<PAGE>
FORM 10-K/A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC.
Securities registered pursuant to Section 12(g) of the Act:
NONE
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
$112,246,998
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at January 31, 1997
(assuming solely for the purposes of this calculation that all Directors and
executive officers of the Registrant are "affiliates").
26,999,952
Number of shares of Common Stock, $.01 par value, outstanding at
February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into
this Annual Report on Form 10-K
IDENTITY OF DOCUMENT PARTS OF FORM 10-K INTO WHICH DOCUMENT IS
INCORPORATED
Definitive Proxy Statement for PART III
the Annual Meeting of Shareholders
to be held May 13, 1997
<PAGE>
The Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 is being amended to correct Part IV, Item 14. Specifically,
page 30, which was inadvertently omitted from the Annual Report, is being filed
with this amendment. No other parts of the Annual Report are being amended.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements:
<TABLE>
<CAPTION>
Page No. In
This Filing
-------------
<S> <C>
Report of Independent Accountants.................................. F-1
Statements of Income and Retained Earnings for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994........ F-2
Balance Sheets as of December 31, 1996 and December 31, 1995....... F-3
Statements of Cash Flows for the years ended December 31, 1996,
December 31, 1995 and December 31, 1994........................... F-4
Notes to Financial Statements...................................... F-5
</TABLE>
2. Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts of the Company
for the years ended December 31, 1996, December 31, 1995 and December
31, 1994.
3. Quarterly Results for 1996 and 1995 (unaudited) appear on page
F-11.
4. Exhibits:
A list of exhibits required to be filed as part of this report is
set forth in the Index to Exhibits appearing on page S-3, 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
December 31, 1996.
-30-
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
ITT Educational Services, Inc.
In our opinion, the financial statements listed in the index appearing under
item 14 (a) (1) and (2) on page 30, present fairly, in all material respects,
the financial position of ITT Educational Services, Inc. at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
January 8, 1997, except for Note 10
which is as of February 12, 1997
F - 1
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Tuition $196,692 $171,936 $159,575
Other educational 35,627 29,895 27,332
-------- -------- --------
Total revenue 232,319 201,831 186,907
Costs and Expenses
Cost of educational services 145,197 130,338 121,594
Student services and administrative
expenses 66,546 57,268 53,481
-------- -------- --------
211,743 187,606 175,075
Operating income 20,576 14,225 11,832
Interest income, net 4,119 4,802 232
-------- -------- --------
Income before income taxes 24,695 19,027 12,064
Income taxes 9,844 7,636 4,902
-------- -------- --------
Net income 14,851 11,391 7,162
Retained earnings, beginning of period 21,058 9,667 19,567
Special dividend 0 0 (17,062)
-------- -------- --------
Retained earnings, end of period $ 35,909 $ 21,058 $ 9,667
======== ======== ========
Earnings per common share $ .55 $ .42 $ .32
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 2
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Currents assets
Cash $ 74 $ 595
Restricted cash 5,911 5,037
Cash invested with ITT Corporation 89,808 71,885
Accounts receivable, less allowance for doubtful
accounts of $1,044 and $963 9,378 7,592
Deferred income tax 1,455 950
Prepaids and other current assets 1,823 1,508
-------- --------
Total current assets 108,449 87,567
Property and equipment, net 19,360 18,985
Direct marketing costs 5,774 5,031
Other assets 2,166 2,701
-------- --------
Total assets $135,749 $114,284
======== ========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 12,188 $ 8,336
Accrued compensation and benefits 4,253 4,195
Other accrued liabilities 5,432 6,172
Deferred tuition revenue 43,532 40,063
-------- --------
Total current liabilities 65,405 58,766
Other liabilities 1,652 1,677
-------- --------
Total liabilities 67,057 60,443
-------- --------
Commitments and contingent liabilities (Note 10)
Shareholders' equity
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding
Common stock, $.01 par value, 50,000,000 and 25,000,000
shares authorized, 26,999,952 and 12,000,000
issued and outstanding 270 120
Capital surplus 32,513 32,663
Retained earnings 35,909 21,058
-------- --------
Total shareholders' equity 68,692 53,841
-------- --------
Total liabilities and shareholders' equity $135,749 $114,284
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 3
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,851 $ 11,391 $ 7,162
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,493 7,542 6,855
Provision for doubtful accounts 1,738 1,173 1,803
Deferred taxes (443) (240) 633
Increase/decrease in operating assets
and liabilities:
Accounts receivable (3,524) (2,189) (2,923)
Direct marketing costs (743) 23 178
Accounts payable and accrued liabilities 3,083 1,438 1,051
Prepaids and other assets 220 683 2,327
Deferred tuition revenue 3,469 (908) 6,348
-------- -------- --------
Net cash provided by operating
activities 26,144 18,913 23,434
-------- -------- --------
Cash flows used for investing activities:
Capital expenditures, net (7,868) (8,206) (7,688)
Net increase in cash invested with ITT
Corporation (17,923) (15,975) ( 8,902)
-------- -------- --------
Net cash used for investing activities (25,791) (24,181) (16,590)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, 17,062
net of expenses
Special dividend paid (17,062)
-------- -------- --------
Net cash from financing activities 0 0 0
-------- -------- --------
Net increase (decrease) in cash and
restricted cash 353 (5,268) 6,844
Cash and restricted cash at beginning
of period 5,632 10,900 4,056
-------- -------- --------
Cash and restricted cash at end of period $ 5,985 $ 5,632 $ 10,900
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes $ 10,051 $ 8,168 $ 4,322
Interest 273 550 127
</TABLE>
The accompanying notes are an integral part of these financial statements.
F - 4
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
1. Initial Public Offering and Stock Ownership
On October 11, 1994, the Board of Directors of the Company approved an
initial public offering (the "Offering") of 2,000,000 shares of the Company's
Common Stock and declared a special dividend in the amount of the net proceeds
of the "Offering." The net proceeds and dividend of $17,062 were received and
paid on December 27, 1994. After the "Offering," 83.3% of the Common Stock is
owned by ITT Corporation ("ITT") and 16.7% is owned by others.
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 May 14, 1996, the
shareholders approved an increase in the number of authorized common shares of
Common Stock from 25,000,000 to 50,000,000. 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.
The change in Common Stock and capital surplus can be summarized as
follows:
<TABLE>
<CAPTION>
Common Common Capital
Stock Shares Stock Surplus
------------ ------ -------
<S> <C> <C> <C>
Balance December 31, 1994 and 1995 12,000,000 $120 $32,663
Common Stock Splits 14,999,952 150 (150)
---------- ---- ------
Balance December 31, 1996 26,999,952 $270 $32,513
========== ==== =======
</TABLE>
2. Summary of Accounting Principles and Policies
Business Activities. The Company is a leading college system providing
career-focused, technical degree programs of study. At December 31, 1996,
the Company operated fifty-nine (59) technical institutes throughout the
United States. The Company maintains corporate headquarters in
Indianapolis, Indiana.
Use of Estimates. The preparation of these financial statements, in
conformity with generally accepted accounting principles, includes
estimates that are determined by the Company's management.
Property and Equipment. The Company includes all property and
equipment in the financial statements at cost. Provisions for depreciation
of property and equipment have generally been made using the straight-line
method for financial reporting purposes and accelerated methods for tax
purposes. Estimated useful lives generally range from three to ten years
for furniture and equipment and leasehold improvements. Maintenance,
repairs and renewals not of a capital nature are expensed as incurred.
Fully depreciated assets no longer in use are removed from both the asset
and accumulated depreciation accounts in the year of their retirement. Any
gains or losses on dispositions are credited or charged to income, as
appropriate.
Fair Value of Financial Instruments. The carrying amounts reported in
the balance sheets for cash, restricted cash, cash invested with ITT
Corporation, accounts receivable, accounts payable, other accrued
liabilities and deferred tuition revenue approximate fair value because of
the immediate or short-term maturity of these financial instruments.
Recognition of Revenues. Tuition revenue is recorded on a straight-
line basis over the length of the applicable course. If a student
discontinues training, the revenue related to the remainder of that quarter
is recorded with the amount of refund resulting from the application of
federal, state or accreditation requirements recorded as an expense. On an
individual student basis, tuition earned in excess of cash received is
recorded as accounts receivable, and cash received in excess of tuition
earned is recorded as deferred tuition revenue.
F - 5
<PAGE>
Other educational revenue is comprised of lab fees and textbook sales.
Lab fees are recorded as revenue at the beginning of each quarter. Textbook
sales are recognized when they occur.
Advertising Costs. The Company expenses all advertising costs as
incurred.
Direct Marketing Costs. Direct costs incurred relating to the
enrollment of new students are capitalized using the successful efforts
method. Direct marketing costs include recruiting representatives'
salaries, employee benefits and other direct costs less enrollment fees.
Direct marketing costs are amortized on an accelerated basis over the
average course length of 24 months commencing on the start date.
Direct marketing costs on the balance sheet totaled $5,774 and $5,031
at December 31, 1996 and 1995, respectively, net of accumulated
amortization of $5,065 and $5,099 at those dates, respectively.
Institute Start-Up Costs. Deferred institute start-up costs consist of
all direct costs incurred at a new institute (excluding advertising costs)
that are incurred from the date a lease for a technical institute facility
is entered into until the first class start. Such capitalized costs are
amortized on a straight-line basis over a one year period. At December 31,
1996 and December 31, 1995, deferred start-up costs included in other
assets in the balance sheet totaled $521 and $1,000, respectively, net of
accumulated amortization of $799 and $166 at such dates, respectively.
Income Taxes. The Company is included in the consolidated U.S. federal
income tax return of ITT and determines its income tax provision
principally on a separate return basis in conformity with Statement of
Financial Accounting Standards ("SFAS") No. 109. Under a tax sharing policy
with ITT, income taxes are allocated to members of the U.S. consolidated
group based principally on amounts they would pay or receive if they filed
a separate income tax return. Deferred income taxes are provided on the
differences in the book and tax basis of assets and liabilities recorded on
the books of the Company (temporary differences) at the statutory tax rates
expected to be in effect when such differences reverse. Temporary
differences related to SFAS No. 106, SFAS No. 112, pension and self-
insurance costs are recorded on the books of ITT where the related assets
and liabilities are recorded. ITT pays current federal income taxes on
behalf of the Company, as calculated under the tax sharing policy, and
reflects the funding through the cash invested with ITT Corporation
account.
Earnings Per Common Share. Earnings per common share data are based on
historical net income and the average number of shares of Common Stock
outstanding during each period. After restatement for stock splits
described in Note 1, the number of average shares outstanding in 1996, 1995
and 1994 was 27,153,000, 27,052,000 and 22,561,000, respectively.
3. Related Party Transactions
At the time of the Offering, the Company and ITT entered into various
agreements, which remain in effect, as follows:
Intercompany Activities. ITT provides the Company with certain
centralized treasury and financing functions. The Company transfers all
unrestricted cash receipts to ITT and receives funds from ITT for all
disbursements. Prior to the Offering in 1994, neither the remittances to,
nor advances from, ITT were interest bearing. After the Offering, the
Company receives interest on the average net cash balance held by ITT, at
an interest rate that is set for a 12-month period and is 30 basis points
over the most recently published rate for twelve month treasury bills. The
net of all such cash transfers as well as charges from ITT for expenses
related to the Company's participation in ITT's plans such as pensions,
medical insurance, federal income taxes, etc. resulted in a net balance of
cash invested with ITT as of December 31, 1996 and 1995 of $89,808 and
$71,885, respectively.
ITT also provides certain risk management, tax and pension management
services. The fee (contract service charge) for such services is 0.25% of
the Company's annual revenue. The contract service charges were $578, $504
and $454 for the years ended December 31, 1996, 1995 and 1994,
respectively.
F - 6
<PAGE>
The Company's employees participate in certain employee benefit
programs which are sponsored and administered by ITT. Administrative costs
relating to these services and participation in these plans are charged to
the Company using allocation methods management believes are reasonable.
The Company pays a processing fee related to its participation in ITT's
consolidated medical plan. The processing fees were $280, $464 and $336 in
1996, 1995 and 1994, respectively.
Service Agreements. The Company and ITT entered into service
agreements relating to the provision of certain services by ITT to the
Company. All services historically provided to the Company by ITT continue
to be provided by ITT at comparable cost. Management believes the
statements of income include a reasonable allocation of costs incurred by
ITT which benefit the Company. The Company will be able to obtain advances
from ITT for general corporate purposes in amounts in excess of any cash
invested with ITT up to a maximum of $10,000.
Interest on any loans made to the Company by ITT will accrue at
prevailing market rates (reflecting a spread over a selected interbank
lending rate) which will be determined at the time of any such loan. Any
loans to the Company by ITT will be subject to a condition precedent that
ITT directly or indirectly owns at least 50% of the outstanding common
stock of the Company.
Tax Agreement. ITT and the Company entered into a tax agreement
providing, among other things, that the Company will pay ITT, with respect
to federal income taxes for each period that the Company is included in
ITT's consolidated federal return, that amount that the Company would have
been required to pay had it filed a separate federal income tax return
under the tax sharing policy described in Note 2.
Similarly, with respect to state, corporate, franchise or income taxes
for those states where ITT files a combined or consolidated state return
that includes the Company, the Company will pay as if they filed a separate
tax return. With respect to ITT's consolidated federal and state returns,
the Company will be responsible for any deficiencies assessed with respect
to such returns if such deficiencies relate to the Company. Similarly, the
Company will be entitled to all refunds paid with respect to such returns
that relate to the Company. The Company will be responsible for all taxes,
including assessments, if any, for prior years with respect to all other
taxes payable by the Company.
4. Financial Aid Programs
The Company participates in various federal student financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). Approximately 74% of the Company's 1996 revenue was derived from
funds distributed under these programs.
The Company participates in the Federal Perkins Loan ("Perkins") program
and administers on behalf of the federal government a pool of Perkins student
loans which aggregated $8,235 and $8,671 at December 31, 1996 and 1995,
respectively. The Company has recorded in its financial statements only its
aggregate mandatory contributions to this program which at December 31, 1996 and
1995 aggregated $1,572 and $1,606, respectively. The Company has provided $955
for potential losses related to funds committed by the Company at December 31,
1996 and 1995.
The Title IV Programs are administered by the Company in separate accounts
as required by government regulation. The Company is required to administer the
funds in accordance with the requirements of the Higher Education Act and U.S.
Department of Education regulations and must use due diligence in approving and
disbursing funds and servicing loans. In the event the Company does not comply
with federal requirements, or if student loan default rates are at a level
considered excessive by the federal government, the Company could lose its
eligibility to participate in the Title IV Programs or could be required to
repay funds determined to have been improperly disbursed. Management believes
that it is in substantial compliance with the federal requirements.
5. Restricted Cash
The Company participates in the Electronic Funds Transfer ("EFT") program
through the U.S. Department of Education. All monies transferred to the Company
via the EFT system are subject to certain holding period
F - 7
<PAGE>
restrictions, generally from 3 to 7 days, before they can be drawn into the
Company's cash account. Such amounts are classified as restricted until they
are applied to the students accounts.
6. Property and Equipment
Fixed assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C>
Furniture and equipment $ 52,317 $ 51,045
Leasehold improvements 7,017 6,620
Land and land improvements 110 110
Construction in progress 1,142 414
-------- --------
60,586 58,189
Less accumulated depreciation (41,226) (39,204)
-------- --------
$ 19,360 $ 18,985
======== ========
</TABLE>
7. Taxes
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current
Federal $ 8,673 $ 6,571 $ 3,648
State 1,614 1,305 621
-------- -------- -------
10,287 7,876 4,269
-------- -------- -------
Deferred
Federal (370) (200) 543
State (73) (40) 90
-------- -------- -------
(443) (240) 633
-------- -------- -------
$ 9,844 $ 7,636 $ 4,902
======== ======== =======
</TABLE>
Deferred tax assets (liabilities) include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Direct marketing costs $(2,263) $(1,973) $(1,982)
Institute start-up costs (204) (392) (495)
Depreciation 785 744 102
Reserves and other 1,828 1,324 1,838
------- ------- -------
Net deferred tax assets(liabilities) $ 146 $ (297) $ (537)
======= ======= =======
</TABLE>
Differences between effective income tax rates and the statutory U.S.
federal income tax rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 4.1% 4.3% 3.8%
Permanent differences and other .8% .8% 1.8%
---- ---- ----
Effective income tax rates 39.9% 40.1% 40.6%
==== ==== ====
</TABLE>
F - 8
<PAGE>
8. Retirement Plans
Employee Pension Benefits. The Company participates in the Retirement
Plan for Salaried Employees of ITT Corporation, a noncontributory defined
benefit, final average pay pension plan which covers substantially all
employees of the Company. ITT determines the aggregate amount of pension
expense on a consolidated basis based on actuarial calculations and such
expense is allocated to participating units on the basis of compensation
covered by the plan. For the years ended December 31, 1996, 1995 and 1994,
pension expense as a percentage of covered compensation for employees over
age 21 who had more than one year of service was 6.57%, 5.52% and 7.30%,
respectively, which resulted in charges to the Company of $3,783, $2,983
and $3,642, respectively. The amount recorded as annual pension expense is
paid to ITT through the cash invested with ITT Corporation account on a
monthly basis.
Retirement Savings Plan. The Company participates in The ITT 401K
Retirement Savings Plan (formerly known as the ITT Investment and Savings
Plan for Salaried Employees), a defined contribution pension plan which
covers substantially all employees of the Company. The Company's non-
matching and matching contributions under this plan are provided for
through the issuance of common shares of ITT. The costs of the non-matching
and matching Company contributions are charged by ITT to the Company. For
the years ended December 31, 1996, 1995 and 1994, the costs of providing
this benefit (including an allocation of the administrative costs of the
plan) were $1,749, $1,369 and $1,259, respectively.
9. Stock Option and Key Employee Incentive Plans
The Company adopted, effective at the date of the Offering, the ITT
Educational Services, Inc. 1994 Stock Option Plan (the "1994 Plan"). The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
in the financial statements for the 1994 Plan. Compensation costs for the 1994
Plan calculated using the Black-Scholes method in accordance with SFAS No. 123
are not significant.
Under the 1994 Plan, a maximum of 405,000 shares of Common Stock may be
issued upon exercise of options. The option price may not be less than 100% of
the fair market value of the Common Stock on the date of grant and the options
will vest and become exercisable in three equal annual installments commencing
with the first anniversary of the grant. A special grant of 135,000 stock
options (at an option price of $4.44) was made to certain executive officers of
the Company at the time of the Offering, and an additional 56,250 stock options
(at an option price of $8.89) were granted in 1995. In 1996, 67,500 stock
options were granted at an option price of $11.94. All amounts reflect the April
15, 1996 and October 21, 1996 3 for 2 Common stock splits as mentioned in Note
1.
During 1996, 1995 and 1994, no options were exercised, expired or canceled.
At December 31, 1996, 108,750 stock options are exercisable.
10. Commitments and Contingent Liabilities
Lease Commitments. The Company leases substantially all of its
facilities under operating lease agreements. A majority of the operating
leases contain renewal options that can be exercised after the initial
lease term. Renewal options are generally for periods of one to five years.
All operating leases will expire over the next fourteen years and
management expects that leases will be renewed or replaced by other leases
in the normal course of business. There are no material restrictions
imposed by the lease agreements and the Company has not entered into any
significant guarantees related to the leases. The Company is required to
make additional payments under the operating lease terms for taxes,
insurance and other operating expenses incurred during the operating lease
period.
F - 9
<PAGE>
Rent expense was composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
<S> ------- ------- -------
<C> <C> <C>
Minimum rentals
Contingent rentals $17,131 $15,842 $14,304
249 223 219
------- ------- -------
$17,380 $16,065 $14,523
</TABLE> ======= ======= =======
Future minimum rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 17,003
1998 18,568
1999 16,534
2000 15,460
2001 10,350
Later Years 33,913
--------
$111,828
========
</TABLE>
Operating leases related to four institutes that are still in the
developmental phase at December 31, 1996 include special clauses that allow the
Company to terminate the lease within one year of signing the lease if the new
school is not accredited. If this were to occur, the Company would be liable, at
the date of termination, for an agreed upon termination cost based on the
lessor's tenant improvement costs. The future minimum rental payments schedule
above includes such termination costs for the four institutes. If the institutes
are accredited as expected, aggregate additional minimum rental payments of
$3,742 will be required over the lease term.
Rent expense and future minimum rental payments related to equipment leases
are not material.
Contingent Liabilities. In December, 1994, the Company entered into an
agreement with an unaffiliated, private funding source to provide loans to
students of certain technical institutes. The agreement requires the Company to
guarantee repayment of the loans. Outstanding loans at December 31, 1996
aggregated $1,853. Additionally, the Company is required to maintain on deposit
with the lender 15% of the aggregate principal balance of outstanding loans.
This deposit is included in other assets in the balance sheet.
The Company has a number of pending legal and other claims arising out of
the normal course of business. Among the legal actions currently pending 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.
F - 10
<PAGE>
<TABLE>
<CAPTION>
ITT EDUCATIONAL SERVICES, INC.
QUARTERLY RESULTS
FOR 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
------------------------------------------
1995 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- --------
<S> <C> <C>
Revenues $51,169 $44,969 $56,017 $49,676 $201,831
Cost and expenses $45,682 $46,143 $48,466 $47,315 $187,606
Operating income $ 5,487 $(1,174) $ 7,551 $ 2,361 $ 14,225
Interest income, net $ 1,212 $ 801 $ 1,438 $ 1,351 $ 4,802
Net income $ 4,026 $ (224) $ 5,402 $ 2,187 $ 11,391
Earnings per share** $ 0.15 $ (0.01) $ 0.20 $ 0.08 $ 0.42
1996
Revenues $57,103 $51,568 $65,113 $58,535 $232,319
Cost and expenses $49,992 $51,954 $55,072 $54,725 $211,743
Operating income $ 7,111 $ (386) $10,041 $ 3,810 $ 20,576
Interest income, net $ 947 $ 909 $ 1,076 $ 1,187 $ 4,119
Net income $ 4,835 $ 314 $ 6,670 $ 3,032 $ 14,851
Earnings per share** $ 0.18 $ 0.01 $ 0.25 $ 0.11 $ 0.55
Supplemental data:
Operating losses at
new institutes,
before income taxes*
1995 $ 2,091 $ 2,307 $ 1,523 $ 1,202 $ 7,123
1996 $ 1,405 $ 2,230 $ 1,227 $ 859 $ 5,721
</TABLE>
*Represents operating losses before income taxes, including amortization of
deferred pre-opening costs, for institutes in the first twenty-four months
after their first class start.
**Restated to reflect stock splits in April 1996 and November 1996.
F-11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BY: /s/Rene R. Champagne
---------------------------------------
Dated: February 9, 1998 Rene R. Champagne
Chairman, President and Chief Executive
Officer
S-1
<PAGE>
SCHEDULE II
ITT EDUCATIONAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING CHARGED TO BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- - -------------------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
Year Ended December 31,
1996 ................ $ 963 $ 1,738 ($ 1,657) $ 1,044
-------- ------- ------- -------
Year Ended December 31,
1995 ................ $ 1,171 $ 1,173 ($ 1,381) $ 963
-------- ------- ------- -------
Year Ended December 31,
1994 ................ $ 1,146 $ 1,803 ($ 1,778) $ 1,171
-------- ------- ------- -------
FFEL Reserve/(1)/:
Year Ended December 31,
1996 ................ $ 955 $ 0 $ 0 $ 955
-------- ------- ------- -------
Year Ended December 31,
1995 ................ $ 893 $ 62 $ 0 $ 955
-------- ------- ------- -------
Year Ended December 31,
1994 ................ $ 834 $ 59 $ 0 $ 893
-------- ------- ------- -------
- - ----------------------
(1) Represents Federal Family Education Loan/Perkins Loan programs.
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
No.
Exhibit In This
No. Description Filing
- - ------- ------------------------------------------------------------------------------ -------
<S> <C> <C>
3.1 (1) Restated Certificate of Incorporation, as Amended to Date...................
3.2 (2) Amended By-laws.............................................................
10.1 (2) Registration Rights Agreement between the Company and ITT...................
10.2 (2) Tax Sharing Agreement between the Company and ITT...........................
10.3 (2) Intercompany Agreement between the Company and ITT..........................
10.4 (2) Trade Name and Service Mark License Agreement between the Company
and ITT.....................................................................
10.5 (2) Employee Benefits and Administrative Services Agreement between the
Company and ITT.............................................................
10.6 (2) Treasury Services and Credit Facilities Agreement between the Company
and ITT....................................................................
10.7 *(3) ITT Educational Services, Inc. 1994 Stock Option Plan......................
11 Statement re Computation of Per Share Earnings.................................
23 Consent of Price Waterhouse LLP................................................
27 Financial Data Schedule........................................................
</TABLE>
- - ----------------
*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 the same exhibit number to the Company's
1996 second fiscal quarter report on Form 10-Q is incorporated herein by
reference.
(2) The copy of this exhibit filed as the same exhibit number to the Company's
1994 Annual Report on Form 10-K is incorporated herein by reference.
(3) The copy of this exhibit filed as the same exhibit number to the Company's
Registration Statement on Form S-1 (Registration No. 33-78272) is
incorporated herein by reference.
All other exhibits listed in this Index to Exhibits are incorporated by
reference to the Company's Report on Form 10-K for the year ended December 31,
1996.
S-3
