1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 Commission file number 0-12751 DeVRY INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 36-3150143 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Tower Lane, Oakbrook Terrace, Illinois 60181 ------------------------------------------ ---------- (Address of principal executive offices) (Zip Code) (630) 571-7700 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X Number of shares of Common Stock, $0.01 par value, outstanding at April 15, 2002: 69,892,822 Total number of pages: 23
2 DeVRY INC. FORM 10-Q INDEX For the Quarter and Nine Months ended March 31, 2002 Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets at March 31, 2002, June 30, 2001, and March 31, 2001 3-4 Consolidated Statements of Income for the quarter and nine months ended March 31, 2002, and 2001 5 Consolidated Statements of Cash Flows for the nine months ended March 31, 2002, and 2001 6 Notes to Consolidated Financial Statements 7-15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16-21 Part II. Other Information Item 5. Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23
3 PART I - Financial Information Item 1 - Financial Statements <TABLE> DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) <CAPTION> March 31, June 30, March 31, 2002 2001 2001 ----------- ---------- ----------- <S> <C> <C> <C> ASSETS Current Assets Cash and Cash Equivalents $ 78,297 $ 29,213 $ 26,868 Restricted Cash 50,820 20,484 58,345 Accounts Receivable, Net 105,186 25,664 115,049 Inventories 3,085 4,899 4,130 Deferred Income Taxes 5,221 5,221 3,526 Prepaid Expenses and Other 2,723 3,146 3,451 ------- ------- ------- Total Current Assets 245,332 88,627 211,369 ------- ------- ------- Land, Buildings and Equipment Land 58,892 42,583 42,501 Buildings 172,685 122,433 119,728 Equipment 166,165 147,437 137,422 Construction In Progress 383 20,808 10,128 ------- ------- ------- 398,125 333,261 309,779 Accumulated Depreciation (144,436) (125,796) (117,829) ------- ------- ------- Land, Buildings and Equipment, Net 253,689 207,465 191,950 ------- ------- ------- Other Assets Intangible Assets, Net 35,919 32,027 32,525 Goodwill 42,391 46,825 47,328 Deferred Income Taxes 3,413 4,658 1,166 Perkins Program Fund, Net 10,201 9,753 9,746 Other Assets 2,155 2,320 1,679 ------- ------- ------- Total Other Assets 94,079 95,583 92,444 ------- ------- ------- TOTAL ASSETS $593,100 $391,675 $495,763 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
4 <TABLE> DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited) <CAPTION> March 31, June 30, March 31, 2002 2001 2001 ----------- ---------- ----------- <S> <C> <C> <C> LIABILITIES Current Liabilities Accounts Payable $ 38,399 $ 34,573 $ 33,039 Accrued Salaries, Wages & Benefits 31,789 23,782 30,725 Accrued Expenses 9,896 10,891 8,646 Advance Tuition Payments 8,833 14,179 9,382 Deferred Tuition Revenue 143,646 10,957 130,684 ------- ------- ------- Total Current Liabilities 232,563 94,382 212,476 ------- ------- ------- Other Liabilities Revolving Loan 14,000 - - Deferred Income Tax Liability - - - Deferred Rent and Other 10,372 12,622 12,425 ------- ------- ------- Total Other Liabilities 24,372 12,622 12,425 ------- ------- ------- TOTAL LIABILITIES 256,935 107,004 224,901 ------- ------- ------- SHAREHOLDERS' EQUITY Common Stock, $0.01 par value, 200,000,000 Shares Authorized, 69,885,847, 69,755,491 and 69,742,851, Shares Issued and Outstanding at March 31, 2002, June 30, 2001 and March 31, 2001, Respectively 699 698 698 Additional Paid-in Capital 65,454 64,481 63,893 Retained Earnings 269,636 218,772 204,921 Accumulated Other Comprehensive Income 376 720 1,350 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY 336,165 284,671 270,862 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $593,100 $391,675 $495,763 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
5 <TABLE> DEVRY INC. CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Except for Per Share Amounts) (Unaudited) <CAPTION> For The Quarter For The Nine Months Ended March 31, Ended March 31, --------------------- ---------------------- 2002 2001 2002 2001 --------------------- ---------------------- <S> <C> <C> <C> <C> REVENUES: Tuition $151,775 $133,001 $450,261 $385,969 Other Educational 12,954 11,120 35,449 33,973 Interest 85 242 411 817 ------- ------- ------- ------- Total Revenues 164,814 144,363 486,121 420,759 ------- ------- ------- ------- COSTS AND EXPENSES: Cost of Educational Services 87,827 76,446 261,089 226,781 Student Services and Administrative Expense 46,536 41,325 140,506 121,893 Interest Expense 143 89 744 278 ------- ------- ------- ------- Total Costs and Expenses 134,506 117,860 402,339 348,952 ------- ------- ------- ------- Income Before Income Taxes 30,308 26,503 83,782 71,807 Income Tax Provision 11,941 10,466 32,918 27,882 ------- ------- ------- ------- NET INCOME $ 18,367 $ 16,037 $ 50,864 $ 43,925 ======= ======= ======= ======= EARNINGS PER COMMON SHARE Basic $0.26 $0.23 $0.73 $0.63 ==== ==== ==== ==== Diluted $0.26 $0.23 $0.72 $0.62 ==== ==== ==== ==== </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
6 <TABLE> DEVRY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) <CAPTION> For The Nine Months Ended March 31, --------------------- 2002 2001 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 50,864 $ 43,925 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 24,163 20,656 Amortization of Intangible Assets and Goodwill 542 2,833 Amortization of Other Assets 33 52 Provision for Refunds and Uncollectible Accounts 26,126 21,742 Deferred Income Taxes 1,245 866 Loss on Disposals and Adjustments to Land, Buildings and Equipment 287 282 Changes in Assets and Liabilities: Restricted Cash (30,336) (38,950) Accounts Receivable (105,555) (111,197) Inventories 1,814 2,261 Prepaid Expenses And Other 562 (2,929) Accounts Payable 3,826 1,212 Accrued Salaries, Wages, Expenses and Benefits 7,012 6,661 Advance Tuition Payments (5,346) (6,125) Deferred Tuition Revenue 132,689 120,589 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 107,926 61,878 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (73,472) (54,087) Payments for Purchase of Business, Net of Cash Acquired - (8,572) ------- ------- NET CASH USED IN INVESTING ACTIVITIES: (73,472) (62,659) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Exercise of Stock Options 974 882 Proceeds From Revolving Credit Facility 55,000 24,000 Repayments Under Revolving Credit Facility (41,000) (24,000) ------- ------- NET CASH PROVIDED BY FINANCING ACTIVITIES 14,974 882 Effects of Exchange Rate Differences (344) 916 ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS 49,084 1,017 Cash and Cash Equivalents at Beginning of Period 29,213 25,851 ------- ------- Cash and Cash Equivalents at End of Period $ 78,297 $ 26,868 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid During the Period $ 741 $ 237 Income Tax Payments During the Period, Net 35,228 29,700 </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
7 DEVRY INC. Notes to Consolidated Financial Statements For the Quarter and Nine Months Ended March 31, 2002 (Unaudited) 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, 2001 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, 2001 and in conjunction with the Company's quarterly reports on Form 10-Q for the quarters ended September 30, 2001 and December 31, 2001, each as filed with the Securities and Exchange Commission. The results of operations for the quarter and nine months ended March 31, 2002, are not necessarily indicative of results to be expected for the entire fiscal year. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Combinations and Intangible Assets - ------------------------------------------- In July 2001, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 141 and 142, entitled "Business Combinations" ("SFAS 141") and "Goodwill and Other Intangible Assets" ("SFAS 142"), respectively. SFAS 141 requires companies to use the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates use of the pooling-of-interests method of accounting for business combinations. All of the Company's acquisitions to-date have been accounted for using the purchase method of accounting. SFAS 141 also establishes criteria that must be used to determine whether acquired intangible assets should be recognized separately from goodwill in the Company's financial statements. SFAS 142 details the method by which companies will account for goodwill and intangible assets after a business combination has been completed. This accounting standard provides that goodwill and indefinite lived intangibles arising from a business combination will no longer be amortized and charged to expense over time. Instead, goodwill and indefinite lived intangibles must be reviewed annually for impairment, or more frequently if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the "implied fair value"
8 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------------------- of the reporting unit goodwill is less than the carrying amount of the goodwill. For indefinite lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. As required by SFAS 142, the Company has completed an assessment of the categorization of its existing intangible assets and goodwill in accordance with the new criteria and has reported them appropriately on the Consolidated Balance Sheets. Intangible assets with indefinite lives are not subject to amortization, but are instead reviewed annually for impairment, or more frequently if circumstances arise indicating potential impairment. Indefinite lived intangible assets related to Trademarks, Trade Names 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 July 1, 2001, there was no impairment loss associated with such indefinite lived intangible assets as fair value exceeds the carrying amount. Amortization of intangible assets with finite lives will continue over the expected economic lives of the intangible assets. As part of its assessment of intangible assets, the company shortened the useful life of the Class Materials intangible asset and wrote-off the $10,000 cost basis of another intangible asset. In the quarter ended December 31, 2001, the Company also finalized the allocation of the purchase price of the Stalla Seminars acquisition that occurred in January 2001. The initially recorded goodwill from this acquisition was reduced by $4,434,000 and reallocated as follows: Amortized Intangible Assets: Class Materials $2,400,000 Non-compete Agreement 100,000 Other 34,000 --------- Total $2,534,000 ========= Unamortized Intangible Assets: Trade Name $1,900,000 ========= The $34,000 of Other amortized intangible assets was subsequently written-off to expense as a part of the allocation process.
9 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------------------- Intangible assets consist of the following: As of March 31, 2002 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non-compete Agreements $2,600,000 $(1,153,000) Class Materials 2,900,000 (210,000) Other 600,000 (275,000) --------- --------- Total $6,100,000 $(1,638,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 15,872,000 Intellectual Property 13,940,000 ---------- Total $31,457,000 ========== As of June 30, 2001 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non-compete Agreements $2,500,000 $ (838,000) Class Materials 500,000 (100,000) Other 610,000 (202,000) --------- --------- Total $3,610,000 $(1,140,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 13,972,000 Intellectual Property 13,940,000 ---------- Total $29,557,000 ==========
10 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------------------- As of March 31, 2001 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non-compete Agreements $2,500,000 $ (735,000) Class Materials 500,000 (95,000) Other 610,000 (175,000) --------- --------- Total $3,610,000 $(1,005,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,661,000 Trade Names 14,146,000 Intellectual Property 14,113,000 ---------- Total $29,920,000 ========== Amortization expense for amortized intangible assets was $137,000 and $542,000 for the three and nine months ended March 31, 2002, respectively. Amortization expense was $503,000 and $1,509,000 for both amortized and unamortized intangible assets for the three and nine months ended March 31, 2001, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ended June 30, is as follows: Fiscal Year 2002 $730,000 2003 730,000 2004 730,000 2005 730,000 2006 230,000 The weighted-average amortization period for amortized intangible assets is 6 years for License and Non-compete Agreements, 14 years for Class Materials and 6 years for Other as of March 31, 2002. Based upon the valuation analysis performed for the Company by independent professional valuation specialists, there was no impairment in the value of the Company's goodwill for any reporting units as of July 1, 2001. The carrying amount of goodwill related to the Undergraduate reportable segment at July 1, 2001 and March 31, 2002 was unchanged at $22,195,000. The carrying amount of goodwill related to Graduate and Professional reportable segment was $24,630,000 at July 1, 2001 and $20,196,000 at March 31, 2002. The decrease is the result of the finalization of the allocation of the Stalla Seminars purchase price as described above.
11 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------------------- As required by SFAS 142, the following is the Company's disclosure of what reported net income would have been in all periods presented, exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized and changes in amortization periods for intangible assets that will continue to be amortized. (Dollars in thousands except per share amounts) For the Quarter Ended For the Nine Months Ended March 31, March 31, --------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- NET INCOME: Net Income as reported $18,367 $16,037 $50,864 $43,925 Goodwill amortization - 304 - 810 Trademark, Trade Name and Intellectual Property Amortization - 220 - 670 Change in useful life of Class Materials - (3) - (9) ------ ------ ------ ------ Adjusted Net Income $18,367 $16,558 $50,864 $45,396 ====== ====== ====== ====== EARNINGS PER COMMON SHARE: Basic Earnings per Common Share as reported $0.26 $0.23 $0.73 $0.63 Aggregate Changes in Amortization Expense - .01 - .02 ------ ------ ------ ------ Adjusted Basic Earnings per Common Share $0.26 $0.24 $0.73 $0.65 ====== ====== ====== ====== Diluted Earnings per Common Share as reported $0.26 $0.23 $0.72 $0.62 Aggregate Changes in Amortization Expense - - - .02 ------ ------ ------ ------ Adjusted Diluted Earnings per Common Share $0.26 $0.23 $0.72 $0.64 ====== ====== ====== ======
12 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Earnings Per Common Share - ------------------------- Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Shares used in this computation were 69,855,000 and 69,721,000 for the third quarters ended March 31, 2002 and 2001, respectively and 69,810,000 and 69,689,000 for the nine months ended March 31, 2002 and 2001, respectively. Diluted earnings per share is computed by dividing net income by the weighted average number of shares assuming dilution. Dilutive shares reflect the additional shares that would be outstanding if dilutive stock options were exercised during the period. Shares used in this computation were 70,611,000 and 70,697,000 for the third quarters ended March 31, 2002 and 2001, respectively and 70,618,000 and 70,678,000 for the nine months ended March 31, 2002 and 2001, respectively. Excluded from the third quarter and nine month ended March 31, 2002 computations of diluted earnings per share were options to purchase 677,000 and 604,000 shares of common stock, respectively. These outstanding options were excluded because the option exercise prices were greater than the average market price of the common shares and therefore, their effect would be anti- dilutive. Comprehensive Income - -------------------- Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in the financial statements. The components of Comprehensive Income, other than those included in Net Income, were immaterial for the quarter ended March 31, 2002. Reclassifications - ----------------- Certain previously reported amounts have been reclassified to conform to current presentation format. This includes tuition refunds, which were previously reported as a Cost of Educational Services and are now classified as a reduction in net revenue.
13 NOTE 3: SEGMENT INFORMATION The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") effective with the year ended June 30, 1999. SFAS 131 establishes standards for the way that public business enterprises report certain information about operating segments in the financial reports. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in assessing performance of the segment and in deciding how to allocate resources to an individual segment. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company's principal business is providing post-secondary education. The services of our operations are described in more detail under "Nature of Operations" in Note 1 to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. The Company presents two reportable segments: the undergraduate operations (Undergraduate) and graduate and professional examination review operations including Keller Graduate School of Management and Becker Conviser Professional Review (Graduate and Professional). These segments are based on the method by which management evaluates performance and allocates resources. Such decisions are based upon each segment's operating income, which is defined as income before interest expense, amortization and income taxes. Intersegment sales are accounted for at amounts comparable to sales to nonaffiliated customers, and are eliminated in consolidation. The accounting policies of the segments are the same as those described in Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. 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.
14 NOTE 3: SEGMENT INFORMATION, continued Following is a tabulation of business segment information for the quarters and for the nine month periods ended March 31, 2002 and 2001. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements. (Dollars in thousands) For the Quarter For the Nine Months Ended March 31, Ended March 31, ------------------ ------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Undergraduate $142,057 $126,243 $416,572 $364,836 Graduate and Professional 22,752 18,566 70,613 56,819 Intersegment Elimination 5 (446) (1,064) (896) ------- ------- ------- ------- Total Consolidated Revenue $164,814 $144,363 $486,121 $420,759 ======= ======= ======= ======= Operating Income: Undergraduate $ 26,181 $ 24,706 $ 69,631 $ 64,986 Graduate and Professiona 4,612 3,050 16,025 10,508 Reconciling Items: Amortization Expense (148) (1,021) (575) (2,885) Interest Expense (143) (89) (744) (278) Depreciation and Other (194) (143) (555) (524) ------- ------- ------- ------- Total Consolidated Income before Income Taxes $ 30,308 $ 26,503 $ 83,782 $ 71,807 ======= ======= ======= ======= Segment Assets: Undergraduate $490,562 $403,147 $490,562 $403,147 Graduate and Professional 81,423 73,471 81,423 73,471 Corporate 21,115 19,145 21,115 19,145 ------- ------- ------- ------- Total Consolidated Assets $593,100 $495,763 $593,100 $495,763 ======= ======= ======= ======= Additions to Long-lived Assets: Undergraduate $ 10,614 $ 14,332 $ 72,059 $ 52,861 Graduate and Professional 370 345 1,413 1,226 ------- ------- ------- ------- Total Consolidated Additions to Long-lived Assets $ 10,984 $ 14,677 $ 73,472 $ 54,087 ======= ======= ======= ======= Depreciation Expense: Undergraduate $ 7,852 $ 6,917 $ 22,433 $ 18,917 Graduate and Professional 397 437 1,150 1,160 Corporate 193 193 580 579 ------- ------- ------- ------- Total Consolidated Depreciation $ 8,442 $ 7,547 $ 24,163 $ 20,656 ======= ======= ======= ======= Amortization Expense: Undergraduate $ 8 $ 271 $ 23 $ 815 Graduate and Professional 140 750 552 2,070 ------- ------- ------- ------- Total Consolidated Amortization $ 148 $ 1,021 $ 575 $ 2,885 ======= ======= ======= =======
15 NOTE 3: SEGMENT INFORMATION, continued The Company conducts its educational operations in the United States, Canada, Europe, the Middle East and the Pacific Rim. International revenues, which are derived principally from Canada, were less than 10% of total revenues for the quarters and for the nine months ended March 31, 2002 and 2001. Revenues and long-lived assets by geographic area are as follows: (Dollars in thousands) For the Quarter For the Nine Months Ended March 31, Ended March 31, ------------------- -------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues from Unaffiliated Customers: Domestic Operations $159,130 $138,427 $468,106 $402,793 International Operations 5,684 5,936 18,015 17,966 ------- ------- ------- ------- Consolidated $164,814 $144,363 $486,121 $420,759 ======= ======= ======= ======= Long-lived Assets: Domestic Operations $337,724 $274,016 $337,724 $274,016 International Operations 10,044 10,378 10,044 10,378 ------- ------- ------- ------- Consolidated $347,768 $284,394 $347,768 $284,394 ======= ======= ======= ======= No one customer accounted for more than 10% of the Company's consolidated revenues. NOTE 4: COMMITMENTS AND CONTINGENCIES The Company is subject to occasional lawsuits, regulatory reviews associated with financial assistance programs and claims arising in the normal conduct of its business. The Company has accrued amounts it believes are appropriate to vigorously pursue its defense in these matters. At this time, the Company does not believe that the outcome of current claims, regulatory reviews and lawsuits will have a material effect on its results of operations or financial position.
16 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition Certain information contained in this quarterly report may constitute forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Potential risks and uncertainties include, but are not limited to, dependence on student financial aid, state and provincial approval and licensing requirements, and other factors detailed in the Company's Securities and Exchange Commission ("SEC") filings, including those discussed under the heading entitled "Risk Factors" in the Company's Registration Statement on Form S-3 (No. 333-22457) filed with the SEC. 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, 2001. The Company's annual report on Form 10-K includes a description of significant accounting policies including, but not limited to, accounting policies on revenue recognition, depreciation methods, asset impairment recognition and capitalization of internal software development costs. The following discussion of the Company's results of operations and financial condition should also be read in conjunction with the Company's quarterly reports on Form 10-Q for the quarters ended September 30, 2001, and December 31, 2001, each as filed with the Securities and Exchange Commission. Because of the somewhat seasonal pattern of the Company's enrollments and its educational program starting dates, which affect the results of operations and the timing of cash inflows, the Company's management believes that comparisons of its results of operations should be made to the corresponding period in the preceding year. Comparisons of financial position should be made to both the end of the previous fiscal year and to the end of the corresponding interim quarterly period in the preceding year. Results of Operations - --------------------- The Company's total consolidated revenues increased from last year by $20.5 million and $65.4 million for the third quarter and first three quarters of the fiscal year, respectively. Tuition revenues, the largest component of revenue, representing over 92% of total revenues, increased by $18.8 million, or 14.1% for the third quarter compared to the third quarter of last year. For the first nine months, the increase in tuition revenues was $64.3 million, or 16.7%. The increases in tuition revenue were produced by several positive factors including higher student enrollments and increased tuition pricing at all of the Company's operations. Other Educational Revenues, which are composed primarily of the sales of books and supplies and fee charges in all of the Company's educational operations, increased by $1.8 million and $1.5 million for the third quarter and nine months, respectively. Further outsourcing of some Undergraduate segment bookstore operations compared to the third quarter of last year, discussed in more detail below, limited increases in this revenue category for both the quarter and year to-date, as expected. This was more than offset by a new
17 Technology and Software Supplies charge, which is being billed each term, to DeVry Institute students to provide them with current technology in their classrooms and laboratories and their own suite of software to help ensure that DeVry graduates have both current software and technology expertise. This charge is recognized ratably into income over the applicable academic term, similar to the recognition of tuition revenue. In the Graduate and Professional segment, book sales to greater numbers of enrolled students attending the Keller Graduate School programs and sales of the Becker CD-ROM and other study materials continue to increase. Interest income on the Company's short-term investments of cash balances declined slightly in the quarter and first nine months from the corresponding periods of a year ago because of lower prevailing interest rates earned on these balances and somewhat lower balances being invested during the period. Undergraduate segment revenues increased by $15.8 million, or 12.5%, for the third quarter compared to last year. For the first three quarters, revenues increased by $51.7 million, or 14.2%, from last year. Total student enrollment at the DeVry Institutes for the fall term that began in November 2001 increased by 3.5% from last year to 48,698. In addition, tuition pricing was increased by approximately 6% from last year effective with the summer term that began in July. Tuition rates at the more recently opened Institute locations have been generally higher than the system average, further contributing to the overall rate of revenue increase. Contributing to the record revenues were the opening of a new DeVry Institute campus in the Seattle, Washington, area in July and a new campus in the Washington, DC, area in November. Undergraduate enrollments for the spring term that began in March 2002 were 46,210, compared to 46,792 last year including the remaining enrollments of certain discontinued Denver Technical College programs still being taught to program completion. At the start of the current fiscal year, 11 of the DeVry Institute bookstores were outsourced and a 12th store was outsourced in the second quarter, contributing to the lesser rate of increase in Other Educational revenues compared to the rate of increase in Tuition revenues from last year. At the end of March last year, a total of 9 bookstores had been outsourced. In the Graduate and Professional segment, revenues increased by $4.2 million, or 22.5%, from the third quarter of last year. For the first three quarters, revenues increased by $13.8 million, or 24.3%, from last year. At Keller Graduate School, total course enrollment for the term that began in November increased by 19.9% from the same term a year ago and course enrollment for the term that began in February 2002 increased by 22.9%. Enrollment increases at Becker Conviser and higher sales of their CD-ROM and online products further contributed to the increased revenues in this segment as did tuition price increases implemented during the past year at both Keller Graduate School and Becker Conviser. The Company's Cost of Educational Services increased by $11.4 million, or 14.9%, from last year. For the first nine months, these costs increased by $34.3 million, or 15.1%. Costs increased in support of increased enrollments and new operating locations. The opening of new locations contributes greater increases to cost than to revenue in their early terms of operation. In addition, during the second and third quarters the Company incurred the incremental cost of acquiring and distributing individual software licenses for undergraduate students in most of DeVry Institute's programs. These software costs, in conjunction with the Technology and Software Supplies charge, are an expansion of DeVry's commitment to educational program
18 support. Depreciation expense, most of which is included in Cost of Educational Services, increased by 17% from last year to $24.2 million for the first three quarters. The increase in depreciation expense reflects the continued high level of capital spending on expansion and improvement throughout all of the Company's operations. Partly offsetting the rate of increase in spending on educational operations is the expanded outsourcing of Undergraduate segment bookstore operations. The Company does not report bookstore revenue or cost of books sold at the outsourced locations, reporting instead the commission income based upon the level of sales at these locations. This change in operation has the effect, slowing somewhat now as the rate of new outsourcing slows, of increasing the reported percentage operating margins within the Undergraduate segment and for the Company as a whole. Student Services and Administrative Expense increased by $5.2 million, or 12.6%, in the third quarter compared to last year. For the first nine months, these costs increased by $18.6 million, or 15.3%, from last year. In the second quarter, the pace of advertising for student recruitment was pared back and the advertising was re-timed to occur in the third quarter. In the third quarter, and contributing to the year-to-date spending increase, the Company incurred the higher student recruitment advertising expense in the Undergraduate segment in response to an increasingly competitive environment and the depressed technology sector that apparently continues to affect the career choices of potential applicants. The Company is continuing its development of a new student information system to better support its educational processes and related activities. In accordance with accounting principles for internal software development costs, certain wage and outside consulting service costs are being capitalized. During the third quarter, the Company capitalized $1.9 million. For the first nine months, the total amount capitalized was $3.9 million while an additional $3.0 million was charged directly to Student Services and Administrative expense during the period. One of the Company's Directors is also a director of a consulting firm engaged by the Company to assist with system development projects, including the new student information system. Fees paid to this consulting firm during the first nine months of fiscal 2002 totaled $2.2 million. Partly offsetting the increased student recruitment expenses and information system development costs during the first nine months was a reduction of $2.3 million in amortization expense of intangible assets and goodwill compared to the same period a year ago as a result of the Company's adoption of Statement of Financial Accounting Standard No. 142, entitled "Goodwill and Other Intangible Assets". Goodwill and indefinite lived intangible assets arising from a business combination will no longer be amortized and charged to expense over time. Instead, goodwill and indefinite lived intangibles must be reviewed annually for impairment, or more frequently if circumstances arise indicating potential impairment. For goodwill, if the carrying amount of the reporting unit containing the goodwill exceeds the fair value of that reporting unit, an impairment loss is recognized to the extent the "implied fair value" of the reporting unit goodwill is less than the carrying amount of the goodwill. For indefinite lived intangible assets, if the carrying amount exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. As of July 1, 2001, there was no impairment loss associated with the Company's indefinite lived intangible assets or goodwill associated with the reporting units represented by the Company's three operating segments.
19 In the Undergraduate segment, although the amount of operating income increased from the levels of a year-ago, operating margins as a percent of revenues of 18.4% and 16.7% for the second quarter and nine months, respectively, were both approximately 1.1% lower than for the corresponding periods last year. The increased level of spending on student recruitment, the opening of two new undergraduate locations and a lesser number of new student enrollments in the fall and spring term all contributed to the lower operating margin. In the Graduate and Professional segment, operating margins for the quarter were 20.2%, up from 16.4% in the third quarter of last year. For the nine months, operating margins of 22.7% increased similarly from the year-ago period. The increased margins reflect the operating efficiencies from higher enrollments and higher tuition pricing at both the Keller Graduate School and Becker Conviser Professional Review. Interest expense of $0.1 million in the quarter increased only slightly from the third quarter of last year. For the first nine months, interest expense was $0.7 million compared to less than $0.3 million last year. The higher interest expense for the nine months reflects borrowings under the Company's revolving line of credit through the first three quarters to meet both cyclical operating needs and to fund the purchase of two DeVry Institute campuses in the first quarter that were formerly occupied under operating leases. Taxes on income were 39.4% of pre-tax income for the third quarter, almost equal to the tax rate in the third quarter of last year. For the first nine months, the rate on pre-tax income was 39.3% compared to 38.8% last year. The higher year-to-date effective tax rate reflects an increase to the weighted average state income tax rate on the Company's U.S. operations and downward adjustments to the value of the Company's Canadian tax loss carryforward benefits based on tax rate reductions in the expected future utilization periods. Reported Net Income for the quarter totaled $18.4 million or $0.26 per share (diluted), a record for any third quarter in the Company's history. Net Income increased by 14.5% from last year. For the first three quarters, Net Income increased by 15.8% from last year to $50.9 million or $0.72 per share (diluted), a record for any first three quarter period in the Company's history. The prior year third quarter and first nine months diluted earnings per share would have been $0.01 and $0.02 per share higher, respectively, without the expense associated with goodwill and indefinite lived intangible assets that are no longer being amortized in accordance with SFAS 142. Liquidity and Capital Resources - ------------------------------- Cash generated from operations reached $107.9 million for the first nine months, up more than 70% from the same period a year ago. Contributing to this increase in cash flow was a reduction in the level of accounts receivable, higher net income and the increased non-cash charges for depreciation, refunds and bad debt included in this net income. The reduction in accounts receivable is attributable to a reduction in the amount of money owed to the Company under various state and federal financial aid programs as a result of more timely requests for the funds owed and improved cash management in the student financial aid process plus a strong start to the collection process for amounts owed by undergraduate students who are attending the term that began in March. Federal and state financial aid programs represent over 60% of the collections for U.S. DeVry Institute revenues.
20 Capital spending for the first nine months reached a record high of $73.5 million. Contributing to the record spending level was the first quarter purchase of two DeVry Institute campuses, in Pomona, California, and Addison, Illinois, both formerly occupied under operating leases. These purchases totaled approximately $37.8 million, or approximately 50% of the total spending year-to-date. Capital spending on improvements and expansion throughout all of the Company's educational operations is an integral part of the Company's operating strategy. Capital spending in future periods is expected to be maintained in full support of this strategy. In the first quarter, the Company borrowed $55 million under its revolving line of credit agreement to fund the record capital spending and to meet cyclical operating needs. Using cash generated from the cyclical inflow following the start of the DeVry Institute summer term, the Company repaid $15 million of the borrowings before the end of the first quarter. In the second quarter, the Company repaid an additional $15 million using cash generated from the cyclical inflow following the start of the DeVry Institute fall term. In the third quarter, the Company repaid an additional $11 million of the borrowings, reducing the outstanding borrowing to $14 million. In addition, there were approximately $2.2 million in outstanding letters of credit issued in conjunction with the Company's participation in federal financial aid programs and property insurance coverage policies. Subsequent to the end of the third quarter, the Company repaid the entire amount of its borrowings except for the outstanding letters of credit. In December 2001, the Company and its banks amended the $85 million revolving loan agreement under which the Company has issued letters of credit and borrowed to meet cyclical operating requirements and for capital spending and acquisitions. The term of the agreement was extended to February 1, 2004. In addition, the covenant limiting capital expenditures was removed and the fixed charge covenant was modified to provide improved flexibility for the Company's future operations. The Company's long-term contractual obligations consist only of its revolving line of credit, operating leases on facilities and equipment and agreements for various services. The Company is not a party to any other long-term contractual or off-balance sheet financing arrangements nor are there any unconsolidated subsidiaries of the Company. The principal source of the Company's liquidity is operating cash flow that is significantly dependent upon the Company's continued participation in and compliance with federal, state and provincial financial aid programs. The Company is highly dependent upon the timely receipt of these financial aid funds in both its U.S. and Canadian operations. The Company estimates that, historically, approximately 70% of its Undergraduate segment's tuition, bookstore and fee revenues have been financed by government-provided financial aid to students. More recently, Keller Graduate School students have begun to make increased use of student loan offerings that now represent over 30% of Keller's revenues. These financial aid and assistance programs are subject to political and governmental budgetary considerations. There is no assurance that such funding will be maintained. Extensive and complex regulations in the United States and Canada govern all of the government financial assistance programs in which the Company's students participate. The Company's administration of these programs is periodically reviewed by various regulatory agencies. Any regulatory violation could be the basis for disciplinary action, including initiation of a suspension, limitation or termination proceeding against the Company. In
21 April 2002, the Company received notice from the Office of Postsecondary Education of the United States Department of Education of a limited scope program review of federally funded student financial assistance programs administered by the DeVry Institutes. Such program reviews may be conducted at any educational institution at any time and have been conducted in the past at various DeVry Institutes. Previous program reviews at DeVry Institutes have not resulted in significant findings or adjustments. The Company believes that current balances of unrestricted cash, cash generated from operations and, if needed, its revolving loan facility will be sufficient to fund its current operations and growth plans for the foreseeable future. Adoption of New Accounting Standards - ------------------------------------ In July 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect that there will be any immediate impact on its financial statements upon adoption of SFAS No. 143 or SFAS No. 144; however, the Company has not yet completed its full analysis of these new standards.
22 Item 5 - Other Information In February 2002, the Company announced that the Higher Learning Commission of the North Central Association approved the merger of DeVry Institutes and Keller Graduate School of Management into a single educational institution with the name DeVry University. The DeVry University designation represents a clear statement of the kind of comprehensive higher education system that the Company has become. In March 2002, the Company announced that it leased land to build an approximately 72,000 square foot undergraduate campus in the NorthRidge Business Park in Westminster (Denver), Colorado. Courses are expected to be offered for the March 2003 term. The current campuses in Denver and Colorado Springs will remain open during the construction and selected programs are expected to continue to be offered at these locations in the future. In March 2002, the Company received notice of a class-action complaint filed under the Fair Labor Standards Act by several former field sales representatives seeking overtime compensation for services rendered during their period of employment. The Company does not believe that there is merit to this claim and intends to vigorously defend itself. The following updates the status of litigation and claims previously disclosed: In January 2002, the Company received notice of an antitrust complaint concerning the operations of its Becker CPA Review Corp. subsidiary in California. This complaint was filed in federal district court by the trustee in bankruptcy of a failed CPA review provider seeking a substantial amount of damages. On April 15, 2002, this complaint was voluntarily dismissed by the plaintiff without prejudice. In January 2002, a graduate of one of DeVry Institute's Los Angeles-area campuses filed a class-action complaint on behalf of all students enrolled in the post-baccalaureate degree program in Information Technology. The suit alleges that the program offered by DeVry did not conform to the program as it was presented in the advertising and other marketing materials. The Company does not believe that there is any merit to the claim and intends to vigorously defend itself. In November 2000, three graduates of one of DeVry Institute's Chicago-area campuses filed a class-action complaint that alleges DeVry graduates do not have appropriate skills for employability in the computer information systems field. The complaint was subsequently dismissed by the court, but was amended and refiled, this time including a current student from a second Chicago-area campus. The Company does not believe that there is any merit to the claim and intends to vigorously defend itself. Item 6 - Exhibits and Reports on Form 8-K (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the quarter ended March 31, 2002.
23 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: MAY 1, 2002 /s/Ronald L. Taylor ----------------------------- Ronald L. Taylor President and Chief Operating Officer Date: MAY 1, 2002 /s/Norman M. Levine --------------------------------- Norman M. Levine Senior Vice President Finance and Chief Financial Office