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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, 1997
Commission file number: 0-12751
DeVRY INC.
------------------------------------------------------
(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
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 2, 1997 - $777,742,000
--------------------------------
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 2, 1997 - 34,507,334 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 18, 1997, are incorporated into
Part III of this Form 10-K to the extent stated herein.
Exhibit Index located on Pages 89-91 Total number of pages, 102
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DEVRY INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE #
PART I
Item 1 - Business 3
Item 2 - Properties 37
Item 3 - Legal Proceedings 41
Item 4 - Submission of Matters to a Vote of Security Holders 42
- Executive Officers 43
PART II
Item 5 - Market for Common Equity
and Related Stockholder Matters 46
Item 6 - Selected Financial Data 47
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 47
Item 8 - Financial Statements and Supplementary Data 57
Item 9 - Changes in and Disagreements with Accountants 81
PART III
Item 10 - Directors and Executive Officers 82
Item 11 - Executive Compensation 82
Item 12 - Security Ownership of Beneficial Owners and Management 82
Item 13 - Certain Relationships and Transactions 82
PART IV
Item 14 - Exhibits, Financial Statements and Reports on Form 8-K 83
- Financial Statements 83
- Financial Statement Schedules 83
- Exhibits 84
- Reports on Form 8-K 84
- Signatures 86-87
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PART I
------
ITEM 1 - BUSINESS
- -----------------
DeVry Inc. (the "Company") is incorporated under the laws of the State of
Delaware. The Company, through its wholly-owned subsidiaries, 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. The Company also owns and operates the Becker CPA Review
("Becker"), which prepares candidates for the Certified Public Accountant
("CPA") and Certified Management Accountant ("CMA") professional certification
examinations; and the Corporate Educational Services Division ("CES"), a
provider of customized, on-site technical education and training services to
corporations and government agencies.
The amounts of revenue, earnings before interest and taxes and identifiable
assets of the Companys U.S. and foreign operations are included in Note 9 to
the Consolidated Financial Statements, Operations by Geographic Area.
DeVry Institutes
- ----------------
The DeVry Institutes were founded in 1931 by Dr. Herman DeVry and for more than
65 years have provided career-oriented technical education to high school
graduates in the United States and Canada. 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 eleven 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 an 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
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management program, followed by the introduction of an accounting program in
the spring of 1988. In 1997, the business operations program was reconfigured
and is now titled business administration. Other programmatic initiatives
include new delivery formats, such as weekend college, accelerated course
schedules and technology-assisted delivery options.
The DeVry Institutes initiated a facility improvement and expansion program in
1991 to attract and retain an increased student enrollment. The program has
included renovation and expansion of the Atlanta campus; relocation and
expansion of the suburban Chicago, Dallas, Los Angeles and New Jersey
Institutes; and opening of new branch or satellite campuses in Long Beach,
California; Scarborough and Mississauga (Toronto), Canada; and Alpharetta,
Georgia.
At the beginning of the spring 1997 semester, which is the final semester in
the Company's 1997 fiscal year, approximately 29,460 full and part-time
students 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 administration,
technical management and telecommunications management.
Cumulatively, total student enrollment for the three semesters of fiscal 1997
increased by 4.5% compared with fiscal 1996. In response to the expansions and
improvements initiated in the past several years, fiscal 1997 marks the seventh
consecutive year that total cumulative enrollment has increased from the prior
year. Since fiscal 1990, cumulative annual total student enrollment at the
DeVry Institutes has increased by more than 32%. The DeVry Institutes'
operations accounted for approximately 87% of the Company's revenues in 1997.
Classes began on July 14th for the summer 1997 semester. In this first
semester in the Company's 1998 fiscal year, which included the opening of a
new DeVry Institute satellite campus in Alpharetta, Georgia, a total of 29,510
students were enrolled in the DeVry Institutes' programs, a 6.9% increase from
the number of students enrolled in the summer term last year.
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This was the twentieth 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.
Changing demographics in the United States are expected to continue to benefit
the DeVry Institutes enrollment. From over 3,000,000 in 1981, the number of
high school graduates, which represents a substantial portion of the DeVry
Institutes' new student enrollment each year, declined steadily through the
1980's reaching a low of 2,482,000 in 1992. Growing slowly from 1993 through
1996, the number of high school graduates is projected, by the U.S. Department
of Education, to further increase to over 3,000,000, by the year 2004. Within
the states where the DeVry Institutes are currently located, the percent change
in the number of public high school graduates from 1993-94 to 1999-2000, as
projected by the U.S. Department of Education, is expected to increase by as
much as 34% in Arizona, 19% in Georgia, 18% in Texas and 15% in California, all
of which are greater than the national rate of increase during this period.
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 more than 40% of
the students enrolling at its DeVry Institutes are 25 years of age or older.
Over 20% of recent new students enrolled at the DeVry Institutes had some prior
college experience. 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. Programs are also being offered on weekends in some
locations to serve the working adult student and DeVry Institute has developed
a weekend Computer Information Systems curriculum with a shorter term length
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and time to completion. While this program, which is being offered at several
DeVry Institutes, is an intensive and demanding experience for students, it
enables 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. Plans are being developed for a weekend telecommunications
program which is currently scheduled to be offered in March 1998.
Each of the DeVry Institutes programs is designed to integrate general
education and technology or business. The DeVry Institutes general education
courses develop skills and competencies that help graduates enhance both their
professional and personal capabilities. Businesses require graduates that can
fit into an organization, work in teams, have an understanding of how business
works, interface well with customers and have the in-depth technical knowledge
to get the job done. 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.
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
with content variations introduced to meet local employment market needs. This
common curriculum allows students to transfer, if necessary, to a DeVry
Institute at a different location without interrupting their studies.
Distance delivery of education is becoming increasingly prominent. The DeVry
Institutes approach to distance learning is to focus on the quality of
education, not the technical feasibility of the delivery system. Last year,
DeVry Institutes entered into a strategic partnership with the University of
Alaska and several other universities and companies in a
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consortium that offers, over the Internet, a three-hour graduate level course
targeted to educators throughout the United States. Other distance learning
initiatives are being explored throughout the system to enhance student
learning opportunities.
Institutions that participate in Title IV financial aid programs must now, upon
request, disclose information about student completion rates to current and
prospective students. The federal Student-Right-To-Know Act defines the cohort
of students on which the institution must report as "first-time, full-time
degree-seeking" students. Completion rates, as defined by the Act, at each of
the U.S. DeVry Institutes generally fall within the range of completion rates,
as published by U.S. News and World Report 1997 America's Best Colleges, for
selected urban public colleges in the areas in which the DeVry Institute
operates. DeVry also admits many students who previously attended another
college and whose completion rates are not included in these statistics.
To facilitate student success, DeVry devotes significant resources to libraries
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.
Keller Graduate School of Management
- ------------------------------------
KGSM was founded in 1973 to offer a practitioner-based graduate management
program leading to a masters degree. In addition to the Master of Business
Administration ("MBA") program, which KGSM began offering in 1977, KGSM
introduced a Master of Project Management ("MPM") degree program in 1991 and a
Master of Human Resource Management ("MHRM") degree program in 1993. In
September 1995, KGSM began offering a Health Services Management ("HSM")
concentration within its MBA program. This HSM concentration is being offered
in response to the growing demands of the health services industry
professionals and professionals in related industries such as insurance or
pharmaceuticals. In February 1997, KGSM introduced a Master of
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Telecommunications Management ("MT") program to meet the need for expertise
in this growing field. This program is currently offered at most KGSM
locations. The MTM program at KGSM was developed in conjunction with the DeVry
Institutes, which offer an undergraduate telecommunications program.
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, classes are currently
offered at twenty locations nationwide with two additional centers scheduled to
begin offering classes in September 1997. KGSM operates six 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 busines and community
affairs.
KGSM is piloting distance-education delivery in several selected courses. A
distance learning model is being developed to complement existing
classroom-based instruction to offer courses and programs utilizing a mix of
learning modalities, including Internet based information access, e-mail and
threaded conversations, video tapes and teleconferences for information
exchange and interpersonal interaction. Distance-education programs provide
convenience and flexibility for students who are physically distant from
classrooms, who have time constraints in attending regular weekly classes
and/or who cannot find their desired courses or programs at the schools near
where they live or work.
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At the start of the June term, which falls primarily in the Company's 1998
fiscal year, enrollment at KGSM was 3,132, an increase of 531 students or
20.4% from the previous June. Historically, the summer term has been the
period of lowest enrollment during the year.
At the start of the summer 1997 semester, which is the first semester in the
Company's 1998 fiscal year, a combined total of approximately 32,642 full and
part-time students were enrolled in the Company's DeVry and KGSM educational
programs, up 8.1% from total of 30,201 full and part-time students in the
summer 1996 semester.
Becker CPA
- ----------
In June 1996, the Company acquired the Becker CPA Review. 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 head quartered in Los Angeles, offers classes at approximately
168 locations, including 24 international locations, compared to a total of 147
sites last year. In addition, to reach students for whom class attendance is
not practical because of location or schedule, Becker is offering the complete
course conveniently packaged on CD-ROM with the same supplementary printed
materials as would be received in a classroom.
Becker's proprietary course materials and teaching methods result in pass rates
on the CPA exam for Becker students which the Company believes are
substantially higher than the national average pass rate, producing more than
one-third of all students passing the CPA exam. In 1996, approximately 21,000
students attended Becker CPA review courses at its U.S. and international
locations. Becker CPA Review alumni now number over 200,000 since the course
was founded in 1957. The CMA exam preparation course was developed for the
many accountants who have moved to the corporate management and strategic
planning side of business.
Corporate Educational Services
- ------------------------------
To serve what the Company believes is a large and growing need for employee
training, the Corporate Educational Services division was created in 1991.
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CES 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.
CES draws on the faculty, staff and curriculum resources of the DeVry
Institutes nd KGSM systems as needed.
Competition
- -----------
The postsecondary education market is highly fragmented and competitive with no
single institution having a significant market share. There are more than
10,000 institutions in the United States that offer postsecondary education.
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. Also, it is
reported that more than 200 corporations, including Apple, AT&T and Intel,
now offer accredited courses that may be applied toward degrees.
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.
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The DeVry Institutes believe their competitive strengths include career-
oriented curricula developed with regular structured employer input which helps
ensure that graduates will be marketable to employers; faculty with related
industry experience; the demonstrated effectiveness of their career services
activities in obtaining education-related employment; their national brand
name; name recognition and market presence through national advertising and
student recruitment; 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. This results in a significant financial advantage to DeVry
students who are able to enter the work force one year earlier than if they had
attended a traditional four year institution.
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. Nationwide
there are more than 800 accredited 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
improve student performance, satisfaction and retention, KGSM introduced an
innovative teaching technique called System Supported Teaching and Learning
(SSTL)TM. This instructional process focuses on providing students and their
instructors with more frequent feedback and correctives using quizzes and
retests. The process is outcomes driven and is being applied to problem-
based core courses in which student retention can be significantly improved.
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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. KGSM also offers an accelerated format of its MBA
program on Saturdays at some locations for students who wish to complete their
degree more quickly and without disrupting their work week. 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 eight states and multiple locations within most of
these 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.
Becker competes with CPA exam preparation through self-study; with firm-
sponsored courses; with courses offered by colleges and universities; and with
other private training companies, some of which operate only on a local or
regional basis. According to the most recently issued report by the National
Association of State Boards of Accountancy, two-thirds of first-time CPA
candidates participated in a review course in the six months prior to taking
the 1996 exams. Taking a privately offered course was cited by 89% of these
first-time candidates, with college and firm- sponsored courses representing
the remainder in approximately equal amounts. Courses offered by colleges and
private competitors generally have a lower total course cost to help attract
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. Becker CPA courses undergo continuous review
and revision to stay current with the latest accounting practice. The high
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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 are testimony to the quality and value of the Becker methodology.
CPA review students in Illinois can now earn graduate academic credit at KGSM
for the CPA review course. These credits can be used to fulfill educational
requirements to sit for the CPA exam and can be applied toward any KGSM masters
degree program. This provides both Becker and KGSM with an important
competitive advantage. Efforts are underway to extend the granting of credit
to the other states in which KGSM operates.
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. Material 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.
Student Recruiting
- ------------------
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 two-thirds of the
DeVry Institutes' total enrollments. The DeVry Institutes employ approximately
380 admissions representatives and field recruiters throughout the United
States and Canada. In order to recruit students in certain states and
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Canadian provinces, representatives and recruiters must be licensed or
authorized by the appropriate regulatory agency. Regulations governing student
participation in U.S. federal financial assistance programs prohibit an
institution from paying a commission, bonus or incentive to the Company's
representatives and recruiters based upon their success in securing
enrollments. The Company believes that its method of representative and
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 potential applicants 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 students
transferring to DeVry from nearby junior colleges. Each of the DeVry
Institutes 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. Over 20% of new students recently
enrolled at the DeVry Institutes had some prior college experience.
Field student recruiters are salaried, full-time Company employees. Field
recruiters meet individually with prospective students who are contacted
primarily through high school, club and youth group presentations. These
student recruiters visited over 11,000 high schools in North America last year
and made 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, and DeVry's
locations across the U.S. are often
15
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.
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 Internet site
provides another avenue for students to receive information and apply for
admission.
To be admitted to a DeVry Institute program in the United States, an applicant
must be a high school graduate, have a General Education Development (GED)
certificate or hold a degree from an accredited postsecondary institution. In
Canada, an applicant must either be a high school graduate or meet "mature
student" criteria. Applicants must also meet minimum admissions and placement
examination scores which vary depending on the program to which they are
applying. In 1996, the DeVry Institutes implemente the Computerized Placement
Tests which were designed in collaboration with The College Board and
Educational Testing Service. These exams help DeVry Institutes serve the needs
of its students by better assessing 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 U.S. institution that is accredited by or in
candidacy status with a regional accrediting agency. Foreign applicants must
hold a degree recognized to be equivalent to a U.S. bachelors degree.
Applicants must also achieve acceptable scores on either the Graduate
Management Admission Test (GMAT), the Graduate Record
16
Examination (GRE) or KGSM's alternative admission test, designed and validated
by Educational Testing Service. All admissions decisions are based on
evaluation of a candidates academic credentials, entrance test scores and
personal interview.
Becker 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 generate the new students who take the CPA or CMA review
courses, which are offered twice each year. Becker enrolls many students who
have previously completed a competitor's course or a self-study program but
were unable to pass the exam.
According to data published by the National Association of State Boards of
Accountancy, the number of first time CPA examination takers declined from
approximately 46,100 who sat for the 1994 exams to approximately 43,300 who
sat for the 1995 exams. First time takers for the 1996 numbered approximately
the same as in 1995.
Several states have either adopted or introduced legislation that requires 150
semester units (the equivalent of five years of college) before a candidate can
sit for the CPA exam. If the 150 semester unit legislation is broadly
implemented, it might have the effect of further reducing candidates for the
CPA exam. Additionally, some states have passed or may pass laws requiring
completion of all educational requirements before a candidate can take the CPA
exam. This has the effect of delaying, for six months or more, enrollment in
Beckers review class by some students in those states.
To overcome these recruiting challenges, Becker is expanding the number of
class locations to make it accessible to more students, has increased
advertising and promotional efforts and, as previously described, has
introduced the course on CD-ROM.
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Accreditation and Approvals
- ---------------------------
Accreditation is a process for recognizing educational institutions and the
programs offered by those institutions for achieving 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.
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, one
of the six regional collegiate accrediting agencies recognized by the U.S.
Department of Education. The North Central Association is 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. A scheduled interim progress monitoring
visit was conducted at the DeVry Institutes in
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May, 1997. A preliminary report from this visit includes a recommendation for
a report by the DeVry Institutes in April, 1999, on the status of its library
collections expansion. The next comprehensive visit remains at its originally
scheduled 2002 date.
Accreditations of the DeVry Institutes and KGSM in the United States and of the
DeVry Institutes in Canada are as follows:
UNITED STATES
- -------------
Commission on Institutions of Higher Education of the North
Central Association of Colleges and Schools.
Technology Accreditation Commission of the Accreditation Board for
Engineering and Technology (DeVry's Electronics Engineering Technology
Bachelor of Science Degree program except at Long Beach, California,
and Alpharetta, Georgia, which operate as branch campuses of
DeVry/Pomona and DeVry/Decatur, respectively, and, at the New Jersey
campus, the Electronics Engineering Technology Associate in Applied
Science Degree program)
CANADA
- ------
Ontario Association of Certified Engineering Technicians and
Technologists (DeVry/Toronto area campuses' Electronics Engineering
Technology and Electronics Engineering Technician programs).
Canadian Technology Accrediting Board (DeVry/Calgary's Electronics
Engineering Technology and Electronics Engineering Technician programs)
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' 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
19
Institute of Technology campus in the New York City area with authority to
grant certain bachelor and associate degrees. The Company is completing 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 Albert 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. Students
attending one of the Toronto-area campuses may transfer to Calgary to
participate in this program rather than transferring to a DeVry campus in the
United States.
KGSM is authorized to operate and award degrees under authority of the Illinois
Board of Higher Education and the appropriate approval boards in Arizona,
California, Georgia, Indiana, Missouri and Wisconsin.
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 over
$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 material compliance with state and
Canadian 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
20
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, 1997, the
Company had a ratio of current assets to current liabilities of 1.21:1. 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, 1997, the
Company believes that it has satisfactorily demonstrated its financial strength
and ability to continue to operate. Effective January 1, 1998, new legislation
provides that when another government agency requires an institution to file
annual financial audits, that agencys current ratio standard may apply in lieu
of the California standard if the ratio of current assets to current
liabilities under that standard is 1:1 or greater. DeVry currently files
audited financial statements each year with the U.S. Department of Education
and, at June 30, 1997, had the required current ratio of more than 1:1.
California law also required an on-site visit to all postsecondary institutions
having 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, 1996, and issued its report granting approval
for continued degree-
21
granting operation for the maximum five-year period. The California Council is
scheduled to be discontinued this year, and the Department of Consumer Affairs
has been designated as the new appropriate regulatory agency.
Tuition and Fees
- ----------------
Effective with the spring 1997 term, the DeVry Institutes' tuition in the
United States for two semesters (one academic year) ranged from $6,940 to
$7,015. Variations in tuition depend on term of enrollment. Students enrolled
on less than a full time basis are charged somewhat lower tuition. DeVry's
tuition rates compare to an average tuition at four-year independent
institutions of $12,820 and an average at four-year publicly supported
institutions of $2,970. DeVrys increase in tuition from spring 1996 was
approximately 5.5%. In its national survey of tuition released in the fall of
1996, The College Board reported that tuition and fees were increased an
average five percent for the 1996/97 academic year. This was one of the
smallest increases in the last 15 years. Based upon current tuition rates, for
a student enrolled in the DeVry Institute's 5 term electronics technician
program, total tuition cost would be $17,425. For a student enrolled in the 8
term accounting program, total tuition cost would be $27,835.
Effective with the spring 1997 term, tuition in Canada was increased to $6,380
(CDN) for the two semester period, an increase of approximately 6.0% from
spring 1996.
Effective with the September, 1997, term, KGSM tuition per course (four quarter
credit hours) ranges from $955 to $1,170, depending on the state in which the
student is enrolled. This compares to tuition rates from $905 to $1,110
implemented in September, 1996.
The price of the complete Becker CPA review course is $1,435, which includes an
enrollment fee. The price of the complete Becker CMA review course in $1,155,
which also includes an enrollment fee.
22
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
Canadian 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.
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 Company believes that approximately 75% 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 have received 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
23
aid. Government-sponsored financial aid is of great importance to the Company
because historically, slightly less than 70% of the DeVry Institutes' U.S.
tuition, book and fee revenues have been financed by government-provided
financial aid received by its students.
The government-provided financial aid and assistance programs in which many of
the Company's students participate are subject to political and governmental
budgetary considerations. In 1992, Congress reauthorized funding for financial
assistance programs through September, 1997, with an automatic one-year
extension if needed. Congress has begun the process of reauthorization but
there is no assurance that federal funding will be continued at its present
level or in its present form. 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.
The 1997 Tax Relief Act provides several education incentives. First,
employer-provided undergraduate educational assistance of up to $5,250 per year
will remain excluded from taxable income for several additional years. Second,
a HOPE tax credit of up to $1,500 for each student has been provided for
expenses paid after 1997 during each of the first two years of college. For
college juniors, seniors, graduate students and employees upgrading skills, a
Lifetime Learning credit of up to $1,000 per year has been provided for
expenses paid after June 30, 1998. Also, student loan interest expense during
the first 60 months of payments, in amounts ranging from $1,000 in 1998 to
$2,500 in 2001, will be allowed as a deduction from taxable income.
Extensive and complex regulations in the United States 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
24
recruiters. At June 30, 1997, 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, 1996, and
1995. 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. In addition to the regulations and standards which must be met by
the institution, student recipients of financial aid must maintain satisfactory
progress toward completion of their program of study and an appropriate grade
point average.
The Company maintains a staff at its Oakbrook Terrace headquarters to review,
interpret and establish procedures for compliance with regulations governing
financial assistance programs. Because financial assistance programs are
required to be administered in accordance with the standard of care and
diligence of a fiduciary, any regulatory violation could be the basis for
disciplinary action, including 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 all required
audits of compliance with federal financial assistance programs and its
independent accountants are currently conducting the required audits of the one
year period ending June, 1997. The Department of Education conducted a site
visit, in August, 1996, at the DeVry Institutes North Brunswick, New Jersey,
campus as a part of its program of periodic review of the administration of
student financial assistance programs. The visit was satisfactorily concluded
without further follow-up or action. 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
25
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, the DeVry Institutes Toronto-area campuses were notified at the end
of August, 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 might 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, and was recently completed, although no report has been issued
to-date. In order to restore financial aid eligibility, the Company refunded
to the Ministry approximately CDN $1.6 million for the 1995/96 academic year
which the Company believes is substantially all of the financial aid previously
inappropriately disbursed to such "zero income" students for this time period.
In addition, the Company posted a letter of credit at the Ministry's request
against possible additional amounts that may have been inappropriately
disbursed as determined by the Ministry audit. Effective with the spring 1996
term, which began in March, 1996, the Ministry conditionally reinstated
approval for the processing of financial aid applications. As a result of
these actions, the results of operations of the Companys Canadian operations
were adversely affected. Full unconditional reinstatement is subject to the
Ministry's completion of certain procedures regarding verification of the
Company's compliance with current financial aid processing regulations.
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
26
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 These funds, made available by the government to eligible
students who demonstrate financial need, 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
$2,700 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 Institutes 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. Historically, over 80% of the financial aid received by
students attending the Company's U.S. DeVry Institutes has been
provided by federal studunt loans. Students at KGSM participate in the
FDSL, which represents 100% of the federal financial aid received by
these students.
In 1993, Congress passed legislation creating the Direct Student Loan
Program. Under this program, students may complete all loan
application and processing steps at their educational institution.
Besides the 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
27
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, Illinois, 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 hile 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 regulation,
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 regulation,
which was reported on for the first time for the Company's 1995 fiscal year, is
commonly referred to as the "85/15 rule." Final data for fiscal 1997 is not
28
yet complete but, 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. Similarly in 1995,
the U.S. Institutes derived approximately 68% of their revenues from these
defined federal assistance 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 is
established as a separate institution 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 student's graduation or
termination of study. The receivable balance related to Company-provided
financial aid at the U.S. DeVry Institutes at June 30, 1997, was approximately
$11.9 million. Continued timeliness in financial aid processing and in the
collection of student-owed balances has restrained the rate of increase in
these receivables under the EDUCARD Plan to a rate approximately equal to the
rate of tuition revenue growth 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 Institutes Scholarship Competition annually offers merit- based
scholarships. The U.S. DeVry Institutes offered 30 full-tuition and 90 half-
tuition scholarships to 1996/97 high school graduates. Each scholarship covers
the application fee and tuition for one of DeVry's
29
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 $350,000 to 1996/97 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 historically, 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 institutions, institutions having large minority
populations 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 tighten
d 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,
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
30
default rate of 40% or more in any year is subject to immediate limitation,
suspension or termination proceedings from all federal aid programs. No DeVry
Institute has ever had a FFELP cohort default rate of 25% or more for three
consecutive years nor a cohort default rate of 40% or more in any one year.
Due to the recent introduction of the FDSL program, no default rates for this
program have yet been reported.
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 undergraduate 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, pre-published reports by the U.S. Department of
Education, the Company's schools had FFELP student loan cohort default rates
for 1995 (the latest year for which statistics are available) ranging from 1.7%
to 21.7%. The Company's weighted average FFELP cohort default rate is
preliminarily reported at approximately 16.1%. The reported rates for 1995
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 1996. For 1994
(the latest year for which "final" statistics are available), the Company's
weighted average FFELP cohort default rate was 17.6%. Cohort default rates are
subject to revision by the Department of Education as new data becomes
available and are subject to appeal by schools contesting the accuracy of the
data. Upon review of the calculations of these rates for each Institute, the
Company discovered errors and exceptions. The Company has requested that the
Department of Education recalculate the cohort default rates for 1994.
31
No DeVry Institute had a FFELP cohort loan default rate greater than 25% in
1995. In 1994, only one Institute had a cohort default rate greater than
25%, which was reported at 25.1%. This same Institute had a reported rate
of 26.6% for 1993. A default
management plan was initiated at this Institute, and it has requested that
the Department of Education recalculate its 1994 cohort default rate based
upon its belief that erroneous data was included and resulted in an
overstatement of the reported rate for
that year. Default rate reduction initiatives are underway at each
Institute. No DeVry Institute is subject to any restrictions or termination
under the student loan program.
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 Perkins loan 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 Perkins loan cohort default rates for 1996 (the latest year
for which statistics are available) range from 16.0% to 32.0%. the U.S. DeVry
Institutes weighted average Perkins loan cohort default rate was 23.2%. For
1995, the Perkins loan default rates ranged from 15.6% to 34.0%, and the U.S.
DeVry Institutes weighted average Perkins loan cohort default rate was
approximately 25.9%. Student counseling and additional collection efforts were
previously implemented and have,in part, contributed to the reduction in
default rates.
32
Career Services
- ---------------
The Company believes that the employment of its graduating students is
essential to its ability to attract new students. At the U.S. DeVry
Institutes, there were more than 46,000 graduates over the ten-year period
ending October, 1996, who were eligible or 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
44,000 graduates who actively pursued employment or were already employed,
91.7% 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 activity, resume preparation and job interviewing. The staff
also maintains contact with local and national employers to determine job
opportunities and arrange interviews.
The shortage of skilled employees has placed an increased premium on educated
workers as evidenced by the widening gap in wages of college vs. high-school
educated employees to 71% in 1993 from 28% in 1980. By the year 2000, it is
estimated that 85% of the jobs in the United States will require education or
training beyond high school from only 65% as recently as 1991.
The DeVry Institutes have formed a strategic alliance with Alternative
Resources Corporation ("ARC"). ARC is a leading provider of technical
staffing, whose 50 local offices can provide the DeVry Institutes students and
graduates with educational and carrer-enhancing opportunities ranging from
student internships to full-time employment opportunities in the computer
information services and telecommunications management fields. This alliance
enhances the DeVry Institutes ongoing career services activity and complements
the Companys commitment to providing quality career-oriented programs in
business and technology.
The DeVry Institutes attempt 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 DeVry Institutes.
33
Full and part-time U.S. degree and diploma program graduates for the three
classes which ended in calendar year 1996, and for the three classes which
ended in calendar year 1995, 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 Employed Positions Employed Employed
---------------------------------------------------------------
Calendar Year
1996 Graduating
Classes (2/96,
6/96, 10/96) 4,170 4,082 3,931 96.3% 94.3%
Calendar Year
1995 Graduating
Classes (2/95,
6/95, 10/95) 4,166 4,070 3,882 95.4% 93.2%
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.
Does not include students who actively pursued employment for less
than 6 months and did not obtain employment.
The majority of employers of the DeVry Institutes' graduates are in the
electronics or information processing industries. The Company believes that no
single employer has hired more than 5% of the DeVry Institutes' graduates in
recent years. Major employers of the DeVry Institutes'
34
graduates include the following companies: Andersen Consulting Group, Applied
Materials, AT&T, Cellular One, Eastman Kodak, EDS, General Electric Company,
Hewlett-Packard, IBM, Intel, MCI, Motorola 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 than for its classes beginning in December and January leading
to the spring 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, Quarterly Financial Data.
Administration and Employees
- ----------------------------
Each DeVry Institute's campus is managed by a president and has a staff of
academic deans, career service and student service personnel and other
professionals. Each campus also has an admissions director who reports to the
Companys vice president of admissions. Each KGSM center is managed by a center
director.
The Company has approximately 2,500 regular full- and part-time employees.
The Company employs over 230 people, approximately 10% of its total work force,
at its corporate headquarters in Oakbrook Terrace, Illinois, including KGSM
management and staff. In addition, the Company employs
35
approximately 1,200 students as faculty assistants and in other part-time
positions. Becker is managed by an administrative staff headquartered in
Los Angeles and by regional administrative staffs which support instructors
and coordinate local recruiting efforts. None of the Companys employees is
represented by a union. The Company believes that its relationships with its
employees are satisfactory.
Faculty
- -------
Each DeVry Institutes campus president hires faculty members in accordance with
criteria established by the Company and applicable state law. Most faculty
members teaching in technical areas have related industry experience. The
strategic alliance between the DeVry Institutes and Alternative Resources
Corporation provides selected faculty with developmental projects or consulting
opportunities to maintain and enhance their currency in the deployment of
technology in business. Faculty members are evaluated each semester based on
student comments and observations by an academic dean. There are approximately
650 full-time faculty members among all of the DeVry Institutes campuses.
Approximately 80% of the DeVry Institutes faculty members hold advanced a
ademic degrees. In addition, DeVry Institutes engaged approximately 550 part-
time, adjunct and visiting faculty, mostly in the evening programs.
KGSM faculty members are practicing business professionals who are engaged by
KGSM to teach on a course-by course basis. A multi-session training course is
used to train and develop new faculty throughout KGSMs national system. Over
the past several years, KGSM has begun selectively utilizing full-time faculty
to respond to student demand in rapidly developing areas and to meet approval
requirements in certain states. Less than 10% of KGSMs instructors, excluding
staff members who regularly teach, are full- time employees of KGSM. More than
90% of KGSMs faculty have advanced degrees. KGSM classes are taught by over
300 faculty members during the year. Beckers faculty, numbering approximately
500 each term, are primarily practicing professionals who teach part-time on a
course-by- course basis.
36
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.
37
ITEM 2 - PROPERTIES
- --------------------
DeVry Institutes
- ----------------
The DeVry Institute campuses are located in both suburban communities and urban
neighborhoods. They are easily accessible to major thoroughfares. Each
Institute campus includes teaching facilities, admissions and administrative
offices. Teaching facilities are housed in modern buildings that include
classrooms, laboratories, libraries, bookstores and student lounges.
Electronics laboratories include PC-based instrumentation and microprocessor
development/circuit simulation systems along with analog and digital
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 six 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, 99,000 square foot Company-owned facility in North Brunswick, N.J., in
advance of the summer term class start.
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 conducted educational operations at
June 30, 1997:
38
DEVRY INSTITUTE CAMPUSES
---------------------------
Full and
Part-Time
Area Students
(Approximate Attending
Square Feet) Spring 1997 Ownership
Decatur (Atlanta), Georgia 107,500 2,915 Owned
Chicago, Illinois 104,850 3,187 Owned
Addison (Chicago), Illinois 91,600 3,307 Leased
Columbus, Ohio 106,480 2,458 Owned
North Irving (Dallas), Texas 95,250 2,384 Leased
Kansas City, Missouri 74,500 2,125 Owned
Phoenix, Arizona 120,200 2,715 Owned
Pomona (Los Angeles), California 100,500 2,971 Leased
Long Beach (Los Angeles),
California 98,240 1,409 Leased
North Brunswick, New Jersey 99,000 2,778 Owned
Calgary, Alberta, Canada 42,900 1,271 Leased
North York (Toronto), Ontario,
Canada 51,690 866 Leased
Scarborough (Toronto), Ontario,
Canada 35,400 656 Leased
Mississauga (Toronto), Ontario,
Canada 42,300 418 Leased
------
29,460
======
Includes 14,400 square feet of modular buildings.
A new DeVry Institute began operation in July 1997 in Alpharetta (Atlanta),
Georgia, in a build-to-suit, leased campus. The facility, of approximately
65,000 square feet, is being operated as a branch location of the DeVry
Institute in Decatur, Georgia.
In the fourth quarter of fiscal 1997, the Company completed the purchase of
land in Fremont (San Francisco), California, for construction of a campus to
serve the Northern California area. Also purchased in the fourth quarter of
fiscal 1997 was a parcel of land in the San Fernando Valley, California, for
construction of a third campus in the Los Angeles area. Purchase of an
adjoining parcel of land, necessary to complete the site, was completed in
August, 1997. In New York, a search is nearing completion for an existing
building that can be renovated to the Company's specifications for operation
in the New York City area.
39
In Calgary (Alberta), Canada, the Company has signed a lease for a build- to-
suit campus of approximately 70,000 square feet to replace its current DeVry
Institute location by the summer 1998 term.
KGSM
- ----
KGSM centers are housed in modern buildings whose locations were chosen for
their convenience to students. KGSM centers, which range in size from
approximately 4,100 to 7,600 square feet, include teaching facilities,
admissions and administrative offices. Each KGSM facility has an information
center designed to enhance students success and to support coursework requiring
data and information beyond that provided in course texts and packets. The
information centers include personal computers; all software required in
courses; Internet access; alternate texts; sample business plans; popular
business periodicals; videos of selected courses; a career services video and
texts, and access to more than three hundred electronic data-bases.
In the fall of 1996, KGSM opened a center in Oakbrook Terrace, Illinois. This
is the seventh center in the Chicagoland area.
The downtown Chicago center relocated to a new and larger facility in the
downtown Chicago area in fall 1996 to permit increased enrollment at this
location.
In April, 1997, Keller opened its third center in California, the twentieth
center in the system, in Irvine, California.
The table below sets forth certain information regarding each of the properties
at which KGSM conducted educational operations in the April, 1997, term:
40
KGSM CENTERS
------------
Part-Time
Students
April 1997 Ownership
---------- ---------
Chicago, Illinois 423 Leased
Schaumburg, Illinois 408 Leased
Downers Grove, Illinois 251 Leased
Lincolnshire, Illinois 348 Leased
Orland Park, Illinois 161 Leased
Elgin, Illinois 175 Leased
Oakbrook Terrace, Illinois 211
Milwaukee, Wisconsin 220 Leased
Waukesha, Wisconsin 192 Leased
Tysons Corner, Virginia 116 Leased
St. Louis, Missouri 107 Leased
Kansas City, Missouri (downtown 149 Leased
Kansas City, Missouri 173
Phoenix, Arizona 151
Mesa, Arizona 181 Leased
Decatur, Georgia 249
Atlanta, Georgia 264 Leased
Pomona, California 170
Long Beach, California 135
Irvine, California 10 Leased
Distance Learning 24 -
-----
4,118
=====
Operates at the Companys corporate headquarters location
Operates on a DeVry Institute campus.
In September, 1997, KGSM is opening two additional centers one in Merrillville,
Indiana, and one in the new DeVry Institute location in Alpharetta, Georgia.
Also in September, KGSM is relocating its Downers Grove, Illinois, center to
Lisle, Illinois, with in a Bellcore (a large training, consulting and research
organization serving the telecommunications industry) research and office
facility to take advantage of state-of-the-art telecommunications laboratory
equipment at this site.
New KGSM centers in San Diego, California, and St. Louis, Missouri, are
expected to open in November, 1997. These will be the twenty-third and
twenty-fourth centers in the system.
41
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. Becker classes are also currently offered in
several DeVry Institute campuses and at KGSM centers where the location and
facility availability are appropriate.
Corporate
- ---------
The Company's administrative offices are located in approximately 70,000 square
feet of leased space in an office tower 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 15 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 legal proceeding which the
Company believes is material 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 to the Companys Consolidated Financial Statements).
42
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.
In fiscal 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 Toronto-area schools. Full
unconditional reinstatement is subject to the Ministry's completion of certain
procedures regarding verification of the Company's compliance with current
financial aid processing regulations.
In July, 1996, the Company and DeVry Canada were served with a purported class
action lawsuit in Canada by a former student alleging breach of contract and
misrepresentation about the quality of the DeVry Institutes' educational
programs, seeking up to CD $400 million in compensatory and punitive damages.
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 and the certification
of the class. A date for oral presentations concerning the pending motion to
certify the class has not yet been scheduled. Following oral presentations,
and subject to the judges schedule, he will rule on whether a class should be
certified.
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.
43
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 56 Mr. Keller co-founded KGSM in 1973. From
the inception of the Company,
Chairman of the Board Mr. Keller has been Chairman of the Board
and Chief Executive Officer 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
Graduate School of Business.
Ronald L. Taylor 53 Mr. Taylor co-founded KGSM in 1973 and
has been a director since its inception.
Director, President and In 1981, Mr. Taylor became President and
Chief Operating Officer Chief Operating Officer. Mr. Taylor is
a graduate of Harvard University and
holds a Master of Business Administration
degree from Stanford University.
Marilynn J. Cason 54 Ms. Cason joined the Company in 1989 with
responsibility for the Companys legal
Senior VIce President, General affairs and human resources. In her
Counsel and Corporate Secretary current position as a Senior Vice
President, Ms. Cason has responsibility
for facilities planning, purchasing and
management information systems in addition
to her responsibilities for legal affairs
and human resources.
Norman C. Metz 49 Mr. Metz joined the Company in 1983 as a
Vice President. In 1986, Mr. Metz assumed
Senior Vice President responsibility for operations of the DeVry
Institutes. In addition, Mr. Metz is
currently responsible for both regional
student recruiting and recruiting in the
admission offices at the Institute
locations.
44
Name, Age and Office Business Experience
- -------------------- -------------------
O. John Skubiak 47 Mr. Skubiak has been with KGSM for more
than 19 years, progressing from admissions
Senior Vice President 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 54 Mr. Levine has been Controller of the
Company since 1987 and has been the Chief
Vice President, Controller Financial Officer since 1989. From 1982
and Chief Financial Officer to 1987, Mr. Levine was Controller of the
DeVry Institutes.
George W. Fisher 45 Mr. Fisher joined the Company as Vice
President, Canadian Operations in 1985.
Vice President, Regional His responsibilities currently include
Operations operations of several of the DeVry
Institutes in the U.S. and Canada.
Patrick L. Mayers 57 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 Ph.D.
Affairs Degrees from the University of Chicago,
was elected an officer of the Company in
1987. Dr. Mayers has served as Vice
President of Academic Affairs for KGSM
until 1997. He is currently the Vice
President of Academic Affairs for the
DeVry Institutes.
Gerald Murphy 50 Mr. Murphy joined the Company in late 1995
as a Vice President with responsibility
Vice President, Regional for the operation of several of the DeVry
Operations Institutes in the U.S. and Canada. Prior
to joining DeVry, Mr. Murphy served as a
Vice President of Educational Management
Corp. and of the Universal Technical
Institute.
45
Name, Age and Office Business Experience
- -------------------- -------------------
James Otten 48 Dr. Otten joined the Company in late 1995
as a Vice President with responsibility
Vice President, Regional for the operation of several of the U.S.
Operations 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 46 Ms. Thomas-Parrott joined the Company in
1982 after several years as an officer in
Vice President, Government the U.S. Department of Education's Office
Relations 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.
Kenneth Rutkowski 50 Mr. Rutkowski joined the Company in 1985
as Director of Operations and
Vice President, Operations Administrative Services and was promoted
Services and Administration to his current position in 1991. His
current responsibilities include managing
the Company's real estate and various
administrative functions.
Vijay Shah 46 Mr. Shah joined the Company in 1977
progressing from representative in a DeVry
Vice President, Admissions Institute admissions office to director of
admissions. He has been DeVry's National
Director of Admissions since 1989 and was
promoted to his current position in
August, 1994.
Edward J. Steffes 47 Mr. Steffes joined the Company in 1984 as
director of marketing and was promoted to
Vice President, Marketing his current position in 1986. Mr. Steffes
is responsible for the Companys
advertising, sales promotion and public
relations.
46
PART II
- -------
ITEM 5 - MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
(a) Market Information
- ----------------------
The Company's common stock is listed on the New York Stock Exchange under
the trading symbol "DV." Prior to November 14, 1995, the Company's common
stock was quoted on The NASDAQ National Market.
The following table sets forth the high and low sales price information by
quarter for the past two years. All sales price information has been restated
to reflect the Companys two-for-one stock split, in the form of a 100% stock
dividend, effective December 18, 1996.
FISCAL 1997 FISCAL 1996
------------------ -------------------
HIGH LOW HIGH LOW
------------------ -------------------
First Quarter $23 7/16 19 $12 7/8 10
Second Quarter 25 3/8 18 3/8 14 1/16 11
Third Quarter 28 19 17 3/4 12 7/8
Fourth Quarter 29 7/8 21 5/8 22 15/16 16 1/2
(b) Approximate Number of Security Holders
- ------------------------------------------
There were 468 holders of record of the Company's common stock as of
September 2, 1997. 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.
(c) Dividends
- -------------
The Company is a holding company and, as such, is dependent on the earnings of
its subsidiaries for funds to pay cash dividends. Cash flow from the Companys
subsidiaries may be restricted by law and is subject to some
47
restrictions by covenants in the subsidiaries debt agreements. 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
85 of this report.
ITEM 7 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------
The following discussion of the Companys 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 Companys two-for-one
stock splits effective June 21, 1995, and December 18, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This new
statement, which will be adopted during the second quarter of the Company's
1998 fiscal year, redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share. Basic earnings per share excludes
potential dilution from issued but unexercised stock options. The Company
expects that the new standard will have the effect of raising its current
48
annual earnings per share by approximately $0.01. Upon adoption, all prior-
period earnings per share figures that are presented in the Companys financial
statements will be consistently restated.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year Ended June 30, 1997, vs. Fiscal Year Ended June 30, 1996
- --------------------------------------------------------------------
Tuition revenues in fiscal 1997 increased by $44.2 million, or 18.7% from
fiscal 1996. This was the largest tuition revenue increase in the history of
the Company. The increase in tuition revenues was produced by several positive
factors, including the June 1996 acquisition of Becker CPA Review. Enrollment
increases at DeVry Institutes and Keller Graduate School of Management (KGSM)
also contributed to the tuition revenue increase. Fiscal 1997 marks the
seventh consecutive year at DeVry Institutes in which cumulative total student
enrollment for the three semesters during the year have increased from the
previous year. At KGSM, cumulative total student enrollment for the five terms
of fiscal 1997 grew by 19.5% compared to fiscal 1996. Enrollment increases at
the DeVry Institutes reflect the opening of a new institute in Mississauga,
Ontario, Canada, and at KGSM, the opening of new centers in Oakbrook Terrace,
Illinois, and Irvine, California. Tuition revenues also increased because of
tuition rate increases of approximately 5%, which became effective at DeVry
Institutes in March 1997 and at KGSM in September 1996.
Other educational revenues, composed primarily of sales of books and supplies,
increased by $4.2 million, or 18.9%, because of sales to the increased number
of students attending the Companys educational programs. Interest income on
the Companys short-term investments of cash balances decreased by $72,000, or
6.8%, from the prior year because increased capital spending and aggressive
debt reduction payments reduced average cash balances in excess of those
needed for daily operations.
49
Cost of educational services increased by $22.9 million, or 14.7%, in fiscal
1997 from the previous year. Cost of educational services includes the cost of
faculty and related staff, which consistently comprises 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
increase in cost of educational services reflects the additional faculty, staff
and facility costs of the Becker operations that were not a part of the
Companys results for fiscal 1996. Also, there were higher wage, benefit,
supply and service expenses associated with the growing number of operating
locations and increased student enrollments at DeVry Institutes and at KGSM.
Depreciation expense increased by $2.2 million, or 28.7%, from fiscal 1996 as
a result of extensive capital improvements and additions, particularly those
related to the opening of the new DeVry Institutes in North Brunswick,
New Jersey, and Mississauga, Ontario, Canada, and the continued expansion and
upgrading of school laboratories and teaching equipment throughout the system.
Tuition refunds and bad debt expense at DeVry Institutes declined by
approximately $200,000 from last year, even as total student enrollments
increased. This results from educational program and student service quality
initiatives that favorably affected student retention.
Student services and administrative expense increased by $16.5 million, or
23.2%, from fiscal 1996. Student services and administrative expense includes
the costs of new student recruiting, general and administrative costs, and
curriculum development. The increase this year in student services and
administrative expense reflects costs associated with Beckers operations, which
were not included in last years results. The increased spending also reflects
the marketing costs associated with generating the higher student enrollments
at DeVry Institutes and at KGSM for the terms that began in fiscal 1997 and
for their summer terms that begin in fiscal 1998. General and administrative
expense increased from last year and includes the ongoing costs of efforts
o restore unconditional financial aid processing at the Toronto-area campuses.
The increase in student
50
services and administrative cost also includes approximately $1.6 million in
amortization of intangibles and goodwill primarily associated with the Becker
acquisition.
The Companys fiscal 1997 earnings from operations, before interest expense and
taxes, were a record $42.7 million. Operating margins, which have been
steadily increasing each year, increased again to 13.9%, up from 13.0% and
12.6% in fiscal 1996 and fiscal 1995, respectively. Operating margins were
favorably affected by the inclusion of Beckers results, where operating margins
have historically been higher, by the higher revenues and improved facility
utilization from the increased enrollments at DeVry Institutes and KGSM, by
continued operations improvements and by cost containment measures.
Interest expense increased by $1.8 million from last year because of higher
outstanding debt levels resulting from the acquisition, for cash, of Becker
in June 1996. This increased interest expense was offset, in part, during the
latter part of the fiscal year by the proceeds of the April 1997 stock
offering, which were used to reduce debt.
The provision for income taxes of $15.7 million represents a 39.3% rate on
pretax income. This years rate is lower than the 41.1% rate in fiscal 1996
because of a lower effective state income tax rate on the Companys U.S.
operations.
Net income of $24.2 million, or $0.71 per share, was a record for any year,
increasing by 25.7% from fiscal 1996.
Fiscal Year Ended June 30, 1996, vs. Fiscal Year Ended June 30, 1995
- --------------------------------------------------------------------
Tuition revenues in fiscal 1996 increased by $29.1 million, or 14.0%, from
fiscal 1995. This increase was attributable to both higher student enrollment
at DeVry Institutes and KGSM and, to a lesser extent, to tuition increases
implemented during the year.
51
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, Ontario, Canada, campuses, both of which opened in the previous
year, and partly due to increased enrollments at the previously existing DeVry
Institutes. Fiscal 1996 was the sixth consecutive year that cumulative total
student enrollment at DeVry Institutes 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% compared to fiscal
1995. The increase in enrollments was due to higher enrollments at the Pomona
and Long Beach, California, centers, both of which opened in fiscal 1995; the
fiscal 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 DeVry Institutes
effective with the spring
term and effective with the fall term at KGSM. Tuition rates rose
approximately 5% at DeVry, which is slightly below the rate of the increase in
fiscal 1995 and below the average rate of tuition increases at other colleges
and universities. Tuition rates rose similarly at KGSM.
Other educational revenues increased by $2.5 million, or 12.3%, because of
sales of books and supplies to the increased number of students attending the
Companys educational programs. Interest income on short-term investments of
cash balances declined by $117,000, or 10.0%, from fiscal 1995, as the higher
level of payments for taxes on income, payments and accounts 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 fiscal 1996.
Cost of educational services rose by $18.5 million, or 13.6%, in fiscal 1996
from fiscal 1995. Costs associated with the new DeVry institutes and KGSM
centers contributed to this increase, along with higher educational costs
resulting from higher student enrollments at existing locations. Depreciation
expense on the Companys' continued investment in facilities
52
and equipment for its students increased by $1.4 million or 22.1% from fiscal
1995. Tuition refund and uncollectible account expense increased in the year
partly because of higher enrollments and higher tuition revenue at DeVry
Institutes and KGSM and partly because of the higher proportion of new DeVry
Institutes students in fiscal 1996 as a result of growing new student
enrollments. New student enrollment at the DeVry Institutes increased by
10.5% from fiscal 1995 to fiscal 1996. New students historically withdraw at
higher rates than do students in later terms.
Student services and administrative expense increased by $7.9 million, or
12.6%, from fiscal 1995. 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 and administrative expenses
increased from fiscal 1995 partly due to normal inflationary change and partly
because of costs associated with the effects of the Ontario Ministry of
Education and Trainings suspension and subsequent conditional reinstatement of
financial aid eligibility for students attending the Companys Toronto-area
campuses.
The Companys earnings from operations, before interest expense and taxes on
income, reached a record $33.8 million for fiscal 1996. This represents an
operating margin of 13.0%, up from 12.6% and 12.1% in fiscal 1995 and fiscal
1994, respectively. Higher revenues and cost containment measures contributed
to the improved margins.
Interest expense was reduced by $2.0 million, or 65.4%, to $1.1 million for
fiscal 1996 from fiscal 1995. The lower interest expense resulted from lower
outstanding levels of debt throughout most of fiscal 1996 and the absence of
the non-recurring make-whole premium payment made in fiscal 1995, when the
Company voluntarily prepaid all of its senior subordinated notes.
Net income of $19.2 million, or $0.57 per share, was a record for any fiscal
year, increasing by 29.2% from fiscal 1995.
53
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Companys primary source of liquidity is the cash received from student
payments for tuition, fees and books. These payments include cash from student
and family educational loans, from other financial aid under various federal,
state and provincial programs, and from student and family resources.
The pattern of cash receipts is somewhat seasonal. 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 DeVry
Institutes semesters, which begin in July, November and March. Collections of
DeVry Institute 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,
t which time substantially all financial aid for the previous 12 months has
been disbursed to students accounts. Both KGSM and Becker also experience
seasonality in their cash receipts and expenditures based upon their respective
operating cycles. At June 30, 1997, total Company accounts receivable, net of
the related deferred tuition revenue, increased by less than $550,000. The
increase in receivables was generated by higher enrollment and revenue levels
in the Companys educational programs.
The Company estimates that historically slightly less than 70% of DeVry
Institutes tuition, bookstore and fee revenues have been financed by
government-provided financial aid to its students. These financial aid and
assistance programs are subject to political and governmental budgetary
considerations. There is no assurance that such funding will be maintained at
current levels. Extensive and complex regulations in the United States and
Canada govern all of the government financial assistance programs in which the
Companys students participate. The Companys administration of
54
these programs is periodically reviewed by various regulatory agencies. Any
regulatory violation could be the basis for disciplinary action, including
initiation of a suspension, limitation or termination proceeding against the
Company.
Under the terms of the Companys 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 DeVry Institutes and KGSM, contributing to the Companys liquidity.
At June 30, 1997, cash held in restricted bank accounts was reduced to $12.1
million, down nearly $4.5 million from the end of the previous year.
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 DeVry Institutes in 1987. All of
these issues have been resolved as a result of the settlement. The settlement
amount was paid in the first quarter of fiscal 1997 and is immaterial to
Companys financial position, results of operations and liquidity.
Cash generated from operations in fiscal 1997 reached a record $42.4 million
after remaining at approximately $28.3 million in each of the last two years.
Higher earnings, the increased non-cash sources of depreciation and
amortization, plus an increase in deferred tuition revenue accounted for nearly
$10.9 million of the increased operating cash flow. Traditionally, the Company
has been able to help fund its expansion through operations with negative
working capital during most of the year. The generation and use of cash during
the year reflects the seasonal operating patterns discussed above. During some
55
periods just prior to the start of a semester, cash balances may be
supplemented by temporary borrowings under the Companys revolving line of
credit. Cash generated from operations each year has been sufficient to meet
all of the Companys operating needs and capital investment needs, while
reducing debt on a regular basis.
Capital expenditures in fiscal 1997 reached a record $28.8 million. Capital
expenditures were made for expansion and facility improvement, replacement and
upgrading of school laboratories and for teaching and administrative equipment.
Contributing to 1997's record spending were the purchases of land in Fremont
(San Francisco), California and West Hills (Los Angeles), California, both of
which will be sites of future DeVry institutes as a part of the Companys
expansion plans during the coming years. Capital expenditures in fiscal 1998
are expected to decrease somewhat from the record 1997 level but should remain
significantly above the level of the previous years as construction begins on
these new campuses and further expansion at KGSM and Becker into new operating
sites is accelerated. Cash generated from operations and existing cash
resources have been sufficient to meet capital requirements in the past and,
with the Companys revolving line of credit, are anticipated to be sufficient
to cover expansion plans in the future.
In April 1997, the Company completed an offering of 1.2 million additional
shares of its common stock. Net proceeds of the offering were approximately
$23.6 million, of which $23.0 million was used to repay indebtedness under the
Companys revolving line of credit.
In June 1997, the Company and its banks renegotiated the Companys 1996
revolving term loan agreement to increase the level of annual capital
expenditures permitted by the agreement to facilitate current and future
expansion plans. At June 30, 1997, approximately $34.5 million of the
revolving line had been utilized in the form of borrowings and letters of
credit, a reduction of $28.5 million from the level of borrowing one year
earlier. Included in these borrowings is a $2.0 million ($CDN) letter of
56
credit posted with the Ontario Ministry of Education and Training in
conjunction with the conditional reinstatement of financial aid processing at
the Companys Toronto-area campuses. Future borrowings and/or repayments will
be based upon the Companys seasonal cash flow cycle and payment requirements
for capital spending and possible future acquisitions.
Effective July 1, 1997, the Companys bank borrowings are at a floating rate of
LIBOR plus 0.5%. Effective October 1, 1997, the Companys bank borrowings will
be reduced again to a floating rate of LIBOR plus 0.35%. At the present time,
the Company does not have an interest rate swap or other form of protection
against increases in the floating rate but does fix the interval of interest
rate adjustment on most of its borrowings for a three- to six-month period to
eliminate some of the possible variability in rates. The Company periodically
evaluates its need for additional protection in light of projected changes in
interest rate 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.
57
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following financial statements of the Company and its subsidiaries are
included below on pages 58 through 80 of this report:
10K
Report Page
-----------
Consolidated Balance Sheets at
June 30, 1997 and 1996 58-59
Consolidated Statements of Income for the
years ended June 30, 1997, 1996 and 1995 60
Consolidated Statements of Cash Flows for
the years ended June 30, 1997, 1996 and 1995 61
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 1997,
1996 and 1995 62
Notes to Consolidated Financial Statements 63-79
Report of Independent Accountants 80
58
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
1997 1996
--------- ---------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 38,865 $ 29,948
Restricted Cash 12,104 16,590
Accounts Receivable, Net 12,322 9,684
Inventories 4,549 3,290
Prepaid Expenses and Other 2,676 2,055
------- -------
Total Current Assets 70,516 61,567
------- -------
Land, Buildings and Equipment:
Land 34,348 18,956
Buildings 50,906 50,570
Equipment 63,609 51,198
Construction In Progress 91 -
------- -------
148,954 120,724
Accumulated Depreciation (58,266) (49,283)
------- -------
Land, Buildings and Equipment, Net 90,688 71,441
------- -------
Other Assets:
Intangible Assets, Net 37,770 37,709
Perkins Program Fund, Net 6,075 5,483
Other Assets 1,654 1,889
------- -------
Total Other Assets 45,499 45,081
------- -------
TOTAL ASSETS $ 206,703 $ 178,089
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
59
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
1997 1996
--------- ---------
LIABILITIES:
Current Liabilities:
Accounts Payable $ 22,301 $ 18,859
Accrued Salaries, Wages and Benefits 16,077 14,735
Accrued Expenses 7,620 7,640
Advance Tuition Payments 6,594 7,617
Deferred Tuition Revenue 5,701 3,609
------- -------
Total Current Liabilities 58,293 52,460
------- -------
Other Liabilities:
Revolving Loan 33,000 61,500
Deferred Income Tax Liability 3,060 2,207
Deferred Rent and Other 7,080 4,635
------- -------
Total Other Liabilities 43,140 68,342
------- -------
TOTAL LIABILITIES 101,433 120,802
------- -------
COMMITMENTS & CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common Stock, $0.01 par value, 75,000,000
Shares Authorized,34,504,214 and
33,243,704 Shares Issued and Outstanding
at June 30, 1997 and 1996, Respectively 345 333
Additional Paid-in Capital 60,482 36,694
Retained Earnings 44,006 19,820
Foreign Currency Translation Adjustment 437 440
------- -------
TOTAL SHAREHOLDERS' EQUITY 105,270 57,287
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 206,703 $ 178,089
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
60
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
For The Year Ended
June 30,
1997 1996 1995
-------- -------- --------
REVENUES:
Tuition $280,774 $236,607 $207,530
Other Educational 26,558 22,341 19,887
Interest 987 1,059 1,176
------- ------- -------
Total Revenues 308,319 260,007 228,593
------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 178,135 155,254 136,721
Student Services and
Administrative Expense 87,480 70,992 63,043
Interest Expense 2,848 1,063 3,070
------- ------- -------
Total Costs and Expenses 268,463 227,309 202,834
------- ------- -------
Income Before Income Taxes 39,856 32,698 25,759
Income Tax Provision 15,670 13,453 10,863
------- ------- -------
NET INCOME $ 24,186 $ 19,245 $ 14,896
======= ======= =======
EARNINGS PER COMMON SHARE $0.71 $0.57 $0.45
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
61
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For The Year Ended June 30,
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $24,186 $19,245 $14,896
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 9,676 7,516 6,157
Amortization 1,586 63 63
Provision for Refunds and
Uncollectible Accounts 16,786 16,130 12,810
Deferred Income Taxes 1,978 (456) 5,480
(Gain) Loss on Disposals of Land,
Buildings and Equipment (116) 19 (7)
Changes in Assets and Liabilities:
Restricted Cash 4,486 3,589 (9,130)
Accounts Receivable (19,257) (18,645) (11,746)
Inventories (1,259) 263 (629)
Prepaid Expenses And Other (1,746) (118) (128)
Perkins Program Fund Contribution
and Other 274 (1,188) (1,649)
Accounts Payable 3,442 3,210 3,136
Accrued Salaries, Wages,
Expenses and Benefits 1,322 6,239 667
Advance Tuition Payments (1,023) (7,340) 7,943
Deferred Tuition Revenue 2,092 (159) 337
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 42,427 28,368 28,200
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (28,807) (18,352) (14,551)
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 (28,807) (53,217) (14,551)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Exercise of Stock Options 217 84 47
Net Proceeds from Common Stock Offering 23,583 - -
Proceeds From Revolving Credit Facility 15,000 46,500 22,000
Repayments Under Revolving Credit Facility (43,500) (18,029) (20,000)
Repayments of Debt - - (12,195)
------ ------ ------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (4,700) 28,555 (10,148)
Effects of Exchange Rate Differences (3) (10) 47
------ ------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,917 3,696 3,548
Cash and Cash Equivalents at Beginning
of Year 29,948 26,252 22,704
------ ------ ------
Cash and Cash Equivalents at End of Year $38,865 $29,948 $26,252
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Year $2,893 $1,429 $3,367
Income Taxes Paid During the Year 16,778 13,902 7,080
The accompanying notes are an integral part of these consolidated
financial statements.
62
DEVRY INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
For The Year Ended June 30,
1997 1996 1995
--------- -------- --------
Common Stock:
Beginning of year $ 333 $ 333 $ 333
Proceeds from public offering 12 - -
--------- -------- --------
End of year 345 333 333
========= ======== ========
Additional Paid-In Capital:
Beginning of year 36,694 36,610 36,563
Proceeds from public offering 23,571 - -
Proceeds from exercise of stock options 217 84 47
--------- -------- --------
End of year 60,482 36,694 36,610
========= ======== ========
Retained Earnings (Accumulated Deficit):
Beginning of year 19,820 575 (14,321)
Net income per accompanying statement 24,186 19,245 14,896
--------- -------- --------
End of year 44,006 19,820 575
========= ======== ========
Foreign Currency Translation Adjustment:
Beginning of year 440 450 403
Translation Adjustment (3) (10) 47
--------- -------- --------
End of year 437 440 450
========= ======== ========
TOTAL SHAREHOLDERS' EQUITY, END OF YEAR $ 105,270 $ 57,287 $ 37,968
========= ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
63
DEVRY INC.
Notes to Consolidated Financial Statements
June 30, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DeVry Inc. (the Company), through its wholly owned subsidiaries, operates an
international 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 administration, accounting, technical management and
telecommunications management. Until June 1997, the DeVry Institutes were
located on 10 campuses in the United States and four campuses in Canada. An
eleventh U.S. campus was opened in July 1997. Keller Graduate School (Keller)
awards master's degrees in business administration, human resource management,
project management and telecommunications management. Keller classes are
offered at 20 locations in Illinois, California, Missouri, Georgia, Wisconsin,
Arizona, and Virginia. Two additional locations are scheduled to open in
September 1997. Becker CPA Review (Becker CPA) 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 144 locations in the United States as well as at 24 international
locations. Becker CPA also offers a Certified Management Accountant (CMA)
examination review course in the United States. The Corporate Educational
Services division offers on-site management and technical training programs
for larger corporations and government agencies.
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 occurring at Becker CPA during the
intervening period before June 30, that materially affected 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 credit worthiness of the security issuers and financial
institutions with which it invests.
64
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial Aid and Restricted Cash
Financial aid and assistance programs, in which most of the Company's
students participate, are subject to political and governmental 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 disciplinary action, including 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.
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 $5,956,000 and $6,603,000 at June 30, 1997 and 1996, 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. No interest was capitalized for the year ended June 30, 1997. 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.
65
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets
Intangible assets relate to the acquired business operations of 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 $1,714,000 and $1,547,000 at June 30, 1997 and
1996, 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.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiary and other foreign operations are measured using the local currencies
as the functional currencies. Assets and liabilities of the foreign subsidiary
and other foreign operations 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, 1997, 1996 and
1995, 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.
66
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 splits (Note 7).
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 34,085,000, 33,661,000 and 33,454,000 in 1997, 1996 and 1995,
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.
Stock-based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which is effective for the Company's year ended
June 30, 1997. As permitted by SFAS 123, the Company has elected to continue
to account for its stock-based awards in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25") and has provided the pro forma disclosures as required by SFAS 123
for the years ended June 30, 1997 and 1996 in Note 7.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This new
statement, which will be adopted during the second quarter of the Company's
1998 fiscal year, redefines earnings per share under generally accepted
accounting principles. Under the new standard, primary earnings per share is
replaced by basic earnings per share and fully diluted earnings per share is
replaced by diluted earnings per share. Net income per share as reported and
the unaudited pro forma earnings per share based on the new standard are as
follows for the year ended June 30, 1997:
Net income per share as reported $0.71
Pro forma basic earnings per share $0.72
Pro forma diluted earnings per share $0.71
Reclassifications
Certain previously reported amounts have been reclassified to conform to the
current presentation format.
67
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 trade names 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 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 occurred 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 occurred, nor is it
necessarily indicative 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 $0.58 $0.45
68
NOTE 3: INTANGIBLE ASSETS
Intangible assets that were not fully amortized at June 30 consist of the
following:
1997 1996
----------- -----------
Trademarks $ 2,521,000 $ 2,521,000
Trade Names 17,465,000 17,465,000
Intellectual Property 17,425,000 17,425,000
Other 2,478,000 860,000
----------- -----------
39,889,000 38,271,000
Accumulated Amortization (2,119,000) (562,000)
----------- -----------
$37,770,000 $37,709,000
=========== ===========
69
NOTE 4: INCOME TAXES
The components of income (loss) before income taxes are as follows:
For the Year Ended June 30,
---------------------------------------
1997 1996 1995
---------------------------------------
U.S. $44,731,000 $35,645,000 $23,323,000
Foreign (4,875,000) (2,947,000) 2,436,000
---------------------------------------
Total $39,856,000 $32,698,000 $25,759,000
=======================================
The net income tax provisions (benefits) related to the above results are as
follows:
For the Year Ended June 30,
---------------------------------------
1997 1996 1995
---------------------------------------
Current Tax Provision:
U.S. Federal $12,575,000 $11,968,000 $ 3,141,000
State and Local 2,412,000 2,717,000 897,000
Foreign (1,295,000) (776,000) 1,345,000
---------------------------------------
Total Current 13,692,000 13,909,000 5,383,000
Deferred Tax Provision:
U.S. Federal 1,982,000 (214,000) 4,578,000
State and Local 455,000 (44,000) 838,000
Foreign (459,000) (198,000) 64,000
---------------------------------------
Total Deferred 1,978,000 (456,000) 5,480,000
---------------------------------------
Net Income Tax Provision $15,670,000 $13,453,000 $10,863,000
=======================================
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,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
Expected Provision $13,950,000 35.0% $11,444,000 35.0% $ 9,016,000 35.0%
Higher (Lower) Rates
on Foreign Operations (48,000) (0.1%) (312,000) (1.0%) 323,000 1.3%
State Income Taxes 1,864,000 4.7% 1,767,000 5.4% 1,123,000 4.4%
Other (96,000) (0.3%) 554,000 1.7% 401,000 1.5%
---------------------------------------------------------
Income Tax Provision $15,670,000 39.3% $13,453,000 41.1% $10,863,000 42.2%
=========================================================
70
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
--------------------------------------
1997 1996 1995
--------------------------------------
Loss Carryforwards $ - $ - $ 829,000
Employee Benefits 1,765,000 1,207,000 1,187,000
Tax Credits - - 47,000
Rental and Occupancy 644,000 762,000 787,000
Receivable Reserves and Other 3,710,000 2,953,000 1,608,000
--------------------------------------
Gross Deferred Tax Assets 6,119,000 4,922,000 4,458,000
Depreciation and Other (5,748,000) (4,837,000) (5,014,000)
Amortization (3,440,000) (1,176,000) (991,000)
--------------------------------------
Gross Deferred Tax Liabilities (9,118,000) (6,013,000) (6,005,000)
--------------------------------------
Net Deferred Taxes ($3,069,000) ($1,091,000) ($1,547,000)
======================================
Based on the Company's history of operating earnings and its expectations for
the future, management believes that operating income will 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,
--------------------------------------
1997 1996 1995
--------------------------------------
Realization of Operating
Loss Carryforwards $ - $ 829,000 $4,220,000
Excess Tax (Book) Depreciation
and Amortization 3,175,000 266,000 87,000
Excess of Amounts Expensed
for (Book) Tax Purposes
Over Amounts Deductible
for Book (Tax) Purposes (1,197,000) (1,603,000) 973,000
Other, Net - 52,000 200,000
--------------------------------------
Deferred Tax Provision $1,978,000 ($ 456,000) $5,480,000
======================================
71
NOTE 5: REVOLVING LOAN AGREEMENT
All of the Company's borrowings and letters of credit under its revolving loan
agreement are through KGSM. This agreement consists of a revolving credit and
letter of credit facility 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. This
agreement was amended again in June 1997 to permit increased annual capital
expenditures in conjunction with the Company's expansion plans. All borrowings
and letters of credit under the revolving loan agreement mature in August 1999,
and there are no required installment payments. Outstanding borrowings under
the revolving loan agreement are $33,000,000 and $61,500,000 at June 30, 1997
and 1996, respectively. There is also a $1,440,000 letter of credit
outstanding under this agreement at June 30, 1997 and 1996. Outstanding
borrowings under the revolving loan agreement bear interest, payable quarterly,
at either the prime rate or a Eurodollar rate plus 0.625%, at the option of
the Comapny. Outstanding letters of credit under the revolving loan agreement
are charged an annual fee equal to 0.625% of the undrawn face amount of the
letter of credit, payable quarterly. Certain financial ratios have been
achieved at the end of the third and fourth quarters in fiscal 1997, which will
reduce the Eurodollar margin and letter of credit fee to 0.50% effective
July 1, 1997, and 0.35% effective October 1, 1997. The effective interest rate
on outstanding borrowings at June 30, 1997, was 7.34%.
The bank financing agreement contains certain covenants that, among other
things, limit annual capital expenditures 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 conjunction
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.
72
NOTE 6: EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan
All employees who meet certain eligibility requirements can participate in
Company's 401(k) Profit Sharing Retirement Plan. The Company contributes to
the plan an amount equal to 1.5% of the total eligible compensation of
employees who make contributions under the plan. Matching contributions under
the plan were approximately $1,131,000, $791,000 and $636,000 in 1997, 1996 and
1995, 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
$2,149,000, $1,898,000 and $1,566,000 in 1997, 1996 and 1995, respectively.
Employee Stock Purchase Plan
Under provisions of the DeVry Employee Stock Purchase Plan 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, 1997, 1996 and 1995.
73
NOTE 7: SHAREHOLDERS' EQUITY
Stock Splits
On June 21, 1995, and again on December 18, 1996, the Company's common stock
was split two-for-one in the form of 100% stock dividends. The par value of
the additional shares arising from both splits 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 both stock splits as though they had occurred at the
beginning of the initial period presented.
Stock Offering
In April 1997, the Company and certain shareholders completed an offering of
the Company's common stock. In this offering, the Company sold 1,200,000
shares of its common stock. The Company's proceeds of the offering, net of
underwriting discounts and commissions and other related expenses, were
approximately $23,580,000. Substantially all the net proceeds were used to
repay indebtedness. The Company did not receive any proceeds from the sale of
shares by the selling shareholders.
Stock Option Plans
The Company maintains three stock-based award 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 are 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 10 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.
At June 30, 1997, 1,502,770 authorized but unissued shares of common stock were
reserved for issuance under the Company's stock option plans.
74
NOTE 7: SHAREHOLDERS' EQUITY, continued
A summary of activity under the stock option plans is as follows:
Options Outstanding
---------------------------
Weighted
Shares Average
Available Number Exercise
for Grant Outstanding Price
----------------------- --------
Balance at June 30, 1994 1,232,800 361,200 $3.59
Options Granted (284,400) 284,400 $6.74
Options Exercised - (14,000) $3.33
Options Canceled 14,400 (14,400) $6.25
----------------------
Balance at June 30, 1995 962,800 617,200 $4.99
Options Granted (132,100) 132,100 $10.96
Options Exercised - (16,480) $5.14
Options Canceled 21,300 (21,300) $7.57
----------------------
Balance at June 30, 1996 852,000 711,520 $6.02
Options Granted (156,500) 156,500 $23.08
Options Exercised - (60,750) $3.58
Options Canceled 14,800 (14,800) $11.90
----------------------
Balance at June 30, 1997 710,300 792,470 $9.46
======================
A summary of outstanding and exercisable stock options as of June 30, 1997, is
as follows:
Options Outstanding Options Exercisable
---------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Shares Life Price Shares Price
-----------------------------------------------------------------------------
$0.79-1.75 123,950 1.55 $1.02 123,950 $1.02
$3.31-7.38 393,080 6.60 $6.37 227,960 $6.23
$10.13-12.56 122,940 8.14 $10.96 26,780 $10.96
$22.38-25.25 152,500 9.17 $23.08 - -
------- ---- ------ ------- ------
792,470 6.54 $9.46 378,690 $4.86
======= ==== ====== ======= ======
75
NOTE 7: SHAREHOLDERS' EQUITY, continued
Pro Forma Disclosure
As permitted under SFAS 123, the Company has elected to continue to follow
APB Opinion No. 25 in accounting for stock-based awards. Under APB Opinion
No. 25, the Company generally recognizes no compensation expense with respect
to such awards, since the exercise price of the common stock options awarded
are equal to the fair market value of the underlying security on the date of
the grant.
Pro forma information regarding net income and earnings per share is required
by SFAS 123 for awards granted after June 30, 1995, as if the Company had
accounted for its stock based awards under the fair value method of SFAS 123.
The fair value of the Company's stock-based awards was estimated as of the date
of grant using the Black-Scholes option pricing model. The Black-Scholes model
was developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. This model also requires highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair value.
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted at market price under the Company's stock option plans
during fiscal 1997 and 1996 was $12.57 and $5.89 per share, respectively. The
fair value of the Company's stock option awards was estimated assuming no
expected dividends and the following weighted average assumptions:
1997 1996
------- -------
Expected life (in years) 8.10 8.10
Expected volatility 34.59% 34.44%
Risk free interest rate 6.80% 6.52%
76
NOTE 7: SHAREHOLDERS' EQUITY, continued
Had the Company recorded compensation based on the estimated grant date fair
value, as defined by SFAS 123, for awards granted under its stock option plans,
the Company's net income and net income per share would have been reduced to
the pro forma amounts below for the years ended June 30, 1997 and 1996:
Fiscal Fiscal
1997 1996
------- -------
Net income as reported $24,186 $19,245
Pro forma net income $23,885 $19,162
Earnings per common share as reported $0.71 $0.57
Pro forma earnings per common share $0.70 $0.57
The pro forma effect on net income and earnings per common share for 1997 and
1996 is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation
expense related to grants made prior to fiscal year 1996.
77
NOTE 8: COMMITMENTS 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, 1997, are as follows:
Year Ended
June 30, Amount
---------- -----------
1998 $12,860,000
1999 12,780,000
2000 11,710,000
2001 11,570,000
2002 10,830,000
Thereafter 68,070,000
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, 1997, 1996 and 1995, were
$15,990,000, $13,879,000 and $12,553,000, respectively.
The Company is subject to occasional lawsuits, investigations and claims
arising in 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.
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 Toronto-area schools. Full
unconditional reinstatement is subject to the Ministry's completion of certain
procedures regarding verification of the Company's compliance with current
financial aid processing regulations.
In July 1996, the Company and DeVry Canada, Inc. were served with a purported
class action lawsuit filed in Canada by a former student alleging breach of
contract and misrepresentation about the quality of 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 continues to vigorously contest the allegations and
certification of the class. Although the outcome cannot be predicted with
certainty, the Company believes the resolution of this matter will not have a
material effect on the Company's financial position, results of operations or
liquidity.
78
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, Canada, Europe, the Middle East and the Pacific Rim. International
revenues from each separate geographic region were less than 10% of total
revenues. Revenues, income before interest and taxes, and identifiable assets
by geographic area are as follows:
For the Year Ended June 30,
--------------------------------------------
1997 1996 1995
--------------------------------------------
Revenues:
Domestic Operations $287,190,000 $234,180,000 $205,424,000
International Operations 21,129,000 25,827,000 23,169,000
--------------------------------------------
Consolidated $308,319,000 $260,007,000 $228,593,000
============================================
Income Before Interest
and Taxes:
Domestic Operations $47,570,000 $36,708,000 $26,393,000
International Operations (4,866,000) (2,947,000) 2,436,000
--------------------------------------------
Consolidated $42,704,000 $33,761,000 $28,829,000
============================================
Identifiable Assets:
Domestic Operations $199,420,000 $170,828,000 $119,160,000
International Operations $7,283,000 7,261,000 7,511,000
--------------------------------------------
Consolidated $206,703,000 $178,089,000 $126,671,000
============================================
79
NOTE 10: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended June 30, 1997 and 1996,
are as follows (dollars in thousands, except for per share amounts):
1997 Quarter
- ---- ------------------------------------- Total
First Second Third Fourth Year
------------------------------------------------
Revenues $69,249 $81,262 $81,133 $76,675 $308,319
Income Before Interest
and Taxes 9,034 11,955 11,310 10,405 42,704
Net Income 4,960 6,781 6,454 5,991 24,186
Earnings Per Common Share 0.15 0.20 0.19 0.17 0.71
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 0.12 0.16 0.15 0.14 0.57
80
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 83 present fairly, in all
material respects, the financial position of DeVry Inc. and its subsidiaries
at June 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Companys 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.
/s/PRICE WATERHOUSE LLP
Price Waterhouse LLP
Chicago, Illinois
August 1, 1997
81
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.
82
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.
83
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 58 through 80 of this Form
10-K.
10K
Report Page
-----------
Consolidated Balance Sheets at
June 30, 1997 and 1996 58-59
Consolidated Statements of Income for the
years ended June 30, 1997, 1996 and 1995 60
Consolidated Statements of Cash Flows for
the years ended June 30, 1997, 1996 and 1995 61
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 1997,
1996 and 1995 62
Notes to Consolidated Financial Statements 63-79
Report of Independent Accountants 80
(2) Supplemental Financial Statement Schedules
The following supplemental schedule of the Company and its
subsidiaries is included on page 88 of this Form 10-K.
84
10K
Report Page
-----------
II. - Valuation and Qualifying Accounts 88
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 89 through 91 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, 1997.
85
FIVE-YEAR SUMMARY - OPERATING, FINANCIAL AND OTHER DATA
(Dollars in Thousands Except for Per Share Amounts)
YEAR ENDED JUNE 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
OPERATING:
Revenues $308,319 $260,007 $228,593 $211,437 $191,915
Depreciation 9,676 7,516 6,157 6,981 6,609
Amortization of Intangible Assets 1,586 63 63 346 190
Earnings Before Interest and Taxes (EBIT) 42,705 33,761 28,829 25,618 22,438
EBIT as a Percent of Revenues 13.9% 13.0% 12.6% 12.1% 11.7%
Interest Expense 2,848 1,063 3,070 4,615 6,849
Net Income 24,186 19,245 14,896 12,225 9,431
Change from Prior Year in Net Income 25.7% 29.2% 21.8% 29.6% 60.1%
Earnings Per Common Share (EPS) 0.71 0.57 0.45 0.37 0.28
Shares Used in Calculating EPS
(In Thousands) 34,085 33,661 33,454 33,388 33,263
FINANCIAL POSITION:
Cash and Cash Equivalents 38,865 29,948 26,252 22,704 13,344
Total Assets 206,703 178,089 126,671 106,798 99,210
Total Funded Debt 33,000 61,500 33,029 43,224 55,712
Total Shareholders' Equity 105,270 57,287 37,968 22,978 11,022
OTHER SELECTED DATA:
Cash Provided by Operating Activities 42,427 28,368 28,200 28,405 24,058
Capital Expenditures 28,807 18,352 14,551 6,288 5,147
Total DeVry and KGSM Fall Term
Student Enrollment 34,596 32,612 29,884 28,815 27,336
Number of DeVry Institutes 14 13 13 11 11
Number of KGSM Centers 20 18 17 15 12
Shares Outstanding at Year-end
(in Thousands) 34,504 33,244 33,227 33,213 33,209
Closing Price of Common Stock
at Year-end 27 22 1/2 10 7 1/4 6 9/32
Price Earnings Ratio on Common Stock 38 39 22 20 22
Comparison to fiscal 1992 is with Income before Cumulative Effect of Change in
Accounting Principle
Computed on trailing four quarters of earnings per common share.
86
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, 1997 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 9/23/97
/s/Ronald L. Taylor
Ronald L. Taylor President, Chief Operating
Officer and Director 9/23/97
/s/Norman M. Levine
Norman M. Levine Vice President, Chief
Financial Officer, Controller
and Principal Accounting Officer 9/23/97
/s/Ewen M. Akin
Ewen M. Akin Director 9/07/97
/s/Charles A. Bowsher
Charles A. Bowsher Director 9/10/97
87
SIGNATURES (CONTINUED)
Signature Title Date
- --------- ----- ----
/s/David S. Brown
David S. Brown Director 9/11/97
/s/Ann I. Gannon
Ann I. Gannon Director 9/11/97
/s/Robert E. King
Robert E. King Director 9/10/97
/s/Frederick A. Krehbiel
Frederick A. Krehbiel Director 9/11/97
Thurston E. Manning Director
/s/Robert C. McCormack
Robert C. McCormack Director 9/09/97
/s/Julie A. McGee
Julie A. McGee Director 9/12/97
/s/Hugo J. Melvoin
Hugo J. Melvoin Director 9/22/97
88
DEVRY INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended June 30, 1997, 1996 and 1995
(Dollars in Thousands)
Balance at Charged to Charged to Balance at
Description of Allowances Beginning Costs and Other Deductions End of
and Reserves of Period Expenses Accounts Period
- --------------------------------------------------------------------------------------------------------------------------
1997
- ----
Deducted from accounts receivable
for refunds and uncollectible accounts $6,603 $16,592 - $17,239 $5,956
Deducted from notes receivable for
uncollectible notes 15 36 - 1 50
For loss on disposition of inventory 61 38 - 36 63
For loss on DeVry capital contributions
to Perkins loan program 1,547 167 - - 1,714
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
Write-offs of uncollectible amounts or inventory.
89
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------- ---------------------------- ------------- ------------------
2(a) Agreement regarding purchase Exhibit 2 to the
of Becker CPA assets dated Company's Form 8-K
as of June 19, 1996 filed July 3, 1996
3(a) Certificate of Amendment of Exhibit 3(a) to the
Restated Certificate of Company's Form 10-K
Incorporation of the for the year ended
Registrant June 30, 1995
3(b) Certificate of Amendment of Exhibit 3.1 to the
Restated Certificate of Company's Form S-3,
Incorporation of the #333-22457 dated
Registrant February 27, 1997
3(c) 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 Exhibit 4(a) to the
Financing Agreement, dated Company's Form 10-K
as of January 14, 1994, for the year ended
between Keller Graduate June 30, 1994
School of Management, Inc.,
certain financial
institutions and Continental
Bank N.A.
4(b) First Amendment, dated as of Exhibit 4(b) to the
July 18, 1995, to Amended Company's Form
and Restated Financing 10-K for the year
Agreement between Keller ended June 30, 1995
Graduate of School of
Management, Inc., certain
financial institutions and
Bank of America Illinois
4(c) Amended and Restated Exhibit 4(c) to the
Financing Agreement, dated Company's Form 10-K
as of June 12, 1996, between for the year ended
Keller Graduate School of June 30, 1996.
Management, Inc., certain
financial institutions and
Bank of America Illinois
90
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------- --------------------------- ------------- ------------------
4(d) First Amendment, dated as of
June 6, 1997, to Amended and
Restated Financing Agreement
between Keller Graduate
School of Management, Inc.,
certain financial
institutions and Bank of
America Illinois. 92-95
4(e) Instrument of Waiver and Exhibit 4(r) to the
Consent dated as of August Company's Form S-3
31, 1992, by and among #33-58636, dated
Keller Graduate School of February 22, 1993
Management, Inc., the
Registrant and certain
financial institutions
regarding the Note Agreement
dated as of November 15,
1987
10(a) Registrant's Amended and Exhibit 10.1 to the
Restated Stock Incentive Company's Form S-3,
Plan #333-22457 dated
February 27, 1997
10(b) Registrant's 1991 Stock Exhibit 10.3 to the
Incentive Plan Company's Form S-3,
#333-22457 dated
February 27, 1997
10(c) Registrant's 1994 Stock Exhibit 10.2 to the
Incentive Plan Company's Form S-3,
#333-22457 dated
February 27, 1997
10(d) DeVry Inc. Amended and Exhibit 10(d) to
Restated Profit Sharing the Company's Form
Retirement Plan dated 10-K for the year
effective as of July 1, 1992 ended June 30, 1996
10(e) First Amendment to DeVry Exhibit 10(e) to
Inc. Amended and Restated the Company's Form
Profit Sharing Retirement 10-K for the year
Plan ended June 30, 1996
91
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------- --------------------------- ------------- ------------------
10(f) Amendment to DeVry Inc. 96-97
Amended and Restated Profit
Sharing Retirement Plan
10(g) Amendment to DeVry Inc. 98
Amended and Restated Profit
Sharing Retirement Plan
10(h) Amendment to DeVry Inc. 99
Amended and Restated Profit
Sharing Retirement Plan
10(i) Employee Stock Purchase Plan Exhibit 10(f) to
the Company's Form
S-3, #33-58636
dated February 22,
1993
10(j) First Amendment to Employee Exhibit 10(h) to
Stock Purchase Plan the Company's Form
10-K for the year
ended June 30, 1994
10(k) Form of Indemnification Exhibit 10(d) to
Agreement between the the Company's Form
Registrant and its directors S-1, #33-40151
dated April 24,
1991
10(l) Employment Agreement between Exhibit 10(f) to
the Registrant and each of the Company's Form
Dennis J. Keller and Ronald 10-K for the year
L. Taylor ended June 30, 1991
21 Subsidiaries of the 100
Registrant
23 Consent of Price Waterhouse 101
LLP, independent accountants
27 Financial Data Schedule 102