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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
For the fiscal year ended: JUNE 30, 2004
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Commission file number: 1-13988
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DeVRY INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-3150143
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification
No.)
ONE TOWER LANE, SUITE 1000, OAKBROOK TERRACE, ILLINOIS 60181
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number; including area code (630) 571-7700
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Securities registered pursuant to section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
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(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [X] No [ ]
AUGUST 2, 2004 - $1,183,695,000.00
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State the aggregate market value of the voting stock held by non-
affiliates of the registrant. The market value was computed using the
closing sale price of the common stock on the date indicated. Shares of
common stock held directly or controlled by each director and executive
officer have been excluded in that such persons may be deemed to be
affiliates.
AUGUST 2, 2004 - 70,337,137 shares of common stock, $0.01 par value
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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 16, 2004, are
incorporated into Part III of this Form 10-K to the extent stated herein.
Exhibit Index located on Pages 148-151 Total number of pages, 192
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DeVry INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
PAGE #
PART I ------
Item 1 - Business 3
Item 2 - Properties 56
Item 3 - Legal Proceedings 62
Item 4 - Submission of Matters to a Vote of Security Holders 63
- Executive Officers 64
PART II
Item 5 - Market for Common Equity and
Related Stockholder Matters 72
Item 6 - Selected Financial Data 73
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 73
Item 7A - Quantitative and Qualitative Disclosures
about Market Risk
102
Item 8 - Financial Statements and Supplementary Data 104
Item 9 - Changes in and Disagreements with Accountants 104
Item 9A - Controls and Procedure 104
PART III
Item 10 - Directors and Executive Officers 143
Item 11 - Executive Compensation 143
Item 12 - Security Ownership of Beneficial Owners and Management 143
Item 13 - Certain Relationships and Transactions 143
Item 14 - Principal Accountant Fees and Services 143
PART IV
Item 15 - Exhibits, Financial Statements and Reports on Form 8-K
- Financial Statements 144
- Financial Statement Schedules 144
- Exhibits 144
- Reports on Form 8-K 144
- Signatures 146
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PART I
Certain information contained in this Annual Report on Form 10-K may
constitute forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements are based upon the Company's current expectations and
beliefs about future events. Such statements are inherently uncertain and
may involve risks that could cause future results to differ materially from
the forward-looking statements. Potential risks and uncertainties include,
but are not limited to, undergraduate program concentration in computer
information systems, electronics and telecommunication technology;
dependence on student financial aid; dependence on state and provincial
approvals and licensing requirements; dependence on continued accreditation
for DeVry and Ross University and the other factors detailed in the
Company's Securities and Exchange Commission ("SEC") filings, including
those discussed under the heading entitled "Risk Factors" in the Company's
Registration Statement on Form S-3 (No. 333-22457) filed with the SEC.
Copies of the Company's SEC filings on Forms 3, 4, 8-K, 10-Q and Annual
Reports on Form 10-K may be obtained free of charge through the Company's
website, www.devry.com.
ITEM 1 - BUSINESS
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DeVry Inc. (the "Company") is incorporated under the laws of the State of
Delaware. The Company's executive offices are located at One Tower Lane,
Oakbrook Terrace, Illinois, 60181. The Company's telephone number is
(630)571-7700.
The Company, through its wholly-owned subsidiaries, owns and operates DeVry
University, Ross University and Becker Professional Review ("Becker").
DeVry University includes DeVry undergraduate programs in technology and
business, and Keller Graduate School of Management ("Keller"), with
graduate programs in management. In fiscal 1999, the holding company for
these degree-granting operations was renamed from Keller Graduate School of
Management, Inc. to DeVry University, Inc. The new name better reflects
the comprehensive higher education system that it has become, offering
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programs in technology, business and management at the undergraduate and
graduate level. DeVry University is one of the largest private, degree-
granting, regionally accredited higher education systems in North America.
Ross University is one of the world's largest providers of medical and
veterinary medical education.
Becker prepares candidates for the Certified Public Accountant ("CPA"),
Certified Management Accountant ("CMA") and Chartered Financial Analyst
("CFA") professional certification examinations.
In July 1999, the Company completed its acquisition of substantially all of
the net tangible operating assets, trademarks and other intangible assets
of the Denver Technical College ("DTC"). At the time of its acquisition,
DTC offered diploma and undergraduate degree programs in electronics,
computer technology, business and medical technology to approximately 1,700
students on campuses in Denver and Colorado Springs, Colorado. Effective
July 2001, Denver Technical College was integrated into DeVry University.
All new students, starting with the July 2001 term, were enrolled in DeVry
undergraduate programs and no further enrollments were accepted to the
original DTC programs. Students enrolled in the original DTC programs were
able to continue their enrollment until they finished their program, most
of which were completed by the end of fiscal 2003.
In July 1999, the Company also completed its acquisition of certain
tangible operating assets, trademarks and other intangible assets of
Conviser Duffy CPA Review ("Conviser Duffy"). Conviser Duffy, which had
operated as a unit of Harcourt General, Inc., was a nationally known
training firm preparing approximately 12,000 students annually to pass the
CPA certification exam.
In January 2001, as a complement to its Becker Professional Review
operation, the Company acquired the operations of Stalla Seminars
("Stalla"), a leading provider of review courses and study materials for
the CFA certification exams.
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To further diversify its educational program offerings, in May 2003, the
Company acquired the stock of Dominica Management, Inc. ("DMI"). DMI owns
and operates the Ross University School of Medicine and the Ross University
School of Veterinary Medicine, operating in the Caribbean countries of
Dominica and St. Kitts/Nevis, respectively.
In October 2003, the Company acquired the assets of Person Wolinsky CPA
Review to further complement its Becker Professional Review operation.
Person Wolinsky offered CPA review courses in the New York City,
Philadelphia and Washington, D.C. areas.
The amounts of revenue and identifiable long-lived assets of the Company's
U.S. and foreign operations are presented in Note 10 to the Consolidated
Financial Statements, "Segment Information".
DeVry University
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The DeVry undergraduate programs trace their origin to Dr. Herman DeVry.
For more than 70 years DeVry has provided career-oriented technology-based
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. Today, the DeVry undergraduate programs are offered on twenty
three campuses in the United States and Canada, and at approximately fifty
smaller DeVry University Center ("DVUC") teaching locations operated in
conjunction with graduate school program offerings at these sites.
Selected undergraduate programs are also offered through DeVry University
Online.
Originally offering only undergraduate programs in electronics, DeVry
introduced its undergraduate computer information systems curriculum in
1979. As the number of high school graduates in the U.S. declined during
the 1980's, DeVry expanded its program offerings and delivery schedule into
the evening hours to serve larger numbers of working adults. In the summer
of 1986, a bachelor's degree program in business operations was introduced,
followed by the telecommunications management program and the introduction
of an accounting program in the spring of 1988. In 1994, DeVry introduced
the undergraduate technical management degree completion program which
focuses on business and management skills for students who already have an
associate degree. In 1997, the undergraduate business operations program
was redefined and is now the business administration program with a
concentration in accounting, replacing the previously separate accounting
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program. Today, other concentrations in the business administration
program include e-commerce, operations management, project management,
business information systems and several others. In 1998, in response to
the increasing employment demands of the information technology field, a
one year Information Technology program was introduced to bachelor's level
college graduates of any discipline seeking career change and enhancement
opportunities in IT.
In fiscal 2000, DeVry introduced a new undergraduate bachelor's degree
program in computer engineering technology, ("CET"). This program is aimed
at helping students develop skills and knowledge in software engineering,
operating systems, data structures and algorithms, and distributed computer
systems.
Programmatic initiatives developed during the past several years have also
expanded the DeVry University undergraduate program reach. These
initiatives include new delivery formats, such as weekend class schedules,
compressed and accelerated course schedules, technology-assisted delivery
options for classroom based courses and courses offered completely online.
In fiscal 2001, DeVry announced two new undergraduate educational program
delivery initiatives. The bachelor of business administration degree
program was the first undergraduate DeVry program to be offered in a fully
online format. Subsequently, the bachelor of information technology and
the bachelor of technical management programs were added in an online
format and the undergraduate Computer Information Systems curriculum was
also added to the online program offerings, bringing to four the number of
undergraduate programs offered online. In June 2004, DeVry University
announced that it would begin offering new concentrations in security
management and hospitality management as a part of its online bachelor's
degree program in business administration. Additional concentrations and
programs are expected to be added in an online format in the future. The
online format allows DeVry to better serve place-bound students and others
whose schedules prevent them from attending classes in person.
The second new delivery initiative was the formation of DeVry University
Centers. In fiscal 2001, DeVry University opened the first adult-learner
DeVry University Center in conjunction with the existing graduate school
teaching site in the downtown Chicago area. By the end of fiscal 2004,
undergraduate programs were offered at approximately 40 DeVry University
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Center locations. Additional DeVry University Centers are planned to be
opened in fiscal 2005. The addition of undergraduate program offerings at
these former graduate teaching centers is aimed at providing both
undergraduate and graduate education convenient to working adults with the
option to combine online with on-site coursework.
At the start of fiscal 2004, DeVry University introduced three new
undergraduate educational programs at selected campuses. The new programs
were Biomedical Engineering Technology ("BMET"), Biomedical Informatics
("BMI") and Health Information Technology ("HIT").
Biomedical Engineering Technology is an interdisciplinary program that
covers engineering design and implementation of equipment and processes for
life sciences with applications in pharmaceuticals and environmental
science; and physical science applications in areas such as development of
artificial limbs and biomedical computing. At the end of fiscal 2004, this
program was being offered at four campuses.
Biomedical Informatics is the application of information technology to
healthcare with applications in fields such as healthcare administration,
medical communications and biomedical research. At the end of fiscal 2004,
this program was being offered at six campuses.
The Health Information Technology program is an associate degree program
that centers around the management of electronic patient record systems
including maintenance, analysis, assurance of privacy and security of these
records. In a recent speech by the U.S. Health and Human Services
Secretary, a plan was presented to bring electronic health records into
physician offices and hospitals, improve access to health information and
clinical research among other objectives. DeVry's Health Information
Technology program is designed to provide the necessary worker education to
facilitate achieving these objectives. At the end of fiscal 2004, this
program was being offered at 3 campuses.
These healthcare education programs are expected to be offered at
additional locations in the coming terms.
In addition to the new healthcare programs, the Telecommunications
Management program was revised and renamed Network and Communications
Management. The change in name better reflects the evolution of the
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content and focus of the program since its introduction to include newer
areas of telecommunications such as enterprise network design,
administration, security and management. Also, additional majors were
introduced within the Business Administration program, including Health
Services, Human Resources, Small Business Management and Sales and
Marketing.
In August 2003, the Company announced that its subsidiary, DeVry Canada
LLC, had signed a letter of intent with RCC College of Technology ("RCC")
that would enable DeVry to phase out its operations at its Toronto campus
commencing with the term that began in November 2003. An agreement was
subsequently finalized with RCC for management of the completion of
programs of study for the remaining DeVry students at the Toronto campus.
July 2003 was the last term for which new students were admitted to the
Toronto campus.
Keller Graduate School was founded in Chicago in 1973 based upon the
concept that the most important components of management education are
effective teaching and student mastery of practical management skills.
Keller emphasizes practitioner orientation, excellence in teaching and
service to working adults. Classes are offered in the evenings and on
weekends. Building on its original MBA program offering, Keller now offers
a total of seven management masters degree programs and numerous
concentrations within some of these programs at more than 60 sites in the
U.S.
At the graduate level, in addition to its original Master of Business
Administration ("MBA") program which Keller Graduate School began offering
in 1977, Keller introduced a Master of Project Management ("MPM") degree
program in 1991 and a Master of Human Resource Management ("MHRM") degree
program in 1993. In 1995, Keller began offering a Health Services
Management ("HSM") concentration within its MBA program. In 1997, Keller
introduced a Master of Telecommunications Management ("MTM") program. In
1998, Keller began offering two new programs, the Master of Information
Systems Management ("MISM") and the Master of Accounting and Financial
Management ("MAFM"). The MAFM program offers students a choice of three
professional certification exam-preparation emphases: Certified Public
Accountant, Certified Management Accountant or Chartered Financial Analyst.
These exam-preparation concentrations were developed in conjunction with
the Becker Professional Review.
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To broaden the scope and appeal of the original MBA program,
concentrations have been developed in a number of areas of interest
including electronic commerce, international business, marketing and public
administration. In fiscal 2002, the MBA program in Illinois was offered
with a specialization in the management of public and private K-12
educational systems. This program was designed to prepare students to be
effective educational leaders.
Also new for fiscal 2002, approval was granted to offer a 7th graduate
degree program, the Master of Public Administration ("MPA"). The MPA
consists of three tracks: Government Management, Nonprofit Management and
Public Health Management. The MPA incorporates the same practitioner focus
as the other graduate programs and is designed for students who want to
become successful managers in the not-for-profit or government arenas.
All of the Keller graduate programs and concentrations are aimed at
satisfying the need for advanced education in high demand areas. In
addition to its expanding network of classroom based program offerings,
Keller offers all seven of its degree programs in an online format. These
offerings are designed to allow students to efficiently complete their
degrees entirely online or in any combination of online and on-site
coursework that suits their needs.
Effective with the start of fiscal 2004, DeVry University adopted a uniform
academic calendar for both the undergraduate and graduate programs across
all methods of educational delivery, on-site and online. The uniform
academic calendar consists of three academic periods of 16 weeks each.
Within these periods are a 15-week semester and two 8-week sessions. To
align the undergraduate and graduate programs to fit this schedule, the
Keller graduate curriculum was redesigned so that its courses, delivered
both on-site and online, could be offered in the new 8-week session.
To enhance the learning process, undergraduate accelerated programs offered
in the 8-week session format and graduate school courses are being taught
using the Integrated Learning System that incorporates both on-site and
online instruction. This model better supports student learning by
combining once-a-week on-site classes with support of faculty and students
by online interaction throughout the week.
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In addition to its programmatic expansion and new delivery method
initiatives, DeVry University embarked upon a strategy of facility
improvement and expansion to attract and retain increased student
enrollment. This improvement and expansion strategy includes facility
renovations, expansion of existing campuses, openings of new campuses and
the formation of DeVry University Centers.
Expansions and improvements during the past several years include the July
2000, acquisition of the operations of Denver Technical College with two
undergraduate campuses in Colorado, the Company's first campuses in that
state. In November 2000, a new undergraduate campus was opened in Orlando,
Florida, the first campus in that state. Further expansion was
accomplished with the completion of a technology center addition to the
urban Chicago campus, a renovation and expansion program at the Columbus,
Ohio, campus and completion of the expansion of the New York undergraduate
campus, bringing that campus to its full facility size.
In July 2001, a new undergraduate campus was opened in the Seattle,
Washington, area, the first campus in that state. In November 2001, a new
undergraduate campus was opened in the Washington, D.C. area, the first
campus in that area.
In July 2002, a new undergraduate campus was opened in the Philadelphia,
Pennsylvania, area, the first DeVry University undergraduate campus in that
state. In November 2002, a new undergraduate campus was opened in Miramar,
Florida, the second campus in the state of Florida. Also, in March 2003, a
new campus was opened in the Denver, Colorado area, replacing as the
primary operating location the original site acquired in the July 2000
purchase of Denver Technical College.
In September 2003, a new campus was opened in Houston, Texas, the second
campus in the state of Texas.
Keller graduate classes are being offered at more than 60 locations
nationwide. Additional teaching centers are planned to be opened in fiscal
2005. Some of Keller's teaching sites are co-located on DeVry
undergraduate campuses but most operate as a part of smaller, more
centrally located DeVry University Centers, offering both graduate and
undergraduate programs. Also, one teaching site is located in the
Company's corporate headquarters in Illinois. In addition, some DeVry
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University teaching sites host Becker exam review classes where space and
location are appropriate.
In addition to its expanding network of undergraduate and graduate program
teaching locations, graduate programs were first offered online in
September 1998. The first online undergraduate program was introduced in
2001. DeVry University Online not only serves the online student but also
supports campus and DeVry University Center-based students with an option
to "mix and match" on-site and online courses of study to best meet their
individual needs and schedules. Online programs offerings extend delivery
of all seven of the master's degree programs and four of the undergraduate
programs to students who reside beyond the geographic reach of local
centers, whose schedules preclude attending weekly classes on-site and/or
who cannot find their desired course at the teaching center near where they
live or work.
At the beginning of the spring 2004 semester, which was the final semester
in the Company's fiscal year 2004, approximately 41,135 full and part-time
students were enrolled in DeVry University undergraduate day, evening and
online programs, including enrollments at the Toronto campus where
educational programs are being phased out under the terms of the previously
discussed teachout agreement with RCC. The Company's undergraduate
programs accounted for approximately 72% of the Company's revenues in
fiscal 2004. In addition, there were approximately 11,140 coursetakers in
graduate school programs for the Spring term that began in May.
Classes began in July for the DeVry University undergraduate summer 2004
semester. This is the first semester in the Company's fiscal year 2005.
DeVry undergraduate enrollments have been concentrated in the areas of
computer and electronics technology. The Company believes that interest in
these programs as careers has been adversely affected by the news of
employee layoffs and financial difficulty encountered by many firms in the
technology sector of the economy. A recent report by USA Today cites
several examples of other colleges and universities with fewer students
enrolled in computer science majors than last year. The Computing Research
Association says that last year, the number of newly declared computer
science and computer engineering majors in the U.S. and Canada fell 23% vs.
the year before and they say that the figures are not expected to improve
this year. Partly as a result of these factors, total undergraduate
enrollment for the summer term was 38,189, including the remaining
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enrollments at the Toronto campus, compared to 41,075 in the previous
summer. In the graduate school programs, there were approximately 10,275
coursetakers in the summer term that began in July, an increase of 8.4%
from the July term of last year.
With expanded marketing emphasis on its undergraduate business programs,
the increased number of DeVry University Center locations and the growing
demand for its online programs, new student undergraduate enrollments for
the summer term of 2004 increased by 0.9% from the previous year, excluding
from 2003 the final admission of new students to the Toronto campus which
is being phased out of operation.
DeVry University operates in the higher education segment of the overall
education market. Higher education gross revenue in the United States now
exceeds an estimated $315 billion. Changing demographics are expected to
increase the size of the higher education market and benefit the Company's
future enrollment. According to the Department of Education's National
Center for Education Statistics, in 2003 there were an estimated 15,756,000
students enrolled at postsecondary degree-granting institutions in the
United States. This was expected to grow by 6.2% to 16,738,000 in 2008 and
by 12% to 17,673,000 in 2012.
The total postsecondary student population can be thought of as two
separate categories of students - career-launchers who are mostly
traditional college age students and career-enhancers who are most working
adult students. After a period of nearly two decades during which the
number of graduating high school seniors (career-launchers) declined by 25
percent to approximately 2.5 million, 1995 marked the beginning of a slow
but steady increase in the number of high school graduates resulting from
the "baby boom echo".
The Western Interstate Commission for Higher Education forecasts that the
number of graduating high school seniors will increase to more than 3.1
million by 2006/2007. The forecasted rate of increase in the number of
high school graduates in many of the states in which the Company's
undergraduate programs are offered is greater than the forecasted national
rate of increase, further contributing to future enrollment growth
opportunities. In addition, it is expected that a greater percentage of
individuals who graduate high school will choose to continue their
education. Since bottoming at 46.6% in 1973, the percentage of U.S. high
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school graduates entering college has increased, reaching an estimated 63%
in 2001 and is expected to increase further, possibly exceeding 65% by
2010.
Students in the 18 to 24 year-old age cohort represent a substantial
portion of DeVry University's full-time undergraduate day school
enrollments. An increasing proportion of these students is demographically
different from college bound generations of the past. They include more
minorities, women, recent immigrants and lower income candidates. Some of
the DeVry undergraduate campuses rank at or near the top on the list of
institutions with degrees granted to minority students in the fields of
computer and information science, business and all academic disciplines
combined. DeVry undergraduate programs have attracted many students from
immigrant and minority populations. Often these students are the first in
their family to attend college.
In addition to the projected growing number of traditional-age students,
more adults, primarily working adult career-enhancers, are returning to
college. It is currently estimated that perhaps as many as 60% of all
college students are 25 years of age or older, up from about 28% in 1970
and 43% in 2000. Approximately 48% of DeVry University's undergraduate
enrollment in the fall 2003 semester were 25 years of age or older. At
DeVry Online and DeVry University Centers that are designed for the adult
student, an estimated 80% or more of the students are age 25 or older.
The increased number of older students attending college today has
positively influenced DeVry University enrollments and has been fueled by
(1) the development of the knowledge-based economy, (2) the rapid pace of
technological change in the workplace, (3) the growing recognition of the
strong correlation between education and income, (4) the emergence of e-
learning tools that make continuing education more accessible and
convenient, and (5) growing recognition of the importance of lifelong
learning. The number of college students who are 25 years of age or older
is projected to reach 6.4 million in 2008 and 6.7 million in 2012, an
increase of about six and ten percent, respectively, over 2002. The U.S.
Census Bureau reported that in 2003, only an estimated 27% of American
adults over 25 had a bachelor's degree. Therefore, adult student
participation rates in postsecondary education are expected to continue to
be stable or favorable through at least the end of the decade.
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A strong motivation for the growing enrollments in postsecondary
institutions is the income premium associated with additional education.
In 2000, the mean income of U.S. employees with a bachelor's degree
($43,782) was nearly double the mean income for those with only a high
school education. The wage gap is even larger for those with graduate
degrees. According to a recent report by the College Board, over a
lifetime, the gap in earnings between those with a high school diploma and
a B.A. or higher exceeds $1,000,000.
Women made up about 56% of U.S. college enrollments in 2000 but are only
about 29% of students enrolled at DeVry. The Company believes that the
smaller proportion of women at DeVry is the result of their lesser interest
in technical areas of study than for their male counterparts.
Online learning is growing rapidly within higher education. The vast
majority of online students are adult learners attracted by the flexibility
and convenience of this form of learning. The DeVry University approach to
distance learning is to focus on the quality of education delivered to the
student. The technical feasibility of the delivery system, while an
integral component of online course delivery, is not the sole or primary
focus. DeVry's online enrollment strategy is not limited to exclusive
enrollment in distance education programs. Many DeVry University students
are attracted by the "mix and match" formats that allow for added
convenience and flexibility. This option better serves students by
effectively complementing the student's preferred learning style and
providing increased course scheduling flexibility.
DeVry University Online offers undergraduate and graduate programs in
business and technology via the Web. It builds on the successful model
initially implemented at the graduate level in 1998 and draws on the
content and pedagogy of both the undergraduate and graduate systems. DeVry
University Online currently offers all seven of the Keller graduate
programs and the DeVry undergraduate Business Administration (BSBA),
Technical Management (BSTM), Information Technology (IT) and Computer
Information Systems (CIS) programs. Additional online programs may be
offered in the future.
DeVry University Online is a cornerstone of both the DeVry University
Center initiative and the educational system capacity strategy in that it
provides mix-and-match capability, ensuring the availability of a full
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complement of courses and helping optimize use of faculty and classroom
space at all teaching locations.
Each of the undergraduate programs is designed to integrate general
education and technology or business. General education courses develop
skills and competencies that help graduates enhance both their professional
and personal capabilities. Businesses require graduates who can fit into
an organization by working collaboratively, having an understanding of how
business works, communicating clearly and having 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.
Undergraduate classes at DeVry campuses are generally offered in morning,
afternoon or evening sessions which help students maintain a part-time job.
The availability of part-time employment and government-provided financial
aid partially offset the competitive advantage of schools charging a lower
tuition. Undergraduate classes at DeVry University Centers are generally
offered in the evening for the scheduling convenience of the predominantly
working adult student although daytime class schedules are being added in
markets where there is a demand. Each curriculum is generally consistent
at all of the undergraduate campuses, with content variations introduced to
meet local employment market needs. This common curriculum is another
competitive advantage that allows students to transfer, if necessary, to an
undergraduate campus at a different location without interrupting their
studies.
Graduate program 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. Keller's
curricula, like the undergraduate curricula, are generally consistent at
all locations, and are regularly reviewed for relevance to both students
and employers.
To facilitate student success, DeVry University invests in resources for
libraries and academic support services that can assist students in any
phase of their educational program. In addition, DeVry undergraduate
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students are encouraged to participate in an array of offered social and
professional activities. DeVry supports student organizations closely
linked to the professional aspirations of graduates. Campuses regularly
invite technology and business leaders into the classroom. Faculty members
serve as mentors for student chapters of professional associations and
sponsor a wide range of student co-curricular projects. Each student is
also required to complete a student success or problem solving strategy
course aiming at preparing students to assume responsibility for their
learning and growth through practical strategies and methods for realizing
success.
Ross University
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Founded a quarter of a century ago, Ross University operates two schools.
Ross University School of Medicine offers a Doctor of Medicine (M.D.)
degree and Ross University School of Veterinary Medicine offers a Doctor of
Veterinary Medicine (D.V.M.) degree. Ross University is one of the world's
largest providers of medical and veterinary medical education with over
3,300 students enrolled in the May 2004 semester. The schools are located
in the Caribbean island countries of Dominica and St. Kitts/Nevis,
respectively.
Ross medical students complete a four semester (approximately 16 months)
basic science and pre-clinical curriculum in modern classrooms and
laboratories on a campus located on Dominica followed by a one semester
course of Advanced Introduction to Clinical Medicine at a campus in Miami,
Florida. Following their successful passage of the USMLE Step 1 exam, the
remainder of the ten semester program is completed through clinical
rotations conducted at more than 40 affiliated teaching hospitals in the
U.S. The educational program, with three academic semesters per year
beginning in May, September and January, is designed to prepare students
for general medical practice and to provide the foundation for postgraduate
specialty training in the U.S.
Ross veterinary students complete a seven semester pre-clinical (basic
sciences plus medicine and surgery) curriculum in a large modern facility
on St. Kitts. The basic science curriculum is structured to provide a
veterinary education that is fully comparable to that offered at U.S.
veterinary schools. After completing their preclinical curriculum, Ross
veterinary students enter a clinical clerkship of approximately 48 weeks
duration at one of 21 affiliated U.S. Colleges of Veterinary Medicine, with
17
Michigan State and Ohio State Universities as the two most recent additions
to this list.
The student population at both schools is selected from applicants who
typically have (1) applied to U.S. medical or veterinary schools but failed
to gain entry, or (2) elected not to apply to U.S. schools because of self-
perceived shortcomings in their academic record but who still desire to
become U.S. physicians or veterinarians. Admission standards at Ross
closely parallel those of U.S. schools, but at somewhat lower levels of
performance. The average Ross medical student is 26 years old, two years
older than the U.S. medical school average and is somewhat more than 50%
male. The average Ross veterinary student is 25 years old, one year older
than the U.S. veterinary school average and is 71% female. Most Ross
students are either citizens or permanent residents of the U.S.
Professional and Training
-------------------------
In June 1996, the Company acquired the Becker CPA Review. At the time of
acquisition, Becker was a leading international training firm preparing
students to take the national Certified Public Accountant and Certified
Management Accountant examinations.
Between 1996 and 1999, Becker acquired several regional CPA review firms,
strengthening its presence in the east coast market. In July 1999, the
Company acquired the operations of Conviser Duffy CPA Review. Conviser was
a national provider of CPA review courses, serving approximately 12,000
students annually at more than 200 locations. With the Conviser Duffy
acquisition, Becker teaching sites included numerous college campuses
throughout the United States.
Most recently, the Company acquired the assets of Person Wolinsky CPA
Review. Person Wolinsky offered CPA review courses in the New York City,
Philadelphia and Washington D.C. areas.
Becker offers CPA review classes at approximately 250 locations, including
sites in more than 30 foreign countries. Becker's numerous teaching
locations and the availability of online makeup sessions help students
whose schedules may occasionally conflict with class dates. To reach
students for whom class attendance is not practical because of location or
schedule, Becker offers the complete CPA review course conveniently
packaged on CD-ROM or in an online format. Online review course
18
enrollments have recently equalled approximately 40% of all students,
pointing to the importance of this method of delivery for many potential
exam takers. The CD-ROM and online products are interactive, bridging the
gap between classroom study and self study. The Becker CD-ROM course
provides the same instructor-led lessons and classroom materials that are
used in the classroom course. This method of study offers the opportunity
to study at one's own pace in the convenience of home, office or anywhere
else.
The Becker online course provides the same materials as are offered in the
classroom format. In addition each student is assigned a dedicated online
instructor providing individualized attention. The structured lesson plan
emphasizes the "work and remember" teaching system which has been so
successful in the Becker classroom environment.
Becker's proprietary course materials and teaching methods, which include
CD-ROM based presentation materials coupled with live classroom
instruction, 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 nearly one half of all students passing the CPA exam.
The November 2003 CPA exam was the last exam offered in the traditional
paper and pencil, fixed date and place format. Beginning in April 2004,
the exam is now offered only in a computer-based, on-demand format. The
new exam is administered for two months out of every three. For example,
the new exam was offered in April and May 2004, but not in June, and then
offered again in July and August.
Unlike the previous exam, which covered all four parts in a single exam
administration, a candidate may now elect to sit for less than all four
parts at one time. The Company believes that the effect of this change
increased enrollments for the review course leading to the last of the old
format exams in November but resulted in lower enrollments for review
courses preceding the first of the new exams in April, as some potential
exam takers took the opportunity to assess the experiences and results for
the first takers of the new exam format. However, the Company expects that
the number of exam candidates will return to historical levels from the
current reduced levels over the period of the next several quarters. The
19
Company also believes that some candidates will elect to take only one part
of the new exam at a time, extending the period over which its review
course revenue is earned.
In the spring of 2000, Becker offered a pilot version of its own CFA review
course for the Level 1 examination. In January 2001, the Company acquired
Stalla Seminars as a complement to its own review course. Stalla is a
leading provider of CFA review courses and study materials, offering
classroom seminars in selected cities in the United States and in major
financial centers around the world. Stalla also offers CFA exam study
materials in print, on video as a supplement to its classroom based
seminars or for use in independent study and in an online format. Although
the number of candidates seeking the Chartered Financial Analyst
professional designation has increased significantly over the past several
years, periodic employment reductions at some financial services firms has
negatively impacted the number of exam takers in some years and may affect
them again in the future. However, the Company believes that declining
exam pass rates, estimated now to be in the mid-thirty percent range for
the Level 1 and Level 2, exams may encourage more exam takers to enroll in
review courses such as those offered by the Company instead of just
purchasing books and trying to study for the exam on their own as many exam
takers have done in the past.
Becker serves an estimated more than 43,000 students annually through its
CPA, CFA and CMA review courses.
Customized educational and training programs are offered through the Center
for Corporate Education ("CCE"). CCE helps organizations achieve superior
performance through work force development, drawing on faculty and
curriculum resources from the DeVry University undergraduate and graduate
programs.
Competition
- -----------
DeVry University
----------------
The postsecondary education market is highly fragmented and competitive
with no single institution having a significant market share. There are
approximately 4,100 degree granting postsecondary education institutions in
20
the United States. DeVry University competes with other (1) for-profit
institutions, (2) community colleges, (3) public and private universities
that serve similar demographic segments, and (4) online education programs.
The undergraduate programs 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, some large corporations have begun to offer their employees
accredited college courses that may be applied toward degrees.
At the graduate level, DeVry University competes for students in a market
consisting of students seeking management skills in business and
technology, additional certification or degree credentialing and
educational formats oriented to working adults. In every market in which
it operates, there are numerous state institutions and private, not-for-
profit universities. In addition, there is growing competition from online
programs and site-based for-profit school programs.
In each market, local community colleges and state universities continue to
provide educational alternatives to students for whom lower tuition cost is
a high priority. In addition, some educational institutions are reaching
out to partner with local businesses to expand their educational reach.
Many educational institutions are also recognizing the growing need for new
and updated programs in what are projected to be future high employment
demand occupations such as information systems, computer networking and
electronics. Although the for-profit segment of postsecondary education
has generally led the way in online education, many traditional
universities are expanding their offerings into the online format.
There is growing competitive pressure from community colleges, traditional
universities and technical colleges that include industry-specific
certification programs, mostly aimed at the computer information field.
Proprietary and community colleges are offering these industry-specific
certification programs and other short-term certificate programs as a
pathway to the job market for students who do not want longer and more
comprehensive career preparation.
Tuition at independent not-for-profit institutions is, on average, higher
than the tuition at DeVry University. Publicly supported colleges may
21
offer similar programs at a lower tuition level due to government
subsidies, tax-deductible contributions and other financial sources not
available to for-profit schools.
There are more than 1,100 public and private community colleges nationwide,
enrolling more than five million degree seeking students. Many local
community colleges offer highly affordable programs similar in content to
DeVry University's associate degree programs. While community colleges may
be viewed as competitors in the recruiting of students, they also provide
DeVry University an opportunity to serve their graduates with bachelor's
and master's degree programs through articulation and transfer agreements.
DeVry University believes that its competitive strengths in undergraduate
program offerings include: career-oriented curricula developed with
regular structured employer input that helps ensure graduates learn skills
that will be marketable to employers; faculty with related industry
experience; the demonstrated effectiveness of undergraduate career services
activities in obtaining education-related employment; national brand name
recognition and market presence; regional accreditation; authorization by
various states to grant degrees; modern facilities; well-equipped
laboratories; evening, weekend and online class schedules; and an academic
calendar schedule that allows attendance year-round, thereby permitting
earlier graduation. Only a limited number of traditional colleges offer a
bachelor's degree program that 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 undergraduate institution.
The expansion of DeVry University Online and DeVry University Centers has
added to the number of locations, class schedules and learning formats to
more effectively compete with educational program offerings by other
educational institutions.
DeVry University differentiates itself in the graduate program 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. Beginning with fiscal 2004, graduate programs, both on-site
and online, were offered on a six 8-week term schedule each year.
Classroom-based courses generally meet once a week, either in the evening
or on Saturday. This schedule allows students with heavy travel or other
22
demands on their time to fit courses into their schedules. In addition, in
most markets, there is flexibility in course scheduling, a greater choice
of elective courses and a more convenient location than offered by its
competitors. There is also an accelerated format of the 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 and weekend programs. However,
enrollments in DeVry University graduate programs continue to increase,
demonstrating the recognition it has earned as an innovator in providing
quality practical education.
With campuses and DeVry University Centers in an expanding number of states
and multiple locations within many of these states, DeVry University 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.
Additionally, with the inclusion of all of its graduate programs and
selected undergraduate programs in a distance delivery format, DeVry
University has expanded its availability to all qualified students without
regard to their location or daily schedule. By delivering courses both on-
site, in an expanding number of sites, and online, DeVry University
benefits from the competitive advantage of enhancing student satisfaction
and success with this scheduling and format flexibility.
Ross University
---------------
For 2003, it is estimated that applications to U.S. medical and veterinary
medical schools aggregated over 35,000 and 6,700, respectively. From these
applicant pools, only approximately 17,000 and 2,300 students,
respectively, were accepted. Acceptance levels have remained largely
unchanged for more than two decades. The large number of denied medical
and veterinary applicants represent the largest segment of prospective
students for Ross University. Based upon the number of Medical College
Admission Test ("MCAT") takers, which exceeded 58,000 in 2003, increasing
from more than 56,000 in 2002, Ross University believes that the potential
market is much larger than the denied applicant pool alone.
The demand for medical education is expected to increase over the next
decade, spurred by a physician/supply demand imbalance that is projected to
grow. The educational capacity of U.S. medical schools has not changed
23
materially in over two decades. Because most university teaching hospitals
are losing money and because of budget pressures at state/federally funded
schools, there is little likelihood of any significant expansion of
capacity. Ross University believes the veterinary medical education market
is subject to many of the same forces.
Competing with Ross University in the medical education market, in addition
to the 125 U.S. based schools of medicine, are twenty U.S. Colleges of
Osteopathic Medicine which admit approximately 3,000 students annually, and
fifteen Caribbean based, U.S. modeled medical schools with U.S. based
clinical rotations. Competing with Ross University in the veterinary
education market, in addition to the U.S. based schools of veterinary
medicine, are two other offshore schools of veterinary medicine with much
lower enrollments.
Compared to its for-profit competitors, Ross University enjoys several
competitive advantages, including a large alumni base and strong
reputation, financial aid eligibility for its students and the large
network and diverse geographical opportunities for clinical rotations.
Professional and Training
-------------------------
Becker competes with other methods of CPA and CFA exam preparation,
including self-study; accounting firm and Association for Investment
Management and Research sponsored courses; courses offered by colleges and
universities; and courses offered by other private training companies.
According to reports by the National Association of State Boards of
Accountancy, more than 60% of first-time CPA exam candidates and more than
half of repeat candidates reported participating in a review course in the
six months prior to taking the exam. 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 of
the areas of specialty included in the exam. Becker's CPA courses undergo
regular review and revision to stay current with the latest accounting
practice. With the introduction of the new computerized exam format,
Becker further updated its review course and includes practice simulations,
24
similar to those included in the actual exam. In addition, Becker's CD-ROM
and online courses offer a wider range of study alternatives than other
course providers. The high success rate of students who take the Becker
review course and the numbers of students enrolling after taking other
review courses or independent study, but not passing the CPA exam, are
testimony to the quality and value of the Becker methodology.
CPA, CMA and CFA exam candidates can also take the Becker review course
content and methodology in conjunction with their DeVry University MBA or
MAFM programs in most states in which Keller Graduate School classes are
offered, earning full graduate academic credit. These credits can also be
used to fulfill the 150 hour rule educational requirement to sit for the
CPA exam in those states where the 150 hour rule has been enacted. This
provides both Becker and DeVry University with an important competitive
advantage. To further extend the marketing and operational benefits of
joint operation, Becker offers classes at some DeVry undergraduate campus
and DeVry University Center locations.
The CFA review course is taught live in a classroom setting in selected
large financial markets around the world and in an online format to help
reach potential exam takers not able to attend the classroom course. In
the CFA exam preparation market, much like the CPA exam preparation market,
Becker competes with courses offered by other training companies and
student self- study.
Student Recruiting
- ------------------
DeVry University
----------------
Students 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 undergraduate
recruiting process because a significant portion of undergraduate students
come from outside the immediate area in which the campus they attend is
located. While all graduate school students are recruited by admissions
representatives, the percentage of undergraduate enrollment which comes
from each of these two recruiting sources varies campus by campus,
depending largely on the school's location and the size of the local market
area. Overall, admissions representatives currently generate more than 75%
of undergraduate total enrollments. DeVry University employs approximately
25
600 undergraduate admissions representatives and field recruiters
throughout the United States and Canada.
In order to recruit students in certain states and 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 the payment of
commissions, bonuses or incentives to student recruiters based directly on
the number of students they enroll. The Company believes that its method
of representative and recruiter compensation complies with the current
regulations.
Admissions representatives are salaried, full-time Company employees. They
are located at each undergraduate campus, and at each graduate and DVUC
teaching center. They 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 or on weekends, recently
unemployed adults seeking to improve their job skills as a way to re-enter
the workforce and students transferring to a DeVry undergraduate program
from nearby community colleges. Each DeVry undergraduate campus 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. Approximately 40% of new students recently
enrolled in U.S. DeVry undergraduate programs had some prior college
experience.
Students applying to the DeVry University undergraduate online education
program are recruited primarily by admissions representatives, either on a
campus or university center if the applicant lives or works in geographic
proximity, or by a central staff of admissions representatives who are
located at the Company's headquarters in Illinois or other Company
facilities and who are dedicated to serving online applicants. Students
seeking admission to the undergraduate online program can complete their
application process by telephone, fax and/or e-mail. In addition, some
students in areas remote from a DeVry University location may also be
recruited by a field sales representative in that territory.
26
Field student recruiters are salaried, full-time Company employees. The
field recruitment organization has the responsibility of managing all
recruitment activity in high schools, community colleges and military bases
in its assigned geographic territory. Field recruiters meet individually
with prospective undergraduate students who are contacted primarily through
high school, club and youth group presentations. These student recruiters
visited over 5,000 high schools in North America last year, making
presentations on career choices and the importance of a college education.
These presentations offer a service to high school educators by providing a
resource for educating students on careers in business and technology
related fields. The outcome of these presentations is the collection of
career surveys from high school juniors and seniors. These surveys provide
a large and important source of leads for student recruitment.
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. Recruiting
opportunities also exist to U.S. military veterans with military-specific
technical training. Veterans are attracted to DeVry's practical career-
oriented education, and the expanding number of locations across the U.S.
are often near the home area to which the veteran will relocate.
In order to broaden its market position and reverse the pattern of reduced
responses to its undergraduate marketing program for technology programs,
in the spring of 2002 DeVry University hired DraftWorldwide, a large
advertising agency with strong strategic branding and direct response
capabilities. By the fall of 2002, a new ad campaign was introduced,
featuring the "University" in DeVry University, as its theme. Since then,
there have been several adjustments and improvements to the campaign to
improve potential applicant response.
In support of its admissions representatives and field recruiters, DeVry
University advertises on television and radio, in magazines and newspapers,
on various Internet sites, and utilizes telemarketing and direct mail to
reach prospective students. Prospective students are also frequently
referred by high school career counselors, employers, alumni or currently
enrolled students. In addition to these more traditional recruiting
methods, DeVry University's own Internet site provides another avenue for
students to receive information and apply for admission.
27
In addition to the student recruitment activities listed above, DeVry has
undertaken a number of new marketing initiatives to expand its enrollments.
Among these initiatives is the recent partnership agreement with the
Chicago Public School system to create the DeVry Advantage Academy. This
is a dual enrollment and dual credit program that allows high school
students with an aptitude for mathematics and technology to complete their
junior and senior year coursework at DeVry's Chicago campus while also
taking college-level courses taught by DeVry University faculty. After
completing Advantage Academy, students will graduate with both a high
school diploma and an associate degree in network systems administration.
All tuition, textbooks and educational materials are paid for by the
Chicago Board of Education. This program began in July 2004 with an
initial enrollment of 128 students selected from approximately 600
applicants. DeVry University hopes to expand this program to other cities
in which it has undergraduate campuses.
Other outreach and recruitment initiatives offered at some of the DeVry
University campus locations include weekend SAT preparatory classes for
high school seniors, Career Reality workshops to teach students and
educators about trends in business and industry as they relate to the
career decision-making process and the "HerWorld" program that encourages
more young women to pursue careers in technology.
To be admitted to an undergraduate program in the United States, an
applicant must be either a high school graduate, have a General Education
Development ("GED") certificate or have a degree from a DeVry approved
postsecondary institution. Applicants for admission must be 17 years old,
interview with an admissions advisor and complete an application for
admission. In Canada, an applicant must meet either the same criteria as
in the U.S. or meet alternative "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
Computerized Placement Tests ("CPT"), which were designed in collaboration
with The College Board and Educational Testing Service, were first used for
undergraduate admissions. These exams help serve the needs of applicants
by better assessing their achievement levels and developmental needs during
the admission process. Since its introduction, minimum admission and
placement scores on the CPT have been raised several times in an effort to
better select and serve those students most likely to successfully complete
their educational program. Submission of ACT or SAT examination scores
28
deemed appropriate for the desired program or the submission of acceptable
grades in qualifying college-level work completed at an approved
postsecondary institution can also be used to meet undergraduate admission
requirements.
Subsequent to the completion of an application by prospective students who
will be attending a DeVry campus, the campus maintains contact with these
prospective students through phone calls, mailings and invitations to
campus run workshops to improve the rate at which such applicants begin
their program of study.
To be admitted to a graduate program, applicants must hold a baccalaureate
degree from a U.S. institution that is accredited by or is in candidacy
status with a regional accrediting agency. International applicants must
hold a degree recognized to be equivalent to a U.S. bachelors' degree.
Applicants who meet baccalaureate degree requirements and whose
undergraduate cumulative grade point average is 2.70 or higher are eligible
for admission. Applicants with a cumulative grade point average below 2.70
must achieve acceptable scores on either the Graduate Management Admission
Test ("GMAT"), the Graduate Record Examination ("GRE") or an alternative
admission test, designed and validated by Educational Testing Service. All
admissions decisions are based on evaluation of a candidate's academic
credentials, entrance test scores and a personal interview.
To assist students who live distant from the campus that they attend, DeVry
University helps undergraduate students secure local living arrangements.
While DeVry University had not constructed its own dormitory facilities,
lists of nearby available private apartments or rooms are maintained for
students' convenience. In addition, some campuses maintain furnished
apartments for shared rental by students. Students pay their housing
rental and fees to DeVry who contracts with the property owner. Thus,
DeVry becomes the students' landlord and students are assured of a fixed
rental charge per month, similar to more traditional dormitory or apartment
arrangements at other colleges. In an effort to attract more new students,
DeVry University is constructing a traditional dormitory facility adjacent
to its Fremont, California campus. This dormitory is planned to be
available for the start of the November 2004 semester.
29
Ross University
---------------
The Ross University medical and veterinary schools focus their marketing
efforts on attracting highly qualified U.S. applicants with the motivation
and ability to complete their educational programs and to pass the
applicable licensure examinations. To generate interest among potential
students, Ross employs a marketing program that includes a national poster
campaign at U.S. undergraduate campuses, web sites, visits to undergraduate
campuses to meet the pre-med, pre-vet advisors and prospective students,
targeted direct mail campaigns, alumni referrals, information seminars in
key markets and college newspaper advertising to build general awareness of
Ross and promote its information seminars. Nearly half of all leads come
through the Ross web site.
Ross employs regional admissions representatives who pursue expressions of
interest by arranging for interviews, campus tours and by assisting
prospective students in the application process. Admission requirements
include a four year undergraduate degree with courses in biology, chemistry
and math as appropriate to the curriculum. Interviews for the medical
school are conducted principally at Ross University facilities in New
Jersey and Miami, Florida. Interviews are also conducted at locations in
California, Massachusetts and Michigan when appropriate. Interviews for
the veterinary school are conducted principally in Florida, California and
New Jersey. All admission decisions are made by the faculty Admissions
Committees at the respective schools.
Professional and Training
-------------------------
Becker markets its courses directly to potential students and to selected
employers, e.g., the large national and regional accounting and financial
services 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, CMA or CFA review
courses. Becker runs its CPA review program on about 70 college campuses,
recruiting students attending that college. Becker is also the preferred
provider of CPA review for several of the largest CPA firms. The Becker
Internet site provides another source of information to interested
applicants. Becker also enrolls many students who have previously
completed a competitor's course or a self-study program but were then
unable to pass the exam.
30
In response to the 150 credit hour requirement to take the CPA exam, some
of the top colleges and universities have designed their accounting
programs to add a fifth year, either with a master of accounting curriculum
or in connection with their MBA programs. In 1998, Keller introduced a
graduate program, Master of Accounting and Financial Management. The MAFM
program includes tracks for CPA, CMA, and CFA candidates and culminates
with the appropriate Becker exam review course.
Becker has introduced the CPA review course on CD-ROM and online for
students who are unable to attend classroom based instruction. With the
acquisition of Stalla Seminars, the CFA exam course is now offered in an
expanded number of classroom locations and online.
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
levels of performance, evidence institutional and program improvement,
demonstrate integrity and fulfill other 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 for DeVry University, 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 their 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.
31
DeVry University
----------------
Until February 2002, DeVry Institutes and Keller Graduate School were each
separately accredited by The Higher Learning Commission of the North
Central Association of Colleges and Schools ("NCA"), 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. Keller Graduate School was
first awarded its NCA accreditation status in 1977 and DeVry Institutes was
first awarded NCA accreditation status in 1981. The DeVry Institutes and
Keller separate accreditations were last reaffirmed by the Higher Learning
Commission of The North Central Association in 1992 for the maximum ten
year period.
In February 2002, the Higher Learning Commission of the North Central
Association approved the merger of DeVry Institutes and Keller Graduate
School of Management into a single educational institution with the name
DeVry University. This represents institutional recognition of the
corporate governance and comprehensive higher-education system that is
DeVry University.
A comprehensive evaluation visit by NCA was conducted during August 2002.
Subsequently, the Higher Learning Commission of NCA approved another 10
year re-accreditation for DeVry University. NCA further affirmed that
DeVry University can offer, without restriction, any of its programs on-
site, online or through any combination of the two. As a part of the re-
accreditation, DeVry University submitted an interim report in May 2004
that included a status of the implementation of the merger into a single
entity. The Company received notification that its report was reviewed and
accepted. This successfully completed all requirements related to the 2002
NCA evaluation.
Until recently, under Canadian law, the Canadian undergraduate campuses
were not permitted to grant degrees. However, students at the Canadian
campuses could transfer to campuses in the U.S. to complete their degree
requirements. In 1995, the Alberta Department of Advanced Education, the
State of Arizona and the Higher Learning Commission of the North Central
Association of Colleges and Schools approved the DeVry campus in Phoenix to
offer several bachelor of science degree-completion programs on the Calgary
campus. This allowed students attending classes at the Calgary campus to
32
complete their degree studies without relocating to a campus in the United
States. In 2001, the province of Alberta granted accreditation to DeVry
Calgary to offer bachelor of technology degree programs in electronics
engineering technology and computer information systems, as well as a
bachelor of business operations degree program. DeVry Calgary became the
first private, for-profit institution in Canada to be provincially
accredited to grant baccalaureate degrees.
Accreditations of DeVry University in the United States and Canada are as
follows:
UNITED STATES CANADA
---------------------------------- -----------------------------------
Higher Learning Commission of the Calgary campus bachelor of
North Central Association. NCA is technology in Electronics
listed by the U.S. Department of Engineering Technology, bachelor of
Education as a recognized technology in Computer Information
accrediting association. Systems and bachelor of Business
Operations is accredited by the
The baccalaureate Electronics Alberta Private Colleges
Engineering Technology (EET) Accreditation Board.
programs at most U.S. locations are
accredited by the Technology Calgary campus Computer Engineering
Accreditation Commission of the Technology and Information
Accreditation Board for Engineering Technology curricula continue
and Technology (TAC of ABET). The accreditation under the DeVry
associate-and baccalaureate-level University campus in Phoenix as an
EET programs in North Brunswick are off-site instructional location.
TAC of ABET accredited.
The Electronics Engineering
Technology program is accredited by
the Canadian Technology
Accreditation Board (CTAB).
DeVry campuses will apply for TAC of ABET accreditation for the Biomedical
Engineering Technology and Computer Engineering Technology programs when
their first classes graduate. Also, newly opened DeVry campus locations
will apply for TAC of ABET accreditation for their eligible programs when
their first classes graduate.
33
In the United States, each DeVry University location is approved to grant
associate, bachelor's or master's degrees by the respective state in which
it is located.
Ross University
---------------
The Medical School has been recognized and accredited as a University and
School of Medicine by the Dominican Medical Board ("DMB"). The National
Committee on Foreign Medical Education ("NCFME") of the U.S. Department of
Education has affirmed that the DMB has established and enforced standards
of educational accreditation which are the equivalent of those promulgated
by the U.S. Liaison Committee on Medical Education ("LCME"). In
conjunction with the change in ownership from the Company's acquisition of
Ross University in May 2003, the Dominica Medical Board conducted site
visits to the Dominica campus and the Miami facility. Additional site
visits and reviews are expected to be conducted in 2005 as a part of this
process. In addition, the states of New York, New Jersey, California and
Florida, the only four states to require separate licensure for medical
schools, have approved or found the Ross program of study to be acceptable.
The Veterinary School has been recognized as a University and School of
Veterinary Medicine by the government of the Federation of St. Christopher
Nevis, St. Kitts, and is American Veterinary Medical Association ("AVMA")
listed. The Veterinary School is affiliated with 21 AVMA accredited U.S.
Colleges of Veterinary Medicine. Only students who graduate from an AVMA
listed school are eligible for U.S. licensure.
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 exam
preparation courses, and grant degrees. Generally, the addition of any new
program of study or new operating location also requires approval by the
appropriate licensing and regulatory agencies. Many states and provinces
require for-profit postsecondary education institutions to post surety
bonds for licensure. The Company has posted more than $8 million of surety
bonds with state and local regulatory authorities on behalf of DeVry
University and Becker Professional Review in the U.S. and approximately CDN
$1.1 million of surety bonds with regulatory agencies in Canada. Certain
states have set standards of financial responsibility different from those
34
prescribed by federal regulation. The Company believes it is in material
compliance with state and Canadian provincial regulations. If the Company
were unable to meet the tests of financial responsibility for a specific
state, 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.
Tuition and Fees
- ----------------
DeVry University
----------------
Effective with the spring 2004 term, tuition at the United States
undergraduate campuses and University Centers for two semesters (one
academic year) ranged from $10,640 to $11,860. Variations in tuition
depend on the particular campus attended. Based upon current tuition
rates, for a student enrolling in the five term undergraduate Electronics
and Computer Technology program, total tuition cost would range from
$26,600 to $29,650. For a student enrolled in the nine term undergraduate
Electronics Engineering Technology program, total tuition cost would range
from $47,880 to $53,370. Students enrolled in an online program pay
somewhat different tuition rates. Students enrolled on less than a full
time basis are charged a somewhat lower tuition. A price tuition increase
of approximately 5.1% has been announced for the November 2004 term.
Undergraduate tuition rates at DeVry University are below the average
tuition at four-year independent institutions, but are higher than the
average at four-year publicly supported institutions. For the academic
year 2003/2004, the average annual tuition and fees at four year private
schools was reported by the College Board to be $19,710, an increase of
6.0% from last year, while the average annual tuition and fees at four year
publicly supported institutions was $4,694, an increase of more than 14%
from last year. Two year publicly supported institutions reportedly
increased their tuition by 13.8% to $1,905 per year. Tuition rate
increases in the past two years have generally been the largest rate
increases since the late 1980s and early 1990s.
The DeVry University undergraduate tuition increase in the summer of 2003
was approximately 6.5%, varying somewhat depending on the campus attended.
Tuition increases in previous years approximated the rate of increase at
35
many other postsecondary education institutions. In early 2002, some state
supported educational institutions, affected by reduced funding because of
declining state tax revenues, announced double digit tuition rate
increases. Similar tuition rate increases occurred in the following year.
However, their tuition rates for students qualifying for in-state tuition
generally remain below those at DeVry University undergraduate campuses.
Tuition rates at the Calgary campus in Canada are somewhat lower than those
at campuses in the U.S.
Students at several DeVry University campuses enrolled in the Computer
Information Systems program receive a laptop computer as part of the
program and pay a somewhat higher tuition.
Effective with the March 2004 term, graduate program tuition per classroom
course (four quarter credit hours) ranges from $1,410 to $1,770, depending
on the location at which the student is enrolled. This is an increase of
approximately 4.8% and compares to tuition rates from $1,345 to $1,690
implemented in July 2003. The price for a graduate course taken online is
$1,800.
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
the student, which varies with, but generally equals or exceeds, the
percentage of the term completed by the student. Amounts received in
payment by the Company in excess of such set percentages of tuition are
refunded to the student or the appropriate financial aid funding source.
In addition to the tuition amounts described above, students at DeVry
University must purchase textbooks and supplies as part of their
educational program.
Ross University
---------------
Current tuition and fees for the basic sciences portion of the program of
the Medical School and Veterinary School are $10,100 and $10,250 per
semester, respectively. These tuition rates became effective in January
2004 and represent an approximately 5.3% increase from the tuition rates
that were implemented in January 2003. Tuition and fees for the clinical
36
portion of the programs are $11,100 and $12,450 per semester for the
Medical and Vetinerary schools, respectively. These amounts do not include
the cost of books, supplies or living expenses.
The Company believes that the tuition charged by Ross University is at the
low end of the range of prevailing tuition rates in private medical and
veterinary schools but approximately equal to or higher than tuition rates
in publicly supported medical and veterinary schools. Tuition rates have
increased every year and have not produced a decline in new student
enrollments.
Professional and Training
-------------------------
The price of the complete classroom Becker CPA review course is $2,340,
which includes an enrollment fee. The complete CPA review course on CD-ROM
and the complete online review course is also priced at $2,340. Exam
candidates may elect to enroll for individual sections of the exam review
course at a price of $840 per section. Discounts from these tuition rates
are offered under various enrollment promotions at college campuses and for
students employed by participating accounting firms. The list price for the
basic on-site CFA exam course is $1,290 and is subject to various
promotional program discounts.
Financial Aid and Financing Student Education
- ---------------------------------------------
DeVry University
----------------
Students attending DeVry University 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 more than 70% of its U.S. undergraduate students
receive some government-sponsored financial aid and that a similar
percentage of the students attending the Calgary, Canada, DeVry campus
receive some government-sponsored financial assistance. A 1999-2000 study
on student financing of undergraduate education found that approximately
55% of all students enrolled in postsecondary education programs received
some form of financial aid from federal, state, institutional or other
sources.
37
DeVry University assists its undergraduate students in locating part-time
employment. Data from the National Center for Education Statistics
indicates that almost half of all full-time college students between the
ages of 16 and 24 are employed. The Company believes that a substantially
greater percentage of its full-time undergraduate students are employed to
help finance their costs of education. DeVry develops an assistance
package for students who require financial aid on the basis of a financial
aid application completed by the student and the student's family.
Government-sponsored financial aid is of great importance to the Company
because more than 60% of the U.S. undergraduate tuition, book and fee
revenues have been financed by government-provided financial aid received
by its students.
Although not as significant for Keller Graduate School, government-
sponsored financial aid is utilized by more than an estimated 50% of its
graduate students, providing approximately 40% of its revenues.
Additionally, the Company believes that more than one half of its graduate
students receive some tuition reimbursement assistance from their
employers.
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 the United States, the Higher
Education Act guides the federal government's support of postsecondary
education. The Act was most recently reauthorized in the fall of 1998,
redefining and extending the numerous financial aid programs currently in
existence. Congress is holding hearings on the next Reauthorization of the
Higher Education Act, but it is not expected to be completed before the
108th Congress adjourns this fall. However, even if reauthorization is not
completed, current financial aid programs are expected to be extended as
they have been in the past. 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.
Extensive and complex regulations in the United States and Canada govern
all of the government grant, loan and work study programs in which DeVry
University and its students participate. Regulations and standards that an
institution must satisfy in order for its students to participate in
38
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; prohibition of
certain types of incentive payments to student recruiters; standards of
financial responsibility and administrative capability requirements.
In 1998, the Department of Education introduced a new standard of financial
responsibility test. The standard is based upon a composite score of three
ratios which are designed to measure various aspects of an educational
institution's financial stability. These ratios include an equity ratio
which measures the institution's capital resources, a primary reserve ratio
which measures an institution's ability to fund its operations from current
resources and a net income ratio which measures an institution's ability to
operate profitably.
In June 2004, the Company received notice from the Department of Education
that the Equity, Primary Reserve and Net Income ratios ("financial
responsibility ratios") yielded a composite score of 1.4 for the year ended
June 30, 2003. A minimum score of 1.5 is necessary to fulfill the
requirements of the Department's financial standards. Effective with
receipt of this notice, the Department required DeVry University to make
financial aid disbursements under a Cash Monitoring mode. Under this Cash
Monitoring, DeVry University could not submit requests for financial aid
funds for its students in an amount greater than the amount of the actual
disbursements made to students included in the request. DeVry University
has historically requested financial aid reimbursements in a fashion
similar to that imposed by this restriction and, therefore, cash flow was
not significantly affected. In late July, DeVry University, in response to
its request, received notice from the Department of Education that the
restriction to operate under Cash Monitoring had been suspended pending
submission of audited financial statements for the year ending June 2004.
The Company's calculation of its composite score at June 2004 is above the
required minimum of 1.5.
The Company believes that it has demonstrated a high level of financial
stability and will be able to continue to do so. Failure to achieve these
financial responsibility 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 letter of
credit to permit its students to continue to participate in federal
39
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.
Institutions that participate in U.S. federal financial aid programs must
disclose information about undergraduate 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. At DeVry University,
undergraduate admission requirements have been changed and student support
services have been added, both aimed at improving student completion rates.
For the fall 1996 freshman student cohort (the latest period for which
final completion statistics are available), the graduation rate for the
system of U.S. undergraduate campuses remained unchanged from the prior
year which increased slightly from the 1994 rate. The Company is currently
compiling its completion statistics for 1997. Preliminary results indicate
that the completion rate has increased somewhat from 1996. Completion
rates, as defined by the Student-Right-To-Know Act at each of the U.S.
undergraduate campuses, generally fall within the range of completion
rates, at selected four-year urban public colleges in the areas in which
these campuses are located. Many students who previously attended another
college are admitted to DeVry's undergraduate programs but are not included
in these completion rate statistics. Completion rates for the
undergraduate students entering with previous college experience are
generally higher than for first-time students.
DeVry University maintains a staff at its Oakbrook Terrace headquarters to
review, interpret and establish procedures for compliance with regulations
governing financial assistance programs and process financial aid
applications from its students. 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 DeVry University. Changes in or new
interpretations of applicable laws, rules or regulations could have an
adverse effect in the future.
40
In the United States, DeVry University has completed and submitted all
required audits of compliance with federal financial assistance programs
for fiscal 2003, and its independent auditors are currently conducting the
required audits of the one year period ending June 30, 2004. In
conjunction with previously filed audit reports on the processing of
financial aid on behalf of its student's participation in federal financial
aid programs, DeVry University has been required to post letters of credit,
generally of one year duration, in amounts totaling approximately $1.4
million. This compares to $2.5 million in letters of credit outstanding
last year.
The Department of Education may periodically conduct site visits at any of
the Company's locations as a part of its program of periodic review of the
administration of student financial assistance programs. In April 2002,
the Company received notice from the Office of Postsecondary Education of
the United States Department of Education of a limited scope program review
of federally funded student financial assistance programs administered by
DeVry on behalf of its undergraduate students. This review was conducted
at the Company's headquarters office in late May. The final report on this
review was issued by the Office of Postsecondary Education in June. It
included recommendations for process improvements but did not impose any
monetary liability on the Company. Such program reviews may be conducted
at any educational institution at any time and have been conducted in the
past at several DeVry campuses. Previous Department of Education program
reviews at DeVry have not resulted in material findings or adjustments.
Although the Company has no reason to believe that any proceeding against
the Company is presently contemplated, if such a proceeding were initiated
against the Company and resulted in a substantial curtailment of DeVry
University's participation in government grant or loan programs, the
Company could be adversely affected.
In January 2003, the New York State Comptroller's Office began an audit of
DeVry New York's compliance with the New York State Tuition Assistance
Program Grant ("TAP") requirements for the three year period ending June
2002. Fieldwork was completed in June 2003 and a preliminary report was
issued in July. The Company responded to the preliminary report,
disagreeing with some of the findings in the report. Subsequently, the
Company received an amended report. Based upon this report, the Company
41
believes that the final determination of disallowance resulting in
financial liability to the Company will not be material in amount and has
been reserved for as of June 30, 2004.
In March 2004, the California Student Aid Commission ("CSAC") conducted a
review of the Cal Grant program for the Company's California undergraduate
campuses in the state. To-date, the Company has not received a final
report of this review and does not believe that there will be any
significant monetary liability.
In Canada, the Toronto-area campuses completed and submitted the required
annual review of Ontario Student Assistance Program administration for
fiscal 2002. In conjunction with the required annual review procedures
related to its administration of financial aid programs under the Ontario
Student Aid Program, the Toronto-area DeVry campuses engaged in discussions
with the Ontario Ministry of Education relating to certain additional
information requirements for the 2001 and 2002 financial aid years. These
additional information requirements could serve as the basis for a Ministry
claim for the return of some amounts of financial aid disbursed to students
attending these campuses. Although there are no current discussions
underway with the Ministry, based upon its previous discussions, the
Company believes that there will be no significant monetary liability. The
Company's Toronto-area campus does not accept new student admissions and is
being operated under an agreement with the RCC College of Technology as
previously discussed. Accordingly, the Company is no longer participating
in these financial aid programs.
In the spring of 2004, the Company received a complaint from a student at
its Alpharetta, Georgia, DeVry undergraduate campus that an admissions
advisor had entered incorrect financial information into the student's
application for financial aid. Upon review by the Company, it was
determined that financial information entered for this student and several
other students was incorrect. The Company promptly notified the U.S.
Department of Education of its review and findings as required by federal
regulation and terminated several employees for the violation of Company
policies. The Company's internal controls prevented any student from
receiving an incorrect disbursement. The Chicago office of the Inspector
General acknowledged that the Company should continue its internal review
and report any further findings within six months. The Company expects to
complete and submit this report as required.
42
The following is a description of the U.S. and Canadian financial aid
programs in which DeVry University 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 DeVry University students in the United
States: (1) Federal Pell Grant ("Pell"), (2) Federal Supplemental
Educational Opportunity Grant ("SEOG"), (3) Federal Family Education Loan
Program ("FFELP"), (4) William D. Ford Federal Direct Student Loan Program
("FDSL"), (5) Federal Perkins Direct Student Loan program ("Perkins") and
(6) Federal Work Study ("FWS").
Grants: These funds, made available by the government to all eligible
students who demonstrate financial need, do not have to be repaid.
Only undergraduate students are eligible to participate in the Pell
and SEOG Grant programs. Eligible students received a Pell grant
which ranged in amount from $400 to $4,150 for the 2003/2004 year.
For the 2004/2005 year, the maximum Pell grant remains unchanged.
Increases in Pell grant limits have historically lagged behind the
rate of tuition increases.
SEOG is a supplement to the Pell grant, available to only the neediest
undergraduate students because SEOG funds are limited in amount at
each institution based upon a federally-determined formula. The
maximum SEOG award is $4,000 per academic year. In addition to these
federal assistance funds, DeVry University is required to make a 25%
institutional matching contribution of all federal SEOG funds. The
institutional matching contribution may be satisfied, in whole or in
part, by DeVry scholarship funds, discussed separately in this
section, or by externally provided scholarship grants.
Loans: Students at DeVry University participate in the Stafford and
PLUS programs within the FFELP and FDSL program and in the Perkins
loan program. Under the FDSL program, students or parents borrow
directly from the Department of Education, rather than from commercial
lenders, under terms that are generally the same as for loans under
the FFELP.
STAFFORD LOANS: A subsidized Stafford loan, awarded on the basis
of student financial need, is a low interest loan with interest
43
charges and principal repayment not scheduled to begin until six
months after a student no longer attends school on at least a
half-time basis. Loan limits per academic year range from $2,625
for students in their first academic year to $5,500 for students
in their third or higher academic year, increasing to $8,500 per
academic year for graduate students. An unsubsidized Stafford
loan may be awarded to students who do not meet the needs test
and incurs interest charges from the time the loan is disbursed;
however, the interest payment may be deferred until the principal
payments begin. Unsubsidized loan limits per academic year range
from $4,000 for students in their first academic year to $5,000
or $6,000 in higher academic years, depending upon the student's
financial status determination as dependent or independent,
increasing to $10,000 per academic year for graduate and
professional program students. Both the subsidized and
unsubsidized loans are available to undergraduate and graduate
students.
PLUS LOANS: A PLUS loan enables parents of a dependant student to
borrow for the cost of their children's education. These loans
are not based on financial need, they are not subsidized and
interest charges and repayment begin following receipt of the
loan.
PERKINS LOANS: A Perkins loan is a low interest loan available to
only those undergraduate students who demonstrate exceptional
financial need. Perkins loans are available up to a maximum of
$4,000 per academic year. 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.
New funding from the Department of Education is limited in amount
based upon federally determined rules.
Approximately 80% or more of the financial aid received by DeVry
University undergraduate students and 100% of the federal financial
aid received by its graduate students has been provided by federal
student loans.
44
Work Study: Work opportunities, both on or off-campus, under FWS are
offered on a part-time basis to undergraduate students who demonstrate
financial need. Work Study wages are paid partly from federal funds
and partly from qualified employer funds.
State Financial Aid Programs: In addition to the various federal loan and
grant programs, state grant and loan assistance may be received by eligible
students attending DeVry University undergraduate campuses in Arizona,
California, Colorado, Florida, Georgia, Illinois, Missouri, New Jersey, New
York, Ohio and Pennsylvania.
"90/10 Rule": This U.S. Department of Education regulation affects only for-
profit postsecondary institutions, such as DeVry University. Under this
regulation, students attending a for-profit institution that derives more
than 90% of its revenues from federal financial assistance programs in any
year are not able to participate in these programs for the following year.
This regulation is commonly referred to as the "90/10 rule." Prior to
1999, the rule permitted only 85% of revenues to be collected from federal
financial assistance programs. When the limit was increased to 90%, the
definition of revenues was modified to exclude revenue funded by
institutional scholarships. Final data for fiscal 2004 are not yet
complete but, in fiscal 2003, the U.S. undergraduate campus system derived
approximately 64% of its revenues from these programs. Approximately 40%
of revenues from students enrolled in graduate programs was derived from
these defined financial aid programs.
In fiscal 2002 and preceding years, each of the DeVry undergraduate
campuses (except for those that operated as an additional location of an
established campus), and the graduate teaching centers as a group were
established as separate institutions under the Higher Education Act ("HEA")
provisions and must separately have met the criteria for the "90/10 rule"
and loan default rates. Beginning with fiscal 2003, all of the DeVry
undergraduate operations were combined into a single reporting rate.
In addition to the various financial aid programs described above, there
are a number of tax favored programs aimed at promoting savings for future
college expenses. These include state sponsored "529" college savings
plans, state sponsored prepaid tuition plans, education savings accounts
(formerly known as education IRAs), custodial accounts for minors, Hope and
Lifetime Learning credits and student loan interest tax deductions.
45
Canadian Government Financial Aid Programs: Canadian undergraduate
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 DeVry students who are Canadian citizens or permanent residents of
Canada. Students who meet residency requirements within the Province of
Ontario and attend an approved postsecondary institution, are eligible to
participate in the Ontario Student Loan Program. Students from Quebec are
eligible for loans under the Quebec Student Loan Plan. The loans are
interest-free while the student is in school, and repayment begins six
months after the student leaves school. Canada Study Grants for students
whose financial needs and special circumstances cannot otherwise be met,
tax-free withdrawals from retirement savings plans, tax-free education
savings plans, loan repayment extensions and interest relief on loans are
also available to qualified applicants to help finance their education.
Company-Provided Financial Assistance: The Company's EDUCARD Plan is
available to undergraduate students attending U.S. campuses. Similar
installment payment options are available at the Calgary, Canada campus.
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 negotiated in accordance with the
financial circumstances of the particular student, but most typically is a
monthly repayment plan with all balances required to be paid within 12-24
months following a student's graduation or termination of study. The
receivable balance related to DeVry University's EDUCARD Plan for its U.S.
undergraduate students at June 30, 2004, was approximately $28.0 million,
compared to approximately $21.2 million last year. The Company believes
that higher tuition rates with no corresponding increase in financial aid
availability and a weaker job market for students seeking part-time
employment have contributed to the increased receivables. Amounts owed by
students under the EDUCARD Plan are subject to a monthly interest charge of
1% of the average outstanding balance.
In September 2000, several undergraduate campuses began offering a
supplementary loan program with funding from private lenders. This new
46
program was aimed at students whose eligibility for federal and state
funded financial aid is not sufficient to cover all their costs of
education. This program, with a limited DeVry University risk sharing for
loan defaults, has longer repayment periods, lower monthly payments and
generally lower interest rates on borrowings than offered by the EDUCARD
Plan, and is intended as an alternative to the current EDUCARD program.
This program has been expanded to additional campuses since its
introduction.
In addition to the student financial assistance provided by the EDUCARD
Plan, numerous scholarships are offered to DeVry University undergraduate
students. Scholarship programs have been offered in previous years and are
expected to be offered in the future. The most recent addition to the
DeVry University scholarship offerings are the Community College
Scholarship and the Community College Scholars Award. These partial
tuition scholarships that are offered exclusively to community college
graduates, are valued at $1,500 and $1,000 per semester, respectively. The
DeVry campuses have also provided funds in the form of institutional grants
which help those students most in need of financial assistance.
Keller Graduate students who wish to defer tuition payment may choose from
several deferred payment plans and students eligible for tuition
reimbursement plans may be able to have their tuition billed directly to
their employer.
The U.S. Congress has, from time to time, provided various tax benefits
related to educational expenses incurred by graduate and undergraduate
students. Educational expenses paid by an employer on behalf of an
employee generally are excludable from the employee's income if provided
under a qualified educational assistance plan. At present, the maximum
annual exclusion is $5,250.
Ross University
---------------
Eligible students attending the Ross University School of Medicine and the
School of Veterinary Medicine can receive federal financial aid in the form
of student loans. Loan limits are $18,500 per academic year with a
$138,000 aggregate borrowing limit. In addition to student loans under
Title IV regulations, many Ross students borrow additional amounts under
private loan programs to pay the portion of their tuition that exceeds
47
federal loan limits and also to help pay for living expenses while they are
in school. Ross University offers a limited number of full tuition
scholarships to students who meet the necessary qualifications.
Professional and Training
-------------------------
Students attending the Becker CPA, CMA or CFA review courses are not
eligible for federal or state financial aid, but many of them receive
partial or full tuition reimbursement from their employers.
Student Loan Defaults
- ---------------------
DeVry University
----------------
DeVry University believes that, historically, federal student loans
represented more than 80% of the federal aid received by its U.S.
undergraduate students and 100% of the federal aid received by its graduate
students. 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 student 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 whose
students have high loan default rates. These regulations were further
tightened by the 1992 Higher Education Reauthorization Act. Any individual
institution with a FFELP or FDSL cohort default rate exceeding 20% for the
year is required to develop a default management plan in order to reduce
defaults, although the institution's operations and its students' ability
to utilize student loans are not restricted. Any individual institution
with a FFELP or FDSL cohort default rate of 25% or more for three
consecutive years is ineligible for participation in these loan programs
and cannot offer student loans administered by the U.S. Department of
Education for the fiscal year in which the ineligibility determination is
made and for the two succeeding fiscal years. In addition, students
attending an institution whose cohort default rate has exceeded 25% for
three consecutive years will be ineligible for Pell grants. Any
institution with a FFELP or FDSL cohort default rate of 40% or more in any
year is subject to immediate limitation, suspension or termination
proceedings from all federal aid programs. No DeVry campus 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.
48
DeVry University carefully monitors its students' loan default rate. To
help reduce student loan default rates, the Department of Education
requires that all educational institutions wait 30 days before disbursing
funds to first-time, first-year undergraduates to prevent potential early-
term dropouts from defaulting on their loans. Students who leave school in
the early part of their educational program typically default on their
loans at a higher rate than do students who remain and complete the
program. Another significant factor in controlling student loan default
rates is the servicing and collection efforts by lenders and guaranty
agencies. DeVry University 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 the U.S. Department of Education, the final default rate for
2001 (the latest year for which data is available) for all colleges and
universities eligible for federal financial aid was 5.4% compared to 5.9%
in the previous year. DeVry University had a FFELP U.S. student loan
cohort default rate for 2001 of approximately 7.5%. This compares to a
weighted system average of 8.7% for 2000. The reported rates for 2001
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 2002.
DeVry University is not subject to any restriction or termination under any
student loan program.
Undergraduate students who attend the U.S. DeVry campuses also participate
in the Federal Perkins loan program. 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.
For fiscal 2002, the DeVry University Perkins loan cohort default rate was
approximately 13.8%. For fiscal 2003, (the latest year for which data is
available), the DeVry University Perkins loan cohort default rate was
49
approximately 11.7%. Student counseling and additional collection efforts,
including the assistance of outside loan service agencies, have been
implemented and have, in part, contributed to the reduction in the default
rate. Because of the relatively small amounts of new funding available for
this program relative to other available financial aid programs, even with
the addition of funds available for new loans from the repayment of
outstanding loans, this program is not a material source of financial aid
to DeVry University undergraduate students.
Ross University
---------------
Default rates under Title IV loans for 2001 were 0.0% and 1.1% for the
medical school and veterinary school, respectively. Although final default
rates for 2002 have not yet been released, the Company believes that
default rates at either school will not exceed 1.5%.
Career Services
- ---------------
DeVry University believes that the employment of its graduates is essential
to its ability to attract and retain students. Career services
professionals located at the DeVry undergraduate campuses work 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. In many
cases, company hiring representatives conduct interviews at a campus.
The need for skilled employees has placed an increased premium on educated
workers in our economy as evidenced by the widening gap in wages of college
vs. high-school graduates. In 2000, the mean income of U.S. employees with
a bachelor's degree was $43,782, nearly double the mean income for those
with only a high school education. It is estimated that 85% of the jobs in
the United States currently require education or training beyond high
school, up from only 65% as recently as 1991.
DeVry University attempts to gather accurate data on the number of its
undergraduates employed in education-related positions within six months
following graduation. To a large extent, the reliability of such data is
dependent on the quality of information that graduates report to DeVry. At
the U.S. campuses, there were more than 55,000 graduates over the ten-year
period ending October 2003, who were eligible for career services
assistance (i.e. excluding graduates who continued their education,
50
students from foreign countries not legally eligible to work in the U.S.,
etc.). Of the more than 49,000 graduates during this ten-year period who
actively pursued employment or were already employed, nearly 92% held
positions in their chosen fields within six months of graduation.
For the three classes that ended in calendar year 2003, there were 7,717
net graduates (excluding students continuing their education, students from
foreign countries legally ineligible to work in the U.S. or ineligible for
employment because of extreme circumstances), from undergraduate degree and
diploma programs in the U.S., excluding the one year post-baccalaureate
Information Technology program. From the 7,717 net graduates, 5,198
actively pursued employment or were already employed. Of those 5,198 net
graduates actively seeking or already employed, 4,338, or 83.4%, were
employed in education related positions within six months of graduation.
This compares to 82.3% who were employed in education related employment
for the three classes that ended in calendar year 2002.
The Company believes that an increased number of graduating students who
are currently employed in non-education related jobs have chosen to not
actively seek other employment opportunities. For the three graduating
classes in calendar year 2003, there were approximately 1,320 graduates
employed in non-education related jobs. Of these graduates, about 82%
chose not to seek other employment through the Company's career services
office.
The 2003 graduates achieved average annual starting compensation that
varies by program of study, ranging from $28,671 to $47,685. Individual
compensation levels vary depending upon the graduate's previous employment
experience, program of study and geographic area of employment.
In Canada, for the three classes which ended in calendar year 2003, over
76% of graduates who actively pursued employment had obtained employment or
were already employed in their chosen field within six months of
graduation. This includes those students who received diplomas, who
received bachelor's degrees through the DeVry Phoenix degree completion
program in Calgary or a bachelors degree awarded under the authority of the
Government of Alberta and those students who completed their degree
requirements at a U.S. DeVry campus, but does not include graduates of the
one year Information Technology program. At the Canadian undergraduate
campuses, there were more than 4,600 graduates over the past decade. For
51
the ten-year period ending October 2003, more than 82 percent of those
graduates who actively pursued employment or who were already employed when
they graduated held positions in their chosen fields within six months of
graduation.
The majority of employers of the DeVry graduates are in the electronics or
information processing industries. The Company believes that no single
employer has hired more than 5% of the DeVry graduates in recent years.
Major employers of the DeVry undergraduates include the following
companies: Accenture, Applied Materials, AT&T, Cellular One, Eastman Kodak,
EDS, General Electric Company, Hewlett-Packard, IBM, Intel Corp, MCI,
Motorola and Xerox.
Graduate program teaching centers maintain 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 both DeVry and Ross University 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 generally occurs during the summer
months. In the Professional and Training Segment, Becker Professional
Review had historically experienced higher enrollments for its courses
beginning in July, the period leading to the fall CPA exam, than for its
classes beginning in January, the period leading to the spring CPA exam.
However, with the introduction of the new on-demand exam format, the
Company believes that the future seasonal pattern may be different.
Results of operations reflect both this seasonal enrollment pattern and the
pattern of student recruiting activity costs that precede the start of
every term. Revenue, income before interest and taxes and net income by
quarter for each of the past two fiscal years are included in Note 13 to
the Company's Consolidated Financial Statements, "Quarterly Financial
Data."
52
Administration and Employees
- ----------------------------
The Company has approximately 5,000 regular full- and part-time employees
including employees at Ross University. Over 600 of these employees are
located at the corporate headquarters in Oakbrook Terrace, Illinois. In
addition, the Company employs more than 900 of its students during peak
periods as faculty assistants and in other part-time positions. None of
the Company's employees is represented by a union. The Company believes
that its relationship with its employees is satisfactory.
DeVry University
----------------
Each DeVry undergraduate campus is managed by a president or campus dean
and has a staff of academic deans, faculty and academic support staff,
career service and student service personnel and other professionals. Each
campus also has an admissions director who reports to a central
organization responsible for new student recruiting. Each DeVry University
Center is managed by a center director and has admissions representatives
and appropriate academic and administrative support staff. Regional vice
presidents provide further oversight to the operations of campuses and
centers in geographically defined areas.
The faculty and staff at each DeVry University location are supported by a
broad range of services provided by staff at the Company's corporate
headquarters in Oakbrook Terrace, Illinois. Among the centrally provided
support services are curriculum development, academic management, licensing
and accreditation, marketing and sales management, computer services,
financial aid processing, regulatory compliance, finance and accounting.
Ross University
---------------
Both the Ross University School of Medicine and School of Veterinary
Medicine are managed by a dean with appropriate department chairs to
oversee the educational operations. In addition, each campus has student
services staff to assist students with financial aid, housing and other
student related matters. The campuses are supported by a central
administrative staff located in Edison, New Jersey.
Professional and Training
-------------------------
Becker Professional Review is managed by a central administrative staff
headquartered in Oakbrook Terrace that supports instructors and coordinates
local operations. Certain local operations management as well as some
other functions are located in smaller regional offices.
53
Faculty
- -------
DeVry University
----------------
Each DeVry undergraduate campus president hires academic deans and faculty
members in accordance with criteria established by the Company, accrediting
standards and applicable state law. Most faculty members teaching in
technical areas have related industry experience. Sabbatical and other
leave programs have been initiated to allow faculty to engage in
developmental projects or consulting opportunities to maintain and enhance
their currency and teaching skills. A recent example of DeVry faculty
participation in educationally related outside activity is the recent award
to a DeVry Chicago campus faculty member of the second annual Global
Wireless Education Consortium Wireless Educators of the Year Award. This
award recognizes distinguished college and university educators and their
role in preparing tomorrow's wireless technology leaders.
Faculty members are periodically evaluated based on student comments and
observations by an academic dean. There are approximately 1,100 full and
part-time faculty member employees among all of the DeVry undergraduate
teaching locations. More than 85% of DeVry full-time undergraduate faculty
member employees hold advanced academic degrees. In addition, DeVry
engages adjunct and visiting faculty, as needed, mostly in the evening
programs, at DeVry University Centers and at DeVry Online who teach on a
part-time basis while maintaining their employment in their technical field
or specialty.
Graduate program faculty members are practicing business professionals who
are engaged to teach on a course-by-course basis. A multi-session training
course is used to train and develop new faculty throughout Keller's
national system. Over the past several years, graduate school courses have
been taught selectively utilizing full-time faculty to respond to student
demand in areas of rapidly growing enrollment and to meet licensing
approval requirements in certain states. Less than 10% of graduate
instructors, excluding staff members who regularly teach, are full-time
employees. Over 900 active faculty taught graduate courses as needed
throughout the past year at DeVry University Centers and online.
54
DeVry University faculty have teaching schedules that may include both day
and evening classes, either on a campus or DeVry University Center or
online. Additionally, some faculty may teach both graduate and
undergraduate courses, depending upon their qualifications and the need for
faculty at specific locations.
Ross University
---------------
Ross University has approximately 480 employees, 100 of which are at its
New Jersey administrative office location. The medical school employs
approximately 63 full-time faculty and 11 part-time faculty who teach the
basic science program. Full-time faculty members have a Ph.D. or an M.D.
degree. Visiting faculty are engaged to lecture on very specialized or
emerging subject matter to supplement curriculum presented by permanent
faculty.
To further strengthen its academic programs, Ross University appointed Dr.
Nancy Perri as Vice President of Academic Affairs. For the past 12 years,
Dr. Perri served and will continue to serve as dean of clinical sciences.
Dr. Perri's academic experience includes teaching assignments at Downstate
Medical Center in Brooklyn, N.Y. Her professional committee assignments
have included seats on St. Elizabeth's Hospital residency review and ethics
committees. Dr. Perri's principal areas of research and publications have
included post-doctoral work at SUNY Downstate's Department of Immunology
and a collaborative research project involving patients with systemic lupus
erythematosus in the Department of Transplant Surgery. Dr. Perri has also
researched rehabilitation by hermodialysis in diabetic nephrophathy. While
at St. Elizabeth's Hospital, she conducted research on peritoneal dialysis
in collaboration with the Department of Renal diseases at Georgetown
University School of Medicine in Washington, D.C.
The veterinary school employs approximately 36 pre-clinical, full-time
faculty. Faculty members have either a Ph.D. or D.V.M. degree.
Faculty members are not tenured but each faculty member generally has an
employment agreement of one to three years in length.
Professional and Training
-------------------------
Becker's faculty, numbering more than 600 each term, are primarily
practicing professionals who teach part-time on a course-by-course basis.
55
Trademarks and Service Marks
- ----------------------------
The Company owns and uses numerous trademarks and service marks including
"DeVry University" and variants thereof. All trademarks, service marks and
copyright registrations associated with the Company's businesses 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.
56
ITEM 2 - PROPERTIES
- --------------------
DeVry University
----------------
DeVry undergraduate campuses are housed in large modern buildings that are
located in suburban communities or urban neighborhoods. They are easily
accessible to major thoroughfares, have available parking areas and many
are served by public transportation. Each campus includes teaching
facilities, admissions and administrative offices. Teaching facilities
include classrooms, laboratories, libraries, bookstores and student
lounges. Electronics laboratories include PC-based instrumentation and
microprocessor development/circuit simulation systems along with
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 with
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 DeVry campuses that are owned by the Company is subject to a
mortgage or other indebtedness.
In Pomona, California; and Kansas City, Missouri; the Company leases
additional space in adjacent office buildings in order to house selected
administrative functions, permitting more space within the campus building
to be used for classrooms and laboratories.
In July 2001, the Company completed the purchase of an approximately 17
acre site in the Houston, Texas, area for the construction of a new DeVry
campus. Construction of an approximately 100,000 square foot facility has
been completed and classes were offered for the first time in September
2003.
In October 2001, the Company announced that it had signed a lease for the
renovation of an existing building for a 103,000 square-foot campus in Fort
Washington (Philadelphia), Pennsylvania, the Company's first campus in that
57
state. Classes were offered for the first time in July 2002 in nearby
temporary facilities pending completion of the renovation. Classes are now
being taught in the permanent campus facility.
In March 2002, the Company announced that it signed a lease for the
construction of a 72,000 square-foot campus in Westminster (Denver),
Colorado. Classes were offered in this facility for the first time in
March 2003. This facility replaces as the primary operating location the
smaller facility acquired by the Company when it purchased Denver Technical
College.
In November 2002, construction was completed on a leased campus of
approximately 102,000 square foot in Miramar, Florida, and classes were
offered for the first time in the fall of 2002.
In the Toronto-area, the Company continued its consolidation of operations
at the Scarborough campus into the Mississauga, Ontario, campus. Beginning
in July 2003, classes were being taught only at the Mississauga campus.
Under the Company's teachout agreement with RCC College of Technology,
classes will not be offered at Mississauga after June 2005. The Company's
lease on this facility expires at the end of October 2005.
The table below sets forth certain information regarding the large campus
properties at which DeVry University programs were conducted at June 30,
2004:
58
UNDERGRADUATE CAMPUSES
----------------------
June 2004
Area
(Approximate
Square Feet) Ownership
------------ ---------
Phoenix, Arizona 120,200 Owned
Westminster (Denver), Colorado 71,500 Leased
Orlando, Florida 72,000 Leased
Miramar, Florida 102,000 Leased
Alpharetta (Atlanta), Georgia 65,000 Leased
Decatur (Atlanta), Georgia 107,500 Owned
Chicago, Illinois 160,000 Owned
Addison (Chicago), Illinois 110,000 Owned
Tinley Park (Chicago), Illinois 65,000 Owned
Kansas City, Missouri 74,500 Owned
North Brunswick, New Jersey 99,000 Owned
Long Island City, New York 155,400 Leased
Columbus, Ohio 114,000 Owned
Fort Washington, Pennsylvania 103,000 Leased
North Irving (Dallas), Texas 95,250 Leased
Houston, Texas 100,000 Owned
Pomona (Los Angeles), California 100,500 Owned
Long Beach (Los Angeles),
California 98,200 Leased
West Hills, (Los Angeles),
California 105,000 Owned
Fremont (San Francisco),
California 99,000 Owned
Arlington (Washington, D.C.) Virginia 86,100 Leased
Federal Way (Seattle), Washington 100,000 Owned
Calgary, Alberta, Canada 70,000 Leased
Mississauga, Ontario, Canada, 61,000 Leased
In addition to the undergraduate programs that are taught at these
campuses, certain campuses also host Keller graduate programs and Becker
CPA Review programs.
By July 2004, there were also 47 DeVry University Centers throughout the
United States. At 39 of these centers, both graduate and undergraduate
programs are being offered. The remainder currently offer only graduate
programs. Additional new DeVry University Centers are planned to be opened
in fiscal 2005. As a part of these expansion plans, the Company announced
in March 2004 that it plans to open a new 12,400 square foot DeVry
University Center in Gurnee (Chicago), Illinois. Currently classes are
59
being offered in a temporary site until the new facility is constructed.
This brings to 11 the number of DeVry University locations in the
Chicagoland area. In May 2004, the Company announced that construction
would begin this summer on a new 17,500 square foot leased facility in
Colorado Springs, Colorado, replacing an older nearby facility.
DeVry University Centers are housed in modern buildings whose locations are
chosen primarily for their convenience to students. These teaching
centers, which mostly range in size from approximately 5,000 to 20,000
square feet, include teaching facilities, admissions and administrative
offices. For example, smaller DeVry University Centers including those in
Scottsdale, Arizona; Broomfield (Denver), Colorado; and Denver, Colorado
are approximately 4,000; 5,000 and 5,200 square feet respectively. Larger
Centers in Sacramento, California; Cleveland, Ohio; Columbus, Ohio;
downtown Chicago, Illinois; and Las Vegas, Nevada; are approximately
15,000, 15,800, 16,200, 17,900 and 18,500 square feet, respectively.
In addition to classrooms, each of these teaching facilities 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; popular
business periodicals; videos of selected courses; a career services video
and texts; and access to more than three hundred electronic data-bases.
Ross University
---------------
The medical school's basic science instructional facilities are located on
an approximately 25 acre campus on the Caribbean island of Dominica.
Approximately 14 acres are occupied under lease. An additional 11 acres
were purchased in fiscal 2004 to facilitate expansion of instructional
facilities and student housing.
In addition to classrooms and auditoriums, educational facilities include a
gross anatomy lab, a multi-purpose lab, library and learning resource
center, offices, bookstore, cafeteria and recreational space. Classrooms
and laboratories are equipped with state of the art audio-visual equipment.
During fiscal 2004, a new 33,000 square foot multi-purpose building with a
308 seat auditorium, problem based learning labs and faculty offices was
completed and put into service. A new 21,000 square foot facility with a
300 seat classroom, patient simulator labs and a patient exam center was
60
also completed and put into service. Construction of a new 500 seat
auditorium and faculty office complex is scheduled to begin in early fiscal
2005. Construction of a second new auditorium and student housing is also
being considered.
The veterinary school's pre-clinical instructional facilities are located
on a 50 acre site. The Company owns 27 acres including a five acre parcel
of land acquired in fiscal 2004 to facilitate campus expansion. The
remaining 23 acres are pasture land leased from the government under a
long-term lease. Educational facilities include an anatomy/clinical
building, pathology building, classroom buildings, administration building,
bookstore, cafeteria and a library/learning resource center. The library
and learning resource center is believed to be the largest electronic
learning lab in veterinary medical education. Animal care facilities
include kennels, aviary, livestock barns and paddock. In fiscal 2005,
plans are being finalized for the construction of a new clinical science
building and student housing.
Ross University central administration is located in leased office space in
Edison, New Jersey.
Professional and Training
-------------------------
Becker is headquartered at the Company's corporate headquarters in Oakbrook
Terrace, Illinois. In addition to this main administrative center, Becker
leases approximately 4,600 square feet of space in Southern California for
staff devoted to curriculum and other development efforts. Becker also
leases approximately 3,500 square feet of space for its eastern regional
sales and administrative staff.
CPA and CFA review classes are conducted in leased facilities, fewer than
ten of which are leased on a full-time basis. The remainder of the classes
are conducted in facilities which are leased on an as-needed basis,
allowing classes to be added, expanded, relocated or closed as current
enrollments require. Becker classes are also offered on several DeVry
University undergraduate campuses and at DeVry University Centers where the
location and facility availability are appropriate.
61
Corporate
---------
The Company's administrative offices are located in approximately 168,000
square feet of leased space in an office tower in Oakbrook Terrace,
Illinois, a suburb of Chicago. In addition, the Company leases more than
50,000 square feet in an adjacent building for its data center, additional
office space, storage and other miscellaneous use. Additional office and
miscellaneous use space were added during the past year to accommodate the
Company's expanding operations. Further space at a different location may
be purchased or leased in the future to accommodate the expanding DeVry
University online operations and admissions offices.
The Company's leased facilities are occupied under leases whose remaining
terms range from one to 15 years. A majority of these leases contain
provisions giving the Company the right to renew its lease for additional
periods at various rental rates.
62
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company is subject to occasional lawsuits, regulatory reviews
associated with financial assistance programs and claims arising in the
normal conduct of its business.
In September 2003, the Company received a notice from Acacia Research
Corporation claiming patent-infringement. The notice alleges that the
Company has infringed upon several Acacia patents relating to streaming
audio and video technology. This technology was allegedly used by the
Company through its online education platform provider and is also used by
many other companies in conjunction with the delivery of online programs.
The Company has had discussions with Acacia relating to this claim and does
not believe that it had infringed upon the Acacia patents.
In March 2002, the Company received notice of a class-action complaint
filed in federal district court in Michigan under the Fair Labor Standards
Act by several former field sales representatives seeking overtime
compensation for services rendered during their period of employment. In
March 2003, the Company participated in a required mediation session but no
resolution was reached. A decision was entered for the Company at trial;
but an appeal was filed. This matter was fully resolved by settlement
between the parties in June 2004.
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by operations of its Becker CPA Review
Corp. subsidiary in California. This complaint was filed in federal
district court by the trustee in bankruptcy of a failed CPA review provider
seeking a substantial amount of damages. In April 2002, this complaint was
voluntarily dismissed by the plaintiff without prejudice. The complaint
was amended and subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation session was
held in August 2004, resulting in a tentative agreement to settle the
matter. Discovery continues and pending a final settlement, a trial is
scheduled for October, 2004.
In January 2002, a graduate of one of DeVry University's Los Angeles-area
campuses filed a class-action complaint on behalf of all students enrolled
in the post-baccalaureate degree program in Information Technology. The
suit alleges that the program offered by DeVry did not conform to the
program as it was presented in the advertising and other marketing
63
materials. In March 2003, the complaint was dismissed by the court with
limited right to amend and re-file. The complaint was subsequently amended
and re-filed.
In November 2000, three graduates of one of DeVry University's Chicago-area
campuses filed a class-action complaint that alleges DeVry graduates do not
have appropriate skills for employability in the computer information
systems field. The complaint was subsequently dismissed by the court, but
was amended and re-filed, this time including a then current student from a
second Chicago-area campus.
In conjunction with the required annual review procedures related to its
administration of financial aid programs under the Ontario Student Aid
Program, the Toronto-area DeVry campuses engaged in discussions with the
Ontario Ministry of Education relating to certain additional information
requirements for the 2001 and 2002 financial aid years. These additional
information requirements could serve as the basis for a Ministry claim for
the return of some amounts of financial aid disbursed to students attending
these campuses. Discussions continue on a periodic basis but the Company
believes that there will be no significant monetary liability. The
Company's Toronto-area campus does not accept new student admissions and is
being operated under an agreement with RCC College of Technology as
previously discussed. Accordingly, the Company is no longer participating
in these financial aid programs.
The Company has recorded approximately $2.9 million associated with
estimated loss contingencies at June 30, 2004. While the ultimate outcome
of these contingencies is difficult to estimate at this time, the Company
does intend to vigorously defend itself with respect to these claims. At
this time, the Company does not believe that the outcome of current claims,
regulatory reviews and lawsuits will have a material effect on its cash
flows, results of operations or financial position.
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.
64
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 63 Mr. Keller co-founded Keller
Graduate School in 1973. From the
Chairman of the Board inception of the Company, Mr.
Keller has been Chairman of the
Board. Mr. Keller has previously
held the positions of Chief
Executive Officer and Co-Chief
Executive Officer.
Mr. Keller is a graduate of
Princeton University and holds a
Masters degree in Business
Administration from the University
of Chicago Graduate School of
Business.
Ronald L. Taylor 60 Mr. Taylor co-founded Keller
Graduate School in 1973 and has
Director and Chief Executive been a director since its
Officer inception. Mr. Taylor was Dean of
Keller Graduate School from its
inception until 1981, when he
became President and Chief
Operating Officer of KGSM. Mr.
Taylor became Co-Chief Executive
Officer in 2002 and was appointed
Chief Executive Officer in July
2004.
Mr. Taylor is a graduate of Harvard
University and holds a Master of
Business Administration degree from
Stanford University.
65
Daniel M. Hamburger 40 Mr. Hamburger joined the Company in
November 2002 as an Executive Vice
Executive Vice President, President with responsibility for
President and Chief Officer the Company's online programs and
Operating Becker Conviser Professional Review
Division. In July 2004, Mr.
Hamburger was appointed president
and Chief Operating Officer of the
Company.
Prior to joining the Company, Mr.
Hamburger was chairman and chief
executive officer of Indeliq, a
developer of simulation-based
training software, which merged
with Accenture Learning in 2002.
From 1998 to 2000, he was president
of W.W. Grainger's Internet
Commerce Division.
O. John Skubiak 58 Mr. Skubiak joined Keller Graduate
School more than 25 years ago. He
Executive Vice President and has held senior management
President, DeVry University positions with Keller Graduate
School and DeVry Institutes over
that time. In his current
position, Mr. Skubiak has
responsibility for all DeVry
University operations other than
its online operations.
Marilynn J. Cason 61 Ms. Cason joined the Company in
1989 with responsibility for the
Senior Vice President, General Company's legal affairs and human
Counsel and Corporate Secretary resources. In 1996 she was
promoted to her current position as
a Senior Vice President.
66
Paul Eppen 41 Mr. Eppen joined the Company in
April 2004 as a Senior Vice
Senior Vice President and Chief President and Chief Marketing
Marketing Officer Officer. Prior to joining the
Company, Mr. Eppen held similar
positions at True Green Companies,
a division of Service Master, and
at Conseco Direct. He has also
held senior marketing positions
with New York Life Ins. Co and
Spiegel.
Norman M. Levine 61 Mr. Levine has been with the
Company since 1982 and its Chief
Senior Vice President and Financial Officer since 1989. He
Chief Financial Officer became a Senior Vice President in
January 2001, assuming the added
responsibility for the Company's
tax planning and compliance.
Gerald Murphy 56 Mr. Murphy joined the Company in
1995 as a Vice President with
Senior Vice President, DeVry responsibility for the operation of
University Operations several of the DeVry undergraduate
campuses in the U.S. and Canada,
following which he was responsible
for new DeVry campus location and
program development. Mr. Murphy is
currently responsible for the
oversight of all the DeVry
University physical site
operations.
Michael J. Alexander 57 Mr. Alexander joined the Company in
1984 and held a number of positions
Vice President in Keller Graduate School including
center director and regional
director of operations.
In his current position, Mr.
Alexander is responsible for the
overall management of the academic
and administrative operations of
DeVry University Online.
67
Thomas A. Babel 49 Mr. Babel joined the Company in
1984 and held a number of positions
Vice President including director of student
accounts and dean of student
finance.
In his current position, Mr. Babel
is responsible for student finance
policies and the delivery of
federal and state financial aid in
compliance with U.S. and Canadian
federal, state and provincial
student financial assistance
regulations.
Jack L. Calabro 62 Mr. Calabro joined DeVry in 1999 as
Vice President of Human Resources.
Vice President, Human Resources Prior to joining DeVry, Mr. Calabro
was vice chancellor of human
resources at City Colleges of
Chicago and vice president of human
resources at Helene Curtis
Industries.
James R. Dill 56 Mr. Dill joined the Company in
1972, originally working at the
Vice President, Regional DeVry Columbus campus. Most
Operations recently Mr. Dill has been the
president of the DeVry DuPage
campus. In his current position,
Mr. Dill is responsible for the
management of several DeVry
University operating locations.
Rose Marie Dishman 60 Dr. Dishman joined the Company in
1992, serving originally as Dean of
Vice President, Regional Academic Affairs for the DeVry
Operations Pomona undergraduate campus before
becoming president of the three
Southern California campuses. In
her current position, Dr. Dishman
is responsible for the management
of several DeVry University
operating locations.
68
James A. Dugan 58 Mr. Dugan joined the Company in
1980 serving in a number of
Vice President, Regional operating positions at the DeVry
Operations Phoenix undergraduate campus, most
recently as its president. In his
current position, Mr. Dugan is
responsible for the management of
several DeVry University operating
locations.
George W. Fisher 52 Mr. Fisher joined the Company as
Vice President, Canadian Operations
Vice President, Expansion Planning in 1985. His current
responsibilities include the
coordination of efforts for new
DeVry University sites, programs
and processes.
Galen Graham 55 Dr. Graham joined the Company in
1982 serving in a number of
Vice President, Regional operating positions at the DeVry
Operations Columbus campus, most recently as
its president. In his current
position, Dr. Graham is responsible
for the management of several DeVry
University operating locations.
Cecil Horst 61 Mr. Horst joined the Company in
1989 and held a number of positions
Vice President, Dean of Keller including center director and
Graduate School regional director of Keller
Graduate School. In his current
position, Mr. Horst is Dean of the
Keller Graduate School and director
of Keller center operations.
Timothy Joyce 43 Mr. Joyce joined the Company in
August 2000 as Controller. Prior
Controller to joining the Company, Mr. Joyce
was Vice President and Controller
of THK America, a manufacturer and
distributor of electronic devices,
in Schaumburg, Illinois. In
addition to his responsibilities as
Controller, Mr. Joyce is also
overseeing the Company's Sarbanes-
Oxley compliance efforts.
69
James W. Kho 59 Dr. Kho joined the Company in 2000,
serving originally as president of
Vice President, Regional the DeVry Fremont campus. In his
Operations current position, Dr. Kho is
responsible for the management of
several DeVry University operating
locations.
Bruno LaCaria 62 Mr. LaCaria joined the Company in
August 1998 as Vice President and
Vice President, Chief Information Chief Information Officer. Prior
Officer to joining the Company, Mr. LaCaria
was the Director of Information
Systems at the University of
Pittsburgh.
C. Robert LeValley 62 Mr. LeValley joined the Company in
1972 as an admissions
Vice President, Regional representative, progressing to
Operations positions of increasing
responsibility, serving most
recently as president of the DeVry
Kansas City undergraduate campus.
In his current position, Mr.
LeValley is responsible for the
management of several DeVry
University operating locations.
Donna M. Lorraine 51 Dr. Lorraine joined the Company in
1994 as an assistant professor.
Vice President, Regional Dr. Lorraine has been president of
Operations the DeVry University campuses in
Dallas and Atlanta. In her current
position, Dr. Lorraine is
responsible for several DeVry
University operating locations.
70
Patrick L. Mayers 64 Dr. Mayers joined Keller Graduate
School in 1978 as Dean of Academic
Vice President, Academic Affairs Affairs. Dr. Mayers served as Vice
President of Academic Affairs for
Keller until 1997 at which time he
became the Vice President of
Academic Affairs for the DeVry
Institutes. In 2002, Dr. Mayers
was promoted to Vice President of
Academic Affairs for DeVry
University.
Sharon Thomas-Parrott 53 Ms. Thomas-Parrott joined the
Company in 1982 after several years
Vice President, Government as an officer in the U.S.
Relations Department of Education's Office of
Student Financial Assistance. She
served the Company in several
student finance positions before
being elected to her current
position which includes
responsibility for corporate
communications, government and
public relations.
Timothy H. Ricordati 48 In 2002, Dr. Ricordati was promoted
to head all enrollment management
Vice President, Enrollment activities at DeVry University.
Management Previously, Dr. Ricordati was Dean
of the Keller Graduate School and
also responsible for the Company's
University Center and Online
Education operations.
Kenneth Rutkowski 57 Mr. Rutkowski joined the Company in
1985 as Director of Operations and
Vice President, Operations Administrative Services and was
Services and Administration promoted to his current position in
1991. His responsibilities include
managing the Company's real estate,
business insurance coverage and
various administrative functions.
71
Edward J. Steffes 54 Mr. Steffes joined the Company in
1984 as director of marketing and
Vice President, Marketing was promoted to his current
position in 1986. Mr. Steffes is
responsible for most of the
Company's advertising and sales
promotion activity.
Thomas J. Vucinic 57 Mr. Vucinic has been the general
manager of the Becker Professional
Vice President Review since 1997. Prior to that,
Mr. Vucinic was the Company's
Director of Financial Planning and
Analysis.
Gerald J. Wawrzynek 49 Mr. Wawrzynek has been with the
Company since 1987. He is
Vice President responsible for the Company's
treasury operations and tax
planning and compliance.
Fred M. Weber 56 Dr. Weber joined the Company in
2001. Dr. Weber is responsible for
Vice President, Regional the management of several DeVry
Operations University operating locations.
Prior to joining the Company, Dr.
Weber was at Follett Higher
Education Group, last serving as
Senior Vice President of Strategic
Planning and Communications.
72
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 and the
Chicago Stock Exchange under the symbol "DV."
The following table sets forth the high and low sales price information by
quarter for the past two years.
FISCAL 2004 FISCAL 2003
------------------ -------------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter $30.15 $21.85 $23.45 $17.37
Second Quarter 27.74 21.97 19.25 12.10
Third Quarter 31.89 24.96 20.05 15.90
Fourth Quarter 32.38 26.10 26.38 18.50
(b) Approximate Number of Security Holders
--------------------------------------
There were 699 holders of record of the Company's common stock as of the
end of August 2004. 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 10,000 beneficial holders of its common stock including
more than 1,500 employees who participate in the employee stock purchase
plan or who own stock as an investment election in the Company's profit
sharing plan.
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
Company's subsidiaries may be restricted by law and is subject to some
restrictions by covenants in the subsidiaries= debt agreements. The
Company has not paid any dividends on its common stock and expects for the
73
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 are
included in the exhibit, "Five-Year Summary - Operating, Financial and
Other Data", on page 145 of this report.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The following discussion of the Company's results of operations and
financial condition should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto appearing
elsewhere in this report.
Fiscal year 2004 financial performance was affected by the continued
softness in demand for technology programs at our undergraduate campuses
although enrollments in business and management programs at our DeVry
University Centers and DeVry University Online continued to grow. New
teaching locations and academic programs were added during the year, which
reflects key elements of our growth strategy. Financial performance for
the year was also affected by the change in the CPA exam format and
schedule at Becker Professional Review. These changes resulted in less
revenue and income as students deferred enrollment in our review courses
until future periods.
In May 2003, the Company completed the acquisition of Dominica Management,
Inc., which owns and operates the Ross University School of Medicine and
Ross University School of Veterinary Medicine. The amounts recorded at
June 30, 2003 relating to the acquisition were adjusted in fiscal 2004
based upon the final valuation of assets and the actual working capital at
the closing date. Ross University provides the Company with a high quality
entry into healthcare education. Campus expansion is underway at both the
medical and veterinary schools to accommodate the growing demand for
enrollment.
74
Changes to our management structure at July 1, 2004 were designed to help
us improve the way we operate and allow us to begin putting elements of our
succession plan in place. The shared role of chief executive officer,
previously held by Dennis Keller and Ronald Taylor, will now be held solely
by Ronald Taylor, with Dennis Keller remaining as chairman of the board of
directors. Daniel Hamburger, who joined the Company in fiscal 2003, was
named president and chief operating officer of DeVry Inc. and John Skubiak,
who has been with the Company since 1975 was appointed president of DeVry
University. The Company further enhanced its management talent with the
addition of Paul Eppen as chief marketing officer, who is expected to
improve our marketing and student recruitment efforts.
FISCAL YEAR ENDED JUNE 30, 2004 VS. FISCAL YEAR ENDED JUNE 30, 2003
- -------------------------------------------------------------------
The following table presents information with respect to the relative size
to revenue of each item in the statement of income for both the current and
previous fiscal year. Percents may not add due to rounding.
Fiscal Year
-----------
2004 2003
---- ----
Revenue 100.0% 100.0%
Cost of Educational Services 53.5% 53.9%
Student Services & Admin. Exp. 35.1% 33.2%
Interest Expense 1.0% 0.2%
------- -------
Total Costs and Expenses 89.6% 87.3%
Income Before Taxes 10.4% 12.7%
Income Tax Provision 3.0% 4.9%
Non-Recurring Tax Benefits - (1.2%)
------- --------
Net Income 7.4% 9.0%
======= ========
Total consolidated revenues for fiscal 2004 set a new record, increasing by
$105.3 million, or 15.5%, from last year. Approximately 70% of the
increase in revenue was generated by the Ross University medical and
75
veterinary school operations that the Company acquired in May 2003 and were
not included in fiscal 2003 results until the final six weeks of the year,
from its mid-May date of acquisition until June 30, 2003.
Tuition revenues, which are the largest component of total revenues,
increased by $109.2 million, or 17.4%, from fiscal 2003. As with total
revenues, most of the increase was generated by the Ross University segment
but the DeVry University segment also contributed to this increase.
Tuition revenue is reported net of tuition refunds.
Revenues in the DeVry University segment increased by $38.9 million, or
6.2% from the previous year. The increase is primarily the result of
higher enrollments and higher tuition pricing at Keller Graduate School.
Revenues at Keller were higher than last year, in part, because of the July
2003 conversion in course length from ten weeks to eight weeks as the
graduate program academic calendar was aligned with the DeVry University
calendar. This change in course length increased the number of terms each
year from five to six, and correspondingly increases revenue by 20% for the
year assuming that all students proceeded through the year with continuous
enrollment at the accelerated six term pace. For fiscal 2004, total
graduate courses taken increased by more than 26% as a result of the change
in course length and higher student enrollments in each term.
Revenues for the DeVry University segment also increased slightly from last
year because of tuition price increases, in July 2003 and March 2004 of
approximately 5-6% each, offsetting somewhat lower total undergraduate
enrollments. Undergraduate total student enrollments for the term that
began in November 2003 were 4.0% lower than last year and undergraduate
total student enrollments for the term that began in March 2004 were 4.5%
lower than last year. Although new student undergraduate enrollments were
higher than last year in both of the final two terms of the year cited
above, the increases have been in online programs and programs at DeVry
University Center locations that are designed to serve working adult
students. These students more typically enroll for less than a full-time
academic load, and accordingly, they pay a somewhat lesser tuition amount
than students at the undergraduate campus locations. Even though
undergraduate enrollments in business programs continue to increase, the
Company believes that declines in enrollment in its technology programs at
its campus locations have been caused by past reductions in technology
field employment, which decreased applicant interest in these fields.
76
During the year, a new undergraduate campus was opened in Houston, Texas,
and several new DeVry University Center locations were opened or expanded.
At the start of the summer term, which is the beginning of fiscal 2005,
graduate coursetakers increased from last year by 8.4% to 10,276. However,
total undergraduate enrollments of 38,036 remained below the level of the
previous year, declining by 7% from the summer term in fiscal 2004 that
were 41,075. On a continuing operation basis, excluding the students at
the Mississauga (Toronto), Canada, campus that did not accept new students
after the summer term of last year, the decline in total enrollment from
last year was 5.8%.
Other Educational revenue declined by $3.6 million, or 7.2%, from the
previous year. Other Educational revenue is composed primarily of the sale
of books and supplies in connection with the Company's educational
programs, including the Becker CPA Review course on CD-ROM and other CPA
and CFA review study materials, application and other non-refundable fees
and interest or payment deferral charges on students' outstanding accounts
receivable balances. The decrease in revenue from last year occurred
primarily in the DeVry University segment where lower undergraduate
enrollments and a further outsourcing of book sales, as discussed more
fully below, affected this source of revenue.
DeVry University entered into an agreement with Follett Higher Education
Group ("Follett") several years ago to manage some of the undergraduate on-
campus bookstores. The wider range of ancillary merchandise and
experienced retail store management available from Follett are believed to
provide an improved level of student service. DeVry University receives a
commission from Follett based upon the level of bookstore sales at these
campuses. At fiscal 2004 year-end, Follett was managing 14 campus
bookstores. Sales at Follett managed bookstores, net of commissions to
DeVry University, were approximately $16.0 million in fiscal 2004 compared
to $17.0 million in fiscal 2003. During fiscal 2004, sales of books to
students enrolled in online courses and at some DeVry University Centers
was managed by a different company under a similar commission agreement.
The Company has entered into an agreement with Follett to manage the
remaining campus bookstores and its online and center book sales, with the
transition occurring over several quarters in fiscal 2005.
77
At Becker Professional Review in the Professional and Training segment,
revenues decreased from the previous year by more than $7 million dollars.
Effective with calendar year 2004, the twice a year, paper and pencil CPA
exam format is no longer being offered. Instead, the exam is now available
on demand almost year-round in a new computer based format. Candidates may
choose to take the four exam sections individually and at different times.
While this provides greater flexibility for candidates sitting for the
exam, it may extend the time over which exam candidates take review
courses, such as those offered by Becker and, therefore, extends the period
over which review course revenue is earned. The Company also believes that
some exam candidates delayed taking the new exam so as to benefit from the
experiences of the first of the takers of the new format exam, thus
reducing enrollments and revenues in the third and fourth quarter.
However, the Company expects that the number of exam candidates will
increase from these reduced levels over the period of the next several
quarters.
Ross University segment revenues were included in fiscal 2004 for the
entire year. In fiscal 2003, Ross University segment revenues were
included only for the six week period from the date of its acquisition
until the end of the fiscal year.
Interest Income on the Company's short-term investments of cash balances
decreased by $0.3 million from fiscal 2003. The decrease is due to lower
interest rates available on investments and the use of most cash balances
to offset bank service fees rather than for short-term investments.
The Company's Cost of Educational Services increased by $54.0 million, or
14.8%, from fiscal 2003. Cost of Educational Services includes the cost of
faculty and related staff that represents more than half of this expense
category. Also included in this expense category are the costs of
facilities, supplies, bookstore and other educational materials, student
education-related support activities and the provision for uncollectible
student accounts.
The increase in this expense category includes a full year of cost of
operations at Ross University that was not a part of the Company for most
of the previous fiscal year. Cost increases were incurred through all of
the Company's previously existing operations, and costs associated with new
DeVry University Centers, the undergraduate Houston campus that opened in
78
September and a growing online student enrollment requiring additional
faculty and staff to support this growing method of delivery. At the new
DeVry undergraduate campuses in Philadelphia and South Florida that were
opened in the first half of last fiscal year, additional faculty and staff
are being hired as students progress into the higher terms of their
educational programs. For the Keller Graduate School term that began in
May 2004, courses were taught in seven new locations compared to the April
term of last year.
In the fourth quarter of fiscal 2003, the Company incurred charges of
approximately $2.5 million related to work force reductions in the eastern
Canada and U.S. operations. No such charges were incurred during the
current fiscal year. However, in the second quarter of fiscal 2004, the
Company recognized an approximately $0.5 million pre-tax loss from asset
impairment on the furniture and laboratory equipment associated with the
Company's Toronto-area operations. Under its agreement with RCC College of
Technology for the teachout of the DeVry student programs that allows
students to complete their program of study, this equipment may become the
future property of RCC and will have no further useful life for DeVry
beyond the period of the teachout.
Additions to land, buildings and equipment were $42.8 million in fiscal
2004 as the Company continued its investment in new and expanded facilities
and equipment for students and staff. As a result of these and previous
years' additions to facilities and equipment, depreciation expense, most of
which is included in Cost of Educational Services, increased by $3.1
million compared to last year, after increasing by $4.9 million in fiscal
2003 from fiscal 2002. Fiscal 2003 depreciation expense included a $0.8
million pre-tax impairment loss on long-lived leasehold improvements in the
Company's Canadian operations.
Student Services and Administrative Expense increased by $49.8 million, or
22.1% from last year. Student Services and Administrative Expense includes
the costs of new student recruiting, general and administrative costs,
expenses associated with curriculum development and the amortization
expense of finite-lived intangible assets related to acquisitions of
businesses, including the acquisition of Ross University. Amortization
expense in fiscal 2004 was $14.7 million compared to only $2.6 million in
fiscal 2003.
79
The increase in expense also includes marketing and administration at Ross
University for a full year compared to just the six-week period at the end
of last fiscal year. The increased expense also reflects the higher
advertising and selling costs associated with efforts to generate more new
student enrollments, primarily in DeVry University's undergraduate
educational programs.
The Company believes that recent reductions in technology field employment
decreased applicant interest in these fields, requiring the Company to
increase the level of its recruitment activity to maintain enrollments.
Expenditures for new student recruitment are charged to expense as
incurred. The Company believes that increased expenditures for new student
recruitment were largely responsible for the increases in new undergraduate
student enrollments for the past several terms. For the undergraduate term
that began in July 2004, that is the start of the Company's fiscal 2005,
new student undergraduate enrollments increased by 0.9% from last year,
excluding the final admission last July of new students to the now
discontinued Toronto-area operations. For the previous two undergraduate
term that began in March 2004 and November 2003, new student undergraduate
enrollments increased by 3.9% and 3.2%, respectively, from last year in the
final terms before new students were no longer being accepted in Toronto.
Information systems development costs are also included in Student Services
and Administrative Expense. In response to the growing size and complexity
of its varied educational program offerings, the Company continued its
development and implementation of a new student information system to
better support the educational process and supporting activities. In
accordance with accounting principles for internal software development
costs, certain wage and outside consulting costs associated with this
project are being capitalized. Indirect expenses, such as training and
employee communication, are being charged directly to expense as incurred.
At the end of fiscal 2004, costs capitalized totaled $20.0 million, of
which $5.3 million was capitalized in the current year. This compares to
$14.7 million of total capitalized costs at the end of fiscal 2003, of
which $6.0 million was capitalized in that year.
Many of the elements of this system have now been placed into service and
the capitalized costs are being amortized to expense over the estimated
useful life of each program element, but not exceeding five years.
Amortization began in the fourth quarter of fiscal 2002. In fiscal 2004,
80
amortization expense totaled $2.3 million compared to $0.5 million in the
previous year. Cumulatively, a total of $2.9 million has been amortized to
expense through the end of fiscal 2004. In addition to the amounts
amortized to expense, $5.2 million of related but indirect activity costs
were charged directly to expense in fiscal 2004. This compares to $5.5
million charged directly to expense in the previous year.
One of the Company's Directors is also an investor in and a director of a
consulting firm engaged by the Company to assist with system development
projects, including the new student information system. Fees paid to this
consulting firm have been negotiated to a level believed to be comparable
to those charged to similar customers. Fees paid to this consulting firm
during fiscal 2004 and 2003 were approximately $4.8 million and $4.1
million, respectively. As the student information system moves from its
development phase to deployment, the Company estimates that fees to be paid
to this consulting firm in the coming year will decrease somewhat from
those paid in fiscal 2004.
In the DeVry University segment, operating income and the operating margin
declined from last year. Contributing to the year's lower earnings were
the lesser total undergraduate student enrollments discussed above and
increased spending on undergraduate new student recruiting to increase
future term enrollments. Income was also affected by the increased number
of new teaching locations and expanding educational operations to support
the increased enrollments in online programs. Although spending at the
undergraduate campuses was curtailed as enrollments declined, significant
fixed costs of operation, such as facility-related costs, were not able to
be reduced. Also affecting income was the recognition of a $0.5 million
pre-tax asset impairment loss on the Toronto-area furniture and laboratory
equipment used under the teachout agreement with RCC as discussed above.
This agreement has reduced the Company's operating losses at the Toronto
campus below what such losses were under Company management in fiscal 2003
and below what the losses would have been if the Company continued to
manage the educational process and services through the current year.
Partly offsetting these factors in the undergraduate operations was the
positive effect on margins from higher enrollments at Keller Graduate
School and from the positive effect on income from the conversion to an
eight-week term length aligned with the common DeVry University calendar as
discussed above. Additionally, price increases of approximately 5-6% for
81
both undergraduate and graduate students were implemented in July 2003 and
another price increase was implemented for the term that began in March
2004.
In the Professional and Training segment, operating income declined by
almost $7.9 million from last year because of the effects on enrollment and
revenues from the change in the CPA exam format and schedule as discussed
above. Also, cost increases for development of the new CPA exam format
materials adversely affected income for the year. Because of the change to
the CPA exam schedule, the Company believes that the historical Becker
operating year that ended in April with the administration of the spring
CPA exam is no longer the most appropriate fiscal year end. Effective with
the Company's fiscal 2005, the Becker fiscal year will be aligned with the
June 30 year-end of DeVry Inc. This change in accounting will be
implemented and reported in the first quarter of fiscal 2005. The
cumulative effect of this change in accounting is expected to add
approximately $0.02 per share for the first quarter and total year of
fiscal 2005.
Income from the Ross University acquisition was first incorporated into the
Company's financial results in the fourth quarter of fiscal 2003 following
completion of its May 2003 acquisition. For the current fiscal year, Ross
University contributed $32.7 million of operating income, or a 39.4%
margin, before interest expense and amortization expense of intangible
assets associated with its acquisition.
Interest expense increased by $6.6 million from last year because of the
fourth quarter of fiscal 2003 borrowings for the acquisition of Ross
University. During the year, borrowings were reduced by $40 million to
$250 million using existing cash balances and cash generated from
operations. Short-term interest rates, that serve as the basis for the
interest rate on this debt, remained low during fiscal 2004 but have now
begun to increase. The Company intends to make further debt reductions
during fiscal 2005, which should offset the effect of higher interest
rates.
Taxes on income were 28.6% of pretax income for the year compared to 29.3%
last year. In fiscal 2003, the Company recognized non-recurring tax
benefits of $8.1 million associated with the restructuring of its Canadian
operations. Without this non-recurring benefit, the tax rate for fiscal
82
2003 would have been 38.7%. The Company's tax rate on income is the
composite of state and federal taxes on operations other than from Ross
University and a single digit rate on the earnings of Ross University, most
of which is earned offshore in jurisdictions where the Company has
agreements with those governments that exempt Ross earnings from local
income taxes. For the foreseeable future, the Company intends to reinvest
the Ross University earnings and cash flow to reduce outstanding debt,
improve and expand facilities and operations at the schools; and pursue
future business opportunities outside the United States. Accordingly, the
Company has not recorded a current provision for the payment of U.S. income
taxes on these earnings.
FISCAL YEAR ENDED JUNE 30, 2003 VS. FISCAL YEAR ENDED JUNE 30, 2002
- -------------------------------------------------------------------
Total consolidated revenues for fiscal 2003 set a new record, increasing by
$31.4 million, or 4.9%, from fiscal 2002. In May 2003, the Company
completed the acquisition of Dominica Management, Inc. ("DMI") for $329.3
million. DMI owns and operates the Ross University School of Medicine and
the Ross University School of Veterinary Medicine, operating in the
Caribbean countries of Dominica and St. Kitts/Nevis, respectively. Ross
University is one of the world's largest providers of medical and
veterinary medical education with over 2,800 students at the date of
acquisition. Ross University operations contributed $9.4 million in
revenues for the period from date of acquisition to the end of the fiscal
year.
Tuition revenues, which are the largest component of total revenues,
increased by $27.9 million, or 4.7%, from fiscal 2002. Tuition revenue is
reported net of tuition refunds. Compared to previous years, the lesser
rate of increase in tuition revenue during fiscal 2003 was caused by
reduced enrollments in the Company's undergraduate technology programs.
Other Educational revenue increased by 7.7% in fiscal 2003 compared to the
previous year. Other Educational revenue is composed primarily of the
sale of books and supplies, including the Becker CPA Review course on CD-
ROM and other CPA and CFA review study materials, application and other non-
refundable fees and interest or payment deferral charges on students'
outstanding accounts receivable balances. The increased revenue results
primarily from a higher enrollment fee charged to new students and
83
increased sales of books and supplies for the CPA and CFA exam reviews, as
increased numbers of students enrolled in the Company's exam preparation
courses.
Interest income on the Company's short-term investments of cash balances
decreased by $0.1 million from fiscal 2002 to $0.4 million. The decrease
is due to lower interest rates available on investments and the application
of some cash balances to offset bank service fees. In addition, a portion
of the Company's cash balances in May and June were utilized to complete
the acquisition of DMI.
The Company's principal business is providing postsecondary education.
Prior to the acquisition of DMI, the Company had presented its financial
results in two reportable segments, DeVry University (undergraduate and
graduate programs in business and technology) and Professional and Training
(Becker CPA, CMA and CFA exam reviews, and corporate training). With the
May 2003 acquisition of DMI, the Company presents the financial results of
these medical program operations for fiscal 2003 in a third reportable
segment.
DeVry University segment revenues increased by $16.3 million, or 2.7%, from
the previous year. Contributing to the increased revenue was an increase
of nearly 21% in coursetakers in graduate management programs for the five
terms of 2003 compared to 2002. However, partly offsetting this increase,
total undergraduate enrollment for the three terms of 2003 decreased
approximately 5.4% from the previous year. Although undergraduate
enrollments in business programs continue to increase, the Company believes
that declines in enrollment in its technology programs have been caused by
reductions in technology field employment that has decreased applicant
interest in these fields. New undergraduate campus openings in
Philadelphia, PA; Miramar, FL; and Denver, CO, plus an expanded number of
DeVry University Centers and increased online student enrollments helped
reduce the effect of lower enrollment in the Company's technology programs.
Tuition rate increases of approximately 6% also helped offset the effect of
lower enrollments.
At the start of the summer term, which is the beginning of fiscal 2004,
graduate coursetakers increased from the previous year by 15.5% to 9,483.
However, total undergraduate enrollments of 41,075 remained below the
fiscal 2003 summer term level of 43,342, down 5.2%. This compares to a
84
decline of 6.0% in total undergraduate enrollments for the spring 2003
term, which was the last term of fiscal 2003, compared to the spring 2002
term.
DeVry University entered into an agreement with Follett Higher Education
Group ("Follett") several years ago to manage some of the undergraduate on-
campus bookstores and provide Internet ordering capability to students at
these campuses. The wider range of ancillary merchandise and experienced
retail store management available from Follett are believed to provide an
improved level of student service. DeVry University receives a commission
from Follett based upon the level of bookstore sales at these campuses. At
fiscal 2003 year-end, Follett was managing 14 campus bookstores, including
two of the new campuses opened during the year. Sales at campus bookstores
under Follett management, net of commissions paid to DeVry University, were
approximately $17.0 million in fiscal 2003, compared to $17.1 million in
the previous year. Responsibility for managing additional campus
bookstores may be transferred to Follett in the future, based upon the
needs of each campus. In addition, sales of books to students enrolled in
DeVry University online courses and some DeVry University Centers are
managed by a different company. DeVry University also receives a
commission based upon the level of these bookstore sales.
In the Professional and Training segment, revenues increased by $5.8
million, or 15.3%, from fiscal 2002 following a 16.4% increase in revenues
in the previous year. Increased numbers of students taking the Becker CPA
Review and Stalla CFA Review courses in the classroom, on CD-ROM or online,
and an increased course price of approximately five percent all contributed
to the increased revenue.
In fiscal 2003, Cost of Educational Services increased by $18.1 million, or
5.2%, from the previous year. Cost of Educational Services includes the
cost of faculty and related staff, which represents approximately 60% of
the expense category. More than half of the increase in this expense
category was the result of higher wages and benefits to faculty and staff
in all of the Company's operations. Also included in this expense category
are the costs of facilities, supplies, bookstore and other educational
materials, student education-related support activities and the provision
for uncollectible accounts. Ross University expenses of a similar nature
are included in this expense category for the six-week period subsequent to
its acquisition. In the fourth quarter of 2003, charges of approximately
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$2.5 million related to work force reductions in the Company's eastern
Canada and U.S. operations were included in this expense category as the
Company adjusted the size of its employee base to better match enrollments
and revenues.
Additions to long-lived assets in DeVry University were $42.7 million as
the Company continued its investment in new and expanded facilities and
equipment for students and staff. As a result of these and previous
additions to facilities and equipment, depreciation expense in DeVry
University, most of which is included in Cost of Educational Services,
increased by $4.9 million, or 15.7% in fiscal 2003, after increasing $4.4
million, or 16.3%, in the previous year. Contributing to the increased
depreciation expense in fiscal 2003 was the recognition during the second
quarter of an approximately $0.8 million impairment loss on long-lived
leasehold improvements in the Company's Canadian operations. The
recognition of this impairment loss followed an assessment of the expected
future results and cash flows of the Canadian operations, where enrollment
declines have adversely affected financial results.
Student Services and Administrative Expense increased by $37.1 million, or
19.6%, from fiscal 2002. Student Services and Administrative Expense
includes the costs of new student recruiting, general and administrative
costs and expenses associated with curriculum development. The increased
spending primarily reflects higher advertising and selling costs associated
with efforts to generate more new student enrollments in the Company's
educational programs for the terms that began in fiscal 2003 and for the
summer term of fiscal 2004. Ross University expenses of a similar nature
are also included in this expense category for the six-week period
subsequent to its acquisition. In addition, $1.8 million of amortization
expense of finite-lived intangible assets related to the Ross acquisition
is included in this expense category.
In fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, entitled "Goodwill and Other Intangible Assets."
Goodwill and indefinite-lived intangible assets arising from a business
combination are no longer amortized and charged to expense over time.
Instead, as required by SFAS 142, goodwill and indefinite-lived intangibles
must be reviewed annually for impairment, or more frequently if
circumstances arise indicating potential impairment. As of June 30, 2003,
the Company, with the assistance of an independent professional valuation
86
specialist, determined that there was no impairment loss in the reporting
units represented by the Company's three operating segments.
As previously explained, the Company believes that reductions in technology
field employment have lessened applicant interest in these fields,
requiring the Company to increase the level of its recruitment activity to
maintain enrollments. Generally, expenditures for new student recruitment,
which are charged to expense as incurred, precede the time periods in which
revenue is generated by these new student enrollments. The Company believes
that increased expenditures for new student recruitment were largely
responsible for the increase in new undergraduate student enrollments in
the summer term of fiscal 2004, up 2.5% from the previous summer term.
Included in Student Services and Administrative Expense was an
approximately $2.5 million charge to reflect the accrual for current year
costs relating to employment agreements completed in the second quarter
with the Company's co-chief executive officers. This accrual is based on
recording the present value of the Company's obligation to the co-chief
executive officers over their period of future active service.
Also, in response to the growing size and complexity of its educational
programs, including the expanded number of DeVry University Centers and
online student enrollments, the Company continued its design and
development of a new student information system to better support the
educational process and supporting activities. Information system
development costs related to this project have increased from last year as
the project nears implementation in fiscal 2004. In accordance with
accounting principles for internal software development costs, certain wage
and outside consulting service costs are being capitalized. Indirect
expenses, such as training and employee communication, are charged directly
to expense as incurred. At the end of fiscal 2003, costs capitalized to-
date were $14.7 million, of which $6.0 million was capitalized during the
current fiscal year. This compares to $6.2 million capitalized during the
previous year. In addition to the amounts capitalized, $5.5 million of
related but indirect activity costs were charged directly to expense, up
from $2.6 million charged directly to expense in the previous year. Some
elements of the overall system have already been placed into service.
Amortization began in the fourth quarter of fiscal year 2002 over the
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expected useful lives of each program element, but not exceeding five
years. Approximately $0.5 million of amortization expense was recognized
during fiscal 2003.
One of the Company's Directors is also an investor in and director of a
consulting firm engaged by the Company to assist with systems development
projects, including the new student information system. Fees paid to this
consulting firm have been negotiated to a level believed to be comparable
to those charged to similar customers. Fees paid to this consulting firm
during the current fiscal year were approximately $4.1 million, compared to
approximately $3.5 million paid in fiscal 2002. The Company estimates that
fees to be paid to this consulting firm in fiscal 2004 will be reduced
somewhat from the level incurred in 2003 as these system projects are being
placed into service.
In the DeVry University segment, both operating income and operating margin
as a percent of revenue declined from the previous year. Operating margins
declined from 16.8% in fiscal 2002 to 11.8% in fiscal 2003 as operating
income decreased by $28.7 million, due largely to the lower number of
undergraduate enrollments and the higher level of spending on student
recruitment to reverse the new and total student enrollment declines that
occurred during fiscal 2003.
The operations of Ross University were acquired by the Company in May 2003
and their results of operations have been included in the Company's results
for the final six weeks of the year. Ross University operations for this
period, net of amortization of intangible assets, interest expense on
Company borrowings for the acquisition and taxes on income as appropriate,
were accretive to the overall Company financial results.
In the Professional and Training segment, operating income in fiscal 2003
increased by $3.3 million, or 31.4%, from the previous year. Operating
margins increased from 27.9% to 31.8% as operating efficiencies were
realized from increased numbers of students enrolled for the exam review
courses and from higher tuition pricing.
Interest expense increased by $0.5 million as borrowings for the Ross
acquisition in mid-fourth quarter of the fiscal year generated additional
expense.
88
Taxes on income, before the non-recurring benefit related to the Company's
Canadian operations and described more fully below, were accrued at a rate
of 38.7%, compared to 39.4% last year. Contributing to the fiscal 2003
lower tax rate were certain business incentive tax credits. Also, in
February of 2003 the Company restructured and continued its Canadian
subsidiary into the U.S. tax jurisdiction and domesticated it as a Limited
Liability Company generating current U.S. tax benefits for the losses of
the LLC beginning in March.
The Ross University School of Medicine, operating in the Commonwealth of
Dominica, and the Ross University School of Veterinary Medicine, operating
in the Federation of St. Christopher Nevis, St. Kitts, both have agreements
with their respective governments that exempt them from local income
taxation through the years 2043 and 2023, respectively. Accordingly, no
current provision for foreign income taxes was provided. The Company has
also not recorded a tax provision for the undistributed earnings of the
schools since the date of acquisition because it is the Company's intention
to indefinitely reinvest these earnings to service debt, improve and expand
the facilities and operations of the schools and pursue future investment
opportunities outside of the United States.
The Company's future composite tax rate will reflect the combination of
both an estimated tax liability at an approximately 37-39% rate
historically experienced on Company operations other than Ross University
and no tax liability on the Ross University operations in their home
Caribbean countries. All of the amortization of intangible assets
associated with the Ross acquisition, and the interest expense on the
portion of the borrowings held by an offshore subsidiary, are attributable
to the Ross earnings that are exempt from income taxes and thus do not
generate a tax benefit in any taxing jurisdiction.
During the second quarter, the Company recorded approximately $8.1 million
of net non-recurring tax benefits related to its Canadian operations. The
Company assessed the expected future results of its DeVry University
Canadian operations including future cash flows and taxable income. This
assessment included an analysis of the previously recorded Canadian
deferred tax assets. These deferred tax assets consisted primarily of net
operating loss carryforwards and a tax basis higher than book basis for
property and equipment. Based upon this assessment, it was determined that
89
a valuation allowance of 100 percent was required for these deferred tax
assets. This resulted in an additional income tax expense provision of
approximately $6.5 million.
Also during the second quarter, the Company determined, based upon this
same assessment, that it would deduct the full amount of the tax basis of
its investment in its Canadian subsidiary. This reflects the negative
value ascribed to the investment as determined by the independent
valuations of the business that were undertaken as a part of the
assessment. The U.S. income tax deduction results in a tax benefit
totaling approximately $14.6 million. The net effect of these two actions
associated with the Canadian investment and operations is a net tax benefit
of approximately $8.1 million, categorized as "Non-Recurring Tax Benefits"
in the Statements of Income.
Net income for the year of $61.1 million decreased by $5.9 million from the
previous year. Earnings per share declined from $0.95 per share (diluted)
in the previous year to $0.87 per share (diluted) in fiscal 2003 primarily
as a result of the previously discussed lower undergraduate enrollments and
increased spending on new student recruitment offset, in part, by the
previously discussed net Canadian tax benefit equal to approximately $0.12
per share.
In August 2003, the Company announced that its subsidiary, DeVry Canada
LLC, had signed a letter of intent with RCC College of Technology ("RCC")
that would enable DeVry to phase out its operations at its Toronto campus,
commencing with the term that began in November 2003. An agreement was
subsequently finalized with RCC for the management of the completion of
programs of study for the remaining students at the Toronto campus. July
2003 was the last term for which new students were admitted to the Toronto
campus.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
- -------------------------------------------
Note 1 of the Notes to Consolidated Financial Statements for the fiscal
year ended June 30, 2004, describes in detail the method of application of
the critical accounting policies listed below.
DeVry University tuition and technology fees and Ross University tuition
revenues are recognized ratably on a straight-line basis over the
90
applicable academic term. Tuition and other refunds are reported as a
reduction of revenues. Textbook and other educational supply sales are
recognized when the sale occurs. Inventory is valued using the first-in,
first-out method of accounting. Advertising costs are charged to expense
in the period in which materials are purchased or services are rendered.
Similarly, all start-up expenses related to new operating locations and new
curriculum development costs are also charged directly to expense as
incurred.
The costs associated with developing the Company's new student information
system are being capitalized in accordance with the rules on accounting for
costs of computer software developed for internal use. Fixed asset
acquisitions are recorded at cost. Depreciation is computed on a straight-
line basis over the estimated useful life of the asset. Stock based
compensation is accounted for using the intrinsic value approach of APB 25
and all required disclosures relative to such compensation and its pro
forma effect on earnings are disclosed in the footnotes to the financial
statements.
In accordance with SFAS 142, entitled "Goodwill and Other Intangible
Assets," the Company annually undertakes an assessment of the fair value of
its reporting units compared to their carrying value for potential
impairment of goodwill, and of the fair value compared to carrying value of
intangible assets arising from a business combination. This assessment is
performed either annually, or more frequently if circumstances require,
with the assistance of an independent professional valuation specialist.
The valuation is based upon several factors including estimates of future
revenues and earnings, a discounted cash flow anlysis for several years
into the future, and includes other assumptions such as future income tax
and interest discount rates. Such estimates require significant judgment,
and over the period of future years, actual results may differ from these
estimates. Although management believes that its estimates are
appropriate, decreases in earnings and cash flow from these estimates
and/or significant changes in other assumptions underlying the analysis
could result in impairment charges in future periods. At June 2004,
intangible assets from business combinations equaled $86.3 million, and
goodwill equaled $284.4 million. Together these assets equal approximately
42% of total assets, and any impairment could significantly affect future
results of operation.
91
The Company's financial statements include estimates and assumptions about
the reported amounts of assets, liabilities, revenues and expenses whose
exact amounts will not be known until future periods. Actual amounts may
differ from the estimates included in the financial statements.
Significant estimates included in the Company's financial statements
include the method of revenue recognition across the academic periods,
determining the useful lives of equipment and facilities whose value is a
significant portion of the Company's total assets, determining the value
and useful lives of acquired finite-lived intangible assets, determining
the value of indefinite-lived intangible assets, determining the pattern of
the amortization of finite-lived intangible assets over their economic
life, estimating losses to be realized in the future on the collection of
presently owed student receivable balances, estimating costs associated
with any settlement of law suits in which the Company is a defendant and
estimating health care reimbursement claims for medical services rendered
but not yet processed or paid. The methodology by which each of these
estimates has been determined for fiscal 2004 is consistent with the manner
in which such estimates were made in prior years although the parameters
used in setting the value of these estimates is analyzed and may change as
current conditions warrant. Variances from estimate to actual expense for
these items in past years have not been material. Although different
assumptions about the parameters affecting each of these estimates could
produce a different amount of estimate, the reasonably determined range of
estimates for each item would generally not be large enough to materially
change the overall Company reported financial results.
CONTINGENCIES
- -------------
The Company is subject to occasional lawsuits, investigations and claims
arising in the normal conduct of its business.
In September 2003, the Company received a notice from Acacia Research
Corporation claiming patent-infringement. The notice alleges that the
Company has infringed upon several Acacia patents relating to streaming
audio and video technology. This technology was allegedly used by the
Company through its online education provider and is also used by many
other companies in conjunction with the delivery of online programs. The
Company has had discussion with Acacia relating to this claim and does not
believe that it had infringed upon the Acacia patents.
92
In March 2002, the Company received notice of a class-action complaint
filed in the federal district court in Michigan under the Fair Labor
Standards Act by several former field sales representatives seeking
overtime compensation for services rendered during their period of
employment. In March 2003, the Company participated in a required
mediation session but no resolution was reached. A decision was entered
for the Company at trial; but an appeal was filed. This matter was fully
resolved by settlement between the parties in June 2004.
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by operations of its Becker CPA Review
Corp. subsidiary in California. This complaint was filed in federal
district court by the trustee in bankruptcy of a failed CPA review provider
seeking a substantial amount of damages. In April 2002, this complaint was
voluntarily dismissed by the plaintiff without prejudice. The complaint
was amended and subsequently re-filed in state court. An initial mediation
session did not result in an agreement. A second mediation session was
held in August 2004, resulting in a tentative agreement to settle the
matter. Discovery continues and pending a final settlement, a trial is
scheduled to commence in October 2004.
In January 2002, a graduate of one of DeVry University's Los Angeles-area
campuses filed a class-action complaint on behalf of all students enrolled
in the post-baccalaureate degree program in Information Technology. The
suit alleges that the program offered by DeVry did not conform to the
program as it was presented in the advertising and other marketing
materials. In March 2003, the complaint was dismissed by the court with
limited right to amend and re-file. The complaint was subsequently amended
and re-filed.
In November 2000, three graduates of one of DeVry University's Chicago-area
campuses filed a class-action complaint that alleges DeVry graduates do not
have appropriate skills for employability in the computer information
systems field. The complaint was subsequently dismissed by the court, but
was amended and re-filed, this time including a then current student from a
second Chicago-area campus.
In conjunction with the required annual review procedures related to its
administration of financial aid programs under the Ontario Student Aid
Program, the Toronto-area DeVry campuses engaged in discussions with the
93
Ontario Ministry of Education relating to certain additional information
requirements for the 2001 and 2002 financial aid years. These additional
information requirements could serve as the basis for a Ministry claim for
the return of some amounts of financial aid disbursed to students attending
these campuses. Although there are no current discussions underway with
the Ministry, based upon its previous discussions, the Company believes
that there will be no significant monetary liability. The Company's
Toronto-area campus does not accept new student admissions and is being
operated under an agreement with RCC College of Technology as previously
discussed. Accordingly, the Company is no longer participating in these
financial aid programs.
The Company has recorded approximately $2.9 million associated with
estimated loss contingencies at June 30, 2004. While the ultimate outcome
of these contingencies is difficult to estimate at this time, the Company
does intend to vigorously defend itself with respect to these claims. At
this time, the Company does not believe that the outcome of current claims,
regulatory reviews and lawsuits will have a material effect on its cash
flows, results of operations or financial position.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of liquidity is the cash received from
payments for student tuition, books, educational supplies and fees. These
payments include funds originating as student and family educational loans;
other financial aid from various federal, state and provincial loan and
grant programs; and student and family financial resources.
The pattern of cash receipts during the year is somewhat cyclical. The
level of accounts receivable from which payments are collected reaches a
peak immediately after the billing of tuition, books and fees each
semester. At DeVry University, the principal undergraduate semesters begin
in July, November and March although shorter session courses are also being
offered beginning in the months of September, January and May. Collections of
student receivables reach their peak during the first half of each term,
generally reaching 70%-80% of collections for the entire term. Collections
during this period exceed payments for operating expenses applicable to
that period and generally provide sufficient cash flow for the balance of
the semester's operations, when collections are much lower.
94
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 undergraduate
spring semester, the end of a graduate school term and the end of a
financial aid year, at which time substantially all financial aid for the
previous 12 months has been disbursed to students' accounts. Ross
University experiences a similar operating pattern but its semesters begin
in May, September and January, smoothing somewhat the seasonal pattern at
DeVry University.
In fiscal 2003, the Keller graduate operations of DeVry University had five
term starts per year, but adoption of a uniform academic calendar created a
revised term structure with six term starts per year that was implemented
in July, effective with the start of fiscal 2004, resulting in a somewhat
different monthly pattern of cash flow this year compared to the previous
year. Similarly, the Professional and Training segment operation has
historically had two major term starts per year, but the change to an on-
demand CPA exam format beginning in April 2004 creates a new and somewhat
smoother future cash flow pattern throughout the year than had been
previously experienced. Although these term start dates and frequency may
be different from the DeVry undergraduate operations, there are similar
cyclical patterns in the billings that create accounts receivable and cash
receipts within the period of these respective academic term cycles.
At June 30, 2004, total Company accounts receivable, net of related
reserves, were approximately $28.2 million, compared to $24.3 million last
year. Increased Company revenues, including revenues from Ross University,
created higher receivables to be collected, and there were higher average
receivables from students at DeVry University as tuition rates were
increased in both July 2003 and March 2004, offsetting increased efforts at
collection and financial aid administration. Reserves for uncollectible
accounts for both undergraduate and graduate student receivables were
increased as a percentage of outstanding receivables to reflect the
Company's current collection experience on balances owed.
To help further reduce the level of Company-provided interim student
financing under the DeVry University undergraduate EDUCARDr program,
students at some of the U.S. and Canadian DeVry undergraduate teaching
locations participate in supplementary loan programs funded by private
lenders. The supplementary loans are aimed at students whose eligibility
95
for federal and state funded financial aid is not sufficient to cover all
their costs of education. Some of these loans are subject to a limited
Company default risk sharing agreement. At June 30, 2004, the Company had
fully reserved for and recognized as expense the entire amount of its share
of the default risk.
The Company is highly dependent upon the timely receipt of financial aid
funds at DeVry University and Ross University. The Company estimates that
historically, more than 60% of its DeVry University undergraduate students'
tuition, book and fee revenues were financed by government-provided
financial aid to students. Keller Graduate School collections from student
participation in federal loan programs is approximately 40% of Keller
revenues. Ross University collections from student participation in
federal loan programs is approximately 70% of its revenues. The financial
aid and assistance programs in which the Company's students participate are
subject to political and governmental budgetary considerations. There is
no assurance that such funding will be maintained in the future.
Extensive and complex regulations in the United States 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 initiation
of a suspension, limitation or termination proceeding against the Company.
Such program reviews may be conducted at any educational institution at any
time and have been conducted in the past at several Company campuses.
Previous Department of Education and state regulatory agency program
reviews have not resulted in material findings or adjustments.
In conjunction with the required annual review procedures related to its
administration of financial aid programs under the Ontario Student Aid
Program, the Toronto-area DeVry campuses engaged in discussions with the
Ontario Ministry of Education relating to certain additional information
requirements for the 2001 and 2002 financial aid years. These additional
information requirements could serve as the basis for a Ministry claim for
the return of some amounts of financial aid disbursed to students attending
these campuses. Although there are no current discussions underway with
the Ministry, based upon its previous discussions, the Company believes
that there will be no significant monetary liability. The Company's
Toronto-area campus does not accept new student admissions and is being
96
operated under an agreement with RCC College of Technology as previously
discussed. Accordingly, the Company is no longer participating in these
financial aid programs.
Under the terms of the Company's participation in governmental financial
aid programs, certain cash received from various state governments and the
U.S. Department of Education is maintained in restricted bank accounts.
These funds are either received subsequent to the completion of the
authorization and disbursement process for the benefit of the student or
just prior to that authorization. Once the authorization and disbursement
process to the student has been completed, the funds are transferred to
unrestricted accounts, and these funds then become available for use by the
Company in current operations. This process generally occurs within the
period of the academic term for which such funds were authorized, with no
academic term being more than 16 weeks in length. At June 30, 2004, cash in
the amount of $13.5 million was held in restricted bank accounts. At June
30, 2003, cash in restricted bank accounts equaled $14.1 million.
In June 2004, the Company received notice from the Department of Education
that the Equity, Primary Reserve and Net Income ratios ("financial
responsibility ratio") yielded a composite score of 1.4 for the year ended
June 30, 2003. A minimum score of 1.5 is necessary to fulfill the
requirements of the Department's financial standards. Effective with
receipt of this notice, the Department required DeVry University to make
financial aid disbursements under a Cash Monitoring mode. Under this Cash
Monitoring, DeVry University could not submit requests for financial aid
funds for its students in an amount greater than the amount of the actual
disbursements made to students included in the request. DeVry University
has historically requested financial aid reimbursements in a fashion
similar to that imposed by this restriction and, therefore, cash flow was
not significantly affected. In late July, DeVry University received notice
from the Department of Education that the restriction to operate under Cash
Monitoring had been suspended pending submission of audited financial
statements for the year ending June 30, 2004. The Company's calculation of
its composite score at June 2004 is above the required minimum of 1.5.
Cash generated from operations in fiscal 2004 was $134.4 million, compared
to $100.2 million last year. Contributing to the increase in cash flow from
operations were higher advance tuition payments and deferred tuition
revenues for the coming terms, particularly at Becker Professional Review
97
where the change in the CPA exam format and exam schedule has resulted in a
different pattern of payments and billings than under the previous twice a
year exam schedule with a business cycle ending in April. Also
contributing to the improved cash flow were higher non-cash charges for
depreciation and amortization included in net income. Partly offsetting
these increases were higher accounts receivable, increasing at about the
same rate as revenues.
Capital expenditures in fiscal 2004 were $42.8 million compared to $43.8
million in the previous year. In just the past three years, the Company
has invested over $172 million for expansion, facility improvement and
replacement of school laboratories, teaching and administrative equipment
for its educational program offerings.
For fiscal 2005, capital expenditures are expected to approximately equal
those of fiscal 2004. There are no new large DeVry University campus sites
under construction, but there is a further facility expansion plan at both
the Ross University medical and veterinary schools. Other new or expanded
operating locations are expected to be in leased facilities requiring less
capital spending by the Company. Capital spending on improvements,
including instructional technology and expansion, is an integral component
of the Company's operating strategy.
In May 2003, in conjunction with its acquisition of Ross University, the
Company terminated its $85 million revolving loan agreement and entered
into two new loan agreements. These new loan agreements provided funding
for the acquisition and for working capital needs as may be required. Under
these new agreements, all borrowings and letters of credit issued under
these agreements are through DeVry Inc. and Global Education International
("GEI"), which was a newly formed international subsidiary. In June 2004,
the Company amended this loan agreement to extend its maturity to July 1,
2009; reduce the interest rate on outstanding borrowings by approximately
0.25% depending upon the achievement of certain financial performance
98
ratios; and increase, at the Company's option, the borrowing limit by
$75,000,000.
The current loan agreements and their borrowing limits are as follows:
Revolving Credit Agreement
- --------------------------
DeVry Inc. as Borrower $125,000,000 (can be increased by $75,000,000
at the Company's option.)
GEI as Borrower 50,000,000
-----------
Total $175,000,000
Senior Notes
- ------------
DeVry Inc. as Borrower $ 75,000,000
GEI as Borrower 50,000,000
-----------
Total $125,000,000
All borrowings and letters of credit under the revolving credit facility
now mature on July 1, 2009. At June 30, 2004, aggregate borrowings under
these agreements totaled $250 million, consisting of borrowings of $125
million under the revolving credit agreement and borrowings of $125 million
under the senior notes. Based upon these levels of borrowing at fiscal
year-end, a 1% increase in short-term interest rates would result in $2.5
million of additional annual interest expense.
At fiscal year-end, letters of credit issued under the revolving credit
agreement totaled approximately $2.7 million. Approximately $1.4 million
of these letters of credit were issued in conjunction with DeVry
University's participation in student financial aid programs. Most of the
letters of credit have expiration dates of less than one year. To-date, no
amount has ever been drawn under any letter of credit issued on behalf of
the Company.
Under the terms of the revolving credit agreement, there are no required
repayments until the 2009 maturity date. There are also no required
repayments under the terms of the senior note agreements until their
maturity in 2010. Prepayments during the first two years of the senior
note agreements include a prepayment penalty. The Company does not intend
to prepay any amount of the senior notes during the prepayment penalty
period.
99
Borrowings under the revolving credit agreement bear interest at either the
prime rate or a Eurodollar LIBOR rate plus 0.75% to 1.50%, depending upon
the achievement of certain financial ratios. At June 30, 2004, the
additional interest rate was 1.25%. Borrowings under the senior note
agreement bear interest at a Eurodollar LIBOR rate plus 1.25%. Both
agreements include financial and other covenants similar to those typically
found in other loan agreements and which are not expected to hinder the
Company's plans for future operation.
Subsequent to June 30, 2004, the Company repaid $35 million of its
borrowings under the revolving credit agreement.
As discussed above, in June 2004 the Company received notification from the
Department of Education that the Company's financial responsibility ratio
yielded a composite score of 1.4 for the year ended June 30, 2003. This
notification created an Event of Default as defined by the revolving credit
agreement that requires a minimum composite score of 1.5. The composite
score as calculated by the Department of Education was affected versus
prior years by the inclusion of intangible assets from the Ross University
acquisition. In June 2004, the lenders waived this default effective June
2003.
In the first quarter of fiscal 2004, the Company entered into several
interest rate cap agreements to protect approximately $100,000,000 of its
current borrowings from sharp increases in short-term interest rates upon
which its borrowings are based. These interest rate cap agreements protect
the portion of the Company's debt that is covered by these agreements from
increases in short-term interest rates above 3.5%. The Company intends to
periodically evaluate the need for interest rate protection in light of
projected changes in interest rates and borrowing levels.
The Company's only long-term contractual obligations consist of its
revolving line of credit and Senior Notes, operating leases on facilities
and equipment, and agreements for various services. At June 30, 2004, there
were no required payments under the Company's borrowing agreements prior to
their maturity. Required payments under non-cancelable operating leases
with a term in excess of one year are $39.1 million and $35.2 million for
fiscal 2005 and 2006, respectively.
100
The Company is not a party to any off-balance sheet financing or contingent
payment arrangements, nor are there any unconsolidated subsidiaries of the
Company. There are no loans extended to any officer, director or other
person affiliated with the Company. The Company has not entered into any
synthetic leases, and there are no residual purchase or value commitments
related to any facility lease. The Company has not entered into any
derivative, swap, futures contract, put, call, hedge or non-exchange traded
contract except for the interest rate cap agreements noted above. Under the
terms of these agreements, the Company is not obligated to any further
payment liability beyond their original purchase price.
As of the end of the fiscal year, the Company had posted more than $8.6
million of surety bonds to various governmental jurisdictions on behalf of
DeVry University and Becker Professional Review in the United States, and
approximately CDN $1.1 million in Canada related primarily to its student
recruiting and educational operations in those jurisdictions. If the
Company were to fail to meet its obligations in these jurisdictions, it
could be responsible for payment up to the amount of the bond issued to
that jurisdiction. To-date, no surety bond has ever been paid in
connection with the Company failing to meet its obligations.
A summary of the Company's contractual obligations is presented below:
(Dollars in Thousands)
Less Than 1-3 4-5 After
Due In Total 1 Year Years Years 5 Years
-------- --------- -------- -------- -------
Long-term Debt $250,000 $35,000 - $215,000 -
Operating Leases $296,100 $39,100 $100,000 $ 58,200 $98,800
Employment Agreement $ 3,700 - $ 800 $ 800 $ 2,100
Other Long-term
Obligations - - - - -
___________________________________________________________________________
Total Cash
Obligations $549,800 $74,100 $100,800 $274,000 $100,900
101
Included in the Company's consolidated cash balances of $146.2 million at
June 30, 2004, is $45.7 million of cash attributable to the Ross University
operations. For the foreseeable future, it is the Company's intention to
reinvest this cash and subsequent earnings and cash flow to service
outstanding debt, improve and expand facilities and operations of the
schools and pursue future business opportunities outside the United States.
In accordance with this plan, cash held by Ross University will not be
available for general Company purposes such as at DeVry University.
The Company believes that current balances of unrestricted cash, cash
generated from operations and, if necessary, the revolving loan facility
will be sufficient to fund both its current operations and its current
growth plans for the foreseeable future, unless future investment
opportunities, similar to the acquisition of Ross University, should arise.
EFFECT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In January 2004, the Financial Accounting Standards Board ("FASB") issued a
revision to Statement of Financial Accounting Standards ("SFAS") No. 132,
"Employers' Disclosures about Pension and Postretirement Benefits." The
Company does not have any defined benefit plans covered by this Standard
and there is no effect on its financial statements.
Also, during fiscal 2004, the FASB issued several staff position papers
covering issues including disclosures regarding the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 and disclosures about
contingently convertible securities. The Company does not have any benefit
plans nor any contingently convertible securities covered by these staff
position papers and there is no effect on its financial statements.
In March 2004, the FASB issued an Exposure Draft on "Share-Based Payment"
(including stock options). The Company currently accounts for its stock
based compensation using the intrinsic value approach of APB 25, and all
required disclosures relative to such compensation and its pro forma effect
on earnings are disclosed in the footnotes to the financial statements. The
Company is evaluating the effects of the proposed new Standard and believes
that, upon adopting an improved method of stock option valuation as
recommended by the proposed Standard, the effect on its Statement of
Income will be somewhat less than that currently disclosed as the pro forma
effect on earnings in its footnotes.
102
In April 2003, the FASB issued SFAS No.149, which amends specific issues in
SFAS 133 on the accounting for derivative instruments and hedging
activities for contracts entered into or modified subsequent to June 30,
2003. Subsequent to June 30, 2003, the Company entered into several
interest rate cap agreements. Under the terms of these agreements, the
Company is not obligated to any further payment liability beyond their
original purchase price. The Company believes that it has properly
accounted for these instruments in accordance with the Standard and
included such accounting, without a material effect, in its financial
statements.
Certain information contained in this Annual Report on Form 10-K may
constitute forward-looking statements made pursuant to the safe harbor
provision of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements are based upon the Company's current expectations and
beliefs about future events. Such statements are inherently uncertain and
may involve risks that could cause future results to differ materially from
the forward-looking statements. Potential risks and uncertainties include,
but are not limited to, undergraduate program concentration in information,
electronics and telecommunication technology; dependence on student
financial aid; dependence on state and provincial approvals and licensing
requirements; dependence on continued accreditation for DeVry and Ross
University, and the other factors detailed in the Company's Securities and
Exchange Commission ("SEC") filings, including those discussed under the
heading entitled "Risk Factors" in the Company's Registration Statement on
Form S-3 (No. 333-22457) filed with the SEC.
Copies of the Company's SEC filings on Forms 3, 4, 8-K, 10-Q and Annual
Reports on Form 10-K may be obtained free of charge at the Company's
website, www.devry.com.
ITEM 7A - QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The nature of the Company's operations does not subject it to a
concentration or dependency upon the price levels or fluctuations in
pricing of any particular or group of commodities.
The financial position and results of operations of Ross University's
Caribbean operations are measured using the U.S. dollar as the functional
currency. Almost all Ross University financial transactions are
103
denominated in the U.S. dollar so there is no significant translation gain
or loss, nor currency exposure risk associated with these operations.
The financial position and results of operations of the Company's Canadian
subsidiary are measured using the local currency as the functional
currency. The Canadian subsidiary does not have any material long term
contracts to purchase or sell goods and services, other than lease
agreements on its teaching facilities. The Company does not have any
foreign exchange contracts or derivative financial instruments related to
protection from changes in the value of the Canadian dollar. Because the
assets and liabilities of the Company's Canadian operations are small
relative to those of the Company, and because the Canadian dollar has
remained relatively stable in value compared to the U.S. dollar, any
exposure to currency change would not have a material effect on the
Company's results of operations or financial position. Based upon the
value of the Canadian subsidiary's assets at the end of the fiscal year
2004, a decline of $0.01 in the value of the Canadian dollar relative to
the U.S. dollar would result in a pre-tax translation adjustment of less
than $100,000.
The interest rate on the Company's debt is based upon LIBOR interest rates
for periods typically ranging from one to three months. Based upon the
level of Company borrowings at fiscal year-end, a 1% increase in short-term
interest rates would result in $2.5 million of additional annual interest
expense. The Company has entered into several interest rate cap agreements
to protect approximately one third of its borrowings from sharp increases
in short-term interest rates. However, these interest rate cap agreements
do not provide protection from increases in short-term interest rates until
the three-month LIBOR interest rate exceeds 3.5%. At the end of August
2004, this LIBOR interest rate was approximately 1.8%.
104
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following financial and supplemental schedule statements of the Company
and its subsidiaries are included below on pages 106 through 145 of this
report:
10K
Report Page
-----------
Consolidated Balance Sheets at
June 30, 2004 and 2003 106-107
Consolidated Statements of Income for the
years ended June 30, 2004, 2003 and 2002 108
Consolidated Statements of Cash Flows for
the years ended June 30, 2004, 2003 and 2002 109
Consolidated Statements of Shareholders'
Equity for the years ended June 30, 2004,
2003 and 2002 110
Notes to Consolidated Financial Statements 111-140
Schedule II. - Valuation and Qualifying Accounts 141
Report of Independent Auditors 142
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.
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.
ITEM 9A - CONTROLS AND PROCEDURES
- ---------------------------------
The Company's management does not believe that any set of disclosure or
internal controls can absolutely prevent all fraud and error. Such
disclosure and internal controls, including those employed by DeVry Inc.,
can and should, however, provide reasonable, but not absolute, assurance
that assets have been safeguarded, used only for their intended purpose and
105
that financial transactions have been properly recorded and reported to
permit the preparation of financial statements in conformity with generally
accepted accounting principles reported within the timeframes required by
the SEC.
The Company's Chief Executive Officer and its Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and internal control procedures upon which these
financial statements and management discussion are based. This review
included the results of the Company's internal audit procedures. This
review was made as of the end of the period covered by this annual report.
Based upon this evaluation, and with the participation of management,
subject to the limitations on absolute prevention of fraud and error, the
above named officers have concluded that these controls and procedures are
effective and appropriate to ensure the correctness and completeness of
this report.
There were no changes in internal control over financial reporting
identified in connection with the evaluation referred to above that
occurred during the Company's fourth fiscal quarter that materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
106
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
---------------------
2004 2003
--------- ---------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 146,227 $ 93,471
Restricted Cash 13,457 14,052
Accounts Receivable, Net 28,150 24,275
Inventories 3,281 4,315
Deferred Income Taxes 7,619 11,358
Prepaid Expenses and Other 10,141 6,988
------- -------
Total Current Assets 208,875 154,459
------- -------
Land, Buildings and Equipment:
Land 64,256 59,888
Buildings 203,651 188,320
Equipment 222,898 207,405
Construction In Progress 6,214 12,662
------- -------
497,019 468,275
Accumulated Depreciation and Amortization (210,132) (182,921)
------- -------
Land, Buildings and Equipment, Net 286,887 285,354
------- -------
Other Assets:
Intangible Assets, Net 86,346 103,330
Goodwill 284,397 280,979
Perkins Program Fund, Net 12,247 11,291
Other Assets 5,380 6,003
------- -------
Total Other Assets 388,370 401,603
------- -------
TOTAL ASSETS $ 884,132 $ 841,416
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
107
DEVRY INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30,
---------------------
2004 2003
--------- ---------
LIABILITIES:
Current Liabilities:
Current Portion of Revolving Loan $ 35,000 $ 15,000
Accounts Payable 27,349 18,866
Accrued Salaries, Wages and Benefits 31,041 30,791
Accrued Expenses 24,610 34,484
Advance Tuition Payments 16,819 10,568
Deferred Tuition Revenue 21,830 16,291
------- -------
Total Current Liabilities 156,649 126,000
------- -------
Other Liabilities:
Revolving Loan 90,000 150,000
Senior Debt 125,000 125,000
Deferred Income Taxes 17,660 10,332
Deferred Rent and Other 16,566 14,417
------- -------
Total Other Liabilities 249,226 299,749
------- -------
TOTAL LIABILITIES 405,875 425,749
------- -------
COMMITMENTS & CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common Stock, $0.01 Par Value, 200,000,000
Shares Authorized,70,331,323 and
70,021,513 shares Outstanding
at June 30, 2004 and 2003, Respectively 704 701
Additional Paid-in Capital 71,797 67,288
Retained Earnings 405,036 346,975
Accumulated Other Comprehensive Income 720 703
------- -------
TOTAL SHAREHOLDERS' EQUITY 478,257 415,667
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 884,132 $ 841,416
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
108
DEVRY INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands Except for Per Share Amounts)
For The Year Ended
June 30,
--------------------------------
2004 2003 2002
-------- -------- --------
REVENUES:
Tuition $737,546 $628,326 $600,400
Other Educational 47,173 50,810 47,181
Interest 166 443 553
------- ------- -------
Total Revenues 784,885 679,579 648,134
------- ------- -------
COSTS AND EXPENSES:
Cost of Educational Services 420,108 366,075 347,986
Student Services and
Administrative Expense 275,587 225,767 188,712
Interest Expense 7,834 1,280 807
------- ------- -------
Total Costs and Expenses 703,529 593,122 537,505
------- ------- -------
Income Before Income Taxes 81,356 86,457 110,629
Income Tax Provision 23,295 33,459 43,574
Non-recurring Tax Benefits - (8,150) -
------- ------- -------
NET INCOME $ 58,061 $ 61,148 $ 67,055
======= ======= =======
EARNINGS PER COMMON SHARE
Basic $0.83 $0.87 $0.96
======= ======= =======
Diluted $0.82 $0.87 $0.95
======= ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
109
DEVRY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For The Year Ended June 30,
----------------------------
2004 2003 2002
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 58,061 $ 61,148 $ 67,055
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 40,836 37,758 32,725
Amortization 14,748 2,574 811
Provision for Refunds and
Uncollectible Accounts 35,495 34,501 34,249
Deferred Income Taxes 5,470 8,940 2,630
Loss on Disposals of Land, Buildings
and Equipment 439 263 188
Changes in Assets and Liabilities, Net of
Effects from Acquisitions of Businesses:
Restricted Cash 595 6,206 1,220
Accounts Receivable (39,340) (23,633) (34,525)
Inventories 1,034 592 (8)
Prepaid Expenses And Other (3,153) (3,070) 677
Perkins Program Fund Contribution
and Other 654 (1,114) 193
Accounts Payable 8,483 (2,132) (105)
Accrued Salaries, Wages,
Expenses and Benefits (685) 2,061 5,363
Advance Tuition Payments 6,251 (6,997) 1,704
Deferred Tuition Revenue 5,539 (16,904) 1,330
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 134,427 100,193 113,507
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (42,808) (43,762) (85,873)
Payments for Purchases of Businesses, Net
of Cash Acquired (1,493) (295,908) -
------- ------- ------
NET CASH USED IN INVESTING ACTIVITIES (44,301) (339,670) (85,873)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options 2,631 404 1,068
Proceeds from Revolving Credit Facility 25,000 165,000 55,000
Repayments Under Revolving Credit Facility (65,000) - (55,000)
Proceeds from Senior Note Issuance - 125,000 -
------- ------- ------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (37,369) 290,404 1,068
Effects of Exchange Rate Differences (1) 29 (46)
------- ------- ------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 52,756 50,956 28,656
Cash and Cash Equivalents at Beginning
of Year 93,471 42,515 13,859
------- ------- ------
Cash and Cash Equivalents at End of Year $146,227 $ 93,471 $ 42,515
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid During the Year $ 7,091 $ 662 $ 807
Income Taxes Paid During the Year, Net 22,471 17,373 42,486
The accompanying notes are an integral part of these consolidated
financial statements.
110
DEVRY INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands)
Common Stock
------------------- Accumulated
Additional Other
Amount Paid-in Retained Comprehensive
$.01 Par Capital Earnings Income Total
------------------- --------- ------------ --------
Balance at June 30, 2001 $698 $64,481 $218,772 $720 $284,671
Comprehensive Income:
Net Income in 2002 67,055 67,055
Foreign Currency
Translation (46) (46)
------
Comprehensive Income 67,009
------
Proceeds from Exercise
of Stock Options 2 1,066 1,068
Tax Benefit from Exercise
of Stock Options 798 798
---------------------------------------------------
Balance at June 30, 2002 700 66,345 285,827 674 353,546
Comprehensive Income:
Net Income in 2003 61,148 61,148
Foreign Currency
Translation 29 29
------
Comprehensive Income 61,177
------
Proceeds from Exercise
of Stock Options 1 403 404
Tax Benefit from Exercise
of Stock Options 540 540
---------------------------------------------------
Balance at June 30, 2003 701 67,288 346,975 703 415,667
Comprehensive Income:
Net Income in 2004 58,061 58,061
Change in Fair Value
of Interest Rate
Hedge 18 18
Foreign Currency
Translation (1) (1)
------
Comprehensive Income 58,078
------
Proceeds from Exercise
of Stock Options 3 2,628 2,631
Tax Benefit from Exercise
of Stock Options 1,881 1,881
---------------------------------------------------
Balance at June 30, 2004 $704 $71,797 $405,036 $720 $478,257
===================================================
The accompanying notes are an integral part of these consolidated
financial statements.
111
DEVRY INC.
Notes to Consolidated Financial Statements
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
- --------------------
DeVry Inc. (the Company), through its wholly owned subsidiaries,
including DeVry University and Dominica Management, Inc. (DMI),
operates an international system of degree-granting, career-
oriented higher education schools and a leading international
training firm.
DeVry University is one of the largest regionally accredited
higher education systems in North America, offering both
undergraduate and graduate programs. Its DeVry undergraduate
operations award associate and bachelor's degrees in
electronics, computer information systems and technology,
biomedical engineering technology, business administration,
technical management, and network and communications
management. The undergraduate programs are offered at 22 large
campus locations and several smaller sites located in
conjunction with graduate program teaching sites, all in the
United States; at one location in Canada; and through DeVry
University Online. Several new U.S. locations are scheduled to
open in fiscal 2005. The University's Keller Graduate School of
Management awards master's degrees in business administration,
accounting and financial management, information systems
management, human resource management, project management,
public administration and telecommunications management.
Graduate school programs are offered at 65 locations in the
United States, and through the Online Education Center. Several
additional locations are scheduled to open in fiscal 2005.
DMI operates the Ross University School of Medicine and the Ross
University School of Veterinary Medicine (collectively referred
to as Ross University), with campuses in the Caribbean countries
of Dominica and St. Kitts/Nevis, respectively. Students
complete their basic science curriculum in modern, fully
equipped campuses in the Caribbean. Ross students complete
their clinical education in U.S. teaching hospitals and
veterinary schools under affiliation with Ross.
Becker Professional Review (Becker) is a leading international
training firm preparing students to pass the Certified Public
Accountant (CPA), Certified Management Accountant (CMA) and
Chartered Financial Analyst (CFA) exams. Currently, the CPA exam
review course is offered at approximately 300 locations
worldwide.
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 accounts are
consolidated based on an April 30 fiscal year end. There were no
events occurring at Becker during the intervening period through
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.
112
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents can include time deposits, commercial paper,
municipal bonds and bankers acceptances with original 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 except for the
concentration of balances at three of the Company's principal depository and
disbursement banks to maximize cash availability and efficiency of
operation. Net cash balances on deposit with these banks were
approximately $66 million, $42 million and $15 million at June 30, 2004,
and $43 million, $33 million and $6 million at June 30, 2003.
The Company periodically evaluates the creditworthiness of the security
issuers and financial institutions with which it invests.
Financial Aid and Restricted Cash
- ---------------------------------
Financial aid and assistance programs, in which most DeVry University
and Ross University 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 United States and Canada govern all of the
government financial assistance programs in which these students
participate. 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 DeVry
University.
A significant portion of revenues is received from students who
participate in government financial aid and assistance programs.
Restricted cash represents amounts received from the United States and state
governments under various student aid grant and loan programs. Restricted
funds are held in separate bank accounts. These funds are either received
subsequent to the completion of the authorization and disbursement process
for the benefit of the student or just prior to that authorization. Once
the authorization and disbursement process to the student has been
completed, the funds are transferred to unrestricted accounts, and
these funds then become available for use in current operations. This
transfer generally occurs within the period of the academic term for
which such funds were authorized, with no term being more than 16
weeks in length.
Revenue Recognition
- -------------------
DeVry University tuition and technology fee revenues are recognized ratably
on a straight-line basis over the applicable academic term. Ross University
basic science curriculum revenues are recognized ratably on a straight-line
basis over the academic terms. The clinical portion of their education
program is conducted under the supervision of the U.S. teaching hospitals
and veterinary schools. The Company is responsible for the billing and
113
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition, continued
- ------------------------------
collection of tuition from Ross University students during the
period of clinical education. Revenues are recognized on a
weekly basis during the period of the clinical program. Fees paid to
the hospitals and veterinary schools for supervision of Ross University
students are charged to expense on the same basis. The provision for
refunds, which is reported as a reduction to Tuition Revenue in
the Consolidated Statements of Income, and the provision for
uncollectible accounts, which is included in the Cost of
Educational Services in the Consolidated Statements of Income,
also are recognized in the same straight-line fashion as revenue
to most appropriately match these costs with the tuition revenue
in that term.
Estimates of the Company's expected exposure to refunds are determined
at the onset of each academic term, based upon actual experience in
previous terms, and monitored and adjusted as necessary within the
term. 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
percentages of tuition are refunded to the student or the appropriate
funding source. All refunds are charged against revenue during the
applicable academic term. Reserves for uncollectible accounts are
analyzed periodically in light of current collection and loss
experience. Related reserves with respect to uncollectible accounts
and refunds are $19,341,000 and $17,262,000 at June 30, 2004 and
June 30, 2003, respectively.
Textbook sales and other educational product sales, including training
services and the Becker CD-ROM product, are included in Other
Educational Revenues in the Consolidated Statements of Income.
Textbook and other educational product revenues are recognized when the sale
occurs, generally at the start of each academic term. Revenue from training
services, which is generally short-term in duration, is recognized
when the training service is provided, without consideration for when
payment is received. Also included in Other Educational Revenues are
receivable interest billings from various student-deferred tuition payment
plans. Interest charges are generally billed monthly and are recognized
when billed. In addition, fees from international licensees of the Becker
programs are included in Other Educational Revenues and recognized into income
when payment is received.
The Company defers DeVry University enrollment fee revenue. This
deferred revenue will be recognized in subsequent periods as student
services are provided. Additionally, the Company has elected to defer
certain direct costs of activities associated with these fees, limited to
the extent of the revenue deferral. These costs are subsequently amortized
over the periods in which student services are provided. These deferred
costs were $281,000 and $693,000 at June 30, 2004 and 2003, respectively.
Since changes to the deferrals involve the recording of equivalent amounts
of revenues and costs, net income is not affected.
114
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
- -----------
Inventories consist mainly of textbooks and educational materials on
electronic media, electronics kits and supplies held for sale to
students enrolled in the Company'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. Upon sale or retirement of an asset, the accounts are
relieved of the cost and the related accumulated depreciation, with
any resulting profit or loss included in income in the period
incurred. Assets under construction are reflected in Construction in
Progress until they are ready for their intended use. Interest
is capitalized as a component of cost on major projects during the
construction period.
Leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the asset,
whichever is shorter. Leased property meeting certain criteria is
capitalized, and the present value of the related lease payments is recorded
as a liability. Amortization of capitalized leased assets is computed on the
straight-line method over the term of the lease or the life of the related
asset, whichever is shorter.
Depreciation is computed using the straight-line method over estimated
service lives. These lives range from five to 31 years for buildings
and leasehold improvements, and from three to eight years for equipment.
Business Combinations, Intangible Assets and Goodwill
- -----------------------------------------------------
Intangible assets relate mainly to acquired business operations
(see "Note 2-Business Combinations"). These assets consist of the
fair value of certain identifiable assets acquired. Goodwill
represents the excess of the purchase price over the fair value of
assets acquired and liabilities assumed.
As required by Statement of Financial Accounting Standards No. 141
entitled "Business Combinations" (SFAS 141), the Company uses the purchase
method of accounting for all business combinations initiated after
June 30, 2001. All of the Company's acquisitions to-date have been accounted
for using the purchase method of accounting.
In accordance with Statement of Financial Accounting Standards
No. 142 entitled "Goodwill and Other Intangible Assets" (SFAS
142), the Company has completed an assessment of the categorization of
its existing intangible assets and goodwill and has reported them
appropriately on the Consolidated Balance Sheets (see "Note 3-Intangible
Assets"). SFAS 142 provides that goodwill and indefinite-lived intangibles
arising from a business combination will no longer be amortized and charged
to expense over time. Instead,
115
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business Combinations, Intangible Assets and Goodwill, continued
- -----------------------------------------------------------------
goodwill and indefinite-lived intangibles must be reviewed
annually for impairment, or more frequently if circumstances
arise indicating potential impairment. This impairment review was
completed at the end of fiscal 2004. For goodwill, if the
carrying amount of the reporting unit containing the goodwill
exceeds the fair value of that reporting unit, an impairment loss
is recognized to the extent the "implied fair value" of the
reporting unit goodwill is less than the carrying amount of the
goodwill.
For indefinite-lived intangible assets, if the carrying amount
exceeds the fair value, an impairment loss shall be recognized in
an amount equal to that excess. See "Note 3-Intangible Assets"
for results of the Company's required impairment analysis of its
intangible assets and goodwill.
Amortization of intangible assets with finite lives will continue
over the expected economic lives of the intangible assets,
generally five to 15 years. Amortization of all intangible
assets and certain goodwill is being deducted for tax reporting
purposes over statutory lives.
The Company expenses all curriculum development and new school opening
costs as incurred.
Perkins Program Fund
- --------------------
DeVry University is required, under federal aid program regulations,
to make contributions to the Perkins Student Loan Fund at a rate equal
to 33% of new contributions 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 $3,031,000 and
$3,001,000 at June 30, 2004 and 2003, respectively. The allowance for
future loan losses is based upon an analysis of actual loan losses
experienced since the inception of the program. The federal contributions
to this revolving loan program do not belong to the Company and are
not recorded on the Company's financial statements. Upon termination
of the program by the federal government or withdrawal from
future participation by DeVry University, subsequent student loan
repayments would be divided between the federal government and
DeVry University in proportion to their relative cumulative
contributions to the fund.
116
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Internal Software Development Costs
- -----------------------------------
The Company capitalizes certain internal software development costs
that are amortized using the straight-line method over the estimateed
lives of the software, not to exceed five years. Capitalized costs include
external direct costs of materials and services consumed in developing or
obtaining internal-use software and payroll, and payroll-related costs for
employees directly associated with the internal software development project.
Capitalization of such costs ceases no later than the point at which the
project is substantially complete and ready for its intended purpose.
Capitalized software development costs for projects not yet complete,
which are included as equipment in the Land, Buildings and Equipment
section of the Consolidated Balance Sheets, were $3,120,000 and $12,349,000
as of June 30, 2004 and 2003, respectively.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts 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. All of the Company's long-term debt (see
"Note 6-Long-Term Debt") bears interest at a floating rate reset to current
rates on a periodic basis not currently exceeding six months. Therefore,
the carrying amount of the Company's long-term debt approximates fair value.
Foreign Currency Translation
- ----------------------------
The financial position and results of operations of Ross University's
Caribbean operations are measured using the U.S. dollar as the
functional currency. As such, there is no translation gain or loss
associated with these operations. The financial position and results
of operations of the Company's Canadian subsidiary are measured using
the local currency as the functional currency. Assets and liabilities
of the Canadian subsidiary are translated to U.S. dollars using
exchange rates in effect at the balance sheet dates. Income and
expense items are translated at monthly average rates of exchange.
The resultant translation adjustments are included in the component of
Shareholders' Equity designated as Accumulated Other Comprehensive
Income. Transaction gains or losses during the years ended
June 30, 2004, 2003 and 2002 were not material.
Income Taxes
- ------------
Income taxes are provided by applying statutory rates to income
recognized for financial statement purposes. Deferred income taxes
are provided for temporary differences between the financial reporting
and income tax bases of assets and liabilities. Effects of statutory
rate changes are recognized for financial reporting purposes in the
year in which enacted by law. The Ross University operating subsidiaries
on Dominica and St. Kitts/Nevis have agreements with their respective
governments that exempt them from local income taxation through the
years 2043 and 2023, respectively. Accordingly, no provision for
current income taxes is being recorded.
117
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Guarantees
- ----------
The Company adopted the accounting requirements of Financial
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others,"
for guarantees issued or modified after December 31, 2002. The
adoption did not have an impact on the Company's financial statements
as of June 30, 2004 and 2003.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences while the officers or
directors are performing at the Company's request in such capacity.
The indemnification agreement period is for an officer's or
director's lifetime. The maximum potential amount of future payments
the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a director and
officer liability insurance policy that limits its exposure and
enables it to recover a portion of any future amounts paid. As a
result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal.
The Company has no liabilities recorded for these agreements of
June 30, 2004 and 2003.
Derivative Instruments and Hedging Activities
- ---------------------------------------------
The Company uses derivative financial instruments to manage its
exposure to movements in interest rates. The use of these financial
instruments modifies the exposure of these risks with the intent to
reduce the risk to the Company. The Company does not use financial
instruments for trading purposes, nor does it use leveraged financial
instruments. Credit risk related to the derivative financial
instruments is considered minimal and is managed by requiring high
credit standards for its counterparties and periodic settlements.
All derivative contracts are reported at fair value, with changes in
fair value reported in earnings or deferred, depending on the nature
and effectiveness of the offset or hedging relationship. Any
ineffectiveness in a hedging relationship is recognized immediately
into earnings.
During the first quarter of fiscal 2004, the Company entered into
several interest rate cap agreements to protect approximately
$100,000,000 of its current borrowings from sharp increases in
short-term interest rates upon which its borrowings are based. The
Company intends to periodically evaluate the need for interest rate
protection in light of projected changes in interest rates and
borrowing levels.
These interest rate cap agreements are designated as cash flow
hedging instruments and are intended to protect the portion of the
Company's debt that is covered by these agreements from increases
in short-term interest rates above 3.5%.
These cap agreements were purchased at fair market values totaling
$568,000. This cost has been capitalized and is being amortized to
earnings and recorded as interest expense over the 24-month term of
the agreements. Differences between the changes in fair value of the
interest rate caps and the amount being amortized to earnings are
reported as a component of Other Comprehensive Income. These amounts
will be reclassified and recognized into earnings over the 24-month
term of the
118
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative Instruments and Hedging Activities, continued
- --------------------------------------------------------
agreements. As of June 30, 2004, $18,000 is recorded as Other
Comprehensive Income in the Consolidated Balance Sheet. This
represents the cumulative difference between the decline in the fair
market value of the interest rate caps of $72,000 and the $90,000
expensed as interest during the year ended June 30, 2004. For the
year ended June 30, 2004, there was no ineffectiveness related to
these agreements.
Earnings per Common Share
- -------------------------
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Shares used in this computation were 70,142,000, 69,942,000 and 69,830,000
in 2004, 2003 and 2002, respectively. Diluted earnings per share is
computed by dividing net income by the weighted average number of shares
assuming dilution. Dilutive shares reflect the additional shares that
would be outstanding if dilutive stock options were exercised during
the period. Shares used in this computation were 70,757,000, 70,336,000
and 70,594,000 in 2004, 2003 and 2002, respectively. Excluded from the
June 30, 2004, 2003 and 2002 computations of diluted earnings per share
were options to purchase 1,107,000, 1,260,000 and 670,000 shares of
common stock, respectively. These outstanding options were excluded
because the option exercise prices were greater than the average market
price of the common shares; thus, their effect would be anti-dilutive.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
Advertising Expense
- -------------------
Advertising expenses are recognized in the period in which
materials are purchased or services are performed.
Stock-based Compensation
- ------------------------
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 FASB Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and FASB Statement Of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition
and Disclosure-An Amendment of FASB Statement No. 123" ("SFAS 148") for
the years ended June 30, 2004, 2003 and 2002 below.
119
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based Compensation, continued
- -----------------------------------
As permitted under SFAS 123, the Company has elected to continue to
account for stock-based employee compensation under the intrinsic
value method of APB Opinion No. 25. Under this method, the Company
generally recognizes no compensation expense with respect to such
awards, since the exercise price of the common stock options awarded
is 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 2004, 2003 and 2002 was
$17.07, $10.62 and $21.75,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:
2004 2003 2002
---- ---- ----
Expected Life (in Years) 7.50 7.50 7.50
Expected Volatility 58.16% 56.25% 55.00%
Risk-free Interest Rate 3.75% 3.80% 5.05%
120
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based Compensation, 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, 2004, 2003 and 2002 (dollars in thousands except for
per share amounts):
2004 2003 2002
---- ---- ----
Net Income as Reported $58,061 $61,148 $67,055
Stock-based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (3,447) (2,761) (2,609)
------- ------ ------
Pro Forma Net Income $54,614 $58,387 $64,446
======= ====== ======
Earnings per Common Share:
Basic as Reported $0.83 $0.87 $0.96
Stock-based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (0.05) (0.04) (0.04)
---- ---- ----
Pro Forma Basic $0.78 $0.83 $0.92
==== ==== ====
Diluted as Reported $0.82 $0.87 $0.95
Stock-based employee compensation
expense had the fair value method
been applied to all options
awarded, net of income tax (0.05) (0.04) (0.04)
---- ---- ----
Pro Forma Diluted $0.77 $0.83 $0.91
==== ==== ====
121
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Comprehensive Income
- --------------------
The differences between changes in the fair values of the cash flow
hedging instruments described above in "Derivative Instruments and
Hedging Activities", and the amount of these instruments being
amortized to earnings are reported as a component of Comprehensive
Income. The amount recorded in Other Comprehensive Income is a gain
of $18,000 for the year ended June 30, 2004. The Company's only other
item that meets the definition for adjustment to arrive at
Comprehensive Income is the change in cumulative translation
adjustment. The amounts recorded in Other Comprehensive Income for
the changes in translation rates were a loss of $1,000 for the year
ended June 30, 2004 and a gain of $29,000 for the year ended June 30,
2003.
The Accumulated Other Comprehensive Income balance at June 30, 2004,
is composed of the $18,000 gain related to the cash flow hedge and a
cumulative translation gain of $702,000. At June 30, 2003, this
balance is composed entirely of the cumulative translation gain of
$703,000.
Reclassifications
- -----------------
Certain previously reported amounts have been reclassified to
conform to current presentation format. These reclassifications had
no effect on reported net income.
NOTE 2: BUSINESS COMBINATIONS
Ross University
- ---------------
On May 16, 2003, the Company acquired all outstanding shares of capital
stock of Dominica Management, Inc. (DMI) for $329,259,000, in cash
which includes approximately $4,175,000 of acquisition-related fees.
The results of DMI's operations have been included in the consolidated
financial statements of the Company since that date. DMI owns and
operates Ross University School of Medicine and Ross University School
of Veterinary Medicine. With campuses located in the Caribbean
countries of Dominica and St. Kitts/Nevis, Ross University is one of
the world's largest providers of medical and veterinary education,
with more than 2,800 students. The acquisition gives the Company entry
into a growing sector of the higher education market. The addition of
Ross University will further diversify the Company's curricula and
help maintain a leadership position in career-focused education.
The initial total consideration paid for DMI of $329,259,000 was
comprised of $59,259,000 in cash from current operations, $125,000,000
of senior notes due 2010 and privately placed with institutional
investors, and $145,000,000 of borrowings under a revolving line of
credit agreement from a group of banks led by Bank of America,
N.A.(Note 6). During fiscal 2004, the Company recorded an adjustment
to the purchase price of DMI based on a settlement of final working
capital balances. This adjustment resulted in a purchase price
reduction of $1,207,000 that was credited to the goodwill balance
recorded for this acquisition. Goodwill was also reduced by
$1,443,000 during fiscal 2004, based on a final analysis of the tax
liabilities arising from the acquisition.
122
NOTE 2: BUSINESS COMBINATIONS
Ross University, continued
- --------------------------
The Company also finalized the allocation of the purchase price of DMI
in the first quarter of fiscal 2004. Based on a final purchase price
allocation analysis performed for the Company by independent
professional valuation specialists, acquired intangible assets totaled
$66,700,000. Of this amount $5,100,000 was assigned to the value of
tradenames, $14,100,000 was assigned to the value of the Ross Medical
and Veterinary Schools' U.S. Title IV financial aid eligibility and
accreditations, all of which are not subject to amortization, and
$47,500,000 was assigned to student relationships that have an initial
average useful life of approximately five years. The goodwill balance
of $239,408,000 was all assigned to the Ross University operating segment.
None of the intangible assets or goodwill is expected to be deductible
for U.S. tax reporting purposes.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition adjusted
for the final working capital settlement, the goodwill adjustment and
the final purchase price allocation described above.
At May 16, 2003
(In Thousands)
Current Assets $ 45,751
Property and Equipment 21,986
Intangible Assets 66,700
Goodwill 239,408
Other Assets 199
-------
Total Assets Acquired 374,044
Current Liabilities 44,939
Deferred Income Tax Liability, net 1,053
-------
Total Liabilities Assumed 45,992
-------
Net Assets Acquired $328,052
=======
The net deferred income tax liability included a current deferred tax
asset of $5,726,000, resulting from a deduction for the exercise and
non-statutory disposition of employee incentive stock options related
to the acquisition. Additionally, the Company recorded a non-current
deferred tax liability of $6,779,000 resulting from a book and tax
basis difference associated with the intangible assets not subject to
amortization that were recorded in purchase accounting. No deferred
tax liability was recorded with respect to student relationship
intangibles, as this temporary difference relates to operations that
have been granted tax-free status in their local jurisdictions during
the periods in which the temporary difference is expected to reverse.
The Company also initially recorded a current tax liability of
$13,599,000, resulting from a deemed distribution arising upon
acquisition of accumulated earnings and profits of its non-U.S.
subsidiaries through the acquisition date. In fiscal 2004, this
accrual was reduced by $1,443,000, with a corresponding reduction
recorded to goodwill.
123
NOTE 2: BUSINESS COMBINATIONS, continued
Ross University, continued
- --------------------------
The following unaudited pro forma financial information presents the
results of operations of the Company and DMI as if the acquisition 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 the information necessarily indicative of future results of
operations of the combined enterprises (dollars in thousands except
for per share amounts):
For the year ended June 30,
2003 2002
(Unaudited) (Unaudited)
--------------------------
Revenues $738,229 $707,313
Net Income 62,578 66,806
Earnings per Common Share:
Basic $0.90 $0.96
Diluted $0.89 $0.95
Person/Wolinsky
- ---------------
On October 21, 2003, Becker Professional Review, a wholly owned
subsidiary of the Company, acquired certain tangible operating assets
and trade names of Person/Wolinsky CPA Review ("Person/Wolinsky").
These assets were purchased for $2.7 million in cash. Funding was
provided from the Company's existing operating cash balances.
Person/Wolinsky is a training firm preparing students to pass the CPA
exam. Founded in 1967, its primary locations include New York City,
Philadelphia and Washington, D.C.
Based on an analysis performed for the Company by independent
professional valuation specialists, the purchase price of
Person/Wolinsky was allocated as follows in the third quarter of 2004:
Amortized Intangible Assets:
Trade Names $110,000
Non-compete Agreement 50,000
Other 20,000
-------
Total $180,000
=======
Goodwill $2,520,000
---------
124
NOTE 3: INTANGIBLE ASSETS
Intangible assets consist of the following:
As of June 30, 2004
--------------------------------
Gross Carrying Accumulated
Amount Amortization
--------------------------------
Amortized Intangible Assets:
Student Relationships $47,500,000 $(14,737,000)
License and Non-compete
Agreements 2,650,000 (2,126,000)
Class Materials 2,900,000 (700,000)
Trade Names 110,000 (21,000)
Other 620,000 (507,000)
---------- ---------
Total $53,780,000 $(18,091,000)
========== ==========
Unamortized Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
and Accreditations 14,100,000
Intellectual Property 13,940,000
----------
Total $50,657,000
==========
As of June 30, 2003
--------------------------------
Gross Carrying Accumulated
Amount Amortization
--------------------------------
Amortized Intangible Assets:
Student Relationships $52,700,000 $(1,805,000)
License and Non-compete
Agreements 2,600,000 (1,692,000)
Class Materials 2,900,000 (500,000)
Other 600,000 (400,000)
---------- ---------
Total $58,800,000 $(4,397,000)
========== =========
Unamortized Intangible Assets:
Trade Names $20,972,000
Trademark 1,645,000
Ross Title IV Eligibility
and Accreditations 12,370,000
Intellectual Property 13,940,000
----------
Total $48,927,000
==========
125
NOTE 3: INTANGIBLE ASSETS, continued
As part of its fiscal 2002 assessment of intangible assets, the
Company shortened the useful life of the Class Materials
intangible asset and wrote-off the $10,000 cost basis of another
intangible asset.
Amortization expense for amortized intangible assets was
$13,694,000 and $2,532,000 for the years ended June 30, 2004 and
2003, respectively. Estimated amortization expense for amortized
intangible assets for the next five fiscal years ending June 30
is as follows:
Fiscal Year
2005 $14,072,000
2006 9,856,000
2007 6,760,000
2008 3,598,000
2009 203,000
The weighted-average amortization period for amortized intangible
assets is five years for Student Relationships, six years for License
and Non-compete Agreements, 14 years for Class Materials, four years
for Trade Names and six years for Other. These intangible assets,
except for the Student Relationships, are being amortized on a
straight-line basis. The amount being amortized for Student
Relationships is based on the estimated progression of the students
through the respective medical and veterinary programs, giving
consideration to the revenue and cash flow associated with both
existing students and new applicants. This results in the basis being
amortized at an annual rate for each of the five years of estimated
economic life as follows:
Year 1 27.4%
Year 2 29.0%
Year 3 21.0%
Year 4 14.5%
Year 5 8.1%
Indefinite-lived intangible assets related to Trademarks, Trade Names,
Title IV Eligibility, Accreditations and Intellectual Property are not
amortized, as there are no legal, regulatory, contractual, economic or
other factors that limit the useful life of these intangible assets to
the reporting entity. As of the end of fiscal years 2004 and 2003,
there was no impairment loss associated with these indefinite-lived
intangible assets, as fair value exceeds the carrying amount.
Based upon the valuation analysis performed for the Company by
independent professional valuation specialists, there was no
impairment in the value of the Company's goodwill for any
reporting units as of the end of fiscal 2004 or 2003. The
carrying amount of goodwill related to the DeVry University
reportable segment at June 30, 2004 and 2003 was unchanged, at
$22,195,000. The carrying amount of goodwill related to
Professional and Training reportable segment was $22,716,000 at
June 30, 2004 and $20,196,000 at June 30, 2003. The increase of
$2,520,000 is the result of the allocation of the purchase price
for Person/Wolinsky as described in Note 2 above.
126
NOTE 3: INTANGIBLE ASSETS, continued
The carrying amount of goodwill related to the Ross University
segment was $239,486,000 at June 30, 2004, and $238,588,000 at
June 30, 2003. This increase of $898,000 is comprised of the
following:
Final Allocation of Purchase
Price (Note 2) $3,470,000
Adjustment to Purchase Price
(Note 2) (1,207,000)
Reduction in Liabilities Assumed
(Note 2) (1,443,000)
Additional Acquisition Related
Costs 78,000
---------
Total Adjustments $ 898,000
=========
NOTE 4: TORONTO OPERATIONS PHASE OUT, IMPAIRMENT OF LONG-LIVED ASSETS
AND WORKFORCE REDUCTION
In October 2003, the Company announced that its subsidiary, DeVry
Canada LLC, had signed an agreement with RCC College of Technology
("RCC") that will enable DeVry to phase out its operations at its
Toronto campus commencing with the term that began in November 2003.
Based in Vaughn, Ontario, RCC provides career-focused electronics and
computer technology diploma programs.
Under the terms of the agreement, which has been approved by the
Ontario Provincial Ministry, DeVry College of Technology has
contracted with RCC to manage the completion of programs of study for
DeVry's current student body in Toronto. DeVry's Toronto campus will
no longer admit new students. RCC will use existing DeVry curricula
to deliver courses that allow current DeVry students to earn DeVry
diplomas and certificates. The agreement also makes provisions for
the acquisition of DeVry assets by RCC and the use of certain portions
of DeVry curriculum under the RCC brand name.
In the second quarter of fiscal 2004, the Company recognized an
approximately $0.5 million pre-tax asset impairment loss in accordance
with Statement of Financial Accounting Standards No. 144 entitled
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), on the furniture and laboratory equipment associated with the
Company's Toronto-area operations. This equipment may become the
future property of RCC and will have no further use at DeVry beyond
the period of the teachout of DeVry's current student body.
During fiscal 2003, the Company assessed the expected future results
of its DeVry University Canadian operations. The assessment performed
by the Company included estimates of expected future cash flows
associated with the Canadian operations, which indicated an impairment
loss with respect to certain long-lived assets that were held and used
by the Company. Upon completing this analysis, it was determined that
recognition of an impairment loss related to Canadian leasehold
improvements was appropriate. This resulted in a charge in the
quarter ended December 31, 2002 of approximately $800,000. In
addition, as of June 30, 2003, the Company reserved the remaining net
rent liability on its Scarborough campus that was closed. This
resulted in a charge of $200,000 in the quarter ended June 30, 2003.
127
NOTE 4: TORONTO OPERATIONS PHASE OUT, IMPAIRMENT OF LONG-LIVED ASSETS
AND WORKFORCE REDUCTION, continued
The Company also provided a severance accrual relating to personnel
reductions at its Toronto area and certain U.S. campus operations that
resulted in a charge of approximately $2.5 million in the quarter
ended June 30, 2003. Of this amount, approximately $800,000 remained
to be paid as of June 30, 2004.
All of the above charges are classified as Cost of Educational
Services in the Consolidated Statements of Income and related to the
DeVry University reportable segment.
NOTE 5: INCOME TAXES
The components of income (loss) before income taxes are as follows:
For the Year Ended June 30,
---------------------------------------
2004 2003 2002
----------- ------------ ------------
U.S. $67,828,000 $ 91,189,000 $111,836,000
Foreign 13,528,000 (4,732,000) (1,207,000)
---------- ----------- -----------
Total $81,356,000 $ 86,457,000 $110,629,000
========== =========== ===========
The net income tax provisions (benefits) related to the above results
are as follows:
For the Year Ended June 30,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Current Tax Provision:
U.S. Federal $16,037,000 $15,758,000 $35,178,000
State and Local 2,214,000 611,000 5,766,000
Foreign (426,000) - -
---------- ---------- ----------
Total Current 17,825,000 16,369,000 40,944,000
Deferred Tax Provision:
U.S. Federal 5,052,000 1,865,000 1,953,000
State and Local 407,000 582,000 369,000
Foreign 11,000 6,493,000 308,000
---------- ---------- ----------
Total Deferred 5,470,000 8,940,000 2,630,000
---------- ---------- ----------
Net Income Tax Provision $23,295,000 $25,309,000 $43,574,000
========== ========== ==========
128
NOTE 5: INCOME TAXES, continued
The income tax provisions differ from those computed using the
statutory U.S. federal rate as a result of the following items:
For the Year Ended June 30,
------------------------------------------------------------
2004 2003 2002
------------------ ------------------ ------------------
Income Tax at
Statutory Rates $28,475,000 35.0% $30,260,000 35.0% $38,720,000 35.0%
(Lower)Higher Rates on
Foreign Operations (5,446,000) (6.7%) 580,000 0.7% 908,000 0.8%
State Income Taxes 1,572,000 1.9% 3,327,000 3.9% 3,788,000 3.4%
Deduction of Worthless
Stock of Subsidiary - - (14,643,000)(17.0%) - -
Increase in Valuation
Allowance - - 6,493,000 7.5% - -
Tax Credits and Other (1,306,000) (1.6%) (708,000) (0.8%) 158,000 0.2%
------------------------------------------------------------
Income Tax Provision $23,295,000 28.6% $25,309,000 29.3% $43,574,000 39.4%
============================================================
Deferred income tax assets (liabilities) result primarily from
temporary differences in the recognition of various expenses for
tax and financial statement purposes, and from the recognition of
the tax benefits of net operating loss carryforwards. These
assets and liabilities are composed of the
following:
For the Year Ended June 30,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Loss Carryforwards, net $ 7,813,000 $ 7,630,000 $ 6,294,000
Employee Benefits 4,848,000 4,412,000 4,144,000
Receivable Reserves and
Other, net 9,036,000 15,778,000 4,782,000
Depreciation 3,160,000 5,061,000 2,960,000
Less: Valuation Allowance (7,100,000) (7,100,000) -
---------- ---------- ----------
Gross Deferred Tax Assets 17,757,000 25,781,000 18,180,000
---------- ---------- ----------
Amortization (27,798,000) (24,755,000) (8,214,000)
---------- ---------- ----------
Gross Deferred Tax Liabilities (27,798,000) (24,755,000) (8,214,000)
---------- ---------- ----------
Net Deferred Taxes $(10,041,000) $ 1,026,000 $ 9,966,000
========== ========== ==========
129
NOTE 5: INCOME TAXES, continued
The Company has net operating loss carryforwards in various tax
jurisdictions expiring at various times through the years ending
June 30, 2023.
Valuation allowances have been established for approximately $7.1
million. These are composed of loss carryforwards of $2.5 million,
depreciation of $3.5 million and other of $500,000 for deferred income tax
benefits of the Canadian subsidiary; and approximately $600,000 for
certain state net operating loss carry forwards that may expire before
their benefit is utilized.
Based on the Company's expectations for future operating earnings,
management believes that, more likely than not, operating income in
respective jurisdictions will be sufficient to recognize fully all
deferred tax assets, except as explained above.
Deferred income tax provisions (benefits) result primarily from
temporary differences in the recognition of various expenses for tax
and financia statement purposes. The sources and tax effects of these
differences are as follows:
For the Year Ended June 30,
-------------------------------------
2004 2003 2002
--------- --------- ---------
Recognition of Operating
Loss Carryforwards $( 183,000) $ 2,214,000 $(139,000)
Excess (Tax) Book
Depreciation and
Amortization 4,944,000 11,764,000 3,696,000
Excess of Amounts Expensed
for (Book) Tax Purposes
Over Amounts Deductible
for Book (Tax) Purposes 709,000 (5,038,000) (927,000)
---------- ---------- ---------
Deferred Tax Provision $5,470,000 $ 8,940,000 $2,630,000
========== ========== =========
On May 16, 2003, the Company acquired all of the outstanding stock of
DMI and subsidiaries ("Note 2-Business Combinations"). The principal
operating subsidiaries of DMI are Ross University School of Medicine
(the Medical School), incorporated under the laws of the Commonwealth
of Dominica, and Ross University School of Veterinary Medicine (the
Veterinary School), incorporated under the laws of the Federation of
St. Christopher Nevis, St. Kitts, in the West Indies. Both operating
companies have agreements with the respective governments that exempt
them from local income taxation through the years 2043 and 2023,
respectively. Accordingly, no current provision for foreign income
taxes was recorded. A provision for deferred foreign income taxes of
approximately $6.8 million was recorded related to indefinite-lived
intangible assets.
130
NOTE 5: INCOME TAXES, continued
Concurrent with the acquisition, a deemed distribution of
approximately $39 million occurred, representing the accumulated
earnings and profits of the Medical and Veterinary Schools through
the date of the acquisition.
The Company has not recorded a tax provision for the undistributed
earnings of the Medical and Veterinary Schools for the period after
the acquisition. It is the Company's intention to indefinitely
reinvest post-acquisition undistributed earnings and profits to
service debt, improve the facilities and operations of the Schools,
and pursue future opportunities outside of the United States.
Cumulative post-acquisition undistributed earnings were approximately
$16.8 million and $1.3 million at June 30 ,2004 and June 30, 2003,
respectively.
As described in Note 4 above, during the second quarter of fiscal
2003, the Company assessed the expected future results of its DeVry
University Canadian operations. The assessment also included an
analysis of the previously recorded Canadian net deferred tax assets,
which were primarily composed of net operating loss carryforwards, and
property and equipment tax basis in excess of book basis. Based upon
its estimates of future cash flows and taxable income associated with
the Canadian operations, the Company determined that, with respect to
the realization of the deferred tax asset, a valuation allowance for
100 percent of the Canadian deferred tax assets was appropriate in the
second quarter. This resulted in an additional income tax provision
in the second quarter ended December 31, 2002, of approximately $6.5
million.
The Company also determined that it would deduct the full amount of
the tax basis of its investment in its Canadian subsidiary in this
quarter. This reflects the negative value ascribed to the investment
as determined by independent valuations of the business that were
undertaken as a part of the assessment. This U.S. income tax
deduction results in a tax benefit totaling approximately $14.6
million.
The effect of the above actions associated with the Canadian
investment and operations is a net tax benefit of approximately $8.1
million, categorized as "Non-recurring Tax Benefits" in the
Consolidated Statements of Income for fiscal 2003.
Also, during the second quarter ended December 31, 2002, the Company
completed a study that identified certain business incentive tax
credits relating primarily to employment at its DeVry University
operations in Long Beach, California. These credits, along with not
recording a tax provision for the undistributed earnings of the
Medical and Veterinary Schools, contributed to a reduced ongoing
effective tax rate of 28.6% for fiscal 2004 and 38.7% for fiscal 2003.
The fiscal 2003 effective tax rate does not include the effect of the
previously described non-recurring tax benefit related to the
Company's Canadian operations.
131
NOTE 6: LONG-TERM DEBT
All of the Company's borrowings and letters of credit under its long-
term debt agreements are through DeVry Inc. and Global Education
International, Inc. (GEI), a subsidiary newly formed in relation to
the acquisition of DMI (Note 2). This long-term debt consists of the
following at June 30, 2004 and 2003:
Outstanding Debt Effective
at June 30, Interest Rate at
2004 2003 June 30, 2004
----------- ----------- ----------------
Revolving Credit Agreement (a):
DeVry Inc. as borrower $ 85,000,000 $115,000,000 3.54%
GEI as borrower 40,000,000 50,000,000 3.37%
----------- -----------
Total $125,000,000 $165,000,000 3.48%
Senior Notes (b):
DeVry Inc. as borrower $ 75,000,000 $ 75,000,000 2.42%
GEI as borrower 50,000,000 50,000,000 2.42%
----------- -----------
Total $125,000,000 $125,000,000 2.42%
----------- -----------
Total long-term debt $250,000,000 $290,000,000 2.95%
=========== ===========
(a)The revolving credit facility became effective on May 16,
2003, and was amended as of June 29, 2004. This facility
replaced another revolving credit agreement in effect before May
16, 2003. Borrowings and letters of credit under this agreement
cannot exceed $175,000,000 in total. DeVry Inc. aggregate
commitments cannot exceed $125,000,000, and GEI aggregate
commitments cannot exceed $50,000,000. At the request of the
Company, the maximum borrowings and letters of credit can be
increased to $250,000,000 with aggregate DeVry commitments
increased to $200,000,000. There are no required payments under
this revolving credit agreement and all borrowings and letters of
credit mature on July 1, 2009. As a result of the agreement
extending beyond one year, all borrowings are classified as long-
term with the exception of amounts prepaid, or committed to be
prepaid, subsequent to the balance sheet date. DeVry Inc.
letters of credit outstanding under this agreement were
$2,715,000 and $3,520,000 as of June 30, 2004 and 2003,
respectively. As of June 30, 2004, outstanding borrowings under
this agreement bear interest, payable quarterly or upon
expiration of the interest rate period, at either the prime rate
or a Eurodollar LIBOR rate plus 1.25%, at the option of the
Company. Outstanding letters of credit under the revolving credit
agreement are charged an annual fee equal to 1.25% of the undrawn
face amount of the letter of credit, payable quarterly. The
agreement also requires payment of a commitment fee equal to .30%
of the undrawn portion of the credit facility. The interest rate,
letter of credit fees and commitment fees are adjustable
quarterly, based upon the Company's achievement of certain
financial ratios.
Subsequent to June 30, 2004, the Company repaid
$35,000,000 of the borrowings under the revolving credit
facility.
132
NOTE 6: LONG TERM DEBT, continued
(b) The senior note agreement was entered into on May 16,
2003. All borrowings under this agreement are due on
April 30, 2010, and there are no required installment
payments. A prepayment penalty exits during the first two
years of this note agreement. As of June 30, 2004,
outstanding borrowings under this agreement bear interest,
payable quarterly, at the 90 day LIBOR Eurodollar rate
plus 1.25%
Both the revolving credit agreement and the senior notes contain
certain covenants that, among other things, require maintenance of
certain financial ratios, as defined in the agreements. These
financial ratios include maintaining a minimum level of consolidated
net worth, a consolidated fixed charge coverage ratio, a consolidated
leverage ratio and a composite Equity, Primary Reserve and Net Income,
Department of Education, financial responsibility ratio ("DOE Ratio").
Failure to maintain any of these ratios or violation of other
covenants contained in the agreement will constitute an event of
default and could result in termination of the agreements and,
requirement of payment of all outstanding borrowings.
In June 2004, the Company received notice from the Department of
Education that the DOE Ratio yielded a composite score of 1.4 for the
year ended June 30, 2003. A minimum composite score of 1.5 is required
for compliance with the Company's revolving credit agreement. This
created an Event of Default as defined by the revolving credit
agreement. In June 2004, the lenders waived this default effective for
June 30, 2003.
The stock of certain of the subsidiaries of the Company is pledged as
collateral for the borrowings under the revolving credit facility and
the senior notes.
In connection with entering into the two new borrowing agreements in
May 2003, the Company incurred $3,986,000 of financing costs that were
deferred. These costs are being amortized over the initial three-year
life of the revolving credit facility and the seven-year life of the
senior notes, based on the ratio of respective borrowings to total
borrowings. Amortization of deferred costs, which is included in
interest expense was $1,012,000 and $125,000 for the years ended
June 30, 2004 and 2003, respectively.
NOTE 7: EMPLOYEE BENEFIT PLANS
Profit Sharing Retirement Plan
- ------------------------------
All employees, except those of Ross University, who meet certain
eligibility requirements can participate in the Company's 401(k)
Profit Sharing Retirement Plan. The Company contributes to the plan an
amount up to 2.0% of the total eligible compensation of employees who
make contributions under the plan. Employees of DMI and Ross
University participate in a separate plan and receive a company
contribution of 5% of total eligible compensation. Matching
contributions under the plans were approximately $3,495,000,
$2,502,000 and $2,293,000 in 2004, 2003 and 2002, respectively. In
addition, the Company's board of directors may also make discretionary
contributions for the benefit of all eligible employees, except those
of DMI and Ross. Provisions for discretionary contributions under the
plan were approximately $4,958,000, $4,747,000 and $4,484,000 in 2004,
2003 and 2002, respectively.
133
NOTE 7: EMPLOYEE BENEFIT PLANS, continued
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, 2004, 2003 and 2002.
Post-employment Benefits
- ------------------------
The Company's employment agreements with its Chairman of the Board
of Directors and Chief Executive Officer provide certain post-
employment benefits that require accrual over the expected future
service period beginning with the second quarter of fiscal 2003.
For the years ended June 30, 2004 and 2003, the Company recognized
expense of approximately $1.2 million and $2.5 million,
respectively, related to these agreements. The amounts provided are based
on recording, over the period of active service, the amount that
will represent the present value of the obligation through the
date the executive attains full eligibility for the benefits,
discounted using a 5.25% rate and using the sinking fund accrual
method.
NOTE 8: SHAREHOLDERS' EQUITY
Stock Option Plans
- ------------------
The Company maintains four stock-based award plans: the Amended and
Restated Stock Incentive Plan, established in 1988, the 1991 Stock Incentive
Plan, the 1994 Stock Incentive Plan and the 1999 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, the 1994 Stock Incentive Plan and the 1999 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 four 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, 2004, 3,048,712 authorized but unissued shares of common
stock were reserved for issuance under the Company's stock option plans.
134
NOTE 8: SHAREHOLDERS' EQUITY, continued
Stock Option Plans, 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, 2001 1,594,429 2,096,528 $16.36
Options Granted (390,300) 390,300 $34.55
Options Exercised - (149,225) $8.15
Options Canceled 36,867 (36,867) $24.11
Unissued and Expired (3,800) - -
----------------------------------
Balance at June 30, 2002 1,237,196 2,300,736 $19.86
Options Granted (471,650) 471,650 $17.25
Options Exercised - (136,305) $5.20
Options Canceled 109,885 (109,885) $27.60
Unissued and Expired (8,080) - -
----------------------------------
Balance at June 30, 2003 867,351 2,526,196 $19.82
Options Grante (595,400) 595,400 $27.03
Options Exercised - (323,735) $9.18
Options Canceled 89,839 (89,839) $26.80
Unissued and Expired (21,100) - -
----------------------------------
Balance at June 30, 2004 340,690 2,708,022 $22.45
==================================
A summary of outstanding and exercisable stock options as of June 30, 2004,
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
-----------------------------------------------------------------------------
$3.24-11.53 338,144 1.65 $8.78 338,144 $8.78
$13.44-18.00 667,771 6.46 $16.21 311,551 $15.15
$19.81-23.93 566,577 4.73 $21.47 498,457 $21.36
$24.00-31.75 775,950 8.15 $28.53 162,810 $31.00
$31.75-38.81 359,580 7.08 $35.32 159,340 $35.49
-------------------------------------------------------------
$3.24-38.81 2,708,022 6.06 $22.45 1,470,302 $19.75
=============================================================
135
NOTE 9: COMMITMENTS AND CONTINGENCIES
DeVry University, Becker and Ross 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, 2004,
are as follows:
Year Ended
June 30, Amount
---------- ------------
2005 $39,100,000
2006 35,200,000
2007 32,900,000
2008 31,900,000
2009 29,100,000
Thereafter 127,900,000
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, 2004, 2003 and 2002, were
$45,239,000, $41,142,000 and $34,660,000, respectively.
The Company is subject to occasional lawsuits, regulatory reviews
associated with financial assistance programs and claims arising in
the normal conduct of its business.
In September 2003, the Company received a notice from Acacia Research
Corporation claiming patent-infringement. The notice alleges that the
Company has infringed upon several Acacia patents relating to
streaming audio and video technology. This technology was allegedly
used by the Company through its online education platform provider and
is also used by many other companies in conjunction with the delivery
of online programs. The Company has had discussions with Acacia
relating to this claim and does not believe that it had infringed upon
the Acacia patents.
In March 2002, the Company received notice of a class-action complaint
filed in federal district court in Michigan under the Fair Labor
Standards Act by several former field sales representatives seeking
overtime compensation for services rendered during their period of
employment. In March 2003, the Company participated in a required
mediation session but no resolution was reached. A decision was
entered for the Company at trial; but an appeal was filed. This
matter was fully resolved by settlement between the parties in June 2004.
136
NOTE 9: COMMITMENTS AND CONTINGENCIES, continued
In January 2002, the Company received notice of an antitrust complaint
concerning the alleged monopoly by operations of its Becker CPA Review
Corp. subsidiary in California. This complaint was filed in federal
district court by the trustee in bankruptcy of a failed CPA review
provider seeking a substantial amount of damages. In April 2002, this
complaint was voluntarily dismissed by the plaintiff without
prejudice. The complaint was amended and subsequently re-filed in
state court. An initial mediation session did not result in an
agreement. A second mediation session was held in August 2004,
resulting in a tentative agreement to settle the matter. Discovery
continues and pending a final settlement, a trial is scheduled to
commence in October 2004.
In January 2002, a graduate of one of DeVry University's Los Angeles-
area campuses filed a class-action complaint on behalf of all students
enrolled in the post-baccalaureate degree program in Information
Technology. The suit alleges that the program offered by DeVry did
not conform to the program as it was presented in the advertising and
other marketing materials. In March 2003, the complaint was dismissed
by the court with limited right to amend and re-file. The complaint
was subsequently amended and re-filed.
In November 2000, three graduates of one of DeVry University's Chicago-
area campuses filed a class-action complaint that alleges DeVry
graduates do not have appropriate skills for employability in the
computer information systems field. The complaint was subsequently
dismissed by the court, but was amended and re-filed, this time
including a then current student from a second Chicago-area campus.
The Company has recorded approximately $2.9 million associated
with estimated loss contingencies at June 30, 2004. While the
ultimate outcome of these contingencies is difficult to estimate
at this time, the Company does intend to vigorously defend itself
with respect to these claims.
In conjunction with the required annual review procedures related
to its administration of financial aid programs under the Ontario
Student Aid Program, the Toronto-area DeVry campuses engaged in
discussions with the Ontario Ministry of Education relating to
certain additional information requirements for the 2001 and 2002
financial aid years. These additional information requirements
could serve as the basis for a Ministry claim for the return of
some amounts of financial aid disbursed to students attending these
campuses. Discussions continue on a periodic basis but the Company
believes that there will be no significant monetary liability. The
Company's Toronto-area campus does not accept new student
admissions and is being operated under an agreement with RCC
College of Technology as previously discussed. Accordingly, the
Company is no longer participating in these financial aid programs.
At this time, the Company does not believe that the outcome of current
claims, regulatory reviews and lawsuits will have a material effect on
its cash flows, results of operations or financial position.
137
NOTE 10: SEGMENT INFORMATION
The Company's principal business is providing post-secondary
education. The services of our operations are described in more detail
in "Note 1-Summary of Significant Accounting Policies" under
"Nature of Operations." The Company presents three reportable
segments: the DeVry University undergraduate and graduate
operations (DeVry University), the professional exam review
and training operations including Becker Professional Review
and the Center for Corporate Education (Professional and
Training), and the Ross University medical and veterinary
school operations (Ross University).
These segments are based on the method by which management evaluates
performance and allocates resources. Such decisions are based, in
part, on each segment's operating income, which is defined as income
before interest expense, amortization and income taxes.
Intersegment sales are accounted for at amounts comparable to
sales to nonaffiliated customers and are eliminated in
consolidation. The accounting policies of the segments are the
same as those described in "Note 1 - Summary of Significant
Accounting Policies."
Beginning with fiscal 2003, the segments as described above
changed from those previously reported. As described in "Note 2-
Business Combinations," the Company acquired Ross University on
May 16, 2003. Accordingly, the reportable segments of the Company
for fiscal years 2004 and 2003 have been increased to three to
reflect this acquisition.
The consistent measure of segment profit excludes interest expense,
amortization and certain corporate-related depreciation. As such,
these items are reconciling items in arriving at income before income
taxes. The consistent measure of segment assets excludes deferred
income tax assets and certain depreciable corporate assets. Additions
to long-lived assets have been measured in this same manner. Reconciling
items are included as corporate assets.
138
NOTE 10: SEGMENT INFORMATION, continued
Following is a tabulation of business segment information based
on the current segmentation for each of the years ended June 30,
2004, 2003 and 2002. Corporate information is included where it
is needed to reconcile segment data to the consolidated financial
statements.
For the Year Ended June 30,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenues:
DeVry University $665,671,000 $626,747,000 $610,495,000
Professional and Training 36,221,000 43,401,000 37,639,000
Ross University 82,993,000 9,431,000 -
----------- ----------- -----------
Total Consolidated Revenues $784,885,000 $679,579,000 $648,134,000
----------- ----------- -----------
Operating Income:
DeVry University $65,167,000 $73,774,000 $102,503,000
Professional and Training 5,943,000 13,801,000 10,507,000
Ross University 32,697,000 3,552,000 -
Reconciling Items:
Amortization Expense (13,736,000) (2,574,000) (811,000)
Interest Expense (7,834,000) (1,280,000) (807,000)
Depreciation and Other (881,000) (816,000) (763,000)
---------- ---------- -----------
Total Consolidated Income
before Income Taxes $81,356,000 $86,457,000 $110,629,000
---------- ---------- -----------
Segment Assets:
DeVry University $410,695,000 $379,767,000 $368,939,000
Professional and Training 75,093,000 65,494,000 61,969,000
Ross University 380,082,000 373,273,000 -
Corporate 18,262,000 22,882,000 19,550,000
----------- ----------- -----------
Total Consolidated Assets $884,132,000 $841,416,000 $450,458,000
----------- ----------- -----------
Additions to Long-lived Assets:
DeVry University $30,783,000 $ 42,678,000 $85,268,000
Professional and Training 3,320,000 172,000 605,000
Ross University 10,198,000 331,656,000 -
---------- ----------- ----------
Total Consolidated Additions
to Long-lived Assets $44,301,000 $374,506,000 $85,873,000
---------- ----------- ----------
Reconciliation to Consolidated
Financial Statements:
Capital Expenditures $42,808,000 $ 43,762,000 $85,873,000
Capital Assets Acquired (Note 2) - 21,986,000 -
Purchase of Goodwill and
Intangible Assets (Note 2) 1,493,000 308,758,000 -
---------- ----------- ----------
Total Increase in Consolidated
Long-lived Assets $44,301,000 $374,506,000 $85,873,000
---------- ----------- ----------
139
NOTE 10: SEGMENT INFORMATION, continued
For the Year Ended June 30,
----------------------------------------------
2004 2003 2002
------------ ----------- ------------
Depreciation Expense:
DeVry University $37,245,000 $36,364,000 $31,421,000
Professional and Training 405,000 384,000 531,000
Ross University 2,305,000 229,000 -
Corporate 881,000 781,000 773,000
---------- ---------- ----------
Total Consolidated Depreciation $40,836,000 $37,758,000 $32,725,000
---------- ---------- ----------
Intangible Asset Amortization Expense:
DeVry University $ 31,000 $ 31,000 $ 31,000
Professional and Training 773,000 738,000 780,000
Ross University 12,932,000 1,805,000 -
---------- ---------- -------
Total Consolidated Amortization $13,736,000 $2,574,000 $811,000
---------- --------- -------
The Company conducts its educational operations in the United States, Canada,
the Caribbean countries of Dominica and St. Kitts/Nevis, Europe, the Middle
East and the Pacific Rim. Other international revenues, which are derived
principally from Canada, were less than 5% of total revenues for the
years ended June 30, 2004, 2003 and 2002. Revenues and long-lived assets
by geographic area are as follows:
For the Year Ended June 30,
----------------------------------------------
2004 2003 2002
------------ ------------ ------------
Revenues from Unaffiliated Customers:
Domestic Operations $685,771,000 $649,244,000 $623,374,000
International Operations:
Dominica and St. Kitts/Nevis 82,869,000 9,431,000 -
Other 16,245,000 20,904,000 24,760,000
----------- ----------- -----------
Total International 99,114,000 30,335,000 24,760,000
----------- ----------- -----------
Consolidated $784,885,000 $679,579,000 $648,134,000
=========== =========== ===========
Long-lived Assets:
Domestic Operations $359,107,000 $362,675,000 $339,797,000
International Operations:
Dominica and St. Kitts/Nevis 315,153,000 322,061,000 -
Other 997,000 2,221,000 10,004,000
----------- ----------- -----------
Total International 316,150,000 324,282,000 10,004,000
----------- ----------- -----------
Consolidated $675,257,000 $686,957,000 $349,801,000
=========== =========== ===========
No one customer accounted for more than 10% of the Company's
consolidated revenues.
NOTE 11: RELATED PARTIES
One of the Company's directors is also an investor in, and a director of,
a consulting firm engaged by the Company to assist with system development
projects, including the new student information system. Fees paid to this
consulting firm during fiscal 2004 and 2003 were approximately $4.8 million
and $4.1 million, respectively.
140
NOTE 12: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended June 30, 2004
and 2003, are as follows. Effective May 16, 2003 the Company acquired all
of the outstanding shares of capital stock of Dominica Management, Inc. (DMI)
(see "Note 2-Business Combinations"). The results of DMI's operations
are included in the consolidated financial statements of the Company
for all of fiscal 2004 and for the period May 16, 2003, through June 30, 2003.
(Dollars in Thousands, Except for Per Share Amounts)
2004 Quarter
-------------------------------------
Total
First Second Third Fourth Year
-----------------------------------------------
Revenues $189,236 $198,806 $196,800 $200,043 $784,885
Income Before Interest
and Taxes 16,837 24,015 24,641 23,697 89,190
Net Income 10,492 15,578 16,295 15,696 58,061
Earnings per Common Share:
Basic 0.15 0.22 0.23 0.22 0.83
Diluted 0.15 0.22 0.23 0.22 0.82
2003 Quarter
------------------------------------
Total
First Second Third Fourth Year
-----------------------------------------------
Revenues $163,269 $172,548 $169,367 $174,395 $679,579
Income Before Interest
and Taxes 18,641 23,797 24,341 20,958 87,737
Net Income 11,156 22,951 14,892 12,149 61,148
Earnings per Common Share
Basic 0.16 0.33 0.21 0.17 0.87
Diluted 0.16 0.33 0.21 0.17 0.87
NOTE 13: SUBSEQUENT EVENT
As described in "Note 1- Summary of Significant Accounting Policies-
Principles of Consolidation", Becker accounts are consolidated
based on an April 30 fiscal year end, which was its natural year-
end based on its business cycle. As a result of a change in the CPA
exam schedule, the Company is aligning the Becker fiscal year end
to that of DeVry Inc. The results of operations for the two-month
period from May 1, 2004 through June 30, 2004, will be included as
a change in accounting in the Consolidated Statements of Income for
the first quarter of fiscal 2005. The cumulative effect of this
change in accounting is expected to add approximately $0.02 per
share to earnings for the first quarter and total year of fiscal
2005.
141
DEVRY INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended June 30, 2004, 2003 and 2002
(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 <FN4> Period
- ----------------------------------------------------------------------------------------------------------
2004
- ---------
Deducted from accounts receivable
for refunds $238 $19,423 - $19,402 $259
Deducted from accounts receivable
for uncollectible accounts 17,024 15,411 10 <FN1> 13,363 19,082
Deducted from notes receivable for
uncollectible notes 1,555 632 8 <FN1) - 2,195
For loss on disposition of inventory 27 211 - 22 216
For loss on DeVry capital contributions
to Perkins loan program 3,001 30 - - 3,031
Deducted from deferred tax assets for
loss of realizable value 7,939 - - - 7,939
2003
- ---------
Deducted from accounts receivable
for refunds $222 $20,286 - $20,270 $238
Deducted from accounts receivable
for uncollectible accounts 13,668 13,107 618 <FN2> 10,369 17,024
Deducted from notes receivable for
uncollectible notes 679 853 27 <FN1> 4 1,555
For loss on disposition of inventory 63 491 - 527 27
For loss on DeVry capital contributions
to Perkins loan program 2,706 295 - - 3,001
Deducted from deferred tax assets for
loss of realizable value - 6,493 1,446 <FN3> - 7,939
2002
- ---------
Deducted from accounts receivable
for refunds $215 $20,104 - $20,097 $222
Deducted from accounts receivable
for uncollectible accounts 12,149 13,608 - 12,089 13,668
Deducted from notes receivable for
uncollectible notes 227 452 - - 679
For loss on disposition of inventory 132 12 - 81 63
For loss on DeVry capital contributions
to Perkins loan program 2,592 114 - - 2,706
<FN>
<FN1> Effect of foreign currency translation charged to Accumulated Other Comprehensive Income.
<FN2> This amount is comprised of the opening balances of acquired businesses charged to
Goodwill of $540 and the effect of foreign currency translation charged to Accumulated Other
Comprehensive Income of $78.
<FN3> This amount includes $542 charged to Goodwill in purchase accounting and $904 charged to
Accumulated Other Comprehensive Income for the effect of foreign currency translation.
<FN4> Write-offs of uncollectible amounts or inventory.
</FN>
142
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of DeVry Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of DeVry Inc. (the "Company") and its
subsidiaries at June 30, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended June 30, 2004 in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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 our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
September 10, 2004
143
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 16, 2004, and is incorporated herein by
reference. Information regarding executive officers is included on pages
64 through 71 in Part I of this Form 10-K.
Information regarding compliance with Section 16(a) filings is included in
the Proxy Statement for the Annual Meeting of Stockholders to be held
November 16, 2004, 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 16, 2004, 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 16, 2004, 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 16, 2004, and is incorporated herein by
reference.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------
Information regarding fees for the part two years for professional services
rendered by the independent public accountants that audited the Company's
annual financial statements is included in the definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on November 16, 2004, and
is incorporated herein by reference.
144
PART IV
---------
ITEM 15 - 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 required financial statements of the Company and its subsidiaries
are included in Part II, Item 8, on pages 106 through 142 of this Form
10-K.
(2) Supplemental Financial Statement Schedules
The required supplemental schedule of the Company and its subsidiaries
is included in Part II, Item 8 on page 141 of this Form 10-K.
(3) Exhibits
A complete listing of exhibits is included on pages 148 through 151 of
this Form 10-K.
(b) Reports on Form 8-K
During the fourth quarter of the fiscal year, the Company filed the
following reports on Form 8-K:
(1) June 28, 2004 reporting the appointment of executive officers.
(2) April 21, 2004 reporting the Company's earnings for its third
fiscal quarter and DeVry University enrollments for the spring 2004
term.
145
FIVE-YEAR SUMMARY - OPERATING, FINANCIAL AND OTHER DATA
(Dollars in Thousands Except for Per Share Amounts)
YEAR ENDED JUNE 30, 2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------
OPERATING:
Revenues $784,885 $679,579 $648,134 $568,177 $490,589
Depreciation 40,836 37,758 32,725 28,132 21,545
Amortization of Intangible Assets 14,748 2,574 811 3,904 3,706
Interest Expense 7,834 1,280 807 400 1,409
Net Income 58,061 61,148 67,055 57,776 47,781
Change from Prior Year in Net Income -5.0% -8.8% 16.1% 20.9% 23.1%
Diluted Earnings per Common Share (EPS) 0.82 0.87 0.95 0.82 0.68
Shares Used in Calculating Diluted EPS
(in Thousands) 70,757 70,336 70,594 70,662 70,390
FINANCIAL POSITION:
Cash and Cash Equivalents 146,227 93,471 42,515 13,859 8,201
Total Assets 884,132 841,416 450,458 376,321 309,429
Total Funded Debt 250,000 290,000 - - -
Total Shareholders' Equity 478,257 415,667 353,546 284,671 225,139
OTHER SELECTED DATA:
Cash Provided by Operating Activities 134,427 100,193 113,507 89,895 68,426
Capital Expenditures 42,808 43,762 85,873 76,933 40,797
DeVry University Fall Term
Student Enrollment 54,275 54,884 57,521 54,482 49,351
Shares Outstanding at Year-end
(in Thousands) 70,331 70,022 69,899 69,755 69,642
Closing Price of Common Stock
at Year-end 27.42 23.29 22.84 36.12 26.44
Price Earnings Ratio on Common Stock <FN1> 33 27 24 44 39
<FN>
<FN1> Computed on trailing four quarters of earnings per common share.
</FN>
146
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 9, 2004 By /s/ Dennis J. Keller
--------------------
Dennis J. Keller
Chairman
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 and Director 9/9/2004
/s/ Ronald L. Taylor
- --------------------
Ronald L. Taylor President, Chief Executive
Officer and Director 9/9/2004
/s/ Norman M. Levine
- --------------------
Norman M. Levine Senior Vice President, Chief
Financial Officer, and
Principal Accounting Officer 9/9/2004
/s/ Charles A. Bowsher
- ----------------------
Charles A. Bowsher Director 9/7/2004
/s/ David S. Brown
- ------------------
David S. Brown Director 9/2/2004
147
SIGNATURES (CONTINUED)
Signature Title Date
- --------- ----- ----
______________________
Connie R. Curran Director
/s/ Frederick A. Krehbiel
- -------------------------
Frederick A. Krehbiel Director 9/1/2004
/s/ Thurston E. Manning
- -----------------------
Thurston E. Manning Director 9/7/2004
_______________________
Robert C. McCormack Director
/s/ Julie A. McGee
- ------------------
Julie A. McGee Director 9/8/2004
/s/ Hugo J. Melvoin
- -------------------
Hugo J. Melvoin Director 9/7/2004
/s/ Harold T. Shapiro
- ---------------------
Harold T. Shapiro Director 9/1/2004
148
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------ ------- ------------- ---------------
2(a) Stock Purchase Agreement and Exhibit 2 to the
amendments regarding Company's Form 8-K
purchase of Dominica filed May 23, 2003
Management, Inc. dated as of
March 19, 2003
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) Credit Agreement, dated as Exhibits 4.1, 4.2
of May 16, 2003, between and 4.3 to the
DeVry Inc. and Global Company's Form 8-K
Education International, filed June 2, 2003
Inc. as borrowers, and
certain financial
institutions and Bank of
America, N.A. as lenders
4(b) Note Purchase Agreement, Exhibits 4.4 and
dated as of May 16, 2003, 4.5 to the
between DeVry Inc. and Company's Form 8-K
Global Education filed on June 2,
International, Inc. as 2003
borrowers, and certain
financial institutions as
lenders
149
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------ ------- ------------- ---------------
4(c) Waiver to Credit Agreement
dated as of June 9, 2004,
between DeVry Inc. and
Global Education
International, Inc. as
borrowers and certain
financial institutions and
Bank of America, N.A. as
lenders 152
4(d) First Amendment, dated as of
June 29, 2004 to Credit
Agreement between DeVry Inc.
and Global Education
International, Inc. as
borrowers and certain
financial institutions and
Bank of America, N.A. as
lenders 163
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) Registrants' 1999 Stock Exhibit 10(d) to
Incentive Plan the Company's Form
10-K for the year
ended June 30, 2000
10(e) Amended and Restated DeVry Exhibit 10(e) to
Inc. 1999 Stock Incentive the Company's Form
Plan 10-K for the year
ended June 30, 2002
150
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------ ------- ------------- ---------------
10(f) 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(g) 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
10(h) Amendment to DeVry Inc. Exhibit 10(f) to
Amended and Restated Profit the Company's Form
Sharing Retirement Plan 10-K for the year
ended June 30, 1997
10(i) Amendment to DeVry Inc. Exhibit 10(g) to
Amended and Restated Profit the Company's Form
Sharing Retirement Plan 10-K for the year
ended June 30, 1997
10(j) Amendment to DeVry Inc. Exhibit 10(h) to
Amended and Restated Profit the Company's Form
Sharing Retirement Plan 10-K for the year
ended June 30, 1997
10(k) Employee Stock Purchase Plan Exhibit 10(f) to
the Company's Form
S-3, #33-58636
dated February 22,
1993
10(l) 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(m) Deferred Compensation Plan Exhibit 10(k) to
the Company's Form
10-K for the year
ended June 30, 1999
10(n) Form of Indemnification Exhibit 10(n) to
Agreement between the the Company's Form
Registrant and its Directors 10-K for the year
ended June 30, 2003
151
Exhibit Sequentially Incorporated by
Number Exhibit Numbered Page Reference to
- ------ ------- ------------- ---------------
10(o) Employment Agreement between Exhibit 10(a) to
the registrant and each of the Company's Form
Dennis J. Keller and Ronald 10-Q for the
L. Taylor quarter ended
December 31, 2002
10(p) Senior Advisor Agreement Exhibit 10(b) to
between the registrant and the Company's Form
each of Dennis J. Keller and 10-Q for the
Ronald L. Taylor quarter ended
December 31, 2002
10(q) Employment Agreement between Exhibit 10(q) to
the registrant and Daniel M. the Company's Form
Hamburger 10-K for the year
ended June 30, 2003
21 Subsidiaries of the
Registrant 181
23 Consent of Pricewaterhouse-
Coopers LLP, independent
auditors 183
31 Rule 13a-14(a)/15d-14(a)
Certifications 184
32 Section 1350 Certifications 188
99(a) Policy on Pre-Approval of
Audit and Permissible Non-
Audit Services 189
99(b) Director Nominating Policy 190
99(c) Policy for Shareholder
Communication with Directors 192