procedures 37 PART II. Other Information Item 1. Legal Proceedings 38-39 Item 4. Submission of Matters to a Vote of Security Holders 39-40 Item 6. Exhibits 41 SIGNATURES 42 3 PART I - Financial Information Item 1 - Financial Statements DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
December 31, June 30, December 31, 2005 2005 2004 ----------- ----------- ----------- Restated Restated ASSETS Current Assets Cash and Cash Equivalents $143,765 $161,823 $132,445 Restricted Cash 38,997 13,935 36,224 Accounts Receivable, Net 85,467 39,226 75,323 Inventories 85 164 1,047 Deferred Income Taxes 17,142 17,142 7,821 Prepaid Expenses and Other 15,843 10,048 11,714 ------- ------- ------- Total Current Assets 301,299 242,338 264,574 ------- ------- ------- Land, Buildings and Equipment Land 67,633 68,013 65,071 Buildings 219,143 212,428 205,520 Equipment 239,442 234,201 231,387 Construction In Progress 5,508 15,813 17,404 ------- ------- ------- 531,726 530,455 519,382 Accumulated Depreciation (254,033) (243,688) (230,915) ------- ------- ------- Land, Buildings and Equipment, Net 277,693 286,767 288,467 ------- ------- ------- Other Assets Intangible Assets, Net 68,538 73,699 79,072 Goodwill 291,306 289,308 284,397 Perkins Program Fund, Net 13,290 13,290 12,697 Other Assets 4,328 4,633 5,165 ------- ------- ------- Total Other Assets 377,462 380,930 381,331 ------- ------- ------- TOTAL ASSETS $956,454 $910,035 $934,372 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 4 DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
December 31, June 30, December 31, 2005 2004 2004 ----------- ----------- ----------- Restated Restated LIABILITIES Current Liabilities Current Maturities of Revolving Loan $ 35,000 $ 50,000 $ - Accounts Payable 29,983 30,681 19,527 Accrued Salaries, Wages & Benefits 33,794 34,071 37,725 Accrued Expenses 26,414 34,462 35,501 Advance Tuition Payments 28,875 14,685 32,185 Deferred Tuition Revenue 110,413 22,823 100,013 ------- ------- ------- Total Current Liabilities 264,479 186,722 224,951 ------- ------- ------- Other Liabilities Revolving Loan - 50,000 65,000 Senior Debt 125,000 125,000 125,000 Deferred Income Taxes 16,078 15,949 9,783 Accrued Post-employment Agreements 6,392 6,352 4,989 Deferred Rent and Other 12,695 12,629 12,670 ------- ------- ------- Total Other Liabilities 160,165 209,930 217,442 ------- ------- ------- TOTAL LIABILITIES 424,644 396,652 442,393 ------- ------- ------- SHAREHOLDERS' EQUITY Common Stock, $0.01 par value, 200,000,000 Shares Authorized, 70,564,000, 70,475,000 and 70,368,000, Shares Issued and Outstanding at December 31, 2005, June 30, 2005 and December 31, 2004, Respectively 706 706 705 Additional Paid-in Capital 116,777 113,571 103,294 Retained Earnings 414,400 398,840 387,733 Accumulated Other Comprehensive Income (Loss) (73) 266 247 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY 531,810 513,383 491,979 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $956,454 $910,035 $934,372 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 DEVRY INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Except for Per Share Amounts) (Unaudited)
For The Quarter For The Six Months Ended December 31, Ended December 31, --------------------- ---------------------- 2005 2004 2005 2004 --------------------- ---------------------- Restated Restated REVENUES: Tuition $196,032 $184,127 $379,085 $362,111 Other Educational 13,398 10,311 26,706 20,663 Interest 439 84 858 144 ------- ------- ------- ------- Total Revenues 209,869 194,522 406,649 382,918 ------- ------- ------- ------- COSTS AND EXPENSES: Cost of Educational Services 111,017 108,689 222,726 218,954 Student Services and Administrative Expense 81,887 77,627 157,777 152,894 Interest Expense 2,606 2,091 5,261 4,082 ------- ------- ------- ------- Total Costs and Expenses 195,510 188,407 385,764 375,930 ------- ------- ------- ------- Income Before Income Taxes and Cumulative Effect of Change in Accounting 14,359 6,115 20,885 6,988 Income Tax Provision 3,531 1,453 5,325 1,996 ------- ------- ------- ------- Income Before Cumulative Effect of Change in Accounting 10,828 4,662 15,560 4,992 Cumulative Effect of Change in Accounting, Net of Tax - - - 1,810 ------- ------- ------- ------- NET INCOME $ 10,828 $ 4,662 $ 15,560 $ 6,802 ======= ======= ======= ======= EARNINGS PER COMMON SHARE Basic Income Before Cumulative Effect of Change in Accounting $0.15 $0.07 $0.22 $0.08 Cumulative Effect of Change in Accounting - - - 0.02 ----- ----- ----- ----- Net Income $0.15 $0.07 $0.22 $0.10 ===== ===== ===== ===== Diluted Income Before Cumulative Effect of Change in Accounting $0.15 $0.07 $0.22 $0.08 Cumulative Effect of Change in Accounting - - - 0.02 ----- ----- ----- ----- Net Income $0.15 $0.07 $0.22 $0.10 ===== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements. 6 DEVRY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
For The Six Months Ended December 31, 2005 2004 -------- -------- Restated CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 15,560 $ 6,802 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Share-Based Compensation Charge 2,239 3,856 Depreciation 18,628 19,937 Amortization 5,402 7,816 Provision for Refunds and Uncollectible Accounts 23,578 19,768 Deferred Income Taxes 56 (4,723) (Gain) Loss on Disposals of Land, Buildings and Equipment (479) 14 Changes in Assets and Liabilities, net of Effects from Acquisition of Business: Restricted Cash (25,059) (22,766) Accounts Receivable (69,800) (66,780) Inventories 87 2,248 Prepaid Expenses And Other (5,629) (811) Perkins Program Fund Contribution and Other - (550) Accounts Payable (727) (7,874) Accrued Salaries, Wages, Expenses and Benefits (8,382) 17,415 Advance Tuition Payments 14,152 15,251 Deferred Tuition Revenue 87,590 78,182 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 57,216 67,785 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (10,848) (21,426) Net Proceeds from Sale of Land and Building 1,798 - Payment for Purchase of Business (1,998) - ------- ------- NET CASH USED IN INVESTING ACTIVITIES: (11,048) (21,426) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Exercise of Stock Options 1,040 147 Excess Tax Benefit from Share-Based Payments - 34 Repayments Under Revolving Credit Facility (65,000) (60,000) ------- ------- NET CASH USED IN FINANCING ACTIVITIES (63,960) (59,819) Effects of Exchange Rate Differences (266) (322) ------- ------- NET DECREASE IN CASH AND CASH EQUIVALENTS (18,058) (13,782) Cash and Cash Equivalents at Beginning of Period 161,823 146,227 ------- ------- Cash and Cash Equivalents at End of Period $143,765 $132,445 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid During the Period $ 4,512 $3,152 Income Tax Payments During the Period, Net 14,447 409
The accompanying notes are an integral part of these consolidated financial statements. 7 DEVRY INC. Notes to Consolidated Financial Statements For the Quarter and Six Months Ended December 31, 2005 ---------- NOTE 1: INTERIM FINANCIAL STATEMENTS The interim consolidated financial statements include the accounts of DeVry Inc. (the Company) and its wholly-owned subsidiaries. These financial statements are unaudited but, in the opinion of management, contain all adjustments, consisting only of normal, recurring adjustments, necessary to present fairly the financial condition and results of operations of the Company. The June 30, 2005 data, which is presented, is derived from audited financial statements. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 and in conjunction with the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2005, each as filed with the Securities and Exchange Commission. The results of operations for the three and six months ended December 31, 2005, are not necessarily indicative of results to be expected for the entire fiscal year. The consolidated financial statements that are presented for the fiscal year ended June 30, 2005 and the six months ended December 31, 2004, have been restated to reflect the adjustments necessary under the provisions of the modified retrospective application method of Statement of Financial Accounting Standards No. 123(R), "Share Based Payments" ("SFAS 123(R)"). SFAS123(R) was adopted in the first quarter of fiscal 2006 (See Note 3). NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Derivative Instruments and Hedging Activities - --------------------------------------------- The Company uses derivative financial instruments to manage its exposure to movements in interest rates. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk to the Company. The Company does not use financial instruments for trading purposes, nor does it use leveraged financial instruments. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties and periodic settlements. All derivative contracts are reported at fair value, with changes in fair value reported in earnings or deferred, depending on the nature and effectiveness of the offset or hedging relationship. Any ineffectiveness in a hedging relationship is recognized immediately into earnings. During the first quarter of fiscal 2004, the Company entered into several interest rate cap agreements to protect approximately $100,000,000 of its outstanding borrowings from sharp increases in short-term interest rates upon which its borrowings are based. These agreements expired in the first quarter of fiscal 2006. The Company intends to periodically evaluate the need for 8 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Derivative Instruments and Hedging Activities, continued - -------------------------------------------------------- interest rate protection in light of projected changes in interest rates and borrowing levels. These interest rate cap agreements were designated as cash flow hedging instruments and were intended to protect the portion of the Company's debt that is covered by these agreements from short-term interest rates above 3.5%. These cap agreements were purchased at fair market values totaling $568,000. This cost was capitalized and amortized to earnings and recorded as interest expense over the 24-month term of the agreements. Differences between the changes in fair value of the interest rate caps and the amount being amortized to earnings were reported as a component of Other Comprehensive Income. These amounts were reclassified and recognized into earnings over the 24- month term of the agreements. As of December 31, 2005, these cap agreements had expired so there is no effect on Accumulated Other Comprehensive Income in the Consolidated Balance Sheets. As of December 31, 2004, $28,000 was recorded as Other Comprehensive Income in the Consolidated Balance Sheet. This represents the cumulative difference between the decline in the fair market value of the interest rate caps of $192,000 and the $220,000 expensed as interest. For the six months ended December 31, 2005 and 2004, gains of $12,000 and $10,000, respectively, were recorded as Other Comprehensive Income. Interest expense of $73,000 and $70,000 was charged to earnings for these interest rate caps for the six months ended December 31, 2005 and 2004, respectively. For the six months ended December 31, 2005 and 2004, there was no ineffectiveness related to these agreements. Internal Software Development Costs - ----------------------------------- The Company capitalizes certain internal software development costs that are amortized using the straight line method over the estimated useful lives of the software, not to exceed five years. Capitalized costs include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll related costs for employees who are directly associated with the internal software development project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose. Capitalized software development costs for projects not yet complete, which are included as Equipment in the Land, Buildings and Equipment section of the Consolidated Balance Sheets, were $286,000 as of December 31, 2004. As of December 31, 2005 and June 30, 2005 there were no capitalized costs for projects not yet completed. The gross capitalized software development costs for completed projects, which are also included as Equipment in the Land, Building and Equipment section of the Consolidated Balance Sheets, were $20,605,000 at December 31, 2005, June 30, 2005, and December 31, 2004. 9 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Post-employment Benefits - ------------------------ The Company's employment agreements with its Chairman of the Board of Directors and Chief Executive Officer provide certain post-employment benefits that require accrual over the expected future service period beginning with the second quarter of fiscal 2003. For the six months ended December 31, 2005 and 2004, the Company recognized expense of approximately $40,000 and $1,310,000, respectively, related to these agreements. The amounts provided are based on recording, over the period of active service that ended in June, 2005, the amount that represents the present value of the obligation, discounted using a 5.62% rate as of December 31, 2005, and using the sinking fund accrual method. Earnings Per Common Share - ------------------------- Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Shares used in this computation were 70,542,000 and 70,368,000 for the second quarters ended December 31, 2005 and 2004, respectively and 70,524,000 and 70,359,000 for the six months ended December 31, 2005 and 2004, respectively. Diluted earnings per share is computed by dividing net income by the weighted average number of shares assuming dilution. Dilutive shares are computed using the Treasury Stock Method and reflect the additional shares that would be outstanding if dilutive stock options were exercised during the period. Shares used in this computation were 70,847,000 and 70,507,000 for the second quarters ended December 31, 2005 and 2004, respectively and 70,702,000 and 70,583,000 for the six months ended December 31, 2005 and 2004, respectively. Excluded from the computations of diluted earnings per share were options to purchase 1,773,000 and 2,915,000 shares of common stock for the second quarter and six months ended December 31, 2005, respectively, and 2,700,000 and 2,274,000 shares of common stock, for the second quarter and six months ended December 31, 2004, respectively. These outstanding options were excluded because the option exercise prices were greater than the average market price of the common shares during these periods and therefore, their effect would be anti-dilutive. Comprehensive Income - -------------------- The differences between changes in the fair values of the cash flow hedging instruments described above in "Derivative Instruments and Hedging Activities", and the amount of these instruments being amortized to earnings are reported as a component of Comprehensive Income. The amounts recorded in Other Comprehensive Income are gains of $12,000 and $10,000 for the six months ended December 31, 2005 and 2004, respectively. The Company's only other item that meets the definition for adjustment to arrive at Comprehensive Income is the change in cumulative translation adjustment. The amounts recorded in Other Comprehensive Income for the changes in translation rates were losses of $4,000 and $243,000, for the quarters ended December 31, 2005 and 2004, respectively, and losses of $351,000 and $483,000 for six months ended December 31, 2005 and 2004, respectively. 10 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Comprehensive Income, continued - ------------------------------- The Accumulated Other Comprehensive Income balance at December 31, 2005 is composed entirely of a cumulative translation loss of $73,000. This balance at December 31, 2004, is composed of a $28,000 gain related to the cash flow hedge and a cumulative translation gain of $219,000. NOTE 3: STOCK-BASED COMPENSATION The Company maintains six stock-based award plans: the Amended and Restated Stock Incentive Plan, established in 1988, the 1991 Stock Incentive Plan, the 1994 Stock Incentive Plan, the 1999 Stock Incentive Plan, the 2003 Stock Incentive Plan and the 2005 Incentive Plan. Under these plans, directors, key executives and managerial employees are eligible to receive incentive stock or nonqualified options to purchase shares of the Company's common stock. The 2005 Incentive Plan also permits the award of stock appreciation rights, restricted stock, performance stock and other stock and cash based compensation. The Amended and Restated Stock Incentive Plan, the 1994, 1999, and 2003 Stock Incentive Plans and the 2005 Incentive Plan are administered by a Plan Committee of the board of directors. Plan Committee members are granted automatic, nondiscretionary annual options. The 1991 Stock Incentive Plan is administered by the board of directors. Options under all six plans are granted for terms of up to 10 years and can vest immediately or over periods of up to five years. The requisite service period is equal to the vesting period. The option price under the plans is the fair market value of the shares on the date of the grant. The company accounts for options granted to retirement eligible employees that vest upon an employees' retirement under the non- substantive vesting period approach to these options. Under this approach, compensation cost is recognized at the grant date for options issued to retirement eligible employees where the options vest upon retirement. At December 31, 2005, 7,655,690 authorized but unissued shares of common stock were reserved for issuance under the Company's stock incentive plans. Effective July 1,2005, the Company adopted the provisions of SFAS 123(R). SFAS 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as expense over the employee requisite service period. The Company previously applied Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25")and related Interpretations and provided the required pro forma disclosures of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company elected to adopt the modified retrospective application method as provided by SFAS 123(R) and accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been restated to reflect the fair value method of expensing options as prescribed by SFAS 123(R). 11 NOTE 3: STOCK-BASED COMPENSATION, continued The following is a summary of options activity for the six months ended December 31, 2005:
Weighted Weighted Average Aggregate Average Remaining Intrinsic Options Exercise Contractual Value Outstanding Price Life ($000) ----------- -------- ----------- --------- Outstanding at July 1, 2005 3,815,039 $22.37 Options Granted 70,500 $22.27 Options Exercised (89,352) $11.69 Options Canceled (119,948) $24.73 --------- Outstanding at December 31, 2005 3,676,239 $22.56 6.55 $4,212 ========= ====== ==== ====== Exercisable at December 31, 2005 2,624,881 $22.48 6.65 $3,558 ========= ====== ==== ======
The total intrinsic value of options exercised for the six months ended December 31, 2005 and 2004 was $803,000 and $620,000, respectively. Prior to fiscal 2005, the fair value of the Company's stock-based awards was estimated as of the date of grant using the Black- Scholes option pricing model ("Black-Scholes model"). The Black- Scholes model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. This model also requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value. Beginning with all options granted in the first quarter of fiscal 2005, the fair value of the Company's stock-based awards is estimated using a binomial model. This model uses historical cancellation and exercise experience of the Company to determine the option value. It also takes into account the illiquid nature of employee options during the vesting period, something that the Black-Scholes model does not consider. For these reasons, Company management believes that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated in previous years, using the Black-Scholes model. The weighted average estimated grant date fair values, as defined by SFAS 123(R), for options granted at market price under the Company's stock option plans during the first six months of fiscal 2006 and 2005 were $10.15 and $9.95, per share, respectively. The fair values of the Company's stock option awards for the first six months of fiscal 2006 and 2005, were estimated assuming no expected dividends and the following weighted average assumptions: Fiscal Year, 2006 2005 ---- ---- Expected Life (in Years) 4.38 6.69 Expected Volatility 41.30% 41.41% Risk-free Interest Rate 3.80% 3.83% Pre-vesting Forfeiture Rate 4.00% 4.00% 12 NOTE 3: STOCK-BASED COMPENSATION, continued The expected life of the options granted is based on the weighted average exercise life with age and salary adjustment factors from historical exercise behavior. For fiscal 2006, to date, the expected life of newly granted options is based on projections more heavily weighted to current exercise patterns. The Company's expected volatility is computed by combining and weighting the implied market volatility, the Company's most recent volatility over the expected life of the option grant, and the Company's long-term historical volatility. The following table shows total stock-based compensation expense included in the Consolidated Statement of Earnings: (Dollars in thousands) For the Quarter For the Six Months Ended December 31, Ended December 31, 2005 2004 2005 2004 ---- ---- ---- ---- Cost of Educational Services $ 350 $ 453 $ 716 $1,233 Student Services and Administrative Expense 744 964 1,523 2,623 Income Tax Benefit 269 223 571 502 ---- ----- ----- ----- Net Stock-based Compensation Expense $ 825 $1,194 $1,668 $3,354 ==== ===== ===== ===== As of December 31, 2005, $9.36 million of total pre-tax unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of 2.6 years. The total fair value of options vested during the six months ended December 31, 2005 and 2004 was $3,458,000 and $4,466,000, respectively. There were no capitalized stock-based compensation costs at December 31, 2005 and 2004. The Company has a policy of issuing new shares of common stock to satisfy share options exercises. As previously discussed, the Company elected to adopt SFAS 123(R) under the modified retrospective application method. The Company believes that the modified retrospective application of this standard achieves the highest level of clarity and comparability among the presented periods. Accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have been restated to reflect the fair value method of expensing prescribed by SFAS 123(R). 13 NOTE 3: STOCK-BASED COMPENSATION, continued The following table details the retroactive application impact of SFAS 123(R) on previously reported results, (dollars in thousands except per share amounts):
For the Quarter For the Six Months ended and as of ended December 31, 2004 December 31, 2004 --------------------- --------------------- As As Previously Previously Restated Reported Restated Reported --------------------- --------------------- CONSOLIDATED STATEMENTS OF INCOME: Total Costs and Expenses $188,407 $186,990 $375,930 $372,074 Income before Income Taxes and Cumulative Effect of Change In Accounting 6,115 7,532 6,988 10,844 Income Tax Provision 1,453 1,676 1,996 2,498 Income before Cumulative Effect Of Change in Accounting 4,662 5,856 4,992 8,346 Net Income 4,662 5,856 6,802 10,156 EARNINGS PER COMMON SHARE: Basic Income before Cumulative Effect Of Change in Accounting $0.07 $0.08 $0.08 $0.12 Net Income $0.07 $0.08 $0.10 $0.14 Diluted Income before Cumulative Effect Of Change in Accounting $0.07 $0.08 $0.08 $0.12 Net Income $0.07 $0.08 $0.10 $0.14
June 30, 2004 --------------------- As Previously Restated Reported -------- ---------- CONSOLIDATED BALANCE SHEETS Deferred Income Taxes $ 9,783 $ 13,675 Total Non-current Liabilities 217,442 221,334 Total Liabilities 442,393 446,285 Additional Paid-in Capital 103,294 71,943 Retained Earnings 387,733 415,192 Total Shareholders' Equity 491,979 488,087 14 NOTE 3: STOCK-BASED COMPENSATION, continued For the Six Months Ended December 31, 2004 ------------------------ As Previously Restated Reported -------- ---------- CASH FLOW RELATED TO SIX MONTHS ENDED DECEMBER 31, 2004 Net Income $ 6,802 $ 10,156 Share Based Compensation Charge 3,856 - Deferred Income Taxes (4,723) (4,187) Net Cash Provided by Operating Activities 67,785 67,819 Excess Tax Benefits from Share Based Payments 34 - Net Cash Used in Financing Activities (59,819) (59,853) June 30, 2005 --------------------- As Previously Restated Reported -------- ---------- CONSOLIDATED BALANCE SHEETS Deferred Income Taxes $ 15,949 $ 21,408 Total Non-current Liabilities 209,930 215,389 Total Liabilities 396,652 402,111 Additional Paid-in Capital 113,571 73,372 Retained Earnings 398,840 433,580 Total Shareholders' Equity 513,383 507,924 NOTE 4: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY Prior to July 1, 2004, the accounts of Becker Professional Review were consolidated based on an April 30 fiscal year end, which management believed was its natural year-end based on its then business cycle. As a result of a change in the CPA exam schedule, the Company has aligned the Becker fiscal year end to that of DeVry Inc. The results of operations for the two-month period from May 1, 2004 through June 30, 2004, are included as a cumulative effect of change in accounting in the Consolidated Statements of Income for the first quarter of fiscal 2005. The cumulative effect of this change in accounting added $1,810,000, or $0.02 per share to net income for the first quarter ended September 30, 2004 and the six months ended December 31, 2004. This amount is net of income tax expense of $1,189,000. 15 NOTE 4: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY,continued Net Income and basic and diluted earnings per share for the three and six months ended December 31, 2004 is set forth below as if the consolidation of the Becker operations had been accounted for in the same manner for all periods presented. These amounts have been restated to reflect the fair value method of expensing stock- based compensation as prescribed by SFAS 123(R). Proforma Three Months Ended Six Months Ended December 31, December 31, 2004 2004 ---- ---- Net Income $4,662,000 $4,992,000 Earnings per Share Basic $0.07 $0.08 Diluted $0.07 $0.08 NOTE 5: BUSINESS COMBINATIONS Gearty CPE - ---------- In July 2005, the Company signed a definitive agreement to acquire Gearty CPE for $2.0 million in cash. Gearty CPE, which operates in the New York/New Jersey metro area, is a provider of continuing professional education (CPE) programs and seminars in accounting and finance predominantly serving chief financial officers and controllers of Fortune 500 companies. There is no pro forma presentation of prior year operating results related to this acquisition due to the insignificant effect on consolidated operations. Deaconess College of Nursing - ---------------------------- On March 24, 2005, Ross University School of Nursing and Health Sciences, a newly formed, wholly owned subsidiary of the Company, acquired the operations of Deaconess College of Nursing (Deaconess) for $5,391,000 in cash, subject to purchase price adjustments. Funding was provided from the Company's existing operating cash balances. The results of Deaconess' operations have been included in the consolidated financial statements of the Company since the date of acquisition. Located in St. Louis, Missouri, Deaconess had approximately 450 students enrolled at the date of purchase and offers associate and bachelor's degree programs in nursing. In addition, Deaconess offers a bachelor's degree completion program designed for registered nurses who have previously completed an associate degree program. Classes are offered days, evenings and weekends with non-clinical coursework offered both on campus and online. The addition of Deaconess will further diversify the Company's curricula. 16 NOTE 5: BUSINESS COMBINATION, continued Deaconess College of Nursing, continued - --------------------------------------- The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. At March 24, 2005 (In Thousands) Current Assets $ 199 Property and Equipment 37 Intangible Assets 1,470 Goodwill 4,909 ----- Total Assets Acquired 6,615 Current Liabilities Assumed 1,224 ----- Net Assets Acquired $5,391 ===== Of the $1,470,000 of acquired intangible assets, $470,000 was assigned to the value of the Deaconess Title IV financial aid eligibility and $730,000 was assigned to accreditations, both of which have been determined to not be subject to amortization, and $270,000 was assigned to student relationships that have an average useful life of approximately 3 years. The Company determined this allocation based upon a number of factors, including a preliminary valuation analysis prepared by an independent professional valuation specialist. The $4,909,000 of goodwill was all assigned to the Medical & Healthcare operating segment. The amounts recorded at December 31, 2005, relating to the acquisition are subject to adjustment, as the purchase price is still subject to final closing adjustments. The Company expects to finalize the purchase price during the third quarter of fiscal 2006. There is no pro forma presentation of prior year operating results related to this acquisition due to the insignificant effect on consolidated operations. 17 NOTE 6: INTANGIBLE ASSETS Intangible assets consist of the following: As of December 31, 2005 ---------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------- Amortized Intangible Assets: Student Relationships $47,770,000 $(33,108,000) License and Non Compete Agreements 2,650,000 (2,582,000) Class Materials 2,900,000 (1,000,000) Trade Names 110,000 (62,000) Other 620,000 (617,000) ---------- ---------- Total $54,050,000 $(37,369,000) ========== ========== Unamortized Intangible Assets: Trade Names $20,972,000 Trademark 1,645,000 Ross Title IV Eligibility And Accreditations 14,100,000 Intellectual Property 13,940,000 Deaconess Title IV Eligibility and Accreditations 1,200,000 ---------- Total $51,857,000 ========== As of December 31, 2004 ---------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------- Amortized Intangible Assets: Student Relationships $47,500,000 $(21,624,000) License and Non Compete Agreements 2,650,000 (2,345,000) Class Materials 2,900,000 (800,000) Trade Names 110,000 (34,000) Other 620,000 (562,000) ---------- ---------- Total $53,780,000 $(25,365,000) ========== ========== Unamortized Intangible Assets: Trade Names $20,972,000 Trademark 1,645,000 Ross Title IV Eligibility And Accreditations 14,100,000 Intellectual Property 13,940,000 ---------- Total $50,657,000 ========== 18 NOTE 6: INTANGIBLE ASSETS, continued Amortization expense for amortized intangible assets was $2,580,000 and $5,161,000 for the quarter and six months ended December 31, 2005, respectively, and $3,637,000 and $7,274,000 for the quarter and six months ended December 31, 2004, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ending June 30, is as follows: Fiscal Year 2006 $10,036,000 2007 6,807,000 2008 3,598,000 2009 203,000 2010 200,000 The weighted-average amortization period for amortized intangible assets is three and five years for Deaconess and Ross Student Relationships, respectively, six years for License and Non-compete Agreements, 14 years for Class Materials, four years for Trade Names and six years for Other. These intangible assets, except for the Ross Student Relationships, are being amortized on a straight- line basis. The amount being amortized for the Ross Student Relationships is based on the estimated progression of the students through the respective medical and veterinary programs, giving consideration to the revenue and cash flow associated with both existing students and new applicants. This results in the basis being amortized at an annual rate for each of the five years of estimated economic life, beginning with May 2003, as follows: Year 1 27.4% Year 2 29.0% Year 3 21.0% Year 4 14.5% Year 5 8.1% Indefinite-lived intangible assets related to Trademarks, Trade Names, Title IV Eligibility, Accreditation and Intellectual Property are not amortized as there are no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity. As of the end of fiscal year 2005, there was no impairment loss associated with these indefinite-lived intangible assets as fair value exceeds the carrying amount. The Company determined that as of the end of fiscal 2005, there was no impairment in the value of the Company's goodwill for any reporting units. This determination was made after considering a number of factors including a valuation analysis prepared by an independent professional valuation specialist. The carrying amount of goodwill related to the DeVry University reportable segment at December 31, 2005 and June 30, 2005 was unchanged at $22,195,000. The carrying amount of goodwill related to Professional and Training reportable segment was $24,716,000 at December 31, 2005 and $22,716,000 at June 30, 2005. The increase of $2,000,000 is the result of the allocation of the purchase price for 19 NOTE 6: INTANGIBLE ASSETS, continued Gearty CPE as described in Note 5 above. The carrying amount of goodwill related to the Medical & Healthcare segment was $244,395,000 at December 31, 2005 and $244,397,000 June 30, 2005. The decrease of $2,000 was the result of purchase price adjustments recorded in the second quarter of fiscal 2006. NOTE 7: SALE OF FACILITY In November 2005, a Company owned building in the Denver, Colorado area was sold for $1,798,000. As a result of this sale, the Company realized a gain of approximately $450,000. This building was acquired in 1999 with the acquisition of Denver Technical College. Although still used partly as classrooms and offices, this facility was no longer essential to the Company operations in the Denver-area, having been largely replaced by a new and larger DeVry University campus serving the Denver market. This gain is classified as Cost of Educational Services in the Consolidated Statements of Income and related to the DeVry University reportable segment. In December 2005, the Company announced that it plans to offer for sale its campus located in West Hills, California. DeVry University plans to remain in the San Fernando Valley area and is considering other new facilities in the vicinity to meet current and future student demand. There is no anticipated impairment loss with this building as its market value exceeds its book value. NOTE 8: REDUCTION IN WORKFORCE CHARGES During the second quarter of fiscal 2005, the Company offered a voluntary separation plan to its employees with more than 20 years of service. In the third quarter of fiscal 2005, the Company implemented an involuntary reduction in force that reduced its workforce at its educational facilities and corporate office. In the fourth quarter of fiscal 2005, the Company offered another voluntary separation plan for its DeVry University faculty employees with more than 15 years of service and implemented an involuntary reduction in force of its faculty employees. These voluntary and involuntary separation plans resulted in workforce reductions of approximately 230 employees. In addition to these separation and reduction in force plans, the Company experienced other involuntary separations during fiscal 2005. In relation to all of these voluntary and involuntary reductions in force, the Company recorded pre-tax charges of approximately $8.4 million in fiscal 2005. These charges consist of severance pay and in some cases, extended medical and dental benefits coverage. These charges were classified as Cost of Educational Services and Student Services and Administrative Expense in the Consolidated Statements of Income and are related to the DeVry University and Medical & Healthcare reportable segments. Cash payments for the voluntary separation plans and all involuntary reductions in force were approximately $300,000 the second quarter of fiscal 2006 and $2,300,000 for the six months ended December 31, 2005. Of the total amount accrued for these events, approximately $1,300,000 remained to be paid as of December 31, 2005. Payments will continue into the third quarter of fiscal 2006. 20 NOTE 9: INCOME TAXES The principal operating subsidiaries of DMI are Ross University School of Medicine (the Medical School) incorporated under the laws of the Commonwealth of Dominica and Ross University School of Veterinary Medicine (the Veterinary School), incorporated under the laws of the Federation of St. Christopher Nevis, St. Kitts in the West Indies. Both operating companies have agreements with the respective governments that exempt them from local income taxation through the years 2043 and 2023, respectively. Accordingly no current provision for foreign income taxes was recorded in the quarter or six months ended December 31, 2005 for the Medical or Veterinary Schools. The Company has not recorded a tax provision for the undistributed earnings of the Medical and Veterinary Schools for the period after the acquisition. It is the Company's intention to indefinitely reinvest post-acquisition undistributed earnings and profits to service debt, improve the facilities and operations of the Schools and pursue future opportunities outside of the United States. As of December 31, 2005 and 2004, cumulative undistributed earnings were approximately $43.3 million and $23.1 million, respectively. It is the Company's intention for the foreseeable future to use accumulated cash balances at the Medical and Veterinary Schools plus subsequent earnings and cash flow to service outstanding debt, and reinvest remaining balances to improve and expand facilities and operations of the schools and pursue future business opportunities outside the United States. In accordance with this plan, cash held by Ross University will not be available for general Company purposes such as at DeVry University and will not be subject to U.S. taxation. NOTE 10: LONG-TERM DEBT All of the Company's borrowings and letters of credit under its long-term debt agreements are through DeVry Inc. and Global Education International, Inc. (GEI). This long-term debt consists of the following at December 31, 2005: Effective Outstanding Interest Rate at Debt December 31,2005 ------------ ---------------- Revolving Credit Agreement: DeVry Inc. as borrower $ 30,000,000 5.63% GEI as borrower 5,000,000 5.75% ----------- Total $ 35,000,000 5.65% ----------- Senior Notes: DeVry Inc. as borrower $ 75,000,000 5.49% GEI as borrower 50,000,000 5.49% ----------- Total $125,000,000 5.49% ----------- Total outstanding debt $160,000,000 5.53% Current Maturities of Revolving Credit Agreement $ 35,000,000 5.65% ----------- Total Long-term debt $125,000,000 5.49% ----------- 21 NOTE 11: COMMITMENTS AND CONTINGENCIES The Company is subject to occasional lawsuits, administrative proceedings, regulatory reviews associated with financial assistance programs and other claims arising in the normal conduct of its business. The following information updates the status of claims and litigation previously disclosed. In January 2002, a graduate of one of DeVry University's Los Angeles-area campuses, filed a class-action complaint against DeVry Inc. and DeVry University, Inc. in the Superior Court of the State of California, County of Los Angeles, on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In March 2003, the complaint was dismissed by the court with limited right to amend and re-file. The complaint was subsequently amended and re-filed. During the first quarter of the Company's fiscal year 2004, a new complaint was filed in the same court by another plaintiff with the same general allegations and by the same plaintiffs' attorneys. This subsequent action has been stayed pending the outcome of the initial matter. Discovery and settlement discussions continue in the matter and a class action certification hearing is still pending, but there is no determinable date at which this matter may be brought to conclusion. The alleged class action above seeks money damages of an indeterminate amount. The Company has accrued $0.75 million representing the estimated minimum amount to resolve this claim. In November 2000, three graduates of one of DeVry University's Chicago-area campuses filed a class-action complaint in the Circuit Court for Cook County, Illinois that alleges DeVry graduates do not have appropriate skills for employment in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and re-filed to include as a plaintiff, a then-current student in another curriculum from a second Chicago-area campus. In September 2005, the court denied the plaintiff's motion for class action certification in its entirety. However, pending claims remain by each of the named defendants in this action. In August 2005 counterclaims were filed against the Company's subsidiary Dominica Management, Inc. and the Ross University School of Medicine by defendants American University of Antigua College of Medicine, Neal Simon and Sol Weltman in a case filed by Dominica Management, Inc. in the U.S. District Court for the Southern District of New York in September 2004. The original case filed by Dominica Management, Inc. sought relief primarily for alleged copyright infringement, misappropriation of trade secrets and confidential information, and unfair competition. The counterclaims allege, inter alia, anticompetive behavior, tortious interference with prospective economic relationships, and defamation. In October 2005, the Company and American University of Antigua reached an agreement to resolve this matter and drop all claims, and the matter is now resolved. 22 NOTE 11: COMMITMENTS AND CONTINGENCIES, continued At December 31, 2005, the Company has recorded approximately $1.5 million associated with estimated loss contingencies, including the amount of approximately $0.6 million in remaining payments under an anti-trust claim settlement agreement. While the ultimate outcome of these and other contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect to the pending claims. At this time, the Company does not believe that the outcome of current claims, regulatory reviews and lawsuits will have a material effect on its cash flows, results of operations or financial position. NOTE 12: SEGMENT INFORMATION The Company's principal business is providing post-secondary education. The services of our operations are described in more detail under "Nature of Operations" in Note 1 to the consolidated financialstatements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005. The Company presents three reportable segments: the DeVry University undergraduate and graduate operations (DeVry University), the professional examination review and training operations including Becker Professional Review and Center for Corporate Education (Professional and Training) and the Ross University medical and veterinary school and Deaconess School of Nursing operations (Medical & Healthcare). These segments are based on the method by which management evaluates performance and allocates resources. Such decisions are based, in part, upon each segment's operating income, which is defined as income before interest expense, amortization and income taxes. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are the same as those described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005. The consistent measure of segment profit excludes interest expense, amortization and certain corporate related depreciation. As such, these items are reconciling items in arriving at income before income taxes. The consistent measure of segment assets excludes deferred income tax assets and certain depreciable corporate assets. Additions to long-lived assets have been measured in this same manner. Reconciling items are included as corporate assets. Following is a tabulation of business segment information for the quarters and six months ended December 31, 2005 and 2004. Where applicable, the December 31, 2004, information has been restated to reflect the adoption of SFAS 123(R) under the modified retrospective application method. These amounts have been restated to reflect the fair value method of expensing stock-based compensation as 23 NOTE 12: SEGMENT INFORMATION, continued prescribed by SFAS 123(R). Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements.
For the Quarter For the Six Months Ended December 31, Ended December 31, ------------------ ------------------ 2005 2004 2005 2004 ---- ---- ---- ---- Revenues: DeVry University $171,676 $161,951 $332,395 $318,691 Professional and Training 9,953 10,207 22,233 20,953 Medical & Healthcare 28,240 22,364 52,021 43,274 ------- ------- ------- ------- Total Consolidated Revenues $209,869 $194,522 $406,649 $382,918 ------- ------- ------- ------- Operating Income: DeVry University $ 6,737 $ 1,680 $ 6,663 $(1,423) Professional and Training 2,335 2,313 6,905 5,226 Medical & Healthcare 10,720 8,115 18,252 15,071 Reconciling Items: Amortization Expense (2,580) (3,637) (5,161) (7,274) Interest Expense (2,606) (2,091) (5,261) (4,082) Depreciation and Other (247) (265) (513) (530) ------ ------ ------ ------ Total Consolidated Income before Income Taxes and Cumulative Effect of Change in Accounting $14,359 $ 6,115 $20,885 $ 6,988 ------ ------ ------ ------ Segment Assets: DeVry University $436,330 $451,169 $436,330 $451,169 Professional and Training 76,461 68,574 76,461 68,574 Medical & Healthcare 417,360 396,659 417,360 396,659 Corporate 26,303 17,970 26,303 17,970 ------- ------- ------- ------- Total Consolidated Assets $956,454 $934,372 $956,454 $934,372 ------- ------- ------- ------- Additions to Long-lived Assets: DeVry University $4,336 $14,099 $ 7,392 $18,754 Professional and Training 123 120 148 202 Medical & Healthcare 3,823 1,495 5,306 2,470 ----- ------ ------ ------ Total Consolidated Additions to Long-lived Assets $8,282 $15,714 $12,846 $21,426 ----- ------ ------ ------ Depreciation Expense: DeVry University $8,201 $ 9,052 $15,978 $17,606 Professional and Training 114 115 228 266 Medical & Healthcare 973 893 1,928 1,571 Corporate 247 247 494 494 ----- ------ ------ ------ Total Consolidated Depreciation $9,535 $10,307 $18,628 $19,937 ----- ------ ------ ------ Intangible Asset Amortization Expense: DeVry University $ - $ - $ - $ - Professional and Training 67 194 133 387 Medical & Healthcare 2,513 3,443 5,028 6,887 ----- ----- ----- ----- Total Consolidated Amortization $2,580 $3,637 $5,161 $7,274 ----- ----- ----- -----
24 NOTE 12: SEGMENT INFORMATION, continued The Company conducts its educational operations in the United States, Canada, the Caribbean countries of Dominica and St. Kitts/Nevis, Europe, the Middle East and the Pacific Rim. Other international revenues, which are derived principally from Canada were less than 5% of total revenues for the quarters and six months ended December 31, 2005 and 2004. Revenues and long-lived assets by geographic area are as follows:
For the Quarter For the Six Months Ended December 31, Ended December 31, -------------------- -------------------- 2005 2004 2005 2004 ---- ---- ---- ---- Revenues from Unaffiliated Customers: Domestic Operations $180,864 $168,670 $352,918 $333,007 International Operations: Dominica and St. Kitts/Nevis 26,048 22,364 48,428 43,274 Other 2,957 3,488 5,303 6,637 ------- ------- ------- ------- Total International 29,005 25,852 53,731 49,911 ------- ------- ------- ------- Consolidated $209,869 $194,522 $406,649 $382,918 ------- ------- ------- ------- Long-lived Assets: Domestic Operations $346,973 $355,811 $346,973 $355,811 International Operations: Dominica and St. Kitts/Nevis 307,754 313,160 307,754 313,160 Other 428 827 428 827 ------- ------- ------- ------- Total International 308,182 313,987 308,182 313,987 ------- ------- ------- ------- Consolidated $655,155 $669,798 $655,155 $669,798 ------- ------- ------- -------
Sales are attributable to geographic areas based on location of customer. No one customer accounted for more than 10% of the Company's consolidated revenues. 25 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition - ----------------------------------------------------------- Forward-Looking Statements / Risks and Uncertainties - ---------------------------------------------------- Certain information contained in this quarterly report on Form 10-Q may constitute forward-looking statements relating to DeVry's future financial results and strategies, business plans or objectives and beliefs about future events. They are often identified by the use of qualifiers in their description such as "expects", "believes", "is likely", "intends", "estimates", "forecast", "assumption" or other similar expressions. Such statements are inherently uncertain and may involve risks and uncertainties that could cause future results to differ materially from the forward-looking statements. Potential risks and uncertainties include, but are not limited to: Shifts in applicant career interests away from the concentration of the Company's undergraduate programs in selected areas of technology, healthcare and business that the Company does not adequately anticipate or respond to. Increased competition in recruiting of new students and retaining students already enrolled. Reductions in student financial aid, upon which the Company is highly dependent for the collection of its billings, because of changes to program regulations affecting student eligibility or reductions to federal and state funding levels. Failure of DeVry University, Ross University or Deaconess College of Nursing to maintain eligibility for student participation in financial aid programs. Reductions in the amount of corporate employee tuition reimbursement because of changes to tax laws or a lower level of corporate earnings that affects employee educational benefit plans. Loss or limitations in accreditations and licensing approvals affecting DeVry University, Ross University or Deaconess College of Nursing. Changes to laws and regulations that adversely affect the Company's eligibility to participate in government financial aid programs, current operations or future growth opportunities. Ability to hire and retain faculty with appropriate qualifications such as education and experience. Reductions in tuition pricing by other educational institutions that affect the Company's current competitive position and its ability to maintain and increase tuition rates in the future. Some of these risks and uncertainties are described more fully in the sections of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC September 13, 2005, especially in the section entitled "Forward Looking Statements" at the beginning of Part 1 and in the subsections of "Item 1 - Business" entitled "Competition," "Student Recruiting," "Accreditation and Approvals," "Tuition and Fees," "Financial Aid and Financing Student Education," "Career Services," and "Faculty". 26 All forward-looking statements included in this Report are based upon information presently available, and the Company assumes no obligation to update any forward-looking statements. Copies of the Company's annual and quarterly reports on Form 10-K, Form 10-Q and other reports filed with the Securities and Exchange Commission may be obtained without charge at the Company's website, www.devryinc.com. The following discussion of the Company's results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto as included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2005 and in the Company's quarterly report on Form 10-Q for the quarter ended September 30, 2005. The Company's annual report on Form 10-K includes a detailed description of critical accounting policies, estimates and assumptions used in the preparation of the Company's financial statements. These include, but are not limited to, revenue and expense recognition, useful lives of equipment and facilities, valuation of goodwill and indefinite-lived intangible assets, valuation and useful lives of acquired finite-lived intangible assets, pattern of amortization of finite-lived intangible assets over their economic lives, losses on the collection of student receivable balances, costs associated with pending legal matters, health care costs for incurred but not yet paid medical services and stock based compensation expense. Because of the somewhat seasonal pattern of the Company's enrollments and its educational program starting dates, which affect the results of operations and the timing of cash flows, the Company's management believes that comparisons of its results of operations should be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding quarterly period in the preceding year. 27 Results of Operations - --------------------- The following table presents information with respect to the relative size to revenue of each item in the statement of income for the second quarter and first half of both the current and prior year. Percents may not add due to rounding.
Quarter Ended Six Months Ended ------------- ---------------- December 31 -------------------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (Restated) (Restated) Revenue 100.0% 100.0% 100.0% 100.0% Cost of Educational Services 52.9% 55.9% 54.8% 57.2% Student Services & Admin. Exp. 39.0% 39.9% 38.8% 39.9% Interest Expense 1.2% 1.1% 1.3% 1.1% ------ ------ ------ ------ Total Costs and Expenses 93.2% 96.9% 94.9% 98.2% Income Before Income Taxes and Cumulative Effect of Change in Accounting 6.8% 3.1% 5.1% 1.8% Income Tax Provision 1.7% 0.7% 1.3% 0.5% ------ ------ ------ ------ Income Before Cumulative Effect of Change in Accounting 5.2% 2.4% 3.8% 1.3% Cumulative Effect of Change in Accounting - - - 0.5% ------ ------ ------ ------ NET INCOME 5.2% 2.4% 3.8% 1.8% ====== ====== ====== ====== Quarter and six months ended December 31, 2004, restated for the adoption of SFAS 123R using the modified retrospective approach.
The Company's financial performance in both the first and second quarters of this year improved from the results in the corresponding quarters of the previous fiscal year. Fiscal 2005 has been restated for the adoption of Statement of Financial Accounting Standard 123R, Share - Based Payments ("SFAS 123R"), using the modified retrospective approach. Factors contributing to the improved revenue and net income performance compared to last year were continued total enrollment growth in DeVry University's graduate school programs, increased tuition rates for both undergraduate and graduate students, an increase in new student enrollments and higher tuition rates at Ross University, an increase in enrollments in the Professional and Training segment's Becker Professional Review operations, 28 wage savings from the workforce reductions implemented last year and continued restraint in spending in other areas of operation. Total DeVry University undergraduate enrollments of 36,200 for the summer term that began in July were 4.8% lower than enrollments a year ago. In the fall term that began in November, total undergraduate enrollments were 2.3% lower than enrollments a year ago. Although total undergraduate enrollments were still below those of last year, the fall term marked the third consecutive term in which new undergraduate student enrollments increased from the year-ago level, contributing to the lessening rate of year-over-year decline in total enrollments. Coursetaker enrollments at DeVry University's Keller Graduate School remained above the year-ago level, for the July session increasing by 11.3% from last year, for the September session increasing by 5% from last year, and for the November session, increasing by 3.3% from last November to 12,777 this year. At Ross University in the Medical and Healthcare segment, for the term that started in September, new student enrollments increased by 40.6% from last year to 575 and total student enrollments were 3,227. Although total student enrollments lagged those of last year by 3.8%, this is an improvement from the year over year decline of 8.5% in the Ross term that began in May 2005. The Company's total consolidated revenue increased by $15.3 million, or 7.9%, in the second quarter compared to last year. The second quarter revenue growth from last year compares to a lesser 4.5% increase in first quarter revenue compared to last year. Tuition revenue, which is the largest component of total revenue, represented over 93% of total revenue for both the second quarter and first half of the year. Both DeVry University and the Medical and Healthcare segments contributed to the revenue increase in the second quarter while all three of the Company's segments contributed to the increased revenue for the first half. DeVry University - ---------------- At DeVry University, total second quarter revenues increased by approximately $9.7 million, more than one half of the increase in second quarter revenues for the total Company. This compares to a revenue increase of only $4.0 million in the first quarter. As discussed above, contributing to the higher revenues in both the second quarter and first half were increased coursetaker enrollments at Keller Graduate School in each of the three sessions that began in the first half and higher tuition rates that were in effect for both the undergraduate and graduate programs compared to last year. Undergraduate program tuition increased by approximately 5% in July 2005 following a similar tuition increase in November 2004. For graduate school programs, tuition increased by approximately 5% for the September session following a similar increase in January 2005. In addition, Other Educational Revenue increased by approximately $2.3 million in the second quarter and $3.2 million in the first half of the year, partly from sales of electronic textbook materials ("eBooks") to students enrolled in selected online and on-site courses. In the first quarter of fiscal 2005, the Company completed an agreement with Follett Higher Education Group ("Follett") to manage the nine remaining U.S. DeVry University campus bookstores not previously managed by them. This resulted in a lowering of reported bookstore sales revenue from what it had been in previous periods. However, DeVry University sales of eBooks in selected graduate and undergraduate courses beginning in the latter part of fiscal 2005 has more than 29 offset the reduced revenues from the bookstores previously managed by the Company. The Company reports the sale of eBooks at their full selling price which is higher than the commission income it reports on book and supply sales by Follett. Also contributing to the increase in Other Educational Revenue was a higher interest charge on undergraduate student accounts receivable. These receivables, which are generally subject to a monthly interest charge of one percent under the Company's EDUCARD revolving charge plan for financing students' education, generated approximately $1.2 million more in student financing charges in the second quarter and $2.1 million more than in the first half of last year. Partly offsetting the increases in revenue from improved enrollments and higher tuition rates was a growing proportion of working adult undergraduate students who typically enroll for less than a full-time academic load. These students are primarily enrolled in the online programs and for program offerings at DeVry University Centers. These part-time students pay a somewhat lesser average tuition amount each term than do full-time students at the undergraduate campus locations. Therefore, the higher revenue per student resulting from tuition increases has been partially offset by the greater proportion of part-time students. Professional and Training - ------------------------- In the Professional and Training segment, second quarter revenues declined by approximately $0.3 million from the second quarter of last year. For the first half, however, revenues were $1.3 million above those of the previous year. The Company believes that higher first half revenues from increased enrollment during the first half of this year, primarily in the Becker Professional Review's CPA review courses, reflects the market recovery from the effects of the CPA exam changes in fiscal 2004. Not only have on-site course enrollments increased, but demand for the review courses online and on CD-ROM have increased, contributing approximately $0.9 million of the total Company increase in Other Educational Revenues in the second quarter and $2.7 million for the first half of the year. Further contributing to the revenue growth in this segment is increased enrollment in the Stalla CFA review course in preparation for the December administration of the Level 1 exam. This is only the second year in which this part of the exam has been offered in December. In July 2005, the Company completed the acquisition of Gearty CPE by a DeVry Inc. subsidiary. Gearty CPE is a provider of continuing professional education programs and seminars in accounting and finance, predominantly serving customers in the New York/New Jersey metro area. The acquisition complements the Becker Professional Review CPA exam review business. The acquisition did not contribute significantly to the revenues or operating income of the Professional and Training segment during the second quarter or first half of the current year. Medical and Healthcare - ---------------------- In the Medical and Healthcare segment, revenues increased by approximately $5.9 million, or 26.3%, in the second quarter and $8.7 million, or 20.2%, in the first half compared to last year. Included in this segment are $1.7 million in revenues for the second quarter and $2.6 million for the first six months at Deaconess College of Nursing that was not acquired by the Company until the latter part of fiscal 2005. At Ross University, although total enrollments during the first and second quarter were lower than a year ago, a tuition price increase of approximately 5% effective 30 with this September semester, following a price increase of slightly less than 8% in January 2005, fully offset the effects of the decline in enrollment and contributed to the revenue increase. SFAS 123R - --------- The Company adopted Statement of Financial Accounting Standards 123R effective with the start of the first quarter of fiscal 2006. Financial results for the second quarter and first half of fiscal 2005 have been restated to reflect the modified retrospective approach of adoption. Accordingly, expenses relating to share-based awards have been included in the various expense categories for both years as appropriate. SFAS 123R establishes the accounting for stock-based awards issued in exchange for employee services. To-date, all of the Company's stock-based awards have been granted in the form of stock options. Stock based compensation is measured at the grant date of the option, based on the fair value of the award. The fair value is recognized as expense over the employee requisite service period which is the period over which these options vest. From the beginning of fiscal 2005, the Company's stock-based awards were valued using a binomial model. Previously, these awards were valued using the Black-Scholes model for purposes of pro forma disclosure pursuant to SFAS 123 and SFAS 148. The binomial model requires estimates of several important factors, e.g. expected life of an option, stock price volatility, risk- free rate of return, forfeiture rate for options granted and the stock dividend yield. The expected life of an option takes into account the contractual term of the option and the effects of the employees' expected exercise and post-vesting employment termination behavior. The Company has granted stock options to hundreds of employees over a period of time that extends back longer than the maximum ten-year contractual life of most of its option awards and, therefore, has a history upon which estimates of the expected life of the option and the forfeiture rate can be based. The Company's stock has been publicly traded since 1991 and, therefore, there is a history upon which estimates of future stock price volatility can be determined. In making its determination of the appropriate estimates, and for computing the actual valuation in a binomial model, the Company engaged the assistance of an independent professional actuarial service. Cost of Educational Services - ---------------------------- The Company's Cost of Educational Services increased by $2.3 million, or 2.1%, from the second quarter of last year. For the first half of the year, these costs increased by $3.8 million, or 1.7%, from last year. Contributing most of the higher cost for the first half was an increase of $3.0 million in the provision for doubtful accounts, primarily in the DeVry University undergraduate operations, as student receivables increased from last year. Also, cost increases were incurred in support of the higher number of DeVry University Centers and expanding online program enrollments. For the November session, courses were being offered at eight new DeVry University locations compared to a year ago. The number of online coursetakers enrolled in courses for summer 2005 increased by more than 67% from last year to 21,068, increasing further to 24,357 for the fall session that began in November. Costs were also recognized for the Deaconess College of Nursing that were not included in the Company results last year. Partly offsetting these increases were the wage savings from workforce reductions implemented last year and continued spending restraint in operations. In the second quarter of last year, the 31 Company recognized a $2.2 million pre-tax charge, of which approximately $1.5 million was included in Cost of Educational Services, as the first of several work force reductions was being implemented. Also, lower capital spending during each of the past several years has resulted in a $1.3 million lower depreciation expense in the first half of this year. Most depreciation expense is included in the Cost of Educational Services. For the first half, depreciation expense was $18.6 million compared to $19.9 million last year. Also included in Cost of Educational Services for the first half is $0.7 million of expense attributed to share-based awards, compared to approximately $1.2 million in the restated first half of last year. Student Services and Administrative Expense - ------------------------------------------- Student Services and Administrative Expense increased by $4.3 million, or 5.5%, from the second quarter of last year. For the first half, these costs increased by $4.9 million, or 3.2%, from the first six months of a year ago. The increased cost reflects efforts to generate higher new student enrollments in all of the Company's educational programs through more advertising and student recruiting. Admissions advisors have been added to support the growing online program enrollments and newly opened DeVry University Centers and at Ross University to offset the previous declines in new student enrollments following changes to admission standards at the medical school. Costs were also recognized for the Deaconess College of Nursing that were not included in the Company results last year. Increased new student enrollments at DeVry University, Becker Professional Review and Ross University are believed to be, in part, attributable to the higher level and effectiveness of this spending. Largely offsetting these increases in student recruiting expense was lower amortization of finite-lived intangible assets related to acquisitions of businesses including, most recently, Ross University and Deaconess College of Nursing. Amortization expense is included entirely in the Student Services and Administrative Expense category. For the second quarter, amortization expense was $2.6 million compared to $3.6 million in the second quarter of a year ago. For the first half, amortization expense was $5.2 million compared to $7.2 million. Also, lower spending for corporate general and administrative expense, resulted in savings of approximately $0.7 million and $1.6 million compared to the second quarter and first half of last year, respectively. Work force reduction costs included in the Student Services and Administrative Expense category, as discussed above in Cost of Educational Services, totaled $0.6 million in the first quarter of last year and another $0.7 million in the second quarter of last year. There were no corresponding work force reduction programs or charges in the current year. Lower expense attributed to share-based awards included in the Student Services expense category also helped offset the increases in student recruitment spending. Share-based award expense in the second quarter was approximately $0.7 million for the current year, compared to approximately $1.0 million in the restated second quarter of last year. For the first half, share- based award expense declined from $2.6 million in the first half of last year to $1.5 million in the first half of this year because the Company has issued fewer option awards thus far this year than it did last year. In addition, there was less than $0.1 million of post-employment benefit cost in the first half of this year relating to agreements with the Company's Chairman and CEO, compared to approximately $1.3 million of expense in the first half of last year. The required period of active service, over which the cost of these benefits were recognized, was fully met at the end of fiscal 2005. 32 DeVry University - ---------------- After a loss of approximately $0.1 million in the first quarter of this year, the DeVry University segment had operating income of approximately $6.7 million in the second quarter. For the first half, this segment had operating income of $6.6 million compared to a loss last year of $1.4 million. The transition from operating loss to operating income was the result of improving enrollments, tuition rates and lower spending described above. Some additional savings have resulted from the consolidation of online operations into a building in Naperville, Illinois, a nearby suburb to the Company's headquarters location. The acquisition of this building in fiscal 2005 has permitted the Company to relinquish some of its higher cost office space at the headquarters site. In addition, DeVry University's Canadian operation, which included the teach out cost for the former undergraduate Toronto-area campuses last year, is no longer incurring further charges for the teach out activity. In the first half of last year, DeVry University incurred operating losses of approximately $1.5 million from its Canadian operation. For the current year, the Canadian operations had a much reduced operating loss of approximately $0.2 million. Professional and Training - ------------------------- As a result of record revenues for the first quarter, operating income in the Professional and Training segment for the first half of the year increased from $5.2 million last year to $6.9 million in the first half of the current year. In the second quarter, as revenues flattened to the level of the prior year, operating income remained flat at approximately $2.3 million. The Company believes that the growth in first quarter revenues can be attributed to exam candidates who previously procrastinated and who are now starting to prepare for the CPA exam. The exam review course continues to be updated and improved with good student response, which we believe is attracting more students than before. Although a small part of the total segment operations, the Stalla CFA exam review continues to increase its enrollments. Declining CFA exam taker pass rates may be attracting more students to take review courses rather than rely on self-study as many have done in the past. Medical and Healthcare - ---------------------- The Medical and Healthcare segment increased its operating income by $2.6 million, or 32.1%, from last year. At Ross University, which is the dominant portion of this segment, lower enrollments were more than offset by tuition increases to produce the higher revenues that generated the higher operating income in the second quarter and first half compared to last year. A proposed amendment to the federal budget reconciliation bill could have affected federal financial aid eligibility for Ross students. This amendment is no longer a part of the budget reconciliation package. However, the proposal is still in the Senate version of the Higher Education Act Reauthorization bill but is not included in the House of Representatives version. The Company is continuing to monitor this legislative process. Deaconess College of Nursing contributed approximately $1.7 million of revenue to the segment in the second quarter and less than $0.5 million of operating income. Deaconess College was not acquired by the Company until the latter part of fiscal 2005 and its results are not included in the first half of last year. At Deaconess, the position of division general manager has now been filled to focus on expansion opportunities. 33 For the past three years, Deaconess has offered an online associate degree in nursing ("ASN"). This program has been reviewed annually by the Missouri State Board of Nursing, and has operated on interim approval status since inception. In its most recent review in December, the Board withdrew its approval. The decision was based on test performance by students who entered the program prior to DeVry's acquisition of Deaconess. The Company has appealed this determination. Pending final action by the Missouri Administrative Hearing Commission on the Company's appeal, the ASN program continues to operate as an approved program, with initial approval status. The State Board decision only affects the ASN Online program and does not affect the ASN on-site or BSN online or on-site programs. The revenues and operating income contribution from the ASN online program are not a material part of the Company's overall financial results. Interest Expense - ---------------- Interest expense on the Company's borrowings was $2.6 million compared to $2.1 million in the second quarter of last year. For the first half, interest expense has increased from $4.1 million last year to $5.3 million this year. Although borrowings have been regularly reduced, the interest rates on the Company's borrowings is based upon short-term interest rates, which increased significantly over the past year. For example, at the end of December, the interest rate on the Company's Revolving Loan was 5.63% compared to 3.53% last December. Taxes on Income - --------------- Taxes on income for the second quarter of this fiscal year were 24.6% of pre-tax income compared to 27.5% in the first quarter. The lower effective tax rate of 24.6% in the second quarter brings the first half rate to 25.5% and reflects the Company's current estimates of the proportion of earnings attributable to Ross University offshore operations compared to Company earnings that are fully taxable at the appropriate federal and state income tax rates. Changes to this proportion as the year progresses could result in a somewhat higher or lower effective tax rate in future periods. Cumulative Effect of Change in Accounting - ----------------------------------------- In the first quarter of last year, the Company recognized $1.8 million of income, net of taxes, from a Cumulative Effect of Change in Accounting for the alignment of the Professional and Training segment's fiscal year to the same June-end fiscal year as the rest of the Company. Because of the change to the CPA exam schedule from a twice a year November and May schedule to a nearly continuous exam administration, the Company believes that the historical Becker Professional Review operating year that ended in April is no longer the most appropriate fiscal year-end. Effective with the start of the Company's fiscal 2005, the Becker fiscal year was aligned to the June 30th year-end of DeVry Inc. and the cumulative effect of this change in accounting, representing the months of May and June 2004, was reported in the first quarter of fiscal 2005. Liquidity and Capital Resources - ------------------------------- Cash generated from operations for the first half was $57.5 million, compared to $67.8 million in the same period last year. Contributing to the lower cash flow was a $5.4 million reduction in non-cash charges included in Net Income. The lower non-cash 34 charges were for share-based compensation, depreciation and amortization. Reductions in accounts payable and accrued expenses and an increase in prepaid expenses were a $23.2 million increase in the use of cash compared to last year. Variations in the levels of accrued expenses and accounts payable are caused, in part, by the timing of the quarter-end relative to the Company's payroll and bill payment cycles. Partly offsetting these increases in the use of cash were higher net income for the first half, up $8.8 million, and a $9.4 million increased source of cash from Deferred Tuition Revenue, which represents the billed but not earned tuition revenue to be recognized in future periods as the educational programs to which this revenue relates are being taught. Capital spending for the first half was $10.8 million, compared to $21.4 million in the first half of last year. There are no major capital projects underway or currently in the late planning stage so that for the total year, capital spending is expected to remain below the level of the past several years. In addition to spending on capital additions and improvements during the first half, the Company paid $2.0 million for the acquisition of Gearty CPE. During the second quarter, the Company completed the sale of a Denver educational facility that had previously been offered for sale. Cash proceeds from the sale totaled approximately $1.8 million. Also during the second quarter, the Company announced that it has offered for sale its campus located in West Hills California. DeVry University plans to continue offering educational programs in the San Fernando Valley area and is considering other new facilities in the vicinity to meet current and future student demand. During the first half of this fiscal year, the Company repaid $65 million in borrowings from its revolving loan agreement using existing cash balances and cash flow generated from operations. During the first half of last year, the Company repaid $60 million of its borrowings. In January 2006, the Company repaid an additional $5 million of borrowings. All of the Company's borrowings are based upon a floating rate, generally LIBOR at the Company's option. In the first quarter of fiscal 2004, the Company entered into several interest rate cap agreements to protect approximately $100,000,000 of its borrowings from sharp increases in short-term interest rates upon which its borrowings are based. These interest rate cap agreements expired during the first quarter of this fiscal year. The company intends to periodically evaluate the need for future interest rate protection in light of projected changes in interest rates and expected borrowing levels. In early November 2005, the Company's revolving loan agreement was amended to exclude from the financial covenant computations, the non-cash effects of accounting for share-based awards in accordance with SFAS 123R. This amendment was initiated at the Company's request in accordance with terms of the original agreement. The Company's only long-term contractual obligations consist of its revolving line of credit and senior notes, operating leases on facilities and equipment, and agreements for various services. There are no required payments under the Company's borrowing agreements prior to their maturities in 2009 and 2010. The Company is not a party to any off-balance sheet financing or contingent payment agreements, nor are there any unconsolidated subsidiaries of the Company. There are no loans extended to any officer, director or other person affiliated with the Company. The Company has not entered into any derivative, swap, futures contract, put, call, hedge or non-exchange traded contract except for the interest rate cap agreements discussed above. 35 The Company's primary source of liquidity is the cash received from payments for student tuition, books, educational supplies and fees. These payments include funds originating as student and family educational loans; other financial aid from various federal, state and provincial loan and grant programs; and student and family financial resources. The Company is highly dependent upon the timely receipt of financial aid funds at DeVry University, Ross University and Deaconess College of Nursing. The Company estimates that historically, more than 60% of its DeVry University undergraduate students' tuition, book and fee revenues were financed by government-provided financial aid to students. At Keller Graduate School, approximately 70% of graduate student revenues are financed by government-provided financial assistance. At Ross University, collections from student participation in federal loan programs are approximately 70% of its revenues. The financial aid and assistance programs in which the Company's students participate are subject to political and budgetary considerations. There is no assurance that such funding will be maintained in the future. As previously discussed, currently there are legislative proposals that could adversely affect Ross University's medical school's participation in federal student loan programs. However, the Company believes that alternative lending sources are available in the event such legislative proposals are enacted. With these alternative lending sources, the Company believes that there would not be a long-term material effect on the Company's cash flows, results of operations or financial position. Extensive and complex regulations in the United States and Canada govern all of the government funded financial assistance programs in which the company's students participate. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for disciplinary action, including initiation of a suspension, limitation or termination proceeding against the Company. Such program reviews may be conducted at any educational institution at any time and have been conducted in the past at the Company's educational facilities and headquarters location. Previous Department of Education and state regulatory agency program reviews have not resulted in material findings or adjustments. Included in the Company's consolidated cash balances at the end of the quarter is $67.6 million attributable to Ross University offshore operations. For the foreseeable future, it is the Company's intention to reinvest this cash and subsequent earnings and cash flow to service the outstanding debt of Global Education International (the Corporate parent of Ross University) to improve and expand facilities and operations of the Ross schools and pursue future business opportunities outside the United States. Therefore, cash held by Ross University will not be available for general Company purposes such as at DeVry University. The Company believes that current balances of unrestricted cash, cash generated from operations and, if necessary, borrowings under the revolving loan facility will be sufficient to fund both its current operations and growth plans for the foreseeable future, unless future investment opportunities, similar to the acquisition of Ross University, should arise. Item 3 - Qualitative and Quantitative Disclosures About Market Risk - ------------------------------------------------------------------- The nature of the Company's operations does not subject it to a concentration or dependency upon the price levels or fluctuations in pricing of any one particular or group of commodities. 36 The financial position and results of operations of Ross University's Caribbean operations are measured using the U.S. dollar as the functional currency. Substantially all Ross University financial transactions are denominated in the U.S. dollar. The financial position and results of operations for the Company's Canadian educational programs are measured using the local currency as the functional currency. The Canadian operations have not entered into any material long-term contracts to purchase or sell goods and services, other than a lease agreement on its principal teaching facility. The Company does not have any foreign exchange contracts or derivative financial instruments related to protection from changes in the value of the Canadian dollar. Because the assets and liabilities of the Company's Canadian operations are small relative to those of the Company (Canadian assets are currently less than 2.5% of total Company assets) changes in currency value within the range of changes recently experienced, would not have a material effect on the Company's results of operations or financial position. Based upon the current value of the net assets in the Canadian operations, a change of $0.01 in the value of the Canadian dollar relative to the U.S. dollar would result in a pre-tax translation adjustment of less than $100,000. The Company's customers are principally individual students enrolled in its various educational programs. Accordingly, concentration of accounts receivable credit risk is small relative to total revenues or accounts receivable. The Company's cash is held in accounts at various financial institutions. The Company selects the financial institutions with which it maintains deposits from amongst only those that are the largest and most financially secure. Therefore, although the amount on deposit at a given institution will typically exceed amounts subject to guarantee, the Company has not experienced any deposit losses to date nor does it expect to incur such losses in the future. The interest rate on the Company's debt is based upon LIBOR interest rates for periods typically ranging from one to three months. Based upon the level of Company borrowings at December 31, 2005, a further 1.0% increase in short-term interest rates would result in $1.6 million of additional annual interest expense. However, future investment opportunities and cash flow generated from operations may affect the level of outstanding borrowings and the effect of a future change in interest rates. In the first quarter of fiscal 2004, the Company entered into several interest rate cap agreements to protect a portion of its borrowings from sharp increases in short-term interest rates. These agreements had expired by the end of the first quarter of fiscal year 2006 and no longer afford any protection from changes interest rates. The Company intends to periodically review further debt repayment and the need for additional interest rate protection agreements in light of projected changes in working capital, investment requirements and expectations about future period interest rates. 37 Item 4 - Controls and Procedures - -------------------------------- CEO and CFO Certificates - ------------------------ The required compliance certificates signed by the Company's CEO and CFO are included as Exhibits 31 and 32 of this Quarterly Report on Form 10-Q. Disclosure Controls and Procedures - ---------------------------------- Disclosure controls and procedures are designed to help ensure that all the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified by the appropriate rules. Evaluations required by Rule 13a - 15 of the Securities Exchange Act of 1934 of the effectiveness of the Company's disclosure and controls and procedures as of the end of the period covered by this Report have been carried out under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer. Based upon these evaluations, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as required, and have attested to this in Exhibit 31 of this Report. Changes In Internal Control Over Financial Reporting - ---------------------------------------------------- There were no changes in internal control over financial reporting that occurred during the second quarter and first half of fiscal year 2006 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 38 Part II - Other Information - --------------------------- Item 1 - Legal Proceedings - -------------------------- The Company is subject to occasional lawsuits, administrative proceedings, regulatory reviews associated with financial assistance programs and other claims arising in the normal conduct of its business. The following information updates the status of claims and litigation previously disclosed. In January 2002, Royal Gardner, a graduate of one of DeVry University's Los Angeles-area campuses, filed a class-action complaint against DeVry Inc. and DeVry University, Inc. in the Superior Court of the State of California, County of Los Angeles, on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. In March 2003, the complaint was dismissed by the court with limited right to amend and re-file. The complaint was subsequently amended and re-filed. During the first quarter of the Company's fiscal year 2004, a new complaint was filed in the same court by Gavino Teanio with the same general allegations and by the same plaintiffs' attorneys. This subsequent action has been stayed pending the outcome of the Gardner matter. Discovery and settlement discussions continue in the Gardner matter and a class action certification hearing is still pending, but there is no determinable date at which this matter may be brought to conclusion. The alleged class action above seeks money damages of an indeterminate amount. The Company has accrued $0.75 million representing the estimated minimum amount to resolve this claim. In November 2000, Afshin Zarinebaf, Ali Mousavi and another graduate of one of DeVry University's Chicago-area campuses filed a class-action complaint in the Circuit Court for Cook County, Illinois that alleges DeVry graduates do not have appropriate skills for employment in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and re-filed to include as a plaintiff Mark Macenas, a then-current student in another curriculum from a second Chicago- area campus. In September 2005, the court denied the plaintiff's motion for class action certification in its entirety. However, pending claims remain by each of the named defendants in this action. In August 2005 counterclaims were filed against the Company's subsidiary Dominica Management, Inc. and the Ross University School of Medicine by defendants American University of Antigua College of Medicine, Neal Simon and Sol Weltman in a case filed by Dominica Management, Inc. in the U.S. District Court for the Southern District of New York in September 2004. The original case filed by Dominica Management, Inc. sought relief primarily for alleged copyright infringement, misappropriation of trade secrets and confidential information, and unfair competition. The counterclaims allege, inter alia, anticompetive behavior, tortious interference with prospective economic relationships, and defamation. In October 2005, the Company and American University of Antigua reached an agreement to resolve this matter and drop all claims, and the matter is now resolved. While the ultimate outcome of these and other contingencies is difficult to estimate at this time, the Company does intend to vigorously defend itself with respect 39 to the pending claims. At this time, the Company does not believe that the outcome of current claims, administrative proceedings, regulatory reviews and lawsuits will have a material effect on its cash flows, results of operations or financial position. Item 4 - Submission Of Matters To A Vote Of Security Holders - ------------------------------------------------------------ The Company's regular annual meeting of stockholders was held in Oakbrook Terrace, Illinois, on Wednesday, November 9, 2005, pursuant to notice duly given. Proxies for the meeting were solicited in accordance with the Securities Exchange Act of 1934 and there was no solicitation in opposition to those of management. At the meeting, one director of the Company was elected as a Class III Director to hold office until 2006 or until his successor is elected and qualified. No. of Shares No. of Shares Class I Voted For Voted to Withhold ------- --------- ----------------- William T. Keevan 64,832,866 1,442,534 Four Directors of the Company were elected as Class II Directors to hold office until 2008 or until their successors are elected and qualified. No. of Shares No. of Shares Class II Voted for Voted to Withhold -------- --------- ----------------- David S. Brown 64,314,170 1,961,230 Dennis J. Keller 64,288,394 1,987,006 Frederick A. Krehbiel 64,471,790 1,803,610 Fernando Ruiz 64,832,540 1,442,860 The terms of the following Directors continued after the meeting: Charles A. Bowsher, Robert C. McCormack, Julia A. McGee, Connie R. Curran, Harold T. Shapiro and Ronald L. Taylor. In addition to the election of Directors, stockholders approved: a) the amendment and restatement of the DeVry Inc. Employee Stock Purchase Plan No. of Shares No. of Shares No. of Shares Voted for Voted Against Voted to Abstain --------- ------------- ---------------- 57,589,72 837,424 27,017 40 b) the DeVry Inc. Incentive Plan of 2005; No. of Shares No. of Shares No. of Shares Voted for Voted Against Voted to Abstain --------- ------------- ---------------- 49,780,084 8,633,554 40,526 and c) the selection of PricewaterhouseCoopers LLP as independent public accountants for the Company for the current fiscal year. No. of Shares No. of Shares No. of Shares Voted for Voted Against Voted to Abstain --------- ------------- ---------------- 66,142,321 121,533 11,546 41 Item 6 - Exhibits - ----------------- Exhibits Sequentially Exhibit # Description Numbered Page --------- ----------- ------------- 31 Rule 13a-14(a)/15d-14(a)Certifications 43 - 46 32 Section 1350 Certifications 47 42 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: February 8, 2006 /s/Ronald L. Taylor ----------------------- Ronald L. Taylor Chief Executive Officer Date: February 8, 2006 /s/Norman M. Levine ------------------------- Norman M. Levine Senior Vice President and Chief Financial Officer EX-31 2 x312.txt EXHIBIT 31 TO FISCAL 2006 2ND QUARTER 10-Q 43 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 officer 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)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)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 d)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 fourth 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 44 5. The registrant's other certifying officer 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 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 8, 2006 /s/ Norman M. Levine ------------------------- Norman M. Levine Senior Vice President and Chief Finance Officer 45 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 officer 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)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c)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 d)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 fourth 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 46 5. The registrant's other certifying officer 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 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 8, 2006 /s/ Ronald L. Taylor ----------------------- Ronald L. Taylor Chief Executive Officer EX-32 3 x322.txt EXHIBIT 32 TO FISCAL 2006 2ND QUARTER 10-Q 47 EXHIBIT #32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT The following statement is provided by the undersigned to accompany the Quarterly Report on Form 10-Q for the quarter ended December 31, 2005 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) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of DeVry Inc. for the periods reflected therein February 8, 2006 /s/Norman M. Levine ------------------------- Senior Vice President and Chief Financial Officer February 8, 2006 /s/Ronald L. Taylor ----------------------- Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----