<PAGE>
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, 1997
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 May 5, 1997
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
March 31, 1997
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
Statements of Income (unaudited) for the three months ended March 31, 1997 and 1996 ............................... 3
Balance Sheets as of March 31, 1997 and 1996 (unaudited) and December 31, 1996..................................... 4
Statements of Cash Flows (unaudited) for the three months ended March 31, 1997 and 1996............................ 5
Notes to Financial Statements...................................................................................... 6
</TABLE>
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ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
<S> <C> <C>
Revenues
Tuition $55,746 $49,268
Other educational 8,730 7,835
------- -------
Total revenues 64,476 57,103
------- -------
Costs and Expenses
Cost of educational services 37,984 33,487
Student services and administrative expenses 17,536 16,505
------- -------
Total costs and expenses 55,520 49,992
------- -------
Operating income 8,956 7,111
Interest income, net 1,380 947
------- -------
Income before income taxes 10,336 8,058
Income taxes 4,134 3,223
------- -------
Net income $ 6,202 $ 4,835
======= =======
Earnings per common share $ 0.23 $ 0.18
Average equivalent common shares outstanding (in thousands) 27,182 27,104
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996 March 31, 1996
(unaudited) (unaudited)
-------------- ----------------- --------------
<S> <C> <C> <C>
Assets
Current assets
Cash $ 62 $ 74 $ 57
Restricted cash 844 5,911 719
Cash invested with ITT Corporation 85,936 89,808 75,207
Accounts receivable, net 9,797 9,378 7,815
Deferred income tax 1,217 1,455 712
Prepaids and other current assets 4,248 1,823 2,557
-------- -------- --------
Total current assets 102,104 108,449 87,067
Property and equipment, net 21,429 19,360 18,212
Direct marketing costs 5,969 5,774 4,958
Other assets 1,946 2,166 3,007
-------- -------- --------
Total assets $131,448 $135,749 $113,244
======== ======== ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 14,039 $ 12,188 $ 16,177
Accrued compensation and benefits 3,481 4,253 3,030
Other accrued liabilities 6,617 5,432 5,745
Deferred tuition revenue 30,800 43,532 27,902
-------- -------- --------
Total current liabilities 54,937 65,405 52,854
Other liabilities 1,617 1,652 1,714
-------- -------- --------
Total liabilities 56,554 67,057 54,568
-------- -------- --------
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,
26,999,952 and 18,000,000 issued and
outstanding 270 270 180
Capital surplus 32,513 32,513 32,603
Retained earnings 42,111 35,909 25,893
-------- -------- --------
Total shareholders' equity 74,894 68,692 58,676
-------- -------- --------
Total liabilities and shareholders' equity $131,448 $135,749 $113,244
======== ======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,202 $ 4,835
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,958 1,965
Provision for doubtful accounts 453 389
Deferred taxes 227 275
Increase/decrease in operating assets and liabilities:
Accounts receivable (872) (612)
Direct marketing costs (195) 73
Accounts payable and accrued liabilities 2,240 6,249
Prepaids and other assets (2,205) (1,355)
Deferred tuition revenue (12,732) (12,161)
-------- --------
Net cash provided by (used for) operating activities (4,924) (342)
-------- --------
Cash flows used for investing activities:
Capital expenditures, net (4,027) (1,192)
Net decrease (increase) in cash invested with
ITT Corporation 3,872 (3,322)
-------- --------
Net cash used for investing activities (155) (4,514)
-------- --------
Net increase (decrease) in cash and restricted cash (5,079) (4,856)
Cash and restricted cash at beginning of period 5,985 5,632
-------- --------
Cash and restricted cash at end of period $ 906 $ 776
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(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, 1996.
The results of operations for the three months ended March 31, 1997 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. On
October 8, 1996, the Company declared a 3 for 2 Common Stock split effected
by payment of a stock dividend on November 4, 1996 to all shareholders of
record at the close of business on October 21, 1996. The earnings per share
amounts for all prior periods have been restated to reflect these stock
splits.
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 late 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 plaintiffs in one such action seek to have the
action certified as a class action. The claims alleged in these legal
actions are similar to the claims alleged in the Eldredge Case and include
misrepresentation and violations of certain statutory provisions of the
California Education Code and California Business and Professions Code.
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.
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<PAGE>
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, 1996 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 $7.4 million, or 13.0%, to $64.5 million in the three months
ended March 31, 1997 from $57.1 million in the three months ended March 31,
1996. This increase was due primarily to a 5% increase in tuition rates in
September 1996 and a 9.8% increase in the total student enrollment at January 1,
1997 compared to January 1, 1996. The number of students attending ITT Technical
Institutes at January 1, 1997 was 22,633 compared to 20,618 at January 1, 1996.
The total number of first-time and re-entering students beginning classes in
March 1997 was 4,363 compared to 4,240 for the same period in 1996. First-time
students numbered 3,619 in March 1997 compared to 3,563 in March 1996. The total
student enrollment on March 31, 1997 was 22,172, compared to 20,354 on March 31,
1996, an increase of 8.9%.
Cost of educational services increased $4.5 million, or 13.4%, to $38.0 million
in the three months ended March 31, 1997 from $33.5 million in the three months
ended March 31, 1996. 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 (two opened in March 1996 and one in September 1996). Cost of
educational services increased to 58.9% of revenues in the three months ended
March 31, 1997 compared to 58.6% of revenues in the three months ended March 31,
1996 as a result of a $0.5 million provision in 1997 (none in the three months
ended March 31, 1996) for the Company's legal expenses in Eldredge, et al. v.
ITT Educational Services, Inc., et al. (the "Eldredge Case"). (See Note 3 of
Notes to Financial Statements.) Excluding this provision, cost of educational
services in the three months ended March 31, 1997 would have been 58.1%, a 0.5%
improvement from the three months ended March 31, 1996.
Student services and administrative expenses increased $1.0 million, or 6.1%, to
$17.5 million in the three months ended March 31, 1997 from $16.5 million in the
three months ended March 31, 1996. The Company increased its media advertising
expenses in the three months ended March 31, 1997 by approximately 8% over the
same expenses incurred in the three months ended March 31, 1996. This media
expense increase was less than the increase experienced during this period in
1996 because of a planned reduction in the percentage increase and an unplanned
reduction caused by higher than expected preemptions by the television stations.
Student services and administrative expenses decreased to 27.2% of revenues in
the three months ended March 31, 1997 compared to 28.9% in the three months
ended March 31, 1996, primarily because the greater revenues did not cause an
increase in the fixed portion of the marketing and headquarters expenses.
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<PAGE>
The Company incurs operating losses when opening new institutes. Six new
institutes were opened in 1994, two in 1995, three in 1996 and none in the first
three months of 1997. 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) during the three months ended March 31,
1997 and 1996 for institutes open less than 24 months were $1.0 million and $1.4
million, respectively.
Operating income increased $1.9 million, or 26.8%, to $9.0 million in the three
months ended March 31, 1997 from $7.1 million in the three months ended March
31, 1996. This increase was due primarily to the control of costs and the
reduction of operating losses of new institutes (i.e., five institutes in the
first 24 months of operation in the three months ended March 31, 1997 compared
to eight in the three months ended March 31, 1996). The operating margin
increased to 13.9% of revenues in the three months ended March 31, 1997, up from
12.5% in the three months ended March 31, 1996 despite the $0.5 million
provision for legal expenses in the three months ended March 31, 1997.
Interest income in the three months ended March 31, 1997 increased $0.5 million
from the three months ended March 31, 1996 because of the increase in the
interest rate earned on the cash invested by the Company with ITT (i.e., 6.3% in
the three months ended March 31, 1997 compared to 5.5% in the three months ended
March 31, 1996) and the $17.9 million increase in cash invested with ITT
Corporation during 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.
The U.S. Department of Education issued final regulations on November 29, 1996
detailing new rules and procedures governing how an institution which
participates in federal student financial aid programs under Title IV ("Title IV
Programs") of the Higher Education Act of 1965, as amended ("HEA") requests,
maintains, disburses and otherwise manages Title IV Program funds. These new
funds management regulations are effective July 1, 1997 and will require the
Company, among other things, to receive its funds in three equal quarterly
disbursements rather than the two disbursements currently permitted. The Company
estimates that these new regulations will decrease 1997 net cash provided by
operating activities (a one-time effect) by approximately $12.0 to $15.0
million, and will decrease interest income in the six months ending December 31,
1997 (an on-going effect) by $0.8 to $1.0 million and annually thereafter by
$1.6 to $2.0 million.
Net cash used for operating activities was $4.9 million in the three months
ended March 31, 1997 compared to $0.3 million in the three months ended March
31, 1996. This decrease in cash provided by operating activities was due
primarily to the timing of payments to vendors. Accounts payable and accrued
liabilities increased by $2.2 million in the three months ended March 31, 1997
compared to $6.2 million in the three months ended March 31, 1996.
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. These rates are based on the historical cohort default rate of
current and former students on loans provided under certain Title IV Programs,
and are calculated on an institutional basis, defined as a main campus and all
of its additional locations or branch campuses. The cohort default rate of an
institution is calculated on the basis of the number of students who have
defaulted and not the dollar amount of such defaults. Under the Federal Family
Education Loan ("FFEL") programs, an institution whose cohort default rate on
loans made under the Federal Stafford Loan ("Stafford") and Federal Supplemental
Loans for Students ("SLS") programs is 25% or greater for three consecutive
years will no longer be eligible to participate in any of the FFEL programs
(including the Federal PLUS ("PLUS") program) or the Federal Direct Student Loan
("FDSL") program for the remainder of the federal fiscal year in which the U.S.
Department of Education determines that the institution has lost its eligibility
and for the two subsequent federal fiscal years, unless it successfully
challenges such
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<PAGE>
disqualification under procedures provided by the HEA and its implementing
regulations. During the pendency of any such appeal, the institution retains its
eligibility to participate in the applicable loan programs.
No ITT Technical Institute campus group has an FFEL cohort default rate equal to
or greater than 25% for the 1991 or 1992 federal fiscal years. Three ITT
Technical Institute campus groups, consisting of three institutes located in
Houston (West), Garland and San Antonio, Texas have an official FFEL cohort
default rate of: (a) 27.4%, 27.4% and 25.0%, respectively, for the 1993 federal
fiscal year; and (b) 25.8%, 39.1% and 25.6%, respectively, for the 1994 federal
fiscal year. For the remaining 28 ITT Technical Institute campus groups, the
official 1993 FFEL cohort default rates range from a high of 23.4% to a low of
11.8% and the official 1994 FFEL cohort default rates range from a high of 19.9%
to a low of 11.0%. The ITT Technical Institutes in Houston (West), Garland and
San Antonio, Texas have a preliminary FFEL cohort default rate of 19.3%, 29.7%
and 28.2%, respectively, for the 1995 federal fiscal year (the latest year for
which rates are available). For the remaining 28 ITT Technical Institute campus
groups, the preliminary 1995 FFEL cohort default rates range from a high of
23.8% to a low of 11.3%. The official 1995 FFEL cohort default rates are
scheduled to be released in October 1997.
The ITT Technical Institutes in Garland and San Antonio, Texas, which
collectively accounted for approximately 4% of the Company's revenues in the
Company's 1996 fiscal year, have identified corrections to their official 1993
and 1994, and preliminary 1995, FFEL cohort default rates based on (I) improper
loan servicing and/or collection of certain student loans included in the
calculation of such rates and (II) erroneous data used to calculate such rates.
Each of these ITT Technical Institutes has submitted the appropriate appeals and
requests for adjustment, respectively, to the U.S. Department of Education to
make these corrections and revise downward the institute's official 1993 and
1994 FFEL cohort default rates accordingly. Each of these ITT Technical
Institutes is also preparing to submit the appropriate challenges to the U.S.
Department of Education to make these corrections and revise downward the
institute's preliminary 1995 FFEL cohort default rate accordingly. The U.S.
Department of Education has denied each of the Garland and San Antonio ITT
Technical Institute's appeal of its official 1993 FFEL cohort default rate based
on improper loan servicing and/or collection, and the Garland ITT Technical
Institute's request for adjustment of its official 1994 FFEL cohort default
rate. There can be no assurance that either of these institutes will be
successful in any of its remaining appeals, requests for adjustment or
challenges to the U.S. Department of Education regarding its official 1993 and
1994, or preliminary 1995, FFEL cohort default rates, or that even if such
institute is successful in these efforts that its official 1993, 1994 or 1995
FFEL cohort default rate will recalculate to less than 25%. If the Company
cannot successfully cause the official 1993 or 1994 FFEL cohort default rate for
each of the Garland and San Antonio, Texas ITT Technical Institutes to be
reduced to less than 25% and any such institute has an official 1995 FFEL cohort
default rate equal to or exceeding 25%, such institute will be notified by the
U.S. Department of Education that it is ineligible to participate in the FFEL
and FDSL programs. The institute can challenge its loss of eligibility through
an administrative review process within the U.S. Department of Education (as
referenced above) and continue to participate in the FFEL programs during this
process. If the institute's challenge is unsuccessful, the institute will be
ineligible to participate in the FFEL and FDSL programs for the remainder of
that federal fiscal year and for the two subsequent federal fiscal years. Loss
of eligibility to participate in the FFEL and FDSL programs by either the
Garland or San Antonio, Texas ITT Technical Institutes could have a material
adverse effect on the Company's financial condition.
In a further attempt to prevent the Garland, Texas ITT Technical Institute from
losing its eligibility to participate in the FFEL and FDSL loan programs in the
event each of its official 1993, 1994 and 1995 FFEL cohort default rates equals
or exceeds 25%, the Company is in the process of converting this institute from
a main campus to an additional location of another main campus (the
"Conversion"). Based on the Company's interpretation of the applicable federal
regulations and discussions with the U.S. Department of Education, the Company
believes that if it can complete the Conversion before the official 1995 FFEL
cohort default rates are issued by the U.S. Department of Education, the 1995
FFEL cohort default rate for the Garland, Texas ITT Technical Institute will be
blended into the calculation of the 1995 FFEL cohort default rate of the ITT
Technical Institute campus group to which this institute becomes an additional
location. Converting an ITT Technical Institute that is a main campus into an
additional location of another ITT Technical Institute campus group requires
approval of the ITT Technical Institute's
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accrediting commission and the U.S. Department of Education. The Garland, Texas
ITT Technical Institute has received the approval of its accrediting commission,
but there can be no assurance that the Company can obtain the requisite U.S.
Department of Education approval of the Conversion or that the Company can
obtain such approval before the official 1995 FFEL cohort default rates are
issued.
In an effort to reduce the adverse effect on the Company's financial condition
that could result from the loss of eligibility to participate in the FFEL and
FDSL programs by either the Garland or San Antonio, Texas ITT Technical
Institutes, the Company is considering whether to attempt to arrange for an
unaffiliated, private funding source ("PFS") to provide loans to the students of
these ITT Technical Institutes. This alternative source of student financial aid
would most probably require the Company to guarantee repayment of the PFS loans.
Based on the Company's experience with student loan repayment on Title IV
Program loans for these institutes, such guaranty could result in significant
cost to the Company.
On January 31, 1997, Hilton Hotels Corporation ("Hilton") commenced a tender
offer for approximately 50.1% of the outstanding shares of ITT's common stock
(the "Hilton Offer"). Hilton has announced that, if its offer succeeds, it will
obtain the entire equity interest in ITT by merging ITT with Hilton or a
subsidiary of Hilton (such merger, together with the Hilton Offer, the "Hilton
Transaction"). The Hilton Transaction is more fully described in the Tender
Offer Statement on Schedule 14D-1 filed by Hilton with the Securities and
Exchange Commission (the "Hilton 14D-1"). Hilton has also commenced a
solicitation of proxies in support of proposals to be submitted to ITT
shareholders at ITT's next annual meeting of shareholders which would have the
effect of ensuring the completion of the Hilton Transaction (the "Hilton
Proposals"). The Company believes that the Hilton Transaction, if successful, or
the Hilton Proposals, if enacted at a meeting of ITT shareholders, would
constitute a change in ownership resulting in a change in control of the Company
under the regulations of the U.S. Department of Education, all or virtually all
of the state education authorities that regulate the Company's business (the
"States") and the accrediting commissions that accredit each ITT Technical
Institute (the "Accrediting Commissions"). Upon a change in control of the
Company under U.S. Department of Education regulations, the ITT Technical
Institutes would immediately become ineligible to participate in Title IV
Programs and their students would be unable to obtain Title IV Program funds to
pay their cost of education until such time as the U.S. Department of Education
recertifies the ITT Technical Institutes to participate in Title IV Programs.
The U.S. Department of Education will not preapprove a change in control and
will only reinstate an institution's eligibility to participate in Title IV
Programs upon approval of a proper application following the institution's
change in control. To be proper, among other things, such application must
demonstrate that the relevant ITT Technical Institute is authorized by the
appropriate States and accredited by the appropriate Accrediting Commission.
Therefore, before each ITT Technical Institute may regain access to Title IV
Program funds following a change in control (a) it must be reaccredited (or
continue to be accredited) by the appropriate Accrediting Commission and
reauthorized (or continue to be authorized) by the appropriate States and (b)
the change in control must otherwise be approved by the U.S. Department of
Education. Reference is made to the Company's Annual Report on Form 10-K for a
discussion of the procedures involved in regaining such approvals.
A material adverse effect on the Company's business, financial condition and
results of operations would result if a change in control of the Company
occurred: (a) without the requisite prior approvals of the States; (b) without
the continued or reinstated accreditation of the Accrediting Commissions; (c)
without the timely and requisite post approvals of the States; or (d) if a
material number of ITT Technical Institutes failed to timely regain eligibility
to participate in Title IV Programs from the U.S. Department of Education. In
addition, the time of year at which a change in control of the Company occurs
coupled with the length of time required by the ITT Technical Institutes to
regain their eligibility to participate in Title IV Programs could have a
material adverse effect on the Company's business, financial condition and
results of operations and the amount of Title IV Program funds students can
obtain to pay the education costs of attending the ITT Technical Institutes.
ITT has stated in the Solicitation/Recommendation Statement on Schedule 14D-9
filed by ITT with the Securities and Exchange Commission (the "ITT 14D-9") in
response to the Hilton Offer that it is actively exploring opportunities to
enhance the value of ITT. As part of this process, ITT has disclosed in the ITT
14D-9 that it "is taking steps to
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monetize or otherwise realize the value of non-core assets." ITT has disclosed
that as a result, it is exploring possible transactions to dispose of some or
all of the Common Stock of the Company held by ITT. There can be no assurance
that ITT will maintain its ownership interest in the Company. The Company
believes that, if ITT were to decide to dispose of its ownership interest in the
Company, certain types of transactions by which ITT could dispose of such
ownership interest might not result in a change in control of the Company under
U.S. Department of Education regulations; however, if the means of disposition
chosen by ITT result in such a change in control, such change in control could
have the material adverse consequences for the Company described above.
Capital expenditures were $4.0 million in the three months ended March 31, 1997
compared to $1.2 million in the three months ended March 31, 1996. This increase
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). The
Company expects that the capital additions for the full 1997 year will be
approximately $13.0 million or a $5.1 million increase over 1996.
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, 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.
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 ITT divests some or all of its Common Stock
holdings.
-11-
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
-12-
<PAGE>
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: May 8, 1997
By: /s/ Gene A. Baugh
-------------------------------------------------
Gene A. Baugh
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------------------------------------------------------------------------------
<S> <C>
11 Statement re Computation of Per Share Earnings....................
27 Financial Data Schedule...........................................
</TABLE>
S-2
<PAGE>
Exhibit 11
ITT EDUCATIONAL SERVICES, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
------- -------
<S> <C> <C>
Net income $ 6,202 $ 4,835
======= =======
Shares:
Weighted average number
of shares of common
stock outstanding 27,000 27,000
Shares assumed issued
(less shares assumed
purchased for treasury)
on stock options 182 104
------- -------
Outstanding shares for primary
earnings per share calculation 27,182 27,104
======= =======
Earnings per common share: $ 0.23 $ 0.18
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 86,842
<SECURITIES> 0
<RECEIVABLES> 10,346
<ALLOWANCES> (549)
<INVENTORY> 0
<CURRENT-ASSETS> 102,104
<PP&E> 64,160
<DEPRECIATION> (42,731)
<TOTAL-ASSETS> 131,448
<CURRENT-LIABILITIES> 54,937
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 74,624
<TOTAL-LIABILITY-AND-EQUITY> 131,448
<SALES> 0
<TOTAL-REVENUES> 64,476
<CGS> 0
<TOTAL-COSTS> 55,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 453
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,336
<INCOME-TAX> 4,134
<INCOME-CONTINUING> 6,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,202
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
