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 period ended December 31, 2004
Commission file number 1-13988
DeVRY INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-3150143
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Lane, Oakbrook Terrace, Illinois 60181
- -----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(630) 571-7700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
YES X
Number of shares of Common Stock, $0.01 par value, outstanding on
January 31, 2005: 70,368,359
Total number of pages: 43
2
DeVRY INC.
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FORM 10-Q INDEX
For the Second Quarter Ended December 31, 2004
Page No.
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PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at
December 31, 2004, June 30, 2004,
and December 31, 2003 3-4
Consolidated Statements of Income
for the quarter and six months ended
December 31, 2004 and 2003 5
Consolidated Statements of Cash
Flows for the six months ended
December 31, 2004 and 2003 6
Notes to Consolidated Financial
Statements 7-22
Item 2. Management's Discussion and
Analysis of Results of Operations
and Financial Condition 23-32
Item 3. Quantitative and Qualitative
Disclosures About Market Risk 32-33
Item 4. Controls and Procedures 33
Part II. Other Information
Item 1. Legal Proceedings 34-35
Item 4. Submission of Matters to a Vote
of Security Holders 35
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37
SIGNATURES 38
3
PART I - Financial Information
Item 1 - Financial Statements
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, June 30, December 31,
2004 2004 2003
----------- --------- -----------
ASSETS
Current Assets
Cash and Cash Equivalents $132,445 $146,227 $106,126
Restricted Cash 36,224 13,457 21,476
Accounts Receivable, Net 75,323 28,150 75,705
Inventories 1,047 3,281 2,241
Deferred Income Taxes 7,821 7,619 9,944
Prepaid Expenses and Other 11,714 10,141 7,963
------- ------- -------
Total Current Assets 264,574 208,875 223,455
------- ------- -------
Land, Buildings and Equipment
Land 65,071 64,256 60,300
Buildings 205,520 203,651 198,428
Equipment 231,387 222,898 216,753
Construction In Progress 17,404 6,214 3,198
------- ------- -------
519,382 497,019 478,679
Accumulated Depreciation (230,915) (210,132) (197,046)
------- ------- -------
Land, Buildings and
Equipment, Net 288,467 286,887 281,633
------- ------- -------
Other Assets
Intangible Assets, Net 79,072 86,346 93,091
Goodwill 284,397 284,397 285,670
Perkins Program Fund, Net 12,697 12,247 11,861
Other Assets 5,165 5,380 5,264
------- ------- -------
Total Other Assets 381,331 388,370 395,886
------- ------- -------
TOTAL ASSETS $934,372 $884,132 $900,974
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
December 31, June 30, December 31,
2004 2004 2003
----------- --------- -----------
LIABILITIES
Current Liabilities
Current Maturities of
Revolving Loan $ - $ 35,000 $ -
Accounts Payable 19,527 27,349 15,423
Accrued Salaries, Wages &
Benefits 37,725 31,041 31,759
Accrued Expenses 35,501 24,610 20,310
Advance Tuition Payments 32,185 16,819 6,546
Deferred Tuition Revenue 100,013 21,830 116,021
------- ------- -------
Total Current Liabilities 224,951 156,649 190,059
------- ------- -------
Non-Current Liabilities
Revolving Loan 65,000 90,000 115,000
Senior Debt 125,000 125,000 125,000
Deferred Income Taxes 13,675 17,660 13,432
Deferred Rent and Other 17,659 16,566 15,196
------- ------- -------
Total Non-Current
Liabilities 221,334 249,226 268,628
------- ------- -------
TOTAL LIABILITIES 446,285 405,875 458,687
------- ------- -------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value,
200,000,000 Shares Authorized,
70,368,359, 70,331,323 and
70,058,125, Shares Issued and
Outstanding at December 31,
2004, June 30, 2004 and
December 31, 2003,
Respectively 705 704 701
Additional Paid-in Capital 71,943 71,797 67,906
Retained Earnings 415,192 405,036 373,045
Accumulated Other Comprehensive
Income 247 720 635
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 488,087 478,257 442,287
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $934,372 $884,132 $900,974
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
5
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
(Unaudited)
For The Quarter For The Six Months
Ended December 31, Ended December 31,
--------------------- ----------------------
2004 2003 2004 2003
--------------------- ----------------------
REVENUES:
Tuition $184,127 $187,286 $362,111 $364,880
Other Educational 10,311 11,479 20,663 23,064
Interest 84 41 144 98
------- ------- ------- -------
Total Revenues 194,522 198,806 382,918 388,042
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 108,236 104,635 217,721 209,085
Student Services and
Administrative Expense 76,663 70,156 150,271 138,105
Interest Expense 2,091 1,972 4,082 4,128
------- ------- ------- -------
Total Costs and Expenses 186,990 176,763 372,074 351,318
------- ------- ------- -------
Income Before Income Taxes and
Cumulative Effect of Change
in Accounting 7,532 22,043 10,844 36,724
Income Tax Provision 1,676 6,465 2,498 10,654
------- ------- ------- -------
Income Before Cumulative Effect
of Change in Accounting 5,856 15,578 8,346 26,070
Cumulative Effect of Change in
Accounting, Net of Tax - - 1,810 -
-------- ------- ------- -------
NET INCOME $ 5,856 $ 15,578 $ 10,156 $ 26,070
======== ======= ======= =======
EARNINGS PER COMMON SHARE
Basic
Income Before Cumulative
Effect of Change in Accounting $0.08 $0.22 $0.12 $0.37
Cumulative Effect of Change
in Accounting - - 0.02 -
----- ----- ----- -----
Net Income $0.08 $0.22 $0.14 $0.37
===== ===== ===== =====
Diluted
Income Before Cumulative
Effect of Change in Accounting $0.08 $0.22 $0.12 $0.37
Cumulative Effect of Change
in Accounting - - 0.02 -
----- ----- ----- -----
Net Income $0.08 $0.22 $0.14 $0.37
===== ===== ===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
6
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For The Six Months
Ended December 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,156 $ 26,070
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 19,937 19,667
Amortization 7,816 7,296
Provision for Refunds and
Uncollectible Accounts 19,768 17,461
Deferred Income Taxes (4,187) 1,797
Loss on Disposals of Land, Buildings
and Equipment 14 147
Changes in Assets and Liabilities, net of
Effects from Acquisition of Business:
Restricted Cash (22,766) (7,424)
Accounts Receivable (66,780) (68,891)
Inventories 2,248 2,074
Prepaid Expenses And Other (811) (44)
Perkins Program Fund Contributions and Other (550) (570)
Accounts Payable (7,874) (3,443)
Accrued Salaries, Wages,
Expenses and Benefits 17,415 (10,489)
Advance Tuition Payments 15,251 (4,022)
Deferred Tuition Revenue 78,182 99,730
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 67,819 79,359
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (21,426) (16,093)
Payments for Purchase of Business,
net of Cash Acquired - (1,143)
------- -------
NET CASH USED IN INVESTING ACTIVITIES: (21,426) (17,236)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 147 618
Repayments Under Revolving Credit Facility (60,000) (50,000)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (59,853) (49,382)
Effects of Exchange Rate Differences (322) (86)
------- -------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (13,782) 12,655
Cash and Cash Equivalents at Beginning
of Period 146,227 93,471
------- -------
Cash and Cash Equivalents at End of Period $132,445 $106,126
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Period $3,152 $3,923
Income Tax Payments During the Period, Net 409 21,729
The accompanying notes are an integral part of these consolidated
financial statements.
7
DEVRY INC.
Notes to Consolidated Financial Statements
For the Quarter and Six Months Ended December 31, 2004
----------
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, 2004 data,
which is presented, is derived from audited financial statements.
The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2004 and in conjunction with the
Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2004, each as filed with the Securities and
Exchange Commission.
The results of operations for the six months ended December 31,
2004, are not necessarily indicative of results to be expected for the
entire fiscal year.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Derivative Instruments and Hedging Activities
- ---------------------------------------------
The Company uses derivative financial instruments to manage its
exposure to movements in interest rates. The use of these
financial instruments modifies the exposure of these risks with
the intent to reduce the risk to the Company. The Company does not
use financial instruments for trading purposes, nor does it use
leveraged financial instruments. Credit risk related to the
derivative financial instruments is considered minimal and is
managed by requiring high credit standards for its counterparties
and periodic settlements.
All derivative contracts are reported at fair value, with changes
in fair value reported in earnings or deferred, depending on the
nature and effectiveness of the offset or hedging relationship.
Any ineffectiveness in a hedging relationship is recognized
immediately into earnings.
During the first quarter of fiscal 2004, the Company entered into
several interest rate cap agreements to protect approximately
$100,000,000 of its outstanding borrowings from sharp increases
in short-term interest rates upon which its borrowings are based.
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 short-
term LIBOR interest rates above 3.5%.
8
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Derivative Instruments and Hedging Activities, continued
- --------------------------------------------------------
These cap agreements were purchased at fair market values totaling
$568,000. This cost has been capitalized and is being amortized to
earnings and recorded as interest expense over the 24-month term
of the agreements. Differences between the changes in fair value
of the interest rate caps and the amount being amortized to
earnings are reported as a component of Other Comprehensive
Income. These amounts will be reclassified and recognized into
earnings over the 24-month term of the agreements. As of December
31, 2004, $28,000 is recorded as Other Comprehensive Income in the
Consolidated Balance Sheet. This represents the cumulative
difference between the decline in the fair market value of the
interest rate caps of $192,000 and the $220,000 expensed as
interest. For the six months ended December 31, 2004, a loss of
$10,000 was recorded as Other Comprehensive Income and interest
expense of $70,000 was charged to earnings for these interest rate
caps. There has been no ineffectiveness of the hedging
relationship related to these agreements.
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development
costs that are amortized using the straight line method over the
estimated useful lives of the software, not to exceed five years.
Capitalized costs include external direct costs of materials and
services consumed in developing or obtaining internal-
use software and payroll and payroll related costs for employees
who are directly associated with the internal software development
project. Capitalized software development costs for projects not yet
complete, which are included as Equipment in the Land, Buildings
and Equipment section of the Consolidated Balance Sheets, were
$286,000, $3,120,000 and $9,702,000 as of December 31, 2004, June
30, 2004 and December 31, 2003, respectively. The gross
capitalized software development costs for completed projects,
which are also included as Equipment in the Land, Building and
Equipment section of the Consolidated Balance Sheets, were
$20,074,000, $16,431,000 and $7,962,000 at December 31, 2004,
June 30, 2004, and December 31, 2003, respectively.
Post-employment Benefits
- ------------------------
The Company's employment agreements with its Chairman of the
Board of Directors and Chief Executive Officers provide
certain post-employment benefits that require accrual over the
expected future service period beginning with the second
quarter of fiscal 2003. For the six months ended December 31,
2004 and 2003, the Company recognized expense of approximately
$1,310,000 and $808,000, respectively, related to these
agreements. The amounts provided are 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 5.50% rate and using the sinking fund
accrual method.
9
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Earnings Per Common Share
- -------------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
period. Shares used in this computation were 70,368,000 and
70,047,000 for the second quarters ended December 31, 2004 and 2003,
respectively and 70,359,000 and 70,038,000 for the six months ended
December 31, 2004 and 2003, 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 70,507,000
and 70,626,000 for the second quarters ended December 31, 2004 and 2003,
respectively and 70,583,000 and 70,625,000 for the six months ended
December 31, 2004 and 2003, respectively. Excluded from the computations
of diluted earnings per share were options to purchase 2,700,000 and
2,274,000 shares of common stock for the second quarter and six
months ended December 31, 2004, respectively, and 1,168,000 and
1,180,000 shares of common stock, for the second quarter and six
months ended December 31, 2003, 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 six months ended December 31, 2004, the Company granted
options at fair market value to purchase up to 644,700 shares of
the Company's common stock under the 1999 and 2003 Stock Incentive
Plans.
As permitted under Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," ("SFAS
123"), as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"), the Company
has elected to continue to account for stock-based employee
compensation under the intrinsic value method of APB Opinion No.
25. Under this method, the Company generally recognizes no compensation
expense with respect to such awards, since the exercise price of the
common stock options awarded is equal to the fair market value of
the underlying security on the date of the grant.
Pro forma information regarding net income and earnings per share
is required by SFAS 123 for awards granted after June 30, 1995, as
if the Company had accounted for its stock-based awards under the
fair value method of SFAS 123. Prior to fiscal 2005, the fair
value of the Company's stock-based awards was estimated as of the
date of grant using the Black-Scholes option pricing model ("Black-
Scholes model"). The Black-Scholes model was developed to estimate
the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. This model also requires highly
subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the
calculated grant date fair value.
10
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Beginning with all options granted in the first quarter of fiscal
2005, the fair value of the Company's stock-based awards is
estimated using a binomial model. This model uses cancellation
and historical exercise experience of the Company to determine the
option value. It also takes into account the illiquid nature of
employee options during the vesting period, something that the
Black-Scholes model does not consider. For these reasons, Company
management believes that the binomial model provides a fair value
that is more representative of actual experience and future
expected experience than the value calculated in previous years,
using the Black-Scholes model.
The weighted average estimated grant date fair values, as defined
by SFAS 123, for options granted at market price under the
Company's stock option plans during the first six months of fiscal
2005 and 2004 were $9.09 and $17.15, per share, respectively. The
fair values of the Company's stock option awards for the first six
months of fiscal 2005 and 2004, were estimated assuming no
expected dividends and the following weighted average assumptions:
Fiscal Year,
2005 2004
---- ----
Expected Life (in Years) 6.69 7.50
Expected Volatility 41.41% 58.16%
Risk-free Interest Rate 3.83% 3.75%
Pre-vesting Forfeiture Rate 4.00% -
The use of a pre-vesting forfeiture rate is optional under SFAS
123, however, it is an important element of option valuation and,
accordingly, has been included in option valuation using the
binomial model.
11
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based Compensation, continued
- -----------------------------------
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123, to stock-based employee
compensation. The change from the Black-Scholes valuation model
to a binomial model had no significant effect on the pro forma
amounts presented below.
(Dollars in thousands, except per share amounts)
For the Quarter Ended For the Six Months Ended
December 31, December 31,
2004 2003 2004 2003
------- ------- ------- -------
Net Income:
- -----------
Net Income as Reported $5,856 $15,578 $10,156 $26,070
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (1,158) (920) (2,274) (1,695)
------ ------ ------ ------
Pro Forma Net Income $4,698 $14,658 $7,882 $24,375
====== ====== ====== ======
Earnings per Common Share:
Basic as Reported $0.08 $0.22 $0.14 $0.37
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (0.01) (0.01) (0.03) (0.02)
---- ---- ---- ----
Pro Forma Basic $0.07 $0.21 $0.11 $0.35
==== ==== ==== ====
Diluted as Reported $0.08 $0.22 $0.14 $0.37
Stock based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (0.01) (0.01) (0.03) (0.02)
---- ---- ---- ----
Pro Forma Diluted $0.07 $0.21 $0.11 $0.35
==== ==== ==== ====
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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Comprehensive Income
- --------------------
The differences between changes in the fair values of the cash
flow hedging instruments described above in "Derivative
Instruments and Hedging Activities", and the amount of these
instruments being amortized to earnings are reported as a
component of Comprehensive Income. The amount recorded as Other
Comprehensive Income is a loss of $10,000 for the quarter ended
December 31, 2004 and a gain of $10,000 for the six months ended
December 31, 2004. The Company's only other item that meets the
definition for adjustment to arrive at Comprehensive Income is the
change in cumulative translation adjustment. The amounts recorded
in Other Comprehensive Income for the changes in translation rates
were losses of $243,000 and $84,000, for the quarters ended
December 31, 2004 and 2003, respectively, and losses of $483,000
and $86,000 for six months ended
December 31, 2004 and 2003, respectively.
The Accumulated Other Comprehensive Income balance at December 31,
2004, is composed of the $28,000 gain related to the cash flow
hedge and a cumulative translation gain of $219,000. At December
31, 2003, this balance is composed of the $18,000 gain related to
the cash flow hedge and a cumulative translation gain of $617,000.
NOTE 3: SHAREHOLDER RIGHTS PLAN
On November 24, 2004, the Company adopted a shareholder rights
plan. In connection with this plan, the Company's Board of
Directors declared a dividend of one Common Stock Purchase Right
("Right" or "Rights") for each outstanding share of DeVry Inc.
Common Stock. The dividend was distributed on December 6, 2004 to
shareholders of record on that date. Each shareholder is
automatically entitled to the Rights and no physical distribution
of new certificates was made.
Each Right, is represented by the Company's Common Stock
certificates, currently entitles the holder to buy one one-
thousandth of a share of the Company's Common Stock at an exercise
price of $75 subject to adjustment, e.g. for stock splits or stock
dividends. However, following the acquisition of 15% or more of
DeVry Inc. Common Stock by a person or group, the holders of the
Rights (other than the acquiring person or group) will be entitled
to purchase shares of DeVry Inc. Common Stock at half-price.
Further, in the event of a subsequent merger or other acquisition
of the Company, the holder of the Rights (other than the acquiring
person or group) will be entitled to buy shares of common stock of
the acquiring entity at one-half of the market price of these
shares.
The Rights are redeemable for $.001 per Right, subject to
adjustment, before the acquisition by a person or group of 15% or
more of the Company's Common Stock. The Rights will expire on
December 6, 2014.
NOTE 4: REDUCTION IN WORKFORCE CHARGES
During the second quarter, the Company offered a voluntary
separation plan to its employees with more than 20 years of
service. As of December 31, 2004, 39 employees had accepted this
separation plan. The Company recorded a pre-tax charge of $2.2
million in the second quarter of the current fiscal year. This
13
NOTE 4: REDUCTION IN WORKFORCE CHARGES, continued
charge consists of severance pay and extended medical and dental
benefits coverage. Cash payments will begin in the third quarter
and extend until the period of benefit coverage has expired. No
cash payments were made in the second quarter in relation to these
charges. In January 2005, an additional 45 employees accepted
this voluntary separation plan. This will result in the Company
recording a charge in the third quarter of fiscal 2005 that will
cover similar severance pay and benefits.
Also in January 2005, the Company announced plans for an
involuntary reduction in force that will reduce its workforce by
approximately 75 positions at its educational facilities and
corporate office. This will result in the Company recording an
additional charge in the third quarter of fiscal 2005. Cash
payments for the involuntary reduction will occur in the third and
fourth quarters of this fiscal year.
The total charge in the third quarter for both the voluntary and
involuntary workforce reductions is expected to be in an amount
similar to that provided in the second quarter.
The workforce reductions relate to actions across several of the
company's businesses resulting from process improvements and its
continuing efforts to realign costs with revenues. The majority of
the workforce reductions are in the U.S. and include managerial,
professional, clerical and instructor roles.
NOTE 5: CHANGE IN ACCOUNTING - CHANGED FISCAL YEAR OF SUBSIDIARY
Prior to July 1, 2004, the accounts of Becker Professional Review
were consolidated based on an April 30 fiscal year end, which
management believed was its natural year-end based on its then
business cycle. As a result of a change in the CPA exam schedule,
the Company has aligned the Becker fiscal year end to that of
DeVry Inc. The results of operations for the two-month period
from May 1, 2004 through June 30, 2004, are included as a
cumulative effect of change in accounting in the Consolidated
Statements of Income for the first quarter of fiscal 2005. The
cumulative effect of this change in accounting added $1,810,000,
or $0.02 per share to net income for the first quarter. This
amount is net of income tax expense of $1,189,000.
Net Income and basic and diluted earnings per share for the three
and six months ended December 31, 2004 and 2003 are set forth
below as if the consolidation of the Becker operations had been
accounted for in the same manner for all periods presented.
Proforma
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
---- ---- ---- ----
Net Income $5,856,000 $11,943,000 $8,346,000 $22,910,000
Earnings per Share
Basic $0.08 $0.17 $0.12 $0.33
Diluted $0.08 $0.17 $0.12 $0.32
14
NOTE 6: 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 fiscal 2004, the Company recorded an adjustment to the
purchase price of DMI based on a settlement of final working
capital balances. This adjustment resulted in a reduction of
$1,207,000 to the goodwill balance recorded for this acquisition.
The Company also finalized the allocation of the purchase price of
DMI in the first quarter of fiscal 2004. Based upon a number of
factors, including a valuation analysis prepared by an independent
professional valuation specialist, the Company determined the
final purchase price allocation for acquired intangible assets
totaled $66,700,000. Of this amount $5,100,000 was assigned to
the value of trade names, $14,100,000 was assigned to the value of
the Ross Medical and Veterinary Schools' U.S. Title IV financial
aid eligibility and accreditations, all of which are not subject
to amortization, and $47,500,000 was assigned to student
relationships that have an initial average useful life of
approximately five years. The goodwill balance of $239,408,000
was all assigned to the Ross University operating segment. None
of the intangible assets or goodwill is expected to be deductible
for U.S. tax reporting purposes.
Person/Wolinsky
- ---------------
On October 21, 2003, Becker Professional Review, a wholly owned
subsidiary of the Company, acquired certain tangible operating
assets and trade names of Person/Wolinsky CPA Review
("Person/Wolinsky"). These assets were purchased for $2.7 million
in cash. Funding was provided from the Company's existing
operating cash balances. 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.
In the third quarter of fiscal 2004, the Company allocated the
purchase price of Person/Wolinsky, based on an analysis performed
for the Company by independent professional valuation specialists,
as follows:
Amortized Intangible Assets:
Trade Names $110,000
Non-compete Agreement 50,000
Other 20,000
-------
Total $180,000
=======
Goodwill $2,520,000
---------
15
NOTE 7: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of December 31, 2004
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $(21,624,000)
License and Non Compete
Agreements 2,650,000 (2,345,000)
Class Materials 2,900,000 (800,000)
Trade Names 110,000 (34,000)
Other 620,000 (562,000)
---------- ----------
Total $53,780,000 $(25,365,000)
========== ==========
Indefinite-lived Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
And Accreditations 14,100,000
Intellectual Property 13,940,000
----------
Total $50,657,000
==========
As of December 31, 2003
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $ (8,211,000)
License and Non Compete
Agreements 2,600,000 (1,905,000)
Class Materials 2,900,000 (600,000)
Other 600,000 (450,000)
---------- ----------
Total $53,600,000 $(11,166,000)
========== ==========
Indefinite-lived Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
And Accreditations 14,100,000
Intellectual Property 13,940,000
----------
Total $50,657,000
==========
16
NOTE 7: INTANGIBLE ASSETS, continued
Amortization expense for amortized intangible assets was
$3,637,000 and $7,274,000 for the quarter and six months ended
December 31, 2004, respectively, and $3,384,000 and $6,769,000
for the quarter and six months ended December 31, 2003,
respectively. Estimated amortization expense for amortized
intangible assets for the next five fiscal years ending June 30,
is as follows:
Fiscal Year
2005 $14,072,000
2006 9,856,000
2007 6,760,000
2008 3,598,000
2009 203,000
The 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,
four years for Trade Names and six years for Other. 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, beginning with May 2003, as follows:
Year 1 27.4%
Year 2 29.0%
Year 3 21.0%
Year 4 14.5%
Year 5 8.1%
Indefinite-lived intangible assets related to Trademarks, Trade
Names, Title IV Eligibility, Accreditation and Intellectual
Property are not amortized as there are no legal, regulatory,
contractual, economic or other factors that limit the useful life
of these intangible assets to the reporting entity. As of the end
of fiscal year 2004, there was no impairment loss associated with
these indefinite-lived intangible assets as fair value exceeds
the carrying amount.
The Company determined that as of the end of fiscal 2004, there
was no impairment in the value of the Company's goodwill for any
reporting units. This determination was made after considering a
number of factors including a valuation analysis prepared by an
independent professional valuation specialist. The carrying
amount of goodwill related to the DeVry University reportable
segment at December 31, 2004 and June 30, 2004 was unchanged at
$22,195,000. The carrying amount of goodwill related to
Professional and Training reportable segment at December 31, 2004
and June 30, 2004 was unchanged at $22,716,000. The carrying
amount of goodwill related to the Ross University segment at
December 31, 2004 and June 30, 2004 was unchanged at $239,486,000.
17
NOTE 8: INCOME TAXES
The principal operating subsidiaries of DMI are Ross University
School of Medicine (the Medical School) incorporated under the
laws of the Commonwealth of Dominica and Ross University School
of Veterinary Medicine (the Veterinary School), incorporated
under the laws of the Federation of St. Christopher Nevis, St.
Kitts in the West Indies. Both operating companies have
agreements with the respective governments that exempt them from
local income taxation through the years 2043 and 2023,
respectively. Accordingly no current provision for foreign income
taxes was recorded in the second quarter or six months ended
December 31, 2004 for the Medical or Veterinary Schools.
The Company has not recorded a tax provision for the
undistributed earnings of the Medical and Veterinary Schools for
the period after the acquisition. It is the Company's intention
to indefinitely reinvest post-acquisition undistributed earnings
and profits to service debt, improve the facilities and
operations of the Schools and pursue future opportunities outside
of the United States. As of December 31, 2004 and 2003,
cumulative undistributed earnings were approximately $23.1
million and $8.2 million, respectively.
NOTE 9: 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. This long-term debt consists
of the following at December 31, 2004:
Effective
Outstanding Interest Rate at
Debt December 31, 2004
------------ -----------------
Revolving Credit Agreement:
DeVry Inc. as borrower $ 40,000,000 3.53%
GEI as borrower 25,000,000 3.53%
-----------
Total $ 65,000,000 3.53%
-----------
Senior Notes:
DeVry Inc. as borrower $ 75,000,000 3.41%
GEI as borrower 50,000,000 3.41%
-----------
Total $125,000,000 3.41%
-----------
Total long-term debt $190,000,000 3.45%
-----------
18
NOTE 10: 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, 2004. The Company
presents three reportable segments: the DeVry University undergraduate
and graduate operations (DeVry University), the professional
examination review and training operations including Becker
Professional Review and Center for Corporate Education
(Professional and Training) and the Ross University medical and
veterinary school operations (Ross University).
These segments are based on the method by which management evaluates
performance and allocates resources. Such decisions are based, 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, 2004.
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.
19
NOTE 10: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information for the
quarters and for the six months ended December 31, 2004 and 2003.
Corporate information is included where it is needed to reconcile
segment data to the consolidated financial statements.
For the Quarter For the Six Months
Ended December 31, Ended December 31,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
DeVry University $161,951 $164,483 $318,691 $324,532
Professional and Training 10,207 13,709 20,953 24,011
Ross University 22,364 20,614 43,274 39,499
------- ------- ------- -------
Total Consolidated Revenues $194,522 $198,806 $382,918 $388,042
------- ------- ------- -------
Operating Income:
DeVry University $ 2,983 $14,029 $ 2,122 $24,135
Professional and Training 2,382 5,771 5,415 8,427
Ross University 8,160 7,822 15,193 15,483
Reconciling Items:
Amortization Expense (3,637) (3,394) (7,274) (6,790)
Interest Expense (2,091) (1,972) (4,082) (4,128)
Depreciation and Other (265) (213) (530) (403)
------ ------ ------ ------
Total Consolidated Income
before Income Taxes $ 7,532 $22,043 $10,844 $36,724
------ ------ ------ ------
Segment Assets:
DeVry University $451,169 $420,181 $451,169 $420,181
Professional and Training 68,574 71,658 68,574 71,658
Ross University 396,659 394,236 396,659 394,236
Corporate 17,970 14,899 17,970 14,899
------- ------- ------- -------
Total Consolidated Assets $934,372 $900,974 $934,372 $900,974
------- ------- ------- -------
Additions to Long-lived Assets:
DeVry University $14,099 $6,630 $18,754 $12,776
Professional and Training 120 2,361 202 2,370
Ross University 1,495 566 2,470 2,090
------ ----- ------ ------
Total Consolidated Additions
to Long-lived Assets $15,714 $9,557 $21,426 $17,236
------ ----- ------ ------
Depreciation Expense:
DeVry University $ 9,052 $ 9,684 $17,606 $18,047
Professional and Training 115 77 266 157
Ross University 893 589 1,571 1,070
Corporate 247 198 494 393
------ ------ ------ ------
Total Consolidated Depreciation $10,307 $10,548 $19,937 $19,667
------ ------ ------ ------
Amortization Expense:
DeVry University $ - $ 8 $ - $ 16
Professional and Training 194 183 387 368
Ross University 3,443 3,203 6,887 6,406
----- ----- ----- -----
Total Consolidated Amortization $3,637 $3,394 $7,274 $6,790
----- ----- ----- -----
20
NOTE 10: SEGMENT INFORMATION, continued
The Company conducts its educational operations in the United
States, Canada, the Caribbean countries of Dominica and St. Kitts/Nevis,
Europe, the Middle East and the Pacific Rim. Other international
revenues, which are derived principally from Canada were less than 5%
of total revenues for the quarters and six months ended December 31, 2004
and 2003. Revenues and long-lived assets by geographic area are as follows:
For the Quarter For the Six Months
Ended December 31, Ended December 31,
------------------- -------------------
2004 2003 2004 2003
------------------- -------------------
Revenues from Unaffiliated Customers:
Domestic Operations $168,670 $173,902 $333,007 $339,949
International Operations:
Dominica and St. Kitts/Nevis 22,364 20,614 43,274 39,499
Other 3,488 4,290 6,637 8,594
------- ------- ------- -------
Total International 25,852 24,904 49,911 48,093
------- ------- ------- -------
Consolidated $194,522 $198,806 $382,918 $388,042
------- ------- ------- -------
Long-lived Assets:
Domestic Operations $355,811 $359,703 $355,811 $359,703
International Operations:
Dominica and St. Kitts/Nevis 313,160 316,455 313,160 316,455
Other 827 1,361 827 1,361
------- ------- ------- -------
Total International 313,987 317,816 313,987 317,816
------- ------- ------- -------
Consolidated $669,798 $677,519 $669,798 $677,519
------- ------- ------- -------
No one customer accounted for more than 10% of the Company's
consolidated revenues.
NOTE 11: COMMITMENTS AND CONTINGENCIES
In October 2003, the Company announced that its subsidiary, DeVry
Canada LLC, had signed an agreement with RCC College of Technology
("RCC") that will enable DeVry to phase out its operations at its
Toronto campus commencing with the term that began in November
2003. Based in Vaughn, Ontario, RCC provides career-focused
electronics and computer technology diploma programs.
Under the terms of the agreement, which has been approved by the
Ontario Provincial Ministry, DeVry College of Technology has
contracted with RCC to manage the completion of programs of study
for DeVry's current student body in Toronto. DeVry's Toronto
campus will no longer admit new students. RCC will use existing
DeVry curricula to deliver courses that allow current DeVry
students to earn DeVry diplomas and certificates. The agreement
also makes provisions for the acquisition of DeVry assets by RCC
and the use of certain portions of DeVry curriculum under the RCC
brand name.
21
NOTE 11: 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.
In September 2003, the Company received a notice from Acacia
Research Corporation claiming patent-infringement. The notice
alleges that the Company has infringed upon several Acacia patents
relating to streaming audio and video technology. This technology
was allegedly used by the Company through its online education
platform provider and is also used by many other companies in
conjunction with the delivery of online programs. The validity of
the Acacia patents is being contested in a third party suit which
DeVry Inc. is monitoring. Indications are that the court will not
uphold the patents. The Company believes that the likelihood of
loss is remote.
In March 2002, the Company received notice of a class-action
complaint filed under the Fair Labor Standards Act by several
former field sales representatives seeking overtime
compensation for services rendered during their period of
employment. In March 2003, the Company participated in a
required mediation session but no resolution was reached.
The action was subsequently dismissed but an appeal has been
filed.
In January 2002, the Company received notice of an antitrust
complaint concerning the alleged monopoly by operations of its
Becker CPA Review Corp. subsidiary in California. This complaint
was filed in federal district court by the trustee in bankruptcy
of a failed CPA review provider seeking a substantial amount of
damages. In April 2002, this complaint was voluntarily dismissed
by the plaintiff without prejudice. The complaint was amended and
subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation
session was held in August 2004 resulting in a tentative agreement
to settle the matter. An agreement was finalized subsequent to
the end of the first quarter of the Company's fiscal year 2005.
In January 2005, the court approved a settlement in an amount for
which the Company had previously accrued.
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.
During the first quarter of the Company's fiscal year 2004, a new
complaint was filed by another plaintiff with the same general
allegations and by the same plaintiffs attorneys. Discovery
continues but there is no determinable date at which this matter
may be brought to conclusion.
22
NOTE 11: COMMITMENTS AND CONTINGENCIES, continued
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 the appropriate skills for
employability in the computer information systems field. The
complaint was subsequently dismissed by the court, but was amended
and re-filed, this time including a then current student from a
second Chicago-area campus. Discovery continues but there is no
determinable date at which this matter may be brought to
conclusion. The Company has accrued $0.5 million representing the
estimated minimum amount to resolve the two class-action claims.
The Company has recorded approximately $2.5 million associated
with estimated loss contingencies, including the amount of the
tentative agreement in the previously discussed anti-trust
complaint, at December 31, 2004. While the ultimate outcome of
these contingencies is difficult to estimate at this time, the
Company does intend to vigorously defend itself with respect to
these claims.
In conjunction with the required annual review procedures related
to its administration of financial aid programs under the Ontario
Student Aid Program, the Toronto-area DeVry campuses engaged in
discussions with the Ontario Ministry of Education relating to
certain additional information requirements for the 2001 and 2002
financial aid years. 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 continued on a periodic basis but
there has been no further communication from the Ministry in
almost a year. The Company's Toronto-area campus has not accepted
new student admission since November 2003 and is being operated
under an agreement with RCC College of Technology as previously
discussed. Accordingly, the Company is no longer participating in
these financial aid programs. The Company believes that the
likelihood of loss is remote.
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.
23
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 and
business, dependence on student financial aid, dependence on
state and provincial approvals and licensing requirements,
dependence on continued accreditation for DeVry University and
Ross University, increasing competition for the recruitment of
new students, applicant interest in careers in areas not covered
by the Company's educational programs and other factors detailed
in the Company's Securities and Exchange Commission ("SEC")
filings, including those discussed under the heading entitled
"Risk Factors" in the Company's Registration Statement on Form S-3
(No. 333-22457) and updated for current risks and uncertainties
in various sections of the Company's quarterly report on Form 10-Q
for the quarter ended September 30, 2004 and in the Company's
annual report on Form 10-K for the fiscal year ended June 30,
2004, as 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 quarterly report on Form 10-Q
for the quarter ended September 30, 2004 and in the Company's
annual report on Form 10-K for the fiscal year ended June 30,2004.
The Company's annual report on Form 10-K includes a
detailed description of critical accounting policies, estimates
and assumptions used in the preparation of the Company's
financial statements. These include, but are not limited to,
revenue recognition, useful lives of equipment and facilities,
valuation of goodwill and indefinite-lived intangible assets,
valuation and useful lives of acquired finite-lived intangible
assets, pattern of amortization of finite-lived intangible assets
over their economic lives, losses on the collection of student
receivable balances, costs associated with pending legal matters
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 quarterly period in the preceding year.
Copies of the Company's annual and quarterly reports on Form 10-
K, Form 10-Q and other reports filed with the Securities and
Exchange Commission may be obtained without charge at the
Company's website, www.devry.com.
24
Results of Operations
- ---------------------
The Company's financial performance for the second quarter and
first half of this fiscal year was negatively affected by several
factors. These include lower DeVry undergraduate total student
enrollments for both the summer term that began in July and for
the fall term that began in November. Student enrollments in
undergraduate technology programs continue to decline from the
level of previous years, with new student enrollments in
technology programs declining 30% from last November. Although
new student enrollments in our undergraduate business programs
continue to increase, up more than 14% from last November, this
increase is from a somewhat smaller base. Tuition revenues were
further affected by the increase in enrollments at our DeVry
University Centers and in online programs while enrollments at
our campuses declined. This shift in enrollment has increased
the proportion of our undergraduate students attending on a part-
time basis. These part-time students pay a lesser tuition amount
than do the full-time students that typically enroll at our
campus locations.
In addition to the effects on revenue described above, expenses
have increased from last year because of the hiring of additional
faculty and staff to support the growing number of DeVry
University Center locations and increased enrollments in our
online programs. We are also enhancing our advertising messages
to aid recruiting efforts and have added additional enrollment
counselors in the last year, predominantly to serve applicants to
the online programs. The increase in spending in these areas has
raised our overall level of spending compared to last year even
as we search for further ways to reduce spending in areas that
are less critical to our success. We believe that in the longer
term, investments in staff and service to students will allow us
to serve larger numbers of students in technology, business or
healthcare related programs; full-time or part-time; in master's,
bachelor's or associate degree programs or in one of our exam
preparation courses, whether on our campuses, University Centers
or online.
Also affecting results for the second quarter and first half has
been a decline in the number of students enrolled for the
Company's Becker CPA review. Last fiscal year, first half
results benefited somewhat from an increase in enrollments as
students studied for the last of the old paper and pencil format
CPA exams. Since then, the number of exam takers has decreased
by approximately 50% according to the AICPA and enrollments for
the Becker Review course have also declined, although at a lesser
rate.
In January 2005, the Company announced that it had completed a
workforce reduction plan that included a voluntary separation
plan, an involuntary general reduction in force and further
decided to leave approximately 100 currently open positions
unfilled. The actions were taken to reduce the size of the work
force to match current lower levels of undergraduate enrollments
as well as the evolving demands of the business.
25
The following table presents information with respect to the
relative size to revenue of each item in the statement of income
for the second quarter and first half for both the current and
prior year. Percents may not add due to rounding.
Quarter Ended Six Months Ended
December 31 December 31
----------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Educational Services 55.6% 52.6% 56.9% 53.9%
Student Services & Admin. Exp. 39.4% 35.2% 39.2% 35.6%
Interest Expense 1.1% 1.0% 1.1% 1.1%
----- ----- ----- -----
Total Costs and Expenses 96.1% 88.9% 97.2% 90.5%
Income Before Income Taxes and Cumulative
Effect of Change in Accounting 3.9% 11.1% 2.8% 9.5%
Income Tax Provision 0.9% 3.3% 0.7% 2.7%
----- ----- ----- -----
Income Before Cumulative
Effect of Change in Accounting 3.0% 7.8% 2.2% 6.7%
Cumulative Effect of
Change in Accounting - - 0.5% -
----- ----- ----- -----
NET INCOME 3.0% 7.8% 2.6% 6.7%
===== ===== ===== =====
The Company's total consolidated revenues declined by $4.3
million, or 2.2%, and by $5.1 million, or 1.3%, for the second
quarter and first half of the fiscal year, respectively. Tuition
revenue, which is the largest component of total revenues,
represented over 94.0% of total revenue in every period.
Contributing to the decline in total Company revenues was lower
revenue than last year for both the quarter and first half in the
DeVry University segment. The revenue decline occurred because
of lower undergraduate student enrollments for the summer and
falls terms compared to last year and because of a greater
proportion of students enrolled on less than a full-time basis,
particularly at the Company's DeVry University Centers and DeVry
Online programs. Students enrolled on less than a full-time
basis pay a lower amount of tuition than do full-time students.
However, while these part-time students may pay less tuition per
term, the time to completion of their program of study is longer
and additional revenue may be realized from these students in
later terms.
26
For the fall term that began in November and which represents the
base from which revenue is determined for two of the three months
in the second quarter, total undergraduate enrollments were
39,603. This compares to 43,383 including the remaining
enrollments at the discontinued Toronto-area campus in the year-
ago fall term. For the summer term that began in July and which
represents the base from which revenue is determined for the
three months of the first quarter and one month of the second
quarter, total undergraduate enrollments were 38,189, a decline
of 7.0% from the summer term last year. The Company believes
that this decline in enrollment, primarily in its technology
programs taught at its large campus sites, has been caused, in
part, by reports of reductions in technology field employment
that has caused applicant interest in these fields to lessen.
Partly offsetting the decline in undergraduate enrollments and
the increased proportion of part-time students has been a tuition
price increase of approximately 5-6% implemented in November for
undergraduate students. The previous price increase, of
approximately the same percent, was implemented this past March.
Graduate school enrollments in DeVry University continue to
increase, further offsetting a part of the decline in revenues
from undergraduate students. For the graduate terms that began
in July, September and November, total course takers increased by
8.3%, 9.0% and 9.7% respectively. In the November term, a total
of 12,368 course takers were enrolled. A tuition price increase
for graduate students was last implemented in March 2004 and
another tuition price increase of approximately 5% was
implemented for the term that began in January 2005.
In the first quarter of this fiscal year, the Company completed
an agreement with Follett Higher Education Group ("Follett") to
manage the nine remaining DeVry University campus bookstores not
previously managed by Follett. The transition to Follett
management at these bookstores occurred at the end of the first
quarter of this fiscal year and is now completed. As a result of
this agreement, the Company will no longer report sales revenue
at these stores but will report instead the commission income it
receives on the sales made by Follett. On an annual basis, the
Company believes that this change will reduce reported Other
Educational Revenues by approximately $10 million but will have
no significant effect on earnings as the commission earned from
Follett will approximate the profits previously generated when
these bookstores were under Company management.
At Becker Professional Review in the Professional and Training
segment, the change in the schedule of CPA exam administration
has resulted in the re-alignment of the fiscal year for this
business from its previous April year-end to a June year-end,
consistent with the year-end for the rest of the Company. This
change in accounting was made effective with the first quarter of
this fiscal year. As described above, a decline in the number of
CPA exam takers and, correspondingly, a decline in the number of
students enrolled in the Becker CPA Review course, has caused
revenues to decline by 25.5% in the second quarter and by 12.7%
for the first half compared to reported revenues in the same
fiscal periods last year. However, due to the change in fiscal
year for this operation, the second quarter of last year
represented the months of August through October and the first
half represented the months of May through October. Revenues
from the Professional and Training Group's Stalla CFA Review
program have increased, up more than 40% from the year-ago period
as exam takers prepared for the Level 1 examination
27
that is offered in December. However, the growth in CFA review
revenues is from a much smaller base than revenues from the CPA
review, particularly in the first half of the fiscal year because
the full offering of all three levels of the CFA exam is
available only in June of each year.
At Ross University, revenues increased by $1.8 million, or 8.5%,
and by $3.8 million, or 9.6%, from the second quarter and first
half of last year, respectively. The increase in revenues stems
largely from higher enrollments at both the medical and
veterinary schools and a tuition price increase that was
implemented in January 2004. For the Ross semester that began in
May, total enrollment of 3,100 increased by 16.1% from last May.
For the Ross semester that began in September, total enrollment
was 3,353, an increase of 5.6% from last September.
The Company's Cost of Educational Services increased by $3.6
million, or 3.4%, from the second quarter of last year. For the
six months, the Cost of Educational Services increased by $8.6
million, or 4.1%, from the first half of last year. Although
spending restraint and cost reduction, without affecting the
quality of student services, remains a high priority throughout
the organization, there have been cost increases as a result of
the expanding number of DeVry University Centers and the growth
in the DeVry University Online operations. For the term that
began in November, courses were being taught at eight new DeVry
University Centers compared to the year-ago period. Expanding
enrollments in the online educational programs, both
undergraduate and graduate, have also generated additional costs
as faculty and staff are added to support this growing method of
course delivery. For the term that began in November, the number
of online course takers increased by almost 79% from last year to
16,236. This compares to only 12,590 online course takers as
recently as the term that began in July. In support of its
online course offerings, the Company recently completed a renewal
of its multi-year agreement with eCollege to provide the
technology and service solution for all of DeVry University's
graduate and undergraduate online course offerings, including
programs and courses delivered completely online as well as for
the online supplement to on-site courses.
Included in the Cost of Educational Services this quarter is an
expense provision of approximately $1.5 million for work force
reduction charges related to employees whose wages were included
in this cost category and who, as of the end of December, had
accepted the terms of the Company's voluntary separation plan.
Subsequent to the end of December, an additional number of
employees accepted the voluntary separation plan and there will
be a further provision of a similar or slightly larger amount, in
the third quarter.
Depreciation expense, most of which is included in Cost of
Educational Services, increased to $19.7 million for the first
half of the year, approximately $0.3 million higher than last
year. The increase in depreciation expense is attributable to
the increased investment throughout the Company for new and
improved laboratory and computer equipment, improvements to
facilities and for expansion of operations. Capital spending on
improvements, including instructional technology, and on
expansion in selected operations is an integral component of the
Company's operating strategy.
Student Services and Administrative Expense increased by $6.5
million, or 9.3%, from the second quarter of last year. For the
first half of the year, this expense category increased by $12.2
million, or 8.8%, from the same period last year. The Company
continues to incur higher
28
costs for student recruitment in the form of advertising and
selling associated with efforts to enroll more new students,
particularly into full-time academic programs at its
undergraduate campus locations. To further these efforts, the
Company has increased the number of its admissions advisors at
its campuses, DeVry University Centers and online operations.
Also, additional admissions advisors have been added at Ross
University to increase enrollments at both the medical and
veterinary schools.
Much of the development work on the DeVry University new student
information system has now been completed. The system
functionality is largely deployed to provide better support for
the educational processes and related student services. In
accordance with accounting principles for internal software
development costs, certain wage and outside consulting costs are
being capitalized. For the second quarter and first half of the
year, approximately $0.2 million and $0.5 million, respectively,
have been capitalized. Cumulatively, a total of $20.6 million
has been capitalized for this project. In the second quarter and
first half, $1.1 million and $2.1 million, respectively, of
previously capitalized costs have been amortized to expense. In
addition, for the first six months an additional $1.5 million of
indirect costs related to this project have been charged directly
to expense. These amounts compare to $3.0 million that was
capitalized, $0.6 million of previously capitalized costs that
were amortized to expense and $3.1 million of indirect costs that
were charged directly to expense in the first half of last year.
Included in the Student Services and Administrative Expense
category was $3.6 million for the second quarter and $7.3 million
for the first half of amortization of finite-lived intangible
assets, mostly associated with the acquisition of Ross
University. This represents an increase of approximately $0.5
million from the amortization expense in the first half of last
year.
Also included in the Student Services and Administrative Expense
category in the second quarter was approximately $0.7 million of
work force reduction costs related to those employees whose wages
were included in this expense category and who, as of the end of
December, had accepted the terms of the Company's voluntary
separation plan. Subsequent to the end of December, an
additional number of employees accepted the voluntary separation
plan and there will be a further provision of a similar or
slightly larger amount, in the third quarter.
The DeVry University segment had operating income of $3.0 million
for the second quarter, compared to a $0.9 million operating loss
in the first quarter of this fiscal year. However, operating
results still lag the year-ago period by more than 90%. As
discussed above, the lower operating income stems in part from
lower undergraduate enrollments and an increased proportion of
part-time students that results in less tuition revenue than last
year, more than offsetting the higher graduate school enrollments
and tuition price increases. Costs have increased in support of
new DeVry University operating locations and increased online
enrollments and from completion of the new student information
system whose amortization of previously capitalized costs equaled
$2.1 million in the first half of this year compared to only $0.6
million of amortization charged to expense in the first half of
last year. Although amortization expense has increased from last
year, total spending on information systems maintenance and
development has declined from the first half of last year by
approximately $1.7 million as the new student information system
development is now largely completed and as other cost saving
initiatives are implemented. In addition, operating income this
29
year was affected by the provision for the work force reduction
program and will be further affected in the third quarter as
discussed above.
In the Professional and Training segment, the operating income
declined by 59% from the second quarter of last year and the
operating margin declined by almost half after a first quarter in
which the operating margin had increased slightly from the first
quarter of last year. In the second quarter, operating expenses
actually declined by $0.1 million from the first quarter but
revenues declined by $3.5 million as fewer students enrolled in
the Becker CPA Review course in preparation for the CPA licensing
examination as discussed above. For the first half of the year,
expenses remained flat with those reported in the first half of
last year but revenues declined because of fewer students
enrolling in the Company's CPA review course.
At Ross University, operating income increased by $0.3 million
from the second quarter of last year, although the operating
margin declined slightly from 37.9% to 36.5%. For the first
half of the year, the operating margin also declined, from 39.2%
last year to 35.2% this year. The lower operating margins result
from higher faculty wages and higher clinical training expenses,
particularly those paid to the U.S. veterinary school clinical
affiliates for Ross students in attendance for the clinical
training portion in the latter part of their educational program.
Further contributing to the lower operating margins has been a
slowing in the rate of growth in enrollments and revenues while
expenses have increased to better support the student learning
process. For the Ross semester that began this past September,
total enrollment increased by 5.6% from last September, after
increasing by 17.0% in the September semester of last year from
the year before. In response to the slowing rate of growth in
enrollments, several more admissions counselors have been hired
to reverse this decline and this has caused selling expense to
increase.
Interest Expense increased by $0.1 million in the second quarter
compared to last year and has remained almost unchanged at $4.1
million for the first half of the year. The interest expense has
not declined even though the total amount of debt outstanding at
December 31st this year was $190 million, down $50 million from
the same date last year. The interest rate on all of the
Company's debt is floating rate, based upon short-term interest
rates which have continued to increase through this fiscal year.
The Company intends to continue to reduce its outstanding debt as
cash balances permit but further increases in interest rates may
offset much or all of the lower interest expense benefit from the
lower debt levels.
Taxes on income were 23.0% of pretax income for the first six
months, compared to a composite effective tax rate of 29.0% in
the first half of last year. The lower effective tax rate this
year reflects the greater proportion of Ross University's
earnings that have a single digit effective tax rate compared to
the earnings from the Company's other operations that are subject
to higher domestic tax rates.
Included in the Company's first half earnings is $1.8 million,
net of taxes, from a Cumulative Effect of Change in Accounting
for the alignment of the Professional and Training Segment's
fiscal year to the same June-end fiscal year as the rest of the
Company. Because of the change to the CPA exam schedule from a
twice a year November and May administration to a nearly
continuous exam administration, the Company believes that the
historical Becker operating year that ended in April is no longer
the most appropriate fiscal year-end. Effective with the
Company's fiscal 2005, the Becker fiscal year is aligned with the
30
June 30th year-end of DeVry Inc. and the cumulative effect of
this change in accounting, representing the months of May and
June 2004, was reported in the first quarter of this fiscal year
as a Cumulative Effect of Change in Accounting.
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations during the first half was $68.0
million, compared to $79.4 million in the first half of last
year. Primarily contributing to the lower cash flow this year
was lower net income, down $15.9 million compared to last year.
Capital spending for the first six months was $21.4 million, up
$5.3 million from the first half of last year. The first half
spending includes the continued funding for construction of
dormitory facilities located on the DeVry University Fremont,
California, undergraduate campus and the acquisition, for
approximately $8.0 million, of office facilities to house the
expanding online education sales and administrative staff. For
the year, total capital spending is expected to be in the range
of $40 - $45 million, approximately the same level as last year.
The Company repaid $60 million of borrowings in the first half of
this year using existing cash balances and cash flow generated
from operations. The Company expects to continue to reduce its
outstanding borrowings during the balance of the year. During
the first half of last fiscal year, the Company repaid $50
million of borrowings.
All of the Company's borrowings are based upon a floating
interest rate, generally LIBOR at the Company's option. During
the first quarter of last fiscal year, the Company entered into
several interest rate cap agreements to protect $100 million of
borrowings from sharp increases in the short-term interest rates
upon which the borrowings are based. The Company intends to
periodically review further debt repayment options and the need
for additional interest rate protection in light of projected
changes in working capital requirements and future period
interest rates.
The Company's significant 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, including the recently renewed agreement with
eCollege for the technology base supporting the DeVry University
online course offerings. 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. There
are no loans extended to any officer, director or other person
affiliated with the Company. The Company has not entered into
any synthetic leases and there are no residual purchase or value
commitments related to any facility or equipment lease. The
Company has not entered into any derivative, swap, futures
contract, put, call, hedge or non-exchange traded contract except
for the interest rate cap agreements noted above. Under the
terms of these cap agreements, the Company is not obligated to
any further payment liability beyond their original purchase
price.
The Company's primary source of liquidity is the cash received
from payments for student tuition, books and fees. These
payments include funds originating as student and family
educational loans; other financial aid from various federal,
state and provincial loan and grant programs; and student and
family financing resources. Funds originating as student and
family educational loans and other forms of financial aid from
31
various sources are dependent upon DeVry and Ross 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 more than 60% of its DeVry University
undergraduate and graduate student revenues, and approximately
70% of Ross University student revenues are funded by these
programs. The reauthorization of the Higher Education Act is
currently being considered by Congress after having been tabled
last year. Various proposals within the bill as currently
presented may have a favorable impact on the amount of federal
aid available in the future to the Company's students. However,
as the bill moves towards final approval, there may be proposals
for changes that could adversely affect the amount of student
financial aid available to the Company's students. 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 January 2003, the New York State Comptroller's Office began an
audit of DeVry New York's compliance with the New York State
Tuition Assistance Program Grant ("TAP") requirements for the
three year period ending June 2002. Fieldwork was completed in
June 2003 and a preliminary report was issued in July. The
Company responded to the preliminary report, disagreeing with
some of the findings in the report. Subsequently, the Company
received an amended report and responded again. In the first
quarter of fiscal 2005, the Company received the final report and
determination of disallowance that resulted in financial
liability to the Company. The final liability was in an amount
for which the Company had previously accrued. The Company has
remitted the required claim of disallowance and the matter is now
closed.
In the spring of 2004, the Company received a complaint from a
student at its Alpharetta, Georgia, DeVry undergraduate campus
that an admissions advisor had entered incorrect financial
information into the student's application for financial aid.
Upon review by the Company, it was determined that financial
information entered for this student and several other students
was incorrect. The Company promptly notified the U.S. Department
of Education of its review and findings as required by federal
regulation and terminated several employees for the violation of
Company policies. The Company's internal controls prevented any
student from receiving an incorrect disbursement. The Chicago
office of the Inspector General acknowledged that the Company
should continue its internal review and report any further
findings. Additional information related to this matter was
requested and submitted by the Company to the Inspector General.
The matter is currently closed pending further communication or
requests for information.
In connection with the discontinuance of the original Denver
Technical College educational programs and its separate
eligibility for student financial aid, the Company is completing
an audit of its participation in these financial aid programs.
Approximately $400,000 of remaining financial aid funds were
identified as a part of this audit as needing to be returned to
the appropriate federal and state funding sources. Most of the
32
amounts owed have been returned and the last part of the return
will be completed upon receipt of the final payment amount and
remittance instructions. Although the company believes that
there is no significant liability that might arise from this
matter, it remains under review by the Department of Education.
In December 2004, the Texas Workforce Commission conducted a
visit to the DeVry University campus in Irving, Texas, for the
purpose of determining compliance with the veterans' educational
benefit approval criteria in the Code of Federal Regulations.
The review was completed and there were no discrepancies noted.
Included in the Company's consolidated cash balances of $132.4
million at December 31, 2004, is approximately $49.6 million of
cash attributable to the Ross University operations. It is the
Company's intention for the foreseeable future to reinvest this
cash plus subsequent earnings and cash flow to service
outstanding debt, improve and expand facilities and operations of
the schools and pursue future business opportunities outside the
United States. In accordance with this plan, cash held by Ross
University will not be available for general Company purposes
such as at DeVry University.
The Company believes that current balances of unrestricted cash,
cash generated from operations and borrowings under its financing
agreements will be sufficient to fund its current operations and
current growth plans for the foreseeable future unless new
investment opportunities should arise similar to the recent
acquisition of Ross University.
Item 3 - Qualitative and Quantitative Disclosures About Market Risk
- -------------------------------------------------------------------
The nature of the Company's educational operations does not
subject it to a concentration or dependency upon the price levels
or fluctuations in pricing of any one 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. Substantially all Ross
University financial transactions are denominated in the U.S.
dollar.
The financial position and results of operations for the
Company's Canadian educational programs are measured using the
local currency as the functional currency. The Canadian
operations have not entered into any material long-term contracts
to purchase or sell goods and services other than lease
agreements on its teaching facilities. The Company does not have
any foreign exchange contracts or derivative financial
instruments related to protection from changes in the value of
the Canadian 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 within the range of
changes recently experienced, would not have a material effect on
the Company's results of operations or financial position. Based
upon the current value of the net assets in the Canadian
operations, a change of $0.01 in the value of the Canadian dollar
relative to the U.S. dollar would result in a pre-tax translation
adjustment of less than $100,000.
33
Of the $190 million in Company debt outstanding at December 31,
2004, $65 million matures on July 1, 2009 and $125 million
matures on April 30, 2010. Future investment opportunities may
affect future debt repayments following such investment and could
require additional borrowings. The interest rate on the
Company's debt is based upon LIBOR interest rates for periods
typically ranging from one to three months. Based upon the level
of Company borrowings at the end of the first quarter, a 1%
increase in short-term interest rates would result in $1.9
million of additional annual interest expense. The Company
entered into several interest rate cap agreements to protect $100
million of its borrowings from sharp increases in short-term
interest rates. However, these interest rate cap agreements
expire in August and September 2005 and do not provide protection
from increases in short-term interest rates of less than 0.8%
from current rates.
Item 4 - Controls and Procedures
- --------------------------------
The Company has been and continues with its efforts to fully
comply with Section 404 of the Sarbanes-Oxley Act of 2002. The
effort includes both evaluating its disclosure controls and
procedures and its internal controls over financial reporting by
expanding and improving the design, documentation and testing of
effectiveness of internal controls. During the course of this
work, the Company has identified certain areas that management
believes need to be improved and efforts have been undertaken to
complete these improvements. Further testing and review
continue, but to date the Company has not identified any material
weaknesses in internal controls over financial reporting as
defined by the Public Accounting Oversight Board. However, the
Company can not provide absolute assurance that in future periods
it will be able to make the required management certifications or
that its Independent Auditors will be able to attest as to
whether they believe we maintained, in all material respects,
effective internal control over financial reporting in
conjunction with the Company's financial statements for the
fiscal year ending June 30, 2005.
Evaluations required by Rule 13a - 15 of the Securities Exchange
Act of 1934 of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a - 15(e) under the
Securities Exchange Act of 1934) as of the end of the period
covered by this Report have been carried out under the
supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief
Financial Officer. Based upon such evaluations, the Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no changes in the Company's internal controls
over financial reporting during the period covered by this report
that were identified in connection with the evaluation referred
to above that have materially affected, or are reasonably likely
to materially affect, the Company's internal control over
financial reporting.
34
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 following updates the
status of claims and litigations previously disclosed.
In September 2003, the Company received a notice from Acacia
Research Corporation claiming patent-infringement. The notice
alleges that the Company has infringed upon several Acacia
patents relating to streaming audio and video technology. This
technology was allegedly used by the Company through its online
education platform provider and is also used by many other
companies in conjunction with the delivery of online programs.
The validity of the Acacia patents is being contested in a third
party suit which DeVry Inc. is monitoring. Indications are that
the court will not uphold the patents. The Company believes that
the likelihood of loss is remote.
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. The complaint was amended
and subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation
session was held in August 2004 resulting in a tentative
agreement to settle the matter. An agreement was finalized
subsequent to the end of the first quarter of the Company's
fiscal year 2005. In January 2005, the court approved a
settlement in an amount for which the Company had previously
accrued.
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. During the first quarter of the Company's
fiscal year 2004, a new complaint was filed by another plaintiff
with the same general allegations and by the same plaintiffs
attorneys. Discovery continues but there is no determinable date
at which this matter may be brought to conclusion.
In November 2000, three graduates of one of DeVry University's
Chicago-area campuses filed a class-action complaint that alleges
DeVry graduates do not have appropriate skills for employability
in the computer information systems field. The complaint was
subsequently dismissed by the court, but was amended and re-
filed, this time including a then current student from a second
Chicago-area campus. Discovery continues but there is no
determinable date at which this matter may be brought to
conclusion. The Company has accrued $0.5 million representing
the estimated minimum amount to resolve the two class-action
claims.
In conjunction with the required annual review procedures related
to its administration of financial aid programs under the Ontario
35
Student Aid Program, the Toronto-area DeVry campuses engaged in
discussions with the Ontario Ministry of Education relating to
certain additional information requirements for the 2001 and 2002
financial aid years. 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 continued on a periodic basis but
there has been no further communication from the Ministry in
almost a year. The Company's Toronto-area campus has not
accepted new student admission since November 2003 and is being
operated under an agreement with RCC College of Technology as
previously discussed. Accordingly, the Company is no longer
participating in these financial aid programs. The Company
believes that the likelihood of loss is remote.
The Company has recorded a $2.5 million accrual representing the
estimated loss for the above items as of December 31, 2004.
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. At this time, the
Company does not believe that the outcome of current claims,
regulatory reviews and lawsuits will have a material effect on
its cash flows, results of operations or financial position.
Item 4 - Submission Of Matters To A Vote Of Security Holders
- ------------------------------------------------------------
The Company's regular annual meeting of stockholders was held in
Chicago, Illinois, on Tuesday, November 16, 2004, pursuant to
notice duly given. Proxies for the meeting were solicited in
accordance with the Securities Exchange Act of 1934 and there was
no solicitation in opposition to those of management.
At the meeting, one Director of the Company was elected as a
Class I Director to hold office until 2007 or until his successor
is elected and qualified.
No. of Shares No. of Shares
Class I Voted For Voted to Withhold
------- --------- -----------------
Harold T. Shapiro 63,187,248 952,426
The terms of office of the following Directors continued after
the meeting: Charles A. Bowsher, David S. Brown, Connie R.
Curran, Dennis J. Keller, Frederick A. Krehbiel, Robert C.
McCormack, Julie A. McGee, and Ronald L. Taylor.
Also submitted to a vote of the stockholders at this meeting was
a proposal for the ratification of the appointment of
PricewaterhouseCoopers LLP as Independent Auditors for the
Company for the current fiscal year. The following table
presents the results of the stockholders' vote on this matter:
For Against Abstain
--- ------- -------
63,763,936 350,365 25,373
36
Item 5 - Other Information
- --------------------------
In November 2004, the Company announced that Steven Riehs joined
the Company as vice president and general manager of its growing
online operations. Steven Riehs was most recently chief
executive officer at BrainX, Inc., an education software company.
Before that he served as president of e-learning and production
for Medsn, a portal for medical students and physicians that
provides e-learning courses for licensing.
In November 2004, the Company completed a realignment of certain
senior management responsibilities. Sharon Thomas-Parrott was
named the Company's chief compliance officer. Paul Eppen, the
Company's chief marketing officer, will now have the added
responsibility for marketing planning and ourtreach functions,
including public relations. Timothy Ricordati has been
reassigned from his position as vice president of enrollment
management to the position of vice president of student services
and retention. The Company also announced that Bruno LaCaria,
the Company's chief information officer, has retired and Jim
Ritchey has been appointed interim chief information officer.
In November 2004, the Company announced that its Board of
Directors adopted a shareholder rights plan. In connection with
the plan, the Company's Board of Directors declared a dividend of
one Common Stock Purchase Right for each outstanding share of
DeVry Inc. Common Stock. Subject to certain restrictions, the
Rights will be exercisable only if a person or group acquires 15%
or more of DeVry Inc. Common Stock or announces a tender or
exchange offer which would result in ownership of 15% or more of
the common stock. The Company also announced that it had
received an oral inquiry about the possibility of a business
combination on unspecified terms. The shareholder rights plan is
designed to assure that shareholders are not deprived of their
rights to share fully in the Company's long-term potential, but
not to prevent a fairly valued bid for the Company.
In January 2005, the Company announced that John Holbrook joined
DeVry University as vice president of new student recruitment
responsible for field and campus admissions recruiting. John
Holbrook has extensive leadership in higher education recruiting,
starting as a recruiting advisor with DeVry University in 1974
and rising to the position of national director. John left DeVry
in 1995. Before his return to DeVry, John held senior recruiting
management roles with other national educational organizations.
In January 2005, DeVry University announced two programmatic
expansions to its undergraduate educational offerings. First,
the associate degree program in health information technology
will now be available through DeVry University Online, starting
in the spring 2005 semester. Also, DeVry University is
introducing a new bachelor of science degree program in game and
simulation programming to be offered initially at its Phoenix,
Arizona, and Fremont, California, campuses for the summer 2005
semester.
37
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Sequentially
Exhibit # Description Numbered Page
--------- ----------- -------------
31 Rule 13a-14(a)/15d-14(a)Certifications 39-42
32 Section 1350 Certifications 43
(b) Reports on Form 8-K:
1. October 21, 2004, reporting revenues and earnings for the
Company's first quarter of fiscal year 2005.
2. November 22, 2004, announcing a realignment of senior
management at the Company.
3. November 24, 2004, announcing that the Company had adopted a
shareholder rights plan.
4. December 7, 2004, announcing fall term student enrollments
at DeVry University and Ross University.
38
Signatures
- ----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: February 8, 2005 /s/Ronald L. Taylor
-------------------
Ronald L. Taylor
Chief Executive Officer
Date: February 8, 2005 /s/Norman M. Levine
-------------------
Norman M. Levine
Senior Vice President and
Chief Financial Officer