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 month period ended September 30, 2003
Commission file number 1-13988
DeVRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3150143
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Lane, Oakbrook Terrace, Illinois 60181
- -----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(630) 571-7700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
YES X
Number of shares of Common Stock, $0.01 par value, outstanding on
October 31, 2003: 70,042,082
Total number of pages: 36
2
DeVRY INC.
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FORM 10-Q INDEX
For the Quarter Ended September 30, 2003
Page No.
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PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
September 30, 2003, June 30, 2003,
and September 30, 2002 3-4
Consolidated Statements of Income
for the quarters ended
September 30, 2003 and 2002 5
Consolidated Statements of Cash
Flows for the three months ended
September 30, 2003 and 2002 6
Notes to Consolidated Financial
Statements 7-19
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 20-25
Item 3. Quantitative and Qualitative
Disclosures about Market Risk 25-26
Item 4. Disclosure Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, June 30, September 30,
2003 2003 2002
------------ ----------- ------------
(Unaudited) (Unaudited)
ASSETS
Current Assets
Cash and Cash Equivalents $139,522 $108,699 $ 97,046
Restricted Cash 21,348 14,052 25,894
Accounts Receivable, Net 50,888 24,275 54,149
Inventories 3,072 4,315 3,347
Deferred Income Taxes 11,358 11,358 5,448
Prepaid Expenses and Other 9,990 6,988 4,176
------- ------- -------
Total Current Assets 236,178 169,687 190,060
------- ------- -------
Land, Buildings and Equipment
Land 59,875 59,888 58,937
Buildings 190,818 188,320 174,890
Equipment 210,384 207,405 179,503
Construction In Progress 12,339 12,662 823
------- ------- -------
473,416 468,275 414,153
Accumulated Depreciation (189,569) (182,921) (155,231)
------- ------- -------
Land, Buildings and
Equipment, Net 283,847 285,354 258,922
------- ------- -------
Other Assets
Intangible Assets, Net 96,475 103,330 35,510
Goodwill 283,298 280,979 42,391
Deferred Income Taxes - - 1,504
Perkins Program Fund, Net 11,291 11,291 10,617
Other Assets 5,665 6,003 2,084
------- ------- -------
Total Other Assets 396,729 401,603 92,106
------- ------- -------
TOTAL ASSETS $916,754 $856,644 $541,088
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, June 30, September 30,
2003 2003 2002
------------ ----------- ------------
(Unaudited) (Unaudited)
LIABILITIES
Current Liabilities
Current Maturities of
Revolving Loan $ - $ 15,000 $ -
Accounts Payable 36,272 34,094 30,173
Accrued Salaries, Wages &
Benefits 38,012 30,791 35,983
Accrued Expenses 28,836 31,767 20,522
Advance Tuition Payments 8,870 10,568 12,893
Deferred Tuition Revenue 87,479 16,291 66,336
------- ------- -------
Total Current Liabilities 199,469 138,511 165,907
------- ------- -------
Other Liabilities
Revolving Loan 138,000 150,000 -
Senior Debt 125,000 125,000 -
Deferred Income Taxes 13,049 13,049 -
Deferred Rent and Other 14,689 14,417 10,593
------- ------- -------
Total Other Liabilities 290,738 302,466 10,593
------- ------- -------
TOTAL LIABILITIES 490,207 440,977 176,500
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,040,257, 70,021,513 and
69,922,793, Shares Issued and
Outstanding at September 30,
2003, June 30, 2003 and
September 30, 2002,
Respectively 701 701 700
Additional Paid-in Capital 67,678 67,288 66,478
Retained Earnings 357,467 346,975 296,983
Accumulated Other Comprehensive
Income 701 703 427
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 426,547 415,667 364,588
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $916,754 $856,644 $541,088
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
(Unaudited)
For The Quarter Ended
September 30,
2003 2002
-------- --------
REVENUES:
Tuition $177,594 $151,155
Other Educational 11,585 12,029
Interest 57 85
------- -------
Total Revenues 189,236 163,269
------- -------
COSTS AND EXPENSES:
Cost of Educational Services 104,450 92,171
Student Services and
Administrative Expense 67,949 52,457
Interest Expense 2,156 47
------- -------
Total Costs and Expenses 174,555 144,675
------- -------
Income Before Income Taxes 14,681 18,594
Income Tax Provision 4,189 7,438
------- -------
NET INCOME $ 10,492 $ 11,156
======= =======
EARNINGS PER COMMON SHARE
Basic $0.15 $0.16
======= =======
Diluted $0.15 $0.16
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
6
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Quarter
Ended September 30,
2003 2002
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,492 $11,156
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 9,119 8,603
Amortization of Intangible Assets 3,385 182
Amortization of Other Assets 264 10
Provision for Refunds and
Uncollectible Accounts 9,579 9,034
Deferred Income Taxes - 297
Loss on Disposals and Adjustments to
Land, Buildings and Equipment 67 146
Changes in Assets and Liabilities:
Restricted Cash (7,296) (6,630)
Accounts Receivable (36,192) (37,013)
Inventories 1,243 1,560
Prepaid Expenses And Other (2,690) (2,041)
Accounts Payable 2,178 (6,111)
Accrued Salaries, Wages,
Expenses and Benefits 4,290 17,267
Advance Tuition Payments (1,698) (2,990)
Deferred Tuition Revenue 71,188 54,049
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 63,929 47,519
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (7,679) (10,044)
Adjustment to Payment for Purchase of Business 1,185 -
------- ------
NET CASH USED IN INVESTING ACTIVITIES: (6,494) (10,044)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 390 133
Repayments Under Revolving Credit Facility (27,000) -
------- ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (26,610) 133
Effects of Exchange Rate Differences (2) (247)
------- ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 30,823 37,361
Cash and Cash Equivalents at Beginning
of Period 108,699 59,685
------- ------
Cash and Cash Equivalents at End of Period $139,522 $97,046
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $1,600 $49
Income Tax Payments During the Period, Net 8,427 30
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, 2003
----------
NOTE 1: INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements include the accounts of DeVry
Inc. (the Company) and its wholly-owned subsidiaries. These financial
statements are unaudited but, in the opinion of management, contain all
adjustments, consisting only of normal, recurring adjustments, necessary to
present fairly the financial condition and results of operations of the
Company. The June 30, 2003 data which is presented is derived from audited
financial statements.
The interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the fiscal year ended June 30, 2003.
The results of operations for the three months ended September 30, 2003, are
not necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
- -------------------------
Included in the accounts payable balance is $21.6, $15.2 and $17.7 million at
September 30, 2003, June 30, 2003 and September 30, 2002, respectively, for
checks issued but not yet cleared through the Company's bank accounts.
Derivative Instruments and Hedging Activities
- ---------------------------------------------
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.
The Company's only hedging contracts at September 30, 2003, are purchased
interest rate caps (see Note 5 - Long term Debt). The effective portion of the
gain or loss of the interest rate caps, which are designated as cash flow
hedges, is first reported as a component of Other Comprehensive Income. These
amounts are reclassified and recognized into earnings upon the recognition of
the interest related to the hedged long-term debt. Any ineffectiveness in a
hedging relationship is recognized immediately into earnings. There was no
significant change in the fair market value of the interest rate cap during the
three months ended September 30, 2003.
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development costs that are
amortized using the straight line method over the estimated 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 $13,790,000, $12,349,000 and $8,500,000 as
of September 30, 2003, June 30, 2003 and September 30, 2002, respectively.
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 (gross) $2,305,000 at September 30, 2003
and June 30, 2003, and $1,849,000 at September 30, 2002
Post-employment Benefits
- ------------------------
The Company's employment agreements with its co-Chief Executive Officers
provide certain post-employment benefits that require accrual over the
expected future service period beginning with the second quarter of fiscal
2002. The Company recorded expense accruals of approximately $445,000 for
the three months ended September 30, 2003 and $2.5 million for the year
ended June 30,2003, related to these agreements. This accrual is based on
recording, over the period of active service, the amount that will
represent the present value of the obligation through the date the
executive attains full eligibility for the benefits, discounted using a
5.25% rate and using the sinking fund accrual method.
Guarantees
- ----------
The Company adopted the accounting requirements of Financial Interpretation No.
45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," for guarantees issued
or modified after December 31, 2002. The adoption did not have an impact on
the Company's financial statements as of September 30, 2003 or June 30, 2003.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences while the officer or director is
performing at its request in such capacity. The indemnification agreement
period is for the
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Guarantees, continued
- ---------------------
officer's or director's lifetime. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a directors and officer
liability insurance policy that limits its exposure and enables it to recover a
portion of any future amounts paid. As a result of its insurance policy
coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal. The Company has no liabilities recorded
for these agreements of September 30, 2003.
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 70,030,000 and 69,910,000 for the first quarters
ended September, 2003 and 2002, respectively. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares
assuming dilution. Dilutive shares are computed using the Treasury Stock Method
and reflect the additional shares that would be outstanding if dilutive stock
options were exercised during the period. Shares used in this computation were
70,637,000 and 70,323,000 for the first quarters ended September 30, 2003 and
2002, respectively. Excluded from the computations of diluted earnings per
share were options to purchase 1,160,000 and 1,358,000 shares of common stock
for the first quarters ended September 30, 2003 and 2002, 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.
Stock-based Compensation
- ------------------------
During the first quarter ended September 30, 2003, the Company granted options
at fair market value to purchase up to 542,150 shares of the Company's common
stock under the 1999 Stock Incentive Plan.
The Company accounts for its stock option plan using Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results
in no charge to earnings when options are issued at fair market value. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," to stock-based employee compensation.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based Compensation, continued
- -----------------------------------
For the Quarter Ended
September 30,
2003 2002
------- -------
Net Income as Reported $10,492,000 $11,156,000
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (773,000) (572,000)
---------- ----------
Pro Forma Net Income $ 9,719,000 $10,584,000
========== ==========
Earnings per Common Share:
Basic as Reported $0.15 $0.16
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (0.01) (0.01)
---- ----
Pro Forma Basic $0.14 $0.15
==== ====
Diluted as Reported $0.15 $0.16
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax expense (0.01) (0.01)
---- ----
Pro Forma Diluted $0.14 $0.15
==== ====
Comprehensive Income
- --------------------
The Company's only item that meets the definition for adjustment to arrive at
Comprehensive Income is the change in cumulative translation adjustment.
This change was immaterial for the quarters and three months ended September
30, 2003 and 2002.
11
NOTE 3: BUSINESS COMBINATIONS
Ross University
- ---------------
On May 16, 2003, the Company acquired all of the outstanding shares of capital
stock of Dominica Management, Inc. (DMI) for $329,259,000 in cash which
includes approximately $4,175,000 of acquisition related fees. The results of
DMI's operations have been included in the consolidated financial statements of
the Company since that date. DMI owns and operates Ross University School of
Medicine and Ross University School of Veterinary Medicine. With campuses
located in the Caribbean countries of Dominica and St. Kitts/Nevis, Ross
University is one of the world's largest providers of medical and veterinary
education with more than 2,800 students. The acquisition gives the Company
entry into a growing sector of the higher education market. The addition of
Ross University will further diversify the Company's curricula and help
maintain a leadership position in career-focused education.
During the first quarter of fiscal 2004, the Company recorded an adjustment
to the purchase price of DMI based on a settlement of final working capital
balances. This adjustment resulted in a reduction of $1,185,000 to the
goodwill balance recorded for this acquisition. The Company also finalized
the allocation of the purchase price of DMI in the first quarter of 2004.
Based on a final purchase price allocation analysis performed for the Company
by independent professional valuation specialists, the goodwill from this
acquisition that was recorded at June 30, 2003, was increased by $3,470,000.
Also, the Student Relationships amortizable intangible assets were reduced by
$5,200,000 and the Ross Title IV Eligibility and Accreditations indefinite-
lived intangible assets were increased by $1,730,000.
The following unaudited pro forma financial information presents the results of
operations of the Company and DMI as if the acquisition had occurred at the
beginning of fiscal 2003. The pro forma information is based on historical
results of operations and does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of
operations of the combined enterprises:
For the Quarter Ended
September 30, 2002
(Unaudited)
-----------
Revenues $177,841,000
Net Income 11,229,000
Earnings per Common Share:
Basic $0.16
Diluted $0.16
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NOTE 4: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of September 30, 2003
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $(5,008,000)
License and Non Compete
Agreements 2,600,000 (1,799,000)
Class Materials 2,900,000 (550,000)
Other 600,000 (425,000)
---------- ---------
Total $53,600,000 $(7,782,000)
========== =========
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
==========
As of September 30, 2002
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
License and Non Compete
Agreements $2,600,000 $(1,372,000)
Class Materials 2,900,000 (350,000)
Other 600,000 (325,000)
--------- ---------
Total $6,100,000 $(2,047,000)
========= =========
Unamortized Intangible Assets:
Trademark $ 1,645,000
Trade Names 15,872,000
Intellectual Property 13,940,000
----------
Total $31,457,000
==========
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NOTE 4: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was $3,385,000 and
$182,000 for the three months ended September 30, 2003 and 2002,
respectively. Estimated amortization expense for amortized intangible
assets for the next five fiscal years ending June 30, is as follows:
Fiscal Year
2004 $13,840,000
2005 14,030,000
2006 9,820,000
2007 6,720,000
2008 3,580,000
The original weighted-average amortization period for amortized intangible
assets is five years for Student Relationships, six years for License and Non-
compete Agreements, 14 years for Class Materials and six years for Other as of
September 30, 2003. These intangible assets are being amortized on a straight-
line basis except for the Student Relationships. The amount being amortized
for these Student Relationships is based on the estimated progression of the
students through the respective medical and veterinary programs, giving
consideration to the revenue and cash flow associated with both existing
students and new applicants. This results in the amount being amortized at an
annual rate for each of the five years of estimated economic life as follows:
Year 1 27.4%
Year 2 29.0%
Year 3 21.0%
Year 4 14.5%
Year 5 8.1%
Indefinite-lived intangible assets related to Trademarks, Trade Names, Title
IV Eligibility, Accreditation and Intellectual Property are not amortized as
there are no legal, regulatory, contractual, economic or other factors that
limit the useful life of these intangible assets to the reporting entity. As
of the end of fiscal years 2003 and 2002, there was no impairment loss
associated with these indefinite-lived intangible assets as fair value
exceeds the carrying amount.
The Company performs an annual analysis of potential impairment with the
assistance of independent professional valuation specialists. Based on
the results of this analysis, there was no impairment in the value of the
Company's goodwill for any reporting units as of the end of fiscal 2003
or 2002. The carrying amount of goodwill related to the DeVry University
reportable segment at September 30, 2003 and 2002 was unchanged at
$22,195,000. The carrying amount of goodwill related to Professional and
Training reportable segment at September 30, 2003 and 2002 was unchanged
14
NOTE 4: INTANGIBLE ASSETS, continued
at $20,196,000. The carrying amount of goodwill related to the Ross
University segment was $240,907,000 at September 30, 2003. This is an
increase of $2,319,000 from the balance at June 30, 2003. This change is
comprised of the following:
Final Allocation of Purchase
Price (Note 3) $3,470,000
Adjustment to Purchase Price
(Note 3) (1,185,000)
Additional Acquisition Related
Costs 34,000
---------
Total Adjustments $2,319,000
=========
NOTE 5: INCOME TAXES
The principal operating subsidiaries of DMI are Ross University School of
Medicine (the Medical School) incorporated under the laws of the Commonwealth
of Dominica and Ross University School of Veterinary Medicine (the Veterinary
School), incorporated under the laws of the Federation of St. Christopher
Nevis, St. Kitts in the West Indies. Both operating companies have agreements
with the respective governments that exempt them from local income taxation
through the years 2043 and 2023, respectively. Accordingly no current
provision for foreign income taxes was recorded in the first quarter ended
September 30, 2003 for the Medical or Veterinary Schools.
The Company has not recorded a tax provision for the undistributed earnings of
the Medical and Veterinary Schools for the period after the acquisition. It is
the Company's intention to indefinitely reinvest post-acquisition
undistributed earnings and profits to service debt, improve the facilities and
operations of the Schools and pursue future opportunities outside of the
United States. As of September 30, 2003, cumulative undistributed earnings
were approximately $4.7 million.
15
NOTE 6: LONG-TERM DEBT
All of the Company's borrowings and letters of credit under its long-term debt
agreements are through DeVry Inc. and Global Education International, Inc.
(GEI), a subsidiary newly formed in relation to the acquisition of DMI
(Note 3). This long-term debt consists of the following at September 30, 2003:
Effective
Outstanding Interest Rate at
Debt September 30, 2003
------------ ------------------
Revolving Credit Agreement (a):
DeVry Inc. as borrower $ 90,000,000 2.64%
GEI as borrower 48,000,000 2.64%
-----------
Total $138,000,000 2.64%
-----------
Senior Notes (b):
DeVry Inc. as borrower $ 75,000,000 2.54%
GEI as borrower 50,000,000 2.54%
-----------
Total $125,000,000 2.54%
-----------
Total long-term debt $263,000,000 2.59%
===========
During the first quarter of fiscal 2004, the Company entered into several
interest rate cap agreements to protect approximately $100,000,000 of its
current borrowings from sharp increases in short-term interest rates upon
which its borrowings are based. The Company intends to periodically evaluate
the need for interest rate protection in light of projected changes in
interest rates and borrowing levels.
These interest rate cap agreements are designated as cash flow hedging
instruments and are intended to protect the portion of the Company's debt
that is covered by these agreements from increases in short-term interest
rates above 3.5%.
These cap agreements were purchased at fair market values totaling $512,000.
This cost has been capitalized and is being amortized to earnings and
recorded as interest expense over the 24 month lives of the agreements.
NOTE 7: COMMITMENTS AND CONTINGENCIES
In August 2003, the Company announced that its subsidiary, DeVry Canada
LLC, had signed a letter of intent with RCC College of Technology ("RCC")
that will enable DeVry to phase out its operations at its Toronto campus
commencing with the term that begins in November 2003. Subject to the
Company entering into a definitive agreement and approval by the Ontario
Provincial Ministry, DeVry University's Toronto campus will no longer
admit new students and will contract with RCC to manage the completion of
programs of study for the current student body in Toronto. The letter of
intent also makes provisions for the acquisition of DeVry assets and the
use of certain portions of DeVry curriculum under the RCC brand name.
16
NOTE 7: COMMITMENTS AND CONTINGENCIES, continued
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 represent its
best estimate of the probable exposure associated with these matters.
In September 2003, the Company received a notice claiming patent-infringement
from Acacia Research Corporation. The notice alleges that the Company has
infringed upon several Acacia patents relating to streaming audio and video
technology. This technology is used by the Company through its online
platform provider and is also used by many other companies in the delivery of
online programs.
In March 2002, the Company received notice of a class-action complaint
filed under the Fair Labor Standards Act by several former field sales
representatives seeking overtime compensation for services rendered
during their period of employment. In March 2003, the Company
participated in a required mediation session but no resolution was
reached.
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by operations of its Becker CPA Review
Corp. subsidiary in California. This complaint was filed in federal
district court by the trustee in bankruptcy of a failed CPA review
provider seeking a substantial amount of damages. On April 15, 2002,
this complaint was voluntarily dismissed by the plaintiff without
prejudice. The complaint was amended and has subsequently been re-filed.
In January 2002, a graduate of one of DeVry University's Los Angeles-area
campuses filed a class-action complaint on behalf of all students enrolled in
the post-baccalaureate degree program in Information Technology. The suit
alleges that the program offered by DeVry did not conform to the program as it
was presented in the advertising and other marketing materials. In March 2003,
the complaint was dismissed by the court with limited right to amend and re-
file. The complaint was subsequently amended and re-filed.
In November 2000, three 1999 graduates of one of DeVry University's
Chicago-area campuses filed a class-action complaint that alleges DeVry
graduates do not have appropriate skills for employability in the
computer information systems field. The complaint was subsequently
dismissed by the court, but was amended and re-filed, this time including
a current student from a second Chicago-area campus.
The Company has recorded approximately $1 million associated with
estimated loss contingencies at June 30, 2003. While the ultimate
outcome of these contingencies is difficult to estimate at this time, the
Company does intend to vigorously defend itself with respect to these
claims.
17
NOTE 7: COMMITMENTS AND CONTINGENCIES, continued
In conjunction with the required annual review procedures related to its
administration of financial aid programs under the Ontario Student Aid Program,
the Toronto-area DeVry campuses had engaged in discussions with the Ontario
Ministry of Education relating to certain additional information requirements.
These additional information requirements could serve as the basis for a
Ministry claim for the return of some amounts of financial aid disbursed to
students attending these campuses. Although there are no current discussions
underway with the Ministry, based upon its previous discussions, the Company
believes that there will be no significant monetary liability.
At this time, the Company does not believe that the outcome of current
claims, regulatory reviews and lawsuits will have a material effect on its
results of operations or financial position.
NOTE 8: SEGMENT INFORMATION
The Company's principal business is providing post-secondary education. The
services of our operations are described in more detail under "Nature
of Operations" in Note 1 to the consolidated financial statements
contained in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2003. The Company presents three reportable
segments: the DeVry University undergraduate and graduate operations
(DeVry University), the professional examination review and training
operations including Becker Conviser Professional Review and Center
for Corporate Education (Professional and Training) and the Ross
University medical and veterinary school operations (Ross University).
These segments are based on the method by which management evaluates
performance and allocates resources. Such decisions are based, 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, 2003.
The consistent measure of segment profit excludes interest expense,
amortization and certain corporate related depreciation. As such, these
items are reconciling items in arriving at income before income taxes. The
consistent measure of segment assets excludes deferred income tax assets and
certain depreciable corporate assets. Additions to long-lived assets have
been measured in this same manner. Reconciling items are included as
corporate assets.
18
NOTE 8: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the three months
ended September 30, 2003 and 2002. Corporate information is included where it
is needed to reconcile segment data to the consolidated financial statements.
For the Quarter Ended
September 30,
2003 2002
Revenues: ---- ----
DeVry University $160,049,000 $154,458,000
Professional and Training 10,302,000 8,811,000
Ross University 18,885,000 -
----------- -----------
Total Consolidated Revenues $189,236,000 $163,269,000
----------- -----------
Operating Income:
DeVry University $10,106,000 $17,086,000
Professional and Training 2,656,000 1,927,000
Ross University 7,661,000 -
Reconciling Items:
Amortization Expense (3,396,000) (192,000)
Interest Expense (2,156,000) (47,000)
Depreciation and Other (190,000) (180,000)
---------- ----------
Total Consolidated Income
before Income Taxes $14,681,000 $18,594,000
---------- ----------
Segment Assets:
DeVry University $451,986,000 $447,276,000
Professional and Training 72,198,000 74,754,000
Ross University 387,388,000 -
Corporate 5,182,000 19,058,000
----------- -----------
Total Consolidated Assets $916,754,000 $541,088,000
----------- -----------
Additions to Long-lived Assets:
DeVry University $6,146,000 $10,030,000
Professional and Training 9,000 14,000
Ross University 1,524,000 -
--------- ----------
Total Consolidated Additions
to Long-lived Assets $7,679,000 $10,044,000
--------- ----------
Depreciation Expense:
DeVry University $8,363,000 $8,314,000
Professional and Training 80,000 94,000
Ross University 481,000 -
Corporate 195,000 195,000
--------- ---------
Total Consolidated Depreciation $9,119,000 $8,603,000
--------- ---------
Amortization Expense:
DeVry University $ 8,000 $ 8,000
Professional and Training 185,000 184,000
Ross University 3,203,000 -
--------- -------
Total Consolidated Amortization $3,396,000 $192,000
--------- -------
19
NOTE 8: 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
ended September 30, 2003 and 2002. Revenues and long-lived assets by geographic
area are as follows:
For the Quarter Ended
September 30,
2003 2002
---- ----
Revenues from Unaffiliated Customers:
Domestic Operations $166,047,000 $158,281,000
International Operations:
Dominica and St. Kitts/Nevis 18,885,000 -
Other 4,304,000 4,988,000
----------- -----------
Total International Operations 23,189,000 4,988,000
----------- -----------
Consolidated $189,236,000 $163,269,000
=========== ===========
Long-lived Assets:
Domestic Operations $359,866,000 $341,467,000
International Operations
Dominica and St. Kitts/Nevis 318,641,000 -
Other 2,069,000 9,561,000
----------- -----------
Total International Operations 320,710,000 9,561,000
----------- -----------
Consolidated $680,576,000 $351,028,000
=========== ===========
No one customer accounted for more than 10% of the Company's consolidated
revenues.
NOTE 9: SUBSEQUENT EVENT
On October 21, 2003, Becker Professional Review, a wholly owned subsidiary of
the Company, acquired certain tangible operating assets, trademarks and trade
names of Person/Wolinsky CPA Review ("Person/Wolinsky"). These assets were
purchased for approximately $2.7 million in cash. Person/Wolinsky is a training
firm preparing students to pass the CPA exam. Founded in 1967 its primary
locations include New York City, Philadelphia and Washington, D.C.
Funding for the acquisition was provided from the Company's existing operating
cash balances.
20
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition
- -----------------------------------------------------------
Certain information contained in this quarterly report on Form 10-Q
may constitute forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based upon
the Company's current expectations and beliefs about future
events. Such statements are inherently uncertain and may involve
risks that could cause future results to differ materially from
the forward-looking statements. Potential risks and
uncertainties include, but are not limited to, undergraduate
program concentration in selected areas of technology, dependence
on student financial aid, dependence on state and provincial
approvals and licensing requirements, dependence on continued
accreditation for DeVry University and other factors detailed in
the Company's Securities and Exchange Commission filings,
including those discussed under the heading entitled "Risk
Factors" in the Company's Registration Statement on Form S-3 (No.
333-22457) 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, 2003. The Company's annual
report on Form 10-K includes a detailed description of the method
of application for critical accounting policies, estimates and
assumptions used in the preparation of the Company's financial
statements including, but not limited to, revenue recognition,
useful lives of equipment and facilities, useful lives of
acquired finite-lived intangible assets, valuation of goodwill
and indefinite-lived intangible assets, pattern of amortization
of finite-lived intangible assets over their economic lives,
losses on the collection of student receivable balances,
resolution of law suits and health care costs for incurred but
not yet paid medical services.
Because of the somewhat seasonal pattern of the Company's
enrollments and its educational program starting dates, which
affect the results of operations and the timing of cash inflows,
the Company's management believes that comparisons of its results
of operations should be made to the corresponding period in the
preceding year. Comparisons of financial position should be made
to both the end of the previous fiscal year and to the end of the
corresponding interim quarterly period in the preceding year.
Copies of the Company's annual and quarterly reports on Form 10-K
and Form 10-Q as filed with the Securities and Exchange
Commission may be obtained at the Company's website,
www.devry.com.
Results of Operations
- ---------------------
The Company's total consolidated revenues for the first quarter
increased by $26.0 million, or 15.9%, from the first quarter of
fiscal 2003. First quarter financial results include $18.9
million of revenues from Dominica Management, Inc. ("DMI") that
21
was acquired in May 2003. DMI owns and operates the Ross University
School of Medicine and the Ross University School of Veterinary Medicine
("Ross University"). Revenues also increased because of higher
enrollments and price increases at the Keller Graduate School and
Becker Professional Review.
Other Educational Revenues, which are included in total
consolidated revenues, decreased by $0.4 million or 3.7% from
last year. The lower revenue is attributable to the increased
outsourcing of book sales to students enrolled in DeVry
University's Keller Graduate School programs offered online and
at most teaching centers. DeVry University receives a commission
based upon the level of book sales to its students.
DeVry University segment revenues increased by $5.6 million, or
3.6%, from the first quarter of last year. The increase in
revenues is entirely attributable to increased enrollments at
Keller Graduate School, up 15.5% to 9,483 for the term that began
in July, and to a change in course length from ten weeks to eight
weeks as the graduate program academic calendar was aligned to
the common DeVry University calendar. This increases the number
of terms each year from five to six, and correspondingly
increases the number of terms in each quarter by 20%, producing a
similar increase in revenue earned in the period assuming that
all students choose to proceed through the year with continuous
enrollment at the accelerated pace. In addition, a price
increase of approximately 6% was implemented effective with the
July term.
DeVry University undergraduate program enrollment for the term
that began in July was 41,075, 5.2% lower than in the July term a
year ago. The lower enrollment largely offset a tuition price
increase of approximately 6% that became effective in July.
Although total undergraduate student enrollment was below the
level of a year ago, new students admitted for the summer term
increased by 2.5% to 10,607. The increased new student
enrollments reflect higher enrollments in undergraduate business
programs and increased interest by students wanting to take
courses online or at the increasing number of DeVry University
Centers.
Professional and Training segment revenues increased by $1.5
million, or 16.9%, from the first quarter of last year. The
increase is largely attributable to increased enrollments in the
Becker Conviser CPA review course leading to the November exam.
Effective with the new calendar year, the twice a year, paper and
pencil format exam will no longer be offered. Instead, the exam
will be available on demand in a new computer based format. This
new exam format will be offered for the first time in April. The
Company believes that some exam takers may have accelerated their
exam preparation to the November exam, the last one in its
historically offered format, in advance of the announced changes
to the exam format. In October 2003, the Company acquired the
assets of Person/Wolinsky CPA Review. Person/Wolinsky conducts
CPA exam preparation classes in the metropolitan areas of Boston,
New York City and Philadelphia as well as in Albany and
Rochester, N.Y.; Arlington, Va.; and Hartford, Ct. This
acquisition is not expected to have a material effect on fiscal
2004 revenues or earnings.
Ross University segment revenues were $18.9 million for the
quarter. Ross University was not a part of the Company in the
first quarter of last year and so there were no revenues in the
year-ago period. For the term that began in May and extends
until September, Ross University enrollments were 2,852, an 11.8%
increase from the previous year.
The Company's Cost of Educational Services increased by $12.3
million, or 13.3%, from last year. Cost of Educational Services
increased by less than the rate of increase in revenues,
reflecting the inclusion of the higher gross margin Ross
University operations and continued cost reduction efforts at
22
previously existing DeVry University and Becker operations.
Gross margins improved from 43.5% in the first quarter of last
year to 44.8% in the current year.
Increased spending in the Cost of Educational Services category
was the result of the inclusion of Ross University financial
results for the quarter compared to the year-ago period when Ross
University was not a part of the Company. In addition, increased
costs were incurred for the expanded online operations and in
support of an increased number of DeVry University Centers, now
numbering 42 compared to 35 a year ago. Also, during the
quarter, courses were offered for the first time at the DeVry
University campus in Houston. In the first quarter of last year,
courses were offered for the first time at the new DeVry
University campus in Philadelphia.
Depreciation expense, most of which is included in Cost of
Educational Services, increased to $9.1 million compared to $8.6
million in the first quarter last year. The increase in
depreciation expense is primarily the result of the depreciation
expense in the acquired Ross University operations. The level of
depreciation expense in DeVry University, approximately $8.4
million in the first quarter, reflects the Company's commitment
to investment in new and improved facilities and associated
equipment in support of its continuous improvement to its
educational programs.
In August 2003, the Company announced that its subsidiary, DeVry
Canada LLC, had signed a letter of intent with RCC College of
Technology ("RCC") that will enable DeVry to phase out its
operations at its Toronto campus commencing with the term that
begins in November. When finalized, this agreement is expected
to provide for RCC to manage the completion of programs of study
for the current student body in Toronto. This agreement is also
expected to permit the Company to reduce its operating losses at
the Toronto campus below what such costs would have been if the
Company continues to manage the educational process and services
through the period of teachout.
Student Services and Administrative Expense increased by $15.5
million, or 29.5%, from the same quarter in fiscal 2003. The
increase reflects the inclusion of Ross University expenses in
this cost category compared to a year ago when Ross was not a
part of the Company, and to higher advertising and selling costs
associated with efforts to generate more new student enrollments
in the Company's educational programs that begin in the fall and
following spring. For the undergraduate term that began in
July, new student enrollments increased by 2.5% from the summer
term a year ago.
In addition, the Company continued to invest in a new student
information system to provide better support for educational
processes and related activities. Information system development
costs related to this project, and to other system support and
initiatives, have been maintained at approximately the same level
as last year. In accordance with accounting principles for
internal software development costs, certain wage and outside
consulting costs are being capitalized. During the first
quarter, the Company capitalized $1.4 million, bringing the
cumulative capitalized amount to $16.1 million. The Company
capitalized $1.7 million in the first quarter of the previous
year. During the quarter, the Company charged $1.7 million of
indirect project related information system costs directly to
expense as they were incurred, compared to $1.4 million charged
directly to expense in the first quarter of last year, and $0.2
million of previously capitalized costs were amortized to expense
in the first quarter of this year compared to $0.1 million
23
in the first quarter of last year as portions of the system have
been placed into service. The Company expects that implementation
of further elements of the system will generate higher amortization
expense in the coming quarters.
Also included in the Student Services and Administrative Expense
category was $3.4 million of amortization of finite-lived
intangible assets, mostly associated with the acquisition of Ross
University, compared to $0.2 million in the first quarter of last
year. Spending for Student Services and Administrative Expense,
other than this amortization, was 34.1% of revenues, compared to
34.0% of revenues in the previous quarter and 32.0% in the first
quarter of last year.
In the DeVry University segment, both operating income and
operating margin as a percent of revenue declined from the year-
ago period. The operating margin declined from 11.1% in the
first quarter of last year to 6.3% in the first quarter of the
current year, as revenues increased slightly but operating income
was $7.0 million lower. Contributing to the decline in income
was a low rate of revenue growth as a result of lower
undergraduate enrollments coupled with higher expenses, as
discussed above, related to more teaching locations and increased
levels of spending on advertising and student recruitment to
increase the number of student enrollments in future terms.
In the Professional and Training segment, both operating income
and operating margin as a percent of revenue increased from the
year-ago period. The operating margin improved from 21.9% last
year to 25.8% in the first quarter of the current year, producing
an increase of $0.7 million in operating income on the increased
revenues. Increased enrollments in the CPA exam preparation
courses leading to the November exam, as discussed above, and
higher course pricing contributed to the increased revenues and
earnings.
The Ross University segment was first incorporated into the
Company's financial results in the fourth quarter of fiscal 2003,
following completion of the Ross acquisition in May. For the
first quarter of the current fiscal year, Ross University had an
operating margin of 40.5% and an operating income of $7.7
million.
Interest expense increased by $2.1 million from the first quarter
of last year. The increased expense is attributable to the
fourth quarter of fiscal 2003 borrowings for the acquisition of
Ross University. During the first quarter, borrowings were
reduced by $27 million to $263 million using cash flow generated
from operations.
Taxes on income were 28.5% of pretax income compared to a rate of
40.0% in the first quarter of last year. Contributing to this
quarter's lower tax rate were the Ross University operations.
The Ross University School of Medicine, operating in the
Commonwealth of Dominica, and the Ross University School of
Veterinary Medicine, operating in the Federation of St.
Christopher Nevis, St. Kitts, both have agreements with their
respective governments that exempt them from local income
taxation through the years 2043 and 2023, respectively.
Accordingly, no current provision for foreign taxes was provided
on this income. Also contributing to the lower tax rate in the
Company's operations other than Ross University were some state
income tax business incentive tax credits and the inclusion of
the Company's Canadian operating losses into the United States
tax jurisdiction, generating current U.S. tax benefits for their
losses.
24
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations during the first quarter reached
$63.9 million, an increase of $16.4 million from the first
quarter of last year. Contributing to the increase were higher
non-cash charges for depreciation and amortization, and in
conjunction with higher total revenues compared to a year ago, a
greater increase during the quarter in the amount of deferred
tuition revenue, representing revenues to be recognized in the
coming months as the corresponding educational programs are being
taught. Partly offsetting these gains was a lesser rate of
increase in accounts payable and accrued expenses. Cash flow in
the quarter also benefited from the transition to six terms per
year at the Keller Graduate School. In previous years, tuition
billings and collections for the semester that began in late June
were included in the fourth quarter of the fiscal year. In
fiscal 2004, with the transition to the common DeVry University
academic calendar, this billing and collection cycle falls
entirely into the first quarter, benefiting it accordingly.
Capital spending for the quarter was $7.7 million as previously
planned new undergraduate campus expansions neared completion.
Although new DeVry University Centers continue to be opened and
expanded, the level of investment in each of these centers
generally does not exceed several hundred thousand dollars.
Capital spending for the full year is expected to be in the range
of $40 million, approximately the same level of spending as in
fiscal 2003.
In conjunction with its acquisition of Ross University, the
Company entered into two credit agreements to provide the
required funding. At June 30, 2003, borrowings under these
agreements totaled $290 million. During the first quarter, the
Company repaid $27 million of these borrowings using cash flow
generated from operations. In addition to the remaining $267
million of borrowings, there were approximately $3.5 million of
letters of credit issued under these borrowing agreements. These
letters of credit were issued in conjunction with DeVry
University's participation in student financial aid programs,
various insurance policies and a rental agreement on a leased
teaching facility.
All of the Company's borrowings are based upon a floating
interest rate, generally LIBOR, at the Company's option. During
the first quarter, the Company entered into several interest rate
cap agreements to protect $100 million of borrowings from sharp
increases in the short-term interest rates upon which the
borrowings are based. The Company intends to periodically review
the rate at which debt repayments are made and the need for
further interest rate protection in light of projected changes in
its working capital requirements and future period interest
rates.
The Company is not a party to any off-balance sheet financing or
contingent payment arrangements nor are there any unconsolidated
subsidiaries of the Company. The Company's only long-term
contractual obligations consist of its revolving line of credit
and Senior Notes, operating leases on facilities and equipment
and agreements for various services. There are no loans extended
to any officer, director or other person affiliated with the
Company. The Company has not entered into any synthetic leases
and there are no residual purchase or value commitments related
to any facility lease. The Company has not entered into any
derivative, swap, futures contract, put, call, hedge or non-
exchange traded contract except for the interest rate cap
agreements noted above. Under the terms of these cap agreements,
the Company is not obligated to any further payment liability
beyond their original purchase price.
25
The Company's primary source of liquidity is the cash received
from payments for student tuition, books and fees. These
payments include funds originating as student and family
educational loans; other financial aid from various federal,
state and provincial loan and grant programs; and student and
family financing resources. Funds originating as student and
family educational loans and other forms of financial aid from
various sources is dependent upon DeVry University's continued
compliance with and participation in these programs. The
Company is highly dependent upon the timely receipt of these
financial aid funds because approximately 70% of its
undergraduate student revenues, approximately 40% of its graduate
student revenues and approximately 70% of Ross University student
revenues are funded by these programs. These financial aid and
assistance programs are subject to political and governmental
budgetary considerations. There is no assurance that such
funding will be maintained in the future.
Extensive and complex regulations in the United States and Canada
govern all of the government financial assistance programs in
which the Company's students participate. The Company's
administration of these programs is periodically reviewed by
various regulatory agencies. Any regulatory violation could be
the basis for disciplinary action, including initiation of a
suspension, limitation or termination proceeding against the
Company.
In conjunction with the required annual review procedures related
to its administration of financial aid programs under the Ontario
Student Aid Program, the Toronto-area DeVry campuses had engaged
in discussions with the Ontario Ministry of Education relating to
certain additional information requirements. These additional
information requirements could serve as the basis for a Ministry
claim for the return of some amounts of financial aid disbursed
to students attending these campuses. Discussions continue on a
periodic basis but the Company believes that there will be no
significant monetary liability.
The Company believes that current balances of unrestricted cash,
cash generated from operations and borrowings under its new
financing agreements will be sufficient to fund its current
operations and current growth plans for the foreseeable future
unless new investment opportunities should arise similar to the
recent acquisition of Ross University.
Item 3 - Qualitative and Quantitative Disclosures About Market Risk
- -------------------------------------------------------------------
The nature of the Company's educational operations does not
subject it to a concentration or dependency upon the price levels
or fluctuations in pricing of any particular or group of
commodities.
The financial position and results of operations of Ross
University's Caribbean operations are measured using the U.S.
dollar as the functional currency. Almost all Ross University
financial transactions are denominated in the U.S. dollar and the
East Caribbean Dollar remains pegged to the U.S. dollar so there
is no material amount of translation gain or loss, nor any
material currency exposure risk, associated with these
operations.
The financial position and results of operations for the
Company's Canadian educational programs are measured using the
local currency as the functional currency. The Canadian
operations have not entered into any material long term contracts
to purchase or sell goods and services, other than lease
agreements on teaching facilities. The Company does not have any
foreign exchange contracts or derivative financial instruments
26
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,
currently Canadian assets are less than 3% of total Company
assets, changes in currency value would not have a material
effect on the Company's results of operations or financial
position. Based upon the current value of the net assets in the
Canadian operations, a change of $0.01 in the value of the
Canadian dollar relative to the U.S. dollar would result in a pre-
tax translation adjustment of less than $100,000.
Of the $267 million in Company debt outstanding at September 30,
2003, $138 million matures on July 1, 2006 and $125 million
matures on April 30, 2010. Based upon future cash flow from
operations and investment opportunities that may become
available, the Company plans to repay portions of this debt
before maturity, thus lessening the exposure to increase in short-
term interest rates. The interest rate on the Company's debt is
based upon LIBOR interest rates for periods typically ranging
from one to three months. Based upon the level of Company
borrowings at the end of the first quarter, a 1% increase in
short-term interest rates would result in $2.7 million of
additional annual interest expense. The Company has entered into
several interest rate cap agreements to protect $100 million of
its borrowings from sharp increases in short-term LIBOR-based
interest rates. However, these interest rate cap agreements do
not provide protection from increases in short-term LIBOR
interest rates of less than 2.25% from current rates.
Item 4 - Disclosure Controls and Procedures
- -------------------------------------------
The Company's management does not believe that any set of
disclosure or internal controls can absolutely prevent all fraud
and error. Such disclosure and internal, controls, including
those employed by DeVry Inc., can and should, however, provide
reasonable, but not absolute assurance that assets have been
safeguarded, used only for their intended purpose and that
financial transactions have been properly recorded and reported
to permit the preparation of financial statements in conformity
with generally accepted accounting principles reported within the
timeframes required by the SEC.
The Company's co-chief Executive Officers and its Chief Financial
Officer have evaluated the effectiveness of the design and
operation of the Company's disclosure controls and internal
control procedures upon which these financial statements and
management discussion are based. This review included the
results of the Company's internal audit procedures. This review
was made as of the end of the period covered by this quarterly
report. Based upon this evaluation, and with the participation
of management, subject to the limitations on absolute prevention
of fraud and error, the above named officers have concluded that
these controls and procedures are effective and appropriate to
ensure the correctness an completeness of this report.
There were no changes in internal control over financial
reporting identified in connection with the evaluation referred
to above that occurred during the Company's first fiscal quarter
that materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
27
Part II - Other Information
- ---------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company is subject to occasional lawsuits, regulatory reviews
associated with financial assistance programs and claims arising
in the normal conduct of its business. The Company has accrued
amounts it believes are appropriate to vigorously pursue its
defense in these matters. At this time, the Company does not
believe that the outcome of current claims, regulatory reviews
and lawsuits will have a material effect on its results of
operations or financial position.
The following updates the status of litigation and claims
previously disclosed and includes one additional item not
previously presented.
In March 2002, the Company received notice of a class-action
complaint filed under the Fair Labor Standards Act by several
former field sales representatives seeking overtime compensation
for services rendered during their period of employment. In
March 2003, the Company participated in a required mediation
session but no resolution was reached.
In January 2002, the Company received notice of an antitrust
complaint concerning the alleged monopoly by operations of its
Becker CPA Review Corp. subsidiary in California. This complaint
was filed in federal district court by the trustee in bankruptcy
of a failed CPA review provider seeking a substantial amount of
damages. In April 2002, this complaint was voluntarily dismissed
by the plaintiff without prejudice. This complaint was amended
and has subsequently been re-filed.
In January 2002, a graduate of one of DeVry University's Los
Angeles-area campuses filed a class-action complaint on behalf of
all students enrolled in the post-baccalaureate degree program in
Information Technology. The suit alleges that the program
offered by DeVry did not conform to the program as it was
presented in the advertising and other marketing materials. In
March 2003, the complaint was dismissed by the court with limited
right to amend and re-file. The complaint was subsequently
amended and re-filed.
In November 2000, three graduates of one of DeVry University's
Chicago-area campuses filed a class-action complaint that alleges
DeVry graduates do not have appropriate skills for employability
in the computer information systems field. The complaint was
subsequently dismissed by the court, but was amended and re-
filed, this time including a current student from a second
Chicago-area campus.
In September, the Company received a notice claiming patent-
infringement from Acacia Research Corporation. The notice
alleges that the Company has infringed upon several Acacia
patents relating to streaming audio and video technology. This
technology is used by the Company through its online platform
provider and is also used by many other companies in the delivery
of online programs.
The Company has recorded approximately $1 million associated with
estimated loss contingencies at September 30, 2003. Wile the
ultimate outcome of these contingencies is difficult to estimate
at this time, the Company does intend to vigorously defend itself
with respect to these claims.
28
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibit
Sequentially
Exhibit # Description Numbered Page
--------- ----------- -------------
31 Rule 13a-14(a)/15d-14(a)Certifications 30 - 35
32 Section 1350 Certifications 36
(b) Reports on Form 8-K
During the third quarter, the Company filed the following
reports on Form 8-K:
1. September 5, 2003, reporting the signing of a letter
of intent enabling the Company to phase out operations at its
Toronto undergraduates campus.
2. August 26, 2003, reporting the financial results
for the Company for fiscal year 2003.
3. July 30, 2003, reporting the required financial
information relating to the purchase of Dominica Management, Inc.
29
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 10, 2003 /s/Ronald L. Taylor
-------------------------------
Ronald L. Taylor
Co-Chief Executive Officer and
President
Date: NOVEMBER 10, 2003 /s/Norman M. Levine
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Norman M. Levine
Senior Vice President and
Chief Financial Officer