In July 2000, ESI received a subpoena from the DOE’s Office of Inspector General requesting information that related primarily to the compensation of its sales representatives (the “OIG Investigation”), which ESI now believes resulted from the Qui Tam Action. If adversely determined, the OIG Investigation could cause the DOE to subject ESI to monetary fines or penalties (including repaying a substantial portion of the Title IV Program funds that ESI disbursed during the last several years) or other sanctions (including a limitation, suspension or termination of ESI’s ability to participate in Title IV Programs). Any substantial restrictions on the ITT Technical Institutes’ ability to participate in Title IV Programs would adversely affect ESI’s ability to enroll students, expand the number of its institutes and increase the number of the programs of study offered at its institutes.
In August 2000, the DOE advised ESI that, during the pendency of the OIG Investigation, it will not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). The DOE also advised ESI, however, that during the pendency of the OIG Investigation, each of the ITT Technical Institutes that currently participates in Title IV Programs remains eligible to participate in Title IV Programs in accordance with the terms of its present eligibility and, if its current period of eligibility expires, its eligibility will continue on a month-to-month basis. A material adverse effect on ESI’s expansion plans, financial condition, results of operations and cash flows would result if the DOE’s restrictions are not lifted prior to 2003. ESI cannot assure anyone that the DOE will lift its restrictions prior to 2003 or that the DOE will not place additional or other more severe restrictions on the ITT Technical Institutes’ ability to participate in Title IV Programs.
In the opinion of management, based on the information currently available to it, the ultimate outcome of the Qui Tam Action and OIG Investigation should not have a material adverse effect on ESI’s financial condition, results of operations or cash flows.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2000 (“2000 Form 10-K”) for discussion of, among other matters, the following items:
| • | Cash receipts from financial aid programs |
| • | Nature of capital additions |
| • | Seasonality of revenues |
| • | Components of income statement captions |
| • | Marketable debt securities and market risk |
| • | Change in our ownership and control |
| • | Changes in federal regulations regarding: |
| | • | Timing of receipt of funds from the federal student financial aid programs under Title IV of the Higher Education Act of 1965, as amended (the “Title IV Programs”) |
| | • | Percentage of applicable revenues that may be derived from Title IV Programs |
| | • | Return of Title IV Program funds for withdrawn students |
| • | Default rates |
| • | College Advantage Loan Program (“CALP”) |
In 1998, we began offering an information technology program of study involving computer network systems (“CNS”) at three ITT Technical Institutes. We began offering the CNS program at an additional 31 ITT Technical Institutes in 1999, at an additional 16 ITT Technical Institutes in the three months ended March 31, 2000, and at an additional 19 ITT Technical Institutes in the remainder of 2000. We incur a loss with respect to each CNS program offered at an ITT Technical Institute until the revenue from the number of enrolled students is high enough to offset the fixed costs associated with the program offering (such as salaries, equipment depreciation, rent and marketing), which typically has not occurred until the program has been offered for three or four quarters. The initial amount of capital required to offer the CNS program at an ITT Technical Institute is approximately $0.2 million.
In 2000, we began offering a computer and electronics engineering technology (“CEET”) program at 34 ITT Technical Institutes and a computer drafting and design (“CDD”) program at 20 ITT Technical Institutes. In the first quarter of 2001, we began offering the CEET program at an additional 33 ITT Technical Institutes and the CDD program at an additional 28 ITT Technical Institutes.
Results of Operations
Revenues increased $12.6 million, or 15.5%, to $93.8 million in the three months ended March 31, 2001 from $81.2 million in the three months ended March 31, 2000. This increase was due primarily to a 5% increase in tuition rates in June 2000 (10% for information technology programs) and a 4.6% increase in the total student enrollment at January 1, 2001 compared to January 1, 2000. The number of students attending ITT Technical Institutes at January 1, 2001 was 27,640 compared to 26,428 at January 1, 2000.
The total number of new students beginning classes in March 2001 was 6,706, compared to 5,633 in March 2000, an increase of 19.0%. The total student enrollment on March 31, 2001 was 28,229, compared to 25,747 on March 31, 2000, an increase of 9.6%.
Cost of educational services increased $7.4 million, or 14.3%, to $59.0 million in the three months ended March 31, 2001 from $51.6 million in the three months ended March 31, 2000. The principal causes of this increase include:
| • | the costs required to service the increased enrollment; |
| • | normal inflationary cost increases for wages, rent and other costs of services; |
| • | increased costs at new institutes (one opened in March 2000, one opened in December 2000 and one opened in March 2001); |
| • | increased costs associated with offering the CNS program at 70 institutes; and |
| • | the costs associated with responding to an investigation being conducted by the U.S. Department of Education’s (“DOE”) Office of Inspector General and other legal matters. |
Cost of educational services as a percentage of revenues decreased to 62.9% in the three months ended March 31, 2001 from 63.6% in the three months ended March 31, 2000, primarily due to the greater facility and faculty utilization efficiencies associated with the three-day per week class schedule of the CNS program which has been offered for more than one year (i.e., 34 ITT Technical Institutes began offering the CNS program prior to 2000).
Student services and administrative expenses increased $3.9 million, or 16.4%, to $27.7 million in the three months ended March 31, 2001 from $23.8 million in the three months ended March 31, 2000, primarily due to increased media advertising expenses (up 21%) and an increase in bad debt expense. Student services and administrative expenses were 29.5% of revenues in the three months ended March 31, 2001, compared to 29.3% in the three months ended March 31, 2000.
Operating income increased $1.3 million, or 22.4%, to $7.1 million in the three months ended March 31, 2001 from $5.8 million in the three months ended March 31, 2000. The operating margin increased to 7.6% of revenues in the three months ended March 31, 2001 from 7.1% in the three months ended March 31, 2000, primarily due to the greater facility and faculty utilization efficiencies associated with the three-day per week class schedule of the CNS program which has been offered for more than one year (i.e., 34 ITT Technical Institutes began offering the CNS program prior to 2000).
Financial Condition, Liquidity and Capital Resources
Due to the seasonal pattern of enrollments and our receipt of tuition payments, comparisons of financial position and cash generated from operations should be made both to the end of the previous year and to the corresponding period during the previous year.
Net cash provided by operating activities, excluding the $1.7 million decrease in marketable debt securities, was $2.2 million in the three months ended March 31, 2001, compared to $4.1 million of net cash used for operating activities in the three months ended March 31, 2000. This $6.3 million increase was primarily due to higher cash flows from operations resulting from the increase in income and accelerated cash collections from students associated with their use of the CALP.
Deferred revenue, which represents the unrecognized portion of revenue received from students, increased $15.7 million to $51.8 million at March 31, 2001 from $36.1 million at March 31, 2000. This increase was primarily due to the students’ use of the CALP and increased tuition revenue resulting from higher tuition rates and a larger number of students.
Capital expenditures were $9.3 million in the three months ended March 31, 2001, compared to $7.0 million in the three months ended March 31, 2000. This increase was primarily due to $7.0 million of capital expenditures to replace computer equipment used in the computer-aided drafting technology program with computer equipment that can also be used in the CDD and information technology programs, and for additional equipment used in the information technology programs. We expect that capital expenditures for the full 2001 year will be approximately $30 million, which will be comparable to 2000.
Capital expenditures for a new institute are approximately $0.4 million. We expect to be able to fund our planned capital expenditures in 2001 from cash flows from operations.
Cash flows on a long-term basis are highly dependent upon the receipt of Title IV Program funds and the amount of funds spent on new institutes, curricula additions at existing institutes and possible acquisitions.
During 1999 and 2000, our Board of Directors authorized us to repurchase in aggregate up to 4.0 million shares of our common stock. As of March 31, 2001, 1.9 million shares remain under the existing repurchase authorization. We may repurchase the shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. We may elect to repurchase additional shares of our common stock from time to time in the future, depending on market conditions and other considerations. The purpose of the stock repurchase is to help us achieve our long-term goal of enhancing shareholder value.
In July 2000, we received a subpoena from the DOE’s Office of Inspector General requesting information that related primarily to the compensation of our sales representatives (the “OIG Investigation”). If adversely determined, the OIG Investigation could cause the DOE to subject us to substantial monetary fines or penalties or other sanctions. We are also a defendant in a qui tam action which, if adversely determined, could result in us having to repay Title IV Program funds that we disbursed during the last several years, which would be trebled, and also to pay penalties. See Note 4 of Notes to Consolidated Financial Statements and our 2000 Form 10-K.
Factors That May Affect Future Results
This report contains certain forward looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions and growth in the postsecondary education industry and in the general economy; changes in federal and state governmental regulations with respect to education and accreditation standards, or the interpretation or enforcement thereof, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students; the results of the OIG Investigation which, if adversely determined, could cause the DOE to subject us to monetary fines or penalties or other sanctions (including a limitation, suspension or termination of our ability to participate in federal student financial aid programs) that could adversely affect our ability to enroll students, expand the number of our institutes and increase the number of the programs of study offered at our institutes; the results of the Qui Tam Action which, if adversely determined, could result in a demand for repayment of Title IV Program funds, trebled under the False Claims Act, 31 U.S.C. § 3730, and penalties; our ability to hire and retain qualified faculty; effects of any change in ownership of us resulting in a change in control of us, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of the institutes; our ability to implement our growth strategies, including our information technology programs; receptivity of students and employers to our existing program offerings and new curricula; and loss of lender access to our students for student loans.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II
OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following information is furnished as to our securities sold during the three months ended March 31, 2001
that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):
| | (a) | On January 1, 2001, we issued 818 treasury shares of ESI Common Stock to two non-employee directors under the ESI Non-Employee Director Deferred Compensation Plan (“ENDDCP”) as the stock portion of the semi-annual installment payment of their annual retainer. |
| | (b) | On January 1, 2001, we credited 818 treasury shares of ESI Common Stock to the deferred share accounts of two non-employee directors under the ENDDCP as the stock portion of the semi-annual installment payment of their annual retainer. These shares of ESI Common Stock will be issued upon the termination of the non-employee director’s service as a non-employee director for any reason, including retirement or death. |
| | (c) | On January 23, 2001, we issued 14,166 treasury shares of ESI Common Stock to six executive officers, two officers and nine other employees as the stock portion of their annual incentive bonus. |
The transactions described in paragraphs (a) through (c) above are exempt from the registration requirements of
the Securities Act pursuant to Section 4(2) thereof.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 2001.
