form10-q.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark
One)
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R
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended: September 30, 2007
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OR
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
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For
the transition period
from to
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Commission
file number: 1-13988
DeVry
Inc.
(Exact
name of registrant as specified in its charter)
DELAWARE
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36-3150143
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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ONE
TOWER LANE, SUITE 1000,
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60181
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OAKBROOK
TERRACE, ILLINOIS
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(Zip
Code)
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(Address
of principal executive offices)
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Registrant’s
telephone number; including area code:
(630) 571-7700
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 R No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
one):
Large
Accelerated Filer R Accelerated
Filer £ Non-Accelerated
Filer £
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes £ No R
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date:
October
31, 2007 — 71,315,242 shares of Common Stock, $0.01 par
value
FORM 10-Q
FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30,
2007
TABLE
OF CONTENTS
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Page No.
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PART I
– Financial Information
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Item 1
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—
Financial Statements (Unaudited)
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3
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4
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5
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6
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Item 2
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17
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Item 3
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25
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Item 4
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26
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PART II
– Other Information
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Item 1
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27
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Item 1A
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27
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Item
2
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28
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Item 6
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28
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29
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PART
I – Financial Information
DEVRY
INC.
Item
1. Financial Statements (Unaudited)
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
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September
30,
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June
30,
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September
30,
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2007
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2007
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2006
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(Dollars
in thousands)
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ASSETS:
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Current
Assets:
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Cash
and Cash Equivalents
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$ |
150,011
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$ |
129,155
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$ |
168,646
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Marketable
Securities
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72,745
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—
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—
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Restricted
Cash
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21,218
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14,483
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30,198
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Accounts
Receivable, Net
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75,790
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43,084
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76,803
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Inventories
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113
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141
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129
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Deferred
Income Taxes, Net
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15,491
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|
13,915
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15,485
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Prepaid
Expenses and Other
|
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18,361
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18,207
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22,463
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Total
Current Assets
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353,729
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218,985
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313,724
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Land,
Buildings and Equipment:
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Land
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51,707
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60,570
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61,642
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Buildings
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201,884
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218,836
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209,668
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Equipment
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266,677
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260,847
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248,476
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Construction
In Progress
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5,038
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15,816
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12,278
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525,306
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556,069
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532,064
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Accumulated
Depreciation and Amortization
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(292,442 |
) |
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(296,742 |
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(274,823 |
) |
Land,
Buildings and Equipment, Net
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232,864
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259,327
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257,241
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Other
Assets:
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Intangible
Assets, Net
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55,874
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56,920
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61,955
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Goodwill
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291,113
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291,113
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291,113
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Perkins
Program Fund, Net
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13,450
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13,450
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13,450
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Other
Assets
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5,510
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4,318
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2,639
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Total
Other Assets
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365,947
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365,801
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369,157
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TOTAL
ASSETS
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$ |
952,540
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$ |
844,113
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$ |
940,122
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LIABILITIES:
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Current
Liabilities:
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Current
Portion of Debt
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$ |
—
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$ |
—
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$ |
75,000
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Accounts
Payable
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32,799
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34,295
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34,313
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Accrued
Salaries, Wages and Benefits
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35,392
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47,093
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34,917
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Accrued
Expenses
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41,491
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32,737
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45,268
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Advance
Tuition Payments
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14,828
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14,402
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18,699
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Deferred
Tuition Revenue
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|
122,415
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37,348
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103,745
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Total
Current Liabilities
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246,925
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165,875
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311,942
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Other
Liabilities:
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Revolving
Loan
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—
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—
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10,000
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Deferred
Income Taxes, Net
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|
|
8,689
|
|
|
|
18,343
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|
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|
10,705
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|
Accrued
Postemployment Agreements
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|
|
4,661
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|
|
4,901
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|
|
|
5,565
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|
Deferred
Rent and Other
|
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|
26,289
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|
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|
13,028
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|
|
|
14,519
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Total
Other Liabilities
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|
39,639
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|
36,272
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|
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|
40,789
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TOTAL
LIABILITIES
|
|
|
286,564
|
|
|
|
202,147
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352,731
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SHAREHOLDERS’
EQUITY:
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Common
Stock, $0.01 Par Value, 200,000,000 Shares Authorized;
71,098,000; 71,131,000 and 70,823,000 Shares Issued and
Outstanding at September 30, 2007, June 30, 2007 and September 30,
2006, Respectively
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|
|
717
|
|
|
|
716
|
|
|
|
709
|
|
Additional
Paid-in Capital
|
|
|
147,511
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|
|
|
143,580
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|
|
|
126,186
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|
Retained
Earnings
|
|
|
536,933
|
|
|
|
510,979
|
|
|
|
462,813
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|
Accumulated
Other Comprehensive Loss
|
|
|
(1,550 |
) |
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|
(918 |
) |
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|
(423 |
) |
Treasury
Stock, at Cost (589,393; 436,786 and 91,927 Shares,
Respectively)
|
|
|
(17,635 |
) |
|
|
(12,391 |
) |
|
|
(1,894 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
665,976
|
|
|
|
641,966
|
|
|
|
587,391
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|
TOTAL
LIABILITIES AND
SHAREHOLDERS’EQUITY
|
|
$ |
952,540
|
|
|
$ |
844,113
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|
$ |
940,122
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|
The
accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in Thousands Except Per Share Amounts)
(Unaudited)
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
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|
2007
|
|
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2006
|
|
|
|
|
|
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|
REVENUES:
|
|
|
|
|
|
|
Tuition
|
|
$ |
230,221
|
|
|
$ |
202,633
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|
Other
Educational
|
|
|
20,097
|
|
|
|
16,582
|
|
Total
Revenues
|
|
|
250,318
|
|
|
|
219,215
|
|
OPERATING
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of Educational Services
|
|
|
121,028
|
|
|
|
120,304
|
|
Loss
(Gain) on Sale of Assets
|
|
|
3,743
|
|
|
|
(19,855 |
) |
Student
Services and Administrative Expense
|
|
|
91,645
|
|
|
|
85,798
|
|
Total
Operating Costs and Expenses
|
|
|
216,416
|
|
|
|
186,247
|
|
Operating
Income
|
|
|
33,902
|
|
|
|
32,968
|
|
INTEREST:
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
2,407
|
|
|
|
1,438
|
|
Interest
Expense
|
|
|
(221 |
) |
|
|
(2,169 |
) |
Net
Interest Income (Expense)
|
|
|
2,186
|
|
|
|
(731 |
) |
Income
Before Income Taxes
|
|
|
36,088
|
|
|
|
32,237
|
|
Income
Tax Provision
|
|
|
9,253
|
|
|
|
11,317
|
|
NET
INCOME
|
|
$ |
26,835
|
|
|
$ |
20,920
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.38
|
|
|
$ |
0.30
|
|
Diluted
|
|
$ |
0.37
|
|
|
$ |
0.29
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$ |
26,835
|
|
|
$ |
20,920
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Charge
|
|
|
1,514
|
|
|
|
978
|
|
Depreciation
|
|
|
8,405
|
|
|
|
8,392
|
|
Amortization
|
|
|
1,081
|
|
|
|
2,200
|
|
Provision
for Refunds and Uncollectible Accounts
|
|
|
14,725
|
|
|
|
13,308
|
|
Deferred
Income Taxes
|
|
|
(6,785 |
) |
|
|
(3,652 |
) |
Loss
(Gain) on Disposals of Land, Buildings and Equipment
|
|
|
3,735
|
|
|
|
(19,724 |
) |
Changes
in Assets and Liabilities, Net of Effects from Acquisitions of
Businesses:
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
(6,729 |
) |
|
|
(9,566 |
) |
Accounts
Receivable
|
|
|
(47,401 |
) |
|
|
(43,544 |
) |
Inventories
|
|
|
37
|
|
|
|
4
|
|
Prepaid
Expenses and Other
|
|
|
704
|
|
|
|
(4,837 |
) |
Accounts
Payable
|
|
|
(1,509 |
) |
|
|
(5,364 |
) |
Accrued
Salaries, Wages, Benefits and Expenses
|
|
|
(60 |
) |
|
|
16,946
|
|
Advance
Tuition Payments
|
|
|
390
|
|
|
|
2,115
|
|
Deferred
Tuition Revenue
|
|
|
85,067
|
|
|
|
71,976
|
|
NET
CASH PROVIDED BY
OPERATINGACTIVITIES
|
|
|
80,009
|
|
|
|
50,152
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(18,140 |
) |
|
|
(7,761 |
) |
Net
Proceeds from Sale of Land and Building
|
|
|
38,528
|
|
|
|
34,778
|
|
Marketable
Securities Purchased
|
|
|
(82,738 |
) |
|
|
—
|
|
Marketable
Securities-Maturities and Sales
|
|
|
10,000
|
|
|
|
—
|
|
NET
CASH (USED IN) PROVIDED BY
INVESTINGACTIVITIES
|
|
|
(52,350 |
) |
|
|
27,017
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
2,394
|
|
|
|
658
|
|
Proceeds
from Stock Issued Under Employee Stock Purchase Plan
|
|
|
182
|
|
|
|
227
|
|
Repurchase
of Common Stock for Treasury
|
|
|
(5,402 |
) |
|
|
—
|
|
Cash
Dividends Paid
|
|
|
(3,557 |
) |
|
|
—
|
|
Excess
Tax Benefit from Stock-Based Payments
|
|
|
167
|
|
|
|
8
|
|
Borrowings
Under Revolving Credit Facility
|
|
|
25,000
|
|
|
|
—
|
|
Repayments
Under Revolving Credit Facility
|
|
|
(25,000 |
) |
|
|
—
|
|
Repayments
Under Senior Notes
|
|
|
—
|
|
|
|
(40,000 |
) |
NET
CASH USED IN FINANCINGACTIVITIES
|
|
|
(6,216 |
) |
|
|
(39,107 |
) |
Effects
of Exchange Rate Differences
|
|
|
(587 |
) |
|
|
1
|
|
NET
INCREASE IN CASH AND
CASHEQUIVALENTS
|
|
|
20,856
|
|
|
|
38,063
|
|
Cash
and Cash Equivalents at Beginningof
Period
|
|
|
129,155
|
|
|
|
130,583
|
|
Cash
and Cash Equivalents at End
ofPeriod
|
|
$ |
150,011
|
|
|
$ |
168,646
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH
FLOWINFORMATION:
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
177
|
|
|
$ |
2,150
|
|
Income
Taxes, Net
|
|
|
6,392
|
|
|
|
225
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Notes
to Consolidated Financial Statements (Unaudited)
NOTE 1: INTERIM
FINANCIAL STATEMENTS
The
unaudited interim consolidated financial statements of DeVry Inc. (“DeVry”) and
its wholly-owned subsidiaries have been prepared pursuant to the rules and
regulations of the United States Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. The interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in DeVry's Annual Report on Form 10-K
as
filed with the Securities and Exchange Commission for the fiscal year ended
June
30, 2007.
In
the
opinion of management, the interim consolidated financial statements reflect
all
adjustments necessary to fairly present the results for such interim
period. All such adjustments, unless otherwise noted herein, are of a
normal, recurring nature. The June 30, 2007 data that is presented is
derived from audited financial statements. The results of operations
for the interim period, are not necessarily indicative of results to be expected
for the entire fiscal year.
NOTE 2: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Marketable
Securities
Marketable
securities consist of municipal auction rate securities and investments in
mutual funds all of which are classified as available-for-sale securities.
All
marketable securities are classified as short term investments because DeVry
has
the ability to divest the holdings within one year. The investments
in the municipal auction rate securities generally have stated terms to maturity
of greater then one year; however, the market is highly liquid and interest
rates reset within 7 to 35 days.
All
available-for-sale securities are recorded at fair market value based upon
quoted market prices. Fair market value of the municipal auction rate
securities approximates cost due to the short interest rate reset
period. Unrealized gains or temporary unrealized losses, net of
income tax effects, are reported as a component of accumulated other
comprehensive loss on the consolidated balance sheets. Realized gains
and losses are computed on the basis of specific identification and are included
in miscellaneous other income (expense) in the consolidated income statements.
No realized gains or losses have been recorded to date. The following
table summarizes DeVry’s available-for-sale securities as of September 30, 2007
(in thousands):
|
|
Gross
Unrealized
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Gain
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction
Rate Municipal Bonds
|
|
$ |
70,187
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
70,187
|
|
Bond
Mutual Fund
|
|
|
715
|
|
|
|
-
|
|
|
|
9
|
|
|
|
724
|
|
Stock
Mutual Funds
|
|
|
1,836
|
|
|
|
(2 |
) |
|
|
-
|
|
|
|
1,834
|
|
Total
Marketable Securities
|
|
$ |
72,738
|
|
|
$ |
(2 |
) |
|
$ |
9
|
|
|
$ |
72,745
|
|
As
of
September 30, 2007, all unrealized losses in the above table have been in a
continuous unrealized loss position for less than one year. When
evaluating our investments for possible impairment, we review factors such
as
length of time and extent to which fair value has been less than cost basis,
the
financial condition of the investee, and our ability and intent to hold the
investment for a period of time that may be sufficient for anticipated recovery
in fair value. The decline in value of the above investments is
considered temporary in nature and, accordingly, management does not believe
these investments are impaired as of September 30, 2007.
Postemployment
Benefits
DeVry’s
employment agreements with its Chair of the Board of Directors and former Chief
Executive Officer provide certain benefits upon a change in their respective
responsibilities that required accrual over the service period which ended
June
30, 2005. For the three months ended September 30, 2007 and
2006, DeVry recognized expense of approximately $29,000 and $177,000,
respectively, representing the present value of the obligation related to these
agreements, discounted using a 6.22% rate as of September 30, 2007, and
using the sinking fund accrual method.
Earnings
per Common Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. 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. Excluded from the September
30,
2007 and 2006 computations of diluted earnings per share were options to
purchase 343,000 and 1,649,000 shares of common stock, respectively,
because their effect would be anti-dilutive.
The
following is a reconciliation of basic shares to diluted shares.
|
|
Three
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in
thousands)
|
|
Basic
shares
|
|
|
71,105
|
|
|
|
70,794
|
|
Effect
of Dilutive Stock Options
|
|
|
842
|
|
|
|
235
|
|
Diluted
Shares
|
|
|
71,947
|
|
|
|
71,029
|
|
Treasury
Stock
During
the third quarter of fiscal 2007, the Company initiated a stock repurchase
program (see “Note 4 – Dividends and Stock Repurchase Program”). Shares that are
repurchased by the Company are recorded as Treasury Stock at cost and result
in
a reduction of Shareholders’ Equity.
From
time
to time, shares of its common stock are delivered back to DeVry under a swap
arrangement resulting from employees’ exercise of incentive stock options
pursuant to the terms of the DeVry Stock Incentive Plans (see “Note 3 –
Stock-Based Compensation”). These shares are recorded as Treasury Stock at cost
and result in a reduction of Shareholders’ Equity.
Treasury
shares are reissued on a monthly basis at market value, to the DeVry Employee
Stock Purchase Plan in exchange for employee payroll deductions. When
treasury shares are reissued, DeVry uses an average cost method to reduce the
treasury stock balance. Gains on the difference between the average
cost and the reissuance price are credited to Additional Paid-in Capital. Losses
on the difference are charged to Additional Paid-in Capital to the extent that
previous net gains from reissuance are included therein; otherwise such losses
are charged to Retained Earnings.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
Accumulated
Other Comprehensive Loss
Accumulated
Other Comprehensive Loss is composed of the change in cumulative translation
adjustment and unrealized gains and losses on available-for-sale marketable
securities. The amounts recorded in Accumulated Other Comprehensive Loss for
the
changes in translation rates were losses of $639,000 and $1,000 for the three
months ended September 30, 2007 and 2006, respectively. An
unrealized gain on available-for-sale marketable securities of $7,000 is
recorded in Accumulated Other Comprehensive Loss for the three months ended
September 30, 2007.
The
Accumulated Other Comprehensive Loss balance at September 30, 2007,
consists of $1,557,000 of cumulative translation losses and $7,000 of unrealized
gains on available-for-sale marketable securities. At September 30, 2006, this
balance was composed entirely of cumulative translation losses of
$423,000.
Advertising
Expense
Advertising
costs are recognized as expense in the period in which materials are purchased
or services are preformed. Advertising expense, which is included in
student services and administrative expense in the Consolidated Statements
of
Income, was $28.6 million and $25.1 million for the three months ended September
30, 2007 and 2006, respectively.
Recent
Accounting Pronouncements
SFAS 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines and
establishes a framework for measuring fair value. In addition, SFAS
157 expands disclosures about fair value measurements. For DeVry,
SFAS 157 is effective beginning in fiscal year 2009. DeVry does not
expect that the adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
SFAS 159
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Liabilities, Including an
Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
assets and liabilities at fair value, with changes in fair value recorded in
earnings. Under SFAS 159, the decision to measure items at fair value
is made at specified election dates on an instrument-by-instrument basis and
is
irrevocable. For DeVry, SFAS 159 is effective beginning in fiscal
year 2009. DeVry is currently evaluating the impact of SFAS
159.
NOTE 3: STOCK-BASED
COMPENSATION
DeVry
maintains five stock-based award plans: the 1991 Stock Incentive Plan, the
1994
Stock Incentive Plan, the 1999 Stock Incentive Plan, the 2003 Stock Incentive
Plan and the 2005 Incentive Plan. Under these plans, directors, key executives
and managerial employees are eligible to receive incentive stock or nonqualified
options to purchase shares of its common stock. The 2005 Incentive Plan also
permits the award of stock appreciation rights, restricted stock, performance
stock and other stock and cash based compensation. The 1999 and 2003 Stock
Incentive Plans are administered by a Plan Committee of the Board of Directors
subject to approval by the Compensation Committee of the Board of
Directors. The 2005 Incentive Plan is administered by the
Compensation Committee of the Board of Directors. Plan Committee
members are granted automatic, nondiscretionary annual options. Options are
granted for terms of up to 10 years and can vest immediately or over
periods of up to five years. The requisite service period is equal to the
vesting period. The option price under the plans is the fair market value of
the
shares on the date of the grant.
DeVry
accounts for options granted to retirement eligible employees that fully vest
upon an employee’s retirement under the non-substantive vesting period approach
to these options. Under this approach, the entire compensation cost is
recognized at the grant date for options issued to retirement eligible
employees.
At
September 30, 2007, 6,580,174 authorized but unissued shares of common
stock were reserved for issuance under DeVry’s stock incentive
plans.
Effective
July 1, 2005, DeVry adopted the provisions of SFAS 123(R) which
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at grant date, based
on
the fair value of the award, and is recognized as expense over the employee
requisite service period.
The
following is a summary of options activity for the three months ended
September 30, 2007:
|
|
Options Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life
|
|
|
Aggregate
IntrinsicValue($000)
|
|
Outstanding
at July 1, 2007
|
|
|
3,316,210
|
|
|
$ |
23.61
|
|
|
|
|
|
|
|
Options
Granted
|
|
|
570,250
|
|
|
$ |
34.53
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(119,030 |
) |
|
$ |
23.54
|
|
|
|
|
|
|
|
Options
Canceled
|
|
|
(63,880 |
) |
|
$ |
24.97
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
3,703,550
|
|
|
$ |
25.28
|
|
|
|
6.81
|
|
|
$ |
43,459
|
|
Exercisable
at September 30, 2007
|
|
|
2,112,271
|
|
|
$ |
24.13
|
|
|
|
5.27
|
|
|
$ |
27,215
|
|
The
total
intrinsic value of options exercised for the three months ended
September 30, 2007 and 2006 was $1,432,000 and $505,000,
respectively.
The
fair
value of DeVry’s stock-based awards was estimated using a binomial model. This
model uses historical cancellation and exercise experience of DeVry to determine
the option value. It also takes into account the illiquid nature of employee
options during the vesting period.
The
weighted average estimated grant date fair values, as defined by
SFAS 123(R), for options granted at market price under DeVry’s stock option
plans during first quarters of fiscal years 2008 and 2007 were $15.45 and
$10.38, per share, respectively. The fair values of DeVry’s stock option awards
were estimated assuming the following weighted average assumptions:
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
|
|
Expected
Life (in Years)
|
|
|
6.60
|
|
|
|
5.42
|
|
Expected
Volatility
|
|
|
39.33 |
% |
|
|
41.35 |
% |
Risk-free
Interest Rate
|
|
|
4.34 |
% |
|
|
3.82 |
% |
Dividend
Yield
|
|
|
0.32 |
% |
|
|
-
|
|
Pre-vesting
Forfeiture Rate
|
|
|
5.00 |
% |
|
|
4.00 |
% |
The
expected life of the options granted is based on the weighted average exercise
life with age and salary adjustment factors from historical exercise
behavior.
DeVry’s
expected volatility is computed by combining and weighting the implied market
volatility, its most recent volatility over the expected life of the option
grant, and DeVry’s long-term historical volatility.
If
factors change and different assumptions are employed in the application of
SFAS 123(R) in future periods, the stock-based compensation expense that
DeVry records may differ significantly from what was recorded in the previous
period.
The
following table shows total stock-based compensation expense included in the
Consolidated Statement of Earnings:
|
|
For
the Three Months
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of Educational Services
|
|
$ |
484
|
|
|
$ |
313
|
|
Student
Services and Administrative Expense
|
|
|
1,030
|
|
|
|
665
|
|
Income
Tax Benefit
|
|
|
(204 |
) |
|
|
(169 |
) |
Net
Stock-Based Compensation Expense
|
|
$ |
1,310
|
|
|
$ |
809
|
|
As
of
September 30, 2007, $15.1 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of 3.8 years. The total fair value of
options vested during the three months ended September 30, 2007 and 2006
was approximately $2.9 million and $4.2 million, respectively.
There
were no capitalized stock-based compensation costs at September 30, 2007
and 2006.
DeVry
has
an established practice of issuing new shares of common stock to satisfy share
option exercises. However, DeVry also may issue treasury shares to
satisfy option exercises under certain of its plans.
NOTE
4: DIVIDENDS AND STOCK REPURCHASE PROGRAM
On
May 8, 2007, DeVry’s Board of Directors declared a cash dividend of $0.05 per
share. This dividend was paid on July 12, 2007, to common stockholders of record
as of June 18, 2007. The total dividend declared of $3.6 million was
recorded as a reduction to retained earnings as of June 30, 2007. On November
7,
2007, DeVry announced that its Board of Directors approved a 20% dividend
increase, raising its annual dividend rate from $0.10 to $0.12 per
share. Payable on a semi-annual basis, the next dividend of $0.06 per
share will be paid on January 4, 2008, to common stockholders of record as
of
December 14, 2007. Future dividends will be at the discretion of the
Board of Directors.
On
November 15, 2006, DeVry announced that the Board of Directors had established
a
stock repurchase plan. The stock repurchase plan allows DeVry to buy back up
to
$35 million of its common stock through December 31, 2008. As of September
30,
2007, DeVry has repurchased, on the open market, 510,573 shares of its common
stock at a total cost of approximately $15.9 million. These buybacks were funded
through available cash balances. The timing and amount of any future
repurchases will be determined by management based on its evaluation of market
conditions and other factors. These repurchases may be made through the open
market, including block purchases, or in privately negotiated transactions,
or
otherwise. The buyback will be funded through available cash balances and/or
borrowings under its revolving credit agreement and may be suspended or
discontinued at any time.
Shares
of
stock repurchased under the program are held as treasury shares. These
repurchased shares have reduced the weighted average number of shares of common
stock outstanding for basic and diluted earnings per share
calculations
NOTE 5: INTANGIBLE
ASSETS
Intangible
assets consist of the following (dollars in thousands):
|
|
As
of September 30, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770
|
|
|
$ |
(45,324 |
) |
License
and Non-compete Agreements
|
|
|
2,650
|
|
|
|
(2,629 |
) |
Class Materials
|
|
|
2,900
|
|
|
|
(1,350 |
) |
Trade
Names
|
|
|
110
|
|
|
|
(110 |
) |
Other
|
|
|
620
|
|
|
|
(620 |
) |
Total
|
|
$ |
54,050
|
|
|
$ |
(50,033 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
20,972
|
|
|
|
|
|
Trademark
|
|
|
1,645
|
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100
|
|
|
|
|
|
Intellectual
Property
|
|
|
13,940
|
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200
|
|
|
|
|
|
Total
|
|
$ |
51,857
|
|
|
|
|
|
|
|
As
of September 30, 2006
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770
|
|
|
$ |
(39,494 |
) |
License
and Non-compete Agreements
|
|
|
2,650
|
|
|
|
(2,605 |
) |
Class Materials
|
|
|
2,900
|
|
|
|
(1,150 |
) |
Trade
Names
|
|
|
110
|
|
|
|
(83 |
) |
Other
|
|
|
620
|
|
|
|
(620 |
) |
Total
|
|
$ |
54,050
|
|
|
$ |
(43,952 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
20,972
|
|
|
|
|
|
Trademark
|
|
|
1,645
|
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100
|
|
|
|
|
|
Intellectual
Property
|
|
|
13,940
|
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200
|
|
|
|
|
|
Total
|
|
$ |
51,857
|
|
|
|
|
|
Amortization
expense for amortized intangible assets was $1,046,000 and $1,807,000 for the
three months ended September 30, 2007 and 2006, respectively. Estimated
amortization expense for amortized intangible assets for the next five fiscal
years ending June 30 is as follows (dollars in thousands):
Fiscal
Year
|
|
|
|
2008
|
|
$ |
3,660
|
|
2009
|
|
|
203
|
|
2010
|
|
|
200
|
|
2011
|
|
|
200
|
|
2012
|
|
|
160
|
|
The
weighted-average amortization period for amortized intangible assets is three
and five years for Chamberlain College of Nursing and Ross University Student
Relationships, respectively, six years for License and Non-compete Agreements,
14 years for Class Materials, four years for Trade Names and six years
for Other. These intangible assets, except for the Ross University Student
Relationships, are being amortized on a straight-line basis. The amount being
amortized for the Ross University Student Relationships is based on the
estimated progression of the students through the respective medical and
veterinary programs, giving consideration to the revenue and cash flow
associated with both existing students and new applicants. This results in
the
basis being amortized at an annual rate for each of the five years of estimated
economic life 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,
Accreditations and Intellectual Property are not amortized, as there are no
legal, regulatory, contractual, economic or other factors that limit the useful
life of these intangible assets to the reporting entity. As of the end of fiscal
years 2007 and 2006, there was no impairment loss associated with these
indefinite-lived intangible assets, as fair value exceeds the carrying
amount.
DeVry
determined that as of the end of fiscal years 2007 and 2006, there was no
impairment in the value of DeVry’s goodwill for any reporting units. This
determination was made after considering a number of factors including a
valuation analysis prepared by management. The carrying amounts of goodwill
related to the DeVry University, Professional & Training and Medical &
Healthcare reportable segments at September 30, 2007 and June 30, 2007,
were unchanged at $22,195,000, $24,716,000, $244,202,000,
respectively.
NOTE 6: SALE
OF FACILITIES
In
September 2007, DeVry sold its facility located in Seattle, Washington for
approximately $12.4 million. In connection with the sale, DeVry
recorded a pre-tax loss of $5.4 million during the first quarter of fiscal
year 2008. In the same transaction, DeVry sold its facility located
in Phoenix, Arizona for approximately $16.0 million and realized a gain of
approximately $7.7 million. In connection with the transaction, DeVry entered
into agreements to lease back approximately 60% of the total space of both
facilities. The leaseback required the deferral of a portion of the
gain on the sale of the Phoenix facility of approximately $6.6 million. This
gain will be recognized as a reduction to rent expense over the ten year life
of
the lease agreement. The remaining pre-tax gain of $1.1 million was recorded
during the first quarter of fiscal 2008.
In
September 2007, DeVry exercised the option under its lease agreement to purchase
its facility in Alpharetta, Georgia for $11.2 million. Immediately
following the acquisition, DeVry sold the facility to a different party for
$11.2 million and executed a leaseback on the entire facility. In
connection with this transaction, DeVry accelerated to the first quarter of
fiscal 2008, the recognition of approximately $0.6 million of remaining deferred
lease credits associated with the original lease.
The
recorded net loss on the sale of the facilities and the recognition of the
deferred lease credits are separately classified in the Consolidated Statements
of Income as a component of Total Operating Costs and Expenses and are related
to the DeVry University reportable segment.
In
September 2006, DeVry sold its facility located in West Hills, California
for $36.0 million. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal year
2007. DeVry relocated its West Hills campus operations to a leased
facility in nearby Sherman Oaks, California. This gain is separately
classified in the Consolidated Statements of Income as a component of Total
Operating Costs and Expenses and is related to the DeVry University reportable
segment.
NOTE 7: REDUCTION
IN WORKFORCE CHARGES
During
the third quarter of fiscal year 2007, DeVry offered a voluntary separation
plan
(VSP) to eligible DeVry University campus-based employees. The
decision to take this action resulted from a thorough analysis which revealed
that a reduction in the number of employees at DeVry University campuses was
warranted to address the subsidiary’s cost structure. The VSP was
offered at 22 DeVry University campuses with 285 employees being eligible to
participate. Seventy employees accepted this separation
plan. Separation of employment was effective no later than June
30, 2007. DeVry recorded a pre-tax charge of approximately $3.7
million in the third and fourth quarters of fiscal year 2007 in relation to
these employees. This charge consists of severance pay and extended
medical and dental benefits coverage.
In
April
2007, DeVry announced plans for an involuntary reduction in force (RIF) that
further reduced its workforce by approximately 150 positions at its DeVry
University campus-based operations. This resulted in an additional
pre-tax charge in the fourth quarter of fiscal 2007 of approximately $2.6
million that represents severance pay and benefits in relation to these
employees.
Cash
payments for the VSP and RIF were approximately $2.9 million and $1.4 million,
respectively in the first quarter of fiscal year 2008. These payments will
extend until the period of benefit coverage has expired. Of
the
total amount accrued for the 2007 VSP and RIF, approximately $0.8 million
remained to be paid as of September 30, 2007.
NOTE
8: INCOME TAXES
DeVry’s
effective income tax rate reflects benefits derived from significant operations
outside the United States. Earnings of Ross University’s
international operations are not subject to U.S. federal or state income taxes.
The principal operating subsidiaries of Ross University 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 Schools have
agreements with the respective governments that exempt them from local income
taxation through the years 2043 and 2023, respectively.
DeVry
has
not recorded a tax provision for the undistributed international earnings of
the
Medical and Veterinary Schools. It is DeVry’s intention to
indefinitely reinvest accumulated cash balances, future cash flows and
post-acquisition undistributed earnings and profits to improve the facilities
and operations of the Schools and pursue future opportunities outside of the
United States. In accordance with this plan, cash held by Ross
University will not be available for general company purposes and under current
laws will not be subject to U.S. taxation. Included in DeVry’s
consolidated cash balances were approximately $96.2 million and $47.9 million
attributable to Ross University’s international operations as of September 30,
2007 and 2006, respectively. As of September 30, 2007 and 2006,
cumulative undistributed earnings were approximately $105.1 million and $64.2
million, respectively.
Taxes
on
income were 25.6% of pretax income for the first quarter of fiscal year 2008,
compared to 35.1% for the year-ago quarter. The higher effective
income tax rate in fiscal year 2007 is attributable to the gain on the sale
of
the West Hills facility which carried a tax rate of 40.4%. In fiscal
year 2008, there is no corresponding gain and the net loss on the fiscal year
2008 first quarter facility sales which carries a tax rate of 39.1% provided
a
benefit which decreased the current quarter’s effective tax
rate. This decrease was partially offset by an increase in the
proportion of income generated by U.S. operations to the offshore operations
of
Ross University as compared to the prior year period. The effective
income tax rate for the fiscal year ended June 30, 2007 was 27.4%.
Effective
July 1, 2007, DeVry adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition of income tax assets
and liabilities, classification of current and deferred income tax assets and
liabilities, accounting for interest and penalties associated with tax
positions, accounting for income taxes in interim periods and income tax
disclosures. The cumulative effects of applying this interpretation have been
recorded as a decrease of $0.9 million to retained earnings, an increase of
$0.5
million to net deferred income tax assets, a decrease of $4.2 million to net
deferred income tax liabilities, an increase of $0.7 million to other accrued
current taxes and an increase of $4.8 million to other accrued non-current
taxes
as of July 1, 2007. In conjunction with adoption of FIN 48, we
classified uncertain tax positions as non-current tax liabilities unless
expected to be paid in one year.
As
of the
adoption of FIN 48, the total amount of gross unrecognized tax benefits for
uncertain tax positions, including positions impacting only the timing of tax
benefits, was $6.0 million. The amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was $1.4
million. DeVry classifies interest and penalties on tax uncertainties
as a component of the provision for income taxes. The total amount of
interest and penalties accrued as of adoption was $0.5 million. The
corresponding amounts at September 30, 2007, were not materially different
from
the amounts at the date of adoption. DeVry expects the total amount of
unrecognized tax benefits to decrease by $4.3 million within 12 months of the
reporting date, in one case due to the anticipated approval of a change in
accounting method, in another case due to the expiration of the applicable
statute of limitations, and in a final item due to an anticipated settlement
with tax authorities.
The
Internal Revenue Service examined the Company's 1997-2003 U.S. Federal Income
Tax Returns. Although these examinations were effectively closed on
May 11, 2006, the examinations and the findings were subject to Joint Committee
Review. On June 23, 2006, the Joint Committee on taxation completed
its consideration of the Internal Revenue Service's Special Report and did
not
take exception to the examination and the agents' conclusions. DeVry
generally remains subject to examination for all tax years beginning on or
after
July 1, 2003.
NOTE 9: LONG-TERM
DEBT
All
of
DeVry’s borrowings and letters of credit under its long-term debt agreements are
through DeVry Inc. and Global Education International, Inc. (“GEI”), an
international subsidiary. As of September 30, 2007, DeVry had no
outstanding borrowings. Long-term debt consists of the following at
September 30, 2007, June 30, 2007 and September 30, 2006 (dollars in
thousands):
|
|
Outstanding
Debt at
|
|
Revolving
Credit Agreement:
|
|
September
30, 2007
|
|
|
June
30, 2007
|
|
|
September
30, 2006
|
|
DeVry
Inc. as borrower$
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
10,000
|
|
GEI
as borrower
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
10,000
|
|
Senior
Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
75,000
|
|
GEI
as borrower
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
75,000
|
|
Total
Outstanding Debt
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
85,000
|
|
Current
Maturities of Debt
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
75,000
|
|
Total
Long-term Debt
|
|
$ |
—
|
|
|
$ |
—
|
|
|
$ |
10,000
|
|
NOTE 10: COMMITMENTS
AND CONTINGENCIES
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of a dormitory facility on the DeVry
University, Fremont, California campus. DeVry's complaint seeks monetary
damages arising out of Sierra Bay's failure to keep the project free from liens
filed by subcontractors, and indemnification against subcontractor claims.
Sierra Bay filed a counterclaim in December 2005, asserting that DeVry owes
approximately $3 million for work allegedly performed on the project.
DeVry filed additional complaints against the architect, the project manager
and
an engineering firm, and the Court subsequently consolidated all claims relating
to the project, including those of the subcontractors, into the principal case
filed by DeVry against Sierra
Bay. In addition, several subcontractors
of Sierra Bay have asserted lien claims against DeVry and the subject property
for sums that Sierra Bay allegedly failed to pay the subcontractors and which
claims are largely subsumed within Sierra Bay's claims against DeVry. Some
of those claims have been resolved by settlement and/or are presently in a
state
of default. Others remain pending.
On
December 23, 2005, Saro Daghlian, a former DeVry University student in
California, commenced a putative class action against DeVry University and
DeVry
Inc. (collectively “DeVry”) in Los Angeles Superior Court, asserting
various claims predicated upon DeVry’s alleged failure to comply with disclosure
requirements under the California Education Code relating to the transferability
of academic units. In addition to the alleged omission,
Daghlian also claimed that DeVry made untrue or misleading statements to
prospective students, in violation of the California Unfair Competition
Law, ("UCL") and the California False Advertising Law,
("FAL"). DeVry denied all of Daghlian’s allegations and removed
the action to the U.S. District Court for the Central District of
California. On June 11, 2007, the District Court issued an Order
certifying a class under the UCL, comprised of students who enrolled and paid
tuition at a California DeVry school in the four years prior to the date when
the suit was filed. On July 16, 2007, DeVry filed a Motion for Summary
Judgment on the grounds that the statutory provisions of
the California Education Code underlying Daghlian's
claims unconstitutionally discriminated
against out-of-state regionally accredited universities, in violation of the
Dormant Commerce Clause and the Equal Protection Clause of
the Fourteenth Amendment. DeVry also argued that the California
Education Code compelled speech in violation of the First
Amendment. On October 9, 2007, the Court granted DeVry’s
Motion for Summary Judgment and entered judgment dismissing all
of Daghlian ’s class claims under the UCL. The Court
also entered judgment in DeVry’s favor on Daghlian's individual claim under
the California Education Code. Additionally, the Court vacated the
existing trial schedule and granted DeVry leave to file a second motion for
summary judgment directed to Daghlian’s remaining individual claims under
the UCL and FAL.
As
of
September 30, 2007, there is an accrual of less than $1.0 million for the
resolution of all legal claims.
While
the
ultimate outcome of pending contingencies is difficult to estimate at this
time,
DeVry intends to vigorously defend itself with respect to the pending claims.
At
this time, DeVry does not believe that the outcome of current claims,
administrative proceedings, regulatory reviews and lawsuits will have a material
effect on its cash flows, results of operations or financial
position.
NOTE 11: SEGMENT
INFORMATION
DeVry’s
principal business is providing post-secondary education. The services of our
operations are described in more detail in “Note 1- Nature of Operations”
to the consolidated financial statements contained in DeVry’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2007. DeVry presents
three reportable segments: the DeVry University undergraduate and graduate
operations (DeVry University); the professional exam review and training
operations including Becker Professional Review and the Center for Corporate
Education (Professional and Training); and the Ross University medical and
veterinary school and Chamberlain College of Nursing operations
(Medical & Healthcare).
These
segments are consistent with the method by which management evaluates
performance and allocates resources. Such decisions are based, in part, on
each
segment’s operating income, which is defined as income before interest income,
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 2 — 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, 2007.
The
consistent measure of segment profit excludes interest income, interest expense,
amortization and certain corporate-related depreciation. As such, these items
are reconciling items in arriving at income before income taxes. The consistent
measure of segment assets excludes deferred income tax assets and certain
depreciable corporate assets. Additions to long-lived assets have been measured
in this same manner. Reconciling items are included as corporate
assets.
Following
is a tabulation of business segment information based on the current
segmentation for the three months ended September 30, 2007 and 2006.
Corporate information is included where it is needed to reconcile segment data
to the consolidated financial statements.
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
(Dollars
in Thousands)
|
|
DeVry
University
|
|
$ |
194,765
|
|
|
$ |
172,572
|
|
Professional
and Training
|
|
|
18,313
|
|
|
|
16,132
|
|
Medical &
Healthcare
|
|
|
37,240
|
|
|
|
30,511
|
|
Total
Consolidated Revenues
|
|
$ |
250,318
|
|
|
$ |
219,215
|
|
Operating
Income:
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
15,561
|
|
|
$ |
18,298
|
|
Professional
and Training
|
|
|
8,358
|
|
|
|
6,814
|
|
Medical &
Healthcare
|
|
|
11,601
|
|
|
|
10,583
|
|
Reconciling
Items:
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(1,046 |
) |
|
|
(1,807 |
) |
Depreciation
and Other
|
|
|
(572 |
) |
|
|
(920 |
) |
Total
Consolidated Operating Income
|
|
$ |
33,902
|
|
|
$ |
32,968
|
|
Interest:
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
2,407
|
|
|
$ |
1,438
|
|
Interest
Expense
|
|
|
(221 |
) |
|
|
(2,169 |
) |
Net
Interest Income (Expense)
|
|
|
2,186
|
|
|
|
(731 |
) |
Total
Consolidated Income before Income Taxes
|
|
$ |
36,088
|
|
|
$ |
32,237
|
|
|
|
For
the Three Months
|
|
|
|
As
of September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Segment
Assets:
|
|
(Dollars
in Thousands)
|
|
DeVry
University
|
|
$ |
420,316
|
|
|
$ |
449,615
|
|
Professional
and Training
|
|
|
85,553
|
|
|
|
85,987
|
|
Medical &
Healthcare
|
|
|
428,650
|
|
|
|
380,615
|
|
Corporate
|
|
|
18,021
|
|
|
|
23,905
|
|
Total
Consolidated Assets
|
|
$ |
952,540
|
|
|
$ |
940,122
|
|
Additions
to Long-lived Assets:
|
|
|
|
DeVry
University
|
|
$ |
14,152
|
|
|
$ |
3,848
|
|
Professional
and Training
|
|
|
14
|
|
|
|
33
|
|
Medical &
Healthcare
|
|
|
3,974
|
|
|
|
3,880
|
|
Total
Consolidated Additions to Long-lived Assets
|
|
$ |
18,140
|
|
|
$ |
7,761
|
|
Depreciation
Expense:
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
6,763
|
|
|
$ |
6,921
|
|
Professional
and Training
|
|
|
95
|
|
|
|
143
|
|
Medical &
Healthcare
|
|
|
1,322
|
|
|
|
1,081
|
|
Corporate
|
|
|
225
|
|
|
|
247
|
|
Total
Consolidated Depreciation
|
|
$ |
8,405
|
|
|
$ |
8,392
|
|
Intangible
Asset Amortization Expense:
|
|
|
|
DeVry
University
|
|
$ |
—
|
|
|
$ |
—
|
|
Professional
and Training
|
|
|
63
|
|
|
|
64
|
|
Medical &
Healthcare
|
|
|
983
|
|
|
|
1,743
|
|
Total
Consolidated Amortization
|
|
$ |
1,046
|
|
|
$ |
1,807
|
|
In
September 2007, DeVry executed a sale leaseback transaction for its facilities
in Seattle, Washington and Phoenix, Arizona. In connection with these
transactions, DeVry recorded a pre-tax loss of $4.3 million during the
first quarter of fiscal 2008. This loss is included in operating income of
the
DeVry University reportable segment.
In
September 2007, DeVry exercised the option under its lease agreement to purchase
its facility in Alpharetta, Georgia. Immediately following the
acquisition, DeVry sold the facility to a different party and executed a
leaseback on the entire facility. In connection with this
transaction, DeVry accelerated to the first quarter of fiscal 2008, the
recognition of approximately $0.6 million of remaining deferred lease credits
associated with the original lease. This income is included in operating income
of the DeVry University reportable segment.
In
September 2006, DeVry sold its facility located in West Hills,
California. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal 2007. This gain is
included in operating income of the DeVry University reportable
segment.
DeVry
conducts its educational operations in the United States, Canada, the Caribbean
countries of Dominica and St. Kitts/Nevis, Europe, the Middle East and the
Pacific Rim. Other international revenues, which are derived principally from
Canada, were less than 5% of total revenues for the quarters ended
September 30, 2007 and 2006. Revenues and long-lived assets by geographic
area are as follows:
|
|
For
the Three Months
|
|
|
|
|
Ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars
in Thousands)
|
Revenues
from Unaffiliated Customers:
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
215,921
|
|
|
$ |
188,837
|
|
International
Operations:
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
31,708
|
|
|
|
27,534
|
|
Other
|
|
|
2,689
|
|
|
|
2,844
|
|
Total
International
|
|
|
34,397
|
|
|
|
30,378
|
|
Consolidated
|
|
$ |
250,318
|
|
|
$ |
219,215
|
|
Long-lived
Assets:
|
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
288,346
|
|
|
$ |
319,344
|
|
International
Operations:
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
310,132
|
|
|
|
306,807
|
|
Other
|
|
|
333
|
|
|
|
247
|
|
Total
International
|
|
|
310,465
|
|
|
|
307,054
|
|
Consolidated
|
|
$ |
598,811
|
|
|
$ |
626,398
|
|
No
one
customer accounted for more than 10% of DeVry’s consolidated
revenues.
NOTE 12: SUBSEQUENT
EVENT
On
October 31, 2007, the Company acquired Advanced Academics Inc. (“AAI”), a
leading provider of online secondary education, for $27.5 million in
cash. Founded in 2000 and headquartered in Oklahoma City, Oklahoma,
AAI partners with school districts to help more students graduate high
school. AAI supplements traditional classroom programs through
Web-based course instruction using highly qualified teachers and a proprietary
technology platform specifically designed for secondary education. AAI also
operates virtual high schools in 6 states. Since its inception, AAI
has delivered online learning programs to more than 20,000 students in more
than
200 school districts. The financial results of AAI will be reported
as part of the DeVry University segment.
ITEM 2 —
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Through
its website, DeVry offers (free of charge) its Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and other reports filed with the United States
Securities and Exchange Commission. DeVry’s website is
http://www.devryinc.com.
The
following discussion of DeVry’s results of operations and financial condition
should be read in conjunction with DeVry’s Consolidated Financial Statements and
the related Notes thereto in Item 1, “FINANCIAL STATEMENTS” in this Quarterly
Report on Form 10-Q and DeVry’s Consolidated Financial Statements and related
Notes thereto in Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” in DeVry’s
Annual Report on Form 10-K for the fiscal year ended June 30,
2007. DeVry’s Annual Report on Form 10-K includes a description of
critical accounting policies and estimates and assumptions used in the
preparation of DeVry’s financial statements. These include, but are
not limited to, revenue and expense recognition; allowance for uncollectible
accounts; internally developed software; land buildings and equipment;
stock-based compensation; impairment of goodwill and other intangible assets;
impairment of long-lived assets and income tax liabilities.
The
somewhat seasonal pattern of DeVry’s enrollments and its educational program
starting dates affect the results of operations and the timing of cash
flows. Therefore, 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.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this Quarterly Report on Form 10-Q, including those
that affect DeVry’s expectations or plans, may constitute “forward-looking
statements” subject to the Safe Harbor Provision of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements generally can
be
identified by phrases such as DeVry Inc. or its management “anticipates,”
“believes,” “estimates,” “expects,” “forecasts,” “foresees” or other words or
phrases of similar import. Such statements are inherently uncertain
and may involve risks and uncertainties that could cause future results to
differ materially from those projected or implied by these forward-looking
statements. Potential risks and uncertainties that could affect
DeVry’s results are described throughout this Report and in DeVry’s Annual
Report on Form 10-K for the fiscal year ended June 30, 2007 and filed with
the
Securities and Exchange Commission on August 24, 2007 including, without
limitation, in Item 1A, “Risk Factors” and in the subsections of
“Item 1 — Business” entitled “Competition,” “Student Recruiting and
Admission,” “Accreditation,” “Approval and Licensing,” “Tuition and Fees,”
“Financial Aid and Financing Student Education,” “Student Loan Defaults,”
“Career Services,” “Seasonality,” and “Employees.”
All
forward-looking statements included in this report are based upon information
presently available, and DeVry assumes no obligation to update any
forward-looking statements.
OVERVIEW
For
the
first quarter of fiscal year 2008, DeVry posted solid financial results driven
by strong revenue growth and effective cost management. Total
revenues rose 14.2%, reaching a quarterly record high of $250.3 million,
and net
income of $26.8 million increased 28.3%. Operational and financial
highlights for the first quarter of fiscal year 2008 include:
|
·
|
All
three of DeVry’s business segments achieved double digit revenue growth,
due in part to increased investments in marketing and recruiting
and
continued demand for DeVry’s high quality educational programs and
offerings.
|
|
·
|
In
connection with its real estate optimization strategy, DeVry executed
sale
leaseback transactions at three of its facilities resulting in
an upfront
loss of $2.3 million net of tax, or $0.03 per share. Management
expects the sale leasebacks to result in a $1.2 million improvement
in
operating income on an annual
basis.
|
|
·
|
DeVry’s
financial position continues to strengthen as it ended the quarter
with no
debt outstanding and $223 million of cash and marketable
securities.
|
The
following table illustrates the effects of the loss/(gain) on the sale of
facilities on DeVry’s earnings. The non-GAAP disclosure of earnings
is not preferable to GAAP net income but is shown as a supplement to such
disclosure for comparability to the year-ago quarter’s earnings (in thousands,
except per share data):
|
|
For
the Three Months
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Net
Income
|
|
$ |
26,835
|
|
|
$ |
20,920
|
|
Earnings
per Share (diluted)
|
|
$ |
0.37
|
|
|
$ |
0.29
|
|
Loss
(Gain) on Sale of Assets (net of tax)
|
|
$ |
2,279
|
|
|
$ |
(11,840 |
) |
Effect
on Earnings per Share (diluted)
|
|
$ |
0.03
|
|
|
$ |
(0.16 |
) |
Net
Income Excluding the Loss (Gain) on Sale of Assets
|
|
$ |
29,114
|
|
|
$ |
9,080
|
|
Earnings
per Share Excluding the Loss (Gain) on Sale of Assets
(diluted)
|
|
$ |
0.40
|
|
|
$ |
0.13
|
|
RESULTS
OF OPERATIONS
The
following table presents information with respect to the relative size to
revenue of each item in the Consolidated Statements of Income for the first
quarter for both the current and prior fiscal year. Percents may not
add because of rounding.
|
|
For
the Three Months
Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of Educational Services
|
|
|
48.3 |
% |
|
|
54.9 |
% |
Loss/(Gain)
on Sale of Assets
|
|
|
1.5 |
% |
|
|
(9.1 |
%) |
Student
Services & Admin. Exp
|
|
|
36.6 |
% |
|
|
39.1 |
% |
Total
Operating Costs and Expenses
|
|
|
86.5 |
% |
|
|
85.0 |
% |
Operating
Income
|
|
|
13.5 |
% |
|
|
15.0 |
% |
Interest
Income
|
|
|
1.0 |
% |
|
|
0.7 |
% |
Interest
Expense
|
|
|
(0.1 |
%) |
|
|
(1.0 |
%) |
Net
Interest Income (Expenses)
|
|
|
0.9 |
% |
|
|
(0.3 |
%) |
Income
Before Income Taxes
|
|
|
14.4 |
% |
|
|
14.7 |
% |
Income
Tax Provision
|
|
|
3.7 |
% |
|
|
5.2 |
% |
Net
Income
|
|
|
10.7 |
% |
|
|
9.5 |
% |
REVENUES
Total
consolidated revenues for the first quarter of fiscal year 2008 increased
14.2%
to $250.3 million from the prior year quarter. Revenues increased at
all three of DeVry’s business segments as a result of continued growth in total
student enrollments, improved student retention, and tuition price increases
as
compared to the year ago period. In addition, revenues increased
because of expanding sales of electronic text books (“eBooks”) and higher sales
of Becker CPA review materials.
DeVry
University
For
the
first quarter of fiscal year 2008, DeVry University revenues increased 12.9%
to
$194.8 million as compared to the year ago period. Tuition revenues
are the largest component of total revenues in the DeVry University segment.
The
two principal factors that influence tuition revenues are enrollment and
tuition
rates. Key trends in these two components are set forth below.
Total
undergraduate enrollment by term:
|
·
|
Increased
by 4.9% from fall 2005 (38,546 students) to fall 2006 (40,434
students);
|
|
·
|
Increased
by 5.5% from spring 2006 (38,523 students) to spring 2007 (40,637
students); and
|
|
·
|
Increased
by 9.8% from summer 2006 (37,132 students) to summer 2007 (40,774
students). This was DeVry University’s fifth consecutive period
of positive total undergraduate student enrollment
growth.
|
New
undergraduate enrollment by term:
|
·
|
Increased
by 11.9% from fall 2005 (10,663 students) to fall 2006 (11,930
students);
|
|
·
|
Increased
by 6.9% from spring 2006 (10,359 students) to spring 2007 (11,075
students); and
|
|
·
|
Increased
by 9.7% from summer 2006 (12,671 students) to summer 2007 (13,906
students). The summer 2007 term was the eighth consecutive term
in which
new undergraduate student enrollments increased from the year-ago
level.
|
Graduate
coursetaker enrollment:
The
term
“coursetaker” refers to the number of courses taken by a
student. Thus, one student taking two courses is counted as two
coursetakers.
|
·
|
Increased
by 11.1% from the July 2006 session (12,617 coursetakers) to the
July 2007
session (14,023 coursetakers) and;
|
|
·
|
Increased
by 12.7% from the September 2006 session (14,069 coursetakers)
to the
September 2007 session (15,857
coursetakers).
|
Tuition
rates:
|
·
|
Undergraduate
program tuition increased by approximately 4.5% in July
2007; and
|
|
·
|
Graduate
school program tuition increased by approximately 4.5% for the
July 2007
session.
|
Management
attributes the increasing undergraduate new student enrollments to greater
investments in marketing and recruiting, continued demand for DeVry’s high
quality educational programs and its position within the working adult
market. Management believes that efforts at Keller to create new
brand awareness through improved messaging have produced positive enrollment
results. Also contributing to higher total revenues in the DeVry
University segment was an increase in Other Educational Revenues from sales
of
eBooks.
Partly
offsetting the increases in revenue from improved enrollments and higher
tuition
rates were an increase in DeVry University scholarships and a growing proportion
of working adult undergraduate students who typically enroll for less than
a
full-time academic load. These students are primarily enrolled in online
programs and in programs offered at DeVry University centers. These part-time
students pay a lesser total average tuition amount each term than do full-time
students at the undergraduate campus locations. Therefore, the higher revenue
per student resulting from tuition increases has been partially offset by
a
greater proportion of part-time students. In addition, interest
charges (included in Other Educational Revenue) on undergraduate student
accounts receivable decreased during the first quarter of fiscal year 2008,
as
compared to the prior year period. These receivables are generally
subject to a monthly interest charge of one percent under DeVry University’s
EDUCARD® proprietary loan program for financing students’
education. Lower interest charges are primarily a result of a
decrease in the average accounts receivable balance on enrolled, undergraduate
student accounts. The timeliness of receivable collections improved
as compared to the prior year period.
Professional
and Training
Professional
and Training segment revenues rose 13.5% to $18.3 million in the first quarter
of fiscal year 2008 as compared to the year-ago quarter. The primary reasons
for
the increase was higher sales of CPA review courses on CD-ROM and increased
enrollment in Becker Professional Review’s CPA review
courses. Management believes that these increases are being driven by
the continued demand for CPAs by accounting and consulting firms. Further
contributing to growth in this segment was increased enrollments in the Stalla
CFA review course in preparation for the Level 1 exam which will be
administered in December.
Medical
and Healthcare
Medical
and Healthcare segment revenues increased 22.1% to $37.2 million in the first
quarter of fiscal year 2008 as compared to the year-ago period. While
Ross University accounted for the majority of the revenue increase in this
segment, increasing enrollments at Chamberlain College of Nursing also
contributed to segment revenue growth. The two principal factors that
influence revenues are enrollment and tuition rates. Key trends in these
two
components are set forth below.
Ross
University total enrollment by term:
|
·
|
Increased
by 14.8% from January 2006 (3,264 students) to January 2007 (3,747
students);
|
|
·
|
Increased
by 9.9% from May 2006 (3,428 students) to May 2007 (3,767 students);
and
|
|
·
|
Increased
by 4.3% from September 2006 (3,724 students) to September 2007
(3,885
students).
|
Ross
University new student enrollment by term:
|
·
|
Increased
by 28.2% from January 2006 (387 students) to January 2007 (496
students);
|
|
·
|
Decreased
by 5.2% from May 2006 (439 students) to May 2007 (416 students)
as a
result of a lower number of transfer students in May 2007 as compared
to
the prior year term; and
|
|
·
|
Decreased
by 8.9% from September 2006 (628 students) to September 2007 (572
students) as a result of capacity constraints in the peak September
term
and a lower number of transfer students in September 2007 as compared
to
the prior year term.
|
Chamberlain
College of Nursing total enrollment by term:
|
·
|
Increased
by 83.3% from July 2006 (594 students) to July 2007 (1,089
students).
|
Tuition
rates:
|
·
|
Tuition
and fees for the Ross University beginning basic sciences programs
increased by approximately 5.4% for the September 2006 term and
approximately 6.8% effective with the September 2007
term;
|
|
·
|
Tuition
and fees for the Ross University final clinical portion of the
programs
increased by approximately 5.0% for the September 2006 term and
approximately 7.5% effective with the September 2007 term;
and
|
|
·
|
Tuition
for Chamberlain College of Nursing increased approximately 5% for
the
2006-2007 academic year (effective July 2006) and approximately
5% for the
2007-2008 academic year (effective July
2007).
|
Management
believes that the increasing enrollments at Ross University for the past
several
terms resulted from enhancements made to its marketing and recruiting
functions. In addition, continued demand for medical doctors and
veterinarians positively influenced career decisions of new students towards
these respective fields of study. To prepare for increasing student
demand, Ross University is adding faculty, classrooms, and a new student
center
and gymnasium.
During
March 2007, Chamberlain College of Nursing began offering associate and
bachelor’s degrees in nursing programs at its new campus in Columbus,
Ohio. This new location is co-located with DeVry University’s campus
in Columbus.
Revenue
from Other Sources
During
the first quarter of fiscal 2008, Other Educational Revenue increased by
$3.5 million, or 21.2%, to $20.1 million as compared to the prior year
period. As discussed above, the primary drivers for the increase in Other
Educational Revenue were strong sales of eBooks at DeVry University and
increased sales of Becker CPA Review course materials on CD-ROM, partially
offset by a decrease in interest charged on undergraduate student
receivables.
COSTS
AND EXPENSES
Cost
of Educational Services
The
largest component of Cost of Educational Services is the cost of faculty
and the
staff that supports educational operations. This expense category also includes
the costs of facilities, supplies, bookstore and other educational materials,
student education-related support activities, and the provision for
uncollectible student accounts.
DeVry’s
Cost of Educational Services during the first quarter of fiscal year 2008
increased by $0.7 million, or 0.6%, as compared to the year-ago
period. Cost increases were incurred in support of the higher number
of DeVry University Centers and expanding online program enrollments. In
addition, cost increases were incurred at Ross University to support increasing
student enrollments. Largely offsetting these cost increases were
expense savings realized from the voluntary and involuntary work force
reductions taken at DeVry University during the fourth quarter of fiscal
year
2007. In addition, DeVry realized facility cost reductions from its
ongoing real estate optimization program.
As
a
percent of revenue, Cost of Educational Services decreased to 48.3% in the
first
quarter of fiscal year 2008 from 54.9% during the prior year period. The
decrease was a result of increased operating leverage with existing facilities
and staff and revenue gains, which more than offset incremental investments
at
all three business segments. Management anticipates improvements in
operating leverage to continue for the remainder of fiscal year 2008, albeit
not
at the same level achieved during the first quarter as expenses are expected
to
increase based on additional hiring and project spending to support future
revenue growth.
Loss
(Gain) on Sale of Assets
In
September 2007, DeVry sold its facility located in Seattle, Washington for
approximately $12.4 million. In connection with the sale, DeVry
recorded a pre-tax loss of $5.4 million during the first quarter of fiscal
year 2008. In the same transaction, DeVry sold its facility located
in Phoenix, Arizona for approximately $16.0 million and realized a gain of
approximately $7.7 million. In connection with the transaction, DeVry entered
into agreements to lease back approximately 60% of the total space of both
facilities. The leaseback required the deferral of a portion of the
gain on the sale of the Phoenix facility of approximately $6.6 million. This
gain will be recognized as a reduction to rent expense over the ten year
life of
the lease agreement. The remaining pre-tax gain of $1.1 million was recorded
during the first quarter of fiscal 2008.
In
September 2007, DeVry exercised the option under its lease agreement to purchase
its facility in Alpharetta, Georgia for $11.2 million. Immediately
following the acquisition, DeVry sold the facility to a different party for
$11.2 million and executed a leaseback on the entire facility. In
connection with this transaction, DeVry accelerated to the first quarter
of
fiscal 2008, the recognition of approximately $0.6 million of remaining deferred
lease credits associated with the original lease.
The
recorded net loss on the sale of the facilities and the recognition of the
deferred lease credits are separately classified in the Consolidated Statements
of Income as a component of Total Operating Costs and Expenses and are related
to the DeVry University reportable segment.
In
September 2006, DeVry sold its facility located in West Hills, California
for $36.0 million. In connection with the sale, DeVry recorded a pre-tax
gain of $19.9 million during the first quarter of fiscal year
2007. DeVry relocated its West Hills campus operations to a leased
facility in nearby Sherman Oaks, California. This gain is separately
classified in the Consolidated Statements of Income as a component of Total
Operating Costs and Expenses and is also related to the DeVry University
reportable segment.
These
transactions were executed as a part of DeVry’s ongoing real estate optimization
strategy, which involves evaluating DeVry’s current facilities and locations in
order to ensure the optimal mix of large campuses, small campuses and DeVry
University centers to meet the demand of each market that it
serves. This process also improves capacity utilization and enhances
economic value. This strategy may include actions such as
reconfiguring large campuses; renegotiating lease terms; sub-leasing excess
space and relocating to smaller locations within the same geographic area
to
increase market penetration. DeVry will also consider co-locating
other educational offerings such as Chamberlain College of Nursing at DeVry
University campuses. Future actions under this program could result
in accounting gains and/or losses depending upon real estate market conditions,
whether the facility is owned or leased and other market
factors.
Student
Services and Administrative Expense
This
expense category includes recruiting and advertising costs, general and
administrative costs, expenses associated with curriculum development, and
the
amortization expense of finite-lived intangible assets related to acquisitions
of businesses. All new student recruitment expenditures are charged to expense
as incurred.
For
the
first quarter of fiscal year 2008, Student Services and Administrative Expense
increased 6.8% to $91.6 million as compared to the year-ago
quarter. The increase in expenses primarily represents additional
investments in advertising and recruiting to drive and support future growth
in
new student enrollments. Increased new student enrollments, as
described above, at DeVry University, Becker Professional Review and Ross
University are believed to be, in part, attributable to the higher level
and
effectiveness of this spending. In addition, expense attributed to
stock-based awards included in Student Services and Administrative Expense
increased during the current year quarter as DeVry’s annual stock option grant
for fiscal year 2008 occurred during the first quarter of the
year. The fiscal year 2007 annual stock option grants were awarded
during the second quarter of that fiscal year.
Partially
offsetting these increases in student recruiting expense was lower amortization
of finite-lived intangible assets in connection with acquisitions of businesses,
primarily related to Ross University. Amortization expense is included entirely
in the Student Services and Administrative Expense category. For the
first quarter of fiscal year 2008, amortization expense for finite-lived
intangible assets was $1.0 million compared to $1.8 million in the year-ago
period.
OPERATING
INCOME
DeVry
University
DeVry
University operating income was $15.6 million for the first quarter of fiscal
2008 as compared to $18.3 million in the prior year period. In
September 2007, DeVry executed sale leaseback transactions for its facilities
in
Seattle, Washington, Phoenix, Arizona and Alpharetta, Georgia. In connection
with these transactions, DeVry recorded a pre-tax loss of $3.7 million
during the first quarter of fiscal 2007. In September 2006,
DeVry sold its facility located in West Hills, California. In
connection with the sale, DeVry recorded a pre-tax gain of $19.9 million
during the first quarter of fiscal 2007. The loss in the current year period
and
gain in the prior year period are included in operating income of the DeVry
University reportable segment. Excluding the impact of the asset
sales in both the current and prior year periods, DeVry University fiscal
year
operating income of $19.3 million increased $20.9 million from a loss of
$1.6
million in the year-ago quarter. The significant improvement in
operating income, exclusive of the asset sales, was due to increased revenue
and
improved operating leverage as discussed above.
Professional
and Training
Professional
and Training segment operating income rose 22.7% to $8.4 million during the
first quarter of fiscal year 2008 as compared to the year-ago
period. The increase in operating income is primarily due to
increased revenue growth in the first quarter of fiscal 2007 and improved
operating leverage as discussed above.
Medical
and Healthcare
Medical
and Healthcare segment operating income increased 9.6% to $11.6 million during
the first quarter of fiscal year 2008 as compared to the prior year
period. Increases in student enrollments and tuition produced higher
revenues and operating income for the current year quarter as compared to
the
prior year period even as faculty, staff and facilities were being added
to
accommodate future enrollment growth. The increase was partially
offset by an increase in the allocation of corporate expenses to this business
unit, including information technology, human resources and legal, based
upon
current usage of such services.
INTEREST
For
the
first quarter of fiscal year 2008, interest income increased $1.0 million,
or
67.4%, to $2.4 million as compared to the prior year period. The
increase was attributable to higher levels of short-term investments with
higher
short-term interest rates as compared to the prior year.
Interest
expense decreased $1.9 million to $0.2 million during the first quarter of
fiscal year 2008 as compared to the year-ago quarter. The decrease in
interest expense was attributable to lower average borrowings and lower
amortization of deferred financing costs. During July and October
2006, DeVry repaid the remaining Senior Notes totaling $115
million. During January 2007, DeVry amended its revolving credit
agreement to, among other things, reduce the spread on applicable interest
and
fee rates.
INCOME
TAXES
Taxes
on
income were 25.6% of pretax income for the first quarter of fiscal year 2008,
compared to 35.1% for the year-ago quarter. The decrease in the
effective income tax rate is attributable to the gain on the sale of the
West
Hills facility in the first quarter of fiscal year 2007, which carried a
tax
rate of 40.4% This decrease was partially offset by an increase in the
proportion of income generated by U.S. operations to the offshore operations
of
Ross University as compared to the prior year period. Earnings of
Ross University’s international operations are not subject to U.S. federal
or state taxes and also are exempt from income taxes in the jurisdictions
in
which the schools operate. The medical and veterinary schools have
agreements with the governments that exempt them from local taxation through
the
years 2043 and 2023, respectively. DeVry intends to indefinitely
reinvest Ross University earnings and cash flow to improve and expand facilities
and operations at the medical and veterinary schools, and pursue other business
opportunities outside the United States. Accordingly, DeVry has not recorded
a
current provision for the payment of U.S. income taxes on these
earnings.
LIQUIDITY
AND CAPITAL RESOURCES
Student
Payments
DeVry’s
primary source of liquidity is the cash received from payments for student
tuition, books, educational supplies and fees. These payments include funds
originating as student and family educational loans; other financial aid
from
various federal, state and provincial loan and grant programs; and student
and
family financial resources.
The
pattern of cash receipts during the year is somewhat seasonal. DeVry’s accounts
receivable peak immediately after bills are issued each semester. At DeVry
University, the principal undergraduate semesters begin in July, November
and
March, but it also offers shorter eight-week session courses that begin six
times per year. These shorter sessions have the effect of somewhat
smoothing the cash flow peaks throughout the year as they represent a new
revenue billing and collection cycle within the longer semester
cycle.
At
September 30, 2007, total accounts receivable, net of related reserves,
were $75.8 million, compared to $76.8 million at September 30, 2006.
The decrease is due to continued improvements in the timeliness of collections
of receivables across all three of DeVry’s business segments. These
decreases were partially offset by the impact on receivables from revenue
growth
across all three business segments as compared to the year-ago
quarter.
Financial
Aid
DeVry
is
highly dependent upon the timely receipt of financial aid funds. In fiscal
year
2006 (the latest year for which data is available), approximately 75% of
DeVry
University undergraduate students’ tuition, book and fee revenues have been
financed by government-provided financial aid to students. Keller Graduate
School tuition revenues from student participation in federal loan programs
were
approximately 60% of revenues. Ross University tuition revenues from student
participation in federal loan programs were approximately 63% of revenues
at
both the medical and veterinary schools. Chamberlain tuition revenues
from student participation in federal financial aid programs were approximately
35% of revenues.
All
financial aid and assistance programs are subject to political and governmental
budgetary considerations. In the United States, the Higher Education Act
(“HEA”)
guides the federal government’s support of postsecondary
education. The HEA was reauthorized in the fall of 1998 to redefine
and extend the numerous financial aid programs then in
existence. Typically, the HEA is amended every five years, but this
process has been delayed. During September 2006, the United States
Congress again extended the HEA, through June 2007, and in July 2007, the
HEA
was extended again through October 2007. In October 2007, the United
States Congress extended the HEA through April 2008. As
reauthorization moves forward, there may be proposals for change that could
adversely affect the amount of financial aid available to students. There
is no
assurance that such federal funding will be continued at its present level
or in
its present form.
In
addition, government-funded financial assistance programs are governed by
extensive and complex regulations in both the United States and Canada. Like
any
other educational institution, DeVry’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. Previous Department of
Education and state regulatory agency program reviews have not resulted in
material findings or adjustments against DeVry.
Under
the
terms of DeVry’s participation in financial aid programs, certain cash received
from state governments and the U.S. Department of Education is maintained
in restricted bank accounts. DeVry receives these funds either after the
financial aid authorization and disbursement process for the benefit of the
student is completed, or just prior to that authorization. Once the
authorization and disbursement process for a particular student is completed,
the funds may be transferred to unrestricted accounts and become available
for
DeVry to use in current operations. This process generally occurs during
the
academic term for which such funds were authorized. At September 30, 2007,
cash in the amount of $21.2 million was held in restricted bank accounts,
compared to $30.2 million at September 30, 2006.
Cash
from Operations
Cash
generated from operations in the first quarter of fiscal 2008 was
$80.0 million, compared to $50.2 million in the prior year
period. Cash flow from operations increased due to higher net income
(excluding the gain on sale of assets) and an increase in deferred tuition
revenue driven by increasing enrollments. These increases were
partially offset by a $7.6 million lower source of cash compared to the prior
year for changes in levels of prepaid expenses, accounts payable and accrued
expenses. Variations in the levels of accrued expenses and accounts payable
from
period to period are caused, in part, by the timing of the period-end relative
to DeVry’s payroll and bill payment cycles.
Cash
from Investing Activities
Capital
expenditures in the first quarter of the current year were $18.1 million
compared to $7.8 million in the year ago quarter. The increase
in capital expenditures during the current period is primarily due to DeVry’s
exercise of its option to purchase its facility in Alpharetta, Georgia for
$11.2
million. Immediately following the acquisition, DeVry sold the
facility to a different party for $11.2 million and executed a leaseback
on the
entire facility. For the remainder of fiscal 2008, management expects
the pace of capital expenditures to increase in order to support future
growth. Although there are no new large DeVry University campus sites
planned or under construction, there are further facility expansion plans
at the
Ross University medical and veterinary schools and Chamberlain College of
Nursing, and spending to support its real estate optimization
strategy. In addition, spending on information systems is likely to
increase for the remainder of fiscal year 2008. Other new or expanded operating
locations are expected to be in leased facilities, thus requiring less capital
spending.
During
the first quarter of fiscal year 2008, DeVry executed sale leaseback
transactions which resulted in the receipt of total sales proceeds of $38.5
million. Included in the total sales proceeds was the receipt of
$11.2 million from the sale leaseback of the Alpharetta Facility, which DeVry
purchased for $11.2 million immediately prior to the leaseback. Also
during the quarter, DeVry purchased $82.7 million of municipal auction rate
securities and investments in mutual funds all of which are classified as
available-for-sale securities. During the current year quarter, DeVry
sold $10.0 million of such securities.
Cash
used in Financing Activities
During
the first quarter of fiscal year 2008, DeVry repurchased, on the open market,
155,100 shares of its common stock at a total cost of approximately $5.4
million. All of the shares repurchased were related to the
share repurchase program announced on November 15, 2006. The total
remaining authorization under the repurchase program was $19.1 million as
of
September 30, 2007. The expiration date of the repurchase program is
December 31, 2008. Cash dividends paid during the first quarter of
the current fiscal year were $3.6 million.
Other
Contractual Arrangements
DeVry’s
only long-term contractual obligations consist of its revolving line of credit,
operating leases on facilities and equipment, and agreements for various
services. At September 30, 2007, there were no outstanding borrowings nor
any required payments under DeVry’s revolving credit agreement.
DeVry
is
not a party to any off-balance sheet financing or contingent payment
arrangements, nor are there any unconsolidated subsidiaries. DeVry has not
extended any loans to any officer, director or other affiliated person. DeVry
has not entered into any synthetic leases, and there are no residual purchase
or
value commitments related to any facility lease. DeVry has not entered into
any
derivative, swap, futures contract, put, call, hedge or non-exchange traded
contracts.
Included
in DeVry’s consolidated cash balances at September 30, 2007 was approximately
$96.2 million attributable to Ross University international
operations. It is DeVry’s intention to indefinitely reinvest this
cash and subsequent earnings and cash flow to improve and expand facilities
and
operations of the Ross University and pursue future business opportunities
outside the United States. Therefore, cash held by Ross University
will not be available for general corporate purposes such as DeVry University
and/or Becker Professional Review.
Management
believes that current balances of unrestricted cash, cash generated from
operations and, if necessary, the revolving loan facility, will be sufficient
to
fund both DeVry’s current operations and current growth plans for the
foreseeable future unless future significant investment opportunities, similar
to the acquisition of Ross University, should arise.
RECENT
ACCOUNTING PRONOUNCEMENTS
SFAS 157
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines and
establishes a framework for measuring fair value. In addition, SFAS
157 expands disclosures about fair value measurements. For DeVry,
SFAS 157 is effective beginning in fiscal year 2009. DeVry does not
expect that the adoption of SFAS 157 will have a material impact on its
consolidated financial statements.
SFAS 159
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, “The Fair Value Option for Financial Assets and Liabilities, Including an
Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits
entities to choose to measure many financial instruments and certain other
assets and liabilities at fair value, with changes in fair value recorded
in
earnings. Under SFAS 159, the decision to measure items at fair value
is made at specified election dates on an instrument-by-instrument basis
and is
irrevocable. For DeVry, SFAS 159 is effective beginning in fiscal
year 2009. DeVry is currently evaluating the impact of SFAS
159.
ITEM 3 —
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
DeVry
is
not dependent upon the price levels, nor affected by fluctuations in pricing,
of
any particular commodity or group of commodities. However, more than 50%
of
DeVry’s costs are in the form of employee wages and benefits. Changes in
employment market conditions or escalations in employee benefit costs could
cause DeVry to experience cost increases at levels beyond what it has
historically experienced.
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 of DeVry’s Canadian educational
programs are measured using the Canadian dollar 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 the lease agreement on a
teaching facility. DeVry does not have any foreign exchange contracts or
derivative financial instruments designed to mitigate changes in the value
of
the Canadian dollar. Because Canada-based assets constitute less than 2.5%
of
DeVry’s overall assets, and its Canadian liabilities constitute a similarly
small percentage of overall liabilities, changes in the value of Canada’s
currency at rates experienced during the past several years are unlikely
to have
a material effect on DeVry’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 translation adjustment of less than $100,000.
DeVry’s
customers are principally individual students enrolled in its various
educational programs. Accordingly, concentration of accounts receivable credit
risk is small relative to total revenues or accounts
receivable.
DeVry’s
cash is held in accounts at various large, financially secure depository
institutions. Although the amount on deposit at a given institution typically
will exceed amounts subject to guarantee, DeVry has not experienced any deposit
losses to date, nor does management expect to incur such losses in the
future.
The
interest rate on DeVry’s debt is based upon Eurodollar interest rates for
periods typically ranging from one to three months. Based upon our borrowings
of
$50.0 million at December 31, 2006, a 1.0% increase in short-term interest
rates
would result in approximately $0.5 million of additional annual interest
expense. At September 30, 2007, DeVry had no outstanding
borrowings. However, future investment opportunities and cash flow
generated from operations may affect the level of outstanding borrowings
and the
effect of a change in interest rates.
ITEM 4 —
CONTROLS AND PROCEDURES
Principal
Executive and Principal Financial Officer Certificates
The
required compliance certificates signed by the DeVry’s CEO and CFO are included
as Exhibits 31 and 32 of this Quarterly Report on
Form 10-Q.
Disclosure
Controls and Procedures
Disclosure
controls and procedures are designed to help ensure that all the information
required to be disclosed in DeVry’s reports filed with the SEC is recorded,
processed, summarized and reported within the time periods specified by the
applicable rules.
Evaluations
required by Rule 13a — 15 of the Securities Exchange Act of 1934 of
the effectiveness of DeVry’s disclosure controls and procedures as of the end of
the period covered by this Report have been carried out under the supervision
and with the participation of its management, including its Chief Executive
Officer and its Chief Financial Officer. Based upon these evaluations, the
Chief
Executive Officer and Chief Financial Officer have concluded that DeVry’s
disclosure controls and procedures were effective as required, and have attested
to this in Exhibit 31 of this Report.
Changes
in Internal Control Over Financial Reporting
There
were no changes in internal control over financial reporting that occurred
during the first quarter of fiscal year 2008 that materially affected, or
are
reasonably likely to materially affect, DeVry’s internal control over financial
reporting.
PART II
– Other Information
ITEM
1 – LEGAL PROCEEDINGS
DeVry
is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
associated with financial assistance programs and other claims arising in
the
normal conduct of its business. The following is a description of pending
litigation that may be considered other than ordinary and routine litigation
that is incidental to the business.
On
August
25, 2005, DeVry filed a complaint in the Superior Court of California, County
of
Alameda, against Sierra Bay Contractors, Inc., the general contractor
responsible for the construction of a dormitory facility on the DeVry
University, Fremont, California campus. DeVry's complaint seeks monetary
damages arising out of Sierra Bay's failure to keep the project free from
liens
filed by subcontractors, and indemnification against subcontractor claims.
Sierra Bay filed a counterclaim in December 2005, asserting that DeVry owes
approximately $3 million for work allegedly performed on the project.
DeVry filed additional complaints against the architect, the project manager
and
an engineering firm, and the Court subsequently consolidated all claims relating
to the project, including those of the subcontractors, into the principal
case
filed by DeVry against Sierra
Bay. In addition, several subcontractors
of Sierra Bay have asserted lien claims against DeVry and the subject property
for sums that Sierra Bay allegedly failed to pay the subcontractors and which
claims are largely subsumed within Sierra Bay's claims against DeVry. Some
of those claims have been resolved by settlement and/or are presently in
a state
of default. Others remain pending.
On
December 23, 2005, Saro Daghlian, a former DeVry University student in
California, commenced a putative class action against DeVry University and
DeVry
Inc. (collectively “DeVry”) in Los Angeles Superior Court, asserting
various claims predicated upon DeVry’s alleged failure to comply with disclosure
requirements under the California Education Code relating to the transferability
of academic units. In addition to the alleged omission,
Daghlian also claimed that DeVry made untrue or misleading statements to
prospective students, in violation of the California Unfair Competition
Law, ("UCL") and the California False Advertising Law,
("FAL"). DeVry denied all of Daghlian’s allegations and removed
the action to the U.S. District Court for the Central District of
California. On June 11, 2007, the District Court issued an Order
certifying a class under the UCL, comprised of students who enrolled and
paid
tuition at a California DeVry school in the four years prior to the date
when
the suit was filed. On July 16, 2007, DeVry filed a Motion for Summary
Judgment on the grounds that the statutory
provisions of the California Education Code underlying Daghlian's
claims unconstitutionally discriminated
against out-of-state regionally accredited universities , in violation of
the Dormant Commerce Clause and the Equal Protection Clause of
the Fourteenth Amendment. DeVry also argued that the California
Education Code compelled speech in violation of the First
Amendment. On October 9, 2007, the Court granted DeVry’s
Motion for Summary Judgment and entered judgment dismissing all
of Daghlian ’s class claims under the UCL. The Court
also entered judgment in DeVry’s favor on Daghlian's individual claim under
the California Education Code. Additionally, the Court vacated the
existing trial schedule and granted DeVry leave to file a second motion for
summary judgment directed to Daghlian’s remaining individual claims under
the UCL and FAL.
As
of
September 30, 2007, there is an accrual of less than $1.0 million for the
resolution of all legal claims.
While
the
ultimate outcome of pending contingencies is difficult to estimate at this
time,
DeVry intends to vigorously defend itself with respect to the pending claims.
At
this time, DeVry does not believe that the outcome of current claims,
administrative proceedings, regulatory reviews and lawsuits will have a material
effect on its cash flows, results of operations or financial
position.
In
addition to the other information set forth in this report, the factors
discussed in Part I “Item 1A. Risk Factors” in DeVry’s Annual Report on Form
10-K for the fiscal year ended June 30, 2007, which could materially affect
DeVry’s business, financial condition or future results, should be carefully
considered. The risks described in DeVry’s Form 10-K are not the only
risks facing the company. Additional risks and uncertainties not currently
known to DeVry or that management currently deems to be immaterial also may
materially adversely affect its business, financial condition and/or operating
results.
ITEM 2 —
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Issuer
Purchases of Equity Securities
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid per Share
|
|
|
Total
Number of Shares Purchased as part of Publicly Announced Plans
or
Programs1
|
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs1
|
|
July
2007
|
|
|
58,700
|
|
|
$ |
34.63
|
|
|
|
58,700
|
|
|
$ |
22,432,878
|
|
August
2007
|
|
|
60,400
|
|
|
$ |
34.53
|
|
|
|
60,400
|
|
|
|
20,347,240
|
|
September
2007
|
|
|
36,000
|
|
|
$ |
35.66
|
|
|
|
36,000
|
|
|
|
19,063,552
|
|
Total
|
|
|
155,100
|
|
|
$ |
34.83
|
|
|
|
155,100
|
|
|
$ |
19,063,552
|
|
1On
November 15,
2006, the Board of Directors approved a stock repurchase program, pursuant
to
which up to $35 million of DeVry common stock may be repurchased within the
next
two years. This program was announced in a press release filed as an
exhibit to DeVry’s Current Report on Form 8-K, which was filed on November 15,
2006. The total remaining authorization under the repurchase program
was $19,063,552 as of September 30, 2007. The expiration date of the
repurchase program is December 31, 2008.
Other
Purchases of Equity Securities
Period
|
|
Total
Number of Shares Purchased2
|
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased as part of Publicly Announced Plans
or
Programs
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs
|
July
2007
|
|
|
-
|
|
|
|
-
|
|
N/A
|
|
N/A
|
August
2007
|
|
|
2,919
|
|
|
$ |
35.86
|
|
N/A
|
|
N/A
|
September
2007
|
|
|
-
|
|
|
|
-
|
|
N/A
|
|
N/A
|
Total
|
|
|
2,919
|
|
|
$ |
35.86
|
|
N/A
|
|
N/A
|
2Represents
shares
delivered back to the issuer under a swap agreement resulting from employees’
exercise of incentive stock options pursuant to the terms of DeVry’s stock
incentive plans.
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities
Exchange
Act of 1934, as Amended.
|
|
|
|
Certification
Pursuant to Title 18 of the United States Code Section
1350
|
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.
|
DeVry
Inc.
|
|
|
|
|
|
|
Date:
November 8, 2007
|
By
|
/s/ Daniel
M. Hamburger
|
|
|
Daniel
M. Hamburger
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
November 8, 2007
|
By
|
/s/ Richard
M. Gunst
|
|
|
Richard
M. Gunst
|
|
|
Senior
Vice President and Chief Financial
Officer
|