FORM 10-Q
UNITED STATES
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, 1998
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)
Registrant's telephone number, including area code: (317) 594-9499
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 [_]
26,999,952
Number of shares of Common Stock, $.01 par value, outstanding at July 24, 1998
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
June 30, 1998
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
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Page
----
Statements of Income (unaudited) for the six months ended June 30, 1998
and 1997 and the three months ended June 30, 1998 and 1997............. 3
Balance Sheets as of June 30, 1998 and 1997 (unaudited) and December
31, 1997............................................................... 4
Statements of Cash Flows (unaudited) for the six months ended June 30,
1998 and 1997 and the three months ended June 30, 1998 and 1997........ 5
Notes to Financial Statements............................................ 6
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ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues
Tuition $ 54,273 $ 48,253 $ 116,860 $ 103,999
Other educational 10,804 10,159 20,504 18,889
--------- --------- ---------- ----------
Total revenues 65,077 58,412 137,364 122,888
--------- --------- ---------- ----------
Costs and Expenses
Cost of educational services 44,970 39,807 86,408 77,791
Student services and
administrative expenses 20,341 18,456 39,777 35,992
Offering, change in control and
other one-time expenses 1,429 -- 1,872 --
--------- --------- ---------- ----------
Total costs and expenses 66,740 58,263 128,057 113,783
========= ========= ========== ==========
Operating income (loss) (1,663) 149 9,307 9,105
Interest income, net 1,191 1,193 2,435 2,573
--------- --------- ---------- ----------
Income (loss) before income taxes (472) 1,342 11,742 11,678
Income taxes 188 537 5,074 4,671
--------- --------- ---------- ----------
Net income (loss) $ (660) $ 805 $ 6,668 $ 7,007
========= ========= ========== ==========
Earnings (loss) per common
share (basic and diluted) $ (.02) $ 0.03 $ 0.25 $ 0.26
The accompanying notes are an integral part of these financial statements.
-3-
ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(In thousands, except per share data)
June 30, 1998 December 31, 1997 June 30, 1997
(unaudited) (unaudited)
------------- ----------------- -------------
Assets
Current assets
Cash and cash equivalents $ 95,875 $ 29 $ 182
Restricted cash 1,059 3,860 642
Cash invested with ITT -- 94,800 93,060
Corporation
Accounts receivable, net 13,318 9,680 9,092
Deferred income tax 1,811 2,019 1,302
Prepaids and other current assets 4,011 2,570 4,529
--------- --------- ---------
Total current assets 116,074 112,958 108,807
--------- --------- ---------
Property and equipment, net 24,128 22,886 21,972
Direct marketing costs 7,480 6,882 6,377
Other assets 3,120 3,188 2,160
--------- --------- ---------
Total assets $ 150,802 $ 145,914 $ 139,316
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 22,459 $ 14,974 $ 20,594
Accrued compensation and benefits 4,585 3,245 3,141
Other accrued liabilities 5,881 6,877 3,943
Deferred tuition revenue 21,203 30,850 34,311
--------- --------- ---------
Total current liabilities 54,128 55,946 61,989
Other liabilities 2,191 2,153 1,628
--------- --------- ---------
Total liabilities 56,319 58,099 63,617
--------- --------- ---------
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,
26,999,952 issued and outstanding 270 270 270
Capital surplus 32,513 32,513 32,513
Retained earnings 61,700 55,032 42,916
--------- --------- ---------
Total shareholders' equity 94,483 87,815 75,699
--------- --------- ---------
Total liabilities and
shareholders' equity $ 150,802 $ 145,914 $ 139,316
========= ========= =========
The accompanying notes are an integral part of these financial statements.
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ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
Cash flows from operating activities:
Net income (loss) $ (660) $ 805 $ 6,668 $ 7,007
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,347 2,096 4,561 4,054
Provision for doubtful accounts 785 404 1,459 857
Deferred taxes 39 81 271 308
Increase/decrease in operating assets
and liabilities:
Accounts receivable (1,333) 301 (5,097) (571)
Direct marketing costs (426) (408) (598) (603)
Accounts payable and accrued liabilities 4,506 3,386 7,804 5,626
Prepaids and other assets 146 (495) (1,373) (2,700)
Deferred tuition revenue (1,838) 3,511 (9,647) (9,221)
------- ------- ------- -------
Net cash provided by operating activities 3,566 9,681 4,048 4,757
------- ------- ------- -------
Cash flows used for investing activities:
Capital expenditures, net (3,538) (2,639) (5,803) (6,666)
Net decrease in cash invested with
ITT Corporation -- (7,124) 94,800 (3,252)
------- ------- ------- -------
Net cash provided by (used for)
investing activities (3,538) (9,763) 88,997 (9,918)
------- ------- ------- -------
Net increase (decrease) in cash,
cash equivalents and restricted cash 28 (82) 93,045 (5,161)
Cash, cash equivalents and restricted cash
at beginning of period 96,906 906 3,889 5,985
------- ------- ------- -------
Cash, cash equivalents and restricted cash
at end of period $96,934 $ 824 $96,934 $ 824
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
-5-
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Dollar amounts in thousands, unless otherwise stated)
1. The accompanying unaudited 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 financial statements should be read in conjunction with the
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, 1997.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results for the entire calendar year.
2. From the Company's initial public offering in 1994 until June 9, 1998, 83.3%
of the outstanding Common Stock of the Company was owned by ITT Corporation
("ITT"). On February 23, 1998, Starwood Hotels and Resorts Worldwide, Inc.
("Starwood, Inc.") completed the acquisition (the "Merger") of ITT and ITT
became a subsidiary of Starwood, Inc. On June 9, 1998, Starwood, Inc. sold
13,050,000 shares of the Company's Common Stock held by ITT to the public
(48.3% of the outstanding shares) (the "Offering"). Starwood, Inc. presently
owns 35% of the outstanding shares of the Company's Common Stock. The
Offering did not constitute a change of control under the U.S. Department of
Education regulations.
Until February 5, 1998, the Company's cash receipts were forwarded to ITT on
a daily basis and the Company's cash disbursements were generally funded by
ITT out of the Company's cash balances invested with ITT. On February 5,
1998, ITT transferred the balance to the Company and the Company has since
been performing its own cash management function. The invested funds are
included in cash and cash equivalents at June 30, 1998.
In June 1998, the Company incurred total expenses for the Offering of $1.1
million. In addition, the Company incurred expenses of $0.3 million and $0.8
million in the three and six months ended June 30, 1998, respectively,
associated with the Company's change in control and establishment of new
employee benefit plans.
3. The Company has a number of pending legal and other claims arising out of
the normal course of business. Among the legal actions is Eldredge, et al.
v. ITT Educational Services, Inc., et al. (the "Eldredge Case"). This action
was filed on June 8, 1995 in San Diego, California by seven graduates of the
San Diego ITT Technical Institute. In October 1996, the jury in this action
rendered a verdict against the Company and awarded the plaintiffs general
damages of approximately $0.2 million and exemplary damages of $2.6 million.
The judge also awarded the plaintiffs attorney's fees and costs, in the
amount of approximately $0.9 million, and interest. The Company is seeking
to overturn the awards and has appealed the decision. Management, based on
the advice of counsel, believes it is probable that it will prevail in its
appeal, thus no provision (other than the Company's legal expenses) for
these awards has been made. If the Company's appeal of the judgment in the
Eldredge Case is unsuccessful, a charge to earnings would be taken at that
time in the amount of the awards, including the general and exemplary
damages assessed against the Company, the plaintiffs' attorney's fees and
costs and the interest assessed thereon.
In January 1997, six legal actions were filed against the Company in San
Diego, California by a total of 21 former students of the San Diego ITT
Technical Institute. The claims alleged in these legal actions are
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similar to the claims alleged in the Eldredge Case, relate primarily to the
Company's marketing and recruitment practices and include misrepresentation
and violations of certain state statutes. The plaintiffs in one of the
California actions seek to have their action certified as a class action.
Recently, the court denied such plaintiffs' request. In June 1997, a legal
action was filed against the Company in Orlando, Florida by three former
students of the Maitland ITT Technical Institute. In April 1998, the legal
action in Florida was dismissed without prejudice by the plaintiffs. In
April 1998, a legal action was filed against the Company in San Diego,
California by nine former students who attended the hospitality program at
either the Maitland or San Diego ITT Technical Institute. The claims alleged
in this action are similar to the claims alleged in the Eldredge Case,
relate primarily to the Company's marketing and recruitment practices and
include fraud and violations of certain federal and state statutes. The
plaintiffs seek to have their action certified as a class action on behalf
of all persons similarly situated who attended the hospitality program at
the Indianapolis, Maitland, Portland or San Diego ITT Technical Institutes.
If a class action is certified in either California action, the number of
plaintiffs that may be awarded damages would increase significantly. In the
three months ended June 30, 1998, the Company increased its provision for
litigation costs related to certain of the aforementioned legal actions by
$1.2 million. The Company believes that it has meritorious defenses and
intends to vigorously defend itself against these claims.
In the opinion of management, the ultimate outcome of these matters will not
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
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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, 1997 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, default rates 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 $6.7 million, or 11.5%, to $65.1 million in the three months
ended June 30, 1998 from $58.4 million in the three months ended June 30, 1997.
Revenues increased $14.5 million, or 11.8%, to $137.4 million in the six months
ended June 30, 1998 from $122.9 million in the six months ended June 30, 1997.
These increases were due primarily to a 5% increase in tuition rates in
September 1997 and an 8.2% increase in the total student enrollment at January
1, 1998 compared to January 1, 1997. The number of students attending ITT
Technical Institutes at January 1, 1998 was 24,498 compared to 22,633 at January
1, 1997.
The total number of first-time and re-entering students beginning classes in
June 1998 was 6,951 compared to 6,879 for the same period in 1997. First-time
students numbered 6,075 in June 1998 compared to 6,158 in June 1997. The total
student enrollment on June 30, 1998 was 25,185, compared to 23,994 on June 30,
1997, an increase of 5.0%.
Cost of educational services increased $5.2 million, or 13.1%, to $45.0 million
in the three months ended June 30, 1998 from $39.8 million in the three months
ended June 30, 1997. Cost of educational services increased $8.6 million, or
11.1%, to $86.4 million in the six months ended June 30, 1998 from $77.8 million
in the six months ended June 30, 1997. These increases were 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 (one opened in June 1997, two in December 1997, one in
March 1998, and one in June 1998). Cost of educational services as a percentage
of revenue increased in the three and six months ended June 30, 1998 compared to
the three and six months ended June 30, 1997 as a result of a $1.2 million
provision for legal expenses in the three months ended June 30, 1998 (compared
to a $0.5 million and $1.0 million provision for legal expenses in the three and
six months ended June 30, 1997, respectively) associated with the legal actions
involving the hospitality program. (See Note 3 of Notes to Financial
Statements.) Excluding these provisions, cost of educational services in the
three months ended June 30, 1998 would have been 67.3% of revenues, the same as
the three months ended June 30, 1997 and 62.0% of revenues for the six months
ended June 30, 1998, a 0.5% improvement from the six months ended June 30, 1997.
Student services and administrative expenses increased $1.8 million, or 9.7%, to
$20.3 million in the three months ended June 30, 1998 from $18.5 million in the
three months ended June 30, 1997. Student services and administrative expenses
increased $3.8 million, or 10.6%, to $39.8 million in the six months ended June
30, 1998 from $36.0 million in the six months ended June 30, 1997. The Company
increased its media advertising expenses in the three and six months ended June
30, 1998 by approximately 8.9% and 8.5%, respectively, over the same expenses
incurred in the three and six months ended June 30, 1997. Student services and
administrative expenses decreased to 31.3% of revenues in the three months ended
June 30, 1998 compared to 31.6% in the three months ended June 30, 1997,
- 8 -
primarily because the greater revenues did not cause an increase in the fixed
portion of the marketing and headquarters expenses.
The Company incurs operating losses when opening new institutes. Three new
institutes were opened in 1996, three in 1997 and two in the first six months of
1998. 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 statements of income. The amount of operating
losses (pre-tax) for institutes open less than 24 months during the three and
six months ended June 30, 1998 were $1.5 million and $2.5 million, respectively,
compared to $1.0 million and $2.0 million for the three and six months ended
June 30, 1997, respectively.
In June 1998, the Company incurred total expenses for the Offering of $1.0
million after tax ($0.04 per share). In addition the Company incurred expenses
of $0.4 million ($0.01 per share) in the three months ended March 31, 1998 and
$0.3 million ($0.01 per share) in the three months ended June 30, 1998
associated with the Company's change in control and establishment of new
employee benefit plans.
Operating income (excluding the Offering, change in control and other one-time
expenses and legal provisions discussed above) increased $0.4 million to $1.0
million in the three months ended June 30, 1998 from $0.6 million in the three
months ended June 30, 1997. Operating income (excluding such one-time costs and
legal provisions) increased $2.3 million, or 22.8%, to $12.4 million in the six
months ended June 30, 1998 from $10.1 million in the six months ended June 30,
1997. The operating margin (excluding such one-time costs and legal provisions)
increased to 1.5% of revenues in the three months ended June 30, 1998, from a
1.1% operating margin in the three months ended June 30, 1997. The operating
margin (excluding such one-time costs and legal provisions) for the six months
ended June 30, 1998 was 9.0% compared to 8.2% for the six months ended June 30,
1997.
Interest income in the three months ended June 30, 1998 was equal to the
interest income for the three months ended June 30, 1997. Interest income
decreased $0.1 million in the six months ended June 30, 1998 compared to the six
months ended June 30, 1997, which was primarily due to the lower interest rate
earned on the cash invested by the Company (i.e., 5.5% in 1998 compared to 6.3%
in 1997) offset by the earnings on increased cash balances.
The Company's combined effective federal and state income tax rate was 40% in
1997. The Company's 1998 federal and state tax provision will be greater than
40%, because $0.9 million of the Offering expenses incurred in the three months
ended June 30, 1998 are not tax deductible.
The following table sets forth the net income (in thousands) for the three and
six months ended June 30, 1998 and 1997:
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
Net income (loss) $ (660) $805 $6,668 $7,007
Offering expense (after tax) 1,048 1,048
Change in control and other
one-time expenses (after tax) 187 453
------ ------ ------ ------
Net income before one-time expenses 575 805 8,169 7,007
Legal provision (after tax) 720 300 720 600
------ ------ ------ ------
Net income before one-time expenses
and legal provision $1,295 $1,105 $8,889 $7,607
====== ====== ====== ======
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
Due to the seasonal pattern of enrollments and the receipt of tuition payments,
comparisons of financial position and
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cash generated from operations should be made both to the end of the previous
year and to the corresponding period during the previous year.
Until February 5, 1998, the Company's cash receipts were forwarded to ITT on a
daily basis and the Company's cash disbursements were generally funded by ITT
out of the Company's cash balances invested with ITT. The Company's cash
invested with ITT Corporation is separately shown on the balance sheets as of
December 31, 1997 and June 30, 1997. On February 5, 1998, ITT transferred the
balance to the Company. The Company has been performing its own cash management
functions since February 5, 1998 and no longer has any cash invested with ITT.
The invested funds are included in the caption "cash and cash equivalents" in
the June 30, 1998 balance sheet.
The U.S. Department of Education ("DOE") issued new regulations in November
1996, which became effective July 1, 1997, that revised the procedures governing
how an institution participating in federal student financial aid programs under
Title IV of the Higher Education Act of 1965, as amended ("Title IV Programs")
requests, maintains, disburses and otherwise manages Title IV Program funds.
These new regulations require the Company to receive Title IV Program loan funds
in three equal quarterly disbursements rather than the two disbursements
previously permitted. The Company estimates that this change decreased deferred
tuition revenues or increased accounts receivable at June 30, 1998 by
approximately $15.0 million compared to June 30, 1997 and decreased interest
income in the three and six months ended June 30, 1998 by approximately $0.2
million and $0.4 million from interest income in the three and six months ended
June 30, 1997, respectively.
Net cash provided by operating activities was $4.0 million in the six months
ended June 30, 1998 compared to $4.8 million in the six months ended June 30,
1997. This $0.8 million decrease in cash provided by operating activities was
due primarily to the decrease in deferred tuition revenues or increase in
accounts receivable discussed above offset by an increase in the amount due ITT
under intercompany agreements that the Company entered into with ITT at the time
of the Offering. As of June 30, 1998, the Company had not paid ITT $6.8 million
for estimated federal income taxes, pension expenses and medical expenses
accrued from January 1, 1998 through the Offering date, pending the
reconciliation of all accounts between ITT and the Company pursuant to the terms
of such intercompany agreements. Management does not believe that the Company's
reconciliation of accounts with ITT will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
An educational institution may lose its eligibility to participate in some or
all Title IV Programs if student defaults on federal student loans exceed
certain rates. An institution whose cohort default rate on loans under the
Federal Family Education Loan ("FFEL") programs and the Federal Direct Loan
("FDL") programs is 25% or greater for three consecutive federal fiscal years
loses eligibility to participate in those programs for the remainder of the
federal fiscal year in which the DOE determines that the institution has lost
its eligibility and for the two subsequent federal fiscal years.
In June 1998, the ITT Technical Institute in Garland, Texas, which accounted for
approximately 1.7% of the Company's revenues in 1997, lost its eligibility to
participate in the FFEL and FDL programs until at least October 1, 2000, because
it had FFEL/FDL cohort default rates exceeding 25% for the 1993, 1994 and 1995
federal fiscal years, the three most recent years for which the DOE has
published official FFEL/FDL cohort default rates. The Company has arranged for
an unaffiliated private funding source ("PFS") to provide loans to the students
enrolled in the Garland institute. This alternative source of student financial
aid requires the Company to guarantee repayment of the PFS loans. Based on the
Company's experience with the repayment of Title IV program loans by students
who attended the Garland institute, the Company believes that such guaranty
should not result in a material adverse effect on the Company's financial
condition, results of operations or cash flows. The Company is also considering
whether to stop enrolling new students in the Garland institute, continue
teaching the students already enrolled and close the institute once the students
already enrolled have completed their programs of study.
The ITT Technical Institute in San Antonio, Texas, which accounted for
approximately 2.4% of the Company's revenues in 1997, had FFEL/FDL cohort
default rates exceeding 25% for the 1994 and 1995 federal fiscal years, but
- 10 -
had an FFEL/FDL cohort default rate below 25% for the 1993 federal fiscal year
and a preliminary FFEL/FDL cohort default rate below 25% for the 1996 federal
fiscal year. If the San Antonio institute receives an official 1996 FFEL/FDL
cohort default rate equal to or greater than 25% and cannot reduce that rate to
less than 25% through an appeal to the DOE, such institute will become
ineligible to participate in the FFEL and FDL programs. Loss of eligibility to
participate in the FFEL and FDL programs by both the Garland and San Antonio,
Texas ITT Technical Institutes (but not by the Garland institute alone) could
have a material adverse effect on the Company's financial condition or results
of operations.
Other than the Garland and San Antonio, Texas ITT Technical Institutes, no ITT
Technical Institute campus group had an FFEL/FDL cohort default rate equal to or
greater than 25% for the 1995 federal fiscal year. No ITT Technical Institute
campus group had a preliminary FFEL/FDL cohort default rate equal to or greater
than 25% for the 1996 federal fiscal year, which preliminary rates were issued
by the DOE in May 1998. The official FFEL/FDL cohort default rates for the 1996
federal fiscal year are expected to be published by the DOE in the last calendar
quarter of 1998.
Any corporate reorganization of, or future disposition of the Common Stock by,
ITT could constitute a change in control of the Company and the ITT Technical
Institutes. A material adverse effect on the Company's financial condition,
results of operations and cash flows would result if a change in control of the
Company occurred and a material number of ITT Technical Institutes failed, in a
timely manner, to be reauthorized by the state education authorities,
reaccredited by their accrediting commissions or recertified by the DOE to
participate in Title IV Programs.
Capital expenditures were $5.8 million in the six months ended June 30, 1998
compared to $6.7 million in the six months ended June 30, 1997. This decrease
was due primarily to the acquisition of approximately $3.0 million of new
computers in the first quarter of 1997 (required to accommodate a software
upgrade for the Company's computer-aided drafting technology curriculum) offset
by increased capital expenditures in 1998 for new institutes and curricula
additions at existing institutes. The Company expects that the capital additions
for the full 1998 year will be approximately $10.0 million or a $1.5 million
decrease from 1997.
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 $0.3 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 Title IV Programs and the amount of funds spent on new
technical institutes, curricula additions at existing institutes and possible
acquisitions.
Management, based on the advice of counsel, believes that it is probable that it
will prevail in its appeal in the Eldredge Case (see Note 3 to the Financial
Statements), thus no provision for the awards in that case has been made. If the
Company's appeal of the judgment in the Eldredge Case is unsuccessful, a charge
to earnings would be taken at that time in the amount of the awards, including
the general and exemplary damages assessed against the Company, the plaintiffs'
reasonable attorney's fees and costs, and the prejudgment and post-judgment
interest assessed thereon.
The American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and requires costs incurred in the application
development stage (whether internal or external) to be capitalized. This SOP is
applicable to all financial statements for fiscal years beginning after December
15, 1998, and should be applied to internal-use computer software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of this SOP. Costs incurred prior to initial
application of this SOP, whether or not capitalized, should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs
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were incurred. The adoption of this SOP is not expected to have a material
impact on the annual operating results of the Company.
Additionally, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," in April 1998. SOP 98-5 provides guidance on the financial
reporting of start-up cost and requires the cost of start-up activities to be
expensed as incurred. This SOP is applicable to all financial statements for
fiscal years beginning after December 15, 1998. Initial application should be
reported as a cumulative effect of a change in accounting principle as described
in Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes." The
Company intends to adopt this standard in the first quarter of 1999. The
cumulative effect of the change in accounting is not expected to have a material
effect on the 1999 annual operating results of the Company.
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; the results of the Company's appeal in Eldredge, et al. v. ITT
Educational Services, Inc., et al. and the results of any related litigation;
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; and loss of lender access to the Company's students
for student loans.
- 12 -
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the second quarter of fiscal year 1998, the Company held its 1998 annual
meeting of shareholders on May 12, 1998 to elect directors. The Company's Board
of Directors currently consists of ten directors divided into three classes. The
first and second classes contain three directors each and the third class
contains four directors. The term of one class expires each year. Generally,
each director serves until the annual meeting of shareholders held in the year
that is three years after such director's election and thereafter until such
director's successor is elected and has qualified. At the Company's 1998 annual
meeting of shareholders, the shareholders elected the following persons to serve
as directors of the Company in the first 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:
First Class - Term expiring at 2001 Annual Meeting
-----------
1. Rene R. Champagne
2. James D. Fowler, Jr.
3. Barry S. Sternlicht
The final results of the vote taken at such meeting for the director nominees
are as follows:
Broker
Votes For Votes Withheld Nonvotes Abstentions
---------- -------------- -------- -----------
Rene R. Champagne 26,208,327 13,787 0 0
James D. Fowler, Jr. 26,208,077 14,037 0 0
Barry S. Sternlicht 25,205,077 17,037 0 0
The directors of the Company continuing in office are as follows:
Second Class - Term expiring at 1999 Annual Meeting
------------
1. John E. Dean
2. Robin Josephs
3. Vin Weber
Third Class - Term expiring at 2000 Annual Meeting
-----------
1. Rand V. Araskog
2. Tony Coelho
3. Merrick R. Kleeman
4. Leslie Lenkowsky
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.
On April 8, 1998, the Company filed a Current Report on Form 8-K dated March 31,
1998 to report, under Item 5 of Form 8-K, a press release issued by the Company
reporting student enrollment data for its March 1998 term.
- 13 -
On April 16, 1998, the Company filed a Current Report on Form 8-K dated April
16, 1998 to report, under Item 5 of Form 8-K, a press release issued by the
Company reporting the Company's financial results for the quarter ended March
31, 1998.
On April 17, 1998, the Company filed Amendment No. 1 on Form 8-K/A to the
Company's Current Report on Form 8-K dated April 16, 1998 to correct the column
headings on the Statements of Income.
- 14 -
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: July 27, 1998
By: /s/ Gene A. Baugh
-------------------------------------------------
Gene A. Baugh
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
S-1
INDEX TO EXHIBITS
Exhibit
No. Description
- --------------------------------------------------------------------------------
10.9 Employee Benefits Agreement between the Company and ITT Corporation
10.10 Income Tax Sharing Agreement between the Company, ITT Corporation
and Starwood Hotels & Resorts Worldwide, Inc........................
10.11 Trade Name and Service Mark License Agreement between the
Company and ITT Sheraton Corporation................................
10.12 (1)Amended and Restated Registration Rights Agreement between the
Company and ITT Corporation.........................................
10.13 (2)Stockholder Agreement between the Company and ITT Corporation......
10.14 *(3)ESI 401(k) Plan...................................................
10.15 *ESI Excess Savings Plan..............................................
11 Statement re Computation of Per Share Earnings........................
27 Financial Data Schedule...............................................
- ----------------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as Exhibit 99.2 to Starwood Hotels & Resorts
Worldwide, Inc.'s and ITT Corporation's Amendment No. 1 to Schedule 13D
dated June 29, 1998 is incorporated herein by reference.
(2) The copy of this exhibit filed as Exhibit 99.1 to Starwood Hotels & Resorts
Worldwide, Inc.'s and ITT Corporation's Amendment No. 1 to Schedule 13D
dated June 29, 1998 is incorporated herein by reference.
(3) The copy of this exhibit filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-55903) is incorporated herein
by reference.