form10q.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: March 31, 2008
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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, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer R
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Accelerated
filer
£
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Non-accelerated
filer £ (Do not
check if a smaller reporting company)
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Smaller
reporting company £
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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:
April
30, 2008 — 71,325,386 shares of Common Stock, $0.01 par
value
FORM 10-Q FOR
THE QUARTERLY PERIOD
ENDED MARCH 31, 2008
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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—
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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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—
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19
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Item 3
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—
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29
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Item 4
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—
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29
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PART II
– Other Information
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Item 1
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—
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30
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Item 1A
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—
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30
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Item
2
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—
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31
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Item 6
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—
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31
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32
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PART I – Financial
Information
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DEVRY
INC.
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|
Item
1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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|
March
31,
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June
30,
|
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March
31,
|
|
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2008
|
|
|
2007
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|
|
2007
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|
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|
(Dollars
in thousands)
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
249,580 |
|
|
$ |
129,155 |
|
|
$ |
135,821 |
|
Marketable
Securities
|
|
|
2,345 |
|
|
|
— |
|
|
|
— |
|
Restricted
Cash
|
|
|
23,077 |
|
|
|
14,483 |
|
|
|
58,042 |
|
Accounts
Receivable, Net
|
|
|
121,523 |
|
|
|
43,084 |
|
|
|
95,490 |
|
Inventories
|
|
|
63 |
|
|
|
141 |
|
|
|
125 |
|
Deferred
Income Taxes, Net
|
|
|
17,287 |
|
|
|
13,915 |
|
|
|
15,501 |
|
Prepaid
Expenses and Other
|
|
|
20,698 |
|
|
|
18,207 |
|
|
|
15,196 |
|
Total
Current Assets
|
|
|
434,573 |
|
|
|
218,985 |
|
|
|
320,175 |
|
Land,
Buildings and Equipment:
|
|
|
|
|
|
|
|
|
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Land
|
|
|
47,478 |
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|
|
60,570 |
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60,578 |
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Buildings
|
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|
200,617 |
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|
218,836 |
|
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214,517 |
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Equipment
|
|
|
276,921 |
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|
260,847 |
|
|
|
257,757 |
|
Construction
In Progress
|
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|
5,816 |
|
|
|
15,816 |
|
|
|
15,367 |
|
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530,832 |
|
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|
556,069 |
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|
548,219 |
|
Accumulated
Depreciation and Amortization
|
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|
(308,001 |
) |
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|
(296,742 |
) |
|
|
(290,655 |
) |
Land,
Buildings and Equipment, Net
|
|
|
222,831 |
|
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|
259,327 |
|
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|
257,564 |
|
Other
Assets:
|
|
|
|
|
|
|
|
|
|
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Intangible
Assets, Net
|
|
|
63,859 |
|
|
|
56,920 |
|
|
|
58,344 |
|
Goodwill
|
|
|
308,671 |
|
|
|
291,113 |
|
|
|
291,113 |
|
Perkins
Program Fund, Net
|
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|
13,450 |
|
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|
13,450 |
|
|
|
13,450 |
|
Marketable
Securities
|
|
|
57,637 |
|
|
|
— |
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|
|
— |
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Other
Assets
|
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|
14,871 |
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|
|
4,318 |
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|
6,515 |
|
Total
Other Assets
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458,488 |
|
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|
365,801 |
|
|
|
369,422 |
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TOTAL
ASSETS
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|
$ |
1,115,892 |
|
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$ |
844,113 |
|
|
$ |
947,161 |
|
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LIABILITIES:
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Current
Liabilities:
|
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Accounts
Payable
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$ |
36,895 |
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|
$ |
34,295 |
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$ |
34,283 |
|
Accrued
Salaries, Wages and Benefits
|
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|
43,049 |
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|
47,093 |
|
|
|
39,912 |
|
Accrued
Expenses
|
|
|
36,196 |
|
|
|
32,737 |
|
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|
35,771 |
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Advance
Tuition Payments
|
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|
21,405 |
|
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|
14,402 |
|
|
|
12,311 |
|
Deferred
Tuition Revenue
|
|
|
195,869 |
|
|
|
37,348 |
|
|
|
167,064 |
|
Total
Current Liabilities
|
|
|
333,414 |
|
|
|
165,875 |
|
|
|
289,341 |
|
Other
Liabilities:
|
|
|
|
|
|
|
|
|
|
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|
Deferred
Income Taxes, Net
|
|
|
13,809 |
|
|
|
18,343 |
|
|
|
11,811 |
|
Accrued
Postemployment Agreements
|
|
|
4,114 |
|
|
|
4,901 |
|
|
|
5,144 |
|
Deferred
Rent and Other
|
|
|
28,158 |
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|
13,028 |
|
|
|
14,855 |
|
Total
Other Liabilities
|
|
|
46,081 |
|
|
|
36,272 |
|
|
|
31,810 |
|
TOTAL
LIABILITIES
|
|
|
379,495 |
|
|
|
202,147 |
|
|
|
321,151 |
|
|
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SHAREHOLDERS’
EQUITY:
|
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Common
Stock, $0.01 Par Value, 200,000,000 Shares Authorized;
71,333,000; 71,131,000 and 70,885,000 Shares Issued and
Outstanding at March 31, 2008, June 30, 2007 and March 31, 2007,
Respectively
|
|
|
722 |
|
|
|
716 |
|
|
|
711 |
|
Additional
Paid-in Capital
|
|
|
164,634 |
|
|
|
143,580 |
|
|
|
133,999 |
|
Retained
Earnings
|
|
|
606,781 |
|
|
|
510,979 |
|
|
|
498,589 |
|
Accumulated
Other Comprehensive Loss
|
|
|
(2,644 |
) |
|
|
(918 |
) |
|
|
(159 |
) |
Treasury
Stock, at Cost (905,384; 436,786 and 275,221 Shares,
Respectively)
|
|
|
(33,096 |
) |
|
|
(12,391 |
) |
|
|
(7,130 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
736,397 |
|
|
|
641,966 |
|
|
|
626,010 |
|
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
$ |
1,115,892 |
|
|
$ |
844,113 |
|
|
$ |
947,161 |
|
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 Quarter
|
|
|
For
the Nine Months
|
|
|
|
Ended March 31, |
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tuition
|
|
$ |
265,253 |
|
|
$ |
226,141 |
|
|
$ |
746,169 |
|
|
$ |
645,850 |
|
Other
Educational
|
|
|
25,720 |
|
|
|
19,684 |
|
|
|
68,859 |
|
|
|
54,794 |
|
Total
Revenues
|
|
|
290,973 |
|
|
|
245,825 |
|
|
|
815,028 |
|
|
|
700,644 |
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Educational Services
|
|
|
130,846 |
|
|
|
125,815 |
|
|
|
375,761 |
|
|
|
366,699 |
|
Separation
Plan Severance
|
|
|
- |
|
|
|
1,097 |
|
|
|
- |
|
|
|
1,097 |
|
Loss
(Gain) on Sale of Assets
|
|
|
- |
|
|
|
(957 |
) |
|
|
3,743 |
|
|
|
(20,812 |
) |
Student
Services and Administrative Expense
|
|
|
109,576 |
|
|
|
90,283 |
|
|
|
304,138 |
|
|
|
269,319 |
|
Total
Costs and Expenses
|
|
|
240,422 |
|
|
|
216,238 |
|
|
|
683,642 |
|
|
|
616,303 |
|
Operating
Income
|
|
|
50,551 |
|
|
|
29,587 |
|
|
|
131,386 |
|
|
|
84,341 |
|
INTEREST:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
2,823 |
|
|
|
1,956 |
|
|
|
8,122 |
|
|
|
5,326 |
|
Interest
Expense
|
|
|
(99 |
) |
|
|
(774 |
) |
|
|
(418 |
) |
|
|
(4,663 |
) |
Net
Interest Income
|
|
|
2,724 |
|
|
|
1,182 |
|
|
|
7,704 |
|
|
|
663 |
|
Income
Before Income Taxes
|
|
|
53,275 |
|
|
|
30,769 |
|
|
|
139,090 |
|
|
|
85,004 |
|
Income
Tax Provision
|
|
|
14,957 |
|
|
|
7,845 |
|
|
|
38,124 |
|
|
|
24,763 |
|
NET
INCOME
|
|
$ |
38,318 |
|
|
$ |
22,924 |
|
|
$ |
100,966 |
|
|
$ |
60,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.54 |
|
|
$ |
0.32 |
|
|
$ |
1.42 |
|
|
$ |
0.85 |
|
Diluted
|
|
$ |
0.53 |
|
|
$ |
0.32 |
|
|
$ |
1.40 |
|
|
$ |
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
DIVIDEND DECLARED PER COMMON SHARE
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in Thousands)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
Income
|
|
$ |
100,966 |
|
|
$ |
60,241 |
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Charge
|
|
|
4,287 |
|
|
|
4,347 |
|
Depreciation
|
|
|
25,997 |
|
|
|
26,826 |
|
Amortization
|
|
|
4,018 |
|
|
|
6,568 |
|
Provision
for Refunds and Uncollectible Accounts
|
|
|
42,197 |
|
|
|
39,184 |
|
Deferred
Income Taxes
|
|
|
(6,880 |
) |
|
|
(2,734 |
) |
Loss
(Gain) on Disposals of Land, Buildings and Equipment
|
|
|
3,760 |
|
|
|
(20,575 |
) |
Changes
in Assets and Liabilities, Net of Effects from Acquisition of
Business:
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
(8,591 |
) |
|
|
(37,412 |
) |
Accounts
Receivable
|
|
|
(116,582 |
) |
|
|
(88,120 |
) |
Inventories
|
|
|
83 |
|
|
|
4 |
|
Prepaid
Expenses and Other
|
|
|
(11,042 |
) |
|
|
(2,276 |
) |
Accounts
Payable
|
|
|
2,527 |
|
|
|
(5,392 |
) |
Accrued
Salaries, Wages, Benefits and Expenses
|
|
|
1,593 |
|
|
|
12,469 |
|
Advance
Tuition Payments
|
|
|
6,985 |
|
|
|
(4,250 |
) |
Deferred
Tuition Revenue
|
|
|
156,004 |
|
|
|
135,295 |
|
NET CASH PROVIDED BY
OPERATING ACTIVITIES
|
|
|
205,322 |
|
|
|
124,175 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
(37,392 |
) |
|
|
(27,539 |
) |
Net
Proceeds from Sale of Land and Building
|
|
|
52,571 |
|
|
|
36,642 |
|
Payment
for Purchase of Business, Net of Cash Acquired
|
|
|
(27,590 |
) |
|
|
— |
|
Marketable
Securities Purchased
|
|
|
(246,278 |
) |
|
|
— |
|
Marketable
Securities-Maturities and Sales
|
|
|
184,854 |
|
|
|
— |
|
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES
|
|
|
(73,835 |
) |
|
|
9,103 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from Exercise of Stock Options
|
|
|
15,487 |
|
|
|
4,738 |
|
Reissuance
of Treasury Stock
|
|
|
787 |
|
|
|
674 |
|
Repurchase
of Common Stock for Treasury
|
|
|
(20,206 |
) |
|
|
(5,317 |
) |
Cash
Dividends Paid
|
|
|
(7,840 |
) |
|
|
(3,545 |
) |
Excess
Tax Benefit from Stock-Based Payments
|
|
|
2,865 |
|
|
|
180 |
|
Borrowings
from Revolving Credit Facility
|
|
|
25,000 |
|
|
|
40,000 |
|
Repayments
Under Revolving Credit Facilities
|
|
|
(26,895 |
) |
|
|
(50,000 |
) |
Repayments
Under Senior Notes
|
|
|
— |
|
|
|
(115,000 |
) |
NET CASH USED IN
FINANCING ACTIVITIES
|
|
|
(10,802 |
) |
|
|
(128,270 |
) |
Effects
of Exchange Rate Differences
|
|
|
(260 |
) |
|
|
230 |
|
NET INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
120,425 |
|
|
|
5,238 |
|
Cash and Cash Equivalents at
Beginning of
Period
|
|
|
129,155 |
|
|
|
130,583 |
|
Cash and Cash Equivalents at
End of Period
|
|
$ |
249,580 |
|
|
$ |
135,821 |
|
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
Paid During the Period For:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
311 |
|
|
$ |
4,700 |
|
Income
Taxes, Net
|
|
|
41,000 |
|
|
|
17,912 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
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, 2007 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 for the fiscal year ended June 30, 2007, and in conjunction
with DeVry’s quarterly reports on Form 10-Q for the quarters ended September 30,
2007 and December 31, 2007, each as filed with the Securities and Exchange
Commission.
The
results of operations for the three and nine months ended March 31, 2008, 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 auction-rate certificates and investments in mutual funds
all of which are classified as available-for-sale securities. The
following is a summary of our short-term and long-term available-for-sale
marketable securities at March 31, 2008 (dollars in thousands):
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
(Loss)
|
|
|
Gain
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond
Mutual Fund
|
|
$ |
733 |
|
|
$ |
- |
|
|
$ |
25 |
|
|
$ |
758 |
|
Stock Mutual Funds
|
|
|
1,934 |
|
|
|
(347 |
) |
|
|
- |
|
|
|
1,587 |
|
Total Short-term
Investments
|
|
$ |
2,667 |
|
|
$ |
(347 |
) |
|
$ |
25 |
|
|
$ |
2,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction Rate Certificates
|
|
$ |
59,647 |
|
|
$ |
(2,010 |
) |
|
$ |
- |
|
|
$ |
57,637 |
|
Total Long-term Investments
|
|
$ |
59,647 |
|
|
$ |
(2,010 |
) |
|
$ |
- |
|
|
$ |
57,637 |
|
Investments
are classified as short-term if they are readily convertible to cash or have
other characteristics of short-term investments such as highly liquid markets or
maturities within one year. At March 31, 2008, contractual maturities of our
long-term investments ranged from 18 to 33 years.
At March
31, 2008, all of the Bond and Stock mutual fund investments are held in a rabbi
trust for the purpose of paying benefits under DeVry’s non-qualified deferred
compensation plan.
All
mutual fund investments are recorded at fair market value based upon quoted
market prices. Due to changing market conditions that have reduced liquidity for
Auction Rate Securities, as detailed below, these investments are valued using
observable and unobservable inputs, such as internally-developed pricing models.
Unrealized gains or temporary unrealized losses, net of income tax effects, are
reported as a component of accumulated other comprehensive loss in the
consolidated balance sheets. Realized gains and losses are computed
on the basis of specific identification and are included in interest income in
the consolidated income statements. DeVry has recorded realized gains of $80,000
for fiscal 2008. No realized losses have been recorded to
date.
As of
March 31, 2008, all unrealized losses in the above table have been in a
continuous unrealized loss position for less than one year. When
evaluating its investments for possible impairment, DeVry reviews 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 DeVry’s 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, DeVry does not consider
these investments to be impaired as of March 31, 2008.
As shown
in the table above, as of March 31, 2008, DeVry held auction-rate debt
securities in the aggregate principal amount of $59.6 million. The auction-rate
securities are triple-A rated, long-term debt obligations with contractual
maturities ranging from 18 to 33 years. They are secured by student
loans, which are guaranteed by U.S. and state governmental agencies. Liquidity
for these securities has in the past been provided by an auction process that
has allowed DeVry and other investors in these instruments to obtain immediate
liquidity by selling the securities at their face amounts. Current disruptions
in credit markets, however, have adversely affected the auction market for these
types of securities. Recent auctions for these securities have not produced
sufficient bidders to allow for successful auctions. As a result, DeVry has been
unable to liquidate its auction-rate securities and there can be no assurance
that DeVry will be able to access the principal value of these securities prior
to their maturity. The liquidity issues associated with DeVry’s
portfolio of auction-rate securities has resulted in a $2.0 million decline in
the fair market value of these securities and has resulted in a reclassification
of these investments from current assets to long-term assets.
For each
unsuccessful auction, the interest rates on these securities are reset to a
maximum rate defined by the terms of each security, which in turn is reset on a
periodic basis at levels which are generally higher than defined short-term
interest rate benchmarks. To date DeVry has collected all interest
payable on all of its auction-rate securities when due and expects to continue
to do so in the future. This is the first time DeVry has experienced
liquidity issues with its portfolio of auction-rate
securities. Recent auction failures relating to this type of security
are symptomatic of current conditions in the broader debt markets and are not
unique to DeVry. DeVry intends to hold its portfolio of auction-rate
securities until successful auctions resume, a buyer is found outside of the
auction process, the issuers establish a different form of financing to replace
these securities, or final payments come due according to contractual maturities
ranging from 18 to 33 years.
While the
recent auction failures will limit DeVry’s ability to liquidate these
investments for some period of time, DeVry believes that based on its current
cash, cash equivalents and marketable securities balances of $252 million
(exclusive of auction-rate securities) and its current borrowing capacity under
its $175 million revolving credit facility (DeVry has the option to expand the
revolving credit facility to $275 million), the current lack of liquidity in the
auction-rate market will not have a material impact on its ability to fund its
operations, nor will it interfere with external growth plans. Should
DeVry need to liquidate such securities and auctions of these securities
continue to fail, future impairment of the carrying value of these securities
could cause DeVry to recognize a material charge to net income in future
periods.
Postemployment
Benefits
DeVry
previously entered into employment agreements with its current Chair of the
Board of Directors and a former Chief Executive Officer. These
agreements provided for certain benefits that required accrual over the service
period which ended June 30, 2005. DeVry recognized expense of
approximately $28,000 and reduced expense by approximately $7,000, related to
these agreements for the three and nine months ended March 31, 2008,
respectively. DeVry recognized expense of approximately $52,000 and
$295,000, related to these agreements for the three and nine months ended March
31, 2007, respectively. The amounts currently provided represent the
present value of the obligations relating to these agreements, discounted using
a 6.52% rate as of March 31, 2008, 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 computations
of diluted earnings per share were options to purchase 35,000 and 459,000 shares
of common stock for the three and nine months ended March 31, 2008,
respectively, and 894,000 and 948,000 shares of common stock, for the three and
nine months ended March 31, 2007, respectively, because their effect would be
anti-dilutive.
The
following is a reconciliation of basic shares to diluted shares (in
thousands).
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares
|
|
|
71,393 |
|
|
|
70,955 |
|
|
|
71,260 |
|
|
|
70,869 |
|
Effect of Dilutive Stock
Options
|
|
|
1,122 |
|
|
|
557 |
|
|
|
1,098 |
|
|
|
410 |
|
Diluted Shares
|
|
|
72,515 |
|
|
|
71,512 |
|
|
|
72,358 |
|
|
|
71,279 |
|
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. In
the second quarter of fiscal year 2008, 3,455 treasury shares were resold at a
10% discount to market value to two employees of Advanced Academics Inc. upon
the acquisition of that business (see “Note 5 – Business
Combination). 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, net of the effects of income taxes. The following are the amounts
recorded in Accumulated Other Comprehensive Loss for the three and nine months
ended March 31, 2008 and 2007 (dollars in thousands).
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Balance
at Beginning of Period
|
|
$ |
(1,788 |
) |
|
$ |
(50 |
) |
|
$ |
(918 |
) |
|
$ |
(424 |
) |
Net
Unrealized Investment Gains (Losses)
|
|
|
(1,300 |
) |
|
|
- |
|
|
|
(1,442 |
) |
|
|
- |
|
Translation
Adjustments
|
|
|
444 |
|
|
|
(109 |
) |
|
|
(284 |
) |
|
|
265 |
|
Balance
at End of Period
|
|
$ |
(2,644 |
) |
|
$ |
(159 |
) |
|
$ |
(2,644 |
) |
|
$ |
(159 |
) |
The
Accumulated Other Comprehensive Loss balance at March 31, 2008, consists of
$1,202,000 of cumulative translation losses and $1,442,000 of unrealized losses
on available-for-sale marketable securities. At March 31, 2007, this balance was
composed entirely of cumulative translation losses of $159,000.
Advertising
Expense
Advertising
costs are recognized as expense in the period in which materials are purchased
or services are performed. Advertising expense, which is included in
student services and administrative expense in the Consolidated Statements of
Income, was $36.0 million and $95.1 million for the three and nine months ended
March 31, 2008, respectively. Advertising expense for the three and nine months
ended March 31, 2007, was $28.4 million and $82.5 million,
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. In February 2008, the FASB deferred the effective
date of SFAS 157 for one year for all non financial assets and non financial
liabilities except for those items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). 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.
SFAS
141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, “Business Combinations” (“SFAS 141R”). SFAS 141R retains the fundamental
requirements of Statement of Financial Accounting Standards No. 141 (“SFAS 141”)
that the acquisition method of accounting be used for all business
combinations.
SFAS 141R also retains the guidance in SFAS 141 for identifying and
recognizing intangible assets separately from goodwill. The new accounting
requirements of SFAS 141R will change how business acquisitions are accounted
for and will impact financial statements both on the acquisition date and in
subsequent periods. For DeVry, SFAS 141R is effective beginning in fiscal year
2010 and will impact the accounting for any acquisitions DeVry may complete
beginning in that fiscal year.
SFAS 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB number 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting
standards to improve the relevance, comparability and transparency of the
financial information provided in a company’s financial statements as it relates
to minority interests in the equity of a subsidiary. These minority
interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. For DeVry, SFAS 160 is effective beginning in fiscal year 2010.
DeVry does not expect that the adoption of SFAS 160 will have a material impact
on its consolidated financial statements as all current subsidiaries are wholly
owned.
SFAS 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, an Amendment
to FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. For DeVry, SFAS
161 is effective beginning in the third quarter of fiscal year 2009. The
adoption of SFAS 161 is not expected to have a material impact on DeVry’s
consolidated financial statements as DeVry does not currently maintain
derivative instruments or engage in hedging activities.
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 DeVry’s 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. 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
March 31, 2008, 6,025,164 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
established 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 nine months ended
March 31, 2008:
|
|
Options
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Outstanding
at July 1, 2007
|
|
|
3,316,210 |
|
|
$ |
23.61 |
|
|
|
|
|
|
|
Options
Granted
|
|
|
610,750 |
|
|
$ |
36.02 |
|
|
|
|
|
|
|
Options
Exercised
|
|
|
(670,965 |
) |
|
$ |
24.53 |
|
|
|
|
|
|
|
Options
Cancelled
|
|
|
(112,629 |
) |
|
$ |
28.11 |
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
3,143,366 |
|
|
$ |
25.69 |
|
|
|
6.65 |
|
|
$ |
51,305 |
|
Exercisable
at March 31, 2008
|
|
|
1,751,956 |
|
|
$ |
23.76 |
|
|
|
5.24 |
|
|
$ |
31,671 |
|
The total
intrinsic value of options exercised for the nine months ended March 31,
2008 and 2007 was $16,442,000 and $2,748,000, 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 nine months of fiscal years 2008 and 2007 were $16.11 and
$10.57, 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 |
|
|
|
6.67 |
|
Expected
Volatility
|
|
|
39.33 |
% |
|
|
41.51 |
% |
Risk-free
Interest Rate
|
|
|
4.34 |
% |
|
|
4.57 |
% |
Dividend
Yield
|
|
|
0.32 |
% |
|
|
0.46 |
% |
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 Statements of Income:
|
|
For
the Three Months
Ended March 31,
|
|
|
For
the Nine Months
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars
in thousands)
|
|
Cost
of Educational Services
|
|
$ |
451 |
|
|
$ |
395 |
|
|
$ |
1,373 |
|
|
$ |
1,391 |
|
Student
Services and Administrative Expense
|
|
|
955 |
|
|
|
839 |
|
|
|
2,914 |
|
|
|
2,956 |
|
Income
Tax Benefit
|
|
|
(189 |
) |
|
|
(240 |
) |
|
|
(577 |
) |
|
|
(947 |
) |
Net
Stock-Based Compensation Expense
|
|
$ |
1,217 |
|
|
$ |
994 |
|
|
$ |
3,710 |
|
|
$ |
3,400 |
|
As of
March 31, 2008, $13.2 million of total pre-tax unrecognized
compensation costs related to non-vested awards is expected to be recognized
over a weighted average period of 3.6 years. The total fair value of
options vested during the nine months ended March 31, 2008 and 2007 was
approximately $4.9 million in each period.
There
were no capitalized stock-based compensation costs at March 31, 2008 and
2007.
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 most recent dividend of $0.06 per share was paid on
January 4, 2008, to common stockholders of record as of December 14,
2007. This dividend of $4.3 million was recorded as a reduction to
retained earnings as of December 31, 2007. Future dividends will be
at the discretion of the Board of Directors.
On
November 15, 2006, DeVry announced that its 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 March 31, 2008,
DeVry had repurchased, on the open market, 820,573 shares of its common stock at
a total cost of approximately $30.7 million. In April 2008, DeVry completed this
repurchase plan with the repurchase of an additional 87,826 shares of its common
stock for approximately $4.3 million. These buybacks were funded
through available cash balances.
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: BUSINESS
COMBINATION
Advanced Academics,
Inc.
On
October 31, 2007, DeVry Inc. acquired the operations of Advanced Academics, Inc.
(“AAI”) for $27.6 million in cash, including costs of acquisition. Funding was
provided from DeVry’s existing operating cash balances. The results of AAI’s
operations have been included in the consolidated financial statements of DeVry
since the date of acquisition.
AAI is a
leading provider of online secondary education. 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 addition of AAI has further diversified DeVry’s
curricula.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition (dollars in
thousands).
|
|
At October 31, 2007
|
|
|
|
|
|
Current
Assets
|
|
$ |
4,570 |
|
Property
and Equipment
|
|
|
210 |
|
Other
Long-term Assets
|
|
|
3,796 |
|
Intangible
Assets
|
|
|
10,853 |
|
Goodwill
|
|
|
17,558 |
|
Total
Assets Acquired
|
|
|
36,987 |
|
Liabilities
Assumed
|
|
|
9,351 |
|
Net
Assets Acquired
|
|
$ |
27,636 |
|
Of the
$10.9 million of acquired intangible assets, $1.3 million was assigned to the
value of the AAI trade name which has been determined to not be subject to
amortization. The remaining acquired intangible assets have all been
determined to be subject to amortization and their values and estimated useful
lives are as follows (dollars in thousands):
|
|
As of October 31,
2007
|
|
|
Value
Assigned
|
|
Estimated
Useful Life
|
|
|
|
|
|
Customer
Contracts-Direct to Student
|
|
$ |
4,100 |
|
6
yrs 8 mths
|
Customer
Contracts-Direct to District
|
|
|
2,900 |
|
4
yrs 8 mths
|
Curriculum/Software
|
|
|
2,500 |
|
5
yrs
|
Other
|
|
|
53 |
|
1
yr
|
DeVry
determined this allocation based upon a number of factors, including a valuation
analysis prepared by an independent professional valuation specialist. The $17.6
million of goodwill was all assigned to the DeVry University operating
segment.
There is
no pro forma presentation of prior year operating results related to this
acquisition due to the insignificant effect on consolidated
operations.
NOTE 6: INTANGIBLE
ASSETS
Intangible
assets consist of the following (dollars in thousands):
|
|
As of March 31, 2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770 |
|
|
$ |
(47,289 |
) |
Customer
Contracts
|
|
|
7,000 |
|
|
|
(561 |
) |
License
and Non-compete Agreements
|
|
|
2,684 |
|
|
|
(2,655 |
) |
Class Materials
|
|
|
2,900 |
|
|
|
(1,450 |
) |
Curriculum/Software
|
|
|
2,500 |
|
|
|
(208 |
) |
Trade
Names
|
|
|
110 |
|
|
|
(110 |
) |
Other
|
|
|
639 |
|
|
|
(628 |
) |
Total
|
|
$ |
63,603 |
|
|
$ |
(52,901 |
) |
Unamortized
Intangible Assets:
|
|
|
|
|
|
|
|
|
Trade
Names
|
|
$ |
22,272 |
|
|
|
|
|
Trademark
|
|
|
1,645 |
|
|
|
|
|
Ross
Title IV Eligibility and Accreditations
|
|
|
14,100 |
|
|
|
|
|
Intellectual
Property
|
|
|
13,940 |
|
|
|
|
|
Chamberlain
Title IV Eligibility and Accreditations
|
|
|
1,200 |
|
|
|
|
|
Total
|
|
$ |
53,157 |
|
|
|
|
|
|
|
As
of March 31, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Amortized
Intangible Assets:
|
|
|
|
|
|
|
Student
Relationships
|
|
$ |
47,770 |
|
|
$ |
(42,979 |
) |
License
and Non-compete Agreements
|
|
|
2,650 |
|
|
|
(2,617 |
) |
Class Materials
|
|
|
2,900 |
|
|
|
(1,250 |
) |
Trade
Names
|
|
|
110 |
|
|
|
(97 |
) |
Other
|
|
|
620 |
|
|
|
(620 |
) |
Total
|
|
$ |
54,050 |
|
|
$ |
(47,563 |
) |
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 $1.5 million and $3.9 million for
the three and nine months ended March 31, 2008, respectively, and $1.8
million and $5.4 million for the three and nine months ended March 31, 2007,
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
|
|
$ |
4,926 |
|
2009
|
|
|
2,154 |
|
2010
|
|
|
2,204 |
|
2011
|
|
|
2,006 |
|
2012
|
|
|
1,698 |
|
The
weighted-average amortization period for amortized intangible assets is three
and five years for Chamberlain and Ross University Student Relationships,
respectively; approximately six years for AAI customer contracts; six years for
License and Non-compete Agreements; 14 years for Class Materials; five
years for Curriculum/Software; four years for Trade Names and six years for
Other. These intangible assets, except for the Ross University Student
Relationships and the AAI Customer Contracts, 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 |
% |
The
amount being amortized for the AAI Customer Contracts is based on the estimated
renewal probability of the contracts, giving consideration to the revenue and
discounted cash flow associated with both types of customer relationships. This
results in the basis being amortized at an annual rate for each of the years of
estimated economic life as follows:
Fiscal
Year
|
|
Direct
to
Student
|
|
|
Direct
to
District
|
|
2008
|
|
|
12 |
% |
|
|
14 |
% |
2009
|
|
|
18 |
% |
|
|
24 |
% |
2010
|
|
|
19 |
% |
|
|
25 |
% |
2011
|
|
|
17 |
% |
|
|
21 |
% |
2012
|
|
|
14 |
% |
|
|
16 |
% |
2013
|
|
|
11 |
% |
|
|
- |
|
2014
|
|
|
9 |
% |
|
|
- |
|
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 amount of goodwill
related to the DeVry University reportable segment at March 31, 2008 was
$39.8 million which was an increase of $17.6 million from June 30, 2007. This
increase results from the allocation of the AAI purchase price as described in
Note 5-Business Combination. The carrying amount of goodwill related
to the Professional and Training reportable segment was unchanged at $24.7
million at March 31, 2008 and June 30, 2007. The carrying amount of
goodwill related to the Medical and Healthcare segment was unchanged at
$244.2 million at March 31, 2008 and June 30, 2007.
NOTE 7: SALE
OF FACILITIES
In
February 2008, DeVry sold its facility located in Houston, Texas, for
approximately $14.5 million in gross proceeds which resulted in a pre-tax gain
of approximately $2.2 million. In connection with the transaction,
DeVry entered into an agreement to lease back approximately 60% of the original
space in the facility. The leaseback required the deferral of the
gain on the sale. The gain is being recognized ratably as a reduction
to rent expense over the twelve year term of the lease agreement.
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 which resulted in a pre-tax
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 year 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 year 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 8: 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 year 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 $68,000 and $4.5 million, in the
three and nine months ended March 31, 2008, respectively. These payments will
extend until the period of benefit coverage has expired. Of the total
amount accrued for the fiscal year 2007 VSP and RIF, approximately $0.6 million
remained to be paid as of March 31, 2008.
NOTE
9: 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 $107.2 million and $62.2 million
attributable to Ross University’s international operations as of March 31, 2008
and 2007, respectively. As of March 31, 2008 and 2007, cumulative
undistributed earnings were approximately $134.8 million and $88 million,
respectively.
The
effective tax rate was 28.1% for the third quarter and 27.4% for the first nine
months of fiscal year 2008, compared to 25.5% for the third quarter and 29.1%
for the first nine months in the prior year. The higher effective income tax
rate for the first nine months of 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 year to date 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. This also
influenced the higher effective rate for the second quarter of fiscal year
2008. 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 classify 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 March 31, 2008, 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 10: LONG-TERM
DEBT
All of
DeVry’s borrowings and letters of credit under its $175 million revolving credit
facility are through DeVry Inc. and Global Education International, Inc.
(“GEI”), an international subsidiary. DeVry has the option to expand
the revolving credit facility to $275 million. As of March 31, 2008,
June 30, 2007 and March 31, 2007, DeVry had no outstanding
borrowings. DeVry Inc. letters of credit outstanding under the
revolving credit facility were approximately $4.3 million, $2.0 million and $2.0
million as of March 31, 2008, June 30, 2007 and March 31, 2007,
respectively.
NOTE 11: COMMITMENTS
AND CONTINGENCIES
DeVry is
subject to occasional lawsuits, administrative proceedings, regulatory reviews
and investigations 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
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. In two Orders dated October 9, 2007, and December 31,
2007, the District Court entered judgment dismissing all
of plaintiffs ’ class and individual claims and awarded DeVry
its cost of suit. Plaintiffs have filed a Notice signifying their
intent to appeal the dismissal to the U.S. Court of Appeals for the Ninth
Circuit. DeVry intends to vigorously defend itself with respect to
this claim.
The
ultimate outcome of pending litigation and other proceedings, reviews,
investigations and contingencies is difficult to estimate. At this time, DeVry
does not expect that the outcome of any such matter, including the litigation
described above, will have a material effect on its cash flows, results of
operations or financial position.
NOTE 12: SEGMENT
INFORMATION
DeVry’s
principal business is providing secondary and 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 and the Advanced Academics operations (DeVry
University); the professional exam review and training operations which includes
Becker CPA Review and Stalla Review for the CFA Exams (Professional and
Training); and the Ross University medical and veterinary school and Chamberlain
College of Nursing operations (Medical and 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, 2007.
The
consistent measure of segment profit excludes interest, 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 and nine months ended March 31, 2008 and 2007.
Corporate information is included where it is needed to reconcile segment data
to the consolidated financial statements.
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
(Dollars
in Thousands)
|
|
DeVry
University
|
|
$ |
222,609 |
|
|
$ |
191,418 |
|
|
$ |
630,768 |
|
|
$ |
549,646 |
|
Medical and
Healthcare
|
|
|
45,885 |
|
|
|
37,173 |
|
|
|
125,711 |
|
|
|
103,017 |
|
Professional
and Training
|
|
|
22,479 |
|
|
|
17,234 |
|
|
|
58,549 |
|
|
|
47,981 |
|
Total
Consolidated Revenues
|
|
$ |
290,973 |
|
|
$ |
245,825 |
|
|
$ |
815,028 |
|
|
$ |
700,644 |
|
Operating
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
27,370 |
|
|
$ |
12,360 |
|
|
$ |
71,151 |
|
|
$ |
37,449 |
|
Medical and
Healthcare
|
|
|
14,464 |
|
|
|
12,596 |
|
|
|
41,327 |
|
|
|
37,182 |
|
Professional
and Training
|
|
|
10,930 |
|
|
|
6,822 |
|
|
|
24,662 |
|
|
|
16,819 |
|
Reconciling
Items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
(1,513 |
) |
|
|
(1,806 |
) |
|
|
(3,914 |
) |
|
|
(5,418 |
) |
Depreciation
and Other
|
|
|
(700 |
) |
|
|
(385 |
) |
|
|
(1,840 |
) |
|
|
(1,691 |
) |
Total
Consolidated Operating Income
|
|
$ |
50,551 |
|
|
$ |
29,587 |
|
|
$ |
131,386 |
|
|
$ |
84,341 |
|
Interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
$ |
2,823 |
|
|
$ |
1,956 |
|
|
$ |
8,122 |
|
|
$ |
5,326 |
|
Interest
Expense
|
|
|
(99 |
) |
|
|
(774 |
) |
|
|
(418 |
) |
|
|
(4,663 |
) |
Net
Interest Income
|
|
|
2,724 |
|
|
|
1,182 |
|
|
|
7,704 |
|
|
|
663 |
|
Total
Consolidated Income before Income Taxes
|
|
$ |
53,275 |
|
|
$ |
30,769 |
|
|
$ |
139,090 |
|
|
$ |
85,004 |
|
Segment
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
557,340 |
|
|
$ |
455,291 |
|
|
$ |
557,340 |
|
|
$ |
455,291 |
|
Medical and
Healthcare
|
|
|
447,846 |
|
|
|
392,398 |
|
|
|
447,846 |
|
|
|
392,398 |
|
Professional
and Training
|
|
|
91,250 |
|
|
|
76,045 |
|
|
|
91,250 |
|
|
|
76,045 |
|
Corporate
|
|
|
19,456 |
|
|
|
23,427 |
|
|
|
19,456 |
|
|
|
23,427 |
|
Total
Consolidated Assets
|
|
$ |
1,115,892 |
|
|
$ |
947,161 |
|
|
$ |
1,115,892 |
|
|
$ |
947,161 |
|
Additions
to Long-lived Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
8,089 |
|
|
$ |
8,188 |
|
|
$ |
29,528 |
|
|
$ |
17,786 |
|
Medical and
Healthcare
|
|
|
1,336 |
|
|
|
2,965 |
|
|
|
7,693 |
|
|
|
9,524 |
|
Professional
and Training
|
|
|
10 |
|
|
|
184 |
|
|
|
171 |
|
|
|
229 |
|
Total
Consolidated Additions to Long-lived Assets
|
|
$ |
9,435 |
|
|
$ |
11,337 |
|
|
$ |
37,392 |
|
|
$ |
27,539 |
|
|
|
For
the Three Months
Ended March 31,
|
|
|
For
the Nine Months
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Depreciation
Expense:
|
|
(Dollars
in Thousands)
|
|
DeVry
University |
|
$ |
7,027 |
|
|
$ |
7,914 |
|
|
$ |
20,885 |
|
|
$ |
22,271 |
|
Medical and
Healthcare
|
|
|
1,415 |
|
|
|
1,193 |
|
|
|
4,217 |
|
|
|
3,447 |
|
Professional
and Training
|
|
|
112 |
|
|
|
107 |
|
|
|
310 |
|
|
|
367 |
|
Corporate
|
|
|
180 |
|
|
|
247 |
|
|
|
585 |
|
|
|
741 |
|
Total
Consolidated Depreciation
|
|
$ |
8,734 |
|
|
$ |
9,461 |
|
|
$ |
25,997 |
|
|
$ |
26,826 |
|
Intangible
Asset Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DeVry
University
|
|
$ |
475 |
|
|
$ |
— |
|
|
$ |
792 |
|
|
$ |
— |
|
Medical and
Healthcare
|
|
|
982 |
|
|
|
1,743 |
|
|
|
2,947 |
|
|
|
5,228 |
|
Professional
and Training
|
|
|
56 |
|
|
|
63 |
|
|
|
175 |
|
|
|
190 |
|
Total
Consolidated Amortization
|
|
$ |
1,513 |
|
|
$ |
1,806 |
|
|
$ |
3,914 |
|
|
$ |
5,418 |
|
In
February 2008, DeVry sold its facility located in Houston, Texas, for
approximately $14.5 million in gross proceeds which resulted in a pre-tax gain
of approximately $2.2 million. In connection with the transaction,
DeVry entered into an agreement to lease back approximately 60% of the original
space in the facility. The gain is being recognized ratably as a
reduction to rent expense over the twelve year term of the lease agreement in
the DeVry University reportable segment. 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 year 2008.
This loss is included in operating income of the DeVry University reportable
segment for the nine months ended March 31, 2008.
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 year 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 for the nine months ended March 31,
2008.
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 year 2007. This
gain was included in operating income of the DeVry University reportable segment
for the nine months ended March 31, 2007.
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 three and nine months ended
March 31, 2008 and 2007. Revenues and long-lived assets by geographic area
are as follows:
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended March 31,
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
from Unaffiliated Customers:
|
|
(Dollars
in Thousands)
|
|
Domestic
Operations
|
|
$ |
249,299 |
|
|
$ |
208,913 |
|
|
$ |
699,595 |
|
|
$ |
598,059 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
38,539 |
|
|
|
33,550 |
|
|
|
107,010 |
|
|
|
92,887 |
|
Other
|
|
|
3,135 |
|
|
|
3,362 |
|
|
|
8,423 |
|
|
|
9,698 |
|
Total
International
|
|
|
41,674 |
|
|
|
36,912 |
|
|
|
115,433 |
|
|
|
102,585 |
|
Consolidated
|
|
$ |
290,973 |
|
|
$ |
245,825 |
|
|
$ |
815,028 |
|
|
$ |
700,644 |
|
Long-lived
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
Operations
|
|
$ |
367,973 |
|
|
$ |
317,158 |
|
|
$ |
367,973 |
|
|
$ |
317,158 |
|
International
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominica
and St. Kitts/Nevis
|
|
|
313,024 |
|
|
|
309,538 |
|
|
|
313,024 |
|
|
|
309,538 |
|
Other
|
|
|
322 |
|
|
|
290 |
|
|
|
322 |
|
|
|
290 |
|
Total
International
|
|
|
313,346 |
|
|
|
309,828 |
|
|
|
313,346 |
|
|
|
309,828 |
|
Consolidated
|
|
$ |
681,319 |
|
|
$ |
626,986 |
|
|
$ |
681,319 |
|
|
$ |
626,986 |
|
No one
customer accounted for more than 10% of DeVry’s consolidated
revenues.
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, including those in Note 11
to the Consolidated Financial Statements and in Part II, Item 1, 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
third quarter of fiscal year 2008, DeVry posted solid financial results driven
by strong revenue growth and continued operating leverage. Total
revenues rose 18.4%, reaching a quarterly record high of $291.0 million, and net
income of $38.3 million increased 67.2% over the prior year
period. Operational and financial highlights for the third quarter of
fiscal year 2008 include:
|
·
|
All
three of DeVry’s business segments achieved double digit revenue and
operating profit growth, due to continued strength in new student
recruiting and continued demand for DeVry’s high quality educational
programs and offerings while making investments to drive future
growth.
|
|
·
|
The
spring 2008 term marked DeVry University’s tenth consecutive period of
positive undergraduate new student growth and seventh consecutive period
of positive total student enrollment
growth.
|
|
·
|
In
connection with its real estate optimization strategy, DeVry sold its
Houston campus for approximately $14.5 million. DeVry is
leasing back approximately 60 percent of the original space, and an
accounting gain from the sale of the facility of $2.2 million is being
recognized ratably over the 12-year lease
period.
|
|
·
|
Chamberlain
College of Nursing began offering nursing programs at its new campuses in
Addison, Illinois, and Phoenix in March 2008. These new
locations are co-located with DeVry University
campuses.
|
|
·
|
DeVry’s
financial position remained strong as it ended the quarter with no debt
outstanding and approximately $310 million of cash and short and long-term
marketable securities.
|
The
following table illustrates the effects of the loss/(gain) on the sale of
facilities and separation plan severance on DeVry’s earnings. The
non-GAAP disclosure of net income and earnings per share, excluding these items,
is not preferable to GAAP net income but is shown as a supplement to such
disclosure for comparability to the year-ago period. The following
table reconciles these items to the relevant GAAP information (in thousands,
except per share data):
|
|
For
the Nine Months
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Net Income
|
|
$ |
100,966 |
|
|
$ |
60,241 |
|
Earnings per Share
(diluted)
|
|
$ |
1.40 |
|
|
$ |
0.85 |
|
Loss (Gain) on Sale of Assets (net of
tax)
|
|
$ |
2,279 |
|
|
$ |
(12,411 |
) |
Effect on Earnings per Share
(diluted)
|
|
$ |
0.03 |
|
|
$ |
(0.17 |
) |
Separation Plan
Severance (net of
tax)
|
|
|
-- |
|
|
$ |
654 |
|
Effect on Earnings per Share
(diluted)
|
|
|
-- |
|
|
$ |
0.01 |
|
Net Income Excluding the Loss (Gain) on Sale of Assets and Separation Plan
Severance (net of tax)
|
|
$ |
103,245 |
|
|
$ |
48,484 |
|
Earnings per Share Excluding the Loss (Gain) on Sale
of Assets and SeparationPlan Severance (diluted)
|
|
$ |
1.43 |
|
|
$ |
0.68 |
|
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 third
quarter and first nine months for both the current and prior fiscal
year. Percents may not add because of rounding.
|
|
For
the Three Months
Ended
March 31,
|
|
|
For
the Nine Months
Ended
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of Educational Services
|
|
|
45.0 |
% |
|
|
51.2 |
% |
|
|
46.1 |
% |
|
|
52.3 |
% |
Loss/(Gain)
on Sale of Assets
|
|
|
-- |
|
|
|
(0.4 |
%) |
|
|
0.5 |
% |
|
|
(3.0 |
%) |
Separation
Plan Severance
|
|
|
-- |
|
|
|
0.4 |
% |
|
|
-- |
|
|
|
0.2 |
% |
Student
Services & Admin. Expense
|
|
|
37.6 |
% |
|
|
36.7 |
% |
|
|
37.3 |
% |
|
|
38.4 |
% |
Total
Operating Costs and Expenses
|
|
|
82.6 |
% |
|
|
88.0 |
% |
|
|
83.9 |
% |
|
|
88.0 |
% |
Operating
Income
|
|
|
17.4 |
% |
|
|
12.0 |
% |
|
|
16.1 |
% |
|
|
12.0 |
% |
Interest
Income
|
|
|
0.9 |
% |
|
|
0.8 |
% |
|
|
1.0 |
% |
|
|
0.8 |
% |
Interest
Expense
|
|
|
(0.0 |
%) |
|
|
(0.3 |
%) |
|
|
(0.0 |
%) |
|
|
(0.7 |
%) |
Net
Interest Income
|
|
|
0.9 |
% |
|
|
0.5 |
% |
|
|
1.0 |
% |
|
|
0.1 |
% |
Income
Before Income Taxes
|
|
|
18.3 |
% |
|
|
12.5 |
% |
|
|
17.1 |
% |
|
|
12.1 |
% |
Income
Tax Provision
|
|
|
5.1 |
% |
|
|
3.2 |
% |
|
|
4.7 |
% |
|
|
3.5 |
% |
Net
Income
|
|
|
13.2 |
% |
|
|
9.3 |
% |
|
|
12.4 |
% |
|
|
8.6 |
% |
REVENUES
Total
consolidated revenues for the third quarter of fiscal year 2008 of $291.0
million increased 18.4% versus the prior year quarter. For the first
nine months of fiscal year 2008, total consolidated revenues of $815.0 million
increased 16.3% versus the same period a year ago. For both the third
quarter and first nine months of fiscal year 2008, 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 periods. In addition, revenues increased
because of higher sales of Becker CPA review materials and expanding sales of
electronic text books (“eBooks”).
DeVry
University
DeVry
University segment revenues increased by 16.3% in the third quarter to $222.6
million, and rose by 14.8% to $630.8 million for the first nine months of fiscal
year 2008. While DeVry University accounted for the majority of the
revenue increase in this segment, revenues at Advanced Academics Inc., which was
acquired on October 31, 2007, also contributed to segment revenue
growth. DeVry University 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 9.8% from summer 2006 (37,132 students) to summer 2007 (40,774
students); and
|
|
·
|
Increased
by 10.3% from fall 2006 (40,434 students) to fall 2007 (44,594 students);
and
|
|
·
|
Increased
by 10.3% from spring 2007 (40,637 students) to spring 2008 (44,814
students). This was DeVry University’s seventh consecutive
period of positive total undergraduate student enrollment
growth.
|
New undergraduate enrollment by
term:
|
·
|
Increased
by 9.7% from summer 2006 (12,671 students) to summer 2007 (13,906
students); and
|
|
·
|
Increased
by 10.7% from fall 2006 (11,930 students) to fall 2007 (13,204 students);
and
|
|
·
|
Increased
by 12.1% from spring 2007 (11,075 students) to spring 2008 (12,410
students). The spring 2008 term was the tenth consecutive term
in which new undergraduate student enrollments increased from the year-ago
level.
|
Total graduate coursetakers by
session:
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);
and
|
|
·
|
Increased
by 12.5% from the November 2006 session (13,920 coursetakers) to the
November 2007 session (15,657 coursetakers);
and
|
|
·
|
Increased
by 13.7% from the January 2007 session (15,278 coursetakers) to the
January 2008 session (17,377 coursetakers);
and
|
|
·
|
Increased
by 15.2% from the March 2007 session (14,756 coursetakers) to the March
2008 session (17,005 coursetakers).
|
Tuition rates:
|
·
|
Undergraduate
program tuition increased by approximately 4.5% in July
2007; and
|
|
·
|
Graduate
school program tuition increased by approximately 0% to 5%, depending on
location, for the July 2007
session.
|
Management
believes the increased undergraduate student enrollments were most significantly
impacted by investments in marketing and recruiting, continued strong demand for
DeVry University’s online programs and a heightened focus on the retention of
existing students. Management believes efforts at Keller to enhance
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 primarily are 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 in both the third quarter and first nine months of
fiscal year 2008, as compared to the prior year periods. 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 the result
of an improvement in the timeliness of receivable collections as compared to the
prior year periods.
Medical and
Healthcare
Medical
and Healthcare segment revenues increased 23.4% to $45.9 million in the third
quarter and grew 22.0% to $125.7 million for the first nine months of fiscal
year 2008 as compared to the year-ago periods. While Ross University
accounted for the majority of the revenue increase in this segment, increasing
enrollments at Chamberlain College of Nursing (“Chamberlain”) 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 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); and
|
|
·
|
Increased
by 7.0% from January 2007 (3,747 students) to January 2008 (4,011
students).
|
Ross University new student
enrollment by term:
|
·
|
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; and
|
|
·
|
Increased
by 11.1% from January 2007 (496 students) to January 2008 (551
students).
|
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 core sciences programs
increased by approximately 5.4% for the September 2006 term and
approximately 6.8% effective with the September 2007
term;
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·
|
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
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|
·
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Tuition
for Chamberlain increased approximately 5% for the 2007-2008 academic year
(effective July 2007).
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Continued
demand for medical doctors and veterinarians positively influenced career
decisions of new students towards these respective fields of
study. Management believes the increasing enrollments at Ross
University for the past several terms resulted from enhancements made to its
marketing and recruiting functions, as well as steps taken to meet increasing
student demand such as adding faculty, classrooms, and a new student center and
gymnasium.
The
increase in student enrollments at Chamberlain was attributable to its growing
RN to BSN online completion program and the opening of its Columbus campus in
March 2007. Also, during March 2008, Chamberlain began offering
nursing programs at its campuses in Addison, Illinois, and
Phoenix. These locations are co-located with existing respective
DeVry University campuses.
Professional and
Training
Professional
and Training segment revenues rose 30.4% to $22.5 million in the third quarter
and increased by 22.0% to $58.5 million for the first nine months of fiscal year
2008 as compared to the year-ago periods. The primary reasons for the increase
were higher sales of CPA review courses on CD-ROM and increased enrollment in
Becker Professional Review’s CPA review courses. Management believes
these increases are being driven largely by Becker’s success in capturing the
continuing strong demand for CPAs from accounting and consulting
firms.
Revenue from Other
Sources
Other
Educational Revenue increased by 30.7% to $25.7 million during the third quarter
and grew 25.7% to $68.9 million during the first nine months of fiscal year 2008
as compared to the prior year periods. As discussed above, the primary drivers
for the increase in Other Educational Revenue were increased sales of Becker CPA
Review course materials on CD-ROM and strong sales of eBooks at DeVry
University, 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 increased 4.0% to $130.8 million during the third
quarter and grew 2.5% to $375.8 million during the first nine months of fiscal
year 2008, as compared to the year-ago periods. Cost increases were
incurred in support of the higher number of DeVry University Centers, expanding
online program enrollments and from Advanced Academics, which was acquired on
October 31, 2007. In addition, cost increases were incurred at Ross University
to both support increasing student enrollments and capacity expansion to drive
future growth. Also, Cost of Educational Services increased due to
the operation of two additional Chamberlain locations which began offering
programs in March 2008. Partially 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 45.0% in the third
quarter of fiscal year 2008 from 51.2% during the prior year
period. For the first nine months of fiscal year 2008, Cost of
Educations Services decreased to 46.1% from 52.3% in the year-ago
period. These decreases were the 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 during the fourth quarter of fiscal year 2008, albeit not at the
same level achieved during the first nine months as expenses are expected to
increase based on additional hiring and project spending to support future
revenue growth.
Separation Plan
Severance
During
the third quarter of fiscal 2007, DeVry offered a voluntary separation plan
(VSP) to eligible DeVry University campus-based employees. DeVry
recorded a pre-tax charge of approximately $1.1 million in the third quarter of
fiscal year 2007 in relation to the number of employees who accepted the
separation plan as of March 31, 2007. This charge consisted of
severance pay and extended medical and dental benefits coverage. The charge was
separately classified in the Consolidated Statements of Income as a component of
Total Costs and Expenses and was related to the DeVry University reportable
segment.
Loss (Gain) on Sale of
Assets
In
February, 2008, DeVry University completed the sale of its 98,000 square foot
Houston facility for approximately $14.5 million of gross proceeds. DeVry is
leasing back approximately 60 percent of the original space. An accounting gain
from the sale of the facility of $2.2 million is being recognized ratably over
the 12-year lease period.
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 which resulted in a pre-tax
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 is being 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 year 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 year 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,
including 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.
Student
Services and Administrative Expense increased 21.4% to $109.6 million during the
third quarter and grew by 12.9% to $304.1 million during the first nine months
of fiscal year 2008 as compared to the year-ago periods. 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 all three of DeVry’s business segments are believed to be, in part,
attributable to the higher level and effectiveness of this
spending. In addition, cost increases were incurred in information
technology and student services. Also, expenses were higher as
compared to the year-ago periods as a result of the acquisition of Advanced
Academics, which was purchased on October 31, 2007.
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, net of increased amortization of
finite-lived intangible assets resulting from the acquisition of Advanced
Academics on October 31, 2007. Amortization expense decreased
approximately $0.3 million and approximately $1.5 million during the respective
three and nine month periods ended March 31, 2008, as compared to the year-ago
periods. Amortization expense is included entirely in the Student
Services and Administrative Expense category.
OPERATING
INCOME
DeVry
University
DeVry
University segment operating income increased 121% to $27.4 million during the
third quarter and increased 90.0% to $71.2 million during the first nine months
of fiscal year 2008, as compared to the prior year periods. Revenue
increased and gross margin improved significantly during the third quarter and
first nine months of fiscal year 2008, which was partially offset by the loss
from sale leaseback transactions. 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
year 2008. During the first nine months of fiscal year 2007, DeVry
recorded pre-tax gains of $20.8 million associated with facility sales and
recorded a pre-tax charge of $1.1 million in connection with a voluntary
separation plan. The loss in the current year period and gain and
charge 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 nine month periods and the voluntary
separation plan charge in the prior year period, DeVry University fiscal year
operating income of $74.9 million increased $57.2 million from $17.7 million in
the year-ago period.
Medical and
Healthcare
Medical
and Healthcare segment operating income increased 14.8% to $14.5 million during
the third quarter and grew 11.1% to $41.3 million during the first nine months
of fiscal year 2008 as compared to the prior year periods. Increases
in student enrollments and tuition produced higher revenues and operating income
for the current year periods as compared to the prior year periods even as
faculty, staff and facilities were being added in connection with the operation
of two additional campuses which began offering programs in March
2008. 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.
Professional and
Training
Professional
and Training segment operating income rose 60.2% to $10.9 million during the
third quarter and increased 46.6% to $24.7 million during the first nine months
of fiscal year 2008 as compared to the year-ago periods. The increase
in operating income is the result of higher revenue and improved operating
leverage as discussed earlier.
INTEREST
Interest
income increased 44.3%, to $2.8 million during the third quarter and rose 52.5%
to $8.1 million during the first nine months of fiscal year 2008 as compared to
the prior year periods. The increase was attributable to higher
levels of invested cash balances and marketable securities with higher interest
rates as compared to the prior year periods. The increase in invested
cash balances and marketable securities was attributable to improved operating
cash flow and proceeds received from the sale of assets, as discussed
earlier.
Interest
expense decreased 87.2% to $0.1 million during the third quarter and dropped
91.0% to $0.4 million during the first nine months of fiscal year 2008 as
compared to the year-ago periods. 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, which among other things, reduced
the spread on applicable interest and fee rates.
INCOME
TAXES
Taxes on
income were 28.1% of pretax income for the third quarter and 27.4% for the first
nine months of fiscal year 2008, compared to 25.5% for the third quarter and
29.1% for the first nine months of the prior year. The higher
effective income tax rate in the third quarter of the current year is
attributable an increase in the proportion of income generated by U.S.
operations to the offshore operations of Ross University as compared to the
year-ago quarter. The decrease in the effective tax rate for the
first nine months of fiscal year 2008 is attributable to the gain on the sale of
facilities in the first nine months of fiscal year 2007, which carried a tax
rate of 40.4%, 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 income 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 financial aid from various federal, state and provincial loan and
grant programs; student and family educational loans (“private loans”); employer
educational reimbursements; and student and family financial
resources. Over the past several months, some lenders announced that
they were exiting certain private loan programs for some
schools. DeVry expects that these actions will not have a material
impact on its students’ ability to access funds for their educational needs and
thus its enrollments.
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
March 31, 2008, total accounts receivable, net of related reserves, were
$121.5 million, compared to $95.5 million at March 31, 2007. The
increase is due to the impact on receivables from revenue growth across all
three business segments as compared to the year-ago period, a change in timing
of federal funds receivable and accounts receivable associated with the
acquisition of Advanced Academics on October 31, 2007. These
increases were partially offset by continued improvements in the timeliness of
collections of receivables across all three of DeVry’s business
segments.
Financial
Aid
DeVry is
highly dependent upon the timely receipt of federal financial aid funds. In
fiscal year 2007, approximately 70% of DeVry University undergraduate students’
tuition, book and fee revenues have been financed by federal financial
assistance programs. Keller Graduate School tuition revenues from student
participation in federal loan programs were approximately 65% of revenues. Ross
University tuition revenues from student participation in federal loan programs
were approximately 80% of revenues at both the medical and veterinary
schools. Chamberlain tuition revenues from student participation in
federal financial aid programs were approximately 70% 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. The United States Congress has extended the
HEA several times, with the current extension ending in May
2008. Legislation is currently pending to further extend the
HEA. 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 and is subject to audit or
investigation by other governmental authorities. Any violation could
be the basis for penalties or other 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 March 31, 2008, cash
in the amount of $23.1 million was held in restricted bank accounts,
compared to $58.0 million at March 31, 2007. The decrease
in the restricted cash balance is due to timing in the disbursement of such
funds.
Cash from
Operations
Cash
generated from operations in the first nine months of fiscal 2008 was
$205.3 million, compared to $124.2 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 advance tuition
payments and deferred tuition revenue driven by increased student
enrollments. This increase was partially offset by an increase in
accounts receivable and by a lower source of cash compared to the prior year for
changes in levels of prepaid expenses, accounts payable and accrued
expenses. Accounts receivable increased due to a change in timing of
federal funds receivable and accounts receivable associated with the acquisition
of Advanced Academics on October 31, 2007. 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 nine months of the current year were
$37.4 million compared to $27.5 million in the year ago
period. The increase in capital expenditures during the current
period reflects 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 fourth quarter
of fiscal 2008, management expects the pace of capital expenditures to increase
in order to support future growth, and anticipates full year fiscal 2008 capital
spending in the range to $40 to $45 million. 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 nine months of fiscal year 2008, DeVry executed sale leaseback
transactions which resulted in the receipt of total sales proceeds of $52.6
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.
Cash
outflows relating to the purchase of businesses was $27.6 million in the first
nine months of fiscal year 2008. On October 31, 2007, DeVry acquired
Advanced Academics Inc., a leading online provider of secondary education, for
$27.5 million in cash.
During
the current year period, DeVry purchased $246.3 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 period, DeVry
sold $184.9 million of such securities.
Cash used in Financing
Activities
During
the first nine months of fiscal year 2008, DeVry repurchased, on the open
market, 465,100 shares of its common stock at a total cost of approximately
$20.2 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 $4.3 million as
of March 31, 2008. In April 2008, DeVry completed this repurchase
plan with the repurchase of an additional 87,826 shares of its common stock for
approximately $4.3 million. Cash dividends paid during the first nine
months of the current fiscal year were $7.8 million.
DeVry’s
Board of Directors declared a dividend on November 7, 2007 of $0.06 per share to
common stockholders of record as of December 14, 2007. The dividend
was paid on January 4, 2008.
Other Contractual
Arrangements
DeVry’s
only long-term contractual obligations consist of its $175 million revolving
credit facility, operating leases on facilities and equipment, and agreements
for various services. DeVry has the option to expand the revolving credit
facility to $275 million. At March 31, 2008, there were no outstanding
borrowings nor any required payments under DeVry’s revolving credit
agreement. DeVry Inc. letters of credit outstanding under the
revolving credit facility were approximately $4.3 million, $2.0 million and $2.0
million as of March 31, 2008, June 30, 2007 and March 31, 2007,
respectively.
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 March 31, 2008 was approximately $107.2
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. In February 2008, the
FASB deferred the effective date of SFAS 157 for one year for all non financial
assets and non financial liabilities except for those items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at
least annually). 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.
SFAS 141R
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, “Business Combinations” (“SFAS 141R”). SFAS 141R retains the
fundamental requirements of Statement of Financial Accounting Standards
No. 141 (“SFAS 141”) that the acquisition method of accounting be used for
all business combinations. SFAS 141R
also retains the guidance in SFAS 141 for identifying and recognizing intangible
assets separately from goodwill. The new accounting requirements of
SFAS 141R will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in subsequent
periods. For DeVry, SFAS 141R is effective beginning in fiscal year
2010 and will impact the accounting for any acquisitions DeVry may complete
beginning in that fiscal year.
SFAS 160
In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB number 51” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards to improve the relevance, comparability and transparency of
the financial information provided in a company’s financial statements as it
relates to minority interests in the equity of a subsidiary. These
minority interests
will be recharacterized as noncontrolling interests and classified as a
component of equity. For DeVry, SFAS 160 is effective beginning in fiscal
year 2010. DeVry does not expect that the adoption of SFAS 160 will
have a material impact on its consolidated financial statements as all current
subsidiaries are wholly owned.
SFAS 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities, An amendment
to FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced
disclosures about an entity’s derivative and hedging activities and thereby
improves the transparency of financial reporting. For DeVry, SFAS
161 is effective beginning in the third quarter of fiscal year
2009. The adoption of SFAS 161 is not expected to have a material
impact on DeVry’s consolidated financial statements as DeVry does not currently
maintain derivative instruments or engage in hedging activities.
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 approximately 2.0%
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 borrowings of
$50.0 million, a 1.0% increase in short-term interest rates would result in
approximately $0.5 million of additional annual interest expense. At March
31, 2008, 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 third 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
and investigations 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
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. In two Orders dated October 9, 2007, and December 31,
2007, the District Court entered judgment dismissing all
of plaintiffs ’ class and individual claims and awarded DeVry
its cost of suit. Plaintiffs filed a Notice signifying their intent
to appeal the dismissal to the U.S. Court of Appeals for the Ninth
Circuit. DeVry intends to vigorously defend itself with respect to
this claim.
The
ultimate outcome of pending litigation and other proceedings, reviews,
investigations and contingencies is difficult to estimate. At this time, DeVry
does not expect that the outcome of any such matter, including the litigation
described above, 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
|
|
January
2008
|
|
|
31,500 |
|
|
$ |
54.34 |
|
|
|
31,500 |
|
|
$ |
12,568,125 |
|
February
2008
|
|
|
82,500 |
|
|
$ |
47.45 |
|
|
|
82,500 |
|
|
|
8,653,800 |
|
March
2008
|
|
|
100,000 |
|
|
$ |
43.93 |
|
|
|
100,000 |
|
|
|
4,260,561 |
|
Total
|
|
|
214,000 |
|
|
$ |
46.82 |
|
|
|
214,000 |
|
|
$ |
4,260,561 |
|
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 approximately $4.3 million as of March 31,
2008. In April 2008, DeVry completed this repurchase plan with the
repurchase of an additional 87,826 shares of its common stock for approximately
$4.3 million. 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
|
|
January
2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
N/A |
|
|
|
N/A |
|
February
2008
|
|
|
6,447 |
|
|
$ |
51.44 |
|
|
|
N/A |
|
|
|
N/A |
|
March
2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
N/A |
|
|
|
N/A |
|
Total
|
|
|
6,447 |
|
|
$ |
51.44 |
|
|
|
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:
May 12, 2008
|
By
|
/s/ Daniel M.
Hamburger
|
|
|
Daniel
M. Hamburger
|
|
|
Chief
Executive Officer
|
|
|
|
Date:
May 12, 2008
|
By
|
/s/ Richard M.
Gunst
|
|
|
Richard
M. Gunst
|
|
|
Senior
Vice President and Chief
|
|
|
Financial
Officer
|