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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended: JUNE 30, 1996
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Commission file number: 0-12751
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DeVRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3150143
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER LANE, SUITE 1000, OAKBROOK TERRACE, ILLINOIS 60181
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number; including area code: (630) 571-7700
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Securities registered pursuant to section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
SEPTEMBER 1, 1996 - $567,103,500
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State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The market value was computed using the
closing sale price of the common stock on the date indicated. Shares of
common stock held directly or controlled by each director and executive
officer have been excluded in that such persons may be deemed to be affiliates.
SEPTEMBER 1, 1996 - 16,623,212 shares of common stock, $0.01 par value
- -------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents incorporated by reference and the Part of
the Form 10-K (e.g. Part I, Part II, etc.) into which the document is
incorporated:
Certain portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on November 19, 1996, are incorporated into
Part III of this Form 10-K to the extent stated herein.
Exhibit Index located on Pages 71-72 Total number of pages, 241
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DeVRY INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1996
TABLE OF CONTENTS
PAGE #
PART I ------
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Item 1 - Business 3
Item 2 - Properties 29
Item 3 - Legal Proceedings 32
Item 4 - Submission of Matters to a Vote of Security Holders 33
- Executive Officers 34
PART II
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Item 5 - Market for Common Equity
and Related Stockholder Matters 37
Item 6 - Selected Financial Data 38
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 38
Item 8 - Financial Statements and Supplementary Data 47
Item 9 - Changes in and Disagreements with Accountants 64
PART III
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Item 10 - Directors and Executive Officers 65
Item 11 - Executive Compensation 65
Item 12 - Security Ownership of Beneficial Owners and Management 65
Item 13 - Certain Relationships and Transactions 65
PART IV
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Item 14 - Exhibits, Financial Statements and Reports on Form 8-K 66
- Financial Statements 66
- Financial Statement Schedules 66
- Exhibits 66
- Reports on Form 8-K 66
- Signatures 68-69
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PART I
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ITEM 1 - BUSINESS
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DeVry Inc. (the "Company") is incorporated under the laws of the State of
Delaware. Founded in 1973, the Company acquired the DeVry Institutes ("Old
DeVry") in August 1987, which were then operating as an 85% owned
subsidiary of Bell & Howell Co. with the remaining 15% being held by public
stockholders. The Company, through its wholly-owned subsidiary, Keller
Graduate School of Management, Inc. (the "Operating Subsidiary"), owns and
operates the DeVry Institutes of Technology (the "DeVry Institutes") and
the Keller Graduate School of Management ("KGSM") which collectively form
one of the largest private, degree-granting, regionally accredited higher
education systems in North America, and Corporate Educational Services
("CES"), a provider of customized, on-site technical education and training
services to corporations and government agencies. The Company also owns
and operates the Becker CPA Review which prepares candidates to pass the
Certified Public Accountant ("CPA") and Certified Management Accountant
("CMA") professional certification examinations.
The DeVry Institutes were founded in 1931 by Dr. Herman DeVry and have
provided career-oriented technical education to high school graduates in
the United States and Canada for more than 60 years. The first DeVry
Institute was opened in Chicago in 1931 as an electronics school. By 1967,
the DeVry Institutes consisted of one school in Chicago and one in Toronto.
Today, the DeVry Institutes are located on ten campuses in the United
States and four campuses in Canada.
Originally offering only programs in electronics, DeVry introduced the
computer information systems curriculum in 1979. As the number of high
school graduates in the U.S. declined during the 1980s, the DeVry
Institutes expanded their program offerings and delivery schedule into the
evening hours to serve larger numbers of working adults. In the summer of
1986, a bachelor's degree program in business operations was introduced.
That fall, the DeVry Institutes introduced the telecommunications
management program, followed by the introduction of an accounting program
in the spring of 1988.
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In 1991, the DeVry Institutes initiated a facility improvement and
expansion program to attract and retain an increased student enrollment.
The Atlanta DeVry Institute completed a renovation and expansion for the
fall 1992 term. In October 1992, the Lombard DeVry Institute was relocated
to a larger facility in Addison, Illinois. In October 1993, the Dallas
DeVry Institute was relocated to a larger facility in North Irving, Texas,
and the City of Industry DeVry Institute was relocated to a larger facility
in Pomona, California. The North York (Toronto), Ontario, Canada, DeVry
Institute expanded its capacity in the fall of 1992 and again in the fall
of 1993 by renovating and leasing additional space at its current location.
The Calgary, Alberta, Canada, DeVry Institute also expanded in the fall of
1993 by leasing additional space. In July 1994, a school was opened in
Scarborough (Toronto), Ontario, Canada, as a satellite branch of the school
in North York and in November 1994 a school was opened in Long Beach,
California. The Scarborough (Toronto), Canada, DeVry Institute was
expanded by the lease of additional space for the fall 1994 term and
expanded again by the lease of additional space for the summer 1995 term.
In June 1996, the Woodbridge, New Jersey, Institute was relocated to a new
and larger company-owned facility in North Brunswick, New Jersey, in
preparation for the summer term. In July 1996, a school was opened in
Mississagua (Toronto), Ontario, Canada, as a second satellite branch of the
school in North York (Toronto).
At the beginning of the spring 1996 semester, which is the final semester
in the Company's 1996 fiscal year, approximately 28,150 full and part-time
students were enrolled in the DeVry Institutes' diploma, associate and
bachelor's degree day and evening programs in electronics, electronics
engineering technology, computer information systems, accounting, business
operations, technical management and telecommunications management.
Cumulatively, total student enrollment for the three semesters of fiscal
1996 increased by 8.6% compared with fiscal 1995. In response to the
expansions and improvements initiated in the past several years, fiscal
1996 marks the fifth consecutive year that total cumulative enrollment has
increased from the prior year. The DeVry Institutes' operations accounted
for approximately 93% of the Company's revenues in 1996.
5
Classes began on July 15th for the summer 1996 semester. At the Atlanta
Institute, however, the class start was postponed until August 12th to
avoid interference with the summer Olympics activity. In this first
semester in the Company's 1997 fiscal year, a total of 27,600 students were
enrolled in the DeVry Institutes' programs, a 4.6% increase from the number
of students enrolled in the summer term last year. This was the
seventeenth consecutive term in which total enrollments exceeded the prior
year level. Historically, the summer semester has been the period of
lowest enrollment during the year.
After declining through much of the 1980's and stabilizing in the early
1990's, the number of high school graduates, which represents a substantial
portion of the DeVry Institutes' new student enrollment each year, is
projected by the U.S. Department of Education to increase without
interruption by more than 20% from a low of 2,482,000 in 1992 to over
3,000,000 by the year 2004. In addition, the Department of Education's
National Center for Education Statistics found that in 1994, 62% of high
school graduates (ages 16-24) went directly to college, up from 51% in
1975.
Recent data from the U.S. Department of Education also indicates that more
than one third of U.S. undergraduate students are 25 years of age or older
and that these older students will continue to be a significant portion of
college enrollments in the coming years. The Company estimates that
approximately 40% of the students enrolled at its DeVry Institutes are 25
years of age or older. To attract the growing number of adults returning
to college, the DeVry Institutes introduced a bachelor of science degree
completion program in technical management which focuses on business and
management skills vital to career advancement for students who already have
an associate degree. Over 20% of recent new students enrolled at the DeVry
Institutes had some prior college experience. Programs are also being
offered on weekends in some locations to serve the working adult. To
better serve the working adult student, DeVry is currently developing a
weekend Computer Information Systems curriculum with a shorter term length
and time to completion. While this program will be an intensive and
demanding experience for students, it will enable them to fulfill their
other responsibilities during the normal work week while still completing
this program in a relatively short period of time on weekends.
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Each of the DeVry Institute programs is designed to integrate general
education and technology or business. DeVry's general education courses
develop skills and competencies that help graduates enhance both their
professional and personal capabilities. Laboratory courses throughout each
curriculum provide the opportunity to translate classroom learning into a
practical, hands-on experience that better prepares the student for the
workplace.
More than 80% of DeVry's U.S. Institute regular faculty hold advanced
academic degrees. The annual U.S. average DeVry faculty compensation is
practically identical to the $48,500 average salary of faculty members at
state-supported four year institutions, as reported in a recent study by
the College and University Personnel Association.
To facilitate student success, DeVry devotes significant amounts of
resources in the form of learning resource centers and academic support
services which can assist students in any phase of their educational
program. In addition, the DeVry Institutes encourage students to
participate in campus activities and offer a student success strategies
course aimed at preparing students to assume responsibility for their
learning and growth through practical strategies and methods for realizing
success.
KGSM was founded in 1973 to offer a practitioner-based graduate management
program leading to the Master of Business Administration ("MBA") degree.
In 1991 and 1993, respectively, KGSM introduced a Master of Project
Management ("MPM") and a Master of Human Resource Management ("MHRM")
degree program. In September 1995, KGSM began offering a Health Services
Management ("HSM") concentration within its MBA program. The HSM
concentration includes five health services management courses within the
16 course MBA curriculum. This program is being offered in response to the
growing demands of the health services industry professionals or
professionals in related fields such as the insurance or pharmaceutical
industries.
KGSM emphasizes a practitioner orientation, excellence in teaching and
service to working adults, offering classes in the evenings and on
weekends. From a base of six sites in Illinois and Wisconsin in 1987,
7
classes are now offered at nineteen locations nationwide. KGSM operates
five of its teaching sites on DeVry Institute campuses in Arizona,
California, Georgia and Missouri.
KGSM faculty members are practicing professionals who bring their expertise
to the classroom, emphasizing theory and practices that will best serve
students in their work as managers. Critical competencies in areas such as
business communications, technology, quality and international issues are
woven throughout the curricula. KGSM's curricula are regularly reviewed
for relevance to both students and employers through advisory councils
composed of representatives of distinction and achievement in business and
community affairs.
At the start of the June term, which falls primarily in the Company's 1997
fiscal year, enrollment at KGSM was 2,601, an increase of 462 students or
21.6% from the previous June. Historically, the summer term has been the
period of lowest enrollment during the year.
At the start of the summer 1996 semester, which is the first semester in
the Company's 1997 fiscal year, a combined total of approximately 30,201
full and part-time students were enrolled in the Company's DeVry and KGSM
educational programs, up 5.9% from a total of 28,513 full and part-time
students in the summer 1995 semester.
To serve what the Company believes is a large and growing need for employee
training, the Corporate Educational Services division was created in 1991.
This division offers customized professional services and training in
business, project management, electronics and telecommunications.
Conducted at customers' sites, CES programs emphasize the direct, practical
application of business concepts, techniques and skills. The operations of
CES have been aligned with KGSM, allowing CES to utilize the academic and
operational infrastructure of KGSM's national system and to better link its
clients to one of the largest applications-based education and training
organizations in North America. Corporate Educational Services draws on
the faculty, staff and curriculum resources of the DeVry and KGSM systems
as needed.
8
In June 1996, the Company acquired the Becker CPA Review (Becker). Becker
is a leading international training firm preparing students to take the
national Certified Public Accountant (CPA) exam and Certified Management
Accountant (CMA) exam. Becker, which is headquartered in Los Angeles,
offers classes at approximately 135 locations in the United States and at
eight locations in the Middle East, Pacific Rim and Canada. Becker's
proprietary course materials and teaching methods result in pass rates on
the CPA exam for Becker students that are approximately double the national
average pass rate. More than one-third of all students passing the CPA
exam are Becker CPA Review alumni which now number over 200,000 since the
course was founded in 1957.
The amounts of revenue, earnings before interest and taxes and identifiable
assets of the Company's U.S. and foreign operations are included in Note 9
to the Consolidated Financial Statements, Operations by Geographic Area.
Competition
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The postsecondary education market, composed of approximately 7,000
universities, colleges and schools, is highly fragmented and competitive
with no single institution having a significant market share. The Company
believes that it is one of the largest private, degree-granting, regionally
accredited, higher education school systems in North America. The DeVry
Institutes compete with traditional publicly supported and independent two-
year and four-year colleges, other for-profit schools and alternatives to
higher education, such as employment and military service. Publicly
supported colleges may offer programs similar to those of the DeVry
Institutes at a lower tuition level due to government subsidies, government
and foundation grants, tax-deductible contributions and other financial
sources not available to for-profit schools. Tuition at independent not-
for-profit institutions is, on average, higher than the tuition at the
DeVry Institutes. Other for-profit schools offer programs that compete, to
a limited extent, with those of the DeVry Institutes. According to Company
surveys of prospective students, the most common alternative to attending a
DeVry Institute is attending a four-year college. Other frequently cited
alternatives are keeping or seeking a full-time job, attending another
career-oriented school or joining the military.
9
The DeVry Institutes believe their competitive strengths include career-
oriented curricula developed with regular structured employer input,
faculty with related industry experience, the demonstrated effectiveness of
their career services activities, their national brand name, market
presence and student recruitment organization, the accreditations granted
to the DeVry Institutes, authorization by various states to grant degrees,
modern facilities, well-equipped laboratories and a trimester schedule that
allows attendance year-round, thereby permitting earlier graduation. Only
a limited number of traditional colleges offer a bachelor's degree program
which can be completed in three years.
At the DeVry Institutes, classes are generally offered in morning,
afternoon or evening sessions which help students maintain a part-time job.
This availability of part-time employment and government-provided financial
aid partially offsets the competitive advantage of those schools with lower
tuition levels. Each curriculum is generally the same at all of the DeVry
Institutes, permitting students to transfer, if necessary, to another DeVry
Institute at a different location without interrupting their studies.
Institutions that participate in Title IV financial aid programs must now,
upon request, begin to disclose information about student completion rates
to current and prospective students. Completion rates at each of the U.S.
DeVry Institutes fall within the range of completion rates for selected
urban public colleges in the areas in which that DeVry Institute operates
as published by U.S. News and World Report, 1996 America's Best Colleges.
KGSM competes with other MBA programs offered in all markets in which it
has operations. In the Chicago area, there are over 20 MBA programs today.
Nationwide there are more than 700 graduate business programs. Competition
with KGSM's MHRM program varies by the market area in which it is offered
but is generally more moderate than competition for the MBA program. KGSM
is one of only a few schools in the country offering a master's degree in
project management but increasing interest in this field is beginning to
attract similar offerings.
KGSM differentiates itself in the marketplace by stressing a practitioner
approach to education, excellence in teaching by a faculty of practicing
professionals and a high level of service to the adult student. To help
10
its students master the skills they need to succeed on the job, KGSM
introduced an innovative teaching technique called System Supported
Teaching and Learning (SSTL)TM that incorporates frequent feedback and
mastery learning.
KGSM offers five 10-week terms each year. Courses meet once a week, either
in the evening or on Saturday. This schedule allows students with heavy
travel or other demands on their time to fit courses into their schedules.
In addition, in most markets KGSM is able to offer greater flexibility in
course scheduling, a greater choice of elective courses and a more
convenient location than its competitors. As the market for adult
education programs has expanded in recent years, other schools have
implemented multi-location evening programs. However, enrollments at KGSM
continue to increase, demonstrating the recognition it has earned as an
innovator in providing quality practical education.
With educational centers in seven states, KGSM also offers distributed
access points throughout the country to adults who may be transferred from
one part of the country to another by their employer or who capitalize upon
personal career opportunities in other locations.
Corporate Educational Services competes with individual consultants,
colleges, industry associations, other training companies and the internal
training departments of many large potential corporate customers and
government agencies. CES, utilizing KGSM's national system, and drawing on
the DeVry Institutes, differentiates itself in the marketplace through the
applied curriculum expertise of both KGSM and DeVry, particularly in the
areas of project management, electronics and telecommunications. Materials
are derived from the proven instructional success in these topics at the
DeVry Institutes and KGSM, modified as necessary using the academic
resources of both.
Becker competes with CPA exam preparation through self-study, with courses
offered by colleges and universities and with other training companies,
most of which operate on a local or regional basis, although at least one
training company competitor operates nationally. Courses offered by
competitors generally have a lower total course cost to help attract
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students. Becker differentiates itself from its competitors by providing
more classroom hours of instruction, extensive and constantly updated
review and practice test materials and experienced, qualified instructors
for each area of specialty included in the exam. The high success rate of
students who take the Becker review course and the numbers of students
enrolling after taking other review courses but not passing the CPA exam is
testimony to the quality and value of the Becker methodology.
Student Recruiting
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Students at the DeVry Institutes are recruited by admissions
representatives at on-campus admissions offices and by field student
recruiters. Field student recruiters are an important nationwide element
of the recruiting process because a significant portion of the DeVry
Institutes' students come from outside the immediate area in which the
DeVry Institute campus they attend is located. The percentage of
enrollment coming from these two recruiting sources varies campus by
campus, but is predicated largely on each school's location. Overall,
admissions representatives currently generate over 2/3 of the DeVry
Institutes' total enrollments. The DeVry Institutes employ approximately
350 admissions and field representatives throughout the United States and
Canada. In order to recruit students in certain states and Canadian
provinces, representatives must be licensed or authorized by the
appropriate regulatory agency. Regulations governing student participation
in federal financial assistance programs prohibit an institution from
paying a commission, bonus or incentive to the Company's student recruiters
based upon their success in securing enrollments. The Company believes
that its method of recruiter compensation complies with the regulations.
The admissions representatives are salaried, full-time company employees.
They are located at each DeVry campus and work with students who respond to
the Company's advertising or otherwise learn of the school. Admissions
representatives generally work with older students, many of them working
adults wanting to attend class in the evening, recently unemployed adults
seeking to improve their job skills as a way to re-enter the workforce and
12
students transferring to DeVry from nearby junior colleges. Each DeVry
Institute has entered into articulation agreements with nearby community
colleges to facilitate the enrollment of their students seeking to transfer
course credits into a DeVry program.
Field student recruiters meet individually with prospective students who
are contacted primarily through high school, club and youth group
presentations. These student recruiters visited over 10,000 high schools
in North America last year, making presentations on career choices and the
importance of a college education. Field recruiters also receive student
inquiries generated by direct mail and television advertising in the
particular recruiter's territory. Follow-up interview sessions with
prospective students are generally held in the student's home with the
student and his or her parents. The continued downsizing of the U.S.
military and recent base closings also presents recruiting opportunities.
Veterans with military-specific technical training are attracted to DeVry's
practical career-oriented education. Although a veteran may be recruited
at his mustering-out base, DeVry's locations across the U.S. are often near
the home area to which the veteran will relocate. Numerous new students
with V.A. benefits have enrolled at the DeVry Institutes over the past
several years. Field student recruiters are salaried, full-time company
employees who are trained by both field managers and headquarters-based
staff.
In support of its recruiting force, the DeVry Institutes advertise on
television and radio, in magazines and newspapers, and utilize
telemarketing and direct mail to reach prospective students. Prospective
students are also frequently referred by their employers, alumni or
currently enrolled students. In addition to the more traditional
recruiting methods, DeVry's new Internet site provides another avenue for
students to receive information and apply for admission.
To be admitted to a DeVry program, an applicant must be a high school
graduate, have a General Education Development (GED) certificate or hold a
degree from an accredited postsecondary institution. Applicants must also
meet minimum entrance examination scores which vary depending on the
program to which they are applying. In 1996, the DeVry Institutes
implemented a Computerized Placement Test designed in collaboration with
13
The College Board and Educational Testing Service. This exam helps DeVry
better serve the needs of its students by allowing DeVry to assess
students' achievement levels and developmental needs during the admission
process.
KGSM recruits students through direct mail, radio advertising,
telemarketing, print advertising and referrals from employers, alumni or
current students. KGSM employs on-campus admissions representatives at
each teaching center who meet with, counsel and evaluate admission
qualifications of prospective students. To be admitted to a KGSM program,
applicants must hold a baccalaureate degree from a regionally accredited
institution. Applicants must also achieve acceptable scores on either the
Graduate Management Admission Test (GMAT), the Graduate Record Examination
(GRE) or KGSM's alternative admission test.
Becker CPA Review markets its courses directly to potential students and to
some of their employers, e.g. Big Six accounting firms. Alumni referrals,
direct mail, print advertising and a network of on-campus recruiters at
colleges and universities across the country all generate the new students
who take the CPA or CMA review courses, which are offered twice each year.
Becker also enrolls many students who have previously completed a
competitor's course or a self-study program but were unable to pass the
exam.
Accreditation and Approvals
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Accreditation is a process for recognizing educational institutions and the
professional programs offered by those institutions for a level of quality
that entitles them to the confidence of the educational community and the
public they serve. In the United States, this recognition is extended
primarily through nongovernmental, voluntary, regional or specialized
accrediting associations. Accredited institutions are subject to periodic
review by accrediting bodies to ensure that these institutions maintain the
level of performance, evidence institutional and program improvement,
demonstrate integrity and fulfill requirements established by the
accrediting body.
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Although regional accreditation in the United States is a voluntary process
designed to promote educational quality and improvement, it is an important
strength of the DeVry Institutes, providing significant advantages over
most other for-profit colleges. College and university administrators
depend on the accredited status of an institution in evaluating transfers
of credit and applications to graduate schools. Employers rely on the
accredited status of an institution when evaluating a candidate's
credentials, and parents and high school counselors look to accreditation
for assurance that an institution meets quality educational standards.
Moreover, accreditation is necessary for students to qualify for
eligibility for federal financial assistance. Also, most scholarship
commissions restrict their awards to students attending accredited
institutions.
DeVry Institutes and KGSM are accredited by the Commission on Institutions
of Higher Education of the North Central Association of Colleges and
Schools, the same accrediting agency that accredits other four-year
publicly supported and independent colleges and universities in the North
Central region. The DeVry Institutes and KGSM accreditations were last
reaffirmed by the North Central Commission in 1992 for the maximum ten year
period. An interim progress monitoring visit is scheduled for the DeVry
Institutes in May of 1997.
Accreditations of the DeVry Institutes and KGSM in the United States and of
the DeVry Institutes in Canada are as follows:
UNITED STATES CANADA
- ----------------------------------- ----------------------------------
Commission on Institutions of Ontario Association of Certified
Higher Education of the North Engineering Technicians and
Central Association of Colleges and Technologists (DeVry/Toronto area
Schools campuses' Electronics Engineering
Technology and Electronics
Technology Accreditation Commission Engineering Technician programs)
of the Accreditation Board for
Engineering and Technology (DeVry's Alberta Society of Engineering
Electronics Engineering Technology Technologists (DeVry/Calgary's
Bachelor of Science Degree program Electronics Engineering Technology
and, at the New Jersey campus, the and Electronics Engineering
Electronics Engineering Technology Technician programs)
Associate in Applied Science Degree
program.)
- ----------------------------------- ----------------------------------
15
In the United States, each DeVry Institute is approved to grant associate
and bachelor's degrees by the respective state where it is located. In New
Jersey, however, authorization is only at the associate degree level for
three programs - electronics engineering technology, computer information
systems and telecommunications management. Students at the DeVry
Institute, North Brunswick, are encouraged, upon completion of their
associate's degree, to transfer to other DeVry Institutes to complete
bachelor's degree requirements.
In June 1996, the New York Board of Regents Commission on Higher and
Professional Education voted to grant permission to establish a DeVry
Institute of Technology campus in the New York City area with authority to
grant certain bachelor and associate degrees. The Company has begun a
search for an appropriate facility for this campus.
Under current Canadian law, the Canadian DeVry Institutes are not permitted
to grant degrees. However, students at the Canadian Institutes are allowed
to transfer to DeVry Institutes in the U.S. to complete their degree
requirements. In 1995, the Alberta Department of Advanced Education, the
State of Arizona and the Commission on Institutions of Higher Education of
the North Central Association of Colleges and Schools approved the DeVry
Institute in Phoenix to offer its bachelor of science degree-completion
program on the Calgary campus. This allows students attending classes at
the Calgary campus to complete their degree studies without relocating to a
campus in the United States.
KGSM is authorized to operate and award degrees under authority of the
Illinois Board of Higher Education, Georgia Nonpublic Postsecondary
Education Commission, Wisconsin Educational Approval Board, Arizona State
Board for Private Postsecondary Education, Missouri Coordinating Board for
Higher Education and the California Council for Private Postsecondary and
Vocational Education. The Virginia Council of Higher Education has granted
conditional approval to KGSM to offer two of its master's degree programs.
16
State and Provincial Approval and Licensing
- -------------------------------------------
Authorizations from state or provincial licensing agencies or ministries
are required to recruit students, operate the Company's schools and grant
degrees. Many states and provinces require for-profit postsecondary
education institutions to post surety bonds for licensure. The Company has
posted approximately $4 million of surety bonds with state and local
regulatory authorities and approximately $1 million (CDN) of surety bonds
with regulatory agencies in Canada and believes it is currently in
compliance with all state and provincial regulations. Certain states have
set standards of financial responsibility beyond those prescribed by
federal regulation. For example, fiscal tests adopted by the California
legislature (as discussed more fully below) and similar regulations adopted
or proposed by other state regulators may place the Company in future non-
compliance under certain state regulations. If the Company were unable to
meet these tests and could not otherwise demonstrate that it was
financially responsible, it could be required to cease operations in that
state. To date, the Company has successfully demonstrated its financial
responsibility where required.
In January 1991, the state of the California adopted legislation that
requires private, postsecondary education institutions to meet certain
fiscal tests in order to continue operating in the state. These fiscal
tests include three requirements; not having an operating loss in each of
an institution's two most recent fiscal years; having positive net worth in
its latest fiscal year; and maintaining a ratio of current assets to
current liabilities of 1.25:1 or greater. The Company has achieved two of
the required fiscal tests but has not maintained the ratio of current
assets to liabilities of 1.25:1 which the Company believes is an
inefficient use of its assets. At June 30, 1996, the Company had a ratio
of current assets to current liabilities of 1.17:1. The California Council
for Private Postsecondary and Vocational Education also has discretion
under this statute to allow an educational institution to continue
operating, even if it does not satisfy the financial tests, if the
institution can demonstrate that it has maintained sufficient financial
resources to sustain all of its promised educational services. At June 30,
1996, the Company believes that it has satisfactorily demonstrated its
financial strength and ability to continue to operate. California law also
requires an on-site visit to all postsecondary institutions having
17
accreditation from a regional accrediting association other than the
Western Association of Colleges and Schools. The California Council for
Private Postsecondary and Vocational Education conducted a visit of the
California campuses in August. Their report has not yet been issued.
Tuition and Fees
- ----------------
Effective with the spring 1996 term, the DeVry Institutes' tuition in the
United States for two semesters (one academic year) ranged from $6,580 to
$6,665, an increase of approximately 5.1% from last spring. Variations in
tuition depend on term of enrollment. Students enrolled on less than a
full time basis are charged somewhat lower tuition. For a student enrolled
in the DeVry Institute's 5 term electronics technician program, total
tuition cost would be $16,550. For a student enrolled in the 8 term
accounting program, total tuition cost would be $26,420. A national survey
of tuition released in the fall of 1995 by the College Board reported that
annual tuition and fee increases adopted by publicly supported and
independent four-year institutions averaged 6% for the 1995-96 academic
year. Tuition in Canada was increased to $6,020 (CDN) for the two semester
period, an increase of approximately 5.1% from last spring.
Effective with the September 1996 term, KGSM tuition per course (four
quarter credit hours) ranges from $905 to $1,110, depending on the state in
which the student is enrolled. This compares to tuition rates from $855 to
$1,050 last year.
In addition to the tuition amounts described above, students at the DeVry
Institutes and KGSM must purchase textbooks and supplies as part of their
educational program.
If a student leaves school prior to completing a term, federal, state and
provincial regulations and accreditation criteria permit the Company to
retain only a set percentage of the total tuition received from such
student, which varies with, but generally equals or exceeds, the percentage
of the term completed by such student. Amounts received by the Company in
excess of such set percentage of tuition are refunded to the student or the
appropriate funding source.
18
Financial Aid and Financing Student Education
- ---------------------------------------------
Students attending the DeVry Institutes finance their education through a
combination of family contributions, individual resources (including
earnings from full or part-time employment), financial aid (including
Company-provided financial aid) and tuition reimbursement from their
employers. The recent restoration of tax exemption for undergraduate
education employer tuition reimbursement will be of benefit to DeVry
students, mainly those working adults attending its part-time evening
programs, who receive partial or full tuition reimbursement.
The Company believes that approximately 79% of the U.S. DeVry Institutes'
students receive some government-sponsored financial aid and that a similar
percentage of the students attending the Canadian DeVry Institutes receive
some government-sponsored financial assistance. The Company believes that
between 10% and 15% of KGSM's students receive government-sponsored
financial aid. In addition, a substantial number of KGSM students receive
tuition reimbursement from their employers.
Students attending the Becker CPA or CMA review courses are not eligible
for financial aid but many of them receive part or full tuition
reimbursement from their employers.
The DeVry Institutes assist their undergraduate students in locating part-
time employment. Data from the National Center for Education Statistics
indicates that in 1993, almost half of all full-time college students
between the ages of 16 and 24 were employed. The Company believes that a
substantially greater percentage of its full-time students are employed to
help finance their costs of education. On the basis of a financial aid
application completed by the student and the student's family, the DeVry
Institutes develop an assistance package for students who require financial
aid. Government-sponsored financial aid is of great importance to the
Company because approximately 68% of the DeVry Institutes' U.S. tuition,
book and fee revenues collected in 1996 were dependent on some form of such
financial aid received by its students. In 1995, approximately 69% of
revenues collected were dependent on financial aid.
The government-provided financial aid and assistance programs in which many
of the Company's students participate are subject to political and
budgetary considerations. There is no assurance that government funding
19
for the financial aid programs in which the Company's students participate
will be maintained at current levels. A reduction in funding levels to
financial aid programs could result in lower enrollments or an increased
amount of Company-provided financial aid to its students. Budgetary
proposals currently circulating in this election year include President
Clinton's tax deduction of up to $10,000 per year for the cost of college
or vocational training, a $1,500 tax credit for full-time students and
increasing the maximum amount of the Pell Grant to $2,700 from its current
level of $2,470. Dole's tax cut proposals include a $500 per child per
year tax credit for funds deposited into an "IRA-like" account which can be
used for college or other post-secondary education costs.
Extensive and complex regulations in the U.S. and Canada govern all of the
government grant, loan and work programs in which the Company and its
students participate. Regulations and standards that an institution must
satisfy in order for its students to participate in federal financial
assistance programs include, among others, maximum student loan default
rates; limits on the proportion of an institution's revenue that can be
derived from federal aid programs; financial responsibility and
administrative capability requirements; and prohibition of certain types of
incentive payments to student recruiters. At June 30, 1996, the Company
achieved an operating profit, positive net worth, a "quick ratio" (cash
plus accounts receivable to all current liabilities) of more than 1:1 and
maintained the required cash reserve for the payment of refunds. This
fully satisfied the standards of financial responsibility established by
the U.S. Department of Education for participation in federal financial
assistance programs. Similarly, the Company fully satisfied the standards
of financial responsibility at June 30, 1995 and 1994. Failure to achieve
these standards or otherwise demonstrate, within the regulations, its
ability to continue to provide the educational services it offers could
result in the Company being required to post a surety bond to permit its
students to continue to participate in federal financial assistance
programs.
The Company maintains a staff at its Oakbrook Terrace headquarters to
review, interpret and establish procedures for compliance with these
regulations. Because financial assistance programs are required to be
administered in accordance with the standard of care and diligence of a
20
fiduciary, any regulatory violation could be the basis for the initiation
of a suspension, limitation or termination proceeding against the Company.
Changes in or new interpretations of applicable laws, rules or regulations
could have an adverse effect on the Company in the future.
In the United States, the Company has completed and submitted its required
audits of compliance with federal financial assistance programs for all
previous years and its independent accountants are currently conducting the
required audits of the one year period ending June 1996. In August, the
Department of Education undertook a site visit, as a part of its program of
periodic review of the administration of student financial assistance
programs, at the DeVry North Brunswick, New Jersey, campus. Although the
Company has no reason to believe that any proceeding against the Company is
presently contemplated, if such a proceeding were initiated against the
Company and resulted in a substantial curtailment of the Company's
participation in government grant or loan programs, the Company could be
adversely affected.
In Canada, DeVry's two Toronto-area schools were notified at the beginning
of September 1995 that the Ontario Ministry of Education and Training had
temporarily suspended the processing of new financial aid applications from
DeVry students pending review of inaccuracies found in applications filed
by some students.
The Ministry believed that some of DeVry's Toronto-area students applied
for and collected what may be excessive government-sponsored financial aid
by inappropriately reporting that they had zero income. A Ministry audit
of these applications, with DeVry's full cooperation, began in September
1995. In order to restore financial aid eligibility, the Company refunded
to the Ministry approximately CDN $1.6 million which the Company believes
is substantially all of the previous inappropriately disbursed financial
aid. In addition, the Company posted a letter of credit at the Ministry's
request against possible additional amounts that may have been
inappropriately disbursed. Effective with the spring term, which began in
March, the Ministry conditionally reinstated approval for the processing of
financial aid applications. Full unconditional reinstatement is subject to
the Ministry's completion of certain procedures regarding verification of
the Company's compliance with financial aid processing regulations.
21
The following is a description of the U.S. and Canadian financial aid
programs in which the Company's students participate.
United States Government Financial Aid Programs The following U.S.
Department of Education financial aid programs under Title IV of the Higher
Education Act are utilized by the Company's students in the United States:
(1) Federal Pell Grant ("Pell"), (2) Federal Supplemental Educational
Opportunity Grant ("SEOG"), (3) Federal Family Education Loan Program
("FFELP"), (4) Federal Perkins Direct Student Loan program ("Perkins"), (5)
Federal Work Study ("FWS") and (6) William D. Ford Federal Direct Student
Loan Program ("FDSL").
Grants are funds made available by the government to eligible students
who demonstrate financial need. Grants do not have to be repaid. The
Company's students are eligible to participate in the Pell and SEOG Grant
programs, which are programs for undergraduate students. Eligible
students receive a Pell grant ranging in amount from $400 to $2,470 per
year. SEOG is a supplement to the Pell grant, available to only the
neediest students because SEOG funds are limited in amount at each
institution based upon a federally determined formula. In addition to
these federal assistance funds, DeVry is required to make a 25%
institutional matching contribution of all SEOG funds disbursed. The
institutional matching contribution may be satisfied, in whole or in
part, by the DeVry scholarship funds, discussed separately in this
section, or by externally provided scholarship grants.
Loans Students at the DeVry Institutes participate in the Stafford and
PLUS programs within the FFELP and in the Perkins loan program. Stafford
loans may include an interest subsidy depending upon the financial need
of the student and loan repayment is scheduled to begin six months after
a student no longer attends school on at least a half-time basis. In
1996, over 80% of the financial aid received by students attending the
Company's U.S. DeVry Institutes was provided by federal student loans.
Students at KGSM participate in the FDSL.
In 1993, Congress passed legislation creating the new Direct Student Loan
Program. Under this program, students may complete all loan application
and processing steps at their educational institution. Besides the
22
benefit of one-stop processing, which can be done at the institution in
conjunction with the application for aid under other programs, this loan
program offers other benefits to student borrowers such as income-based
repayments, lower loan fees and lower loan interest rates. For the 1994-
95 school year, the DeVry DuPage Institute was one of only 104
institutions in the nation chosen by the Department of Education to pilot
the implementation. For the 1995-96 school year, four additional DeVry
Institutes and KGSM were chosen for participation. The U.S. Congress has
considered various proposals to eliminate this program or to cap loans
made under this program at some percentage of all federal student loans
until there is more experience with its success and realized cost
savings.
Work Study Work Study wages are 75% paid from federal funds and 25% from
qualified employer funds. Work opportunities, both on or off-campus,
under FWS are offered on a part-time basis by the U.S. DeVry Institutes
to undergraduate students who demonstrate financial need.
State Financial Aid Programs State grant assistance may be received by
eligible students attending DeVry Institutes in Arizona, California,
Georgia, Ohio and New Jersey.
Canadian Government Financial Aid Programs Canadian students, other than
students from Quebec, are eligible for loans under the Canada Student Loan
Plan, which is financed by the Canadian government but administered at the
provincial level. Canadian Student Loans are available to students who are
Canadian citizens or a permanent resident of Canada enrolled at approved
postsecondary institutions. Students from Quebec are eligible for loans
under the Quebec Student Loan Plan. The loans are interest-free while the
student is in school and repayment begins six months after the student
leaves school. All other forms of government financial aid in Canada, both
loans and grants, are financed and administered by the provinces.
"85/15 Rule" This U.S. Department of Education regulation affects only for-
profit postsecondary institutions, such as the Company. Under this rule,
students attending a for-profit institution that derives more than 85% of
its revenues from federal financial assistance programs in any year will
not be able to participate in these programs for the following year. This
23
rule, which was reported on for the first time for the Company's fiscal
1995, is commonly referred to as the "85/15 rule." In 1995, the U.S.
Institutes derived approximately 69% of their revenues from these defined
federal assistance programs. In 1996, the U.S. Institutes derived
approximately 68% of their revenues from these programs and no institute
within the DeVry system derived more than 78% of its revenues from these
programs. Each of the DeVry Institutes (except for the Long Beach,
California, Institute which currently operates as an additional location of
the Pomona, California, Institute) and KGSM are established as separate
institutions under the HEA provisions and must separately meet the criteria
for the "85/15 rule" and for loan default rates.
Company-Provided Financial Assistance The Company's EDUCARD Plan is
available to students attending the U.S. DeVry Institutes. The EDUCARD
Plan is an installment loan program designed to assist students unable to
completely cover educational costs with student and family contributions,
federal and state grants and loans. The installment loan feature of the
EDUCARD Plan is available to a student only after other student financial
assistance has been applied toward the payment of tuition, books and fees
and is available only for those purposes. Repayment of EDUCARD Plan
balances is worked out in accordance with the financial circumstances of
the particular student, but is typically on a monthly basis with all
balances required to be paid within 12 months following a students's
graduation or termination of study. The receivable balance related to
Company-provided financial aid at the U.S. DeVry Institutes at June 30,
1996, was approximately $10.8 million. Improved timeliness in financial
aid processing and the collection of student-owed balances, maintained this
receivable at approximately the same amount owed by students last year
under the EDUCARD Plan, although the number of enrolled students and
tuition revenues increased from last year. Amounts owed by students under
the EDUCARD Plan are subject to a monthly interest charge of 1% of the
average outstanding balance.
In addition to the student financial assistance provided by the EDUCARD
Plan, the DeVry Scholarship Competition annually offers merit-based
scholarships. The U.S. DeVry Institutes offered 30 full-tuition and 90
half-tuition scholarships to 1995/96 high school graduates. Each
scholarship covers the application fee and tuition for one of DeVry's
24
degree programs. The total value of these scholarships was over $2
million. Similar scholarship offers have been made to high school
graduates in previous years and are expected to be offered in the future.
To attract students who attend community or junior colleges, the U.S. DeVry
Institutes offered 36 half-tuition scholarships, valued at more than
$500,000, to students who graduated from an accredited community/junior
college in 1994 or later. In Canada, the DeVry Institutes offered 7 full-
tuition and 14 half-tuition scholarships valued at more than CDN $300,000
to high school graduates. The DeVry Institutes have also provided funds in
the form of institutional grants which help students most in need of
financial assistance.
Student Loan Defaults
- ---------------------
The Company believes that in 1996, federal student loans represented more
than 80% of the federal aid received by students at the U.S. DeVry
Institutes and 100% of the federal aid received by students at KGSM. For a
variety of reasons, high student loan default rates on federal student
loans are most often found in proprietary and minority institutions and
community colleges, all of which tend to have a higher percentage of low
income students enrolled than do four-year publicly supported and
independent colleges and universities. In 1989, the U.S. Department of
Education instituted strict regulations that penalize educational
institutions with high student loan default rates. These regulations were
further tightened by the 1992 Higher Education Reauthorization Act. Any
individual institution with a FFELP or FDSL cohort default rate exceeding
20% for the year is required to develop a default management plan in order
to reduce defaults, although the institution's operations and its students'
ability to utilize student loans are not restricted. Any individual
institution with a FFELP or FDSL cohort default rate of 25% or more for
three consecutive years is ineligible for participation in these loan
programs and cannot offer student loans administered by the U.S. Department
of Education for the fiscal year in which the ineligibility determination
is made and for the two succeeding fiscal years. In addition, effective
this fall is the added provision that students attending an institution
whose cohort default rate has exceeded 25% for three consecutive years will
be ineligible for Pell grants. Any institution with a FFELP or FDSL cohort
default rate of 40% or more in any year is subject to immediate limitation,
suspension or termination proceedings from all federal aid programs. No
25
DeVry Institute has ever had a FFELP or FDSL cohort default rate of 25% or
more for three consecutive years nor a cohort default rate of 40% or more
in any one year.
The Company carefully monitors its students' loan default rate. To help
reduce student loan default rates, the Department of Education requires
that all educational institutions wait 30 days before disbursing funds to
first-time, first-year undergraduates to prevent potential early-term
dropouts from defaulting on their loans. Students who leave school in the
early part of their educational program typically default on their loans at
a higher rate than those students who remain and complete the course.
Another significant factor in controlling student loan default rates is the
servicing and collection efforts by lenders and guaranty agencies. The
Company assists the efforts of these lenders and agencies by contacting its
students who are delinquent in their loan repayments and advising them of
their responsibilities and rights to deferments or collection forbearance
if they are eligible. According to preliminary reports by the U.S.
Department of Education, the Company's schools had FFELP student loan
default rates for 1994 (the latest year for which statistics are available)
ranging from 1.5% to 26.8%. The Company's preliminary system-wide FFELP
student loan default rate was reported at approximately 17.7%. The
reported rates for 1994 reflect the proportion of former students who were
due to begin repaying their loans during that year but who were in default
by the end of 1995. For 1993, the Company's system-wide FFELP cohort
default rate was 18.6%. Upon review of the calculations of these rates for
each Institute, the Company discovered numerous errors and exceptions. The
Company has filed an appeal with the Department of Education for the
recalculation of rates for both 1993 and 1994.
Only one DeVry Institute had a FFELP student loan default rate greater then
20% for 1994. That Institute, whose preliminary default rate was reported
at 26.8%, has initiated a default management plan and submitted it for
approval to the Department of Education. The Company believes that its
appeals should result in lower reported default rates and that the
Institutes can lower their default rates for future periods. Default rate
reduction initiatives are underway at each Institute. No DeVry Institute
is subject to any restrictions or termination under the student loan
program.
26
Students who attend the U.S. DeVry Institutes also participate in the
Federal Perkins loan program. This program provides low interest
educational loans to students who demonstrate exceptional need. Funding
for this program is provided, in part, by the Department of Education and,
in part, by the participating institution. As loans are repaid, the
principal and interest from these repayments is returned to the pool of
funds available for future loans to students at that institution. The
program, including the responsibility for collection of outstanding loans,
is administered by the institution. Any institution with a Perkins loan
cohort default rate exceeding 15% must establish a default reduction plan.
Any institution with a Perkins loan cohort default rate between 20% and 30%
will receive a reduced annual federal contribution to the program. If the
cohort default rate exceeds 30%, the institution will not receive any new
federal contribution to the program. However, new loans to eligible
students may continue to be made from the pool of funds created by monthly
repayments on previous loans. The DeVry Institutes reported Perkins loan
default rates for 1995 (the latest year for which statistics are available)
ranging from 15.6% to 34.0%. The U.S. DeVry Institutes system-wide Perkins
loan default rate was 25.9%. For 1994, the Perkins loan default rates
ranged from 10.8% to 27.0% and the U.S. DeVry Institutes system-wide
Perkins loan default rate was approximately 20.5%. A portion of the
increase in the 1995 default rates results from regulatory changes in the
default rate calculation which now includes as defaults some loans
previously considered to be not in default. For 1996, it is expected that
some of these calculation revisions will be rescinded. Student counseling
and additional collection efforts are being implemented to reduce these
default rates.
Career Services
- ---------------
The Company believes that the employment of its graduating students is
essential to its ability to attract new students. There were more than
45,600 graduates over the ten year period ending October 1995 who were
eligible for career services assistance (i.e. excluding graduates who
continued their education, students from foreign countries not legally
eligible to work in the U.S., etc.). Of the more than 43,000 graduates who
actively pursued employment or were already employed, 91.5% held positions
in their chosen fields within six months of graduation. Each Institute has
career services staff working with students in the areas of career choice
27
activity, resume preparation and job interviewing. The staff also
maintains contact with local and national employers to determine job
opportunities and arrange interviews.
The Company attempts to gather accurate data on the number of its graduates
employed in education related positions within six months following
graduation. To a large extent, the reliability of such data is dependent
on the information that graduates report to the Company.
Full and part-time U.S. degree and diploma program graduates for the three
classes which ended in calendar year 1995, and for the three classes which
ended in calendar year 1994, were employed in their chosen field within six
months of graduation, based on data reported to the DeVry Institutes, as
follows:
THE U.S. DEVRY INSTITUTES' GRADUATE EMPLOYMENT STATISTICS
---------------------------------------------------------
Percent of
Graduates
Who
Number of Actively
Graduates Pursued
Who Number of and
Actively Graduates Obtained
Pursued Employed Employment
Employment in and Those Percent
Number or Were Education Who were Of Net
of Net Already Related Already Graduates
Graduates(1) Employed(2) Positions Employed(2) Employed(1)
---------- --------- --------- --------- ---------
Calendar Year
1995 Graduating
Classes (2/95,
6/95, 10/95) 4,166 4,070 3,882 95.4% 93.2%
Calendar Year
1994 Graduating
Classes (2/94,
6/94, 10/94) 4,207 4,064 3,848 94.7% 91.5%
- ----------------------------
(1)Net graduates exclude students continuing their education,
students from foreign countries who are legally ineligible to work in
the United States and students ineligible for employment because of
extreme circumstances.
(2)Does not include students who actively pursued employment for less
than 6 months and did not obtain employment.
28
The majority of employers of the DeVry Institutes' graduates are in the
electronics or information processing industries. Management believes that
no single employer has hired more than 5% of the DeVry Institutes'
graduates in recent years. Major employers of the DeVry Institutes'
graduates include the following companies: Andersen Consulting Group,
Applied Materials, AT&T, Cellular One, Eastman Kodak Co., EDS, General
Electric Company, IBM, INTEL, Motorola Inc. and Sprint.
KGSM maintains a career services office to assist current and past
graduates. This office offers a full range of services designed to enhance
each individual's career development skills and is available to graduates,
at no charge, on a lifetime basis.
Seasonality
- -----------
The Company's business is somewhat seasonal. Highest enrollment and
revenues at the DeVry Institutes and KGSM typically occur during the fall
back-to-school period which corresponds to the second and third quarters of
the Company's fiscal year. Slightly lower enrollment is experienced in the
spring and the lowest enrollment occurs during the summer months. Becker
experiences higher enrollments for its courses beginning in June and July
leading to the fall CPA exam.
Results of operations reflect this seasonal enrollment pattern and the
pattern of student recruiting activity costs that precede the start of
every term. Revenues, income before interest and taxes and net income by
quarter for each of the past two fiscal years are included in Note 10 to
the Company's consolidated financial statements.
Employees
- ---------
As of August 1996, the Company had approximately 2,900 full and part-time
employees. In addition, the DeVry Institutes employed over 1,000 students
as faculty assistants and in other part-time positions and used over 200
visiting instructors who teach on an as-needed, course-by- course basis,
primarily for evening courses. The majority of KGSM faculty members are
practicing business professionals who are engaged to teach on a course-by-
course basis. KGSM used over 300 such faculty members during the year.
None of the Company's employees is represented by a union. The Company
believes that relations with its employees are satisfactory.
29
Trademarks and Service Marks
- ----------------------------
The Company uses a number of trademarks including "DeVry Institute of
Technology", "Becker CPA Review" and variants thereof. All trademarks,
service marks and copyright registrations associated with the business are
registered in the name of the Company or one of its subsidiaries and expire
over various periods of time. The Company vigorously defends against
infringements of its trademarks, service marks and copyrights.
ITEM 2 - PROPERTIES
- --------------------
DeVry Institutes
- ----------------
The DeVry Institute campuses are located in both suburban communities and
urban neighborhoods. They are all easily accessible to major
thoroughfares. Each Institute campus includes teaching facilities,
admissions and administrative offices. Teaching facilities are housed in
modern, air-conditioned buildings that include classrooms, laboratories,
libraries, bookstores and student lounges. Electronics laboratories
include PC based instrumentation and microprocessor development/circuit
simulation systems along with traditional oscilloscopes, digital
multimeters, power supplies, signal generators and other equipment.
Computer laboratories include both stand alone and networked PC compatible
workstations that support all curricula areas. Resources available to
students include access to a central mainframe owned and operated by a
third party, UNIX and numerous software packages supporting a variety of
business, engineering and scientific applications. Connections to the
Internet and World Wide Web are included through the computer laboratories
as a part of the program curriculum. Telecommunications laboratories
provide central office simulation, PBX administration, inter-networking and
teaching LAN environments.
None of the five DeVry Institute campuses owned by the Company is subject
to a mortgage or other indebtedness.
In June 1996, the DeVry Technical Institute in Woodbridge, N.J., moved to a
new, 98,000 square foot company owned facility in North Brunswick, N.J., in
advance of the summer term class start.
30
In July 1996, the Company began operation of a satellite campus in
Mississauga (Toronto), Ontario, Canada. Opened in 42,000 square feet of
space, this is the second satellite to the main campus operation in North
York (Toronto) and the fourth DeVry Institute in Canada.
The table below sets forth certain information regarding each of the
properties at which the DeVry Institutes conduct educational operations:
DeVRY INSTITUTE CAMPUSES
---------------------------
Full and
Part-Time
Area Students
(Approximate Attending
Square Feet) Spring 1996 Ownership
------------ ----------- ---------
Decatur (Atlanta), Georgia 107,500 2,766 Owned
Chicago, Illinois 104,850 2,924 Owned
Addison (Chicago), Illinois 91,600 3,137 Leased
Columbus, Ohio 106,480(1) 2,473 Owned
North Irving (Dallas), Texas 95,250 2,294 Leased
Kansas City, Missouri 74,500 1,902 Owned
Phoenix, Arizona 120,200 2,559 Owned
Pomona (Los Angeles), California 100,500 2,938 Leased
Long Beach (Los Angeles),
California 98,240 1,056 Leased
Woodbridge, New Jersey 97,470 2,423 Leased
Calgary, Alberta, Canada 42,900 1,389 Leased
North York (Toronto), Ontario,
Canada 51,690 1,499 Leased
Scarborough (Toronto), Ontario,
Canada 35,400 790 Leased
------
28,150
======
- -------------------------------
(1) Includes 14,400 square feet of modular buildings.
The Company placed a deposit in escrow on a parcel of land in the San
Fernando Valley, California, for the construction of a third campus in the
Los Angeles area. Completion of the purchase is dependent upon, among
other things, obtaining zoning of the property for campus use.
In Alpharetta (Atlanta), Georgia, the Company is finalizing contracts with
a developer for the construction of a build to suit, leased campus in that
suburb. The facility, planned at 65,000 square feet, is expected to open
for classes in fiscal 1998.
31
The Company has begun a search for land in the San Francisco area for
construction of a campus to serve the Northern California area. In New
York, a search is underway for an existing building that can be renovated
to the Company's specifications for operation in the New York City area.
KGSM
- ----
KGSM centers include teaching facilities, admissions and administrative
offices. The centers are housed in modern, air conditioned buildings whose
locations were chosen for their convenience to students. Keller centers
range in size from approximately 3,600 to 9,000 square feet.
In the spring of 1996, Keller Graduate School of Management opened one new
center in Tysons Corner, Virginia (Washington, D.C. area).
The table below sets forth certain information regarding each of the
properties at which KGSM conducts educational operations:
KGSM CENTERS
------------
Part-Time
Students
April 1996 Ownership
---------- ---------
Chicago, Illinois 310 Leased
Schaumburg, Illinois 372 Leased
Downers Grove, Illinois 390 Leased
Lincolnshire, Illinois 358 Leased
Orland Park, Illinois 162 Leased
Elgin, Illinois 147 Leased
Milwaukee, Wisconsin 220 Leased
Waukesha, Wisconsin 164 Leased
St. Louis, Missouri 85 Leased
Kansas City, Missouri (downtown) 161 Leased
Kansas City, Missouri 147 (1)
Phoenix, Arizona 140 (1)
Mesa, Arizona 169 Leased
Decatur, Georgia 190 (1)
Atlanta, Georgia 168 Leased
Pomona, California 128 (1)
Long Beach, California 91 (1)
Tysons Corner, Virginia 41 Leased
-----
3,443
=====
- ------------------------
(1)Operates on a DeVry Institute campus.
32
In the fall of 1996, Keller opened a center at the Company's corporate
headquarters location in Oakbrook Terrace, Illinois. This is the seventh
center in the Chicagoland area and the nineteenth center in the system.
The downtown Chicago center will relocate to a new and larger facility in
the downtown Chicago area this fall to permit increased enrollment at this
location.
Becker
- ------
Becker CPA is headquartered in leased offices in Encino, California.
Classes are conducted in leased facilities, less than twenty of which are
leased on a full-time basis. The remainder of the classes are conducted in
facilities which are leased on an as used basis, allowing classes to be
expanded or relocated as enrollments require.
Corporate
- ---------
The Company's administrative offices are located in approximately 60,000
square feet of a leased facility in Oakbrook Terrace, Illinois. In
addition, the Company leases approximately 17,900 square feet of storage
and other miscellaneous use space at this facility.
Corporate Educational Services maintains its headquarters at the Company's
administrative offices in Oakbrook Terrace, Illinois.
The Company's leased facilities are occupied under leases whose remaining
terms range from one to 13 years. A majority of these leases can be
renewed for additional periods.
ITEM 3 -LEGAL PROCEEDINGS
- -------------------------
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. Neither the Company nor
any of its subsidiaries is currently a party to any material legal action
except those described below.
In July 1996, the Company entered into an out-of-court settlement agreement
with the Internal Revenue Service (IRS) relative to the Statutory Notice of
Deficiency issued by the IRS against the Company for tax years 1988 through
1991. The claimed deficiencies related to the amortization of intangible
33
assets purchased during the acquisition of the DeVry Institutes in 1987
(Notes 1 and 3). All of these issues have been resolved as a result of the
settlement. The settlement amount is immaterial to the Company's financial
position, results of operations and liquidity.
During 1996, the Ontario Ministry of Education and Training temporarily
suspended and later conditionally reinstated the processing of financial
aid applications for students attending the Company's two Toronto-area
schools. Full unconditional reinstatement is subject to the Ministry's
completion of certain procedures regarding verification of the Company's
compliance with financial aid processing regulations.
In July 1996, the Company was served with a class action lawsuit in Canada
alleging misrepresentation about the quality of the DeVry Institutes'
educational programs. The Company believes that the claims in the lawsuit
are frivolous and without merit. In response to the lawsuit, the Company
has filed a Statement of Defense and intends vigorously to contest the
allegations.
Although the outcomes cannot be predicted with certainty, the Company
believes the resolution of these matters will not have a material effect on
the Company's financial position, results of operations or liquidity.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year.
34
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The name, age and current position
of each executive officer of the
Company are:
Name, Age and Office Business Experience
- -------------------- -------------------
Dennis J. Keller.............55 Mr. Keller co-founded KGSM in 1973.
From the inception of the company,
Chairman of the Board and Mr. Keller has been Chairman of the
Chief Executive Officer Board and Chief Executive Officer.
Mr. Keller is a graduate of Princeton
University and holds a Master of
Business Administration degree from
the University of Chicago.
Ronald L. Taylor.............52 Mr. Taylor co-founded KGSM in 1973 and
has been a director since its
Director, President and inception. In 1981, Mr. Taylor became
Chief Operating Officer President and Chief Operating
Officer. Mr. Taylor is a graduate of
Harvard University and holds a Master
of Business Administration degree from
Stanford University.
David C. MacFarlane..........52 Mr. MacFarlane joined KGSM in 1974.
During the past 20 years, he has
Senior Vice President served in a variety of
positions including Director of
Admissions, Dean of Admissions and
Dean of KGSM. Currently Mr.
MacFarlane has responsibility for
DeVry Institute regional student
recruiting and various administrative
functions.
Norman C. Metz...............48 Mr. Metz joined the Company in April
1983 as a Vice President. In 1986,
Senior Vice President Mr. Metz assumed responsibility for
operations of the DeVry Institutes. In
addition, Mr. Metz is responsible for
student recruiting in the admission
offices at the Institute locations.
35
Name, Age and Office Business Experience
- -------------------- -------------------
O. John Skubiak..............46 Mr. Skubiak has been with KGSM for
more than 18 years, progressing from
Senior Vice President admissions representative to Dean of
KGSM. In his current position as a
Senior Vice President of the Company,
Mr. Skubiak has responsibility for the
Company's marketing, other than sales,
and the operations of KGSM, Corporate
Educational Services and Becker CPA
Review.
Norman M. Levine...........53 Mr. Levine has been Controller of the
Company since 1987 and has been the
Vice President, Controller Chief Financial Officer since March 1989.
and Chief Financial Officer. From November 1982 to 1987, Mr. Levine was
Controller of the DeVry Institutes.
Marilynn J. Cason..........53 Ms. Cason joined the Company in
January 1989 with responsibility for
Vice President, General the Company's legal affairs and human
Counsel and Corporate resources. From 1976 to 1988, Ms.Cason
Secretary served in various legal roles as Vice
President of Johnson Products Company,
a manufacturer of cosmetics and toiletries.
George W. Fisher...........44 Mr. Fisher joined the Company as Vice
President Canadian Operations in
Vice President, February 1985. His responsibilities
Regional Operations currently include operations of several
of the U.S. and Canadian DeVry Institutes.
Patrick L. Mayers..........56 Dr. Mayers joined KGSM in 1978 as Dean
of Academic Affairs. Dr. Mayers, who
Vice President, Academic obtained his B.A., M.A., M.B.A. and
Affairs, KGSM Ph.D. Degrees from the University of
Chicago, was elected an officer of the
Company in 1987.
Gerald Murphy..............49 Mr. Murphy joined the Company in late
1995 as a Vice President with
Vice President, responsibility for the operation of
Regional Operations several of the U.S. and Canadian DeVry
Institutes. Prior to joining DeVry,
Mr. Murphy served as a Vice President
of Education Management Corp. and of the
Universal Technical Institute.
36
Name, Age and Office Business Experience
- -------------------- -------------------
James Otten................47 Dr. Otten joined the Company in late
1995 as a Vice President with
Vice President, responsibility for the operation of
Regional Operations several of the U.S. DeVry Institutes.
Prior to joining DeVry, Dr. Otten served
as President of the Katherine Gibbs School
in Boston and of the Brown Institute in
Minneapolis.
Sharon Thomas-Parrott......45 Ms. Thomas-Parrott joined the Company
in January 1982 after several years as
Vice President, Government an officer in the U.S. Department of
Relations Education's Office of Student
Financial Assistance. She served the
Company in several student finance
positions before being elected to her
current position which includes
responsibility for both student
finance and government relations.
Robert R. Roehrich.........49 Dr. Roehrich joined the Company in
June 1981 as Dean of Computer Science
Vice President, Academic at the Columbus DeVry Institute. In
Affairs March 1983, he became Vice
President, Accreditation, following
which he was elected Vice President,
Academic Affairs.
Kenneth Rutkowski..........49 Mr. Rutkowski joined the Company in
1985 as Director of Operations
Vice President, Operations and Administrative Services and was
Services and Administration promoted to his current position in
May 1991. His current responsibilities
include managing the Company's real
estate and various administrative
functions.
Vijay Shah.................45 Mr. Shah joined the Company in 1977
progressing from a representative in
Vice President, Admissions an admissions office to director of
admissions at a DeVry Institute. He
has been National Director of
Admissions since 1989 and was promoted
to his current position in August
1994.
Edward J. Steffes..........46 Mr. Steffes joined the Company in
September 1984 as director of
Vice President, Marketing marketing and was promoted to his
current position in December 1986.
37
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
(a) Market Information
------------------
The Company's common stock has been traded on the New York Stock Exchange
since November 14, 1995, under the symbol DV. Prior to that date, the
Company's common stock traded on The NASDAQ Stock Market.
The following table states the high and low quotation and sales price
information by quarter for the past two years as reported by NASDAQ and the
New York Stock Exchange. All quotation and sales price information has
been adjusted for the two-for-one stock split in the form of a 100% stock
dividend paid June 21, 1995, to shareholders of record on June 1, 1995.
FISCAL 1996 FISCAL 1995
----------------- --------------------
HIGH LOW HIGH LOW
------------------------------------------------------------------
First Quarter $25 3/4 $20 $14 1/2 $12 17/32
Second Quarter 28 1/8 22 15 1/2 12 7/8
Third Quarter 35 1/2 25 3/4 19 5/16 15 1/4
Fourth Quarter 45 7/8 33 21 1/2 18 1/4
------------------------------------------------------------------
(b) Approximate Number of Security Holders
--------------------------------------
There were 337 holders of record of the Company's common stock as of August
8, 1996. The number of holders of record does not include beneficial
owners of its securities whose shares are held by various brokerage firms
and other financial institutions. The Company believes that there are over
8,000 beneficial holders of its common stock.
38
(c) Dividends
---------
The Company is a holding company and, as such, is dependent on the earnings
of the Operating Subsidiary and Becker for funds to pay cash dividends.
Cash flow from the Operating Subsidiary and Becker may be restricted by law
and is subject to some restrictions by covenants in the Operating
Subsidiary's debt agreement. The Company has not paid any dividends on its
common stock and expects for the foreseeable future to retain all of its
earnings from operations for use in the Company's business. From time to
time, the board of directors will review the Company's dividend policy.
Any payment of dividends will be at the discretion of the board of
directors and will be dependent on the earnings and financial requirements
of the Company and other factors as the board of directors deems relevant.
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
Selected financial data for the Company for the last five years is included
in the exhibit, Five-Year Summary - Operating, Financial and Other Data,
on page 67 of this report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto appearing
elsewhere in this report. All references in the financial statements to
the number of shares outstanding and per share amounts have been restated
to reflect the two-for-one stock split effective June 21, 1995.
RESULTS OF OPERATIONS
- ---------------------
1996 vs. 1995
- -------------
Tuition revenues in 1996 increased by $29,077,000 or 14.0% from 1995. This
was the largest tuition revenue increase in the history of the Company and
is attributable to both higher student enrollment at the DeVry Institutes
and KGSM and to tuition increases implemented during the year.
39
Cumulatively, total student enrollment at the DeVry Institutes in the three
semesters of fiscal 1996 increased by 8.6% compared with fiscal 1995. This
was partly due to higher enrollments at the Long Beach, California, and
Scarborough (Toronto), Ontario, Canada, campuses, both of which opened in
the previous year, and partly due to increased enrollments at the
previously existing Institutes. This is the fifth consecutive year that
total cumulative enrollment at the DeVry Institutes has increased from the
previous year and the largest rise in any of those years. At KGSM,
cumulative total student enrollment for the five terms of fiscal 1996 grew
by 16.7% from 1995. The increase in enrollments was due to elevated
enrollments at the Pomona and Long Beach, California, centers, both of
which opened last year, the 1996 opening of a center in Tysons Corner,
Virginia (Washington, D.C. area), and continued growth in enrollments at
the previously existing centers. Tuition increases have historically been
implemented by the DeVry Institutes effective with the spring term and
effective with the fall term at KGSM. Tuition rates rose approximately 5%
at DeVry, which is just slightly below the rate of last year's increase and
below the average rate of tuition increases at other colleges and
universities. Tuition rates rose similarly at KGSM.
Other revenues are attributable primarily to sales of books and supplies to
students attending the Company's educational programs. Interest income on
short-term investments of cash balances in excess of those needed for daily
operations declined slightly from last year, as the higher level of
payments for taxes on income, payments and receivable increases associated
with financial aid processing at the Toronto-area campuses and completion
of the new DeVry Institute campus in North Brunswick, New Jersey, reduced
average investible balances during the year.
Cost of educational services include the cost of faculty and related staff,
which composed approximately 60% of this expense category. Also included
in this expense category are the costs of facilities, supplies, bookstore
sales, other student education-related support activities and the cost of
tuition refunds and uncollectible accounts. The cost of educational
services rose by 13.6% from last year. Costs associated with the new DeVry
40
Institutes and KGSM centers contributed to this increase along with higher
educational costs resulting from higher student enrollments at the existing
locations. Depreciation expense on the Company's continued investment in
facilities and equipment for its students increased by over $1 million from
last year. Tuition refund and uncollectible account expense increased in
the year partly because of higher enrollments and a larger tuition base at
DeVry and KGSM and partly because of the higher proportion of new DeVry
students this year as a result of growing new student enrollments. For the
year, new student enrollment at the DeVry Institutes increased by 10.5%
from last year. New students historically withdraw at higher rates than do
students in later terms.
Student services and administrative expense includes the costs of new
student recruiting, curriculum development and general administrative
costs. These expenses increased by 12.6% from last year. Marketing costs
have grown to support the new DeVry Institutes and KGSM locations and to
support the higher number of new students recruited at the existing
locations. General administrative expenses increased from last year partly
due to normal inflationary changes and partly because of efforts associated
with the Ontario Ministry of Education's suspension and subsequent
conditional reinstatement of financial aid eligibility for students
attending the Company's Toronto area campuses.
The Company's earnings from operations, before interest expense and taxes
on income, reached a record $33,761,000 for the year. This represents an
operating margin of 13.0%, up from 12.6% and 12.1% in each of the last two
years, respectively. Higher revenues and cost-containment measures
contributed to the improved margins.
Interest expense was reduced by $2,007,000 to $1,063,000 for the year. The
lower interest expense resulted from lower outstanding levels of debt
throughout most of the year and the absence of the non-recurring make-whole
premium payment made in 1995 when the Company voluntarily prepaid all of
its senior subordinated notes.
41
The effective tax rate represents the combination of U.S. federal and state
and Canadian federal and provincial income taxes on the Company's
operations in these jurisdictions.
1995 vs. 1994
- -------------
Tuition revenues in 1995 increased by $16,325,000 or 8.5% from 1994. The
rise is attributable to both higher student enrollment at DeVry and KGSM
and to tuition increases implemented during the year. Cumulatively, total
student enrollment at the DeVry Institutes in the three semesters of fiscal
1995 increased by 3.3% compared with fiscal 1994. This is the fourth
consecutive year that total cumulative enrollment has grown from the
previous year. At KGSM, cumulative total student enrollment for the five
terms of fiscal 1995 grew by 17.7% from 1994. Tuition increases have
historically been implemented by the DeVry Institutes in the spring term
and at KGSM in the fall. Tuition rates grew by more than 5% at DeVry, a
slightly lower percentage increase than was implemented in 1994. Tuition
rates were increased similarly at KGSM. Historically, the Company has been
able to pass along inflationary cost increases through higher tuition.
Other revenues are attributable primarily to sales of books and supplies to
students attending the Company's educational programs. Interest income on
short-term investments increased because of higher cash balances available
for investment throughout most of the year and because of higher prevailing
interest rates.
Costs of educational services include the cost of faculty and related
staff, which composed approximately 60% of this expense category. Also
included in this expense category are the costs of facilities, supplies,
bookstore sales, other student education-related support activities and
tuition refunds. The cost of educational services increased by 7.1% from
1994. Costs associated with rising student enrollment, such as additional
faculty and higher wages and benefits, were largely responsible for the
increase. The Company also continued its investment in growth with the
42
opening of new DeVry Institutes in Long Beach, California, and Scarborough
(Toronto), Ontario, Canada. During the year, KGSM opened two new centers
in California, operating in the DeVry Institute campuses in these
locations.
Partially offsetting these cost increases was a reduction in depreciation
expense on certain assets whose depreciable lives expired in the first
quarter. Tuition refund and bad debt expenses also declined, reflecting
educational program and student service quality initiatives that have
favorably affected the pattern of student retention, reducing refund
expense and uncollected account balances compared to prior periods.
Student services and administrative expense includes the costs of new
student recruiting, curriculum development and general administrative
costs. These expenses increased by 8.4% from last year. Marketing costs
grew at a somewhat faster rate than tuition revenue in support of the two
new DeVry campuses and two KGSM centers that opened during 1994. For the
year, new student enrollment at the DeVry Institutes increased by 7.6% from
1994.
The Company's earnings from operations, before interest expense and taxes
on income, reached a record $28,829,000 for the year. This represents an
operating margin of 12.6%, up from 12.1% last year and 11.7% the year
before. Higher revenues; improved educational program success, producing
greater student retention; and cost-containment measures contributed to the
improved margins even as expansion continued.
Interest expense was reduced by $1,545,000 to $3,070,000 for the year. The
lower interest expense resulted from scheduled principal payments and
voluntary prepayments of the Company's funded debt. In June, the Company
voluntarily prepaid all $7,870,000 of its 13% senior subordinated notes,
with a make-whole premium payment of $573,000 included in interest expense
in the Consolidated Statement of Income. In 1995, total funded debt was
reduced by $10,195,000.
43
Taxes on income were computed in accordance with Statement of Financial
Accounting Standards No. 109 (FAS 109), which the Company adopted in 1992.
The effective tax rate of 42.2% represents the combination of U.S. federal
and state and Canadian income taxes on the Company's operations.
Liquidity and Capital Resources
- -------------------------------
The Company's primary source of liquidity is the cash received from student
payments for tuition, fees and books. These payments include cash from
student and family resources, student and family educational loans and
other financial aid under various federal, state and provincial programs.
The pattern of cash receipts is somewhat seasonal throughout the year. The
level of accounts receivable from which cash payments are collected reaches
a peak immediately after the billing of tuition, fees and books at the
beginning of each DeVry Institute semester in July, November and March.
Collections of these receivables are heaviest at the start of each
semester. In the first two months of each semester, collections typically
exceed payments for operating expenses applicable to that period. Accounts
receivable reach their lowest level just prior to the start of the next
semester, dropping to their lowest point in the year at the end of June.
The end of June corresponds to both the end of the spring semester and to
the end of a financial aid year, at which time all financial aid for the
previous 12 months should have been disbursed to students' accounts. At
June 30, 1996, net accounts receivable were $9,684,000. The increase in
accounts receivable from last year results from the inclusion of a
$1,472,000 receivable of refundable income tax and from higher revenues and
number of students at the DeVry Institutes and KGSM during the year. The
increase in receivables is also attributable, in part, to the tuition
financing offered by DeVry Canada to those students at the Toronto area
campuses who were affected by the temporary suspension of financial aid.
In conjunction with the conditional reinstatement of financial aid
processing effective with the spring term, the Company returned to the
Ontario Ministry of Education and Training payments believed to have been
44
inappropriately disbursed to students. In addition, the Company posted a
letter of credit with the Ministry as security against possible additional
amounts that may have been inappropriately disbursed to students who
incorrectly completed their financial aid applications.
The Company estimates that historically nearly 70% of the DeVry Institutes'
tuition, bookstore and fee revenues are derived from some form of
government-provided financial aid to its students. These financial aid and
assistance programs, in which most of the Company's students participate,
are subject to political and budgetary considerations. There is no
assurance that such funding will be maintained at current levels.
Extensive and complex regulations in the U.S. and Canada govern all of the
government financial assistance programs in which the Company's students
participate. The Company's administration of these programs is
periodically reviewed by various regulatory agencies. Any regulatory
violation could be the basis for the initiation of a suspension, limitation
or termination proceeding against the Company.
Under the terms of the Company's participation in governmental financial
aid programs, certain cash received from the U.S. Department of Education
is maintained in restricted bank accounts. This cash becomes available for
general use by the Company only after student loans and grants have been
credited to the accounts of students and the cash is transferred to an
unrestricted operating cash account. The introduction of electronic fund
transfers for student loans and the direct loan program from the Department
of Education have generally accelerated the receipt and processing of these
payments by the DeVry Institutes and KGSM, contributing to the Company's
liquidity.
Cash payments for income taxes no longer benefit from the net operating
loss carryovers, which were fully utilized by the end of the first quarter
of fiscal 1996. While the increased payment of income taxes will affect the
Company's liquidity, the Company believes that its present cash resources
and cash flow from operations will be sufficient to meet its cash
requirements.
45
In July 1996, the Company entered into an out-of-court settlement agreement
with the Internal Revenue Service (IRS) relative to the Statutory Notice of
Deficiency issued by the IRS against the Company for tax years 1988 through
1991. The claimed deficiencies related to the amortization of intangible
assets purchased during the acquisition of the DeVry Institutes in 1987.
All of these issues have been resolved as a result of the settlement. The
settlement amount, which is expected to be paid in the first quarter of
fiscal 1997, is immaterial to the Company's financial position, results of
operations and liquidity.
Cash generated from operations in 1996 was $28,368,000, approximately the
same as in each of the last two years. The generation and use of cash
during the year reflects the seasonal operating patterns discussed above.
During some periods just prior to the start of a semester, cash balances
may be supplemented by temporary borrowings under the Company's revolving
line of credit. Cash generated from operations each year has been
sufficient to meet all of the Company's operating needs and capital
investment needs while reducing debt on a regular basis.
Capital expenditures were primarily for expansion and facility improvement,
replacement and upgrading of school laboratories and for teaching and
administrative equipment. Capital expenditures in 1996 were a record
$18,352,000. This spending reflects the Company's continued investment in
improved quality of educational offerings, facilities and programs and in
additional expenditures connected with the opening of new DeVry Institutes
in Scarborough, Ontario, Canada, and Long Beach, California, last year, and
the completion of construction of a DeVry Institute campus in North
Brunswick, New Jersey, to replace the present leased facility in
Woodbridge, New Jersey.
For 1997, total capital spending for existing operations is planned at
somewhat lower levels than during the past two years. Cash generated from
operations and existing cash resources have been sufficient to meet capital
requirements in the past and are anticipated to be sufficient to cover
expansion plans in the future.
46
In June 1996, the Company and its banks completed a renegotiation of its
1994 term loan agreement. The $85,000,000 bank facility remains an
unsecured revolving line of credit with a higher borrowing limit, longer
term and lower interest rates effective upon the achievement of certain
financial ratios. The revolving loan facility allows the Company to take
maximum advantage of its seasonally heavy cash flows to reduce debt while
also providing flexibility in providing funds for expansion as needed. At
June 30, 1996, approximately $63,000,000 of the revolving line had been
utilized in the form of borrowings and letters of credit. The terms of
this loan agreement reflect the Company's strong financial position.
In June 1996, the Company acquired certain tangible assets and tradenames
of the Becker CPA review for $18,458,000 in cash and acquired copyrights,
other intellectual property and publicity rights of the Becker CPA Review
for $17,935,000. Funds for the acquisition were provided by borrowings
under the Company's newly renegotiated revolving line of credit.
The Company's bank borrowings are at a floating interest rate subject to
adjustment at varying intervals at the Company's option. At the present
time, the Company does not have an interest rate swap or other forms of
protection against increases in the floating rate but has fixed the
interval of interest rate adjustment on approximately one-third of its year-
end borrowings for a one-year period. The Company periodically evaluates
its need for additional protection in light of projected interest expense
and borrowing levels.
The Company believes that current balances of unrestricted cash, cash
generated from operations and, if needed, the revolving loan facility will
be sufficient to fund its operations for the foreseeable future.
47
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company and its subsidiaries are
included below on pages 48 through 63 of this report:
10K
Report Page
-----------
Consolidated Balance Sheets at
June 30, 1996 and 1995 48-49
Consolidated Statements of Income for the
years ended June 30, 1996, 1995 and 1994 50
Consolidated Statements of Cash Flows for
the years ended June 30, 1996, 1995 and 1994 51
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 1996,
1995 and 1994 52
Notes to Consolidated Financial Statements 53-62
Report of Independent Accountants 63
48
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
1996 1995
---- ----
ASSETS
Current Assets
Cash and Cash Equivalents $ 29,948 $ 26,252
Restricted Cash 16,590 20,179
Accounts Receivable, Net 9,684 6,189
Inventories 3,290 3,553
Prepaid Expenses and Other 2,055 1,846
-------- --------
Total Current Assets 61,567 58,019
-------- --------
Land, Buildings and Equipment
Land 18,956 18,952
Buildings 50,570 39,399
Equipment 51,198 43,390
Construction In Progress - 1,337
-------- --------
120,724 103,078
Accumulated Depreciation (49,283) (42,820)
-------- --------
Land, Buildings and Equipment, Net 71,441 60,258
-------- --------
Other Assets
Intangible Assets, Net 37,709 2,022
Perkins Program Fund, Net 5,483 4,522
Other Assets 1,889 1,850
-------- --------
Total Other Assets 45,081 8,394
-------- --------
TOTAL ASSETS $178,089 $126,671
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
49
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
1996 1995
---- ----
LIABILITIES
Current Liabilities
Accounts Payable $ 18,859 $ 14,957
Accrued Salaries, Wages & Benefits 14,735 12,369
Accrued Expenses 7,640 3,671
Advance Tuition Payments 7,617 13,982
Deferred Tuition Revenue 3,609 3,768
-------- --------
Total Current Liabilities 52,460 48,747
-------- --------
Other Liabilities
Revolving Loan 61,500 33,029
Deferred Income Tax Liability 2,207 2,318
Deferred Rent and Other 4,635 4,609
-------- --------
Total Other Liabilities 68,342 39,956
-------- --------
TOTAL LIABILITIES 120,802 88,703
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Common Stock, $0.01 par value, 20,000,000
Shares Authorized;16,621,852 and
16,613,492 Shares Issued and Outstanding
at June 30, 1996 and 1995, Respectively 166 166
Additional Paid-in Capital 36,694 36,610
Retained Earnings 19,987 742
Foreign Currency Translation Adjustment 440 450
-------- --------
TOTAL SHAREHOLDERS' EQUITY 57,287 37,968
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $178,089 $126,671
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
50
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
For The Year Ended June 30,
1996 1995 1994
---- ---- ----
REVENUES:
Tuition $236,607 $207,530 $191,205
Other Educational 22,341 19,887 19,681
Interest 1,059 1,176 551
-------- -------- --------
Total Revenues 260,007 228,593 211,437
-------- -------- --------
COSTS AND EXPENSES:
Cost of Educational Services 155,254 136,721 127,673
Student Services and
Administrative Expense 70,992 63,043 58,146
Interest Expense 1,063 3,070 4,615
-------- -------- --------
Total Costs and Expenses 227,309 202,834 190,434
-------- -------- --------
Income Before Income Taxes 32,698 25,759 21,003
Income Tax Provision 13,453 10,863 8,778
-------- -------- --------
NET INCOME $ 19,245 $ 14,896 $ 12,225
======== ======== ========
EARNINGS PER COMMON SHARE $1.14 $0.89 $0.73
===== ===== =====
The accompanying notes are an integral part of these consolidated
financial statements.
51
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For The Year Ended June 30,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $19,245 $14,896 $12,225
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 7,516 6,157 6,981
Amortization 63 63 346
Provision for Refunds and
Uncollectible Accounts 16,130 12,810 14,101
Deferred Income Tax (Provision) Benefit (456) 5,480 2,419
Loss (Gain)on Disposals of Land,
Buildings and Equipment 19 (7) 338
Changes in Assets and Liabilities:
Restricted Cash 3,589 (9,130) (1,447)
Accounts Receivable (18,645) (11,746) (14,125)
Inventories 263 (629) 34
Prepaid Expenses And Other (118) (128) 266
Perkins Program Fund Contribution
and Other (1,188) (1,649) 1,717
Accounts Payable 3,210 3,136 1,380
Accrued Salaries, Wages,
Expenses and Benefits 6,239 667 3,601
Advance Tuition Payments (7,340) 7,943 1,010
Deferred Tuition Revenue (159) 337 (441)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,368 28,200 28,405
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (18,352) (14,551) (6,288)
Acquisition of Net Assets (Note 2):
Payment for Purchase of Operating
Assets, Net of Cash Acquired (16,930) - -
Payment for Purchase of
Intellectual Property (17,935) - -
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (53,217) (14,551) (6,288)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds From Exercise of Stock Options 84 47 6
Proceeds From Revolving Credit Facility 46,500 22,000 35,029
Repayments Under Revolving Credit Facility (18,029) (20,000) (4,000)
Repayments of Debt - (12,195) (43,517)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 28,555 (10,148) (12,482)
------- ------- -------
Effects of Exchange Rate Differences (10) 47 (275)
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,696 3,548 9,360
Cash and Cash Equivalents at Beginning
of Year 26,252 22,704 13,344
------- ------- -------
Cash and Cash Equivalents at End of Year $29,948 $26,252 $22,704
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Year $ 1,429 $3,367 $4,606
Income Taxes Paid During the Year 13,902 7,080 4,607
The accompanying notes are an integral part of these consolidated
financial statements.
52
DEVRY INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
For The Year Ended June 30,
1996 1995 1994
---- ---- ----
Common Stock
Beginning of year $ 166 $ 83 $ 83
Two-for-one stock split in the form of a
stock dividend - 83 -
------- ------- -------
End of year 166 83 83
======= ======= =======
Additional Paid-In Capital
Beginning of year 36,610 36,563 36,557
Shares issued for exercise of stock options 84 47 6
------- ------- -------
End of year 36,694 36,610 36,563
======= ======= =======
Retained Earnings (Accumulated Deficit)
Beginning of year 742 (14,071) (26,296)
Net income per accompanying statement 19,245 14,896 12,225
Two-for-one stock split in the form of a
stock dividend - (83) -
------- ------- -------
End of year 19,987 742 (14,071)
======= ======= =======
Foreign Currency Translation Adjustment
Beginning of year 450 403 678
Translation Adjustment (10) 47 (275)
------- ------- -------
End of year 440 450 403
======= ======= =======
TOTAL SHAREHOLDERS' EQUITY, END OF YEAR $57,287 $37,885 $22,978
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
53
DEVRY INC.
Notes to Consolidated Financial Statements
June 30, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DeVry Inc. (the Company) is a holding company which, through its
wholly owned subsidiaries, operates a national system of degree-
granting, career-oriented higher-education schools and a leading
international training firm. Keller Graduate School of Management,
Inc. (KGSM), is one of the largest regionally accredited higher-
education systems in North America. Its DeVry Institutes award
associate and bachelor's degrees in electronics, computer information
systems, business operations, accounting, technical management and
telecommunications management. The DeVry Institutes are located on 10
campuses in the United States and four campuses in Canada. Keller
Graduate School (Keller) awards master's degrees in business
administration, human resource management and project management.
Keller classes are offered at 18 locations in Illinois, Wisconsin,
Missouri, Georgia, Arizona, California and Virginia. The Corporate
Educational Services division offers on-site management and
technical training programs for larger employers and government
agencies. Becker CPA Review (Becker CPA), acquired June 19, 1996
(Note 2), is the leading international training firm preparing
students to pass the Certified Public Accountant (CPA) examination .
Currently, the CPA exam review course is offered at approximately 135
locations in the United States and at eight international locations.
Becker CPA also offers a Certified Management Accountant (CMA)
examination review course in the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation. Becker CPA
accounts are consolidated based upon an April 30 fiscal year end,
which is its natural year end based on its business cycle. There
were no events ocurring during the intervening period before June 30,
that materially effected the financial position or results of
operations of the Company. Unless indicated, or the context requires
otherwise, references to years refer to the Company's fiscal years
then ended.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits, commercial paper,
municipal bonds and bankers acceptances with maturities of three
months or less or that are highly liquid and readily convertible to a
known amount of cash. These investments are stated at cost, which
approximates market, due to their short duration or liquid nature. The
Company limits the amount of credit exposure with any one investment
instrument or with any one financial institution. The Company
evaluates the creditworthiness of the security issuers and financial
institutions with which it invests.
Financial Aid and Restricted Cash
The financial aid and assistance programs, in which most of the
Company's students participate, are subject to political and budgetary
considerations. There is no assurance that such funding will be
maintained at current levels. Extensive and complex regulations in
the U.S. and Canada govern all of the government financial assistance
programs in which the Company's students participate. The Company's
administration of these programs is periodically reviewed by various
regulatory agencies. Any regulatory violation could be the basis for
the initiation of a suspension, limitation or termination proceeding
against the Company.
A significant portion of revenues is provided by students who
participate in government financial aid and assistance programs.
Restricted cash represents amounts received from the U.S. government
under various student aid grant and loan programs. The cash is held
in separate bank accounts and does not become available for general
use by the Company until the financial aid is credited to the accounts
of students and the cash is transferred to an operating cash account.
54
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Tuition revenue and provisions for refunds and uncollectible accounts
are recognized ratably over each of the academic terms in a fiscal
year. The provisions for refunds and uncollectible accounts are
included in the cost of educational services in the Consolidated
Statements of Income. Related reserves are $6,603,000 and $5,368,000
at June 30, 1996 and 1995, respectively. Textbook sales and other
educational revenues are recognized when they occur. Revenue from
training services is recognized when the training is provided.
Inventories
Inventories consist mainly of textbooks, electronics kits and supplies
held for sale to students enrolled in KGSM's educational programs.
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Land, Buildings and Equipment
Land, buildings and equipment are recorded at cost. Cost includes
additions and those improvements that increase the capacity or
lengthen the useful lives of the assets. Repairs and maintenance
costs are expensed as incurred. Interest is capitalized as a
component of cost on major projects during the construction period.
The amount of interest capitalized for the years ended June 30, 1996
and 1995, was $314,000 and $101,000, respectively. Assets under
construction are reflected in construction in progress until they are
ready for their intended use.
Depreciation is computed using the straight line method over
estimated service lives ranging from three to 31 years.
Intangible Assets
Intangible assets relate to the acquired business operations of the
DeVry Institutes and Becker CPA (Note 2). These assets consist of
the purchase prices allocated to the estimated fair value of certain
assets acquired (Note 3). Accumulated amortization is computed using
the straight line method over the assets' estimated useful lives of 25
to 40 years.
The Company expenses all marketing and new school opening costs as
incurred.
Perkins Program Fund
The Company makes contributions to the Perkins Student Loan Fund at a
rate equal to 33% of that contributed by the federal government. As
previous borrowers repay their Perkins loans, their payments are used
to fund new loans thus creating a permanent revolving loan fund. The
Company carries its investment in such contributions at original
values net of allowances for losses on loan collections of $1,547,000
and $1,275,000 at June 30, 1996 and 1995, respectively.
Fair Value of Financial Instruments
The carrying amount reported in the Consolidated Balance Sheets for
cash and cash equivalents, restricted cash, accounts receivable,
accounts payable, accrued expenses and advanced and deferred tuition
payments approximate fair value because of the immediate or short-term
maturity of these financial instruments. The carrying amount reported
for borrowings under the revolving loan agreement approximates fair
value because the underlying instruments are variable-rate notes.
55
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
The financial position and results of operations of KGSM's Canadian
subsidiary are measured using the local currency as the functional
currency. Assets and liabilities of the foreign subsidiary are
translated to U.S. dollars using exchange rates in effect at the
balance sheet dates. Income and expense items are translated at
monthly average rates of exchange prevailing during the year. The
resultant translation adjustments are included in the component of
shareholders' equity designated as Foreign Currency Translation
Adjustment. Transaction gains or losses during the years ended June
30, 1996, 1995 and 1994, were insignificant.
Income Taxes
Income taxes are provided by applying statutory rates to income
recognized for financial statement purposes. Deferred income taxes are
provided for revenue and expense items that are recognized in
different accounting periods for financial reporting purposes than for
income tax purposes. Effects of statutory rate changes are recognized
for financial reporting purposes in the year in which enacted by law.
Stock Split
On May 17, 1995, the Company's board of directors authorized a
two-for-one stock split in the form of a 100% stock dividend payable
on June 21, 1995, to shareholders of record on June 1, 1995. The par
value of the additional shares arising from the split has been
reclassified from retained earnings to common stock. In addition, all
references in the financial statements to the number of shares
outstanding, per share amounts, stock option data and market prices of
the Company's common stock have been restated to reflect the stock
split.
Earnings Per Common Share
Earnings per common share are determined by dividing net earnings by
the weighted average number of common and common share equivalents
outstanding during the year after giving retroactive effect to the
stock split. Incentive stock options are included as common stock
equivalents using the treasury stock method. The number of shares
used in computing the net earnings per share was 16,830,000,
16,727,000 and 16,694,000 in 1996, 1995 and 1994, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
56
NOTE 2: ACQUISITION
On June 19, 1996, a newly formed, wholly owned subsidiary of the
Company acquired substantially all of the tangible operating assets
and trademarks and assumed certain liabilities of Becker CPA for
$18,458,000 in cash. On this same date, another newly formed, wholly
owned subsidiary of the Company acquired certain copyrights, other
intellectual property and publicity rights of Becker CPA for
$17,935,000 in cash. Becker CPA is the leading international
training firm preparing students to pass the nationally administered
and centrally graded CPA exam, and it also offers a CMA exam review
course. Funding for the acquisitions was obtained through borrowings
under the Company's revolving credit facility (Note 5).
The acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the purchase prices were allocated to the
tangible and identifiable intangible assets acquired and liabilities
assumed based on their estimated fair values. The intangible assets
are being amortized using the straight line method over a 25-year
period for financial reporting purposes and are being deducted for tax
reporting purposes over shorter statutory lives.
The following unaudited pro forma financial information presents the
results of operations of the Company and the acquired Becker CPA
business as if the acquisitions had ocurred at the beginning of
each fiscal year. The pro forma information is based on historical
results of operations and does not necessarily reflect the actual
results that would have ocurred, nor is it necessarily indicitive of
future results of operations of the combined enterprises (dollars in
thousands except for per share amounts):
1996 1995
(Unaudited) (Unaudited)
----------- -----------
Net Sales $279,938 $248,386
Net Income 19,375 15,035
Earnings Per Common Share $1.15 $0.90
NOTE 3: INTANGIBLE ASSETS
Intangible assets that were not fully amortized at June 30 consist of
the following:
1996 1995
----------- ----------
Trademarks $ 2,521,000 $2,521,000
Tradenames 17,465,000 -
Intellectual Property 17,425,000 -
Other 860,000 -
----------- ----------
38,271,000 2,521,000
Accumulated Amortization (562,000) (499,000)
----------- ----------
$37,709,000 $2,022,000
=========== ==========
57
NOTE 4: INCOME TAXES
The components of income (loss) before income taxes are as follows:
For the Year Ended June 30,
1996 1995 1994
----------- ----------- -----------
U.S. $35,645,000 $23,323,000 $18,220,000
Foreign (2,947,000) 2,436,000 2,783,000
----------- ----------- -----------
Total $32,698,000 $25,759,000 $21,003,000
=========== =========== ===========
The net income tax provisions (benefits) related to the above results
are as follows:
For the Year Ended June 30,
1996 1995 1994
----------- ------------ ----------
Current Tax Provision:
U.S. Federal $11,373,000 $ 3,141,000 $4,237,000
State and Local 2,400,000 897,000 596,000
Foreign (776,000) 1,345,000 1,526,000
----------- ----------- ----------
Total Current 12,997,000 5,383,000 6,359,000
Deferred Tax Provision:
U.S. Federal 381,000 4,578,000 2,039,000
State and Local 273,000 838,000 268,000
Foreign (198,000) 64,000 112,000
----------- ----------- ----------
Total Deferred 456,000 5,480,000 2,419,000
----------- ----------- ----------
Net Income Tax
Provision $13,453,000 $10,863,000 $8,778,000
=========== =========== ==========
The income tax provisions differ from those computed using the
statutory rate as a result of the following items:
For the Year Ended June 30,
1996 1995 1994
----------------- ----------------- ----------------
Expected Provision $11,444,000 35.0% $ 9,016,000 35.0% $7,351,000 35.0%
Higher Rates on (312,000)(1.0%) 323,000 1.3% 308,000 1.5%
Foreign Operations
State Income Taxes 1,767,000 5.4% 1,123,000 4.4% 875,000 4.1%
Other 554,000 1.7% 401,000 1.5% 244,000 1.2%
----------- ----------- ----------
Income Tax
Provision $13,453,000 41.1% $10,863,000 42.2% $8,778,000 41.8%
=========== =========== ==========
58
NOTE 4: INCOME TAXES (continued)
Deferred income tax assets (liabilities) result primarily from the
recognition of the tax benefits of net operating loss carryforwards
and from temporary differences in the recognition of various expenses
for tax and financial statement purposes. These assets and
liabilities are composed of the following:
For the Year Ended June 30,
1996 1995 1994
---------- ---------- ----------
Loss Carryforwards $ - $ 829,000 $5,038,000
Employee Benefits 1,207,000 1,187,000 1,027,000
Tax Credits - 47,000 92,000
Rental and
Occupancy 762,000 787,000 609,000
Receivable Reserves
and Other 2,953,000 1,608,000 1,943,000
---------- ---------- ----------
Gross Deferred
Tax Assets 4,922,000 4,458,000 8,709,000
Depreciation and
Other (4,837,000) (5,014,000) (3,970,000)
Amortization (1,176,000) (991,000) (806,000)
---------- ---------- ----------
Gross Deferred Tax
Liabilities (6,013,000) (6,005,000) (4,776,000)
---------- ---------- ----------
Net Deferred Taxes ($1,091,000) ($1,547,000) $3,933,000
========== ========== ==========
Based on the Company's history of operating earnings and its
expectations for the future, management believes that operating income
will more than likely be sufficient to recognize fully all deferred
tax assets.
Deferred income tax provisions (benefits) result primarily from
temporary differences in the recognition of various expenses for tax
and financial statement purposes. The sources and tax effects of
these differences are as follows:
For the Year Ended June 30,
1996 1995 1994
-------- ---------- ----------
Realization of Operating Loss
Carryforwards $829,000 $4,220,000 $4,497,000
Excess (Tax) Book Depreciation
and Amortization (266,000) 87,000 (339,000)
Excess of Amounts Expensed for
(Book) Tax Purposes Over
Amounts Deductible for Book
(Tax) Purposes (159,000) 973,000 (1,739,000)
Other, Net 52,000 200,000 -
-------- ---------- ----------
Deferred Tax Provision $456,000 $5,480,000 $2,419,000
======== ========== ==========
59
NOTE 5: REVOLVING LOAN AGREEMENT
All of the Company's borrowings and letters of credit under its
revolving loan agreement are through its operating subsidiary, KGSM.
This agreement consists of a revolving credit and letter of credit
facility, which is available to KGSM in an aggregate amount not to
exceed $85,000,000. This agreement was amended in June 1996 to permit
the acquisition of Becker CPA (Note 2), increase the borrowing limits,
extend its term and provide for reduced interest rates upon the
achievement of certain financial ratios. All borrowings and letters of
credit under the revolving loan agreement now mature in August 1999,
and there are no required installment payments. Outstanding borrowings
under the revolving loan agreeement are $61,500,000 and $33,029,000 at
June 30, 1996 and 1995, respectively. There is also a $1,460,000
letter of credit outstanding under this agreement at June 30, 1996.
Outstanding borrowings under the revolving loan agreement bear
interest, payable quarterly, at either the prime rate or a Eurodollar
rate plus 0.75%, at the option of KGSM. Upon achieving certain
financial ratios included in the June 1996 amendment, the interest
rate can be reduced to a Eurodollar rate plus 0.35%. The effective
interest rate on outstanding borrowings at June 30, 1996, was 6.84%.
Outstanding letters of credit under the revolving loan agreement are
charged an annual fee equal to 0.75% of the undrawn face amount of the
letter of credit , payable quarterly.
The bank financing agreement contains certain covenants that, among
other things, limit capital expenditure to $25,000,000 annually and
require maintenance of certain financial ratios as defined in the
agreement. None of these covenants negatively impacts the Company's
liquidity or capital resources.
In June 1995, the Company voluntarily prepaid the entire $7,870,000
remaining balance of its senior subordinated notes. On December 1,
1994 , in conjuntion with the scheduled principal payment on this
date, the Company made a voluntary prepayment of $775,000 These
senior subordinated notes bore interest at a rate of 13% per annum and
were subordinate to the revolving credit facility.
NOTE 6: EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan
All employees who meet certain eligibility requirements can
participate in KGSM's 401(k) Profit Sharing Retirement Plan. KGSM
contributes to the plan an amount equal to 1.5% of the total eligible
compensation of employees who make contributions under the plan.
KGSM's matching contributions under the plan were approximately
$765,000, $636,000 and $608,000 in 1996, 1995 and 1994, respectively.
In addition, the Company's board of directors may also make
discretionary contributions for the benefit of all eligible employees.
Provisions for discretionary contributions under the plan were
approximately $1,924,000, $1,566,000 and $1,413,000 in 1996, 1995 and
1994, respectively.
Employee Stock Purchase Plan
Effective August 1, 1993, the Company established the DeVry Inc.
Employee Stock Purchase Plan. The Plan stipulates that any eligible
employee may authorize the Company to withhold up to $25,000 of annual
earnings to purchase common stock of the Company on the open market at
100% of the prevailing market price. The Company pays all brokerage
commissions and administrative fees associated with the Plan. These
expenses were insignificant for the years ended June 30, 1996, 1995
and 1994.
60
NOTE 7: STOCK OPTION PLANS
The Company maintains three stock option plans: the Amended and
Restated Stock Incentive Plan, established in 1988, the 1991 Stock
Incentive Plan and the 1994 Stock Incentive Plan. Under these Plans,
directors, key executives and managerial employees are eligible to
receive incentive stock or nonqualified options to purchase shares of
the Company's common stock. The Amended and Restated Stock Incentive
Plan and the 1994 Stock Incentive Plan are administered by a Plan
Committee of the board of directors. Plan Committee members will be
granted automatic, nondiscretionary annual options. The 1991 Stock
Incentive Plan is administered by the board of directors. Options
under all three Plans are granted for terms of up to ten years and
vest over periods of one to five years. The option price under the
Plans is the fair market value of the shares on the date of the grant.
Share status of each of these plans at June 30, 1996, was as follows:
Reserved for Available for
Authorized Issuance Future Grant
---------- ---------- -----------
Stock Incentive Plan 200,000 184,600 3,400
1991 Stock Incentive Plan 200,000 199,040 61,100
1994 Stock Incentive Plan 400,000 398,000 358,000
Activity during the three years ended June 30, 1996, with respect to
options under these plans, was as follows:
Shares Option Prices
------- -------------
Under Option at June 30, 1993 122,000 $1.57 - 10.18
Options Exercised (1,800) 3.50
Options Canceled (2,000) 13.13
Options Granted 65,400 13.13 - 13.88
------- -------------
Under Option at June 30, 1994 183,600 1.57 - 13.88
Options Exercised (7,000) 3.50 - 13.13
Options Canceled (7,600) 3.50 - 13.13
Options Granted 142,500 12.94 - 14.75
------- -------------
Under Option at June 30, 1995 311,500 1.57 - 14.75
Options Exercised (8,360) 3.50 - 14.75
Options Canceled (10,550) 12.94 - 21.75
Options Granted 66,550 21.75 - 25.13
------- -------------
Under Option at June 30, 1996 359,140 1.57 - 25.13
------- -------------
Exercisable at June 30, 1996 151,040 $1.57 - 14.75
------- -------------
61
NOTE 8: COMMITTMENTS AND CONTINGENCIES
KGSM and Becker CPA lease certain equipment and facilities under
non-cancelable operating leases, some of which contain renewal
options, escalation clauses and requirements to pay taxes,
insurance and maintenance costs. Future minimum rental commitments
for all non-cancelable operating leases having a remaining term in
excess of one year at June 30, 1996, are as follows:
Year Ended June 30, Amount
------------------ -----------
1997 $12,410,000
1998 11,740,000
1999 10,580,000
2000 9,480,000
2001 9,360,000
Thereafter $56,170,000
The Company recognizes rent expense on a straight-line basis over the
term of the lease, although the lease may include escalation clauses
that provide for lower rent payments at the start of the lease term
and higher lease payments at the end of the lease term.
Rent expenses for the years ended June 30, 1996, 1995 and 1994, were
$13,879,000, $12,553,000 and $9,611,000, respectively.
The Company is subject to occasional lawsuits, investigations and
claims arising out of the normal conduct of its business. Neither
the Company nor any of its subsidiaries is currently a party to any
material legal action except those described below.
In July 1996, the Company entered into an out-of-court settlement
agreement with the Internal Revenue Service (IRS) relative to the
Statutory Notice of Deficiency issued by the IRS against the Company
for tax years 1988 through 1991. The claimed deficiencies related to
the amortization of intangible assets purchased during the acquisition
of the DeVry Institutes in 1987 (Notes 1 and 3). All of these issues
have been resolved as a result of the settlement. The settlement
amount is immaterial to the Company's financial position, results of
operations and liquidity.
During 1996, the Ontario Ministry of Education and Training
temporarily suspended and conditionally reinstated the processing of
financial aid applications for students attending the Company's
Toronto-area schools. Full unconditional reinstatement is subject to
the Ministry's completion of certain procedures regarding verification
of the Company's compliance with financial aid processing regulations.
In July 1996, the Company was served with a class action lawsuit in
Canada alleging misrepresentation about the quality of the DeVry
Institutes' educational programs. The Company believes that the claims
in the lawsuit are frivolous and without merit. In response to the
lawsuit, the Company has filed a Statement of Defense and intends to
vigorously contest the allegations. Although the outcome cannot be
predicted with certainty, the Company believes the resolution of this
matter will not have material effect on the Company's financial position,
results of operations or liquidity.
62
NOTE 9: OPERATIONS BY GEOGRAPHIC AREA
The Company operates in a single industry segment as a provider of
educational services. The Company conducts its educational operations
in the United States and Canada. Revenues, income before interest and
taxes, and identifiable assets by geographic area are as follows:
For the Year Ended June 30,
1996 1995 1994
------------ ------------ ------------
Revenues:
U.S. $234,180,000 $205,424,000 $192,842,000
Foreign 25,827,000 23,169,000 18,595,000
Income Before Interest
and Taxes:
U.S. 36,708,000 26,393,000 22,835,000
Foreign (2,947,000) 2,436,000 2,783,000
Identifiable Assets:
U.S. 170,828,000 119,160,000 100,080,000
Foreign 7,261,000 7,511,000 6,718,000
NOTE 10: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended June 30, 1996
and 1995, are as follows (dollars in thousands, except for per share
amounts):
1996 Quarter
-------------------------------------------------------- Total
First Second Third Fourth Year
--------------------------------------------
Revenues $59,839 $66,940 $68,412 $64,816 $260,007
Income Before
Interest and Taxes 7,382 9,336 8,822 8,221 33,761
Net Income 4,031 5,385 5,062 4,767 19,245
Earnings Per Common
Share 0.24 0.32 0.30 0.28 1.14
1995 Quarter
------------------------------------------------------- Total
First Second Third Fourth Year
--------------------------------------------
Revenues $51,955 $59,299 $59,739 $57,600 $228,593
Income Before
Interest and Taxes 5,770 8,198 7,652 7,209 28,829
Net Income 2,932 4,343 4,098 3,523 14,896
Earnings Per Common
Share 0.18 0.26 0.24 0.21 0.89
63
Report of Independent Accountants
---------------------------------
To the Board of Directors
and Shareholders of DeVry Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 66 present fairly, in all
material respects, the financial position of DeVry Inc. and its subsidiaries
at June 30, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
August 6, 1996
64
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
There were no changes in or disagreements with accountants on accounting
and financial disclosure.
65
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ----------------------------------------------------------------------
Information regarding directors and nominees for directors of the Company
is included in the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1996, and is incorporated herein by
reference. Information regarding executive officers is included on pages
34 through 36 in Part I of this Form 10-K.
Information regarding compliance with Section 16(a) filings, if required,
will be included in the Proxy Statement for the Annual Meeting of
Stockholders to be held November 19, 1996, and is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
Information regarding compensation of executive officers of the Company is
included in the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1996, and is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners and
management is included in the definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on November 19, 1996, and is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Information regarding certain relationships and related transactions is
included in the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 19, 1996, and is incorporated herein by
reference.
66
PART IV
--------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements
The following financial statements of the Company and its subsidiaries
are included in Part II, Item 8, on pages 48 through 63 of this Form
10-K.
10K
Report Page
-----------
Consolidated Balance Sheets at
June 30, 1996 and 1995 48-49
Consolidated Statements of Income for the
years ended June 30, 1996, 1995 and 1994 50
Consolidated Statements of Cash Flows for
the years ended June 30, 1996, 1995 and 1994 51
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 1996,
1995 and 1994 52
Notes to Consolidated Financial Statements 53-62
Report of Independent Accountants 63
(2) Supplemental Financial Statement Schedules
The following supplemental schedule of the Company and its
subsidiaries is included on page 70 of this Form 10-K.
10K
Report Page
II. - Valuation and Qualifying Accounts 70
Schedules other than the one listed above are omitted for the reason
that they are not required or are not applicable, or the required
information is shown on the financial statements or notes thereto.
(3) Exhibits
A complete listing of exhibits is included on pages 71 through 72 of
this Form 10-K.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
fourth quarter of its fiscal year ending June 30, 1996.
67
FIVE-YEAR SUMMARY - OPERATING, FINANCIAL AND OTHER DATA
(Dollars in Thousands Except for Per Share Amounts)
YEAR ENDED JUNE 30, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
OPERATING:
Revenues $260,007 $228,593 $211,437 $191,915 $179,196
Depreciation 7,516 6,157 6,981 6,609 6,782
Amortization of Intangible Assets 63 63 346 190 410
Earnings Before Interest and Taxes (EBIT) 33,761 28,829 25,618 22,438 19,534
EBIT as a Percent of Revenues 13.0% 12.6% 12.1% 11.7% 10.9%
Interest Expense 1,063 3,070 4,615 6,849 9,661
Income before Cumulative Effect of Change in
Accounting Principle 19,245 14,896 12,225 9,431 5,889
Change from Prior Year in Income before Cumulative
Effect of Change in Accounting Principle 29.2% 21.8% 29.6% 60.1% NM
Net Income 19,245 14,896 12,225 9,431 21,687
Per Share:
Income before Cumulative Effect of Change in
Accounting Principle 1.14 0.89 0.73 0.57 0.36
Net Income 1.14 0.89 0.73 0.57 1.31
Shares Used in Calculating Per Share
Amounts (In Thousands) 16,830 16,727 16,694 16,631 16,668
FINANCIAL POSITION:
Cash and Cash Equivalents 29,948 26,252 22,704 13,344 16,015
Total Assets 178,089 126,671 106,798 99,210 110,769
Total Funded Debt 61,500 33,029 43,224 55,712 77,563
Total Shareholders' Equity 57,287 37,968 22,978 11,022 1,322
OTHER SELECTED DATA:
Cash Provided by Operating Activities 28,368 28,200 28,405 24,058 15,282
Capital Expenditures 18,352 14,551 6,288 5,147 3,892
Total Fall Term Student Enrollment 32,612 29,884 28,815 27,336 26,941
Shares Outstanding at Year-end
(in Thousands) 16,622 16,613 16,606 16,604 16,338
Closing Price of Common Stock
at Year-end 45 20 14 1/2 12 9/16 9
Price Earnings Ratio on Common Stock (1) 39 22 20 22 25
Number of Shareholders of Record 339 252 211 192 139
(1) Computed on trailing four quarters of fully diluted earnings before cumulative effect of accounting change.
68
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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: September 23, 1996 By /s/Dennis J. Keller
Dennis J. Keller
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and dates indicated below.
Signature Title Date
- --------- ----- ----
/s/Dennis J. Keller
Dennis J. Keller Chairman, Chief Executive
Officer and Director 09/23/96
/S/Ronald L. Taylor
Ronald L. Taylor President, Chief Operating
Officer and Director 09/23/96
/s/Norman M. Levine
Norman M. Levine Vice President, Chief
Financial Officer, Controller
and Principal Accounting Officer 09/24/96
/s/David S. Brown
David S. Brown Director 09/17/96
/s/Ann I. Gannon
Ann I. Gannon Director 09/17/96
______________________
Robert E. King Director
/s/Thurston E. Manning
Thurston E. Manning Director 09/17/96
69
SIGNATURES (CONTINUED)
----------------------
Signature Title Date
- --------- ----- ----
/s/Robert C. McCormack
Robert C. McCormack Director 09/18/96
/s/Julie A. McGee
Julie A. McGee Director 09/17/96
/s/Hugo J. Melvoin
Hugo J. Melvoin Director 09/18/96
70
DeVRY INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended June 30, 1996, 1995 and 1994
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Beginning Costs and Other Deductions End of
Description of Allowances and Reserves of Period Expenses Accounts (a) Period
- -------------------------------------- ---------- ---------- ---------- ---------- ----------
1996
Deducted from accounts receivable for
refunds and uncollectible accounts $5,368 $15,867 $ - $14,632 $6,603
Deducted from notes receivable for
uncollectible notes 24 - - 9 15
For loss on disposition of inventory 61 22 - 22 61
For loss on DeVry capital contributions
to Perkins loan program 1,275 272 - - 1,547
1995
Deducted from accounts receivable for
refunds and uncollectible accounts $6,121 $12,634 $ - $13,387 $5,368
Deducted from notes receivable for
uncollectible notes 29 5 - 10 24
For loss on disposition of inventory 62 15 - 16 61
For loss on DeVry capital contributions
to Perkins loan program 1,099 176 - - 1,275
1994
Deducted from accounts receivable for
refunds and uncollectible accounts $6,018 $14,252 $ - $14,149 $6,121
Deducted from notes receivable for
uncollectible notes 60 (15) - 16 29
For loss on disposition of inventory 41 40 - 19 62
For loss on DeVry capital contributions
to Perkins loan program 1,079 20 - - 1,099
71
INDEX TO EXHIBITS
-----------------
Sequentially
Exhibit Numbered Incorporated by
Number Exhibit Page Reference to
- ------ ------- ------------ ---------------
2(a) Agreement regarding purchase of Exhibit 2 to the
Becker CPA assets dated as of Company's Form 8-K
June 19, 1996. filed July 3, 1996
3(a) Certificate of Amendment Exhibit 3(a) to the
of Restated Certificate of Company's Form 10-K
Incorporation of the Registrant for the year ended
June 30, 1995
3(b) Amended and Restated By-Laws Exhibit 3(d) to
of the Registrant Amendment #1 of the
Company's Form S- 1,
#33-40151 dated
May 21, 1991
4(a) Amended and Restated Financing Exhibit 4(a) to the
Agreement, dated as of January 14, Company's Form 10-K
1994, between Keller Graduate for the year ended
School of Management, Inc., certain June 30, 1994
financial institutions and
Continental Bank N.A.
4(b) First Amendment, dated as of Exhibit 4(b) to the
July 18, 1995, to Amended and Company's Form 10-K
Restated Financing Agreement for the year ended
between Keller Graduate School of June 30, 1995
Management, Inc., certain
financial institutions and Bank
of America Illinois
4(c) Amended and Restated Financing
Agreement, dated as of June 12, 1996,
between Keller Graduate School of
Management, Inc., certain financial
institutions and Bank of America
Illinois. 73-175
4(d) Note Agreement, dated as of November 15, Exhibit 4(l) to the
1987, by and among Keller Graduate School Company's Form S-1,
of Management, Inc., the Registrant and #33-40151 dated
certain financial institutions regarding April 24, 1991
the 13% Senior Subordinated Notes and
the 13% Convertible Senior Subordinated
Notes
4(e) First Amendment and Exchange Agreement, Exhibit 4(m) to the
dated as of August 1, 1990, by and among Company's Form S- 1,
Keller Graduate School of Management, #33-40151 dated
Inc., the Registrant and certain financial April 24, 1991
institutions regarding the Note Agreement
dated as of November 15, 1987
4(f) Second Amendment to Note Agreement, dated Exhibit 4(m) to the
as of May 30, 1991, by and among Keller Company's Form 10-K
Graduate School of Management, Inc., the for the year ended
Registrant and certain financial June 30, 1991
institutions regarding the Note Agreement
dated as of November 15, 1987
72
Sequentially
Exhibit Numbered Incorporated by
Number Exhibit Page Reference to
- ------ ------- ------------ ---------------
4(g) Instrument of Waiver and Consent dated Exhibit 4(r) to the
as of August 31, 1992, by and among Company's Form S-3
Keller Graduate School of Management, Inc., #33-58636, dated
the Registrant and certain financial February 22, 1993
institutions regarding the Note Agreement
dated as of November 15, 1987
10(a) Registrant's Amended and Restated Stock Exhibit 10(a) to the
Incentive Plan Company's Form S-3,
#33-58636 dated
February 22, 1993
10(b) Registrant's 1991 Stock Incentive Exhibit 10(b) to the
Plan Company's Form S- 1,
#33-40151 dated
April 24, 1991
10(c) Registrant's 1994 Stock Incentive Exhibit 10(c) to the
Plan Company's Form 10-K
for the year ended
June 30, 1994
10(d) DeVry Inc. Amended and Restated
Profit Sharing Retirement Plan
dated effective as of July 1, 1992 176-237
10(e) First Amendment to the DeVry Inc.
Amended and Restated Profit Sharing
Retirement Plan 238
10(f) Employee Stock Purchase Plan Exhibit 10(f) to the
Company's Form S-3,
#33-58636 dated
February 22, 1993
10(g) First Amendment to Employee Stock Exhibit 10(h) to the
Purchase Plan Company's Form 10-K
for the year ended
June 30, 1994
10(h) Form of Indemnification Agreement Exhibit 10(d) to the
between the Registrant and its Company's Form S- 1,
directors #33-40151 dated
April 24, 1991
10(i) Employment Agreement between the Exhibit 10(f) to the
Registrant and each of Dennis J. Company's Form 10-K
Keller and Ronald L. Taylor for the year ended
June 30, 1991
21 Subsidiaries of the Registrant 239
23 Consent of Price Waterhouse LLP, 240
independent accountants
27 Financial Data Schedule 241