FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________ to __________________
Commission file number 1-13144
ITT EDUCATIONAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-2061311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5975 CASTLE CREEK PARKWAY N. DRIVE
P.O. BOX 50466
INDIANAPOLIS, INDIANA 46250-0466
(Address of principal executive offices) (Zip Code)
(317) 594-9499
(Registrant's telephone number, including area code)
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 [ ]
17,999,987
Number of shares of Common Stock, $.01 par value, outstanding at June 30, 1996.
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
June 30, 1996
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
-----
Page
----
Consolidated Statements of Income (unaudited) for the six months
ended June 30, 1996 and 1995 and the three months ended
June 30, 1996 and 1995.............................................. 3
Consolidated Balance Sheets as of June 30, 1996 and 1995 (unaudited)
and December 31, 1995............................................... 4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 1996 and 1995 and the three months ended
June 30, 1996 and 1995.............................................. 5
Notes to Consolidated Financial Statements........................... 6
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ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------
1996 1995 1996 1995
-------------- ------------- ------------ -----------
REVENUES
Tuition $42,376 $37,309 $ 91,644 $81,958
Other educational 9,192 7,660 17,027 14,180
------- ------- -------- -------
Total revenue 51,568 44,969 108,671 96,138
------- ------- -------- -------
COSTS AND EXPENSES
Cost of educational services 35,074 32,082 68,561 63,685
Student services and administrative
expenses 16,880 14,061 33,385 28,140
------- ------- -------- -------
51,954 46,143 101,946 91,825
------- ------- -------- -------
Operating income (loss) (386) (1,174) 6,725 4,313
Interest income, net 909 801 1,856 2,013
------- ------- -------- -------
Income before income taxes 523 (373) 8,581 6,326
Income taxes 209 (149) 3,432 2,524
------- ------- -------- -------
Net income (loss) $ 314 $ (224) $ 5,149 $ 3,802
======= ======= ======== =======
Earnings (loss) per common share $ .02 $ (0.01) $ .29 $ .21
Average equivalent common shares
outstanding (in thousands) 18,106 18,027 18,088 18,023
The accompanying notes are an integral part of these consolidated financial
statements.
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ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, 1996 June 30, 1995
(unaudited) December 31, 1995 (unaudited)
------------- ----------------- -------------
ASSETS
Current assets
Cash $ 46 $ 595 $ 574
Restricted cash 910 5,037 10,849
Cash invested with ITT Corporation 75,347 71,885 58,432
Accounts receivable, net 8,932 7,592 6,750
Deferred income tax 509 950 1,012
Prepaids and other current assets 3,030 1,508 2,946
-------- -------- --------
Total current assets 88,774 87,567 80,563
Property and equipment, net 17,906 18,985 17,359
Direct marketing costs 5,352 5,031 5,177
Other assets 2,658 2,701 2,349
-------- -------- --------
Total assets $114,690 $114,284 $105,448
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 16,778 $ 8,336 $ 11,246
Accrued compensation and benefits 2,806 4,195 3,414
Other accrued liabilities 2,953 6,172 4,529
Deferred tuition revenue 31,457 40,063 37,797
-------- -------- --------
Total current liabilities 53,994 58,766 56,986
Other liabilities 1,706 1,677 2,210
-------- -------- --------
Total liabilities 55,700 60,443 59,196
-------- -------- --------
Shareholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized, none
issued or outstanding
Common stock, $.01 par value,
50,000,000 shares authorized,
18,000,000, 12,000,000 and
12,000,000 issued and outstanding 180 120 120
Capital surplus 32,603 32,663 32,663
Retained earnings 26,207 21,058 13,469
-------- -------- --------
Total shareholders' equity 58,990 53,841 46,252
-------- -------- --------
Total liabilities and
shareholders' equity $114,690 $114,284 $105,448
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
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ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1996 1995 1996 1995
------------- -------------- ------------ -------------
Cash flows from operating activities:
Net earnings (loss) $ 314 $ (224) $ 5,149 $ 3,802
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,026 1,837 3,991 3,654
Provision for doubtful accounts 460 231 849 650
Deferred taxes 199 (81) 474 261
Increase/decrease in operating assets
and liabilities:
Accounts receivable (1,577) (432) (2,189) (824)
Direct marketing costs (394) (109) (321) (123)
Accounts payable and
accrued liabilities (2,415) (1,532) 3,834 1,894
Prepaids and other assets (128) 443 (1,483) (403)
Deferred tuition revenue 3,555 5,381 (8,606) (3,174)
------- ------- ------- -------
Net cash provided by operating activities 2,040 5,514 1,698 5,737
------- ------- ------- -------
Cash flows used for investing activities:
Capital expenditures, net (1,720) (1,519) (2,912) (2,692)
Net increase in cash invested with
ITT Corporation (140) (1,659) (3,462) (2,522)
------- ------- ------- -------
Net cash used for investing activities (1,860) (3,178) (6,374) (5,214)
------- ------- ------- -------
Net increase (decrease) in cash and
restricted cash 180 2,336 (4,676) 523
Cash and restricted cash at beginning of period 776 9,087 5,632 10,900
------- ------- ------- -------
Cash and restricted cash at end of period $ 956 $11,423 $ 956 $11,423
------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
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ITT EDUCATIONAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(Dollar amounts in thousands unless otherwise stated)
1. The accompanying unaudited consolidated financial statements have been
prepared by ITT Educational Services, Inc. (the "Company") without audit.
In the opinion of management, the financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial condition and results of operations of the
Company. Certain information and footnote disclosures, including
significant accounting policies, normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted. The interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended December 31, 1995.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results for the entire calendar year.
2. On March 22, 1996, the Company declared a 3 for 2 Common Stock split,
effected by payment of a stock dividend on April 15, 1996 to all
shareholders of record at the close of business on April 1, 1996. The
earnings per share amounts for all prior periods have been restated to
reflect this stock split.
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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 the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the year ended December 31, 1995 for discussion of cash
receipts from financial aid programs, nature of capital additions, seasonality
of revenues, components of income statement captions, interest payments on cash
invested with ITT Corporation ("ITT") and other matters.
The Company records its revenues as students attend class. Due to the two week
vacations in June and December, the first and third quarters include 13 weeks of
revenue and the second and fourth quarters include 11 weeks of revenue. The
Company's incurrence of costs, however, is generally not affected by the
academic schedule and such costs do not fluctuate significantly on a quarterly
basis. As a result, net income in the second and fourth quarters is
significantly less than in the first and third quarters.
Results of Operations
- - ---------------------
Revenues increased $6.6 million, or 14.7%, to $51.6 million in the three months
ended June 30, 1996 from $45.0 million in the three months ended June 30, 1995.
Revenues increased $12.6 million, or 13.1%, to $108.7 million in the six months
ended June 30, 1996 from $96.1 million in the six months ended June 30, 1995.
These increases are primarily due to a 5% increase in tuition rates in September
1995, an increase in the number of first-time students beginning classes in
March and June 1996 as discussed below, increased total student enrollment at
June 30, 1996 as discussed below, and a change in the mix of students to higher
tuition rate courses (i.e., bachelor's degree and CAD programs).
The total number of first-time and re-entering students beginning classes in
1996 and 1995 may be shown as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------
Percentage Percentage
1996 1995 Increase 1996 1995 Increase
----- ----- ---------- ------ ----- ----------
First-time students 5,918 4,920 20.3 9,481 7,658 23.8
Re-entering students 635 552 15.0 1,312 1,130 16.1
----- ----- ---- ------ ----- ----
Total new students 6,553 5,472 19.8 10,793 8,788 22.8
===== ===== ==== ====== ===== ====
The total student enrollment on June 30, 1996 was 22,100, compared to 20,365
students on June 30, 1995, an increase of 8.5%.
Cost of educational services increased $3.0 million, or 9.3%, to $35.1 million
in the three months ended June 30, 1996 from $32.1 million in the three months
ended June 30, 1995. Cost of educational services increased $4.9 million, or
7.7%, to $68.6 million in the six months ended June 30, 1996 from $63.7 million
in the six months ended June 30, 1995. These increases are principally a result
of costs required to service the increased enrollment, normal inflationary cost
increases for wages, rent and other costs of services, and increased costs at
new technical institutes (two opened in September 1995 and two in March 1996).
Cost of educational services decreased as a percentage of revenue in the three
and six months ended June 30, 1996 from the respective periods in 1995 primarily
because of greater revenues being spread over the fixed portion of cost of
educational services.
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Student services and administrative expenses increased $2.8 million, or 19.9%,
to $16.9 million in the three months ended June 30, 1996 from $14.1 million in
the three months ended June 30, 1995. Student services and administrative
expenses increased $5.3 million, or 18.9%, to $33.4 million in the six months
ended June 30, 1996 from $28.1 million in the six months ended June 30, 1995. To
address the relatively soft market for new student enrollment, the Company
increased its media advertising expenses in the three and six months ended June
30, 1996 by approximately 31% and 30%, respectively, over the same expenses
incurred in the three and six months ended June 30, 1995, respectively. Student
services and administrative expenses also increased as a result of normal
inflationary cost increases for wages and media advertising.
The Company incurs operating losses when opening new institutes. Five new
institutes were opened in 1993, six in 1994, two in 1995 and two in the first
six months of 1996. A new institute typically is open for approximately 24
months before it experiences a profit. The revenues and expenses of these
institutes are included in the respective captions in the consolidated statement
of income. The amount of operating losses (pre-tax) during the three and six
months ended June 30, 1996 for institutes open less than 24 months were $2.2
million and $3.6 million, respectively, compared to $2.3 million and $4.4
million for the three and six months ended June 30, 1995, respectively.
Operating losses decreased $0.8 million to $0.4 million in the three months
ended June 30, 1996 from $1.2 million in the three months ended June 30, 1995.
Operating income increased $2.4 million, or 55.8%, to $6.7 million in the six
months ended June 30, 1996 from $4.3 million in the six months ended June 30,
1995. These increases are primarily due to the control of costs and the
reduction of operating losses of new institutes (i.e., ten institutes in the
first 24 months of operation in the six months ended June 30, 1996 compared to
13 in the six months ended June 30, 1995). The operating margin increased to
6.2% of revenues in the six months ended June 30, 1996, up from 4.5% in the six
months ended June 30, 1995.
Interest income in the three months ended June 30, 1996 increased $0.1 million
from the three months ended June 30, 1995 because of a non-recurring interest
expense of $250,000, related to a previously accrued liability for a state tax
assessment recorded in the three months ended June 30, 1995, that was offset by
the reduction in the interest rate earned on the cash invested by the Company
with ITT (i.e., 5.5% in the three months ended June 30, 1996 compared to 7.5% in
the three months ended June 30, 1995). Interest income decreased $0.1 million,
or 5.0%, to $1.9 million in the six months ended June 30, 1996 from $2.0 million
in the six months ended June 30, 1995 due to the same reasons discussed above
for the three months ended June 30, 1996.
Financial Condition, Liquidity and Capital Resources
- - ----------------------------------------------------
Due to the seasonal pattern of enrollments and the 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 was $2.0 million in the three months
ended June 30, 1996 compared to $5.5 million provided by operations in the three
months ended June 30, 1995. Net cash provided by operating activities was $1.7
million in the six months ended June 30, 1996 compared to $5.7 million in the
six months ended June 30, 1995. These decreases are primarily due to the July
1995 federal regulation that changes the timing of receipt of federal financial
aid to later dates in 1996 than 1995 and its impact on accounts receivable and
deferred tuition revenue. The Company received $7.5 million of cash on July 11,
1996 pursuant to the July 1995 federal regulation. This amount would have been
received in June 1996 pursuant to the previous regulations.
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Capital expenditures were $1.7 million in the three months ended June 30, 1996
compared to $1.5 million in the three months ended June 30, 1995. Capital
expenditures were $2.9 million in the six months ended June 30, 1996 compared to
$2.7 million in the six months ended June 30, 1995. The Company expects that the
capital additions for the full 1996 year will be approximately $9.0 million or a
$0.5 million increase over 1995.
The capital additions for a new technical institute are approximately $0.4
million and the capital additions for each new curriculum at an existing
institute are approximately $0.2 million. The Company anticipates that its
planned capital additions can be funded through cash flows from operations.
Cash flows from operations on a long-term basis are highly dependent upon the
receipt of funds from federal financial aid programs and the amount of funds
spent on new technical institutes, curricula additions at existing institutes
and possible acquisitions.
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 the Company's eligibility
to participate in, student financial aid programs utilized by the Company's
students; effects of any change in ownership of the Company resulting in a
change in control of the Company, including, but not limited to, the
consequences of such changes on the accreditation and federal and state
regulation of the institutes; receptivity of students and employers to the
Company's existing program offerings and new curricula; loss of lender access to
the Company's students for student loans; and a substantial increase in the
shares of Common Stock available for sale in the market if ITT divests some or
all of its Common Stock holdings.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to litigation in the ordinary course of its business.
Among the legal actions currently pending is Eldredge, et al. v. ITT Educational
Services, Inc., et al. (Civil Action No. 689376). This action was filed on June
8, 1995 in the Superior Court of San Diego County in San Diego, California by
seven students who attended the San Diego ITT Technical Institute. The suit
alleges, among other things, misrepresentation, civil conspiracy and statutory
violations by the Company, ITT Corporation and three employees of the San Diego
ITT Technical Institute. The plaintiffs seek general damages, exemplary damages,
civil penalties, restitution (including return of educational costs) on behalf
of the plaintiffs and all other persons similarly situated, attorney's fees and
costs. The judge has recently determined that the Company is subject to certain
statutory provisions which the Company believed were not applicable to it. The
Company intends to appeal this decision.
While there can be no assurances as to the ultimate outcome of any litigation
involving the Company, management does not believe any pending legal proceeding
will result in a judgment or settlement that will have, after taking into
account the Company's existing provisions for such liabilities, a material
adverse effect on the Company's financial position, results of operations or
cash flows. Certain litigation may, however, subject the affected ITT Technical
Institute to additional regulatory scrutiny.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the second quarter of fiscal year 1996, the Company submitted the
following matters to a vote of the holders of its Common Stock:
The 1996 annual meeting of shareholders of the Company was held on May 14, 1996
to elect directors and approve an amendment to the Company's Restated
Certificate of Incorporation. At this meeting, the shareholders elected the
following persons to serve as directors of the Company in the second class of
the Company's Board of Directors, each to hold office for the term of three
years and until his successor is elected and has qualified:
Second Class - Term expiring at 1999 Annual Meeting
------------
1. Robert A. Bowman
2. John E. Dean
3. Vin Weber
The final results of the vote taken at such meeting for the director nominees
are as follows:
Broker
Votes For Votes Withheld Nonvotes Abstentions
---------- --------------- -------- -----------
Robert A. Bowman 11,764,529 7,446 0 0
John E. Dean 11,764,629 7,346 0 0
Vin Weber 11,764,629 7,346 0 0
At this meeting, the shareholders also approved an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of the Company's Common Stock, $0.01 par value per share, from 25,000,000
to 50,000,000. The final results of the vote taken at such meeting to approve
the amendment to the Company's Restated Certificate of Incorporation are as
follows:
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Percentage of Shares Broker
Votes For Outstanding Voting For Votes Against Nonvotes Abstentions
---------- ---------------------- ------------- -------- -----------
11,739,947 97.83% 27,955 0 4,073
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 June 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ITT EDUCATIONAL SERVICES, INC.
Date: August 5, 1996
By: /s/ Gene A. Baugh
-------------------------------------------
GENE A. BAUGH
Senior Vice President, Treasurer and
Controller
(Principal Financial Officer)
INDEX TO EXHIBITS
Exhibit
No. Description
- - ----------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation, as Amended to Date..........
11 Statement re Computation of Per Share Earnings.....................
27 Financial Data Schedule............................................
- - ----------------
S-2