DeVry 10-Q 09-30-2006
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
(Mark
One)
R
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the quarterly period ended: September 30, 2006
OR
£
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period
from to
Commission
file number: 1-13988
DeVry
Inc.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
36-3150143
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
ONE
TOWER LANE, SUITE 1000,
|
|
60181
|
OAKBROOK
TERRACE, ILLINOIS
|
|
(Zip
Code)
|
(Address
of principal executive offices)
|
|
|
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, 2006 — 70,834,287 shares of Common Stock, $0.01 par
value
DEVRY
INC.
FORM 10-Q
FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2006
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Page No.
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—
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3
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4
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5
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6
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—
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16
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—
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24
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—
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25
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—
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26
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—
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27
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—
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27
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—
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27
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|
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28
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CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
|
|
June
30,
|
|
September
30,
|
|
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
168,646
|
|
$
|
130,583
|
|
$
|
119,829
|
|
Restricted
Cash
|
|
|
30,198
|
|
|
20,632
|
|
|
26,217
|
|
Accounts
Receivable, Net
|
|
|
76,803
|
|
|
46,567
|
|
|
83,585
|
|
Inventories
|
|
|
129
|
|
|
133
|
|
|
95
|
|
Deferred
Income Taxes, Net
|
|
|
15,485
|
|
|
13,700
|
|
|
17,142
|
|
Prepaid
Expenses and Other
|
|
|
22,463
|
|
|
16,458
|
|
|
16,478
|
|
Total
Current Assets
|
|
|
313,724
|
|
|
228,073
|
|
|
263,346
|
|
Land,
Buildings and Equipment:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
61,642
|
|
|
67,756
|
|
|
68,015
|
|
Buildings
|
|
|
209,668
|
|
|
222,059
|
|
|
222,479
|
|
Equipment
|
|
|
248,476
|
|
|
245,360
|
|
|
237,620
|
|
Construction
In Progress
|
|
|
12,278
|
|
|
9,057
|
|
|
4,105
|
|
|
|
|
532,064
|
|
|
544,232
|
|
|
532,219
|
|
Accumulated
Depreciation and Amortization
|
|
|
(274,823
|
)
|
|
(271,306
|
)
|
|
(249,966
|
)
|
Land,
Buildings and Equipment, Net
|
|
|
257,241
|
|
|
272,926
|
|
|
282,253
|
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
61,955
|
|
|
63,762
|
|
|
71,118
|
|
Goodwill
|
|
|
291,113
|
|
|
291,113
|
|
|
291,308
|
|
Perkins
Program Fund, Net
|
|
|
13,450
|
|
|
13,450
|
|
|
13,290
|
|
Other
Assets
|
|
|
2,639
|
|
|
3,158
|
|
|
4,481
|
|
Total
Other Assets
|
|
|
369,157
|
|
|
371,483
|
|
|
380,197
|
|
TOTAL
ASSETS
|
|
$
|
940,122
|
|
$
|
872,482
|
|
$
|
925,796
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current
Portion of Debt
|
|
$
|
75,000
|
|
$
|
60,000
|
|
$
|
50,000
|
|
Accounts
Payable
|
|
|
34,313
|
|
|
39,677
|
|
|
24,154
|
|
Accrued
Salaries, Wages and Benefits
|
|
|
34,917
|
|
|
35,600
|
|
|
30,784
|
|
Accrued
Expenses
|
|
|
45,268
|
|
|
27,639
|
|
|
30,525
|
|
Advance
Tuition Payments
|
|
|
18,699
|
|
|
16,584
|
|
|
15,664
|
|
Deferred
Tuition Revenue
|
|
|
103,745
|
|
|
31,769
|
|
|
95,446
|
|
Total
Current Liabilities
|
|
|
311,942
|
|
|
211,269
|
|
|
246,573
|
|
Other
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Revolving
Loan
|
|
|
10,000
|
|
|
—
|
|
|
—
|
|
Senior
Notes
|
|
|
—
|
|
|
65,000
|
|
|
125,000
|
|
Deferred
Income Taxes, Net
|
|
|
10,705
|
|
|
12,564
|
|
|
15,963
|
|
Accrued
Postemployment Agreements
|
|
|
5,565
|
|
|
5,594
|
|
|
6,352
|
|
Deferred
Rent and Other
|
|
|
14,519
|
|
|
13,448
|
|
|
12,613
|
|
Total
Other Liabilities
|
|
|
40,789
|
|
|
96,606
|
|
|
159,928
|
|
TOTAL
LIABILITIES
|
|
|
352,731
|
|
|
307,875
|
|
|
406,501
|
|
|
|
|
|
|
|
|
|
|
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SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
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|
Common
Stock, $0.01 Par Value, 200,000,000 Shares Authorized;
70,823,000; 70,757,000 and 70,527,000 Shares Issued and
Outstanding at September 30, 2006, June 30, 2006 and September 30,
2005, Respectively
|
|
|
709
|
|
|
708
|
|
|
706
|
|
Additional
Paid-in Capital
|
|
|
126,186
|
|
|
124,550
|
|
|
117,463
|
|
Retained
Earnings
|
|
|
462,813
|
|
|
441,893
|
|
|
403,572
|
|
Accumulated
Other Comprehensive Loss
|
|
|
(423
|
)
|
|
(424
|
)
|
|
(69
|
)
|
Treasury
Stock, at Cost ( 91,927; 97,770 and 109,767 Shares, Respectively)
|
|
|
(1,894
|
)
|
|
(2,120
|
)
|
|
(2,377
|
)
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
587,391
|
|
|
564,607
|
|
|
519,295
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
940,122
|
|
$
|
872,482
|
|
$
|
925,796
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
DEVRY
INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in Thousands Except Per Share Amounts)
(Unaudited)
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
Tuition
|
|
$
|
202,633
|
|
$
|
183,053
|
|
Other
Educational
|
|
|
16,582
|
|
|
13,308
|
|
Interest
|
|
|
1,438
|
|
|
419
|
|
Total
Revenues
|
|
|
220,653
|
|
|
196,780
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
Cost
of Educational Services
|
|
|
120,304
|
|
|
111,709
|
|
Gain
on Sale of Assets
|
|
|
(19,855
|
)
|
|
—
|
|
Student
Services and Administrative Expense
|
|
|
85,798
|
|
|
75,890
|
|
Interest
Expense
|
|
|
2,169
|
|
|
2,655
|
|
Total
Costs and Expenses
|
|
|
188,416
|
|
|
190,254
|
|
Income
Before Income Taxes
|
|
|
32,237
|
|
|
6,526
|
|
Income
Tax Provision
|
|
|
11,317
|
|
|
1,794
|
|
NET
INCOME
|
|
$
|
20,920
|
|
$
|
4,732
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
$
|
0.07
|
|
Diluted
|
|
$
|
0.29
|
|
$
|
0.07
|
|
The
accompanying notes are an integral part of these
consolidated financial statements
DEVRY
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in Thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
Income
|
|
$
|
20,920
|
|
$
|
4,732
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
Stock-Based
Compensation Charge
|
|
|
978
|
|
|
1,145
|
|
Depreciation
|
|
|
8,392
|
|
|
9,093
|
|
Amortization
|
|
|
2,200
|
|
|
2,701
|
|
Provision
for Refunds and Uncollectible Accounts
|
|
|
13,308
|
|
|
11,264
|
|
Deferred
Income Taxes
|
|
|
(3,652
|
)
|
|
14
|
|
(Gain)
Loss on Disposals of Land, Buildings and Equipment
|
|
|
(19,724
|
)
|
|
10
|
|
Changes
in Assets and Liabilities, Net of Effects from Acquisitions of
Businesses:
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
(9,566
|
)
|
|
(12,279
|
)
|
Accounts
Receivable
|
|
|
(43,544
|
)
|
|
(55,604
|
)
|
Inventories
|
|
|
4
|
|
|
77
|
|
Prepaid
Expenses and Other
|
|
|
(4,837
|
)
|
|
(6,418
|
)
|
Accounts
Payable
|
|
|
(5,364
|
)
|
|
(6,556
|
)
|
Accrued
Salaries, Wages, Benefits and Expenses
|
|
|
16,946
|
|
|
(7,281
|
)
|
Advance
Tuition Payments
|
|
|
2,115
|
|
|
941
|
|
Deferred
Tuition Revenue
|
|
|
71,976
|
|
|
72,623
|
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
50,152
|
|
|
14,462
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(7,761
|
)
|
|
(4,564
|
)
|
Net
Proceeds from Sale of Land and Building
|
|
|
34,778
|
|
|
—
|
|
Payments
for Purchases of Businesses, Net of Cash Acquired
|
|
|
—
|
|
|
(2,000
|
)
|
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
27,017
|
|
|
(6,564
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
658
|
|
|
328
|
|
Proceeds
from Stock Issued Under Employee Stock Purchase Plan
|
|
|
227
|
|
|
—
|
|
Excess
Tax Benefit from Stock-Based Payments
|
|
|
8
|
|
|
42
|
|
Repayments
Under Senior Notes
|
|
|
(40,000
|
)
|
|
—
|
|
Repayments
Under Revolving Credit Facility
|
|
|
—
|
|
|
(50,000
|
)
|
NET
CASH USED IN FINANCING ACTIVITIES
|
|
|
(39,107
|
)
|
|
(49,630
|
)
|
Effects
of Exchange Rate Differences
|
|
|
1
|
|
|
(262
|
)
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
38,063
|
|
|
(41,994
|
)
|
Cash
and Cash Equivalents at Beginning of
Period
|
|
|
130,583
|
|
|
161,823
|
|
Cash
and Cash Equivalents at End of Period
|
|
$
|
168,646
|
|
$
|
119,829
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Interest
Paid During the Period
|
|
$
|
2,150
|
|
$
|
2,206
|
|
Income
Taxes Paid During the Period, Net
|
|
|
225
|
|
|
6,900
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DEVRY
INC.
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE 1:
|
INTERIM
FINANCIAL STATEMENTS
|
The
interim consolidated financial statements include the accounts of DeVry Inc.
(“DeVry”) and its wholly-owned subsidiaries. These financial statements are
unaudited but, in the opinion of management, contain all adjustments, consisting
only of normal, recurring adjustments, necessary to fairly present the financial
condition and results of operations of DeVry. The June 30, 2006 data that is
presented is derived from audited financial statements.
The
interim consolidated financial statements should be read in conjunction with
the
consolidated financial statements and notes thereto contained in DeVry's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission for
the
fiscal year ended June 30, 2006.
The
results of operations for the three months ended September 30, 2006, are not
necessarily indicative of results to be expected for the entire fiscal
year.
NOTE 2:
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Postemployment
Benefits
DeVry’s
employment agreements with its Chair of the Board of Directors and Chief
Executive Officer provide certain benefits upon a change in their respective
responsibilities that require accrual over the expected future service period
beginning with the second quarter of fiscal 2003. For the three months ended
September 30, 2006, DeVry recognized expense of approximately $177,000, related
to these agreements. For the three months ended September 30, 2005, DeVry
recognized no expenses related to these agreements. The amounts provided are
based on recording, over the period of active service that ended June 30, 2005,
the amount that represents the present value of the obligation, discounted
using
a 5.82% rate as of September 30, 2006, 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. Shares used in this
computation were 70,794,000 and 70,506,000 for the first quarters ended
September 30, 2006, and 2005, respectively. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares
assuming dilution. Dilutive shares are computed using the Treasury Stock Method
and reflect the additional shares that would be outstanding if dilutive stock
options were exercised during the period. Shares used in this computation were
71,029,000 and 70,664,000 for the first quarters ended September 30, 2006,
and
2005, respectively. Excluded from the September 30, 2006 and 2005
computations of diluted earnings per share were options to purchase 1,649,000
and 2,839,000 shares of common stock, respectively. These outstanding
options were excluded because the option exercise prices were greater than
the
average market price of the common shares during the period; thus, their effect
would be anti-dilutive.
Treasury
Stock
DeVry
has, from time to time, reacquired shares of its common stock upon an employee’s
exercise of incentive stock options under a tax-free swap arrangement 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 recorded
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.
Comprehensive
Income
The
differences between changes in the fair values of cash flow hedging
instruments and the amount of these instruments that was amortized to earnings
is reported as a component of Comprehensive Income. For the three months ended
September 30, 2005, the amount recorded in Other Comprehensive Income was a
gain of $12,000. DeVry’s only other item that meets the definition for
adjustment to arrive at Comprehensive Income is the change in cumulative
translation adjustment. The amounts recorded in Other Comprehensive Income
for
the changes in translation rates were a gain of $1,000 for the three months
ended September 30, 2006, and a loss of $262,000 for the three months ended
September 30, 2005.
The
Accumulated Other Comprehensive Income balance at September 30, 2006 and
2005, is composed entirely of cumulative translation losses of $423,000 and
$69,000, respectively.
Reclassifications
The
previously reported amounts in the Consolidated Balance Sheets for Additional
Paid-in Capital have been reclassified to disclose the balance in Treasury
Stock
in order to conform to the current presentation format.
Recent
Accounting Pronouncements
SFAS 154 —
Accounting Changes and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections,” (“SFAS 154”). This statement
replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements.”
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. For DeVry, SFAS 154 is effective for
accounting changes and corrections of errors made beginning in fiscal year
2007.
SFAS 157 —
Fair Value Measurements
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 measurement. For DeVry, SFAS 157 is effective beginning in
fiscal year 2009.
FIN 48 —
Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
Statement 109
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement 109”
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for DeVry beginning in fiscal year 2008.
DeVry is currently evaluating the impact of FIN 48.
NOTE 3:
|
STOCK-BASED
COMPENSATION
|
DeVry
maintains six stock-based award plans: the Amended and Restated Stock Incentive
Plan, established in 1988, 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 vest upon
an
employee’s retirement under the non-substantive vesting period approach to these
options. Under this approach, compensation cost is recognized at the grant
date
for options issued to retirement eligible employees where the options vest
upon
retirement.
At
September 30, 2006, 7,392,026 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, 2006:
|
|
Options
Outstanding
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Contractual Life
|
|
Aggregate
Intrinsic Value ($000)
|
|
Outstanding
at July 1, 2006
|
|
|
3,428,211
|
|
$
|
22.91
|
|
|
|
|
|
|
|
Options
Granted
|
|
|
44,000
|
|
$
|
21.05
|
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(60,395
|
)
|
$
|
13.37
|
|
|
|
|
|
|
|
Options
Canceled
|
|
|
(37,741
|
)
|
$
|
26.11
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
3,374,075
|
|
$
|
23.02
|
|
|
6.14
|
|
$
|
4,037
|
|
Exercisable
at September 30, 2006
|
|
|
2,634,689
|
|
$
|
23.34
|
|
|
5.69
|
|
$
|
3,179
|
|
The
total
intrinsic value of options exercised for the three months ended
September 30, 2006 and 2005 was $505,000 and $672,000,
respectively.
On
October 3, 2006, a total of 564,150 options were granted to DeVry employees.
This grant was approved by the Compensation Committee of DeVry’s Board of
Directors, which consists entirely of outside directors.
Prior
to
fiscal 2005, the fair value of DeVry’s stock-based awards was estimated as of
the date of grant using the Black-Scholes option pricing model (“Black-Scholes
model”). The Black-Scholes model was developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from DeVry’s stock option awards. This model also requires
highly subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated grant date
fair value.
Beginning
with all options granted in the first quarter of fiscal 2005, 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, something that the Black-Scholes model does not consider.
For these reasons, management believes that the binomial model provides a fair
value that is more representative of actual experience and future expected
experience than the value calculated in previous years, using the Black-Scholes
model.
The
weighted average estimated grant date fair values, as defined by
SFAS 123(R), for options granted at market price under DeVry’s stock option
plans during first quarters of fiscal years 2007 and 2006 were $10.38 and $8.36,
per share, respectively. The fair values of DeVry’s stock option awards were
estimated assuming no expected dividends and the following weighted average
assumptions:
|
|
Fiscal
Year
|
|
|
|
2007
|
|
2006
|
|
Expected
Life (in Years)
|
|
|
5.42
|
|
|
5.42
|
|
Expected
Volatility
|
|
|
41.35
|
%
|
|
41.35
|
%
|
Risk-free
Interest Rate
|
|
|
3.82
|
%
|
|
3.82
|
%
|
Pre-vesting
Forfeiture Rate
|
|
|
4.00
|
%
|
|
4.00
|
%
|
The
use
of a pre-vesting forfeiture rate was not required in the Black-Scholes pricing
model but is an important element of option valuation in the binomial
model.
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.
For fiscal 2007 and 2006, the expected life of newly granted options is based
on
projections more heavily weighted to current exercise patterns.
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,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of Educational Services
|
|
$
|
313
|
|
$
|
366
|
|
Student
Services and Administrative Expense
|
|
|
665
|
|
|
779
|
|
Income
Tax Benefit
|
|
|
(169
|
)
|
|
(161
|
)
|
Net
Stock-Based Compensation Expense
|
|
$
|
809
|
|
$
|
984
|
|
As
of
September 30, 2006, $6.8 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of 2.5 years. The total fair value of
options vested during the three months ended September 30, 2006 and 2005
was approximately $4,200,000 and $4,700,000, respectively.
There
were no capitalized stock-based compensation costs at September 30, 2006
and 2005.
DeVry
has
a policy of issuing new shares of common stock to satisfy share option
exercises.
NOTE 4:
|
BUSINESS
COMBINATIONS
|
Gearty
CPE
In
July
2005, DeVry signed a definitive agreement to acquire Gearty CPE for
$2.0 million in cash. Gearty CPE, which operates in the New York/New Jersey
metro area, is a provider of continuing professional education (CPE) programs
and seminars in accounting and finance predominantly serving chief financial
officers and controllers of Fortune 500 companies.
There
is
no pro forma presentation of prior year operating results related to this
acquisition due to the insignificant effect on consolidated
operations.
NOTE 5:
|
INTANGIBLE
ASSETS
|
Intangible
assets consist of the following (dollars in thousands):
|
|
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
|
|
|
|
|
|
|
As
of September 30, 2005
|
|
|
|
Gross
Carrying Amount
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
Student
Relationships
|
|
$
|
47,770
|
|
$
|
(30,595
|
)
|
License
and Non-compete Agreements
|
|
|
2,650
|
|
|
(2,573
|
)
|
Class Materials
|
|
|
2,900
|
|
|
(950
|
)
|
Trade
Names
|
|
|
110
|
|
|
(55
|
)
|
Other
|
|
|
620
|
|
|
(616
|
)
|
Total
|
|
$
|
54,050
|
|
$
|
(34,789
|
)
|
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 $1,807,000 and $2,581,000 for the
three months ended September 30, 2006 and 2005, 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
|
|
|
|
2007
|
|
$
|
6,843
|
|
2008
|
|
|
3,660
|
|
2009
|
|
|
203
|
|
2010
|
|
|
200
|
|
2011
|
|
|
200
|
|
The
weighted-average amortization period for amortized intangible assets is three
and five years for Chamberlain 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 2006 and 2005, 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 2006 and 2005, 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 an independent professional valuation specialist. The carrying
amount of goodwill related to the DeVry University reportable segment at
September 30, 2006 and June 30, 2006, was unchanged at $22,195,000. The
carrying amount of goodwill related to the Professional and Training reportable
segment was unchanged at $24,716,000 at September 30, 2006 and June 30,
2006. The carrying amount of goodwill related to the Medical &
Healthcare segment was unchanged at $244,202,000 at September 30, 2006 and
June 30, 2006.
NOTE 6:
|
SALE
OF FACILITIES
|
On
September 7, 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 2007. This
gain is separately classified in the Consolidated Statements of Income as a
component of Total Costs and Expenses and related to the DeVry University
reportable segment. DeVry is leasing back the entire building for the next
several months to serve its existing student population until a leased
replacement facility in the nearby area is operational.
NOTE 7:
|
REDUCTION
IN WORKFORCE CHARGES
|
During
the second quarter of fiscal 2005, DeVry offered a voluntary separation plan
to
its employees with more than 20 years of service. In the third quarter of
fiscal 2005, DeVry implemented an involuntary reduction in force that reduced
its workforce at its educational facilities and corporate office. In the fourth
quarter of fiscal 2005, DeVry offered another voluntary separation plan for
its
DeVry University faculty employees with more than 15 years of service and
implemented an involuntary reduction in force of its faculty employees. These
voluntary and involuntary separation plans resulted in workforce reductions
of
approximately 230 employees. In addition to these separation and reduction
in
force plans, DeVry experienced other involuntary separations during fiscal
2005.
In relation to all of these voluntary and involuntary reductions in force,
DeVry
recorded pre-tax charges of approximately $8.4 million in fiscal 2005.
These charges consist of severance pay and in some cases, extended medical
and
dental benefits coverage. These charges were classified as Cost of Educational
Services and Student Services and Administrative Expense in the Consolidated
Statements of Income and are related to the DeVry University and
Medical & Healthcare reportable segments.
Cash
payments for the fiscal 2005 voluntary separation plans and the involuntary
reductions in force were approximately $135,000 for the three months ended
September 30, 2006 and $2.0 million for the three months ended September
30, 2005. Of the total amount accrued for these events, approximately $440,000
remained to be paid as of September 30, 2006. Payments will continue
throughout fiscal 2007.
The
workforce reductions related to actions across several of DeVry’s businesses
resulting from process improvements and its continuing efforts to realign costs
with revenues. The majority of the workforce reductions were in the U.S. and
included managerial, professional, clerical and instructor
roles.
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 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. As of September
30,
2006 and 2005, cumulative undistributed earnings were approximately $64.2
million and $35.5 million, respectively.
Taxes
on
income were 35.1% of pretax income for the first quarter of fiscal 2007,
compared to 27.5% for the year-ago quarter. The increase in the effective income
tax rate is attributable to the gain on the sale of the West Hills facility,
which carried a tax rate of 40.4%. This increase was partially offset by an
increase in the proportion of income generated by the offshore operations of
Ross University to U.S. sourced income as compared to the prior year period.
The
effective income tax rate for the fiscal year ended June 30, 2006 was
25.1%.
During
the third quarter of fiscal 2006, the Internal Revenue Service began an audit
of
DeVry’s consolidated federal income tax returns for the fiscal years of 2003 and
2004 and certain refund claims for prior years. During the first quarter of
fiscal 2007, the Internal Revenue Service completed this audit and no
adjustments were required to be made for those income tax returns and refund
claims.
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 formed in connection with the acquisition of Ross
University. This long-term debt consists of the following at September 30,
2006 and 2005 (dollars in thousands):
|
|
Outstanding
Debt
|
|
Effective
|
|
|
|
at
September 30,
|
|
Interest
Rate at
|
|
|
|
2006
|
|
2005
|
|
Sept. 30,
2006
|
|
Revolving
Credit Agreement:
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
$
|
10,000
|
|
$
|
40,000
|
|
|
6.32
|
%
|
GEI
as borrower
|
|
|
—
|
|
|
10,000
|
|
|
—
|
|
Total
|
|
$
|
10,000
|
|
$
|
50,000
|
|
|
6.32
|
%
|
Senior
Notes:
|
|
|
|
|
|
|
|
|
|
|
DeVry
Inc. as borrower
|
|
$
|
75,000
|
|
$
|
75,000
|
|
|
6.74
|
%
|
GEI
as borrower
|
|
|
—
|
|
|
50,000
|
|
|
—
|
|
Total
|
|
$
|
75,000
|
|
$
|
125,000
|
|
|
6.74
|
%
|
Total
Outstanding Debt
|
|
$
|
85,000
|
|
$
|
175,000
|
|
|
6.69
|
%
|
Current
Maturities of Debt
|
|
$
|
75,000
|
|
$
|
50,000
|
|
|
6.74
|
%
|
Total
Long-term Debt
|
|
$
|
10,000
|
|
$
|
125,000
|
|
|
6.32
|
%
|
In
July
2006, DeVry prepaid, without penalty, the remaining $40.0 million of senior
note
debt owed by GEI. As a result of the prepayment, a pro rata share of deferred
financing cost related to this debt, approximately $0.3 million, was charged
to
expense as interest.
In
October 2006, DeVry prepaid, without penalty, the $75.0 million of senior note
debt owed by DeVry Inc. This prepayment was funded through a combination of
available cash balances, $35.0 million, and from borrowings under the Revolving
Credit Agreement, $40.0 million.
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.
In
January 2002, Royal Gardner, a graduate of one of DeVry University’s Los
Angeles-area campuses, filed a class-action complaint against DeVry Inc. and
DeVry University, Inc. in the Superior Court of the State of California, County
of Los Angeles, on behalf of all students enrolled in the post-baccalaureate
degree program in Information Technology. The suit alleges that the program
offered by DeVry did not conform to the program as it was presented in the
advertising and other marketing materials. In March 2003, the complaint was
dismissed by the court with limited right to amend and re-file. The complaint
was subsequently amended and re-filed. During the first quarter of DeVry’s
fiscal year 2004, a new complaint was filed in the same court by Gavino Teanio
with the same general allegations and by the same plaintiffs’ attorneys. This
subsequent action was stayed pending the outcome of the Gardner matter. The
parties reached a settlement, which was approved by the court in October 2006.
The total amount to be paid out is within the amount previously reserved for
this matter.
Brigette
Dean Hines, a former student of Ross University Veterinary School of Medicine
was dismissed from the school and denied re-enrollment. This former student
claims that the dismissal was based upon her disability and she is seeking
compensatory damages for economic and non-economic harm, punitive damages,
cost
of the suit, attorney’s fees and other relief deemed appropriate by the Court.
Ross University filed a motion to dismiss the suit which was denied and
discovery will proceed.
Sierra
Bay Contractors, the contractor that built the student dormitory building on
the
DeVry University Fremont, California campus has placed a lien on the site and
filed a counterclaim to DeVry’s claim for contract breach, alleging that DeVry
has failed to pay for extra work done in building the dormitory. In addition,
some of the sub-contractors have also filed liens on the site, seeking
additional payments owed to them by the general contractor. The total amount
claimed for the extra work is approximately $3.0 million. Discussions are
underway to try to resolve these claims. Additional costs of construction,
if
any, arising from the settlement of these claims would be capitalized as a
part
of the cost of the building construction and would not result in any immediate
additional expense. Accordingly, no accrual has been made for this claim. Sierra
Bay Contractors and some of the sub-contractors have filed lawsuits to foreclose
on their liens, which DeVry is contesting vigorously.
Saro
Daghlian, a former student at a California DeVry University campus, brought
a
putative class action suit in the California state district court for the County
of Los Angeles alleging that DeVry’s materials distributed to students did not
comply with California state statutes including a California Education Code
requirement to provide a specified statement to prospective students concerning
the transferability of credits. The case was removed to federal court, and
a
motion to dismiss was filed. The motion to dismiss was denied, and discovery
is
proceeding. The plaintiff has filed a motion for class certification. DeVry
intends to vigorously defend itself against this motion, and a response to
the
motion is due November 15, 2006.
The
total
accrual for the resolution of all pending legal claims and for final payment
on
claims previously resolved was approximately $1.4 million at September 30,
2006.
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, 2006. 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 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, 2006.
The
consistent measure of segment profit excludes interest expense, amortization
and
certain corporate-related depreciation. As such, these items are reconciling
items in arriving at income before income taxes. The consistent measure of
segment assets excludes deferred income tax assets and certain depreciable
corporate assets. Additions to long-lived assets have been measured in this
same
manner. Reconciling items are included as corporate assets.
Following
is a tabulation of business segment information based on the current
segmentation for the three months ended September 30, 2006 and 2005.
Corporate information is included where it is needed to reconcile segment data
to the consolidated financial statements.
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in Thousands)
|
|
Revenues:
|
|
|
|
|
|
DeVry
University
|
|
$
|
173,310
|
|
$
|
160,719
|
|
Professional
and Training
|
|
|
16,281
|
|
|
12,280
|
|
Medical &
Healthcare
|
|
|
31,062
|
|
|
23,781
|
|
Total
Consolidated Revenues
|
|
$
|
220,653
|
|
$
|
196,780
|
|
Operating
Income:
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
19,036
|
|
$
|
(74
|
)
|
Professional
and Training
|
|
|
6,963
|
|
|
4,570
|
|
Medical &
Healthcare
|
|
|
11,134
|
|
|
7,532
|
|
Reconciling
Items:
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(1,807
|
)
|
|
(2,581
|
)
|
Interest
Expense
|
|
|
(2,169
|
)
|
|
(2,655
|
)
|
Depreciation
and Other
|
|
|
(920
|
)
|
|
(266
|
)
|
Total
Consolidated Income before Income Taxes
|
|
$
|
32,237
|
|
$
|
6,526
|
|
Segment
Assets:
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
449,615
|
|
$
|
423,735
|
|
Professional
and Training
|
|
|
85,987
|
|
|
79,484
|
|
Medical &
Healthcare
|
|
|
380,615
|
|
|
396,027
|
|
Corporate
|
|
|
23,905
|
|
|
26,550
|
|
Total
Consolidated Assets
|
|
$
|
940,122
|
|
$
|
925,796
|
|
Additions
to Long-lived Assets:
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
3,848
|
|
$
|
3,056
|
|
Professional
and Training
|
|
|
33
|
|
|
25
|
|
Medical &
Healthcare
|
|
|
3,880
|
|
|
1,483
|
|
Total
Consolidated Additions to Long-lived Assets
|
|
$
|
7,761
|
|
$
|
4,564
|
|
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in Thousands)
|
|
Depreciation
Expense:
|
|
|
|
|
|
DeVry
University
|
|
$
|
6,921
|
|
$
|
7,777
|
|
Professional
and Training
|
|
|
143
|
|
|
114
|
|
Medical &
Healthcare
|
|
|
1,081
|
|
|
955
|
|
Corporate
|
|
|
247
|
|
|
247
|
|
Total
Consolidated Depreciation
|
|
$
|
8,392
|
|
$
|
9,093
|
|
Intangible
Asset Amortization Expense:
|
|
|
|
|
|
|
|
DeVry
University
|
|
$
|
—
|
|
$
|
—
|
|
Professional
and Training
|
|
|
64
|
|
|
66
|
|
Medical &
Healthcare
|
|
|
1,743
|
|
|
2,515
|
|
Total
Consolidated Amortization
|
|
$
|
1,807
|
|
$
|
2,581
|
|
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 including 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, 2006 and 2005. Revenues and long-lived assets by geographic
area are as follows:
|
|
For
the Three Months
|
|
|
|
Ended
September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in Thousands)
|
|
Revenues
from Unaffiliated Customers:
|
|
|
|
|
|
Domestic
Operations
|
|
$
|
189,724
|
|
$
|
172,054
|
|
International
Operations:
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
28,085
|
|
|
22,380
|
|
Other
|
|
|
2,844
|
|
|
2,346
|
|
Total
International
|
|
|
30,929
|
|
|
24,726
|
|
Consolidated
|
|
$
|
220,653
|
|
$
|
196,780
|
|
Long-lived
Assets:
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$
|
319,344
|
|
$
|
352,499
|
|
International
Operations:
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
306,807
|
|
|
309,502
|
|
Other
|
|
|
247
|
|
|
449
|
|
Total
International
|
|
|
307,054
|
|
|
309,951
|
|
Consolidated
|
|
$
|
626,398
|
|
$
|
662,450
|
|
No
one
customer accounted for more than 10% of DeVry’s consolidated revenues.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
|
Through
its Web site, DeVry offers (free of charge) the 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 Web site is at
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 year ended June 30, 2006. 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 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” in DeVry’s Annual Report on
Form 10-K for the fiscal year ended June 30, 2006 and filed with the Securities
and Exchange Commission on September 13, 2006..
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
During
the first quarter of fiscal 2007, DeVry’s total revenues increased by 12.1%, and
net income of $20.9 million, or $0.29 per share, was up $16.2 million over
the
prior year on improved operating performance and a gain on the sale of a
facility. Operational and financial highlights for the first quarter of fiscal
year 2007 include:
|
·
|
All
three of DeVry’s business segments achieved enrollment growth for both new
and total students, 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 DeVry’s real estate optimization strategy, the DeVry
University facility in West Hills, California was sold for $36.0
million
resulting in a pre tax gain of $19.9 million. Net of tax, the gain
on the
sale was $11.8 million or $0.16 per share. DeVry is leasing back
the
entire building for the next several months to serve its existing
student
population until a leased replacement facility in nearby Sherman
Oaks,
California is operational.
|
|
·
|
Cash
flow increased significantly as cash provided by operations more
than
doubled as compared to the prior year and from net proceeds received
on
the sale of the West Hills
facility.
|
|
·
|
DeVry’s
financial position improved as it paid down $40 million of debt
during July 2006. In October 2006, DeVry paid down the remaining
$75
million of Senior Notes with a combination of available cash and
revolver
borrowings which are at a more favorable interest
rate.
|
The
following table illustrates the effects of the gain on the sale of the West
Hills facility on the company’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,
|
|
|
|
2006
|
|
2005
|
|
Net
Income
|
|
$
|
20,920
|
|
$
|
4,732
|
|
Earnings
per Share (diluted)
|
|
$
|
0.29
|
|
$
|
0.07
|
|
Gain
on Sale of Assets (net of tax)
|
|
$
|
11,840
|
|
|
--
|
|
Earnings
per Share (diluted)
|
|
$
|
0.16
|
|
|
--
|
|
Net
Income Excluding the Gain on Sale of Assets
|
|
$
|
9,080
|
|
$
|
4,732
|
|
Earnings
per Share (diluted)
|
|
$
|
0.13
|
|
$
|
0.07
|
|
RESULTS
OF OPERATIONS - COMPARISON OF FIRST QUARTER 2007 TO FIRST QUARTER
2006
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 year.
|
|
For
the Three Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of Educational Services
|
|
|
54.5
|
%
|
|
56.8
|
%
|
Gain
on Sale of Assets
|
|
|
(9.0
|
%)
|
|
—
|
|
Student
Services & Admin. Exp
|
|
|
38.9
|
%
|
|
38.6
|
%
|
Interest
Expense
|
|
|
1.0
|
%
|
|
1.3
|
%
|
Total
Costs and Expenses
|
|
|
85.4
|
%
|
|
96.7
|
%
|
Income
Before Income Taxes
|
|
|
14.6
|
%
|
|
3.3
|
%
|
Income
Tax Provision
|
|
|
5.1
|
%
|
|
0.9
|
%
|
Net
Income
|
|
|
9.5
|
%
|
|
2.4
|
%
|
REVENUES
Total
revenue for the first quarter of fiscal 2007 of $220.7 million increased
$23.9 million, or 12.1%, as compared to the prior year. Revenues are
reported net of tuition refunds applicable to students who withdraw from the
academic term for which they are enrolled during the period specified by the
refund policy. Revenue increased at all three of DeVry’s business segments
primarily due to continued growth in new student enrollments and tuition price
increases as compared to the year ago period. In addition, revenue increased
due
to higher sales of Becker CPA review materials, the expanding sale of electronic
text books (“eBooks”) and higher interest earned on
investments.
DeVry
University
In
the
DeVry University segment, current year first quarter revenues of
$173.3 million increased by $12.6 million, or 7.8%, as compared to the
prior year. Tuition revenues are the largest component of total revenues in
the
DeVry University segment. The two principal factors that influence revenues
are
enrollment and tuition rates. Key trends in these two components are set forth
below.
Total
undergraduate enrollment by term:
|
·
|
Declined
by 2.3% from fall 2004 (39,450 students) to fall 2005 (38,546
students);
|
|
·
|
Increased
by 1.2% from spring 2005 (38,083 students) to spring 2006 (38,523
students); and
|
|
·
|
Increased
by 2.5% from summer 2005 (36,220 students) to summer 2006 (37,132
students).
|
New
undergraduate enrollment by term:
|
·
|
Increased
by 6.4% from fall 2004 (10,018 students) to fall 2005 (10,663 students);
|
|
·
|
Increased
by 16.4% from spring 2005 (8,902 students) to spring 2006 (10,359
students); and
|
|
·
|
Increased
by 12.2% from summer 2005 (11,293 students) to summer 2006 (12,671
students). The summer 2006 term marked the fifth consecutive term
in which
new undergraduate student enrollments increased from the year-ago
level.
|
Graduate
coursetaker enrollment:
|
·
|
Increased
by 10.3% from the July 2005 session (11,434 coursetakers) to the
July 2006
(12,617 coursetakers) session; and
|
|
·
|
Increased
by 10.5% from the September 2005 session (12,732 coursetakers) to
the
September 2006 session (14,069
coursetakers).
|
Tuition
rates:
|
·
|
Undergraduate
program tuition increased by approximately 4.5% in July
2006; and
|
|
·
|
Graduate
school program tuition increased by approximately 4.5% for the July
2006
session following a 5.0% increase for the September 2005
session.
|
DeVry
believes that the increasing undergraduate new student enrollments for the
past
several terms were the result of increased investment in and better integration
of its marketing and recruiting functions, an improved overall marketing
communication plan and better management of lead flow. Also, management believes
that demand for technology graduates continues to improve, positively
influencing career decisions of new students towards this field of study.
Management
believes that efforts at Keller to create new brand awareness through improved
messaging have produced positive enrollment results, and it will continue to
focus on further improvements in the future.
Also
contributing to higher total revenues in the DeVry University segment was an
increase in Other Educational Revenue partly from sales of eBooks.
Partly
offsetting the increases in revenue from improved enrollments and higher tuition
rates is 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 at 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 in the first quarter
of
fiscal 2007, as compared to the prior year. These receivables are generally
subject to a monthly interest charge of one percent under DeVry University’s
EDUCARD revolving charge plan for financing students’ education. The decrease in
interest charges is primarily due to a decrease in the average accounts
receivable balance on enrolled, undergraduate student accounts due to an
improvement in the timeliness of receivable collections as compared to the
prior
year.
Professional
and Training
In
the
Professional and Training segment, revenues for the first quarter of fiscal
year
2007 increased $4.0 million, or 32.6%, to $16.3 million as compared to the
year-ago quarter. The primary reason for the increase was increased enrollment
in Becker Professional Review’s CPA review courses and from increased sales of
CPA review courses on CD-ROM. 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 enrollment in
the
Stalla CFA review course in preparation to the administration of the
Level 1 exam which will be administered in December.
Medical
and Healthcare
In
the
Medical and Healthcare segment, current year first quarter revenues of
$31.1 million increased by approximately $7.3 million, or 30.6%, as
compared to the prior year period. 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 4.5% from January 2005 (3,122 students) to January 2006 (3,264
students);
|
|
·
|
Increased
by 13.2% from May 2005 (3,029 students) to May 2006 (3,428 students);
and
|
|
·
|
Increased
by 15.4% from September 2005 (3,227 students) to September 2006 (3,724
students).
|
Ross
University new student enrollment by term:
|
·
|
Increased
by 67.5% from January 2005 (231 students) to January 2006 (387
students);
|
|
·
|
Increased
by 63.8% from May 2005 (268 students) to May 2006 (439 students);
and
|
|
·
|
Increased
by 9.2% from September 2005 (575 students) to September 2006 (628
students). In the September 2005 term, new student enrollments grew
40.6%.
|
Chamberlain
College of Nursing total enrollment by term:
|
·
|
Increased
by 126% from June 2005 (263 students) to July 2006 (594
students);
|
Tuition
rates:
|
·
|
Tuition
and fees for the Ross University beginning basic sciences programs
increased by approximately 5% for the September
2006;
|
|
·
|
Tuition
and fees for the Ross University final clinical portion of the programs
increased by approximately 5% as compared to the year-ago quarter;
and
|
|
·
|
Tuition
for Chamberlain College of Nursing increased approximately 5% for
the
2006-2007 academic year (effective July 2006).
|
Management
believes that the increasing new student enrollments at Ross University for
the
past several terms was the result of enhancements to its marketing and
recruiting functions, and that 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, laboratories and student
housing.
Revenue
from Other Sources
During
the first quarter of fiscal 2007, Other Educational Revenue increased by
$3.3 million, or 24.6%, to $16.6 million as compared to the prior
year. As discussed above, the primary drivers for the increase in Other
Educational Revenue is increased sales of Becker CPA Review course materials
on
CD-ROM and increased sales of eBooks at DeVry University, partially offset
by a
decrease in interest charged on undergraduate student receivables.
Interest
Income on DeVry’s short-term investments of cash balances increased by
$1.0 million. The increase is due to generally higher levels of short-term
investments and higher short-term interest rates for these investments as
compared to the prior year.
COSTS
AND EXPENSES
Cost
of Educational Services
DeVry’s
Cost of Educational Services during the first quarter of the current year
increased by $8.6 million, or 7.7%, 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. As of September 30, 2006,
courses were being offered at eighty-one DeVry University locations compared
to
seventy-eight as of September 30, 2005, and the number of online coursetakers
increased by approximately 35.7% from the year-ago term to 28,580. In addition,
cost increases were incurred at Ross University to support increasing student
enrollments. Also contributing to the higher cost of educational services was
an
increase in the provision for doubtful accounts of $1.4 million, primarily
in
the DeVry University undergraduate operations, as receivable balances for
inactive students increased from last year. The increase in inactive student
receivable balances was partially offset by improvement in collections of active
student receivable balances due to internal process improvements.
Partially
offsetting these increases was a decrease in depreciation expense. Lower capital
spending during each of the past several years has resulted in $8.4 million
of depreciation expense for the first quarter of fiscal 2007 as compared to
$9.1 million last year. Most depreciation expense is included in the Cost
of Educational Services.
As
a
percent of revenue, Cost of Educational Services decreased to 54.5% in the
first
quarter of fiscal 2007 from 56.8% during the prior year period, due to increased
operating leverage with existing facilities and staff and revenue gains, which
more than offset incremental investments at all three business
segments.
Gain
on Sale of Assets
On
September 7, 2006, DeVry sold its facility located in West Hills, California
for
$36.0 million. In connection with this sale, DeVry recorded a pre tax gain
of
$19.9 million during the first quarter of fiscal 2007. Net of tax, the gain
on
the sale was $11.8 million or $0.16 per share. DeVry is leasing back the entire
building for the next several months to serve its existing student population
until a leased replacement facility in nearby Sherman Oaks, California is
operational.
This
transaction was executed as a part of DeVry’s ongoing real estate optimization
strategy, which involves evaluating DeVry’s current facilities and locations in
order to improve capacity utilization and enhance economic value. DeVry may
pursue plans to reconfigure large campuses and/or relocate 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
Student
Services and Administrative Expense for the first quarter of fiscal 2007 of
$85.8 million increased by $9.9 million, or 13.1%, as compared to the prior
year. The increased cost primarily reflects efforts to generate higher new
student enrollments at DeVry University through increased student recruiting,
advertising and systems infrastructure. Admissions advisors have been added
to
support the growing online program enrollments and at new DeVry University
Centers that have opened since the year-ago quarter. 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. All new student recruitment
expenditures are charged to expense as incurred.
Partially
offsetting these increases in student recruiting expense was lower amortization
of finite-lived intangible assets related to 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 2007, amortization expense for finite-lived intangible assets
was $1.8 million compared to $2.6 million in the year-ago
period.
OPERATING
INCOME
DeVry
University
The
DeVry
University segment generated operating income of $19.0 million in the first
quarter of fiscal 2007 as compared to a loss of $0.1 million in the prior
year period. 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. Revenue
increased and gross margin improved during the first quarter of 2007 as compared
to the prior year period. However, increased spending on recruiting, advertising
and systems infrastructure to drive future enrollment gains outpaced revenue
growth during the first quarter of fiscal 2007.
Professional
and Training
In
the
Professional and Training segment, current year first quarter operating income
of $7.0 million, increased $2.4 million, or 52.3%, from the prior year
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. The increase was partially offset by an increase in the
allocation of corporate expenses to this business segment, including information
technology, human resources and legal, based upon the current usage of such
services.
Medical
and Healthcare
First
quarter of fiscal year 2007 operating income of $11.1 million for the
Medical and Healthcare segment increased by approximately $3.6 million, or
47.8%, from the prior year period. At Ross University, which is the dominant
portion of this segment, 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.
INTEREST
EXPENSE
Interest
expense on DeVry’s borrowings in the first quarter of fiscal 2007 was
$2.2 million compared to $2.7 million in the year-ago quarter. The decrease
in interest expense is due to lower average borrowings during the first quarter
of fiscal 2007 partially offset by increases in short-term interest rates as
compared to the prior year period and the write-off of unamortized deferred
financing costs related to the pre-payment of $40.0 million of Senior Notes
in
July 2006. During October 2006, DeVry repaid the remaining $75 million of Senior
Notes. In connection with this debt prepayment, DeVry will write-off
approximately $0.5 million of unamortized deferred financing costs in the second
quarter of fiscal year 2007. This prepayment was funded through a combination
of
$35.0 million of available cash and increased borrowings of $40.0 million under
DeVry’s revolving credit agreement, which bears a lower rate of interest than
the Senior Notes.
INCOME
TAXES
Taxes
on
income were 35.1% of pretax income for the first quarter of fiscal 2007,
compared to 27.5% for the year-ago quarter. The increase in the effective income
tax rate is attributable to the gain on the sale of the West Hills facility,
which carried a tax rate of 40.4%. This increase was partially offset by an
increase in the proportion of income generated by the international operations
of Ross University to U.S. sourced income 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 cyclical. 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 we offer shorter eight-week session courses that begin in September,
January and May. 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, 2006, total accounts receivable, net of related reserves,
were $76.8 million, compared to $83.6 million at September 30, 2005.
The decrease is due to continued improvements in the timeliness of collections
of DeVry University active undergraduate receivables and an increase in the
allowance for uncollectible accounts primarily for inactive undergraduate
student receivables. These decreases were partially offset by the impact on
receivables from revenue growth across all three of DeVry’s business segments as
compared to the year-ago quarter with the greatest impact at Becker due to
revenue growth of 32.6% and the impact of additional large public accounting
firms with direct billing arrangements with inherently longer collection
cycles.
Financial
Aid
DeVry
is
highly dependent upon the timely receipt of financial aid funds at DeVry
University, Ross University and Chamberlain College of Nursing. Management
estimates that approximately 70% of its DeVry University undergraduate students’
tuition, book and fee revenues have been financed by government-provided
financial aid to students. Keller Graduate School collections from student
participation in federal loan programs have increased during the past several
years and are now approximately 75% of revenues. Ross University collections
from student participation in federal loan programs are approximately 70% of
revenues at both the medical and veterinary schools.
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
most recently reauthorized in the fall of 1998 to redefine and extend the
numerous financial aid programs then in existence. Typically, the HEA is
reviewed and amended every five years, but this process has been delayed. During
September 2006, the United States House of Representatives again extended the
HEA, through June 2007. 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, 2006,
cash in the amount of $30.2 million was held in restricted bank accounts,
compared to $26.2 million at September 30, 2005.
Cash
from Operations
Cash
generated from operations in the first quarter of fiscal 2007 was
$50.2 million, compared to $14.5 million in the prior year period.
Cash flow from operations increased due to higher net income (excluding the
gain
on sale of assets) and a decrease in net accounts receivable. Also, driving
greater cash flow was a $27.0 million greater 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 year-end
relative to DeVry’s payroll and bill payment cycles. These increases were
partially offset by lower non-cash charges (such as depreciation, amortization,
and the stock-based compensation charge).
Cash
from Investing Activities
Capital
spending on improvements, including instructional technology and expansion,
is
an integral component of DeVry’s operating strategy. Capital expenditures in the
first quarter of the current year were $7.8 million compared to
$4.6 million in the year ago quarter. For the remainder of fiscal 2007,
management expects the pace of capital expenditures to increase to a level
more
in line with prior years which is needed to support future growth. Although
there are no new large DeVry University campus sites planned or under
construction, investments are being made to open smaller DeVry University
Centers, and to support school curricula and facility renovation. Also, there
are further facility expansion plans at both the Ross University medical and
veterinary schools. Other new or expanded operating locations are expected
to be
in leased facilities, thus requiring less capital spending.
On
September 7, 2006, DeVry sold its West Hills facility for $36 million.
Proceeds from the sale will be used to pay income taxes attributed to the gain
on the sale, reduce debt and for general corporate purposes.
Cash
used in Financing Activities
In
July
2006, DeVry prepaid $40.0 million of Senior Notes without penalty. In
connection with this prepayment, DeVry wrote off approximately $0.3 million
of
unamortized deferred financing costs. In October 2006, DeVry prepaid the
remaining $75.0 million of Senior Notes without penalty and will write-off
approximately $0.5 million of unamortized deferred financing costs during the
second quarter of fiscal 2007. This prepayment was funded through a combination
of $35.0 million of available cash and $40.0 million of increased borrowings
under DeVry revolving credit agreement, which bears a lower rate of interest
than the Senior Notes.
Other
Contractual Arrangements
DeVry’s
only long-term contractual obligations consist of its revolving line of credit,
the senior notes, operating leases on facilities and equipment, and agreements
for various services. At September 30, 2006, there were no required
payments under DeVry’s borrowing agreements prior to their maturity. However, as
discussed above, DeVry prepaid the remaining $75.0 million of Senior Notes
in
October 2006.
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
contract except for the interest rate cap agreements that expired during the
first quarter of fiscal 2006. Under the terms of those interest rate cap
agreements, DeVry did not incur any further payment liability beyond their
original purchase price.
Included
in DeVry’s consolidated cash balances at September 30, 2006 was approximately
$48 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 154 —
Accounting Changes and Error Corrections
In
May
2005, the FASB issued Statement of Financial Accounting Standards No. 154,
“Accounting Changes and Error Corrections,” (“SFAS 154”). This statement
replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim Financial Statements.”
SFAS 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. For DeVry, SFAS 154 is effective for
accounting changes and corrections of errors made beginning in fiscal year
2007.
SFAS 157 —
Fair Value Measurements
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 measurement. For DeVry, SFAS 157 is effective beginning in
fiscal year 2009.
FIN 48 —
Accounting for Uncertainty in Income Taxes — an Interpretation
of FASB Statement 109
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes — an Interpretation of FASB Statement 109”
(“FIN 48”), which clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for DeVry beginning in fiscal year 2008.
DeVry is currently evaluating the impact of FIN 48.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
DeVry
is
not dependent upon the price levels, or 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 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 our 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 October 31, 2006, a 1.0% increase in short-term interest rates
would result in approximately $0.5 million of additional annual interest
expense. 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.
In
the
first quarter of fiscal 2004, DeVry entered into several interest rate cap
agreements to protect approximately $100,000,000 of current borrowings from
sharp increases in the prevailing short-term interest rates. These agreements
expired during the first quarter of fiscal 2006. DeVry intends to periodically
review further debt repayment and evaluate the need for future interest rate
protection in light of projected changes in interest rates, borrowing levels,
working capital, and investment requirements.
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 2007 that materially affected, or are
reasonably likely to materially affect, DeVry’s internal control over financial
reporting.
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.
In
January 2002, Royal Gardner, a graduate of one of DeVry University’s Los
Angeles-area campuses, filed a class-action complaint against DeVry Inc. and
DeVry University, Inc. in the Superior Court of the State of California, County
of Los Angeles, on behalf of all students enrolled in the post-baccalaureate
degree program in Information Technology. The suit alleges that the program
offered by DeVry did not conform to the program as it was presented in the
advertising and other marketing materials. In March 2003, the complaint was
dismissed by the court with limited right to amend and re-file. The complaint
was subsequently amended and re-filed. During the first quarter of DeVry’s
fiscal year 2004, a new complaint was filed in the same court by Gavino Teanio
with the same general allegations and by the same plaintiffs’ attorneys. This
subsequent action was stayed pending the outcome of the Gardner matter. The
parties reached a settlement, which was approved by the court in October 2006.
The total amount to be paid out is within the amount previously reserved for
this matter.
Brigette
Dean Hines, a former student of Ross University Veterinary School of Medicine
was dismissed from the school and denied re-enrollment. This former student
claims that the dismissal was based upon her disability and she is seeking
compensatory damages for economic and non-economic harm, punitive damages,
cost
of the suit, attorney’s fees and other relief deemed appropriate by the Court.
Ross University filed a motion to dismiss the suit which was denied and
discovery will proceed.
Sierra
Bay Contractors, the contractor that built the student dormitory building on
the
DeVry University Fremont, California campus has placed a lien on the site and
filed a counterclaim to DeVry’s claim for contract breach, alleging that DeVry
has failed to pay for extra work done in building the dormitory. In addition,
some of the sub-contractors have also filed liens on the site, seeking
additional payments owed to them by the general contractor. The total amount
claimed for the extra work is approximately $3.0 million. Discussions are
underway to try to resolve these claims. Additional costs of construction,
if
any, arising from the settlement of these claims would be capitalized as a
part
of the cost of the building construction and would not result in any immediate
additional expense. Accordingly, no accrual has been made for this claim. Sierra
Bay Contractors and some of the sub-contractors have filed lawsuits to foreclose
on their liens, which DeVry is contesting vigorously.
Saro
Daghlian, a former student at a California DeVry University campus, brought
a
putative class action suit in the California state district court for the County
of Los Angeles alleging that DeVry’s materials distributed to students did not
comply with California state statutes including a California Education Code
requirement to provide a specified statement to prospective students concerning
the transferability of credits. The case was removed to federal court, and
a
motion to dismiss was filed. The motion to dismiss was denied, and discovery
is
proceeding. The plaintiff has filed a motion for class certification. DeVry
intends to vigorously defend itself against this motion, and a response to
the
motion is due November 15, 2006.
The
total
accrual for the resolution of all pending legal claims and for final payment
on
claims previously resolved was approximately $1.4 million at September 30,
2006.
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, 2006, 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.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(c)
Purchases of Equity Securities by the Issuer and Affiliated
Parties
Period
|
|
Total
Number of Shares
Purchased1
|
|
Average
Price Paid per
Share
|
|
Total
Number of Shares Purchased as part
of Publicly Announced Plans or
Programs
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the
Plans or Programs
|
|
July
2006
|
|
|
-
|
|
|
-
|
|
|
N/A
|
|
|
N/A
|
|
August
2006
|
|
|
-
|
|
|
-
|
|
|
N/A
|
|
|
N/A
|
|
September
2006
|
|
|
4,625
|
|
$
|
22.67
|
|
|
N/A
|
|
|
N/A
|
|
Total
|
|
|
4,625
|
|
$
|
22.67
|
|
|
|
|
|
|
|
1
|
Represents
shares delivered back to the issuer upon employees’ exercise of incentive
stock options under a tax-free swap agreement pursuant to the terms
of
DeVry’s stock incentive plans.
|
Exhibit
10(w)
|
|
Letter
Agreement between the Registrant and Ronald L. Taylor, CEO, dated
August
15, 2006 (incorporated by reference to Exhibit 10.1 to the Company’s Form
8-K dated August 16, 2006)
|
|
|
|
|
|
Letter
Agreement between the Registrant and Richard M. Gunst, CFO, dated
July 24,
2006
|
|
|
|
|
|
Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the United States
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 9, 2006
|
By
|
/s/ Ronald
L. Taylor
|
|
|
|
Ronald
L. Taylor
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
Date:
November 9, 2006
|
By
|
/s/ Richard
M. Gunst
|
|
|
|
Richard
M. Gunst
|
|
|
|
Senior
Vice President and Chief Financial Officer
|
|
28