1
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 MARCH 31, 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 April 28,
1998
2
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
March 31, 1998
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
Page
----
Statements of Income (unaudited) for the three months ended March 31, 1998 and 1997 .............................. 3
Balance Sheets as of March 31, 1998 and 1997 (unaudited) and December 31,1997 .................................... 4
Statements of Cash Flows (unaudited) for the three months ended March 31, 1998 and 1997 ......................... 5
Notes to Financial Statements .................................................................................... 6
-2-
3
ITT EDUCATIONAL SERVICES,INC.
STATEMENTS OF INCOME
(IN THOUSANDS,EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
-------------- --------------
REVENUES
Tuition $62,587 $55,746
Other educational 9,700 8,730
-------------- --------------
Total revenues 72,287 64,476
-------------- --------------
COSTS AND EXPENSES
Cost of educational services 41,438 37,984
Student services and administrative expenses 19,436 17,536
Change in control expenses 443 --
-------------- --------------
Total costs and expenses 61,317 55,520
-------------- --------------
Operating income 10,970 8,956
Interest income, net 1,244 1,380
-------------- --------------
Income before income taxes 12,214 10,336
Income taxes 4,886 4,134
-------------- --------------
Net income $7,328 $6,202
============== ==============
Earnings per common share (basic and diluted) $0.27 $0.23
The accompanying notes are an integral part of these financial statements.
-3-
4
ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1997
(UNAUDITED) (UNAUDITED)
---------------- ----------------- --------------
ASSETS
Current assets
Cash and cash equivalents $90,217 $ 29 $ 62
Restricted cash 6,689 3,860 844
Cash invested with ITT Corporation -- 94,800 85,936
Accounts receivable, net 12,770 9,680 9,797
Deferred income tax 1,843 2,019 1,217
Prepaids and other current assets 3,939 2,570 4,248
---------------- -------------- -----------
Total current assets 115,458 112,958 102,104
Property and equipment, net 22,937 22,886 21,429
Direct marketing costs 7,054 6,882 5,969
Other assets 3,338 3,188 1,946
---------------- -------------- -----------
Total assets $148,787 $145,914 $131,448
================ ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 11,639 $ 14,974 $ 14,039
Accrued compensation and benefits 5,054 3,245 3,481
Other accrued liabilities 11,729 6,877 6,617
Deferred tuition revenue 23,041 30,850 30,800
---------------- -------------- -----------
Total current liabilities 51,463 55,946 54,937
Other liabilities 2,181 2,153 1,617
---------------- -------------- -----------
Total liabilities 53,644 58,099 56,554
---------------- -------------- -----------
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 62,360 55,032 42,111
---------------- -------------- -----------
Total shareholders' equity 95,143 87,815 74,894
---------------- -------------- -----------
Total liabilities and shareholders' equity $148,787 $145,914 $131,448
================ ============== ===========
The accompanying notes are an integral part of these financial statements.
-4-
5
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------- -------
Cash flows from operating activities:
Net income $ 7,328 $ 6,202
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,214 1,958
Provision for doubtful accounts 674 453
Deferred taxes 232 227
Increase/decrease in operating assets and liabilities:
Accounts receivable (3,764) (872)
Direct marketing costs (172) (195)
Accounts payable and accrued liabilities 3,298 2,240
Prepaids and other assets (1,519) (2,205)
Deferred tuition revenue (7,809) (12,732)
------- --------
Net cash provided by (used for) operating activities 482 (4,924)
------- --------
Cash flows used for investing activities:
Capital expenditures, net (2,265) (4,027)
Net decrease in cash invested with
ITT Corporation 94,800 3,872
------- --------
Net cash provided by (used for) investing activities 92,535 (155)
------- --------
Net increase (decrease) in cash, cash equivalents
and restricted cash 93,017 (5,079)
Cash, cash equivalents and restricted cash
at beginning of period 3,889 5,985
------- --------
Cash, cash equivalents and restricted cash at end of period $96,906 $906
======= ========
-5-
The accompanying notes are an integral part of these financial statements.
6
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 1998 are
not necessarily indicative of results for the entire calendar year.
2. Since the Company's initial public offering in 1994, 83.3% of the
outstanding Common Stock of the Company has been 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.
As a result of the Merger, each ITT Technical Institute campus group
became ineligible to participate in the federal student financial
aid programs. Effective March 20, 1998, the eligibility of each ITT
Technical Institute campus group to participate in federal student
financial aid programs was reinstated by the U.S. Department of
Education ("DOE") with certain conditions imposed by the DOE. The
Company believes that it is in compliance with or satisfies these
DOE conditions.
On February 13, 1998, the Company filed a registration statement with
the Securities and Exchange Commission pursuant to which ITT plans to sell
up to 13,050,000 shares of the Company's common stock to the public (48.3%
of the outstanding shares) (the "Offering"). The Offering will not
constitute a change of control under the DOE's regulations.
Since the Company's initial public offering in 1994, the relationship
between the Company and ITT has been governed by various agreements
pursuant to which ITT provided certain services to the Company. These
agreements have been modified since the Merger and the new agreements will
become effective upon the closing of the Offering. Management believes
that the new agreements, including the transfer of any assets or
liabilities from ITT to the Company contemplated thereunder, will not have
a material effect on the Company's financial position, results of
operations or cash flows.
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 approximately $83.0 million 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
March 31, 1998.
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.
-6-
7
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 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 opinion of management, the ultimate outcome of these matters
should not have a material adverse effect on the Company's financial
position, results of operations or cash flows.
-7-
8
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 it 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 $7.8 million, or 12.1% to $72.3 million in the three months
ended March 31, 1998 from $64.5 million in the three months ended March 31,
1997. This increase was 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
March 1998 was 4,730 compared to 4,363 for the same period in 1997. First-time
students numbered 3,882 in March 1998 compared to 3,619 in March 1997. The
total student enrollment on March 31, 1998 was 23,879, compared to 22,172 on
March 31, 1997, an increase of 7.7%.
Cost of educational services increased $3.4 million, or 8.9%, to $41.4 million
in the three months ended March 31, 1998 from $38.0 million in the three months
ended March 31, 1997. This increase was 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 and two in December 1997). Cost of
educational services decreased to 57.3% of revenues in the three months ended
March 31, 1998 compared to 58.9% of revenues in the three months ended March
31, 1997, because there was no provision for legal expenses in the legal
actions associated with the hospitality program (see Note 3 of Notes to
Financial Statements) during this period in 1998, compared with $0.5 million in
the three months ended March 31, 1997, and because the greater revenues did not
cause an increase in the fixed portion of rent, administrative salaries and
other costs included in the cost of educational services.
Student services and administrative expenses increased $1.9 million, or 10.9%,
to $19.4 million in the three months ended March 31, 1998 from $17.5 million in
the three months ended March 31, 1997. The Company increased its media
advertising expenses in the three months ended March 31, 1998 by approximately
8.1% over the same expenses incurred in the three months ended March 31, 1997.
Student services and administrative expenses decreased to 26.9% of revenues in
the three months ended March 31, 1998 compared to 27.2% in the three months
ended March 31, 1997, 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. Two new
institutes were opened in 1995, three in 1996, three in 1997 and one in the
first three 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
-8-
9
captions in the statements of income. The amount of operating losses
(pre-tax) during the three months ended March 31, 1998 and 1997 for institutes
open less than 24 months were $1.1 million and $1.0 million, respectively.
Change in control expenses represent fees to the accrediting commissions
and state education authorities that regulate the Company's ITT Technical
Institutes, fees and expenses of accountants to conduct an audit of the
balance sheet as of the date of the Merger as required under applicable
regulations and other expenses caused by the Merger. (See Note 2 of Notes to
Financial Statements.)
Operating income increased $2.0 million, or 22.2%, to $11.0 million in the
three months ended March 31, 1998 from $9.0 million in the three months ended
March 31, 1997 (a 27.4% increase before the non-recurring change in control
expenses). The operating margin increased to 15.2% of revenues in the three
months ended March 31, 1998, up from 13.9% in the three months ended March 31,
1997 primarily because the greater revenues did not cause an increase in the
fixed portion of expenses.
Interest income in the three months ended March 31, 1998 decreased $0.1 million
from the three months ended March 31, 1997 primarily because the Company did
not receive any federal student financial aid funds from February 22, 1998 to
March 20, 1998 due to the change in control of the Company resulting from the
Merger. Interest income earned on the increased cash investments was offset by
a decrease in the interest rate earned on the cash invested by the Company
(i.e., 5.5% in the three months ended March 31, 1998 compared to 6.3% in the
three months ended March 31, 1997).
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.
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 March 31, 1997. On February 5, 1998, ITT transferred
approximately $83.0 million 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 March 31, 1998 balance sheet.
The 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 March 31, 1998 by approximately $15.0 million
compared to March 31, 1997 and decreased interest income in the three months
ended March 31, 1998, by approximately $0.2 million from interest income in the
three months ended March 31, 1997.
Net cash provided by operating activities was $0.5 million in the three months
ended March 31, 1998 compared to $4.9 million used for operating activities in
the three months ended March 31, 1997. This $5.4 million increase in cash
provided by operating activities was due primarily to the timing of payments to
ITT under current intercompany agreements. As of March 31, 1998, the Company
had not made payments to ITT aggregating $4.7 million for estimated federal
income taxes, pension expenses and medical expenses for the first quarter of
1998, pending the negotiation of new intercompany agreements between the
Company and ITT in connection with the Merger and the Offering.
-9-
10
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. Two ITT Technical Institutes, located in Garland and San
Antonio, Texas, are in danger of losing their eligibility to participate in the
Federal Family Education Loan ("FFEL") and the Federal Direct Loan ("FDL")
programs due to their default rates. 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 either alone) could have a material adverse effect on
the Company's financial condition or results of operations. The Company has
arranged for an unaffiliated, private funding source ("PFS") to provide loans
to the students enrolled at the Garland, Texas ITT Technical Institute in the
event this institute loses its eligibility to participate in the FFEL and FDL
programs. 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, Texas ITT Technical 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.
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 $2.3 million in the three months ended March 31, 1998
compared to $4.0 million in the three months ended March 31, 1997. This
decrease was due primarily to the approximately $3.0 million expenditure for
new computers in the first quarter of 1997 (required to accommodate a software
upgrade for the Company's computer-aided drafting technology curriculum). 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 $0.2 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 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 were incurred. The adoption of this SOP is not
expected to have a material impact on the annual operating results of the
Company.
-10-
11
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; 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 some or all of ITT's Common Stock
holdings are divested.
-11-
12
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 are:
1. Eldredge, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 689376), was filed on June 8, 1995 in the Superior Court of
San Diego County in San Diego, California by seven graduates of the
hospitality program at the San Diego ITT Technical Institute. The suit
alleged, among other things, misrepresentation, civil conspiracy and
statutory violations of the California Education Code
("CEC"), California Business and Professions Code ("CBPC") and
California Consumer Legal Remedies Act ("CCLRA") by the Company, ITT and
three employees of the Company. The plaintiffs claimed that the
defendants (a) made misrepresentations and engaged in deceptive acts in
the recruitment of the plaintiffs for, and/or in the promotion of, the
program, (b) provided inadequate instruction to the plaintiffs, (c) used
inadequate facilities and equipment in the program and inappropriate
forms of contracts with the plaintiffs, (d) failed to provide the
plaintiffs with all required information and disclosures and (e)
misrepresented the plaintiffs' prospects for employment upon graduation,
the employment of the program's graduates and the plaintiffs' ability to
transfer program credits. The jury rendered a verdict against the
Company and ITT in this action in October 1996. General damages of
approximately $0.2 million were assessed against the Company and ITT,
jointly, on the plaintiffs' misrepresentations and CEC claims.
Exemplary damages of $2.6 million and $4.0 million were assessed against
the Company and ITT, respectively. The judge also awarded the
plaintiffs attorney's fees and costs in the amount of approximately $0.9
million. Prejudgment interest was assessed on the general damages award
and post-judgment interest was assessed on the entire award. The
plaintiffs' CBPC and CCLRA claims and their claims against the Company
employees were dismissed, and the judge vacated the jury verdict against
ITT. The Company is seeking to overturn the awards and has appealed the
decision. Although the Company is optimistic that it may be able to
reverse or reduce the verdict, there can be no assurance thereof.
Management, based on the advice of counsel, believes it is probable that
it will prevail in its appeal and, 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 prejudgment
and post-judgment interest assessed thereon. In addition, a California
statute prohibits the Company's California regulator from approving an
application for a change in control of any institution submitted by an
applicant that has been found in any judicial or administrative
proceeding to have violated Chapter 7 (formerly Chapter 3) of the CEC
("Chapter 7") . Since the jury in the Eldredge Case determined that the
Company violated Chapter 7, it is questionable whether the Company's
California regulator will approve any subsequent application for a
change in control submitted by the Company for any of the 11 ITT
Technical Institutes in California; however, the California regulator
has approved the Company's applications for a change in control of the
11 ITT Technical Institutes in California necessitated by the Merger.
There can be no assurance that the California regulator will approve any
subsequent application for a change in control of an ITT Technical
Institute in California submitted by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
Other legal proceedings (such as the actions discussed below) have
resulted and may continue to result from other persons alleging similar
claims of misrepresentation and violations of certain statutory
provisions.
-12-
13
2. Robb, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 00707460), was filed on January 24, 1997 in the Superior
Court of San Diego County in San Diego, California by four graduates of
the San Diego ITT Technical Institute. The suit, as originally filed,
alleged, among other things, statutory violations of the CEC and CBPC
by the Company and ten employees of the Company. The plaintiffs in the
original complaint sought compensatory damages, civil penalties,
injunctive relief, disgorgement of ill-gotten gains, restitution
(including return of educational costs) on behalf of plaintiffs and all
other persons similarly situated who attended an ITT Technical
Institute in California, attorney's fees and costs, and to have the
action certified as a class action. The plaintiffs amended their
complaint on August 14, 1997. The amended complaint deletes three and
adds two named plaintiffs. Each of the three plaintiffs was a student
who attended one of three different programs (i.e., hospitality,
electronics engineering technology and computer-aided drafting
technology) at an ITT Technical Institute in California. The
plaintiffs in the amended complaint allege only violations of the CEC,
based on the plaintiffs' claims that the defendants (a) made
misrepresentations and engaged in deceptive acts in the recruitment of
students for, and/or in the promotion of, the programs offered in
California, (b) failed to provide students with all required
information and disclosures and (c) misrepresented students' prospects
for employment upon graduation and the employment of the programs'
graduates. The plaintiffs seek (a) a refund of an unspecified amount
representing all consideration paid to the Company by the plaintiffs
and all other persons similarly situated who attended any of the
programs in California at any time from January 1, 1991 through
December 31, 1996, (b) a state statutory penalty equal to two times the
refund amount, (c) injunctive relief and (d) an unspecified amount of
attorney's fees and costs. The plaintiffs' request to have this action
certified as a class action has been denied.
3. Iverson, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 00707705); Ohrt v. ITT Educational Services, Inc., et al.
(Civil Action No. 00707706); Sayers v. ITT Educational Services, Inc.,
et al. (Civil Action No. 00707707); Barrent, et al. v. ITT Educational
Services, Inc., et al. (Civil Action No. 00707708); and Kellum, et al.
v. ITT Educational Services, Inc., et al. (Civil Action No. 00707709),
were each filed on January 31, 1997 in the Superior Court of San Diego
County in San Diego, California. Each of the five actions (involving,
in total, 17 former students who attended the hospitality program at
the San Diego ITT Technical Institute) alleges statutory violations of
the CEC, the CBPC and the California Consumer Contract Awareness Act of
1990, intentional misrepresentation and/or concealment, and civil
conspiracy by the Company, ITT and a Company employee. The plaintiffs
claim that the defendants (a) made misrepresentations and engaged in
deceptive acts in the recruitment of the plaintiffs for, and/or in the
promotion of, the program, (b) used inadequate facilities and equipment
in the program and inappropriate forms of contracts with the
plaintiffs, (c) failed to provide the plaintiffs with all required
information and disclosures and a fully executed copy of their
contracts with the Company and (d) misrepresented the plaintiffs'
prospects for employment upon graduation, the employment of the
program's graduates and the plaintiffs' externship portion of the
program. The plaintiffs in each action seek various forms of recovery,
including (a) an unspecified amount for compensatory damages,
disgorgement of ill-gotten gains, restitution, attorney's fees and
costs, (b) state statutory penalties equal to two times actual damages,
(c) injunctive relief and (d) $10 million in exemplary damages. These
actions are currently at the discovery stage.
4. DeBattista, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 97-1366-CA-15-W), was filed on June 25, 1997 in the Circuit
Court of Seminole County in Orlando, Florida by three former students
who attended the hospitality program at the Maitland ITT Technical
Institute. The suit alleged violations of the Florida Deceptive and
Unfair Trade Practices Act ("FDUTPA"), the Florida Civil Remedies for
Criminal Practices Act ("FCRCPA") and Florida statutes prohibiting
misleading advertising, common law fraud and/or concealment, civil
conspiracy and rescission by the Company, ITT and seven employees of
the Maitland ITT Technical Institute. The plaintiffs claimed that the
defendants (a) made misrepresentations and engaged in deceptive acts in
the recruitment of students for, and/or in the promotion of, the
program and (b) misrepresented students' prospects for employment upon
graduation, the employment of the
-13-
14
program's graduates and the students' externship portion of the
program. The plaintiffs sought various forms of recovery, including an
unspecified amount for (a) actual damages, statutory penalties equal to
three times actual damages, exemplary damages and equitable rescission
on behalf of the plaintiffs and all other persons similarly situated who
attended the program at the Maitland ITT Technical Institute at any time
from January 1, 1991 through December 31, 1995 and (b) attorney's fees,
interest and costs. The plaintiffs also sought to have the action
certified as a class action. The plaintiffs dismissed this action
without prejudice in April 1998.
5. Collins, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 98 cv 0659 BTM), was filed on April 6, 1998 in the U.S.
District Court for the Southern District of California in San Diego,
California by nine former students who attended the hospitality program
at either the Maitland or San Diego ITT Technical Institute. The suit
alleges violations of the federal Racketeer Influenced and Corrupt
Organizations Act, the CEC, the CBPC, the CCLRA, the FDUTPA, the FCRCPA
and Florida statutes prohibiting misleading advertising, common law
fraud and/or concealment and civil conspiracy by the Company and ITT.
The plaintiffs claim that the defendants (a) made misrepresentations
and engaged in deceptive acts in the recruitment of students for,
and/or in the promotion of, the program, (b) failed to provide students
with all required information and disclosures and (c) misrepresented
students' prospects for employment upon graduation, the employment of
the program's graduates and the students' externship portion of the
program. The plaintiffs seek various forms of recovery on behalf of
the plaintiffs and all other persons similarly situated who attended
the program at the Indianapolis, Maitland, Portland or San Diego ITT
Technical Institutes at any time from January 1, 1990 through December
31, 1996, including (a) an unspecified amount for compensatory damages,
exemplary damages, recession and the return of all tuition and fees
paid to the Company by or on behalf of students who attended the
program, the disgorgement of ill-gotten gains, restitution, attorney's
fees and costs, (b) state statutory penalties of two and three times
actual damages, (c) a federal statutory penalty of $45 million and (d)
injunctive relief. The plaintiffs seek to have the action certified as
a class action.
On September 22, 1997, the Company received an inquiry from the staff of
the U.S. Federal Trade Commission requesting information relating to the
Company's offering and promotion of vocational or career training. The Company
has since responded to this inquiry and provided the requested information.
While there can be no assurance 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 a material
adverse effect on the Company's financial condition, results of operations or
cash flows. Any litigation alleging violations of education or consumer
protection laws and/or regulations, misrepresentation, fraud or deceptive
practices, however, may subject the affected ITT Technical Institute to
additional regulatory scrutiny.
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 March 10, 1998, the Company filed a Current Report on Form 8-K dated
February 23, 1998 to report, under Item 1 of Form 8-K, the change in control of
the Company resulting from the acquisition of ITT Corporation by Starwood
Hotels & Resorts and Starwood Hotels & Resorts Worldwide, Inc.
-14-
15
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.
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.
-15-
16
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: April 28, 1998
By: /s/ Gene A. Baugh
------------------------------
GENE A. BAUGH
Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
S-1
17
INDEX TO EXHIBITS
Exhibit
No. Description
- ---------------------------------------------------------------------------------------------------------
11 Statement re Computation of Per Share Earnings.............................................
27 Financial Data Schedule.....................................................................
S-2