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 September 30, 2001 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 November 1, 2001: 69,795,064 Total number of pages: 22
2 DeVRY INC. FORM 10-Q INDEX For the Quarter Ended September 30, 2001 Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets at September 30, 2001, June 30, 2000, and September 30, 2000 3-4 Consolidated Statements of Income for the quarter ended September 30, 2001, and 2000 5 Consolidated Statements of Cash Flows for the quarter ended March 31, 2001, and 2000 6 Notes to Consolidated Financial Statements 7-15 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16-20 Part II. Other Information Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22
3 PART I - Financial Information Item 1 - Financial Statements <TABLE> DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <CAPTION> September 30, June 30, September 30, 2001 2001 2000 --------- --------- --------- (Unaudited) (Unaudited) <S> <C> <C> <C> ASSETS Current Assets Cash and Cash Equivalents $ 50,127 $ 29,213 $ 30,635 Restricted Cash 25,060 20,484 22,519 Accounts Receivable, Net 67,936 25,664 66,725 Inventories 3,593 4,899 4,652 Deferred Income Taxes 5,221 5,221 3,526 Prepaid Expenses and Other 5,211 3,146 2,701 ------- ------- ------- Total Current Assets 157,148 88,627 130,758 ------- ------- ------- Land, Buildings and Equipment Land 58,881 42,583 42,062 Buildings 169,190 122,433 113,119 Equipment 151,865 147,437 122,607 Construction In Progress 2,937 20,808 2,347 ------- ------- ------- 382,873 333,261 280,135 Accumulated Depreciation (127,899) (125,796) (107,324) ------- ------- ------- Land, Buildings and Equipment, Net 254,974 207,465 172,811 ------- ------- ------- Other Assets Intangible Assets, Net 31,881 32,027 33,520 Goodwill 46,825 46,825 39,699 Deferred Income Taxes 3,955 4,658 2,035 Perkins Program Fund, Net 9,858 9,753 8,316 Other Assets 2,312 2,320 1,188 ------- ------- ------- Total Other Assets 94,831 95,583 84,758 ------- ------- ------- TOTAL ASSETS $506,953 $391,675 $388,327 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
4 <TABLE> DEVRY INC. CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) <CAPTION> September 30, June 30, September 30, 2001 2001 2000 --------- --------- --------- (Unaudited) (Unaudited) <S> <C> <C> <C> LIABILITIES Current Liabilities Accounts Payable $ 36,446 $ 34,573 $ 27,187 Accrued Salaries, Wages & Benefits 30,159 23,782 28,155 Accrued Expenses 18,462 10,891 15,540 Advance Tuition Payments 8,078 14,179 6,916 Deferred Tuition Revenue 62,817 10,957 59,988 ------- ------- ------- Total Current Liabilities 155,962 94,382 137,786 ------- ------- ------- Other Liabilities Revolving Loan 40,000 - - Deferred Rent and Other 12,290 12,622 12,765 ------- ------- ------- Total Other Liabilities 52,290 12,622 12,765 ------- ------- ------- TOTAL LIABILITIES 208,252 107,004 150,551 ------- ------- ------- SHAREHOLDERS' EQUITY Common Stock, $0.01 par value, 200,000,000 Shares Authorized, 69,791,039, 69,755,491 and 69,679,874, Shares Issued and Outstanding at September 30, 2001, June 30, 2001 and September 30, 2000, Respectively 698 698 697 Additional Paid-in Capital 64,773 64,481 63,311 Retained Earnings 232,850 218,772 173,162 Accumulated Other Comprehensive Income 380 720 606 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY 298,701 284,671 237,776 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $506,953 $391,675 $388,327 ======= ======= ======= </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 Ended September 30, --------------------- 2001 2000 -------- -------- <S> <C> <C> REVENUES: Tuition $144,759 $119,063 Other Educational 9,681 11,130 Interest 192 255 ------- ------- Total Revenues 154,632 130,448 ------- ------- COSTS AND EXPENSES: Cost of Educational Services 83,127 73,338 Student Services and Administrative Expense 48,116 37,215 Interest Expense 310 113 ------- ------- Total Costs and Expenses 131,553 110,666 ------- ------- Income Before Income Taxes 23,079 19,782 Income Tax Provision 9,001 7,616 ------- ------- NET INCOME $ 14,078 $ 12,166 ======= ======= EARNINGS PER COMMON SHARE Basic $0.20 $0.17 ======= ======= Diluted $0.20 $0.17 ======= ======= </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 Quarter Ended September 30, ------------------- 2001 2000 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $14,078 $12,166 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation 7,510 6,105 Amortization of Intangible Assets and Goodwill 146 915 Amortization of Other Assets 11 18 Provision for Refunds and Uncollectible Accounts 8,530 7,249 Deferred Income Taxes 703 (3) Loss on Disposals and Adjustments to Land, Buildings and Equipment 199 (35) Changes in Assets and Liabilities: Restricted Cash (4,576) (3,124) Accounts Receivable (50,773) (48,612) Inventories 1,306 1,719 Prepaid Expenses And Other (2,534) (606) Accounts Payable 1,873 (4,640) Accrued Salaries, Wages, Expenses and Benefits 13,948 11,939 Advance Tuition Payments (6,101) (8,591) Deferred Tuition Revenue 51,860 49,893 ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 36,180 24,393 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital Expenditures (55,218) (20,080) ------ ------ NET CASH USED IN INVESTING ACTIVITIES: (55,218) (20,080) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds From Exercise of Stock Options 292 299 Proceeds From Revolving Credit Facility 55,000 6,000 Repayments Under Revolving Credit Facility (15,000) (6,000) ------ ------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 40,292 299 Effects of Exchange Rate Differences (340) 172 ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,914 4,784 Cash and Cash Equivalents at Beginning of Period 29,213 25,851 ------ ------ Cash and Cash Equivalents at End of Period $50,127 $30,635 ====== ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest Paid During the Period $250 $83 Income Tax (Refunds)Payments During the Period, Net 1,600 (170) </TABLE> The accompanying notes are an integral part of these consolidated financial statements.
7 DEVRY INC. Notes to Consolidated Financial Statements For the Quarter Ended September 30, 2001 ---------- 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 as filed with the Securities and Exchange Commission for the fiscal year ended June 30, 2001. The results of operations for the three months ended September 30, 2001, 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" ("FAS 141") and "Goodwill and Other Intangible Assets" ("FAS 142"), respectively. FAS 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. FAS 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. FAS 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 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.
8 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------- As required by FAS 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 impairment. Indefinite lived intangible assets related to Trademarks, Trade Names and Intellectual Property are not amortized as there is no legal, regulatory, contractual, economic or other factors that limit the useful life of these intangible assets to the reporting entity. As of July 1, 2001 there was no impairment loss associated with such indefinite lived intangible assets. 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 assets consist of the following: As of September 30, 2001 --------------------------------- Gross Carrying Accumulated Amount Amortization --------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $ 2,500,000 $ (941,000) Class Materials 500,000 (110,000) Other 600,000 (225,000) --------- --------- Total $ 3,600,000 $(1,276,000) ========= ========= Unamortized Intangible Assets: Trademark $ 1,645,000 Trade Names 13,972,000 Intellectual Property 13,940,000 ---------- Total $29,557,000 ==========
9 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------- 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 ========== As of September 30, 2000 ---------------------------------- Gross Carrying Accumulated Amount Amortization ---------------------------------- Amortized Intangible Assets: License and Non Compete Agreements $ 2,500,000 $ (529,000) Class Materials 500,000 (85,000) Other 610,000 (127,000) --------- ------- Total $ 3,610,000 $ (741,000) ========= ======= Unamortized Intangible Assets: Trademark $ 1,692,000 Trade Names 14,496,000 Intellectual Property 14,463,000 ---------- Total $30,651,000 ==========
10 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------- Amortization expense for amortized intangible assets was $146,000 for the three months ended September 30, 2001 and $501,000 for both amortized and unamortized intangible assets for the three months ended September 30, 2000. Estimated amortization expense for amortized intangible assets for the next five fiscal years ended June 30, is as follows: Fiscal Year ----------- 2002 $550,000 2003 550,000 2004 550,000 2005 550,000 2006 50,000 The weighted-average amortization period for amortized intangible assets is 6 years for License and Non Compete Agreements, 10 years for Class Materials and 6 years for other as of July 1, 2001. A complete valuation of the Company's goodwill by reporting unit is underway to determine if there is any impairment in the carrying value as of July 1, 2001 and is expected to be completed by the end of the second fiscal quarter. Based upon the Company's preliminary analysis, it does not appear that there will be any impairment in the value of the Company's goodwill for any reporting unit. The carrying amount of goodwill for each reportable segment at July 1, 2001 and September 30, 2001 was unchanged and was $22,195,000 related to Undergraduate and $24,630,000 related to Graduate and Professional reportable segments. The goodwill reported for the Graduate and Professional segment at September 30, 2001 includes estimated goodwill associated with the Stalla Seminars acquisition that occurred in January 2001 for which the Company is in the process of finalizing the purchase price allocation at this time. As required by FAS 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.
11 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (continued) - ------------------------------------------- (Dollars in thousands except per share amounts) For the Quarter Ended September 30, --------------------- 2001 2000 ---- ---- NET INCOME: Net Income as reported $14,078 $12,166 Goodwill amortization - 256 Trademark, Trade Name and Intellectual Property Amortization - 225 Change in useful life of Class Materials - (3) ------ ------ Adjusted Net Income $14,078 $12,644 ====== ====== EARNINGS PER COMMON SHARE: Basic Earnings per Common Share as reported $0.20 $0.17 Aggregate Changes in Amortization Expense - .01 ----- ----- Adjusted Basic Earnings per Common Share $0.20 $0.18 ===== ===== Diluted Earnings per Common Share as reported $0.20 $0.17 Aggregate Changes in Amortization Expense - .01 ----- ----- Adjusted Diluted Earnings per Common Share $0.20 $0.18 ===== =====
12 NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued Business Combinations and Intangible Assets (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 69,778,000 and 69,660,000 for the first quarters ended September, 2001 and 2000, 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 70,711,000 and 70,820,000 for the first quarters ended September 30, 2001 and 2000, respectively. 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 September 30, 2001. 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 periods ended September 30, 2001 and 2000. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements. For the Quarter Ended September 30, -------------------------- 2001 2000 -------------------------- Revenues: Undergraduate $133,369,000 $113,201,000 Graduate and Professional 21,541,000 17,426,000 Intersegment Elimination (278,000) (179,000) ----------- ----------- Total Consolidated Revenues $154,632,000 $130,448,000 =========== =========== Operating Income: Undergraduate $19,329,000 $18,577,000 Graduate and Professional 4,384,000 2,437,000 Reconciling Items: Amortization Expense (157,000) (932,000) Interest Expense (310,000) (113,000) Depreciation and Other (167,000) (187,000) ----------- ----------- Total Consolidated Income before Income Taxes $23,079,000 $19,782,000 =========== =========== Segment Assets: Undergraduate $399,300,000 $288,583,000 Graduate and Professional 86,086,000 80,321,000 Corporate 21,567,000 19,423,000 ----------- ----------- Total Consolidated Assets $506,953,000 $388,327,000 =========== =========== Additions to Long-lived Assets: Undergraduate $54,697,000 $19,699,000 Graduate and Professional 521,000 381,000 ----------- ----------- Total Consolidated Additions to Long-lived Assets $55,218,000 $20,080,000 =========== =========== Depreciation Expense: Undergraduate $6,958,000 $5,564,000 Graduate and Professional 359,000 348,000 Corporate 193,000 193,000 ----------- ----------- Total Consolidated Depreciation $7,510,000 $6,105,000 =========== =========== Amortization Expense: Undergraduate $ 8,000 $265,000 Graduate and Professional 149,000 668,000 ----------- ----------- Total Consolidated Amortization $157,000 $933,000 =========== ===========
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 periods ended September 30, 2001 and 2000. Revenues and long-lived assets by geographic area are as follows: For the Quarter Ended September 30, -------------------------- 2001 2000 -------------------------- Revenues from Unaffiliated Customers: Domestic Operations $148,233,000 $124,756,000 International Operations 6,399,000 5,692,000 -------------------------- Consolidated $154,632,000 $130,448,000 ========================== Long-lived Assets: Domestic Operations $338,909,000 $245,589,000 International Operations 10,896,000 11,980,000 -------------------------- Consolidated $349,805,000 $257,569,000 ========================== No one customer accounted for more than 10% of the Company's consolidated revenues.
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 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. Results of Operations - --------------------- The Company's total consolidated revenues increased by $24.2 million, or 18.5%, compared to last year. Tuition revenues, representing the largest component of total revenues, increased by $25.7 million, or 21.5%, from last year because of higher student enrollments and increased tuition pricing at all of the Company's operations. Other Educational Revenues, that are composed primarily of the sale of books and supplies for all of the Company's educational operations, declined slightly from last year. While sales of the Becker CD-ROM and other study materials contributed to an increase in Other Educational Revenues in the Graduate and Professional segment, the continued outsourcing of some Undergraduate segment bookstore operations that is discussed in more detail below, has caused an overall decline in this revenue category. Interest income on the Company's short-term investments of cash balances declined slightly because of the somewhat lower cash balances that were available for investment during most of the quarter. Undergraduate segment revenues increased by 17.8% to $133.4 million. Total student enrollment at the DeVry Institutes for the summer term that began in July, including the newly opened campus in the Seattle, Washington area, increased by more than 9% from last year to 47,415. In addition, tuition pricing was increased by approximately 6% from last year. Tuition rates at the more recently opened Institute locations have been
17 generally higher than the system average rate, further contributing to the overall rate of revenue increase. At the start of the current fiscal year, 11 of the DeVry Institute bookstores had been outsourced compared to 5 at the start of the previous fiscal year, resulting in a somewhat lower level of Other Educational Revenues within the total Undergraduate segment revenue. In the Graduate and Professional segment, total revenues increased by 23.6% from last year to $21.5 million. An increased number of graduate school teaching centers and higher enrollments at existing centers produced more than a 26% increase in enrollments for the term which began at the end of June. Enrollment increased at a 24+% rate for the graduate school term that began in September. Enrollment increases at Becker Conviser and higher tuition rates for both operations also contributed to the higher level of revenue. Other Educational Revenue within this segment did increase as student enrollments grew, but at a somewhat lesser rate from the prior year so that the overall rate of revenue growth was less than the rate of growth in just tuition revenue. The Company's Cost of Educational Services increased by 13.3% from last year, a lesser rate of increase than for revenues. Costs did increase generally in support of increased enrollments and new operating locations. However, offsetting these increases and partly contributing to the lesser rate of growth in this expense category, is the effect of economies of scale from increased enrollments and 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 commission income based upon the level of sales at these locations. This change in operation and reporting has the effect of increasing the reported operating margins within the Undergraduate segment and for the Company as a whole. Student Services and Administrative Expense increased by 29.3% to $48.1 million. The higher rate of increase relative to the rate of increase in tuition revenue is due to higher student recruitment expense in the Undergraduate segment in response to an increasingly competitive environment and the events of September 11th which diverted applicant attention at a critical point in the recruiting process for the new academic term that begins in early November. The Company continued its efforts at developing a new student information system to better its support for educational processes and related activities. In
18 accordance with accounting principles for internal software development costs, certain wage and outside consulting service costs are being capitalized. During the quarter, the Company capitalized an additional $1.0 million, bringing the cumulative capitalized amount to $3.3 million. Partly offsetting the increase in Undergraduate segment student recruiting costs is a reduction of $775,000 in amortization expense of intangible assets and goodwill compared to the first quarter of last year. The Company adopted Financial Accounting Standard No. 142, entitled "Goodwill and Other Intangible Assets" effective with its first quarter of the current fiscal year. 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. During the quarter, the Company completed an analysis of its identifiable intangible assets and goodwill. One intangible asset was reduced to no remaining value and the amortizable life of another intangible asset was shortened to better reflect its expected useful life. The final purchase price allocation of the January 2001 acquisition of the Stalla Seminars business will be completed and reported in the Company's second fiscal quarter. Goodwill and indefinite lived intangible assets must be reviewed annually for impairment in value. As of July 1, 2001, there was no impairment loss associated with the Company's indefinite lived intangible assets. With respect to goodwill, a complete valuation study is underway on the Fair Value compared to the Carrying Value of the three operating segments that are the appropriate reporting units for purposes of the FAS 142 analysis. Based upon preliminary results, the Company does not believe that there is currently any impairment in value to the goodwill in any of its reporting units. In the Undergraduate segment, revenue growth produced operating leverage in Cost of Educational Services, but overall operating margins declined from 16.4% to 14.5% in the quarter because of the increased spending on student recruitment discussed above. In the Graduate and Professional segment, operating margins increased from 14.0% to 20.4% because of the benefits of scale from higher enrollments and tuition rates that were not offset
19 by the need for higher rates of spending on educational operations or student recruitment. Interest expense increased to $0.3 million from $0.1 million in the same quarter last year as the Company used its revolving line of credit throughout the entire quarter to meet both its cyclical operating needs and for the acquisition of the two DeVry Institute campuses purchased during the quarter. Reported net income of $14.1 million, or $0.20 per share (diluted), was a record for any first quarter. If FAS 142 had been adopted in the first quarter of last year, reported net earnings for the quarter ended September 30, 2000, would have increased by $0.01 to $0.18 per share (diluted). Liquidity and Capital Resources - ------------------------------- Cash generated from operations in the first quarter was $35.2 million, a 51% increase from the same period a year ago. Contributing to the sharply increased cash flow were higher net income, the increased non-cash charges for depreciation, refunds and bad debt included in this net income and increases in accounts payable and accrued expenses. These increases are generally related to the higher level of student enrollments, increased revenues and related operating activities as the Company continues to grow. Capital spending for the quarter was a record $54.2 million, up more than $35 million from last year. Contributing to this increase in capital spending was the purchase of two DeVry Institute campuses, in Pomona, California, and Addison, Illinois, formerly occupied under lease. These purchases totaled approximately $37.8 million. Capital spending on improvements and expansion throughout all of the Company's educational operations is expected to remain at historically high levels for the foreseeable future. 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 quarter. To- date, there have been no further borrowings or repayments.
20 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 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. With respect to both of these new accounting standards, the Company is in the process of performing a preliminary assessment and has not yet determined whether these standards will have any immediate impact on the Company's financial statements upon adoption.
21 Item 5 - Other Information - -------------------------- In November 2000, three graduates of one of DeVry Institute's Chicago-area campus 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 has filed a motion with the court requesting that the suit be dismissed. 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 September 30, 2001.
22 Signatures - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: NOVEMBER 12, 2001 /s/ Ronald L. Taylor ------------------------------ Ronald L. Taylor President and Chief Operating Officer Date: NOVEMBER 12, 2001 /s/Norman M. Levine ------------------------------ Norman M. Levine Senior Vice President Finance and Chief Financial Officer