<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1998
REGISTRATION NO. 333-46267
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ITT EDUCATIONAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-2061311
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5975 CASTLE CREEK PARKWAY NORTH DRIVE
P.O. BOX 50466
INDIANAPOLIS, INDIANA 46250-0466
(317) 594-9499
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CLARK D. ELWOOD
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
5975 CASTLE CREEK PARKWAY NORTH DRIVE
P.O. BOX 50466
INDIANAPOLIS, INDIANA 46250-0466
(317) 594-9499
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES A. ASCHLEMAN MORTON A. PIERCE
BAKER & DANIELS RICHARD D. PRITZ
300 NORTH MERIDIAN STREET DEWEY BALLANTINE LLP
SUITE 2700 1301 AVENUE OF THE AMERICAS
INDIANAPOLIS, INDIANA 46204 NEW YORK, NEW YORK 10019-6092
(317) 237-0300 (212) 259-8000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
is practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par
value...................... 13,050,000 shares $30.125 $393,131,250 $98,015
=================================================================================================================================
</TABLE>
(1) Includes 1,700,000 shares as to which the Underwriters have been granted an
option to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) based on the average of the high and low sale prices of the
Common Stock on the New York Stock Exchange, Inc. on April 22, 1998.
(3) Amount previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 8, 1998
11,350,000 SHARES
ITT EDUCATIONAL SERVICES, INC. LOGO
COMMON STOCK
($.01 par value)
------------------------
All of the shares of common stock, $.01 par value (the "Common Stock"), of ITT
Educational Services, Inc. (the "Company") offered hereby (the "Offering") are
being offered by the Selling Stockholder named herein under "Principal and
Selling Stockholder." The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholder.
The Common Stock of the Company is listed on the New York Stock Exchange, Inc.
(the "NYSE") under the symbol "ESI." On May 7, 1998, the last reported sale
price of the Common Stock on the NYSE was $26.75 per share. See "Price Range of
Common Stock."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE DISCOUNTS AND SELLING
TO PUBLIC COMMISSIONS STOCKHOLDER(1)
--------- ------------- --------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(2).................................... $ $ $
</TABLE>
(1) Before deduction of expenses payable by the Company estimated to be
$1,000,000.
(2) The Selling Stockholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase a maximum of
1,700,000 additional shares from the Selling Stockholder to cover over-
allotments of shares. If the option is exercised in full, the total Price to
Public will be $ , Underwriting Discounts and Commissions will be
$ and proceeds to the Selling Stockholder will be $ .
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that the shares of Common
Stock will be ready for delivery on or about , 1998, against
payment in immediately available funds.
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
PROSPECTUS DATED , 1998
<PAGE> 3
[LOGO] ITT EDUCATIONAL SERVICES, INC.
[PHOTO OF STUDENTS [PHOTO OF STUDENTS
IN CLASS] IN CLASS]
[PHOTO OF STUDENTS [PHOTO OF STUDENTS
AND INSTRUCTOR IN AND INSTRUCTOR IN
CLASS] CLASS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
THE COMPANY: ITT Educational Services, Inc. (ESI) is a leading proprietary
provider of technology-oriented programs of study. ESI operates 63 ITT
Technical Institutes in 27 states which predominantly provide career-focused,
degree programs to approximately 24,000 students. Headquartered in
Indianapolis, Indiana, ESI has been actively involved in the higher education
community in the United States since 1969.
[PHOTO OF STUDENTS [PHOTO OF STUDENTS
IN CLASS] IN CLASS]
[PHOTO OF STUDENTS
IN CLASS]
[PHOTO OF STUDENTS [PHOTO OF STUDENTS
IN CLASS] AND INSTRUCTOR IN
CLASS]
[PHOTO OF STUDENTS
AND INSTRUCTOR IN
CLASS]
The mission of ITT Educational Services, Inc. is to provide
a quality postsecondary education and the services
that can help a diverse student body begin to prepare for
career opportunities in various fields involving technology.
We will strive to establish an environment
for students and employees which promotes professional growth, encourages each
person to achieve his or her highest potential and fosters ethical
responsibility and individual creativity within a framework of
equal opportunity.
<PAGE> 5
THE CURRICULA: Curriculum offerings, leading primarily to associate's and
bachelor's degrees, are designed to help students begin to prepare for career
opportunities in various fields involving technology, including electronics,
computer-aided drafting, industrial design, automated manufacturing, computer
visualization, chemical technology, telecommunications and other areas. One
ITT Technical Institute also offers a master's degree program in project
management. Programs of study vary among ITT Technical Institute campuses.
ITT Technical Institute programs of study blend traditional academic content
with applied learning concepts, with a significant portion devoted to practical
study in a lab environment. Advisory commitees, comprised of representatives
of local emoloyers, help each ITT Technical Institute periodically assess and
update curricula, equipment and laboratory design.
[PHOTO OF STUDENT [PHOTO OF [PHOTO OF STUDENTS
IN CLASS] SCHOOL BUILDING] AND INSTRUCTOR IN
CLASS]
[PHOTO OF STUDENTS [PHOTO OF STUDENTS
AND INSTRUCTOR IN IN CLASS]
CLASS]
MARKET SHARE: According to U.S. Department of Education data, ITT Technical
Institutes granted the largest percentage (16.3 percent) of the 26,824
associate's degrees awarded in the U.S. in electronics and electronics-related
programs in 1994-95 school year (the latest year available). ITT Technical
Institutes also granted the largest share (23.0 percent) of the 8,648
associate's degrees awarded in the U.S. in drafting programs during the
1994-1995 school year.
THE STUDENTS' SCHEDULE: Students attend classes year-round with convenient
breaks provided throughout the year. Year-round classes enable students to
complete bachelor's degree programs and enter the work force full-time in as
few as three years. Bachelor's degree programs are offered only at select
campuses. Classes are generally offered in four-hour sessions five days a week
and are typically available in the morning, afternoon and evening, depending on
student enrollment. This class schedule offers flexibility to students to
pursue part-time employment opportunities.
<PAGE> 6
THE ITT TECHNICAL INSTITUTE NETWORK
ITT Educational Services, Inc. operates more than
60 ITT Technical Institutes across the country.
[MAP OF U.S.]
ALABAMA
Birmingham
ARIZONA
Phoenix
Tucson
ARKANSAS
Little Rock
CALIFORNIA
Anaheim (Los Angeles)
Hayward (San Francisco)
Lathrop (Stockton)
Oxnard (Los Angeles)
Rancho Cordova (Sacramento)
San Bernardino (Los Angeles)
San Diego
Santa Clara (San Francisco)
Sylmar (Los Angeles)
Torrance (Los Angeles)
West Covina (Los Angeles)
COLORADO
Thornton (Denver)
FLORIDA
Fort Lauderdale
Jacksonville
Maitland (Orlando)
Miami
Tampa
IDAHO
Boise
ILLINOIS
Burr Ridge (Chicago)
Hoffman Estates (Chicago)
Matteson (Chicago)
INDIANA
Fort Wayne
Indianapolis
Newburgh (Evansville)
KENTUCKY
Louisville
LOUISIANA
St. Rose (New Orleans)
MASSACHUSETTS
Framingham (Boston)
MICHIGAN
Grand Rapids
Troy (Detroit)
MISSOURI
Arnold (St. Louis)
Earth City (St. Louis)
NEBRASKA
Omaha
NEVADA
Henderson (Las Vegas)
NEW MEXICO
Albuquerque
NEW YORK
Albany
Getzville (Buffalo)
Liverpool (Syracuse)
OHIO
Dayton
Norwood (Cincinnati)
Strongsville (Cleveland)
Youngstown
OREGON
Portland
PENNSYLVANIA
Mechanicsburg (Harrisburg)
Monroeville (Pittsburgh)
Pittsburgh
SOUTH CAROLINA
Greenville
TENNESSEE
Knoxville
Memphis
Nashville
TEXAS
Arlington
Austin
Garland (Dallas)
Houston (North)
Houston (South)
Houston (West)
Richardson (Dallas)
San Antonio
UTAH
Murray (Salt Lake City)
VIRGINIA
Norfolk
Richmond
WASHINGTON
Bothell (Seattle)
Seattle
Spokane
WISCONSIN
Greenfield (Milwaukee)
[LOGO] Opened prior to 1998 [LOGO] Opened or planned to open in 1998
<PAGE> 7
DOCUMENTS INCORPORATED BY REFERENCE
The Company hereby incorporates in this Prospectus by reference thereto and
makes a part hereof (i) the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, (ii) the Company's Current Report on Form 8-K
dated February 23, 1998, (iii) the Company's Current Report on Form 8-K dated
March 31, 1998, (iv) the Company's Current Report on Form 8-K dated April 16,
1998 and the amendment thereto on Form 8-K/A filed on April 17, 1998 and (v) the
Company's Quarterly Report on Form 10-Q for the three months ended March 31,
1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
after the date of this Prospectus and prior to the termination of the Offering
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the date of filing such documents. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document that is also
incorporated or is deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus. Subject to the foregoing, all information appearing in this
Prospectus is qualified in its entirety by the information appearing in the
documents incorporated by reference.
The Company undertakes to provide without charge, upon written or oral
request, to each person to whom this Prospectus is delivered, a copy of any or
all such documents referenced above other than exhibits to such documents.
Requests for such copies should be directed to Clark D. Elwood, Senior Vice
President, General Counsel and Secretary, ITT Educational Services, Inc., 5975
Castle Creek Parkway North Drive, P.O. Box 50466, Indianapolis, Indiana
46250-0466, telephone (317) 594-9499.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Room 3190, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, material filed by the Company can be inspected
and copied at the offices of the NYSE, 20 Broad Street, New York, New York
10005. The Commission maintains a site on the World Wide Web at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including the Company.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules filed as a part thereof,
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to such Registration Statement, including the exhibits and schedules
filed as a part thereof. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein are not
necessarily complete and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. The Registration Statement, including the
exhibits and schedules filed as a part thereof, may be inspected without charge
at the public reference facilities maintained by the Commission as set forth in
the preceding paragraph. Copies of these documents may be obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
3
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Company's Financial Statements and Notes thereto included
elsewhere or incorporated by reference in this Prospectus. Prospective investors
should consider carefully, among other things, the information set forth under
"Risk Factors" in this Prospectus. Unless otherwise indicated, all information
in this Prospectus (i) gives effect to a three-for-two stock split of the Common
Stock effected as a stock dividend on April 15, 1996, (ii) gives effect to a
three-for-two stock split of the Common Stock effected as a stock dividend on
November 4, 1996 and (iii) assumes no exercise of the over-allotment option. As
used in this Prospectus, unless the context indicates otherwise, the term
"Company" refers to ITT Educational Services, Inc., including all of its
educational institutions; the term "Starwood" refers collectively to Starwood
Hotels & Resorts Worldwide, Inc., a Maryland corporation formerly known as
Starwood Lodging Corporation ("Starwood, Inc."), and Starwood Hotels & Resorts,
a Maryland real estate investment trust formerly known as Starwood Lodging Trust
or Starwood Hotels & Resorts Trust ("Starwood Trust"), and their subsidiaries
other than the Company; the term "ITT" refers to ITT Corporation, a Nevada
corporation, and its subsidiaries other than the Company; the terms "ITT
Technical Institutes," "technical institutes" or "institutes" (in singular or
plural form) refer to educational institutions owned and operated by the
Company; and the term "institution" means a main campus and its additional
locations or branch campuses, if any (hereinafter "campus group" in singular or
plural form).
THE COMPANY
OVERVIEW
ITT Educational Services, Inc. is a leading proprietary provider of
technology-oriented postsecondary degree programs in the United States based on
revenues and student enrollment. The Company offers associate, bachelor and
master degree programs and non-degree diploma programs to approximately 24,000
students through 63 ITT Technical Institutes located in 27 states. As of
December 31, 1997, approximately 97% of ITT Technical Institute students were
enrolled in a degree program, with approximately 74% enrolled in programs
relating to electronics engineering technology ("EET") and approximately 23%
enrolled in programs relating to computer-aided drafting technology ("CAD").
While most graduates of ITT Technical Institutes are initially employed by
numerous small, technology-oriented companies, employers have also included well
recognized corporations, such as AT&T, Boeing, Intel, MCI, Microsoft, Motorola,
IBM and General Electric, and many federal and local government agencies. The
Company has provided career-oriented education programs for 32 years and its
schools have graduated over 125,000 students since 1976.
The Company has experienced significant growth, acquiring three and
establishing 50 new technical institutes since January 1, 1981. Of the 63
institutes currently operating, 20 have been established since January 1, 1993.
The number of students attending ITT Technical Institutes has increased 32.1%
from 18,539 at December 31, 1992 to 24,498 at December 31, 1997. Total revenues
from the ITT Technical Institutes have increased 74.0% from $150.4 million
(excluding discontinued operations) in 1992 to $261.7 million in 1997. The
Company opened three new technical institutes in 1997 and one new technical
institute in March 1998. The Company intends to continue expanding by opening
new technical institutes (including five additional new institutes in the
remainder of 1998) and offering a broader range of programs at its institutes.
The Company expects that the demand for postsecondary education will
continue to increase over the next several years as a result of favorable
demographic, economic and social trends. These trends include, based on data
from the United States Department of Education and data collected in the Current
Population Survey conducted by the Bureau of the Census, (a) 24% projected
growth in the number of new high school graduates from approximately 2.5 million
in 1994 to approximately 3.1 million in 2004, (b) the relatively small
percentage of adults over age 25 who possess a bachelor degree (approximately
23% in 1995), (c) an increasing number of high school graduates attending
postsecondary educational institutions (65% in 1996 versus 53% in 1983) and (d)
a heightened recognition of the importance of postsecondary education to an
individual's career prospects.
4
<PAGE> 9
The Company believes that it is well positioned to take advantage of the
increasing demand for postsecondary education programs for the following
reasons:
Employment Oriented Education. ITT Technical Institutes offer
curricula designed to teach the technical knowledge and skills desired by
many employers for entry-level positions. Unlike many two-and four-year
colleges, each undergraduate curriculum offered by ITT Technical Institutes
has been designed, after consultation with employers, to help graduates
begin to prepare for careers in various fields involving technology. The
Company believes that the strength of its programs and career services is
reflected in its graduate employment rates. Based on information provided
by graduates and employers, approximately 90% of the ITT Technical
Institutes' 1997 graduates, other than graduates who continued in a
bachelor degree program at an ITT Technical Institute, had obtained
employment or were already employed in fields involving their programs of
study as of April 24, 1998, the end of the most recently completed
statistical year.
Programs Designed for the Convenience of Students. Each ITT Technical
Institute operates year-round and undergraduate programs are offered on a
quarterly basis, typically with four 12-week quarters during a year. This
year-round format allows students to complete their program of study and
enter the work force more rapidly than students attending traditional
colleges. Students are better able to be employed while attending ITT
Technical Institutes than while attending traditional colleges, because
classes are typically offered in four-hour sessions five days a week and
are generally available in the morning, afternoon and evening. Programs of
study are substantially standardized throughout the ITT Technical
Institutes, enabling students to transfer, if necessary, to the same
program offered at another ITT Technical Institute with less disruption to
their education.
Financial Strength and Regulatory Compliance. Management believes
that the Company's financial strength enables it to capitalize on expansion
opportunities and is an important factor in its ability to comply with
federal and state regulatory requirements.
BUSINESS STRATEGY
The Company has multiple opportunities for growth and has developed a
business plan to increase revenues by increasing the number of programs of study
and students at existing ITT Technical Institutes while adding additional
locations to enhance operating efficiencies throughout the Company. Principal
elements of this plan include the following:
ENHANCE RESULTS AT THE SCHOOL LEVEL
Increase Enrollments at Existing Schools. ESI has successfully
increased student enrollment. Total student enrollment at ITT Technical
Institutes open for more than 24 months increased 6.2% from December 31,
1996 to December 31, 1997 and 7.2% from December 31, 1995 to December 31,
1996. Management believes that current demographic trends will support
increased enrollment of high school graduates. In addition, the Company
intends to increase recruiting efforts aimed at increasing enrollments of
working adults.
Broaden Availability of Current Program Offerings. The Company
intends to continue to expand program offerings at existing schools with
the objective of offering at least three programs at each ITT Technical
Institute. Since January 1, 1993, the Company has increased the number of
institutes which offer three or more programs from 16 to 29. The Company
increased the number of program offerings at three existing ITT Technical
Institutes in March 1998 and intends to increase the number of program
offerings at approximately nine additional existing institutes in the
remainder of 1998. Management believes that the introduction of higher
level programs at additional ITT Technical Institutes will attract more
students and increase the number of students continuing their studies
beyond the associate degree level.
Develop or Acquire Additional Degree Programs. The Company also plans
to introduce programs in additional fields of study and at different degree
levels. ESI has introduced three new degree programs
5
<PAGE> 10
since December 1995, which had a total of 319 students enrolled at December
31, 1997. The Company believes that the development and introduction of new
programs attract a broader base of students and motivate current students
to extend their studies. ESI intends to test an associate degree program in
Computer Network Systems Technology ("CNS") at one institute in September
1998 to target the growing need for technically skilled personnel in the
computer systems field. The new CNS program will be considered for testing
at additional institutes thereafter.
Extend Total Program Time. By increasing the number of institutes
that offer graduates of the eight- and six-quarter associate degree
programs (which are the primary program offerings at most institutes) an
additional four or six quarters of study, respectively, in which they can
earn a bachelor degree, the Company has been able to extend the total
program time for which a student can enroll. As a result, the average total
program time for which ITT Technical Institute students have enrolled has
increased from 18 months in 1986 to 24 months in 1997. The Company expects
that the average total program time for which ITT Technical Institute
students enroll will increase further as additional bachelor degree
programs are added.
Improve Student Outcomes. The Company seeks to improve the graduation
and graduate employment rates of the undergraduate students at ITT
Technical Institutes by providing extensive academic services and career
services. From 1993 through 1997, the percent of ITT Technical Institute
graduates (other than graduates who continued in a bachelor degree program
at an ITT Technical Institute) who were employed in fields involving their
programs of study increased from 83% to 90%.
INCREASE THE NUMBER OF ITT TECHNICAL INSTITUTES
The Company plans to add new ITT Technical Institutes at sites
throughout the United States. The Company opened three new technical
institutes in 1997 and one new technical institute in March 1998 and
intends to open five additional new technical institutes in the remainder
of 1998. The Company also intends to continue to evaluate the acquisition
of schools located in markets where ITT Technical Institutes are not
presently located.
INCREASE MARGINS BY LEVERAGING FIXED COSTS AT SCHOOL AND HEADQUARTERS
LEVELS
By optimizing school capacity and class size, the Company has the
ability to gain additional revenues from increased enrollment without
incurring a proportionate increase in fixed costs at the institutes. In
addition, centralization of management functions and the implementation of
operational uniformity among its 63 institutes have resulted in substantial
operating efficiencies. Expenses incurred at headquarters (including the
district offices) declined as a percentage of revenues from 6.8% in 1993 to
5.3% in 1997 as a result of increased revenues and these operating
efficiencies.
RECENT DEVELOPMENTS
Starwood/ITT Merger. On February 23, 1998, Starwood completed the
acquisition of ITT in accordance with the Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997 (the "Merger Agreement") among
Starwood, Inc., Chess Acquisition Corp., a Nevada corporation and a subsidiary
of Starwood, Inc. ("Chess"), Starwood Trust and ITT. Pursuant to the Merger
Agreement, Chess was merged with and into ITT (the "Merger") and ITT became a
subsidiary of Starwood, Inc. Starwood is the largest hotel and gaming company in
the world in terms of revenue and owns, manages or franchises a geographically
diversified portfolio of approximately 650 hotel properties.
ITT holds 22,500,000 shares, or 83.3%, of the Company's outstanding Common
Stock. Accordingly, the Merger constituted a change in control of the Company
and its ITT Technical Institutes under the regulations of the U.S. Department of
Education ("DOE") and most state education authorities. As a result, each ITT
Technical Institute campus group became ineligible to participate in federal
student financial aid programs as of the date of the Merger. 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 DOE.
The DOE's approval was on a provisional basis, which is the DOE's practice for
all institutions following a change in control. See
6
<PAGE> 11
"Risk Factors -- Potential Adverse Effects of Regulation -- Change in Control"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997 -- Change in Control Expenses."
Starwood, Inc. has announced that it is exploring a range of disposition
strategies for the Company. To that end, the Offering is being made hereby.
Although the Offering will be considered a change in control by certain state
education authorities, it will not be considered a change in control by the DOE
or the two accrediting commissions that accredit the Company's institutes. The
Company has obtained all approvals of the Offering from those state education
authorities that require approval before the Offering occurs. Future sales or
transfers of shares of Common Stock by ITT could result in a change in control
of the Company. ITT has agreed not to make any such sales or transfers that
would cause a change in control of the Company until the Company has received
all of the required prior approvals from the applicable federal and state
education authorities. See "Risk Factors -- Potential Adverse Effects of
Regulation -- Change in Control" and "Relationship with Selling Stockholder and
Related Transactions."
THE OFFERING
Common Stock offered by the Selling
Stockholder......................... 11,350,000 shares
Common Stock outstanding.............. 26,999,952 shares(1)
NYSE Symbol........................... ESI
- ---------------
(1) Excludes (i) 810,000 shares of Common Stock issuable upon the exercise of
outstanding options (of which options for 266,250 shares are currently
exercisable) and (ii) an aggregate of 3,645,000 shares of Common Stock
reserved for issuance under the 1997 ITT Educational Services, Inc.
Incentive Stock Plan (the "1997 Stock Plan") and the ITT Educational
Services, Inc. 1994 Stock Option Plan (the "1994 Stock Option Plan" and,
together with the 1997 Stock Plan, the "Stock Plans").
7
<PAGE> 12
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The following table sets forth certain financial data for the Company. This
information should be read in conjunction with the Financial Statements and
Notes thereto appearing elsewhere or incorporated by reference in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total revenue..................... $ 72,287 $ 64,476 $261,664 $232,319 $201,831 $186,907 $168,997
Operating income.................. 10,970 8,956 26,223 20,576 14,225 11,832 13,839
Interest income, net(1)........... 1,244 1,380 5,565 4,119 4,802 232 80
Income before income taxes........ 12,214 10,336 31,788 24,695 19,027 12,064 13,919
Net income........................ 7,328 6,202 19,123 14,851 11,391 7,162 8,314
Earnings per share (basic and
diluted)(2)..................... $.27 $.23 $.71 $.55 $.42 $.32 $.37
OTHER OPERATING DATA:
EBITDA(3)......................... $ 13,184 $ 10,914 $ 34,162 $ 28,069 $ 21,767 $ 18,687 $ 20,182
Operating losses from new
technical institutes before
income taxes(4)................. $ 1,060 $ 964 $ 3,165 $ 5,721 $ 7,123 $ 7,316 $ 2,914
Capital expenditures, net......... $ 2,265 $ 4,027 $ 11,465 $ 7,868 $ 8,206 $ 7,688 $ 6,679
Number of students at end of
period.......................... 23,879 22,172 24,498 22,633 20,618 20,668 19,860
Number of technical institutes at
end of period................... 63 59 62 59 56 54 48
AT
MARCH 31, AT DECEMBER 31,
----------- -------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
BALANCE SHEET DATA:
Cash, restricted cash and cash
invested with ITT............... $ 96,906 $ 98,689 $ 95,793
Total current assets.............. 115,458 112,958 108,449
Property and equipment less
accumulated depreciation........ 22,937 22,886 19,360
Total assets...................... 148,787 145,914 135,749
Total current liabilities......... 51,463 55,946 65,405
Shareholders' equity.............. 95,143 87,815 68,692
</TABLE>
- ---------------
(1) See Note 3 of Notes to Financial Statements for information concerning
intercompany interest between the Company and ITT. Prior to the Company's
initial public offering in December 1994 (the "Initial Public Offering"),
the Company did not receive interest on the full amount of net cash balances
invested with ITT and was assessed an interest charge based on an allocation
of the consolidated debt of ITT. After the Initial Public Offering and until
February 5, 1998, the Company received interest from ITT on the amount of
any net cash balances invested with ITT and no longer was subject to an
interest charge based on such an allocation. Since February 5, 1998, the
Company has performed its own cash management functions and no longer has
any cash invested with ITT. Depending upon current interest rates on
short-term investments, the Company may not be able to obtain the same
yields on its cash balances that were being paid by ITT. Accordingly,
interest income, net may decrease in 1998.
(2) Earnings per share data are based on historical net income and the number of
shares of Common Stock outstanding during each period after giving
retroactive effect to the three-for-two stock splits in April and November
1996. Earnings per share for all periods have been calculated in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
(3) EBITDA represents earnings before interest and financial charges, income
taxes, depreciation and amortization. The Company has included information
concerning EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because it understands that it is
used by certain investors as one measure of an issuer's financial
performance. EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's performance or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) or as a measure of liquidity.
(4) Operating losses from new technical institutes before income taxes
represents operating losses before income taxes, including amortization of
deferred pre-opening costs, for institutes in the first 24 months after
their first class start.
8
<PAGE> 13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any shares of Common Stock offered hereby.
This Prospectus contains certain statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act (and Section
21E of the Exchange Act). These forward-looking statements are based on the
beliefs of, as well as assumptions made by and information currently available
to, the Company's management. All statements which are not statements of
historical fact are intended to be such forward-looking statements. Such
statements reflect the current views of the Company or its management and are
subject to certain risks, uncertainties and assumptions, including, but not
limited to, those set forth in the following Risk Factors. Should one or more of
these risks or uncertainties materialize or should underlying assumptions prove
incorrect, the Company's actual results, performance or achievements in 1998 and
beyond could differ materially from those expressed in, or implied by, such
forward-looking statements.
POTENTIAL ADVERSE EFFECTS OF REGULATION
The Company and the ITT Technical Institutes are subject to extensive
regulation by federal and state governmental agencies and accrediting
commissions. At the federal level, the Higher Education Act of 1965, as amended
(the "HEA"), and the regulations promulgated thereunder by the DOE set forth
numerous and complex standards that schools must satisfy in order to participate
in the federal student financial aid programs under Title IV of the HEA ("Title
IV Programs"). These standards are designed to limit institutional dependence on
Title IV Program funds, prevent institutions with unacceptable student loan
default rates from participating in Title IV Programs and, in general, require
institutions to satisfy certain criteria related to educational value,
administrative capability and financial responsibility. Sixty of the 63 ITT
Technical Institutes currently participate in Title IV Programs, and the other
three institutes, which were recently opened, have begun the certification
process for participation in Title IV Programs. In 1997, the Company indirectly
derived approximately 70% of its revenues from Title IV Programs.
Proprietary providers of postsecondary education have been subjected to
increased scrutiny and regulation by the DOE and other regulatory authorities as
a result of concern about fraud and abuse of federal student financial aid
programs by certain proprietary institutions. The Company believes that the ITT
Technical Institutes are in substantial compliance with the HEA and its
implementing regulations. The Company cannot, however, predict with certainty
how all of the HEA provisions and the implementing regulations will be applied.
It is also possible that the HEA and its implementing regulations may be applied
in a way that could hinder the Company's operations or expansion plans. In the
event of a determination by the DOE that one of the ITT Technical Institutes
improperly disbursed Title IV Program funds or violated a provision of the HEA
or the implementing regulations, the affected institute could be required to
repay those funds, assessed an administrative fine, transferred to the
"reimbursement" system of receiving Title IV Program funds (which delays the
institute's receipt of such funds), and subjected to other civil and criminal
penalties. The failure by any of the ITT Technical Institutes to comply with
applicable federal, state or accrediting commission requirements could result in
the limitation, suspension or termination of that institution's ability to
participate in Title IV Programs or the loss of state authorization or
accreditation. Any such event could have a material adverse effect on the
Company's financial condition, results of operations or cash flows. There are no
proceedings for any such purposes pending, and the Company has no reason to
believe that any such proceeding by the DOE is contemplated. See
"Business -- Regulation of Federal Financial Aid Programs."
Significant factors relating to Title IV Programs that could adversely
affect the Company include the following:
Change in Control. The DOE, the two accrediting commissions that
accredit the ITT Technical Institutes (the "Accrediting Commissions") and
most of the state education authorities that regulate the ITT Technical
Institutes (the "SEAs") have laws, regulations and/or standards
("Regulations") pertaining to the change in ownership and/or control
(collectively "change in control") of educational institutions, but these
Regulations do not uniformly define what constitutes a change in control.
The DOE's Regulations describe certain transactions that constitute a
change in control, including the transfer of a controlling interest in the
voting stock of an institution or such institution's parent
9
<PAGE> 14
corporation. The DOE's standards also specify that a change in control of a
publicly traded corporation, such as the Company, occurs when there is an
event that obligates the corporation to file a Current Report on Form 8-K
with the Securities and Exchange Commission disclosing a change in control.
Upon the occurrence of a change in control under the DOE's Regulations, an
institution immediately becomes ineligible to participate in Title IV
Programs and can only receive and disburse certain Title IV Program funds
that were previously committed to its students, until it has applied for
certification and is reinstated by the DOE to continue Title IV Program
participation under such institution's new ownership and control. The time
required for the DOE to act on such an application can vary substantially
and may take several months. The DOE's Regulations also require that all of
the ITT Technical Institutes in a particular campus group have their state
authorizations and accreditations reaffirmed or reestablished before any
institute in that campus group can regain its eligibility from the DOE to
continue participation in Title IV Programs. The Regulations of the SEAs
and Accrediting Commissions vary widely with respect to what constitutes a
change in control, with most including the sale of a controlling interest
of common stock in the definition of a change in control, but those
Regulations are subject to varying interpretations as to whether a
particular transaction constitutes a change in control. Many of the SEAs,
including the California SEA which authorizes 11 ITT Technical Institutes,
require that a change in control of an institution be approved before it
occurs in order for the institution to maintain its SEA authorization.
Other SEAs will only review a change in control of an institution after it
occurs. The Accrediting Commissions will not reaccredit an institution
following a change in control until the institution submits a complete
application for reaccreditation, but may temporarily continue or reinstate
an institution's accreditation to allow time for the completion and review
of the application.
The DOE, the Accrediting Commissions and most of the SEAs (including
the California SEA) considered the Merger to constitute a change in control
of the Company and the ITT Technical Institutes under their respective
Regulations. As a result, effective upon the Merger, each ITT Technical
Institute campus group immediately became ineligible to participate in all
of the Title IV Programs. The Company obtained all prior approvals of the
Merger from the Accrediting Commission and the SEAs that required such
approval before the Merger occurred. Since the Merger, the Company has
obtained temporary approval of the Merger from the other Accrediting
Commission, final approvals of the Merger from some of the SEAs required
after a change in control occurs and continued authorization to operate
from the remaining SEAs. The Company is continuing to pursue final
approvals from such Accrediting Commission and SEAs. The DOE approved the
reinstatement of each ITT Technical Institute campus group's participation
in Title IV Programs effective March 20, 1998. The DOE's approval was on a
provisional basis, which is the DOE's practice for all institutions
following a change in control. As an additional condition of each
institute's provisional certification, the DOE directed the Company to
maintain a sufficient, but undefined, level of cash or cash equivalents,
and to revise its current accounting treatment of direct marketing costs,
revenue recognition and amortization of direct marketing costs or provide
evidence that the Company's treatment of these items is in conformance with
Generally Accepted Accounting Principles ("GAAP"). The Company believes
that its treatment of these items is in accordance with GAAP and that it
maintains cash and cash equivalents in sufficient amounts to satisfy the
DOE, but there can be no assurance thereof. If the Company is required to
change its accounting treatment for any of the above items, management does
not believe that such change would have a material adverse effect on the
Company's financial condition or results of operations before the
cumulative effect of any change in accounting. Four campus groups each had
one additional condition placed on their provisional certification. See
"Business -- Regulation of Federal Financial Aid Programs -- Eligibility
and Certification Procedures" and "-- Change in Control."
The Offering will constitute a change in control under the Regulations
of certain SEAs (but not the California SEA), but not under the Regulations
of the DOE or of either Accrediting Commission. Thus, certain ITT Technical
Institutes will be subject to review by their applicable SEAs to reaffirm
their authorization as a result of the Offering. A significant delay in
obtaining or the failure to obtain SEA authorization of any ITT Technical
Institute could have a material adverse effect on the Company's financial
condition or results of operations. The Company does not believe it will
experience any material
10
<PAGE> 15
delay or difficulty in obtaining SEA authorization of any affected
institute. The Company has obtained all approvals of the Offering from
those SEAs that require approval before the Offering occurs.
A change in control under the Regulations of the DOE, the Accrediting
Commissions and most of the SEAs could also occur as the result of certain
future transactions involving the ITT Technical Institutes, the Company or
a principal stockholder, including but not limited to ITT's disposition of
a significant portion of the shares of Common Stock that it retains after
the Offering, certain corporate reorganizations and certain changes in the
boards of directors of such corporations. Starwood, Inc. has announced that
it is exploring a range of disposition strategies for the Company. The
Company believes that if a future transaction results in a change in
control of the ITT Technical Institutes, the Company or a principal
stockholder, the Company will be able to obtain all necessary approvals
from the DOE, the SEAs and the Accrediting Commissions, with the possible
exception of the California SEA. There can be no assurance, however, that
all such approvals can be obtained in a timely manner. In particular,
obtaining such approval from the California SEA, which authorizes 11 ITT
Technical Institutes, could be adversely affected by a state statute that
prohibits the California SEA from approving a change in control application
by any applicant that has been found in any judicial or administrative
proceeding to have violated certain provisions of the California Education
Code ("CEC"). In October 1996, a state court jury determined that the
Company, through its ITT Technical Institute in San Diego, California,
violated those provisions of the CEC. The Company has appealed the jury's
verdict in that case. While the California SEA approved the change in
control application submitted by the Company with respect to the Merger,
there can be no assurance that it will approve any future change in control
application submitted by the Company. See "Business -- Change in Control"
and "Business -- Legal Proceedings."
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 their SEAs (including the
California SEA in particular), reaccredited by their Accrediting
Commissions or recertified by the DOE to participate in Title IV Programs.
See "Business -- Change in Control."
Risk of Legislative Action. Title IV Programs are subject to
significant political and budgetary pressures. The HEA is reauthorized by
the U.S. Congress approximately every six years, and the next
reauthorization is expected to be completed in 1998 or 1999. There can be
no assurance that funding for Title IV Programs will continue to be
available or maintained at current levels or that current requirements for
institutional participation and student eligibility will not change. A
reduction in Title IV Program funding levels or a limitation of the
Company's participation in Title IV Programs could result in lower
enrollments and require the Company to arrange for alternative sources of
financial aid for its students. Given the significant percentage of the
Company's revenues that are indirectly derived from Title IV Programs, any
significant reduction in Title IV Program funding or the ability of the ITT
Technical Institutes or their students to participate in Title IV Programs
could have a material adverse effect on the Company's financial condition
or results of operations. See "Business -- Regulation of Federal Financial
Aid Programs -- Risk of Legislative Action."
Student Loan Defaults. Under the HEA, an institution may lose its
eligibility to participate in some or all Title IV Programs if student
defaults on federal student loans exceed certain rates. An institution
whose cohort default rate on loans under the Federal Family Education Loan
("FFEL") programs and the Federal Direct Loan ("FDL") programs is 25% or
greater for three consecutive federal fiscal years loses eligibility to
participate in those programs for the remainder of the federal fiscal year
in which the DOE determines that the institution has lost its eligibility
and for the two subsequent federal fiscal years.
The ITT Technical Institute in Garland, Texas had FFEL/FDL cohort
default rates exceeding 25% for the 1993, 1994 and 1995 federal fiscal
years. The ITT Technical Institute in San Antonio, Texas had FFEL/FDL
cohort default rates exceeding 25% for the 1994 and 1995 federal fiscal
years but a cohort default rate below 25% for the 1993 federal fiscal year.
No other ITT Technical Institute campus group had an FFEL/FDL cohort
default rate equal to or greater than 25% for the 1995 federal fiscal year,
the latest year for which the DOE has published official FFEL/FDL cohort
default rates. The Company has
11
<PAGE> 16
received 29 of the 30 ITT Technical Institute campus groups' (consisting of
59 institutes) preliminary FFEL/FDL cohort default rates for the 1996
federal fiscal year, which preliminary rates were issued by the DOE in May
1998. The ITT Technical Institutes in Garland and San Antonio, Texas had
preliminary FFEL/FDL cohort default rates of 19.2% and 21.8%, respectively,
for the 1996 federal fiscal year. None of the 29 ITT Technical Institute
campus groups had a preliminary FFEL/FDL cohort default rate equal to or
greater than 25% for the 1996 federal fiscal year. The Company does not
expect that the remaining ITT Technical Institute campus group's
(consisting of one institute) preliminary FFEL/FDL cohort default rate for
the 1996 federal fiscal year will be equal to or greater than 25%. The
official FFEL/FDL cohort default rates for the 1996 federal fiscal year are
expected to be published by the DOE in the last calendar quarter of 1998.
The ITT Technical Institutes in Garland and San Antonio, Texas, which
accounted for approximately 1.7% and 2.4%, respectively, of the Company's
revenues in its 1997 fiscal year, have initiated appeals of their 1995
FFEL/FDL cohort default rates with the DOE. There can be no assurance that
either institute's appeal will result in a recalculation of its 1995
FFEL/FDL cohort default rate to less than 25%. If the Garland, Texas ITT
Technical Institute's appeal does not result in its 1995 FFEL/FDL cohort
default rate being reduced to less than 25%, such institute will
immediately become ineligible to participate in the FFEL and FDL programs.
The Company has arranged for an unaffiliated private funding source to
provide loans to the students enrolled at the Garland, Texas ITT Technical
Institute in the event of such ineligibility. Another alternative would be
to stop enrolling new students in the Garland institute, continue to teach
the students already enrolled, and close the institute once the students
already enrolled had completed their programs of study. If the San Antonio,
Texas ITT Technical Institute's appeal does not result in its 1995 FFEL/FDL
cohort default rate being reduced to less than 25% and such institute
subsequently receives an official 1996 FFEL/FDL cohort default rate equal
to or greater than 25% and cannot reduce that rate to less than 25% through
an appeal to the DOE, such institute will become ineligible to participate
in the FFEL and FDL programs. Loss of eligibility to participate in the
FFEL and FDL programs by both the Garland and San Antonio, Texas ITT
Technical Institutes (but not by either alone) could have a material
adverse effect on the Company's financial condition or results of
operations.
If an institution's FFEL/FDL cohort default rate is 25% or greater in
any of the three most recent federal fiscal years, or if an institution's
cohort default rate for loans under the Federal Perkins Loan ("Perkins")
program exceeds 15% for any federal award year, that institution may be
placed on provisional certification status by the DOE. When the Garland and
San Antonio, Texas ITT Technical Institutes were provisionally recertified
for participation in Title IV Programs following the Merger, one of the
reasons each of those institutes received provisional certification was
because the institute's FFEL/FDL cohort default rate exceeded 25% for at
least one of the three most recent federal fiscal years. Each of those
institutes was told that it would remain provisionally certified until its
FFEL/FDL cohort default rates for the three most recent federal fiscal
years for which such rates have been published are all below 25%.
Twenty-seven ITT Technical Institute campus groups (consisting of 53
institutes) had a Perkins cohort default rate in excess of 15% for students
who were scheduled to begin repayment in the 1995/1996 federal award year,
the most recent year for which such rates have been calculated. Thus, those
ITT Technical Institutes could be placed on provisional certification
status based on their Perkins cohort default rates. To date, no ITT
Technical Institute campus group has been placed on provisional
certification status because of its Perkins cohort default rate. See
"Business -- Regulation of Federal Financial Aid Programs -- Student Loan
Defaults," "-- Administrative Capability" and "-- Eligibility and
Certification Procedures."
Financial Responsibility Standards. The HEA and its implementing
regulations prescribe specific standards of financial responsibility that a
proprietary institution must satisfy to participate in Title IV Programs.
Under such standards, an institution must (a) have an acid test ratio
(defined as the ratio of cash, cash equivalents and current accounts
receivable to current liabilities) of at least 1:1 at the end of each
fiscal year, (b) have a positive tangible net worth at the end of each
fiscal year and (c) not have a cumulative net operating loss during its two
most recent fiscal years that results in a decrease of more
12
<PAGE> 17
than 10% of the institution's tangible net worth at the beginning of such
two-year period. If the DOE determines that an institution does not satisfy
each of these numeric standards, that institution may establish its
financial responsibility on an alternative basis by posting a letter of
credit in favor of the DOE. Historically, the DOE has evaluated the
financial condition of the ITT Technical Institutes on a consolidated basis
based on the Company's financial statements. The DOE's regulations,
however, permit the DOE to examine the financial statements of each ITT
Technical Institute campus group, the Company, Starwood, Inc. and ITT. The
Company has calculated that its acid test ratio at December 31, 1997 was
1.94:1, and the Company believes that it satisfied all the other standards
of financial responsibility at the Company level as of that date. As a part
of the DOE's review of the applications of the ITT Technical Institute
campus groups to have their eligibility to participate in Title IV Programs
reinstated after the Merger, the DOE evaluated the financial responsibility
of all of the ITT Technical Institute campus groups following the Merger.
The DOE determined that each of the campus groups satisfied the DOE's
financial responsibility standards following the Merger, but the DOE
directed the Company to address certain issues related to its financial
condition and financial statements. See "-- Potential Adverse Effects of
Regulation -- Change in Control" and "Business -- Change in Control."
In November 1997, the DOE issued new regulations, to take effect July
1, 1998, which revised the DOE's standards of financial responsibility.
These new standards replace the numeric tests described above with three
different ratios: an equity ratio, a primary reserve ratio and a net income
ratio, which are weighted and added together to produce a composite score
for the institution. The Company applied these new regulations to the
Company's audited financial statements for its 1997 fiscal year and has
determined that it satisfied the new standards as of that date. The Company
does not believe, based on its current understanding of how the revised
financial responsibility standards will be applied, that these standards
will have a material adverse effect on the Company's financial condition or
results of operations or its expansion plans. See "Business -- Regulation
of Federal Financial Aid Programs -- Financial Responsibility Standards."
The "85/15 Rule." Under a provision of the HEA commonly referred to
as the "85/15 Rule," a proprietary institution, such as each ITT Technical
Institute campus group, becomes ineligible to participate in Title IV
Programs if more than 85% of its applicable revenues for a fiscal year are
derived from Title IV Programs. If any ITT Technical Institute campus group
were to violate the 85/15 Rule for any fiscal year, it would be ineligible
to participate in Title IV Programs as of the first day of the following
fiscal year and would be unable to apply to regain its eligibility until
the next fiscal year. For each of its 1996 and 1997 fiscal years, the
Company has calculated that no ITT Technical Institute campus group derived
more than 81% of its revenues from Title IV Programs, and for its 1997
fiscal year, the range for the campus groups was from approximately 61% to
approximately 80%. See "Business -- Regulation of Federal Financial Aid
Programs -- The '85/15 Rule.' "
Additional Locations and Program Offerings of ITT Technical
Institutes. The HEA requires proprietary educational institutions, such as
the ITT Technical Institute campus groups, to be in full operation for two
years before the institution can qualify to participate in Title IV
Programs. The HEA and applicable regulations, however, permit an
institution that is already certified to participate in Title IV Programs
to establish additional locations that may, after review by the DOE, begin
to participate in Title IV Programs without satisfying the two-year
requirement so long as each such additional location satisfies all other
applicable requirements for institutional eligibility. The HEA and
applicable regulations also permit institutions participating in Title IV
Programs to offer additional programs without restricting the number or
delaying the introduction of such programs, but students can only receive
Title IV Program funds for enrollment in programs that satisfy all
applicable requirements for eligibility. Applicable accrediting commission
standards and state laws and regulations generally permit institutions to
establish additional locations and expand their program offerings under
certain conditions. Although such conditions limit the ability of the
Company to establish additional locations and expand program offerings in
certain circumstances, the Company does not believe, based on its current
understanding of how the accrediting standards and state laws and
regulations will be applied, that these limitations will have a material
adverse effect on the Company's expansion plans. The Company's expansion
plans
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<PAGE> 18
assume its continued ability to (a) establish new ITT Technical Institutes
as additional locations of existing ITT Technical Institute main campuses
and (b) expand the program offerings at existing institutes. In its last
three fiscal years, the Company has: (i) established eight new additional
locations, six of which are participating in Title IV Programs and two of
which are in the process of obtaining certification to participate; and
(ii) added 35 programs at its existing ITT Technical Institutes. In
addition, in March 1998 the Company established one new additional
location, which is in the process of obtaining certification to participate
in Title IV Programs. See "Business -- Regulation of Federal Financial Aid
Programs -- Additional Locations and Program Offerings of ITT Technical
Institutes."
Availability of Lenders and Guarantors. In the Company's 1997 fiscal
year, one lending institution provided approximately 62% of all federally
guaranteed student loans to ITT Technical Institute students and one
student loan guaranty agency guaranteed approximately 94% of all FFEL
program loans made to ITT Technical Institute students. The Company
believes that other lenders and guarantors would be willing to make and
guarantee, respectively, FFEL program loans to its students if such loans
or guarantees were no longer available from its primary lender or
guarantor, but there can be no assurance in this regard. See
"Business -- Regulation of Federal Financial Aid Programs -- Availability
of Lenders and Guarantors."
State Authorization and Accreditation. Each ITT Technical Institute
must be authorized by the applicable state education authority(ies) to
operate and grant degrees or diplomas to its students. State authorization
and accreditation by an accrediting commission recognized by the DOE are
also required in order for an institution to become and remain eligible to
participate in Title IV Programs. Each ITT Technical Institute is subject
to extensive regulation by its state education authority(ies) and
accrediting commission, and the HEA specifies certain standards that each
recognized accrediting commission must utilize in reviewing institutions.
All 63 ITT Technical Institutes are currently authorized by one or more
state education authorities. Sixty-one of those institutes are accredited
by a recognized accrediting commission, and the other two institutes, which
were recently opened, have applied for accreditation. One ITT Technical
Institute (an additional location) is on probation by its accrediting
commission. An institute on probation is required to demonstrate to the
accrediting commission that the institute has taken corrective action and
is in continuous compliance with accrediting commission standards. If any
ITT Technical Institute on probation fails to make the applicable
demonstration to the accrediting commission, the accrediting commission may
revoke, refuse to renew or otherwise condition the institute's
accreditation. Loss of state authorization or accreditation by any ITT
Technical Institute: (a) would render (i) only the affected institute
ineligible to participate in Title IV Programs, if the affected institute
was an additional location or (ii) the entire campus group ineligible to
participate in Title IV Programs, if the affected institute was a main
campus; and (b) could have a material adverse effect on the Company's
financial condition, results of operations and cash flows. Loss of state
authorization by any ITT Technical Institute would also force the Company
to close the institute, which could have a material adverse effect on the
Company's financial condition or results of operations. See
"Business -- State Authorization and Accreditation."
CONTROL BY ITT; RELATIONSHIP WITH ITT
Prior to the Offering, ITT holds 83.3% of the outstanding shares of Common
Stock. Consequently, ITT has had significant influence over the policies and
affairs of the Company. Effective upon the Merger, ITT became a wholly owned
subsidiary of Starwood, Inc. See "Relationship With Selling Stockholder and
Related Transactions," "Principal and Selling Stockholder" and "Description of
Capital Stock." Upon the completion of the Offering, Starwood, Inc., through its
wholly owned subsidiary ITT, will beneficially own 41.3% of the outstanding
shares of Common Stock (35.0% if the over-allotment option is exercised in
full). Accordingly, ITT will continue to be able to substantially influence the
outcome of corporate actions requiring stockholder approval, including the
election of Directors, the adoption of amendments to the Company's Restated
Certificate of Incorporation and the approval of mergers and certain sales of
the Company's assets.
At the time the Merger was consummated, four of the ten members of the
Board of Directors of the Company (Bette B. Anderson, Robert A. Bowman, Richard
S. Ward and Margita E. White, all of whom were
14
<PAGE> 19
directors and/or executive officers of ITT prior to the Merger) resigned
effective February 23, 1998. On February 25, 1998, the remaining members of the
Board of Directors of the Company elected four individuals recommended by
Starwood, Inc. (Tony Coelho, Robin Josephs, Merrick R. Kleeman and Barry S.
Sternlicht) to fill the vacancies caused by such resignations and to serve as
Directors for terms expiring at the 2000, 1999, 2000 and 1998 Annual Meeting of
Shareholders, respectively, and until such Director's successor is duly elected
and qualified. Mr. Sternlicht has been nominated for re-election as a Director
at the Company's 1998 Annual Meeting of Shareholders for a term expiring at the
2001 Annual Meeting of Shareholders. Mr. Sternlicht serves as chairman and a
director of Starwood, Inc. and as chairman, chief executive officer and a
trustee of Starwood Trust. Mr. Sternlicht is also the general manager of
Starwood Capital Group, L.L.C., which, together with its affiliates and Mr.
Sternlicht, beneficially owns approximately 5.3% of the outstanding paired
shares of Starwood, Inc. common stock and Starwood Trust beneficial interest.
Mr. Kleeman is also a managing director of Starwood Capital Group, L.L.C. Mr.
Coelho and Ms. Josephs are not affiliated with ITT, Starwood, Inc., Starwood
Trust or Starwood Capital Group, L.L.C. See "Relationship with Selling
Stockholder and Related Transactions."
Under agreements with the Company, since the Initial Public Offering in
December 1994, ITT has provided certain administrative, financial, treasury,
accounting, tax and other services to the Company and has made available certain
of its employee benefit plans to the Company's employees. In addition, ITT and
the Company are parties to a number of intercompany agreements covering matters
such as corporate governance, tax sharing arrangements, the use of the "ITT"
name, registration rights and employee benefits. For a description of these
arrangements and certain changes thereto in connection with the Merger and the
Offering, see "Relationship With Selling Stockholder and Related Transactions."
Included among the intercompany agreements to become effective upon the
consummation of the Offering is a Stockholder Agreement, pursuant to which the
Company's Board of Directors is required, in connection with each annual meeting
of the Company's stockholders, to nominate and recommend for election to the
Board persons designated by ITT so that the total number of ITT designees on the
Board is in relative proportion to the percentage of the outstanding shares of
Common Stock held by ITT and its affiliates, up to a maximum of four such
designees.
A future change in ownership of Starwood, Inc. or ITT resulting in a change
in control of the Company or the ITT Technical Institutes could have significant
adverse regulatory consequences for the Company at the state and federal levels
and could affect the accreditation of the ITT Technical Institutes. See
"-- Potential Adverse Effects of Regulation -- Change in Control."
Conflicts of interest between the Company and ITT or Starwood, Inc. could
arise with respect to business dealings between them, including potential
acquisitions of businesses or properties, the issuance or sale of additional
securities, other transactions involving the Company, the election of new or
additional directors and the payment of dividends by the Company. The Company
has not instituted any formal plan or arrangement to address potential conflicts
of interest that may arise between the Company and ITT or Starwood, Inc. The
Company's directors intend, however, to exercise reasonable judgment and take
such steps as they deem necessary to resolve any specific conflict of interest
that may occur and will determine what, if any, specific measures, such as the
retention of an independent advisor or independent counsel or the appointment of
a special committee, may be necessary or appropriate. There can be no assurance
that any conflicts will be resolved in favor of the Company.
MATERIAL LITIGATION
The Company is subject to several pending legal proceedings instituted by
or on behalf of former students alleging misrepresentations and statutory
violations. In October 1996, the Company had a judgment rendered against it in a
California state court for approximately $3.7 million, plus interest, in a
lawsuit brought 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 state
education code by the Company, based on the plaintiffs' claims 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, (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
15
<PAGE> 20
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 Company has appealed that decision. The Company
has made no provision (other than for the Company's legal expenses) for the
awards.
Six other legal proceedings are pending in California state court involving
former students who attended the ITT Technical Institutes in California. The
three plaintiffs in one of these legal proceedings each attended one of three
different programs (i.e., hospitality, EET and CAD) and allege that the Company,
ITT and ten Company employees violated state education laws, 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 request of the plaintiffs in that legal proceeding to have their action
certified as a class action on behalf of all persons similarly situated who
attended an ITT Technical Institute in California has been denied by the court.
The 17 plaintiffs in the other five California state court legal proceedings
each attended the hospitality program at the San Diego ITT Technical Institute
and allege that the Company, ITT and a Company employee committed intentional
misrepresentation and/or concealment, civil conspiracy and violations of state
education, consumer protection and trade practices laws. The plaintiffs in those
actions 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.
Another legal proceeding is pending in federal court in California
involving nine former students who attended the hospitality program at either
the Maitland or San Diego ITT Technical Institute. The suit alleges that the
Company and ITT committed common law fraud and/or concealment, civil conspiracy
and violations of a federal racketeering statute and state education, consumer
protection and trade practices laws. The plaintiffs in that action 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 in that legal proceeding seek to have their action
certified as a class action on behalf of all persons similarly situated who
attended the program at the Indianapolis, Maitland, Portland or San Diego ITT
Technical Institutes.
In May 1998, the Company increased its provision for legal expenses in the
legal actions associated with the hospitality program by $1.2 million. The
Company intends to reflect this increased provision in the Company's Quarterly
Report on Form 10-Q for the three months ended June 30, 1998 and, as a result,
expects that the cost of educational services for the three and six months ended
June 30, 1998 will increase, causing a decrease of approximately $0.03 and
$0.03, respectively, in earnings per common share (both basic and diluted) for
such periods. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
There can be no assurance as to the ultimate outcome of any of the
litigation involving the Company. An unsuccessful appeal of the California
judgment or judgments against the Company in the other California legal
proceedings or in other similarly based legal proceedings could have a material
adverse effect on the financial condition or results of operations of the
Company. See "Business -- Legal Proceedings."
COMPETITION
The postsecondary education market in the United States is highly
fragmented and competitive with no private or public institution enjoying a
significant market share. ITT Technical Institutes compete for students with
four-year and two-year degree granting institutions, which include non-profit
public and private colleges and proprietary institutions, as well as with
alternatives to higher education such as military service or
16
<PAGE> 21
immediate employment. Management believes that competition among educational
institutions is based on the quality of the educational program, perceived
reputation of the institution, cost of the program and employability of
graduates. Certain public and private colleges may offer programs similar to
those of the ITT Technical Institutes at a lower tuition cost due in part to
governmental subsidies, government and foundation grants, tax deductible
contributions or other financial resources not available to proprietary
institutions. Other proprietary institutions also offer programs that compete
with those of the ITT Technical Institutes. Certain of the Company's competitors
in both the public and private sector have greater financial and other resources
than the Company. There can be no assurance that competitive pressures will not
have a material adverse effect on the financial condition or results of
operations of the Company.
SEASONALITY IN RESULTS OF OPERATIONS
The Company's quarterly results of operations tend to fluctuate
significantly within a fiscal year because of differences in the number of weeks
of earned tuition revenue in each fiscal quarter and the timing of student
matriculations. The Company's first and third fiscal quarters have 13 weeks of
earned tuition revenue, while the second and fourth quarters have 11 weeks of
earned tuition revenue because of two-week vacation breaks in June and December.
In addition, revenues in the third and fourth fiscal quarters generally benefit
from increased student matriculations as the number of new students entering ITT
Technical Institutes tends to be substantially higher in June and September
because of the significant number of recent high school graduates entering ITT
Technical Institutes for the academic quarters beginning in those two months.
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Variations in Quarterly Results of Operations."
RISKS ASSOCIATED WITH CHANGES IN MARKET NEEDS AND TECHNOLOGY
Prospective employers of graduates of ITT Technical Institutes increasingly
demand that their entry-level employees possess appropriate technical skills.
The Company believes its management processes and information systems should
permit the Company to make changes in curricula content and supporting
technology in response to market needs. The inability of the Company to
adequately respond, however, to changes in market requirements due to financial
constraints, unusually rapid technological change or other factors could have a
material adverse effect on the Company's financial condition or results of
operations.
DEPENDENCE ON KEY EMPLOYEES
The Company's future performance will depend, in part, on the efforts and
abilities of the Company's executive officers and in particular Rene R.
Champagne, Chairman, President and Chief Executive Officer of the Company. The
loss of the services of Mr. Champagne or one or more other executive officers
could have an adverse effect on the Company's business. None of the Company's
executive officers is subject to an employment or non-competition agreement with
the Company. The Company has no key man life insurance on any of its employees.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
No predictions can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock and may make it more
difficult for the Company to sell its equity securities in the future at a time
and price which it deems appropriate.
Immediately after the Offering, the Company will continue to have
outstanding 26,999,952 shares of Common Stock. The shares of Common Stock sold
in the Offering will be freely tradeable without restriction or further
registration under the Securities Act except for any of those shares of Common
Stock that are beneficially owned at any time by an "affiliate" of the Company
within the meaning of Rule 144 under the
17
<PAGE> 22
Securities Act (which sales will be subject to the timing, volume and manner of
sale limitations of Rule 144). The 11,150,000 outstanding shares of Common Stock
that will be held by the Selling Stockholder after the Offering (9,450,000
shares if the over-allotment option is exercised in full) are "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be publicly resold, except in compliance with the registration requirements of
the Securities Act or pursuant to an exemption from registration, including that
provided by Rule 144 under the Securities Act. The Selling Stockholder has
certain registration rights with respect to the shares of Common Stock owned by
it. See "Relationship with Selling Stockholder and Related Transactions."
The Company, its executive officers, ITT and Starwood, Inc. have agreed
that they will not offer, sell, contract to sell, announce any intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock, without the prior
written consent of Credit Suisse First Boston Corporation, for a period of 180
days after the date of this Prospectus; provided, however, that such
restrictions will not affect the ability of the Company to grant stock options
for Common Stock pursuant to the Stock Plans, or to issue Common Stock pursuant
to the exercise of stock options currently outstanding or granted pursuant to
the Stock Plans. See "Shares Eligible for Future Sale" and "Underwriting."
ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law, the Company's Restated Certificate of
Incorporation and the Company's By-Laws could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. Such provisions could limit the
price that certain investors might be willing to pay in the future for shares of
Common Stock. These provisions of Delaware law, the Company's Restated
Certificate of Incorporation and the Company's By-Laws may also have the effect
of discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. Certain of these provisions authorize the issuance of "blank check"
preferred stock, divide the Board of Directors into three classes expiring in
rotation, require advance notice for stockholder proposals and nominations,
prohibit stockholders from calling a special meeting and prohibit stockholder
action by written consent. These provisions may make it more difficult for
stockholders to take certain corporate actions and could have the effect of
delaying or preventing a change in control of the Company. See "Description of
Capital Stock -- Preferred Stock," "-- Provisions of Restated Certificate of
Incorporation and By-Laws Affecting Change in Control" and "-- Delaware General
Corporation Law."
18
<PAGE> 23
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the NYSE under the trading symbol "ESI." The
prices set forth below reflect the high and low sale prices of the Common Stock
during the periods indicated, as reported in the consolidated transaction
reporting system of the NYSE. These prices have been restated to reflect the
following adjustments to the market price of the Common Stock: (a) on April 16,
1996 to reflect the three-for-two Common Stock split declared by the Company on
March 22, 1996 and effected by payment of a stock dividend on April 15, 1996;
and (b) on November 15, 1996 to reflect the three-for-two Common Stock split
declared by the Company on October 8, 1996 and effected by payment of a stock
dividend on November 4, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
First Quarter............................................ $15.109 $11.063
Second Quarter........................................... 22.750 14.891
Third Quarter............................................ 25.672 17.500
Fourth Quarter........................................... 26.078 18.250
1997
First Quarter............................................ $27.000 $21.500
Second Quarter........................................... 25.000 19.375
Third Quarter............................................ 26.750 19.000
Fourth Quarter........................................... 26.000 20.750
1998
First Quarter............................................ $28.375 $21.375
Second Quarter (through May 7, 1998)..................... 32.500 26.438
</TABLE>
On May 7, 1998, the last reported sale price of the Common Stock on the
NYSE was $26.75 per share. There were approximately 200 holders of record, and
approximately 1,500 beneficial owners, of the Common Stock on May 7, 1998.
DIVIDEND POLICY
No cash dividends were declared by the Company in 1996 or 1997. The Company
anticipates that it will not pay any cash dividends on the Common Stock for the
foreseeable future and that it will retain its earnings to finance future
growth. The declaration and payment of dividends by the Company are subject to
the discretion of its Board of Directors and compliance with applicable law. Any
determination as to the payment of dividends in the future will depend on, among
other things, general business conditions, the effect of such payment on the
Company's financial condition and other factors the Company's Board of Directors
may in the future consider to be relevant.
19
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998. The Company will not receive any of the proceeds from the Offering.
See "Principal and Selling Stockholder." This table should be read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(DOLLARS IN THOUSANDS)
<S> <C>
Long-term debt.............................................. $ --
Shareholders' equity:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; none issued and outstanding................ --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 26,999,952 issued and outstanding(1)....... 270
Capital surplus........................................... 32,513
Retained earnings......................................... 62,360
-------
Total shareholders' equity........................ 95,143
-------
Total capitalization...................................... $95,143
=======
</TABLE>
- ---------------
(1) Excludes 4,455,000 shares of Common Stock which may be issued pursuant to
the Company's Stock Plans, under which options to purchase an aggregate of
810,000 shares of Common Stock were outstanding on March 31, 1998.
20
<PAGE> 25
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with the Financial Statements and
Notes thereto and other financial data included elsewhere or incorporated by
reference herein. The statement of income data set forth for each of the three
years in the period ended December 31, 1997 and the balance sheet data as of
December 31, 1997 and 1996 have been derived from the Financial Statements of
the Company which have been audited by Price Waterhouse LLP, independent
accountants, whose report thereon is included elsewhere in this Prospectus. The
statement of income data for each of the two years in the period ended December
31, 1994 and the balance sheet data as of December 31, 1995, 1994 and 1993 have
been derived from audited financial statements of the Company not included in
this Prospectus. The statement of income data for each of the three months ended
March 31, 1998 and 1997 and the balance sheet data as of March 31, 1998 have
been derived from the Company's unaudited financial statements which were
prepared on the same basis as the audited financial statements and which, in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
below. These historical results are not necessarily indicative of the results to
be expected in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue:
Tuition...................................... $ 62,587 $55,746 $222,457 $196,692 $171,936 $159,575 $144,908
Other educational(1)......................... 9,700 8,730 39,207 35,627 29,895 27,332 24,089
-------- ------- -------- -------- -------- -------- --------
Total revenues......................... 72,287 64,476 261,664 232,319 201,831 186,907 168,997
-------- ------- -------- -------- -------- -------- --------
Cost of educational services................... 41,438 37,984 163,053 145,197 130,338 121,594 108,075
Student services and administrative expenses... 19,436 17,536 72,388 66,546 57,268 53,481 47,083
Change in control expenses..................... 443 -- -- -- -- -- --
-------- ------- -------- -------- -------- -------- --------
Total costs and expenses............... 61,317 55,520 235,441 211,743 187,606 175,075 155,158
Operating income............................... 10,970 8,956 26,223 20,576 14,225 11,832 13,839
Interest income, net(2)........................ 1,244 1,380 5,565 4,119 4,802 232 80
-------- ------- -------- -------- -------- -------- --------
Income before income taxes..................... 12,214 10,336 31,788 24,695 19,027 12,064 13,919
Income taxes................................... 4,886 4,134 12,665 9,844 7,636 4,902 5,605
-------- ------- -------- -------- -------- -------- --------
Net income..................................... $ 7,328 $ 6,202 $ 19,123 $ 14,851 $ 11,391 $ 7,162 $ 8,314
======== ======= ======== ======== ======== ======== ========
Earnings per common share (basic and
diluted)(3).................................. $ .27 $ .23 $ .71 $ .55 $ .42 $ .32 $ .37
-------- ------- -------- -------- -------- -------- --------
OTHER OPERATING DATA:
EBITDA(4)...................................... $ 13,184 $10,914 $ 34,162 $ 28,069 $ 21,767 $ 18,687 $ 20,182
Operating losses from new technical institutes
before income taxes(5)....................... $ 1,060 $ 964 $ 3,165 $ 5,721 $ 7,123 $ 7,316 $ 2,914
Capital expenditures, net...................... $ 2,265 $ 4,027 $ 11,465 $ 7,868 $ 8,206 $ 7,688 $ 6,679
Number of students at end of period............ 23,879 22,172 24,498 22,633 20,618 20,668 19,860
Number of technical institutes at end of
period....................................... 63 59 62 59 56 54 48
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, AT DECEMBER 31,
------------ ----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, restricted cash and cash invested with
ITT.......................................... $ 96,906 $ 98,689 $ 95,793 $ 77,517 $ 66,810 $ 51,064
Total current assets........................... 115,458 112,958 108,449 87,567 76,460 61,383
Property and equipment less accumulated
depreciation................................. 22,937 22,886 19,360 18,985 18,321 17,488
Total assets................................... 148,787 145,914 135,749 114,284 102,899 87,305
Total current liabilities...................... 51,463 55,946 65,405 58,766 57,646 50,247
Shareholders' equity........................... 95,143 87,815 68,692 53,841 42,450 35,288
</TABLE>
- ---------------
(1) Other educational revenue is comprised of laboratory and application fees
and textbook sales.
(2) See Note 3 of Notes to Financial Statements for information concerning
intercompany interest between the Company and ITT. Prior to the Initial
Public Offering in December 1994, the Company did not receive interest on
the full amount of net cash balances invested with ITT and was assessed an
interest charge based on an allocation of the consolidated debt of ITT.
After the Initial Public Offering and until February 5, 1998, the Company
received interest from ITT on the amount of any net cash balances invested
with ITT and no longer was subject to an interest charge based on such an
allocation. Since February 5, 1998, the Company has performed its own cash
management functions and no longer has any cash invested with ITT. Depending
upon current interest rates on short-term investments, the Company may not
be able to obtain the same yields on its cash balances that were being paid
by ITT. Accordingly, interest income, net may decrease in 1998.
(3) Earnings per share data are based on historical net income and the number of
shares of Common Stock outstanding during each period after giving
retroactive effect to the three-for-two stock splits in April and November
1996. Earnings per share for all periods have been calculated in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings per
Share."
(4) EBITDA represents earnings before interest and financial charges, income
taxes, depreciation and amortization. The Company has included information
concerning EBITDA (which is not a measure of financial performance under
generally accepted accounting principles) because it understands that it is
used by certain investors as one measure of an issuer's financial
performance. EBITDA should not be construed as an alternative to operating
income (as determined in accordance with generally accepted accounting
principles) as an indicator of the Company's performance or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) or as a measure of liquidity.
(5) Operating losses from new technical institutes before income taxes
represents operating losses before income taxes, including amortization of
deferred pre-opening costs, for institutes in the first 24 months after
their first class start.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial and Operating Data appearing elsewhere in this Prospectus and the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
GENERAL
The Company operates 63 ITT Technical Institutes in 27 states which provide
technology-oriented postsecondary education to approximately 24,000 students.
The Company derives its revenue almost entirely from tuition, textbook sales,
fees and charges paid by, or on behalf of, its students. Most students at the
ITT Technical Institutes rely on funds received under various
government-sponsored student financial aid programs, especially the federal
student financial aid programs under Title IV of the Higher Education Act of
1965, as amended ("Title IV Programs"), to pay a substantial portion of their
tuition and other education-related expenses. In 1997, the Company indirectly
derived approximately 70% of its revenues from Title IV Programs.
The Company's revenue varies based on the aggregate student population,
which is influenced by the number of students attending ITT Technical Institutes
at the beginning of a fiscal period, by the number of new first-time students
entering and former students re-entering ITT Technical Institutes during such
period and by student retention rates. New students generally enter ITT
Technical Institutes at the beginning of an academic quarter that commences in
March, June, September and December. The Company believes that the size of its
student population is affected to some extent by general economic conditions,
and that, in the absence of countervailing factors, student enrollments and
retention rates tend to increase as opportunities for immediate employment for
high school graduates decline and decrease as such opportunities increase. The
establishment of new ITT Technical Institutes and the introduction of additional
program offerings at existing ITT Technical Institutes have been significant
factors in increasing the aggregate student population in recent years.
A new technical institute must be authorized by the state in which it will
operate, accredited by an accrediting commission that has been recognized by the
U.S. Department of Education ("DOE"), and certified by the DOE to participate in
Title IV Programs. The approval processes for accreditation and DOE
certification cannot commence until the first students begin classes. Such
accreditation and DOE certification for a new additional location generally take
approximately one year from the first class start date. Certain direct costs
incurred with respect to a new technical institute prior to the first class
start ("institute start-up costs") are deferred and amortized over the first
year of operation after the first class start. Since the beginning of 1993, the
Company has opened 20 new technical institutes (six of which started classes in
1996 or 1997 and one of which started classes in 1998). New technical institutes
historically incur a loss during the 24-month period after the first class start
date. These losses during the year by institutes in their first two years of
operation, together with the amortization of institute start-up costs, are
referred to as "operating losses from new technical institutes." Such operating
losses from new technical institutes totaled $1.1 million and $1.0 million for
the three months ended March 31, 1998 and 1997, respectively, and $3.2 million,
$5.7 million and $7.1 million for the years ended December 31, 1997, 1996 and
1995, respectively.
The Company earns tuition revenue on a weekly basis, pro rata over the
length of each of four, 12-week academic quarters in each fiscal year. Under
federal and state regulations and accrediting commission standards, the Company
generally is required to refund a portion of the tuition payments received from
a student who withdraws from an ITT Technical Institute during an academic
quarter. The amount of tuition, if any, that may be retained by the Company
after payment of any refund is immediately recognized in the Company's statement
of income. Other educational revenue is comprised of textbook sales and
laboratory and application fees.
The Company incurs expenses throughout a fiscal period in connection with
the operation of the ITT Technical Institutes. The cost of educational services
includes faculty and administrative salaries, cost of
22
<PAGE> 27
books sold, occupancy costs, depreciation and amortization of equipment costs
and leasehold improvements and certain other administrative costs incurred by
the ITT Technical Institutes.
Student services and administrative expenses include direct marketing costs
(which are marketing expenses directly related to new student recruitment),
indirect marketing expenses, an allowance for doubtful accounts and
administrative expenses incurred at corporate headquarters. Direct marketing
costs include salaries and employee benefits for recruiting representatives and
direct solicitation advertising expenses. Direct marketing costs, excluding
advertising expenses, are capitalized and amortized on an accelerated basis over
the average course length of 24 months commencing on the class start date.
Marketing costs that do not relate to the direct solicitation of potential
students are expensed as incurred.
Until February 5, 1998, all cash receipts of the Company were forwarded to
ITT for investment on a daily basis after, in the case of certain receipts, the
lapse of applicable regulatory restrictions. Cash disbursements of the Company
were generally funded by ITT out of the cash balances of the Company held and
invested for the Company by ITT. Net interest income represents principally
interest paid or received from ITT and miscellaneous interest paid or received
from other parties. Commencing in 1995, ITT has paid the Company interest on the
full amount of any net cash balances invested for the Company by ITT at an
interest rate that was set for a six- or twelve-month period and was 30 basis
points over the most recently published rate for six-or twelve-month treasury
bills, as appropriate, and no longer assessed interest charges on the Company
except with respect to funds actually advanced to the Company in excess of cash
invested with ITT. ITT performed a number of other services for the Company,
including the administration of certain employee benefit plans, for which it
received compensation from the Company. The Company intends to perform
substantially all of these services after the Offering. Since February 5, 1998,
the Company has performed its own cash management functions and no longer has
any cash invested with ITT. Depending upon current interest rates on short-term
investments, the Company may not be able to obtain the same yields on its cash
balances that were being paid by ITT. Accordingly, interest income, net may
decrease in 1998.
VARIATIONS IN QUARTERLY RESULTS OF OPERATIONS
The Company's quarterly results of operations tend to fluctuate
significantly within a fiscal year because of differences in the number of weeks
of earned tuition revenue in each fiscal quarter and the timing of student
matriculations. The Company's first and third fiscal quarters have 13 weeks of
earned tuition revenue, while the second and fourth quarters have 11 weeks of
earned tuition revenue because of two-week vacation breaks in June and December.
In addition, revenue in the third and fourth fiscal quarters generally benefits
from increased student matriculations as the number of new students entering ITT
Technical Institutes tends to be substantially higher in June (31% of all new
students in 1997) and September (36% of all new students in 1997) because of the
significant number of recent high school graduates entering ITT Technical
Institutes for the academic quarters beginning in those two months. 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.
The following table sets forth the Company's revenue in each quarter during
the three prior fiscal years.
QUARTERLY REVENUE OF ITT TECHNICAL INSTITUTES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
THREE-MONTH ------------------ ------------------ ------------------
PERIOD ENDED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------ -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31.............................. $ 64,476 25% $ 57,103 25% $ 51,169 25%
June 30............................... 58,412 22 51,568 22 44,969 22
September 30.......................... 73,060 28 65,113 28 56,017 28
December 31........................... 65,716 25 58,535 25 49,676 25
-------- --- -------- --- -------- ---
Total for Year...................... $261,664 100% $232,319 100% $201,831 100%
======== === ======== === ======== ===
</TABLE>
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<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain
statement of income data to tuition and other educational revenue for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- -----------------------
1998 1997 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Tuition and other educational revenue............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of educational services..................... 57.3 58.9 62.3 62.5 64.6
Student services and administrative expenses..... 26.9 27.2 27.7 28.6 28.4
Change in control expenses....................... .6 -- -- -- --
----- ----- ----- ----- -----
Operating income................................. 15.2 13.9 10.0 8.9 7.0
Interest income, net............................. 1.7 2.1 2.1 1.7 2.4
----- ----- ----- ----- -----
Income before income taxes....................... 16.9% 16.0% 12.1% 10.6% 9.4%
===== ===== ===== ===== =====
</TABLE>
In May 1998, the Company increased its provision for legal expenses in the
legal actions associated with the hospitality program by $1.2 million. The
Company intends to reflect this increased provision in the Company's Quarterly
Report on Form 10-Q for the three months ended June 30, 1998 and, as a result,
expects that the cost of educational services for the three and six months ended
June 30, 1998 will increase, causing a decrease of approximately $0.03 and
$0.03, respectively, in earnings per common share (both basic and diluted) for
such periods. See "Business -- Legal Proceedings."
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenue. 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. 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 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. See "Business -- Legal Proceedings."
Student Services and Administrative Expenses. 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
24
<PAGE> 29
because the greater revenues did not cause an increase in the fixed portion of
the marketing and headquarters expenses.
Change in Control Expenses. 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
"Business -- Change in Control."
Interest Income. 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).
Net Income. Net income increased $1.1 million, or 17.7%, to $7.3 million
for the three months ended March 31, 1998 from $6.2 million for the three months
ended March 31, 1997 (despite the change in control expenses of $0.3 million
after tax), principally due to the 22.5% increase in operating income ($1.2
million after tax).
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenue. Revenue increased by $29.4 million, or 12.7%, to $261.7 million
for the year ended December 31, 1997 from $232.3 million for the year ended
December 31, 1996 primarily due to (i) a 9.8% increase in the total student
enrollment at January 1, 1997 compared to January 1, 1996 (22,633 at January 1,
1997 compared to 20,618 at January 1, 1996), (ii) a 5% increase in tuition rates
in September 1997 and 1996, (iii) a 2.3% increase in the number of new
first-time students commencing their attendance at ITT Technical Institutes
(19,911 in 1997 compared to 19,464 in 1996) and (iv) the opening of new
institutes (two in March 1996, one in September 1996, one in June 1997 and two
in December 1997). Student retention rates did not change materially in the two
years. The three new ITT Technical Institutes beginning classes in 1997
accounted for 140 new students.
Cost of Educational Services. Cost of educational services increased by
$17.9 million, or 12.3%, to $163.1 million in 1997 from $145.2 million in 1996
principally as a result of increased costs related to the introduction of
additional programs, an increase in salaries and occupancy costs at ITT
Technical Institutes opened prior to 1995, costs at the two new institutes
opened in 1995, costs at the three new institutes opened in 1996, costs at the
three new institutes opened in 1997, and, to a lesser extent, as a result of an
increase in the costs of books sold related to the increased student population.
Provisions for legal expenses increased by $1.9 million to $3.2 million in 1997
($1.7 million in fourth quarter) from $1.3 million in 1996 ($1.0 million in
fourth quarter) as a result of the legal actions associated with the California
and Florida hospitality programs. See "Business -- Legal Proceedings." Cost of
educational services decreased to 62.3% of revenues in 1997 compared to 62.5% in
1996, primarily 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. Excluding the provisions for the legal expenses,
cost of educational services decreased to 61.1% of revenues in 1997 compared to
61.9% in 1996.
Student Services and Administrative Expenses. Student services and
administrative expenses increased by $5.9 million, or 8.9%, to $72.4 million in
1997 from $66.5 million in 1996 principally as a result of a $5.0 million
increase in marketing costs. This increase was due to (i) an increase in the
marketing costs for the two new technical institutes opened in 1995 and the
three new technical institutes opened in 1996, (ii) the commencement of
marketing costs for the three new technical institutes opened in 1997 and (iii)
the increased marketing costs for ITT Technical Institutes opened prior to 1995.
The Company's media advertising expenses increased by 10.9% in 1997 from 1996.
Administrative expenses at the corporate headquarters increased by $0.3 million
in 1997 from 1996 levels primarily due to increased headquarters staff. The
provision for doubtful accounts in 1997 was approximately $0.6 million more than
in 1996 principally because of increased revenue and a regulatory change that
delays the Company's receipt of funds under the
25
<PAGE> 30
Title IV Programs (i.e., the students withdrew before they could secure federal
student financial aid with which they could pay their obligations to the
Company). See "-- Liquidity and Capital Resources" for a further description of
the regulatory changes affecting when the Company receives Title IV Program
funds after June 30, 1997. Student services and administrative expenses
decreased to 27.7% of revenues in 1997 compared to 28.6% in 1996, primarily
because the greater revenues did not cause an increase in the fixed portion of
the marketing and headquarters expenses.
Interest Income. Interest income increased by $1.4 million in 1997 because
of the increase in the interest rate earned on the cash invested by the Company
with ITT (i.e., 6.3% in 1997 compared to 5.5% in 1996) and the increase in cash
invested with ITT.
Net Income. Net income increased $4.2 million, or 28.2%, to $19.1 million
for 1997 from $14.9 million for 1996, principally due to the 27.4% increase in
operating income ($3.4 million after tax).
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenue. Revenue increased by $30.5 million, or 15.1%, to $232.3 million
for the year ended December 31, 1996 from $201.8 million for the year ended
December 31, 1995 primarily due to a 17.7% increase in the number of new
first-time students commencing their attendance at ITT Technical Institutes
(19,464 in 1996 compared to 16,539 in 1995), a 5% increase in tuition rates in
September 1995 and 1996, and the opening of new institutes (two in September
1995, two in March 1996 and one in September 1996). The number of students
attending ITT Technical Institutes at January 1, 1996 was approximately the same
as at January 1, 1995. Student retention rates did not change materially in the
two years. The three new ITT Technical Institutes beginning classes in 1996
accounted for 348 new students.
Cost of Educational Services. Cost of educational services increased by
$14.9 million, or 11.4%, to $145.2 million in 1996 from $130.3 million in 1995
principally as a result of increased costs related to the introduction of
additional programs, an increase in salaries and occupancy costs at ITT
Technical Institutes opened prior to 1994, costs at the six new institutes
opened in 1994, costs at the two new institutes opened in 1995, costs at the
three new institutes opened in 1996, and, to a lesser extent, as a result of an
increase in the costs of books sold related to the increased student population.
Provisions for legal expenses increased by $1.2 million in 1996 from 1995
levels. This increase was principally a result of a $1.3 million provision in
1996 ($1.0 million in fourth quarter and $0.3 million in third quarter) for the
legal actions in Eldredge, et al. v. ITT Educational Services, Inc., et al. (the
"Eldredge Case"). (See Note 10 of Notes to Financial Statements for a further
description.) Cost of educational services decreased to 62.5% of revenues in
1996 compared to 64.6% in 1995, primarily because of greater revenues being
spread over the fixed portion of cost of educational services.
Student Services and Administrative Expenses. Student services and
administrative expenses increased by $9.2 million, or 16.1%, to $66.5 million in
1996 from $57.3 million in 1995 principally as a result of a $7.9 million
increase in marketing costs. This increase was due to (i) an increase in the
marketing costs for the six new technical institutes opened in 1994 and the two
new technical institutes opened in 1995, (ii) the commencement of marketing
costs for the three new technical institutes opened in 1996 and (iii) the
increased marketing costs for ITT Technical Institutes opened prior to 1994.
Administrative expenses at the corporate headquarters increased by $0.7 million
in 1996 from 1995 levels primarily due to increased headquarters staff. The
provision for doubtful accounts in 1996 was approximately $0.6 million more than
in 1995 principally because of increased revenue and a delay in the DOE's
certification of the new institutes opened in 1995 and 1996 to participate in
the Title IV Programs (i.e., the delay resulted in a greater number of students
who withdrew or were terminated from the institutes before they could secure
federal student financial aid with which they could pay their obligations to the
Company). Student services and administrative expenses increased to 28.6% of
revenues in 1996 as compared to 28.4% in 1995, because of increased television
advertising.
Interest Income. Interest income decreased by $0.7 million in 1996 because
of the reduction in the interest rate earned on the cash invested by the Company
with ITT (i.e., 5.5% in 1996 compared to 7.5% in 1995).
26
<PAGE> 31
Net Income. Net income increased $3.5 million, or 30.7%, to $14.9 million
for 1996 from $11.4 million for 1995, principally due to the 44.6% increase in
operating income ($3.8 million after tax).
LIQUIDITY AND CAPITAL RESOURCES
In 1997, the Company indirectly derived approximately 70% of its revenues
from Title IV Programs. Federal regulations dictate the timing of disbursements
of funds under Title IV Programs. Students must apply for a new loan for each
academic year (three academic quarters). Loan funds are generally provided by
lenders in three disbursements for each academic year. The first disbursement is
usually received either 30 days after (in the case of students commencing a
program of study) or 10 days before the start of the first academic quarter of a
student's academic year, and the second and third disbursements are typically
received 10 days before the start of the second and third academic quarters of a
student's academic year, respectively. While the timing of loan disbursements to
the Company is subject to a student's directions to the lender and to existing
regulatory requirements regarding such disbursements, which last changed
effective July 1, 1997, the Company has typically received student loan funds
upon their disbursement by the lender.
The DOE issued new regulations in November 1996, which became effective
July 1, 1997, that revised the procedures governing how an institution
participating in 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 1997 net cash provided by operating activities (a
one-time effect) by approximately $15.0 million, and decreased 1997 interest
income (an ongoing effect) by $0.2 million. The Company estimates that this
change will decrease 1998 interest income (an ongoing effect) by $0.8 million to
$1.0 million.
The principal uses of cash are to pay salaries, occupancy and equipment
costs, recruiting and marketing expenses, administrative expenses and taxes,
including institute start-up costs for new institutes. Until February 5, 1998,
cash receipts of the Company were forwarded to ITT on a daily basis after, in
the case of certain receipts, the lapse of applicable regulatory restrictions,
and cash disbursements of the Company were generally funded by ITT out of the
cash balances of the Company invested with ITT. The Company's net cash balances
of the cash invested with ITT increased from $89.8 million at December 31, 1996
to $94.8 million at December 31, 1997 and ranged from a low of $65.2 million in
May 1997 to a high of $103.3 million in November 1997. Since February 5, 1998,
the Company has performed its own cash management functions and no longer has
any cash invested with ITT.
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.
The Company has generated positive cash flows from operations for the past
five years. Cash flows from operations decreased by $11.7 million in 1997 to
$14.4 million from $26.1 million in 1996. This decrease is primarily due to the
decrease in deferred tuition revenue resulting from the July 1, 1997 regulatory
change affecting when the Company receives federal student loan funds, as
discussed above. Cash flows from operations in 1996 was $26.1 million, an
increase of $7.2 million from $18.9 million in 1995. This increase was primarily
due to the increases in operating income and deferred tuition revenue resulting
from increased student enrollment.
At March 31, 1998, the Company had positive working capital of $64.0
million. Deferred tuition revenue, which represents the unrecognized portion of
tuition revenue received from students, was $23.0 million at March 31, 1998.
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<PAGE> 32
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. See "Business -- Regulation of Federal Financial Aid
Programs -- Student Loan Defaults." 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.
The DOE, the Accrediting Commissions and most of the SEAs considered the
Merger to constitute a change in control of the Company and the ITT Technical
Institutes under their respective Regulations. As a result, effective upon the
Merger, each ITT Technical Institute campus group immediately became ineligible
to participate in Title IV Programs. The Company obtained all prior approvals of
the Merger from the Accrediting Commission and the SEAs that required such
approval before the Merger occurred. Since the Merger, the Company has obtained
temporary approval of the Merger from the other Accrediting Commission, final
approvals of the Merger from some of the SEAs required after a change in control
occurs and continued authorization to operate from the remaining SEAs. The
Company is continuing to pursue final approvals from such Accrediting Commission
and SEAs. The DOE approved the reinstatement of each ITT Technical Institute
campus group's participation in Title IV Programs effective March 20, 1998. The
DOE's approval was on a provisional basis, which is the DOE's practice for all
institutions following a change in control. As an additional condition of each
institute's provisional certification, the DOE directed the Company to maintain
a sufficient, but undefined, level of cash or cash equivalents, and to revise
its current accounting treatment of direct marketing costs, revenue recognition
and amortization of direct marketing costs or provide evidence that the
Company's treatment of these items is in conformance with GAAP. The Company
believes that its treatment of these items is in accordance with GAAP and that
it maintains cash and cash equivalents in sufficient amounts to satisfy the DOE,
but there can be no assurance thereof. If the Company is required to change its
accounting treatment for any of the above items, management does not believe
that such change would have a material adverse effect on the Company's financial
condition or results of operations before the cumulative effect of any change in
accounting.
The Offering will not constitute a change in control under the DOE's
Regulations. Any corporate reorganization of, or future disposition of the
Common Stock by, ITT could, however, constitute a change in control of the
Company and the ITT Technical Institutes. See "Business -- Change in Control."
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 their SEAs, reaccredited by their Accrediting
Commissions or recertified by the DOE to participate in Title IV Programs.
The Company's capital assets consist primarily of classroom and laboratory
equipment (such as computers, electronic equipment and robotic systems),
classroom and office furniture and leasehold improvements. All building
facilities are leased. Capital expenditures totaled $11.5 million during 1997
and included expenditures of $1.6 million for new technical institutes, $1.9
million to expand curricula offerings at existing institutes, $7.3 million to
replace or add furniture or equipment at existing institutes and $0.7 million on
leasehold improvements. Leasehold improvements represent part of a continuing
effort by the Company to maintain its existing facilities in excellent
condition. Capital expenditures increased by $3.6 million to $11.5 million in
1997 from $7.9 million in 1996, principally due to the expenditure of
approximately $3.0 million for the acquisition of new computers in 1997
(required to accommodate a software upgrade for the Company's
28
<PAGE> 33
computer-aided drafting technology curriculum). New institutes have large
capital additions in the first two years. To date, cash generated from
operations has been sufficient to meet capital expenditures.
The Company plans to continue to upgrade and expand current facilities and
equipment. The Company expects that the 1998 capital expenditures will be
approximately $10.0 million, of which $2.3 million had been expended through
March 31, 1998. The capital additions for a new institute are approximately $0.4
million and the capital expenditures for each new curriculum at an existing
institute are approximately $0.2 million. The Company anticipates that its
planned capital additions can be funded from cash flows from operations. Cash
flows from operations on a long-term basis is highly dependent upon the receipt
of funds from federal financial aid programs and the amount of funds spent on
new institutes, curricula additions at existing institutes and possible
acquisitions.
YEAR 2000 COMPLIANCE
The Company has made and will continue to make certain investments in its
software systems and applications to ensure the Company is year 2000 compliant.
The financial impact to the Company to ensure year 2000 compliance has not been
and is not anticipated to be material to its business, financial condition or
results of operations. There can be no assurance, however, that the institutions
or governmental agencies with which the Company transacts business will not
experience problems in year 2000 compliance that could adversely affect the
financial condition or results of operations of the Company.
SFAS PUBLICATIONS WITH FUTURE EFFECTIVE DATES
The Company is required to adopt the Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," and begin
reporting the financial information required thereunder beginning with the
Company's 1998 fiscal year. The Company's adoption of these standards will not
have a material impact on the financial information it will report in future
periods.
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.
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 costs 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.
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<PAGE> 34
BUSINESS
Unless the context indicates otherwise, the term "Company" refers to ITT
Educational Services, Inc., including all of its educational institutions; the
term "Starwood" refers collectively to Starwood Hotels & Resorts Worldwide,
Inc., a Maryland corporation formerly known as Starwood Lodging Corporation
("Starwood, Inc."), and Starwood Hotels & Resorts, a Maryland real estate
investment trust formerly known as Starwood Lodging Trust or Starwood Hotels &
Resorts Trust ("Starwood Trust"), and their subsidiaries other than the Company;
the term "ITT" refers to ITT Corporation, a Nevada corporation, and its
subsidiaries other than the Company; the terms "ITT Technical Institutes,"
"technical institutes" or "institutes" (in singular or plural form) refer to
educational institutions owned and operated by the Company; and the term
"institution" means a main campus and its additional locations or branch
campuses, if any (hereinafter "campus group" in singular or plural form).
BACKGROUND
Prior to its Initial Public Offering, which was consummated on December 27,
1994, the Company was a wholly owned subsidiary of ITT Corporation, formerly a
Delaware corporation and now known as ITT Industries, Inc., an Indiana
corporation ("Old ITT"). On September 29, 1995, ITT succeeded to the interests
of Old ITT in the beneficial ownership of 83.3% of the Common Stock of the
Company, as part of the division of Old ITT's businesses among itself and two of
its wholly owned subsidiaries (including ITT) and distribution of all the
outstanding common stock of ITT and the other subsidiary to the shareholders of
Old ITT, which occurred on December 19, 1995. On February 23, 1998, ITT became a
wholly owned subsidiary of Starwood, Inc. Starwood is the largest hotel and
gaming company in the world in terms of revenue and owns, manages or franchises
a geographically diversified portfolio of approximately 650 hotel properties.
The Company is a Delaware corporation incorporated in 1946. Old ITT
acquired a predecessor of the Company in 1966, and the Company changed its name
to ITT Educational Services, Inc. in 1969. The principal executive offices of
the Company are located at 5975 Castle Creek Parkway, North Drive, Indianapolis,
Indiana 46250, and its telephone number is (317) 594-9499.
OVERVIEW
ITT Educational Services, Inc. is a leading proprietary provider of
technology-oriented postsecondary degree programs in the United States based on
revenues and student enrollment. The Company offers associate, bachelor and
master degree programs and non-degree diploma programs to approximately 24,000
students through 63 ITT Technical Institutes located in 27 states. The education
programs are designed, after consultation with employers, to help graduates
begin to prepare for careers in various fields involving technology. As of
December 31, 1997, approximately 97% of ITT Technical Institute students were
enrolled in a degree program, with approximately 74% enrolled in programs
relating to electronics engineering technology ("EET") and approximately 23%
enrolled in programs relating to computer-aided drafting technology ("CAD").
While most graduates of ITT Technical Institutes are initially employed by
numerous small, technology-oriented companies, employers have also included well
recognized corporations, such as AT&T, Boeing, Intel, MCI, Microsoft, Motorola,
IBM and General Electric. Additionally, the institutes' graduates have been
hired by many federal and local government agencies, including the Federal
Bureau of Investigation and the Central Intelligence Agency. The Company has
provided career-oriented education programs for 32 years and its schools have
graduated over 125,000 students since 1976.
The Company has experienced significant growth, acquiring three and
establishing 50 new technical institutes since January 1, 1981. Of the 63
institutes currently operating, 20 have been established since January 1, 1993.
The number of students attending ITT Technical Institutes has increased 32.1%
from 18,539 at December 31, 1992 to 24,498 at December 31, 1997. Total revenues
from the ITT Technical Institutes have increased 74.0% from $150.4 million
(excluding discontinued operations) in 1992 to $261.7 million in 1997. The
Company opened three new technical institutes in 1997 and one new technical
institute in March 1998. The Company intends to continue expanding by opening
new technical institutes (including five additional new institutes in the
remainder of 1998) and offering a broader range of programs at its institutes.
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<PAGE> 35
The Company expects that the demand for postsecondary education will
continue to increase over the next several years as a result of favorable
demographic, economic and social trends. These trends include, based on data
from the United States Department of Education and data collected in the Current
Population Survey conducted by the Bureau of the Census, (a) 24% projected
growth in the number of new high school graduates from approximately 2.5 million
in 1994 to approximately 3.1 million in 2004, (b) the relatively small
percentage of adults over age 25 who possess a bachelor degree (approximately
23% in 1995), (c) an increasing number of high school graduates attending
postsecondary educational institutions (65% in 1996 versus 53% in 1983) and (d)
a heightened recognition of the importance of postsecondary education to an
individual's career prospects.
The Company believes that it is well positioned to take advantage of the
increasing demand for postsecondary education programs for the following
reasons:
Employment Oriented Education. ITT Technical Institutes offer
curricula designed to teach the technical knowledge and skills desired by
many employers for entry-level positions. Unlike many two-and four-year
colleges, each undergraduate curriculum offered by ITT Technical Institutes
has been designed, after consultation with employers, to help graduates
begin to prepare for careers in various fields involving technology.
Curricula are reviewed on a regular basis by headquarters curriculum
managers, as well as by advisory committees comprised of representatives of
employers, to respond to changes in technology and industry needs. The
Company believes that the strength of its programs and career services is
reflected in its graduate employment rates. Based on information provided
by graduates and employers, approximately 90% of the ITT Technical
Institutes' 1997 graduates, other than graduates who continued in a
bachelor degree program at an ITT Technical Institute, had obtained
employment or were already employed in fields involving their programs of
study as of April 24, 1998, the end of the most recently completed
statistical year.
Programs Designed for the Convenience of Students. ITT Technical
Institute programs are designed to provide students flexibility in
scheduling classes. Each ITT Technical Institute operates year-round and
undergraduate programs are offered on a quarterly basis, typically with
four 12-week quarters during a year. This year-round format allows students
to complete their program of study and enter the work force more rapidly
than students attending traditional colleges. Students are better able to
be employed while attending ITT Technical Institutes than while attending
traditional colleges, because classes are typically offered in four-hour
sessions five days a week and are generally available in the morning,
afternoon and evening. Programs of study are substantially standardized
throughout the ITT Technical Institutes, providing greater uniformity and
enabling students to transfer, if necessary, to the same program offered at
another ITT Technical Institute with less disruption to their education.
Financial Strength and Regulatory Compliance. Management believes
that the Company's financial strength enables it to capitalize on expansion
opportunities and is an important factor in its ability to comply with
federal and state regulatory requirements.
BUSINESS STRATEGY
The Company has multiple opportunities for growth and has developed a
business plan to increase revenues by increasing the number of programs of study
and students at existing ITT Technical Institutes while adding additional
locations to enhance operating efficiencies throughout the Company. Principal
elements of this plan include the following:
ENHANCE RESULTS AT THE SCHOOL LEVEL
Increase Enrollments at Existing Schools. ESI has successfully
increased student enrollment. Total student enrollment at ITT Technical
Institutes open for more than 24 months increased 6.2% from December 31,
1996 to December 31, 1997 and 7.2% from December 31, 1995 to December 31,
1996. Management believes that current demographic trends will support
increased enrollment of high school graduates. In addition, the Company
intends to increase recruiting efforts aimed at increasing enrollments of
working adults.
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<PAGE> 36
Broaden Availability of Current Program Offerings. The Company
intends to continue to expand program offerings at existing schools with
the objective of offering at least three programs at each ITT Technical
Institute. The Company's 63 institutes provide significant potential for
the introduction of existing programs to a broader number of ITT Technical
Institutes. Since January 1, 1993, the Company has increased the number of
institutes which offer three or more programs from 16 to 29. The Company
increased the number of program offerings at three existing ITT Technical
Institutes in March 1998 and intends to increase the number of program
offerings at approximately nine additional existing institutes in the
remainder of 1998. Management believes that the introduction of higher
level programs at additional ITT Technical Institutes will attract more
students and increase the number of students continuing their studies
beyond the associate degree level.
Develop or Acquire Additional Degree Programs. The Company also plans
to introduce programs in additional fields of study and at different degree
levels. ESI has introduced three new degree programs since December 1995,
which had a total of 319 students enrolled at December 31, 1997. The
Company believes that the development and introduction of new programs
attract a broader base of students and motivate current students to extend
their studies. ESI intends to test an associate degree program in Computer
Network Systems Technology ("CNS") at one institute in September 1998 to
target the growing need for technically skilled personnel in the computer
systems field. The new CNS program will be considered for testing at
additional institutes thereafter.
Extend Total Program Time. By increasing the number of institutes
that offer graduates of the eight- and six-quarter associate degree
programs (which are the primary program offerings at most institutes) an
additional four or six quarters of study, respectively, in which they can
earn a bachelor degree, the Company has been able to extend the total
program time for which a student can enroll. As a result, the average total
program time for which ITT Technical Institute students have enrolled has
increased from 18 months in 1986 to 24 months in 1997. The Company expects
that the average total program time for which ITT Technical Institute
students enroll will increase further as additional bachelor degree
programs are added.
Improve Student Outcomes. To attract new students and enhance student
retention, the Company seeks to improve the graduation and graduate
employment rates of the undergraduate students at ITT Technical Institutes
by providing extensive academic services and dedicating significant
administrative resources to career services. From 1993 through 1997, the
percent of ITT Technical Institute graduates (other than graduates who
continued in a bachelor degree program at an ITT Technical Institute) who
were employed in fields involving their programs of study increased from
83% to 90%.
INCREASE THE NUMBER OF ITT TECHNICAL INSTITUTES
The Company plans to add new ITT Technical Institutes at sites
throughout the United States. The Company opened three new technical
institutes in 1997 and one new technical institute in March 1998 and
intends to open five additional new technical institutes in the remainder
of 1998. The Company also intends to continue to evaluate the acquisition
of schools located in markets where ITT Technical Institutes are not
presently located.
INCREASE MARGINS BY LEVERAGING FIXED COSTS AT SCHOOL AND HEADQUARTERS
LEVELS
By optimizing school capacity and class size, the Company has the
ability to gain additional revenues from increased enrollment without
incurring a proportionate increase in fixed costs at the institutes. In
addition, the Company has controlled its administrative costs through the
centralization of management functions and the implementation of
operational uniformity among its 63 institutes. Centralization and
uniformity have resulted in substantial operating efficiencies. Between
1993 and 1997, expenses incurred at headquarters (including the district
offices) declined as a percentage of revenues from 6.8% in 1993 to 5.3% in
1997 as a result of increased revenues and these operating efficiencies.
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<PAGE> 37
PROGRAMS OF STUDY
The Company offers 14 degree programs and several diploma programs in
various fields of study. All ITT Technical Institutes offer a degree or diploma
program in EET and 54 ITT Technical Institutes offer a degree or diploma program
in CAD. Together the EET and CAD programs comprise the core of the ITT Technical
Institutes' program offerings. The table below sets forth information regarding
the programs of study offered by the Company as of December 31, 1997.
PROGRAMS OF STUDY OFFERED AT ITT TECHNICAL INSTITUTES
<TABLE>
<CAPTION>
NUMBER OF TECHNICAL INSTITUTES
OFFERING AT NUMBER OF STUDENTS ENROLLED AT
DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------------------------- ------------------------------------------------
MASTER BACHELOR ASSOCIATE MASTER BACHELOR ASSOCIATE
PROGRAM TITLE DEGREE DEGREE DEGREE DIPLOMA DEGREE DEGREE DEGREE DIPLOMA TOTAL
------------- ------ -------- --------- ------- ------ -------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Project Management.................. 1 -- -- -- 115 -- -- -- 115
Electronics Engineering
Technology........................ -- 17 61 1 -- 833 16,539 322 17,694
Computer-Aided Drafting
Technology........................ -- -- 52 2 -- -- 4,858 227 5,085
Automated Manufacturing
Technology(1)..................... -- 5 -- -- -- 304 -- -- 304
Tool Engineering Technology(2)...... -- -- 3 -- -- -- 193 -- 193
Architectural Engineering
Technology(2)..................... -- -- 3 -- -- -- 173 -- 173
Industrial Design(2)................ -- 3 -- -- -- 121 -- -- 121
Computer Visualization
Technology(2)..................... -- 4 -- -- -- 114 -- -- 114
Chemical Technology................. -- -- 2 -- -- -- 106 -- 106
Telecommunications Engineering
Technology(1)..................... -- 2 -- -- -- 99 -- -- 99
Hospitality (3)..................... -- 1 1 -- -- 26 62 -- 88
Other Programs of Study(4).......... -- -- 3 2 -- -- 239 167 406
--- ----- ------ --- ------
Total........................... 115 1,497 22,170 716 24,498
</TABLE>
- ---------------
(1) EET related program.
(2) CAD related program.
(3) In the Company's normal course of operations, it reviews the operations and
viability of all of its programs of study (including the marketing,
recruitment and enrollment procedures and materials relating to the
programs) and, from time to time, the Company makes changes with respect to
each of its programs. Due to the continuing lack of profitability of the
Hospitality programs, the Company has recently ceased enrolling new students
in the associate degree Hospitality program and intends to cease offering:
(a) the associate degree Hospitality program once all students currently
enrolled therein have an opportunity to complete that program; and (b) the
bachelor degree Hospitality program once all students currently enrolled
therein have an opportunity to complete that program and all students
currently enrolled in the associate degree Hospitality program have the
opportunity to enroll in and complete the bachelor degree Hospitality
program.
(4) Other programs consist of Business Technology and Administration, Business
Management and Accounting, Automotive Service Technology and Heating/Air
Conditioning/Refrigeration.
Students enrolled in programs related to EET and CAD represent
approximately 74% and 23%, respectively, of the ITT Technical Institute student
population as of December 31, 1997. The Company's EET programs are designed to
help graduates begin to prepare for careers in various fields involving EET by
providing students a practical education with respect to specific electronic
circuits and specialized techniques and, in the case of the bachelor degree
program, offering a broader foundation in EET through the study of subjects such
as circuit analysis, computer programming, computer operating systems and
advanced communications systems. Graduates of the programs have obtained a
variety of entry-level positions in various fields involving EET, such as
electronics product design and fabrication, communications, computer technology,
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<PAGE> 38
industrial electronics, instrumentation, telecommunications and consumer
electronics. The Company's CAD program is designed to help graduates begin to
prepare for careers in various fields involving CAD through the teaching of
computer-aided drafting techniques and conventional drafting methods. Graduates
have obtained a variety of entry-level positions in various fields involving
CAD, such as computer-aided drafting, electrical and electronics drafting,
mechanical drafting, architectural and construction drafting, civil drafting,
interior design and landscape architecture.
The academic schedule of undergraduate programs at the ITT Technical
Institutes is generally organized on the basis of four 12-week quarters of
instruction with new students beginning at the start of each academic quarter.
Associate degree programs can be completed in eight academic quarters or less,
and bachelor degree programs can typically be completed in 12 academic quarters
(including academic quarters completed as part of a related associate degree
program). Classes are typically offered in four-hour sessions five days a week
and, depending on student enrollment, sessions are generally available in the
morning, afternoon and evening. This class schedule generally affords
flexibility to students to pursue part-time employment opportunities. Based on
student surveys, the Company believes that a substantial majority of ITT
Technical Institute students work at least part-time during their programs of
study.
The academic schedule of the Master of Project Management ("MPM") program,
currently the Company's only graduate degree program of study, is organized on a
non-term basis pursuant to which one- to six-week courses are taken sequentially
one at a time. The MPM program can be completed in 21 months. Classes are
typically offered in four-hour sessions one night a week, which generally
accommodates students working full-time jobs. Students may generally begin the
MPM program once the minimum number of applicants necessary to begin a new class
has been assembled. The MPM program is presently offered by one technical
institute in Indiana, but at various sites throughout the state. The Company's
ability to offer the MPM program at other ITT Technical Institutes is currently
limited by the scope of the DOE's recognition of the accrediting commission that
accredits most of the ITT Technical Institutes. This accrediting commission
intends to petition the DOE to expand its scope of recognition by the DOE to
include master degree programs.
ITT Technical Institute programs of study blend traditional academic
content with applied learning concepts and have the objective of helping
graduates begin to prepare for a changing economic and technological
environment. A significant portion of a typical student's day in an associate
degree program at an ITT Technical Institute involves practical study in a lab
environment.
The content of technical courses in each program of study is substantially
standardized among the ITT Technical Institutes to provide greater uniformity
and to better enable students to transfer among the ITT Technical Institutes
offering the same programs with less disruption to their education. Each
curriculum is regularly reviewed to respond to changes in technology and
industry needs. The ITT Technical Institutes have established advisory
committees comprised of representatives of local employers for each field of
study. These advisory committees assist the ITT Technical Institutes in
assessing and updating curricula, equipment and laboratory design. In addition
to courses directly related to a student's program of study, degree programs may
also include general education courses, such as economics, humanities, oral and
written communications, environmental science and social psychology.
Tuition for a student entering an undergraduate program in December 1997
for three consecutive academic quarters (the equivalent of an academic year at
traditional two- and four-year colleges) is $7,145 for the EET program and
$8,456 for the CAD program. A student's tuition cost for a program of study is
set at the time of a student's enrollment in the program, provided the student
remains continually enrolled in the program and does not repeat any courses. The
majority of students attending an ITT Technical Institute lived in such
institute's metropolitan area prior to enrollment. The Company does not provide
any student housing.
STUDENT RECRUITMENT
The Company seeks to attract students with the motivation and ability to
complete the career-oriented educational programs offered by the ITT Technical
Institutes. To generate interest among potential students, the Company engages
in a broad range of activities to inform potential students and their parents
about the
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<PAGE> 39
ITT Technical Institutes and the programs offered. These activities include
television and other media advertising, direct mailings and high school visits.
The Company's television advertising is centrally coordinated and
developed. Television advertising is directed at a combination of both the
national market and the local markets in which ITT Technical Institutes are
located. The Company's television commercials generally include a toll free
telephone number for direct responses and information about the location of ITT
Technical Institutes in the area. Direct responses to television advertising are
centrally received, tracked and promptly forwarded to the appropriate ITT
Technical Institute representatives to contact prospective students and schedule
interviews. Responses to direct mail campaigns, which are targeted at high
school students and other potential postsecondary students, are also centrally
received, tracked and forwarded to the appropriate ITT Technical Institute
representatives.
The Company employs a director of recruitment at each institute, who
reports to the director of such institute. Recruiting policies and procedures,
as well as standards for hiring and training representatives, are established
centrally but are implemented at the local level. The Company employs
approximately 80 high school coordinators who make thousands of presentations to
students at high schools annually. These coordinators promote ITT Technical
Institutes and obtain information about high school juniors and seniors who may
be interested in attending the ITT Technical Institutes. The Company employed
approximately 485 other representatives as of December 31, 1997 to assist in
local recruiting efforts. As of December 31, 1997, approximately 230
representatives performed their services solely in student recruitment offices
located at each institute, while approximately 255 representatives worked
outside these offices and visited the homes of high school seniors and other
prospective students.
Local representatives of an ITT Technical Institute pursue expressions of
interest from potential undergraduate students by contacting prospective
students and arranging for interviews either at such institute or at prospective
students' homes. The interview is designed to establish a prospective student's
qualifications, academic background, interests, motivation and goals for the
future. Prospective undergraduate students are generally shown a video providing
information about the ITT Technical Institutes and the programs of study.
Expressions of interest from potential graduate students are pursued by
contacting them and arranging for their attendance at an informational seminar
providing information about the institute and the MPM program.
The Company monitors the effectiveness of its various marketing efforts and
seeks to determine the extent to which each of its marketing efforts results in
student enrollments. The Company estimates that in 1997 television advertising
produced 39% of student enrollments at ITT Technical Institutes, high school
coordinators accounted for 14%, referrals accounted for 15%, direct mail
campaigns accounted for 11%, associate degree graduates enrolling in a bachelor
degree program accounted for 6% and the remaining 15% were classified as
miscellaneous.
Student recruitment activities are subject to substantial regulation at
both the state and federal level. Most states have bonding and licensing
requirements that apply to many of the Company's representatives. The
implementation of recruitment policies and procedures is overseen by the
Company's National Director of Recruitment and the directors of field
recruitment and training. In addition, the Company's internal audit department
generally reviews the recruiting practices relating to the execution and
completion of enrollment agreements at each ITT Technical Institute on an annual
basis.
STUDENT ADMISSIONS AND RETENTION
The Company seeks to ensure that incoming students have the necessary
academic background to complete their chosen programs of study. All applicants
for admission to any of the ITT Technical Institutes' associate degree or
diploma programs are required to have a high school diploma or a recognized
equivalent and also must pass an admissions examination. Students interested in
bachelor degree programs or the MPM program must satisfy additional admissions
criteria that generally require, among other things: (a) in the case of bachelor
degree programs, the student first earn an associate degree, complete an
equivalent level program or complete an equivalent number of credit hours of
coursework in the same or related subject matter; and (b) in the case of the MPM
program, the student first earn a bachelor degree and possess at least three
years' full-time work experience. ITT Technical Institute students are of
varying ages and backgrounds. At
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<PAGE> 40
December 31, 1997, approximately 93% of the students were high school graduates
and the remaining students possessed the recognized equivalent of a high school
diploma. In addition, approximately 34% of the students had some postsecondary
educational experience prior to entering an ITT Technical Institute for the
first time. Approximately 35% of the students were 19 years of age or younger,
34% were between 20 and 24 years of age, 19% were between 25 and 30 years of age
and 12% were age 31 or over. Male students accounted for approximately 88% of
total enrollment as of December 31, 1997, while total minority enrollment at the
ITT Technical Institutes (based on applicable federal classifications) was
approximately 38%.
ITT Technical Institute faculty and staff strive to help students overcome
obstacles to the completion of their programs of study. As is the case in other
postsecondary institutions, however, students often fail to complete their
programs for a variety of personal, financial or academic reasons. Student
withdrawals prior to program completion not only affect the student, they also
have a negative regulatory, financial and marketing effect on the institute. To
minimize student withdrawals, each ITT Technical Institute devotes staff
resources to assist and advise students regarding academic and financial
matters. Academic advising and tutoring are encouraged in the case of
undergraduate students experiencing academic difficulties. Assistance and advice
are also offered to undergraduate students looking for part-time employment and
housing. In addition, factors relating to student retention are considered in
the performance evaluation of every instructor.
Students are most likely to withdraw before they begin their second
academic quarter of study at an ITT Technical Institute. Of all students who
enroll in ITT Technical Institutes, approximately 22% withdraw before their
second academic quarter of study and approximately 23% withdraw at some point
after the start of their second quarter. As a result, new technical institutes
generally have higher withdrawal rates than institutes which have been open for
five or more years. Approximately 70% of all students who continue their
education past their first academic quarter complete their education at an ITT
Technical Institute.
GRADUATE EMPLOYMENT
ITT Technical Institutes have graduated over 125,000 students since 1976.
The Company believes that the success of graduates from undergraduate programs
who begin their careers in various fields involving their programs of study is
critical to the ability of the ITT Technical Institutes to continue to recruit
undergraduate students. The Company seeks to obtain data on the number of
undergraduate students employed following graduation. The reliability of such
data is largely dependent on information that students and employers report to
the Company. Based on information from students and employers, the Company
believes that students graduating from ITT Technical Institute undergraduate
programs during the prior five years obtained employment or were already
employed in various fields involving their programs of study as of June 30 or
earlier of the year following graduation, as set forth below:
GRADUATE EMPLOYMENT STATISTICS
<TABLE>
<CAPTION>
PERCENT OF EMPLOYABLE
GRADUATES WHO OBTAINED
EMPLOYMENT OR WERE ALREADY
GRADUATING NUMBER OF EMPLOYABLE EMPLOYED IN FIELDS INVOLVING
CLASSES GRADUATES(1) THEIR PROGRAMS OF STUDY
---------- -------------------- -----------------------------
<S> <C> <C>
1997........................... 8,248 90%
1996........................... 8,422 88%
1995........................... 8,005 87%
1994........................... 7,459 85%
1993........................... 7,015 83%
</TABLE>
- ---------------
(1) Employable graduates exclude graduates who continue in a bachelor degree
program at an ITT Technical Institute.
Each ITT Technical Institute employs personnel to offer students and
graduates of undergraduate programs career services, including job search
assistance and soliciting employment opportunities from
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<PAGE> 41
employers. In addition, undergraduate students receive instruction during their
programs of study on such job search techniques as the identification of
potential employment opportunities, the use of relevant reference materials, the
composition of resumes and letters of introduction and the appropriate
preparation, appearance and conduct for interviews. No career services are
offered to students in the graduate program of study. The increase in employment
rates set forth in the table above may also be due in part to improved
conditions in the economy as a whole.
Based on information from students and employers who responded to inquiries
from the Company, the Company estimates that average annual starting salaries
reported for 1997 graduates of certain programs offered by the ITT Technical
Institutes who obtained employment or were already employed in fields involving
their programs of study were as follows:
AVERAGE STARTING SALARIES
<TABLE>
<CAPTION>
NUMBER OF AVERAGE ANNUAL
EMPLOYABLE SALARY UPON
PROGRAM GRADUATES GRADUATION
- ---------------------------------------------------------- ---------- ---------------
<S> <C> <C>
Automated Manufacturing Technology (Bachelor Degree)...... 310 $28,440
Electronics Engineering Technology (Bachelor Degree)...... 786 $27,228
Industrial Design (Bachelor Degree)....................... 57 $26,592
Computer-Aided Drafting Technology, Tool Engineering
Technology and Architectural Engineering Technology
(Associate Degree and Diploma).......................... 2,429 $21,286
Electronics Engineering Technology (Associate Degree
and Diploma)............................................ 4,271 $23,172
</TABLE>
Average annual salaries upon graduation for ITT Technical Institute
graduates may vary significantly among ITT Technical Institutes depending on
local employment conditions and each graduate's background. Initial employers of
graduates from ITT Technical Institute undergraduate programs include both
small, technology-oriented companies and well recognized corporations.
FEDERAL AND OTHER FINANCIAL AID PROGRAMS
In 1997, the Company indirectly derived approximately 70% of its revenues
from federal financial aid programs under Title IV ("Title IV Programs") of the
Higher Education Act of 1965, as amended ("HEA"), although ITT Technical
Institute students also rely on state financial aid programs, family
contributions, personal savings, employment and other resources to pay their
educational expenses. Students at the ITT Technical Institutes receive grants
and loans to fund the cost of their education under the following Title IV
Programs: (a) the Federal Pell Grant program, which accounted in aggregate for
approximately 11% of the Company's revenues in 1997; (b) the Federal
Supplemental Educational Opportunity Grant ("SEOG") program, which accounted in
aggregate for less than 1% of the Company's revenues in 1997; (c) the Federal
Family Education Loan ("FFEL") programs (consisting of the Federal Stafford Loan
program, Federal PLUS Loan program and Federal Consolidation Loan program),
which accounted in aggregate for approximately 55% of the Company's revenues in
1997; (d) the Federal Perkins Loan ("Perkins") program, which accounted in
aggregate for less than 1% of the Company's revenues in 1997; (e) the Federal
Work-Study ("Work-Study") program, under which federal funds are made available
to provide part-time employment to students and pursuant to which the ITT
Technical Institutes employed approximately 500 students and paid $957,000 in
student wages in 1997; and (f) the Federal Direct Loan ("FDL") programs
(consisting of the Federal Direct Stafford Loan program, Federal Direct PLUS
Loan program and Federal Direct Consolidation Loan program), which accounted in
aggregate for approximately 3% of the Company's revenues in 1997. The SEOG,
Perkins and Work-Study programs each require the institution to make a matching
contribution in the amount of 25% of all federal funds the institution receives
from the DOE each year. In 1997, the Company's 25% matching contribution
amounted to $17,000 for the SEOG program, $33,000 for the Perkins program and
$360,000 for the Work-Study program.
In 1997, approximately 2% of the Company's revenues were indirectly derived
from state financial aid programs and the Company awarded $738,000 in
institutional scholarships. The Company also provides
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<PAGE> 42
tuition discounts to full-time employees of the Company and their dependents to
attend ITT Technical Institutes. For 1997, the cost of these employee
educational discounts was $639,000.
REGULATION OF FEDERAL FINANCIAL AID PROGRAMS
In order to participate in Title IV Programs, an institution must comply
with numerous and complex standards set forth in the HEA and the regulations
promulgated thereunder by the U.S. Department of Education ("DOE"). These
standards are designed to limit institutional dependence on Title IV Program
funds, prevent institutions with unacceptable student loan default rates from
participating in Title IV Programs and, in general, require institutions to
satisfy certain criteria related to educational value, administrative capability
and financial responsibility. These standards are applied primarily on an
institutional basis, with an institution defined as a main campus and its
additional locations or branch campuses, if any. Among the 63 ITT Technical
Institutes, 30 are considered to be main campuses and 33 are considered to be
additional locations. The HEA standards require an institution to obtain and
periodically renew its certification by the DOE as an "eligible institution"
that has been authorized by the relevant state education authority(ies) and
accredited by an accrediting commission recognized by the DOE. Sixty of the 63
ITT Technical Institutes currently participate in Title IV Programs, and the
other three institutes, which were recently opened, have begun the certification
process for participation in Title IV Programs.
Proprietary providers of postsecondary education have been subjected to
increased scrutiny and regulation by the DOE and other regulatory authorities as
a result of concern about fraud and abuse of federal student financial aid
programs by certain proprietary institutions. The Company believes that the ITT
Technical Institutes are in substantial compliance with the HEA and its
implementing regulations. The Company cannot, however, predict with certainty
how all of the HEA provisions and the implementing regulations will be applied.
As described below, the violation of Title IV Program requirements by the
Company or any ITT Technical Institute could have a material adverse effect on
the Company's financial condition, results of operations or cash flows. In
addition, it is possible that the HEA and its implementing regulations may be
applied in a way that could hinder the Company's operations or expansion plans.
Significant factors relating to Title IV Programs that could adversely
affect the Company include the following:
Risk of Legislative Action. Title IV Programs are subject to
significant political and budgetary pressures. The HEA is reauthorized by
the U.S. Congress approximately every six years, and the next
reauthorization is expected to be completed in 1998 or 1999. There can be
no assurance that funding for Title IV Programs will continue to be
available or maintained at current levels or that current requirements for
institutional participation and student eligibility will not change. A
reduction in Title IV Program funding levels or a limitation of the
Company's participation in Title IV Programs could result in lower
enrollments and require the Company to arrange for alternative sources of
financial aid for its students. Given the significant percentage of the
Company's revenues that are indirectly derived from Title IV Programs, any
significant reduction in Title IV Program funding or the ability of the ITT
Technical Institutes or their students to participate in Title IV Programs
could have a material adverse effect on the Company's financial condition
or results of operations.
If an ITT Technical Institute lost its eligibility to participate in
Title IV Programs, or if the amount of available Title IV Program funding
was reduced, the Company would seek to arrange or provide alternative
sources of financial aid for that institute's students. There are a number
of private organizations that provide loans to students. Although the
Company believes that one or more private organizations would be willing to
provide loans to students attending an ITT Technical Institute, there is no
assurance that this would occur or that the interest rate and other terms
of such loans would be as favorable as for Title IV Program loans. In
addition, the Company would be required to guarantee all or part of this
assistance and might incur other additional costs in connection with
securing alternative sources of student financial aid. If the Company
provided more direct financial assistance to ITT Technical Institute
students, it would incur additional costs and assume increased credit
risks.
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Student Loan Defaults. Under the HEA, an 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
calculated on an institutional basis and represent the number of students
who have defaulted, not the dollar amount of such defaults. An
institution's cohort default rate is calculated on an annual basis as the
rate at which borrowers scheduled to begin repayment on their loans in one
year default on those loans by the end of the next year. For each year
through federal fiscal year 1994, each institution participating in the
FFEL programs received an FFEL cohort default rate. Beginning with federal
fiscal year 1995, the DOE also included loans under the FDL programs in the
calculation of an institution's cohort default rate, and each institution
received an FFEL/FDL cohort default rate based solely on FFEL program
loans, solely on FDL program loans or on a weighted average of both FFEL
and FDL program loans, depending on whether the institution participated in
the FFEL programs only, the FDL programs only or both FFEL and FDL
programs, respectively. An institution whose FFEL/FDL cohort default rate
is 25% or greater for three consecutive federal fiscal years loses
eligibility to participate in the FFEL and FDL programs for the remainder
of the federal fiscal year in which the DOE determines that the institution
has lost its eligibility and for the two subsequent federal fiscal years,
unless it successfully appeals such disqualification under the 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 FFEL and FDL programs. An institution whose FFEL/FDL cohort default
rate for any federal fiscal year exceeds 40% may have its eligibility to
participate in all Title IV Programs limited, suspended or terminated.
One ITT Technical Institute campus group, consisting of the institute
in Garland, Texas, had FFEL/FDL cohort default rates of 25% or greater for
three consecutive federal fiscal years: 27.7%, 36.8% and 28.4% for the
1993, 1994 and 1995 federal fiscal years, respectively. Another ITT
Technical Institute campus group, consisting of the institute in San
Antonio, Texas, had FFEL/FDL cohort default rates of 25% or greater for two
consecutive federal fiscal years: 25.6% and 26.1% for the 1994 and 1995
federal fiscal years, respectively. No other ITT Technical Institute campus
group had an FFEL/FDL cohort default rate equal to or greater than 25% for
the 1995 federal fiscal year, the latest year for which the DOE has
published official FFEL/FDL cohort default rates. The Company has received
29 of the 30 ITT Technical Institute campus groups' (consisting of 59
institutes) preliminary FFEL/FDL cohort default rates for the 1996 federal
fiscal year, which preliminary rates were issued by the DOE in May 1998.
The ITT Technical Institutes in Garland and San Antonio, Texas had
preliminary FFEL/FDL cohort default rates of 19.2% and 21.8%, respectively,
for the 1996 federal fiscal year. None of the 29 ITT Technical Institute
campus groups had a preliminary FFEL/FDL cohort default rate equal to or
greater than 25% for the 1996 federal fiscal year. The DOE issues
preliminary FFEL/FDL cohort default rates to provide institutions an
opportunity to correct any errors in the data used to calculate such rates
before the rates are published as official. The Company does not expect
that the remaining ITT Technical Institute campus group's (consisting of
one institute) preliminary FFEL/FDL cohort default rate for the 1996
federal fiscal year will be equal to or greater than 25%. The official
FFEL/FDL cohort default rates for the 1996 federal fiscal year are expected
to be published by the DOE in the last calendar quarter of 1998.
The ITT Technical Institutes in Garland and San Antonio, Texas, which
accounted for approximately 1.7% and 2.4%, respectively, of the Company's
revenues in its 1997 fiscal year, have initiated appeals of their 1995
FFEL/FDL cohort default rates with the DOE based on the servicing and
collection of the loans included in such rates and erroneous data used to
calculate such rates. The Company expects that these appeals will be
resolved in 1998. There can be no assurance that either institute's appeal
will result in a recalculation of its 1995 FFEL/FDL cohort default rate to
less than 25%. If the Garland, Texas ITT Technical Institute's appeal does
not result in its 1995 FFEL/FDL cohort default rate being reduced to less
than 25%, such institute will immediately become ineligible to participate
in the FFEL and FDL programs. If the San Antonio, Texas ITT Technical
Institute's appeal does not result in its 1995 FFEL/FDL cohort default rate
being reduced to less than 25% and such institute subsequently receives an
official 1996 FFEL/FDL cohort default rate equal to or greater than 25% and
cannot reduce that rate to less than 25% through an appeal to the DOE, such
institute will become ineligible to participate in the FFEL and FDL
programs. Loss of eligibility to participate in the
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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. Another alternative would be to stop enrolling
new students in the Garland institute, continue teaching the students
already enrolled, and close the institute once the students already
enrolled had completed their programs of study.
If an institution's FFEL/FDL cohort default rate is 25% or greater in
any of the three most recent federal fiscal years, or if its cohort default
rate for loans under the Perkins program exceeds 15% for any federal award
year (i.e., July 1 through June 30), that institution may be placed on
provisional certification status by the DOE. When the Garland and San
Antonio, Texas ITT Technical Institutes were provisionally recertified for
participation in Title IV Programs following the Merger, one of the reasons
each of those institutes received provisional certification was because the
institute's FFEL/FDL cohort default rate exceeded 25% for at least one of
the three most recent federal fiscal years. Each of those institutes was
told that it would remain provisionally certified until its FFEL/FDL cohort
default rates for the three most recent federal fiscal years for which such
rates have been published are all below 25%. Twenty-seven ITT Technical
Institute campus groups (consisting of 53 institutes) had a Perkins cohort
default rate in excess of 15% for students who were scheduled to begin
repayment in the 1995/1996 federal award year, the most recent year for
which such rates have been calculated. Thus, these ITT Technical Institutes
could be placed on provisional certification status based on their Perkins
cohort default rates. To date, no ITT Technical Institute campus group has
been placed on provisional certification status because of its Perkins
cohort default rate.
The HEA requires an institution with a Perkins cohort default rate of
15% or greater to establish a default management plan, and each ITT
Technical Institute has developed such a plan. Twenty-four ITT Technical
Institute campus groups (consisting of 46 institutes) had a Perkins cohort
default rate of 20% or greater for the 1995/1996 federal award year. The
HEA subjects institutions with a Perkins cohort default rate of 20% or
greater to a "default penalty" that reduces the amount of additional
federal funds allocated annually to the institution for use in the Perkins
program by: (a) 10%, if the rate is at least 20% but less than 25%; (b)
30%, if the rate is at least 25% but less than 30%; or (c) 100%, if the
rate is 30% or greater. The Perkins loans disbursed to ITT Technical
Institute students amounted to less than 1% of the Company's revenues in
1997, and less than half of the ITT Technical Institutes disburse their
entire annual allocation. As a result, the Company does not believe that
its financial condition or results of operations will be materially
affected by any reduction of additional federal funds allocated to the ITT
Technical Institute campus groups for use in the Perkins program. See
"-- Regulation of Federal Financial Aid Programs -- Administrative
Capability" and "-- Eligibility and Certification Procedures."
A substantial factor in controlling FFEL/FDL cohort default rates is
the servicing and collection efforts of student loan lenders and guaranty
agencies, which are independent of the Company. The Company supplements
such efforts by attempting to contact students who are delinquent in making
payments to advise them of their responsibilities and any deferment or
forbearance for which they may qualify. The Company has also contracted
with third-party servicers to provide additional assistance in reducing
defaults under the FFEL, FDL and Perkins programs by delinquent students
who attended certain ITT Technical Institutes.
Financial Responsibility Standards. The HEA and its implementing
regulations prescribe specific and detailed financial responsibility
standards that an institution must satisfy to participate in Title IV
Programs. Among the most significant of these standards is a requirement
that proprietary institutions have an acid test ratio (defined as the ratio
of cash, cash equivalents and current accounts receivable to
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<PAGE> 45
current liabilities) of at least 1:1 at the end of each of the
institution's fiscal years. In addition, an institution must (a) have a
positive tangible net worth at the end of each fiscal year and (b) not have
a cumulative net operating loss during its two most recent fiscal years
that results in a decrease of more than 10% of the institution's tangible
net worth at the beginning of such two-year period. If the DOE determines
that an institution does not satisfy each of these numeric standards, that
institution may establish its financial responsibility on an alternative
basis by (i) posting a letter of credit in an amount equal to 50% of the
total Title IV Program funds received by students enrolled at such
institution during the most recent year for which the DOE has data or (ii)
posting a letter of credit in an amount equal to 10% of such prior year's
Title IV Program funds and agreeing to receive Title IV Program funds under
an arrangement other than the DOE's standard advance funding arrangement.
Another significant financial responsibility standard requires institutions
to post a letter of credit with the DOE in an amount equal to 25% of the
total dollar amount of refunds paid by the institution in its most recent
fiscal year, if the institution has not paid refunds timely in its two most
recent fiscal years.
Historically, the DOE has evaluated the financial condition of the ITT
Technical Institutes on a consolidated basis based on the Company's
financial statements. The DOE's regulations, however, permit the DOE to
examine the financial statements of each ITT Technical Institute campus
group, the Company, Starwood, Inc. and ITT. The Company has calculated that
its acid test ratio at December 31, 1997 was 1.94:1 and the Company
believes that it satisfied all the other standards of financial
responsibility at the Company level as of that date. As a part of the DOE's
review of the applications of the ITT Technical Institute campus groups to
have their eligibility to participate in Title IV programs reinstated after
the Merger, the DOE evaluated the financial responsibility of all of the
ITT Technical Institute campus groups following the Merger. The DOE
determined that each of the campus groups satisfied the DOE's financial
responsibility standards following the Merger, but the DOE directed the
Company to address certain issues related to its financial condition and
financial statements. See "--Change in Control."
In November 1997, the DOE issued new regulations, to take effect July
1, 1998, which revised the DOE's standards of financial responsibility.
These new standards replace the acid test ratio, the tangible net worth
standard and the operating loss test described above with three different
ratios: an equity ratio, a primary reserve ratio and a net income ratio.
The equity ratio measures the institution's capital resources, ability to
borrow and financial viability. The primary reserve ratio measures the
institution's ability to support current operations from expendable
resources. The net income ratio measures the ability of an institution to
operate at a profit. The results of each ratio are assigned a strength
factor on a scale from negative 1.0 to positive 3.0, with negative 1.0
reflecting financial weakness and 3.0 reflecting financial strength. An
institution's strength factors are then weighted based on an assigned
weighting percentage for each ratio. The weighted scores for the three
ratios are then added together to produce a composite score for the
institution. The composite score must be at least 1.5 for the institution
to be deemed financially responsible by the DOE without the need for
further oversight. The Company has calculated that the application of these
new regulations to the Company's audited financial statements for its 1997
fiscal year results in a composite score of 3.0. The Company does not
believe, based on its current understanding of how the revised financial
responsibility standards will be applied, that these standards will have a
material adverse effect on the Company's financial condition, results of
operations or expansion plans.
The "85/15 Rule." Under a provision of the HEA commonly referred to
as the "85/15 Rule," a proprietary institution, such as each ITT Technical
Institute campus group, becomes ineligible to participate in Title IV
Programs if, on a cash accounting basis, more than 85% of its applicable
revenues for a fiscal year are derived from Title IV Programs. If any ITT
Technical Institute campus group were to violate the 85/15 Rule for any
fiscal year, it would be ineligible to participate in Title IV Programs as
of the first day of the following fiscal year and would be unable to apply
to regain its eligibility until the next fiscal year. Furthermore, if an
ITT Technical Institute campus group violated the 85/15 Rule and became
ineligible to participate in Title IV Programs but continued to disburse
Title IV Program funds, the DOE would consider all Title IV Program funds
disbursed to the institution after the effective date of the loss of
eligibility to be a liability subject to repayment by the institution. For
each of its 1996 and 1997
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fiscal years, the Company has calculated that no ITT Technical Institute
campus group derived more than 81% of its revenues from Title IV Programs,
and for its 1997 fiscal year, the range for the campus groups was from
approximately 61% to approximately 80%.
The Company believes that, due to the expansion and increased
availability of funding under certain Title IV Programs resulting from the
1992 reauthorization of the HEA, students have increasingly relied, and
probably will continue to rely, on Title IV Programs to finance their
education, thereby increasing the prospect that a greater percentage of ITT
Technical Institute revenues will be indirectly derived from Title IV
Programs. In an effort to prevent any future loss of Title IV Program
eligibility by any ITT Technical Institute campus group as a result of the
85/15 Rule, the Company has implemented various measures to reduce the
percentage of applicable revenues indirectly derived from Title IV
Programs. Some of these alternatives require the Company to incur costs not
associated with Title IV Programs.
Additional Locations and Program Offerings of ITT Technical
Institutes. The Company's expansion plans assume its continued ability to
(a) establish new ITT Technical Institutes as additional locations of
existing ITT Technical Institute main campuses and (b) expand the program
offerings at existing institutes. In its last three fiscal years, the
Company has: (i) established eight new additional locations, six of which
are participating in Title IV Programs and two of which are in the process
of obtaining certification to participate; and (ii) added 35 programs at
its existing ITT Technical Institutes. In addition, in March 1998 the
Company established one new additional location, which is in the process of
obtaining certification to participate in Title IV Programs. The HEA
requires proprietary educational institutions, such as the ITT Technical
Institute campus groups, to be in full operation for two years before the
institution can qualify to participate in Title IV Programs. The HEA and
applicable regulations, however, permit an institution that is already
certified to participate in Title IV Programs to establish additional
locations that may, after review by the DOE, begin to participate in Title
IV Programs without satisfying the two-year requirement so long as each
such additional location satisfies all other applicable requirements for
institutional eligibility.
The HEA and applicable regulations permit students to use Title IV
Program funds only to pay the cost of attending eligible programs offered
by institutions participating in Title IV Programs. The HEA and applicable
regulations do not, however, restrict the number or delay the introduction
of educational programs that an institution may offer, but students can
only receive Title IV Program funds for enrollment in programs that satisfy
all applicable requirements for eligibility.
Fifty-eight ITT Technical Institutes are accredited by the Accrediting
Commission of Career Schools and Colleges of Technology ("ACCSCT"), and
three are accredited by the Accrediting Council for Independent Colleges
and Schools ("ACICS"). The ACCSCT standards generally permit an
institution's main campus to establish an additional location, if the main
campus: (a) is not on probation; (b) is not subject to a show cause order;
(c) is not subject to outcomes reporting, or, if subject to outcomes
reporting, has been expressly permitted by the ACCSCT to establish an
additional location; (d) has not applied for accreditation for an
additional location within the past two years; and (e) has not undergone a
change in control for at least one year, but this requirement generally
does not apply to an accreditation application for an additional location
submitted prior to the change in control. Prior to the change in control
caused by the Merger, the Company submitted applications for accreditation
to the ACCSCT for all additional locations that the Company anticipates
opening in 1998 and for most of the additional locations that the Company
anticipates opening in 1999. The ACICS standards generally permit an
institution's main campus to establish a branch campus (referred to herein
as an "additional location") if: (i) the main campus is not on probation;
(ii) neither the main campus nor any of its additional locations is subject
to a show cause order; (iii) neither the main campus nor any of its
additional locations is subject to a financial or outcomes review, or, if
subject to a financial or outcomes review, has been expressly permitted by
the ACICS to establish an additional location; and (iv) the main campus
does not have any additional location awaiting final accreditation.
The ACCSCT standards generally permit an institution's main campus and
its additional locations to expand their program offerings if (a) the
institute is not on probation and (b) the institute is not subject to a
show cause order. The ACICS standards generally permit an institution's
main campus and
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its additional locations to expand their program offerings if: (i) the
institute is not on probation; and (ii) neither the main campus nor any of
its additional locations is subject to a financial or outcomes review or,
if subject to an outcomes review, has been expressly permitted by the ACICS
to expand its program offerings.
One ITT Technical Institute (an additional location) accredited by the
ACCSCT is on probation and 22 ITT Technical Institutes (14 main campuses
and eight additional locations) accredited by the ACCSCT are subject to
outcomes reporting. No ITT Technical Institute accredited by the ACICS is
on probation or subject to a financial or outcomes review. The ACCSCT may
place an institution's main campus or additional location on probation or
subject it to outcomes reporting for a variety of reasons. All of the ITT
Technical Institutes that are on probation or subject to outcomes reporting
by the ACCSCT received such status because the ACCSCT determined that the
student completion rates for certain programs of study offered by these ITT
Technical Institutes are not reasonable. Under the ACCSCT and the ACICS
standards, as applicable, an institution's main campus or additional
location that is: (a) placed on probation is required to demonstrate to the
accrediting commission that the institute has taken corrective action and
is in continuous compliance with accrediting commission standards; (b)
subjected to outcomes reporting is required to periodically report its
results in such areas to the accrediting commission; or (c) subjected to a
financial or outcomes review is required to report its results in such
areas to the accrediting commission. Although the ACCSCT and the ACICS
standards limit the ability of the Company to establish additional
locations and expand the programs offered at an institute in certain
circumstances, the Company does not believe, based on its current
understanding of how the accrediting standards will be applied, that these
limitations will have a material adverse effect on the Company's expansion
plans.
State laws and regulations generally treat each ITT Technical
Institute location as a separate institution and do not distinguish between
main campuses and additional locations. Thus, ITT Technical Institutes that
are recognized as additional locations by the DOE and their respective
accrediting commissions are, for the most part, recognized as separate,
unaffiliated institutions by their respective state education authorities.
State laws and regulations generally do not limit the number of
institutions that can be established within the state or the number of
programs that can be offered by an institution, so long as each institution
satisfies all requirements to obtain the requisite state authorization(s).
The requirements to obtain the requisite state authorization(s) limit the
ability of the Company in certain states to establish new institutes and
offer new programs, and the process of obtaining the requisite state
authorization(s) can delay the opening of new institutes or the offering of
new programs. Although state laws and regulations limit the ability of the
Company to establish new ITT Technical Institutes and expand the programs
offered at an institute, the Company does not believe, based on its current
understanding of how the state laws and regulations in effect in the states
where the Company is located or anticipates establishing a new location
will be applied, that these limitations will have a material adverse effect
on the Company's expansion plans. See "-- State Authorization and
Accreditation."
Administrative Capability. The HEA directs the DOE to assess the
administrative capability of each institution to participate in Title IV
Programs. The DOE has issued regulations that require each institution to
satisfy a series of separate standards. Failure to satisfy any of the
standards may lead the DOE to determine that the institution lacks
administrative capability and, therefore, is not eligible to continue its
participation in Title IV Programs or must be placed on provisional
certification status as a condition of such continued participation. One
standard that is applicable to certain programs with the stated objective
of preparing students for employment requires the institution to show a
reasonable relationship between the length of the program and the
entry-level job requirements of the relevant field of employment. Other
standards provide that an institution lacks administrative capability if
its FFEL/FDL cohort default rate equals or exceeds 25% for any of the three
most recent federal fiscal years for which FFEL/FDL cohort default rates
are available, or if its Perkins cohort default rate exceeds 15% for any
federal award year. Two ITT Technical Institute campus groups (each
consisting of one institute) had a FFEL/FDL cohort default rate equal to or
greater than 25% for at least one of the three most recent federal fiscal
years for which FFEL/FDL cohort default rates have been published.
Twenty-seven ITT Technical Institute campus groups (consisting of 53
institutes) had a Perkins cohort default rate in
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excess of 15% for the most recent federal award year for which such rates
have been calculated. When the Garland and San Antonio, Texas ITT Technical
Institutes were provisionally recertified for participation in Title IV
Programs following the Merger, one of the reasons each of those institutes
received provisional certification was because the institute's FFEL/FDL
cohort default rate exceeded 25% for at least one of the three most recent
federal fiscal years. Each of those institutes was told that it would
remain provisionally certified until its FFEL/FDL cohort default rates for
the three most recent federal fiscal years for which such rates have been
published are all below 25%. To date, no ITT Technical Institute campus
group has been placed on provisional certification status because of its
Perkins cohort default rate. See "-- Regulation of Federal Financial Aid
Programs -- Student Loan Defaults" and "-- Eligibility and Certification
Procedures."
An additional standard in the HEA prohibits an institution from
providing any commission, bonus or other incentive payment based directly
or indirectly on success in securing enrollments or financial aid to any
person or entity engaged in any student recruitment, admission or financial
aid awarding activity. The DOE has provided only limited guidance
respecting compliance with this requirement. ITT Technical Institute
employees involved in student recruitment, admissions or financial aid
receive only a salary. The Company believes that its method of compensating
persons and entities engaged in student recruitment, admission or financial
aid awarding activity complies with the requirements of the HEA. The
regulations do not, however, establish clear standards for compliance, and
there can be no assurance that the DOE will not find deficiencies in the
Company's present or former methods of compensation.
Under new regulations issued by the DOE in November 1996, starting
January 1, 1998 each institution must utilize certain electronic processes
provided by the DOE in order to be considered administratively capable.
Although the Company will have to adjust some of its current practices in
order for its institutes to comply fully with this new requirement, the
Company does not believe, based on its current understanding of how this
new requirement will be applied, that the Company's financial condition
will be materially affected by this new standard.
Eligibility and Certification Procedures. Under the HEA and its
implementing regulations, each institution is required to periodically
reapply to the DOE for continued eligibility to participate in Title IV
Programs. Each institution deemed to be in compliance with the HEA and the
DOE's regulations is recertified for a period not to exceed four years,
before which time it must apply again for continued recertification. In
1997, 13 ITT Technical Institute campus groups (consisting of 20
institutes) were required by the DOE to apply for recertification to
participate in Title IV Programs. The DOE combined each of these campus
groups' applications for recertification with their applications for
reinstatement of participation in Title IV Programs following the change in
control caused by the Merger. The DOE normally requires an institution to
submit an updated application for institutional eligibility and
certification when it opens an additional location that offers a full
educational program or raises its level of program offering.
An institution may be placed on provisional certification status for a
period not to exceed three years, if the DOE finds that the institution
does not fully satisfy all the eligibility and certification standards. If
an institution successfully participates in the Title IV Programs during
its period of provisional certification but fails to satisfy the full
certification criteria, the DOE may renew the institution's provisional
certification. An institution's provisional certification may be withdrawn
by the DOE without advance notice if the DOE determines that the
institution is not fulfilling all applicable requirements, and an
institution that is provisionally certified may be subjected to closer
review by the DOE if it applies for approval to open a new location or some
other significant change in its eligibility, but provisional certification
does not otherwise limit an institution's access to Title IV Program funds.
Further, any institution seeking eligibility to participate in Title IV
Programs after a change in control will be provisionally certified for a
limited period, following which the institution will be required to reapply
for continued eligibility. No ITT Technical Institute campus group was
provisionally certified by the DOE prior to the Merger. As a result of the
Merger, each ITT Technical Institute campus group was recertified to
participate in Title IV Programs on a provisional basis for a three-year
period. As an additional condition of each institute's provisional
certification, the DOE directed the Company to address certain issues
related to its financial condition and financial statements. Four campus
groups (consisting of six
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ITT Technical Institutes) each had one additional condition placed on their
provisional certification, as follows: (a) the Garland and San Antonio,
Texas ITT Technical Institutes were each cited for having an FFEL/FDL
cohort default rate equal to or greater than 25% for at least one of the
three most recent federal fiscal years for which such rates have been
published, and each was told that it would stay on provisional
certification status until its rates for the three most recent federal
fiscal years for which such rates have been published are all below 25%;
(b) the San Diego, California ITT Technical Institute was cited for having
a pending DOE program review, and was told it would stay on provisional
certification status until all liabilities identified in the program review
were paid and all deficiencies identified in the program review were
resolved; and (c) the Youngstown, Ohio ITT Technical Institute campus group
was cited because its accrediting commission, the ACICS, had only
temporarily extended the campus group's accreditation following the Merger
and had not yet formally reaccredited the campus group. See "-- Change in
Control."
Title IV Program Funds Management. The DOE issued new regulations in
November 1996 which became effective July 1, 1997 and which revised the
procedures governing how an institution participating in Title IV Programs
requests, maintains, disburses and otherwise manages Title IV Program
funds. One significant change is the requirement that institutions disburse
all Title IV Program funds by payment period, which, in the case of the ITT
Technical Institutes, corresponds to an academic quarter. This regulation
increases the number of disbursements of federal student loans that
institutions on a quarter system, like the ITT Technical Institutes, must
make and, therefore, delays each institute's receipt and disbursement of
federal student loan funds. Other significant changes include expanding the
requirements for institutions to notify Title IV Program fund recipients of
certain information and reducing the time by which an institution must
return undisbursed Title IV Program funds. These new regulations materially
affect the Company's cash flow and increase the Company's administrative
burden, but they will not have a material adverse effect on the Company's
financial condition or results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
Availability of Lenders and Guarantors. For a variety of reasons,
including the high default rates of students attending certain proprietary
institutions, the growth of the FDL programs and the potential assertion of
claims against holders of student loans, the number of lenders willing to
make federally guaranteed student loans to students at certain proprietary
institutions has declined. To date, however, the availability of lenders
has not affected the ability of ITT Technical Institute students to obtain
FFEL program loans. In the Company's 1997 fiscal year, one lending
institution provided approximately 62% of all federally guaranteed student
loans to ITT Technical Institute students. The Company believes that other
lenders would be willing to make FFEL program loans to its students if such
loans were no longer available from any of its current lenders, but there
can be no assurance in this regard. In addition, the HEA requires the
establishment of lenders of last resort in every state to make loans to
students at any school that cannot otherwise identify lenders willing to
make federally guaranteed loans to its students. Using a lender of last
resort may delay the receipt of FFEL program loans by ITT Technical
Institute students and slightly reduce the total loan access for ITT
Technical Institute students, but it should not have a material adverse
effect on the Company. The lenders of last resort will not provide PLUS
loans, which accounted for 11% of the Company's revenues in 1997, and are
not required to provide any unsubsidized Stafford loans, which accounted
for 23% of the Company's revenues in 1997.
In the Company's 1997 fiscal year, one student loan guaranty agency
guaranteed approximately 94% of all FFEL program loans made to ITT
Technical Institute students. The Company believes that other guaranty
agencies would be willing to guarantee FFEL program loans to ITT Technical
Institute students if that guaranty agency ceased guaranteeing such loans
or reduced the volume of loans guaranteed, but there can be no assurance in
this regard. Most states have a designated guaranty agency that the Company
believes would guarantee most, if not all, FFEL program loans made to ITT
Technical Institute students in that state. In addition, the HEA's lender
of last resort program provides for the guarantee of FFEL program loans
made by lenders of last resort. Thus, any reduction in the volume of FFEL
program loans for ITT Technical Institute students guaranteed by the
institutes' primary guaranty agency should not have a material adverse
effect on the Company's financial condition, results of
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<PAGE> 50
operations or cash flows. Neither ITT, Starwood, Inc. nor any of their
subsidiaries or affiliates (including the Company) makes or guarantees any
Title IV Program loans to any student attending any ITT Technical
Institute.
Compliance with Regulatory Standards and Effect of Regulatory
Violations. The Company maintains an internal audit department that
reviews the compliance of the ITT Technical Institutes with Title IV
Program requirements. The Company's audit plan provides for an annual
on-site compliance review of each ITT Technical Institute. The review
addresses numerous compliance areas, including student tuition refunds,
student academic progress, student admissions, graduate employment, student
attendance, student financial aid applications and implementation of prior
audit recommendations.
The ITT Technical Institutes are subject to audits or program
compliance reviews by various external agencies, including the DOE, state
agencies, guaranty agencies and accrediting commissions. The HEA and its
implementing regulations also require that an institution's administration
of Title IV Program funds be audited annually by an independent accounting
firm. If the DOE or another regulatory agency were to determine that an ITT
Technical Institute had improperly disbursed Title IV Program funds or had
violated a provision of the HEA or the implementing regulations, the
affected institute could be required to repay such funds to the DOE or the
appropriate state agency or lender and could be assessed an administrative
fine. The DOE could also transfer the institute from the advance system of
receiving Title IV Program funds to the reimbursement system, under which a
school must disburse its own funds to students and document the students'
eligibility for Title IV Program funds before receiving such funds from the
DOE. Violations of Title IV Program requirements could also subject an
institute or the Company to other civil and criminal penalties. In
addition, significant violations of regulatory standards governing Title IV
Programs by the Company or any of the ITT Technical Institutes could be the
basis for a proceeding by the DOE to limit, suspend or terminate the
participation of the affected institutes in Title IV Programs. If the DOE
terminates the eligibility of an institution to participate in Title IV
Programs, the institution in most circumstances must wait 18 months before
requesting a reinstatement of its participation. An institution that loses
its eligibility to participate in the FFEL and FDL programs due to high
cohort default rates for three consecutive years normally may not apply to
resume participation in those programs for at least two federal fiscal
years. An institution that loses its eligibility to participate in Title IV
Programs due to a violation of the 85/15 Rule may not apply to resume
participation in Title IV Programs for at least one year.
The DOE performed a program review of the ITT Technical Institute in
San Diego, California. As a part of that program review, the DOE directed
the Company to (a) remit a nominal amount of money to lenders and the DOE
and (b) adopt a policy of refunding late disbursement amounts directly to
students, instead of to students' lenders for the purpose of reducing
students' Title IV Program loan balances. The Company has made such
remittance and has adopted such a policy and submitted it to the DOE for
review. These actions will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows. There
is no proceeding pending to fine, limit, suspend or terminate any ITT
Technical Institute's participation in Title IV Programs, and the Company
has no reason to believe that any such proceeding is contemplated. If such
a proceeding were initiated and resulted in a substantial curtailment of
the Company's participation in Title IV Programs, the Company would be
materially adversely affected, even if the Company could arrange or provide
alternative sources of student financial aid. If an institute lost its
eligibility to participate in Title IV Programs and the Company could not
arrange for alternative sources of financial aid for the institute's
students, the Company probably would have to close that institute.
STATE AUTHORIZATION AND ACCREDITATION
The Company is subject to extensive and varying regulation in each of the
27 states in which an ITT Technical Institute currently operates and in four
other states in which the institutes recruit students. Each ITT Technical
Institute must be authorized by the applicable state education authority(ies) to
operate and grant degrees or diplomas to its students. In addition, certain
states require an institute to be in operation for a period of up to two years
before such institute can be authorized to award degrees. All 63 ITT Technical
Institutes are currently authorized by one or more state education authorities.
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<PAGE> 51
ITT Technical Institutes that confer bachelor or master degrees must, in
most cases, meet additional regulatory standards. Raising the curricula of
existing ITT Technical Institutes to the bachelor and/or master degree level
requires the approval of state education authorities and accrediting
commissions. State education laws and regulations affect the Company's
operations and may limit the ability of the Company to introduce degree programs
or to obtain authorization to operate in certain states. If any ITT Technical
Institute lost its state authorization, the institute would be unable to offer
postsecondary education and the Company would be forced to close the institute.
Closing an ITT Technical Institute could have a material adverse effect on the
Company's financial condition or results of operations.
The HEA specifies a series of standards that each recognized accrediting
commission must utilize in reviewing institutions. For example, accrediting
commissions must assess the length of each academic program and the tuition
charged by each institution in relation to the subject matters taught and the
objectives of the degrees or diplomas offered. Further, accrediting commissions
must evaluate each institution's success with respect to student achievement, as
measured by rates of program completion, passing of state licensing examinations
and job placement. In 1997, seven ITT Technical Institutes were reviewed and
reaccredited by their respective accrediting commission and one ITT Technical
Institute obtained its initial accreditation.
State authorization and accreditation by a recognized accrediting
commission are required in order for an institution to become and remain
eligible to participate in Title IV Programs. In addition, some states require
institutions operating therein to be accredited as a condition of state
authorization. Fifty-eight ITT Technical Institutes are accredited by the ACCSCT
and three are accredited by the ACICS, both of which are accrediting commissions
recognized by the DOE. The other two institutes, which were recently opened,
have applied for accreditation. One ITT Technical Institute (an additional
location) accredited by the ACCSCT is on probation and 22 ITT Technical
Institutes (14 main campuses and eight additional locations) accredited by the
ACCSCT are subject to outcomes reporting. No ITT Technical Institute accredited
by the ACICS is on probation or subject to a financial or outcomes review. Under
the ACCSCT and the ACICS standards, as applicable, an institution's main campus
or additional location may be placed on probation, subjected to outcomes
reporting or subjected to a financial or outcomes review for a variety of
reasons. All of the ITT Technical Institutes that are on probation or subject to
outcomes reporting by the ACCSCT received such status because the ACCSCT
determined that the student completion rates for certain programs of study
offered by these ITT Technical Institutes are not reasonable. Under the ACCSCT
and the ACICS standards, as applicable, an institution's main campus or
additional location that is: (a) placed on probation is required to demonstrate
to the accrediting commission that the institute has taken corrective action and
is in continuous compliance with accrediting commission standards; (b) subjected
to outcomes reporting is required to periodically report its results in such
areas to the accrediting commission; or (c) subjected to a financial or outcomes
review is required to report its results in such areas to the accrediting
commission. If any ITT Technical Institute on probation by the ACCSCT fails to
make the applicable demonstration to the ACCSCT, the ACCSCT may revoke, refuse
to renew or otherwise condition the institute's accreditation. The loss of
accreditation by an existing ITT Technical Institute or the failure of a new
technical institute to obtain full accreditation: (a) would render (i) only the
affected institute ineligible to participate in Title IV Programs, if the
affected institute was an additional location or (ii) the entire campus group
ineligible to participate in Title IV Programs, if the affected institute was a
main campus; and (b) could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
CHANGE IN CONTROL
The DOE, the ACCSCT and the ACICS (collectively, the "Accrediting
Commissions") and most of the state education authorities that regulate the ITT
Technical Institutes (the "SEAs") have laws, regulations and/or standards
(collectively "Regulations") pertaining to changes in ownership and/or control
(collectively "change in control") of educational institutions, but these
Regulations do not uniformly define what constitutes a change in control. The
DOE's Regulations describe certain transactions that constitute a change in
control, including the transfer of a controlling interest in the voting stock of
an institution or such institution's parent corporation. The DOE's standards
also specify that a change in control of a publicly traded corporation, such as
the Company, occurs when there is an event that obligates the corporation to
file a Current Report on Form 8-K with the Securities and Exchange Commission
disclosing a change in control.
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<PAGE> 52
Most of the SEAs and the Accrediting Commissions include the sale of a
controlling interest of common stock in the definition of a change in control.
The change in control Regulations adopted by the DOE, the Accrediting
Commissions and the SEAs are subject to varying interpretations as to whether a
particular transaction constitutes a change in control.
Upon the occurrence of a change in control under the DOE's Regulations, an
institution immediately becomes ineligible to participate in Title IV Programs,
cannot commit additional Title IV Program funds to its students, and can only
receive and disburse certain Title IV Program funds that were previously
committed to its students. Thereafter, the institution must file a complete
application with the DOE in order to have its eligibility to participate in
Title IV Programs reinstated. Reinstatement of an institution's certification to
participate in Title IV Programs is dependent on the DOE's determination that
the institution, under its new ownership and control, is in compliance with
specified DOE requirements for institutional eligibility. The time required for
the DOE to act on an application for certification under new ownership and
control can vary substantially and may take several months. To be complete,
among other things, such application must demonstrate that, following the change
in control, the main campus and all of the additional locations and branch
campuses that comprise the institution are authorized by the appropriate state
educational authority(ies) and accredited by an accrediting commission
recognized by the DOE.
The Accrediting Commissions will not reaccredit an institution following a
change in control until the institution submits a complete application for
reaccreditation, which requires (among other things) documentation that the
institution has been reauthorized, or continues to be authorized, by the
appropriate SEA(s). The standards of the ACCSCT (which accredits 58 ITT
Technical Institutes) provide that, during the 30 days immediately preceding the
change in control, the ACCSCT will determine whether to temporarily continue the
institution's accreditation for a period of six months after the change to allow
time for the completion and review of the application. The standards of the
ACICS (which accredits three ITT Technical Institutes) provide that, generally
within five business days after an institution documents (among other things)
that it has been reauthorized, or continues to be authorized, by the appropriate
SEA(s) following a change in control, the ACICS will determine whether to
temporarily reinstate the institution's accreditation for an undefined period to
allow for the completion and review of the application.
Many of the SEAs, including the California SEA which authorizes 11 ITT
Technical Institutes, require that a change in control of an institution be
approved before it occurs in order for the institution to maintain its SEA
authorization. Other SEAs will only review a change in control of an institution
after it occurs.
The DOE, the Accrediting Commissions and most of the SEAs (including the
California SEA) considered the Merger to constitute a change in control of the
Company and the ITT Technical Institutes under their respective Regulations. As
a result, effective upon the Merger, each ITT Technical Institute campus group
immediately became ineligible to participate in all of the Title IV Programs.
The Company obtained all prior approvals of the Merger from the ACCSCT and the
SEAs that required such approval before the Merger occurred. Since the Merger,
the Company has obtained temporary approval of the Merger from the ACICS, final
approvals of the Merger from some of the SEAs required after a change in control
occurs and continued authorization to operate from the remaining SEAs. The
Company is continuing to pursue final approvals from the ACICS and SEAs. The DOE
approved the reinstatement of each ITT Technical Institute campus group's
participation in Title IV Programs effective March 20, 1998. The DOE's approval
was on a provisional basis, which is the DOE's practice for all institutions
following a change in control. As an additional condition of each institute's
provisional certification, the DOE directed the Company to maintain a
sufficient, but undefined, level of cash or cash equivalents, and to revise its
current accounting treatment of direct marketing costs, revenue recognition and
amortization of direct marketing costs or provide evidence that the Company's
treatment of these items is in conformance with GAAP. The Company believes that
its treatment of these items is in accordance with GAAP and that it maintains
cash and cash equivalents in sufficient amounts to satisfy the DOE, but there
can be no assurance thereof. If the Company is required to change its accounting
treatment for any of the above items, management does not believe that such
change would have a material adverse effect on the Company's financial condition
or results of operations before the cumulative effect of any change in
accounting. Four campus groups (consisting of six ITT Technical Institutes) each
had one additional condition placed on their provisional certification. See "--
Regulation of Federal Financial Aid Programs -- Eligibility and Certification
Procedures."
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<PAGE> 53
The Offering will constitute a change in control under the Regulations of
certain SEAs (but not the California SEA), but not under the Regulations of the
DOE or of either Accrediting Commission. Thus, certain ITT Technical Institutes
will be subject to review by their applicable SEAs to reaffirm their
authorization. A significant delay in obtaining or the failure to obtain SEA
authorization of any ITT Technical Institute could have a material adverse
effect on the Company's financial condition or results of operations. The
Company does not believe it will experience any material delay or difficulty in
obtaining SEA authorization for any affected institute. The Company has obtained
all approvals of the Offering from those SEAs that require approval before the
Offering occurs.
A change in control under the Regulations of the DOE, the Accrediting
Commissions and most of the SEAs could also occur as a result of certain future
transactions involving the ITT Technical Institutes, the Company or a principal
stockholder, including but not limited to ITT's disposition of a significant
portion of the shares of Common Stock that it retains after the Offering,
certain corporate reorganizations and certain changes in the boards of directors
of such corporations. Starwood, Inc. has announced that it is exploring a range
of disposition strategies for the Company.
The Company believes that if a future transaction results in a change in
control of the ITT Technical Institutes, the Company or a principal stockholder,
the Company will be able to obtain all necessary approvals from the DOE, the
SEAs and the Accrediting Commissions, with the possible exception of the
California SEA. There can be no assurance, however, that all such approvals can
be obtained in a timely manner that would not unreasonably delay the
availability of Title IV Program funds to ITT Technical Institute students or
prevent certain ITT Technical Institute students from receiving Title IV Program
funds for which they would otherwise be eligible. In particular, obtaining such
approval from the California SEA, which authorizes 11 ITT Technical Institutes,
could be adversely affected by a state statute that prohibits the California SEA
from approving a change in control application by any applicant that has been
found in any judicial or administrative proceeding to have violated Chapter 7
(formerly Chapter 3) of the California Education Code ("Chapter 7"). In October
1996, the jury in the Eldredge Case determined that the Company, through its ITT
Technical Institute in San Diego, California, violated Chapter 7. The Company
has appealed the jury's verdict in the Eldredge Case. While the California SEA
approved the change in control application submitted by the Company with respect
to the Merger, there can be no assurance that it will approve any future change
in control application submitted by the Company. See "-- Legal Proceedings."
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 to timely: (a)
obtain the approvals of the SEAs required prior to a change in control,
including the California SEA in particular; (b) obtain the requisite
reauthorizations from the SEAs which review a change in control after it occurs;
(c) regain accreditation (or have their accreditation temporarily continued or
reinstated) by the Accrediting Commissions; or (d) regain eligibility to
participate in Title IV Programs from the DOE. 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
amount of Title IV Program funds students can obtain to pay the education costs
of attending the ITT Technical Institutes and, accordingly, on the Company's
business, financial condition and results of operations.
FEDERAL INCOME TAX RELIEF
Federal income tax relief in the form of tax credits, tax deductions and
income exclusions is available to students and their families beginning in 1998
under the Taxpayer Relief Act of 1997 ("TRA"). The TRA provides: (a) an annual
Hope Scholarship tax credit of up to $1,500 for tuition and related expenses
incurred on or after January 1, 1998 for each of a student's first two years of
postsecondary education; (b) an annual Lifetime Learning tax credit of up to
$1,000 in 1998 through 2002 and up to $2,000 in subsequent years for tuition and
related expenses incurred on or after July 1, 1998, but the Lifetime Learning
tax credit is not available in any tax year in which the taxpayer is claiming
the Hope Scholarship tax credit; (c) an annual tax deduction, ranging from up to
$1,000 in 1998 to up to $2,500 in 2001 and thereafter, for interest paid during
the first 60 months in which interest payments are required on any student
loan(s); and (d) an annual income
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<PAGE> 54
exclusion of up to $5,250 for undergraduate educational expenses incurred on or
after January 1, 1998 and before June 1, 2000 that are paid by the student's
employer. The TRA also allows taxpayers to establish Education IRAs, for taxable
years beginning on or after January 1, 1998, that can be funded with non-
deductible contributions of up to $500 annually for any child up to the age of
18 years, and the earnings on those accounts are tax-free if the funds are used
to pay for qualified higher education expenses. The tax benefits provided by the
TRA may help reduce the effective cost of postsecondary education to the student
and his or her family and may, as a result, lead to higher enrollments at ITT
Technical Institutes, decreased student dependence on Title IV Program funds and
fewer Title IV Program loan defaults. Educational institutions are required to
submit certain information about the student and the student's family to the
Internal Revenue Service ("IRS") in order for the student and the student's
family to qualify for some of the tax benefits under the TRA. The Company's
administrative burden will increase as a result of these IRS reporting
requirements, but such compliance will not have a material adverse effect on the
Company's financial condition or results of operations.
FACULTY
Faculty members are hired in accordance with criteria established by the
Company, the Accrediting Commissions and the SEAs. The Company strives to hire
faculty with related work experience and academic credentials to teach most
technical subjects. Faculty members typically include education supervisors, who
act as department heads for a program of study, and various categories of
instructors. As of December 31, 1997, the ITT Technical Institutes employed 997
full-time faculty members and 167 part-time faculty members. The ratio of the
number of all ITT Technical Institute students to all ITT Technical Institute
full-time instructors is approximately 25 to 1.
ADMINISTRATION AND EMPLOYEES
Each ITT Technical Institute is administered by a director who has overall
responsibility for the management of the institute. The administrative staff of
each ITT Technical Institute also includes a director of recruitment, a director
of career services, a director of finance and a director of education. The
Company employs approximately 160 people at its corporate headquarters in
Indianapolis, Indiana. As of December 31, 1997, the Company had approximately
2,750 full-time and regular part-time employees. In addition, the Company
employed approximately 600 students as laboratory assistants and in other
part-time positions at that date. None of the Company's employees is represented
by labor unions.
The Company's headquarters provides centralized services to all ITT
Technical Institutes in the following areas: accounting, marketing, public
relations, curricula development, purchasing, human resources, regulatory and
legislative affairs and real estate. In addition, national directors of each
major technical institute function (i.e., recruiting, finance, education and
career services) reside at the headquarters and develop policies and procedures
to guide these functions at the technical institutes. Managers located at the
headquarters closely monitor the operating results of each ITT Technical
Institute and frequently conduct on-site reviews.
COMPETITION
The postsecondary education market in the United States is highly
fragmented and competitive with no private or public institution enjoying a
significant market share. ITT Technical Institutes compete for students with
four-year and two-year degree granting institutions, which include nonprofit
public and private colleges and proprietary institutions, as well as with
alternatives to higher education such as military service or immediate
employment. Competition among educational institutions is believed to be based
on the quality of the educational program, perceived reputation of the
institution, cost of the program and employability of graduates. Certain public
and private colleges may offer programs similar to those of the ITT Technical
Institutes at a lower tuition cost due in part to government subsidies,
foundation grants, tax deductible contributions or other financial resources not
available to proprietary institutions. Other proprietary institutions offer
programs that compete with those of the ITT Technical Institutes. Certain of the
Company's competitors in both the public and private sector have greater
financial and other resources than the Company.
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PROPERTIES
All ITT Technical Institute facilities are leased by the Company, except
for a parking lot adjacent to the Houston (North), Texas ITT Technical Institute
that is owned by the Company. The average lease term is approximately eight
years. The table below sets forth certain information regarding the ITT
Technical Institute facilities leased by the Company as of March 31, 1998.
ITT TECHNICAL INSTITUTE FACILITIES LEASES
<TABLE>
<CAPTION>
AREA IN
LOCATION (METROPOLITAN AREA) SQUARE FEET
- --------------------------------- -----------
<S> <C>
Birmingham, Alabama.............. 23,907
Phoenix, Arizona................. 25,900
Tucson, Arizona.................. 17,818
Little Rock, Arkansas............ 22,766
Anaheim, California (Los
Angeles)....................... 35,646
Hayward, California (San
Francisco)..................... 20,009
Lathrop, California (Stockton)... 13,274(1)
Oxnard, California (Los
Angeles)....................... 27,098
Rancho Cordova, California
(Sacramento)................... 27,020
San Bernardino, California
(Los Angeles).................. 33,551
San Diego, California............ 34,360
Santa Clara, California
(San Francisco)................ 24,390
Sylmar, California (Los
Angeles)....................... 30,000
Torrance, California (Los
Angeles)....................... 30,000
West Covina, California
(Los Angeles).................. 36,382
Aurora, Colorado (Denver)........ 23,450(2)
Thornton, Colorado (Denver)...... 27,076
Fort Lauderdale, Florida......... 16,341
Jacksonville, Florida............ 25,200
Maitland, Florida (Orlando)...... 32,418
Miami, Florida................... 21,347
Tampa, Florida................... 35,000
Boise, Idaho..................... 27,978
Burr Ridge, Illinois (Chicago)... 21,000(1)
Hoffman Estates, Illinois
(Chicago)...................... 24,000
Matteson, Illinois (Chicago)..... 19,058
Fort Wayne, Indiana.............. 67,000
Indianapolis, Indiana............ 58,692
Newburgh, Indiana (Evansville)... 20,000
Louisville, Kentucky............. 20,232
St. Rose, Louisiana (New
Orleans)....................... 21,000(3)
Framingham, Massachusetts
(Boston)....................... 19,938
Grand Rapids, Michigan........... 25,000
</TABLE>
<TABLE>
<CAPTION>
AREA IN
LOCATION (METROPOLITAN AREA) SQUARE FEET
- --------------------------------- -----------
<S> <C>
Troy, Michigan (Detroit)......... 32,000
Arnold, Missouri (St. Louis)..... 21,000(1)
Earth City, Missouri (St.
Louis)......................... 29,360
Omaha, Nebraska.................. 22,400
Henderson, Nevada (Las Vegas).... 11,166(1)
Albuquerque, New Mexico.......... 21,588
Albany, New York................. 21,000(3)
Getzville, New York (Buffalo).... 22,765
Liverpool, New York (Syracuse)... 21,000(3)
Dayton, Ohio..................... 45,591
Norwood, Ohio (Cincinnati)....... 21,272
Strongsville, Ohio (Cleveland)... 21,548
Youngstown, Ohio................. 22,500
Portland, Oregon................. 39,600
Mechanicsburg, Pennsylvania
(Harrisburg)................... 21,000
Monroeville, Pennsylvania
(Pittsburgh)................... 23,791
Pittsburgh, Pennsylvania......... 19,232
Greenville, South Carolina....... 22,065
Knoxville, Tennessee............. 30,000
Memphis, Tennessee............... 21,648
Nashville, Tennessee............. 34,690
Arlington, Texas................. 19,600
Austin, Texas.................... 25,480
Garland, Texas (Dallas).......... 21,138
Houston (North), Texas........... 22,695
Houston (South), Texas........... 22,954
Houston (West), Texas............ 36,413
Richardson, Texas (Dallas)....... 23,500(3)
San Antonio, Texas............... 25,000
Murray, Utah (Salt Lake City).... 33,600
Norfolk, Virginia................ 25,572
Richmond, Virginia............... 21,000(3)
Bothell, Washington (Seattle).... 27,800
Seattle, Washington.............. 30,316
Spokane, Washington.............. 16,378
Greenfield, Wisconsin
(Milwaukee).................... 29,650
</TABLE>
- ---------------
(1) Institutes in the first year of operation.
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<PAGE> 56
(2) Facility under lease from which the Company relocated the ITT Technical
Institute to Thornton, Colorado. While the Company remains subject to the
lease for the Aurora facility, an ITT Technical Institute is no longer
located in this facility.
(3) Facility under lease at which the Company plans to open a new ITT Technical
Institute.
ITT Technical Institutes are generally located in suburban areas near major
population centers. Campus facilities are generally situated in modern, air
conditioned buildings, which include classrooms, laboratories, student break
areas and administrative offices. ITT Technical Institutes have accessible
parking facilities and are generally near a major highway. Approximately 32 ITT
Technical Institutes occupy an entire building. New ITT Technical Institutes
typically lease facilities for a six to 11 year term. If desirable or necessary,
a facility may be relocated to a new location reasonably near the existing
facility at the end of the lease term.
The Company leases approximately 41,100 square feet of office space in its
headquarters building in Indianapolis, Indiana. As of December 31, 1997, the
lease requires payments of approximately $3.5 million over the remaining term of
the lease, which expires in 2003.
The Merger was, and the Offering will be, deemed a change in control under
certain of the Company's leases and, absent the consent of the landlord, would
cause such leases to be in default. The Company has obtained all such consents.
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) (the "Eldredge Case"), 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
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<PAGE> 57
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.
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, EET
and CAD) 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
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<PAGE> 58
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 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, rescission 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.
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<PAGE> 59
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information about the Company's
current executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rene R. Champagne................... 56 Chairman, President and Chief Executive Officer
Gene A. Baugh....................... 55 Senior Vice President and Chief Financial Officer
Clark D. Elwood..................... 37 Senior Vice President, General Counsel and Secretary
Edward G. Hartigan.................. 58 Senior Vice President
Thomas W. Lauer..................... 52 Senior Vice President
</TABLE>
RENE R. CHAMPAGNE has served as Chairman of ESI since October 1994,
President and Chief Executive Officer of ESI since September 1985 and a Director
of ESI since October 1985.
GENE A. BAUGH has served as Chief Financial Officer of ESI since December
1996 and Senior Vice President of ESI since January 1993. From 1981 through
November 1996 he served as Treasurer and Controller of ESI.
CLARK D. ELWOOD has served as Senior Vice President of ESI since December
1996, Secretary of ESI since October 1992 and General Counsel of ESI since May
1991. From January 1993 through November 1996, he served as Vice President of
ESI.
EDWARD G. HARTIGAN has served as Senior Vice President of ESI since January
1993.
THOMAS W. LAUER has served as Senior Vice President of ESI since January
1993.
PRINCIPAL AND SELLING STOCKHOLDER
The following table sets forth certain information concerning the
beneficial ownership by Starwood, Inc. of the Common Stock, and as adjusted to
reflect consummation of the Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING(1)
NAME AND ADDRESS -------------------- SHARES --------------------
OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED(1) NUMBER PERCENT
------------------- ---------- ------- ---------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Starwood Hotels & Resorts Worldwide,
Inc.(2)............................... 22,500,000 83.3% 11,350,000 11,150,000 41.3%
2231 E. Camelback Road,
Suite 400
Phoenix, Arizona 85016
</TABLE>
- ---------------
(1) Assumes the underwriters' over-allotment option for 1,700,000 shares is not
exercised. If the over-allotment option is exercised in full, Starwood, Inc.
would beneficially own 9,450,000 shares after the Offering (35.0% of the
shares outstanding).
(2) The shares are held of record by ITT, a wholly owned subsidiary of Starwood,
Inc. since the Merger. ITT is the Selling Stockholder.
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<PAGE> 60
RELATIONSHIP WITH SELLING STOCKHOLDER AND RELATED TRANSACTIONS
GENERAL
Prior to the Offering, ITT holds 83.3% of the outstanding shares of Common
Stock. In addition, prior to the Merger on February 23, 1998, three directors of
the Company (Rand V. Araskog, Robert A. Bowman and Richard S. Ward) served as
executive officers of ITT and three other directors of the Company (Bette B.
Anderson, Vin Weber and Margita E. White) served on ITT's board of directors.
Mr. Araskog and Mr. Bowman also served on ITT's board of directors. In
connection with the Merger, Mrs. Anderson, Mr. Bowman, Mr. Ward and Mrs. White
resigned from the Company's Board of Directors, effective February 23, 1998. On
February 25, 1998, the remaining members of the Board of Directors of the
Company elected four individuals recommended by Starwood, Inc. (Tony Coelho,
Robin Josephs, Merrick R. Kleeman and Barry S. Sternlicht) to fill the vacancies
caused by such resignations and to serve as Directors for terms expiring at the
2000, 1999, 2000 and 1998 Annual Meeting of Shareholders, respectively, and
until such Director's successor is duly elected and qualified. Mr. Sternlicht
has been nominated for re-election as a Director at the 1998 Annual Meeting of
Shareholders for a term expiring at the 2001 Annual Meeting of Shareholders. Mr.
Sternlicht serves as chairman and a director of Starwood, Inc. and as chairman,
chief executive officer and a trustee of Starwood Trust. Mr. Sternlicht is also
the general manager of Starwood Capital Group, L.L.C., which, together with its
affiliates and Mr. Sternlicht, beneficially owns approximately 5.3% of the
outstanding paired shares of Starwood, Inc. common stock and Starwood Trust
beneficial interest. Mr. Kleeman is also a managing director of Starwood Capital
Group, L.L.C. Mr. Coelho and Ms. Josephs are not affiliated with ITT, Starwood,
Inc., Starwood Trust or Starwood Capital Group, L.L.C.
SERVICES
Set forth below are descriptions of certain services provided by ITT to the
Company since the Initial Public Offering. As described below and in "--
Agreements With Selling Stockholder," there have been changes in such
arrangements in connection with the Merger and the Offering.
Treasury and Financing Services. Until February 5, 1998, ITT provided the
Company with centralized treasury and financing services. As part of these
functions, surplus cash receipts of the Company were remitted to ITT, and ITT
advanced cash, as necessary, to the Company. For 1997, the net amount of cash
transferred from the Company to ITT, exclusive of payments for the services
described below, was $24,293,000 and aggregate payments for the services
described below were $20,472,000. ITT paid interest to the Company on the
average net cash balances of the Company held by ITT. For 1997, the Company
received net interest income from ITT in the amount of $5,682,000. Since
February 5, 1998, the Company manages and invests its own cash. Depending upon
current interest rates on short-term investments, the Company may not be able to
obtain the same yields on its cash balances that were being paid by ITT.
Accordingly, interest income, net may decrease in 1998.
General and Administrative Services. Under agreements in place since the
Initial Public Offering, ITT periodically provided advice and assistance to the
Company with regard to certain risk management, accounting, tax and other
management services. The fee for such services (the "contract service charge")
is 0.25% of the Company's annual revenues. For 1997, the contract service charge
was $654,000. The Company ceased utilizing substantially all of these services
and incurring the related fee at the time of the Merger.
Pension Plan. The Company participates in the Retirement Plan for Salaried
Employees of ITT Corporation (the "Pension Plan"), a non-contributory defined
benefit 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. Prior to December 19,
1995, the Company participated in the Retirement Plan for Salaried Employees of
Old ITT (the "Old Pension Plan"), which was substantially identical to the terms
of the Pension Plan. For 1997, the Company's pension expense was $4,458,000.
Federal legislation limits the amount of benefits that can be paid and
compensation that may be recognized under a tax-qualified retirement plan. ITT
has adopted a non-qualified unfunded retirement plan ("Excess Pension Plan") for
payment of those benefits at retirement that cannot be paid from the qualified
Pension Plan. The practical
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<PAGE> 61
effect of the Excess Pension Plan is to continue calculation of retirement
benefits to all employees on a uniform basis. Benefits for the Company's
employees under the Excess Pension Plan are generally to be paid directly by the
Company. Any "excess" benefit accrued to any such employee will be immediately
payable in the form of a single discounted lump sum payment upon the occurrence
of a change in corporate control (as defined in the Excess Pension Plan). The
approval by ITT's shareholders of the Merger constituted a change in corporate
control as defined in the Excess Pension Plan, which resulted in a distribution
of all of the accrued benefits under the Excess Pension Plan to the
participants. After the Offering, the Company will implement its own pension and
excess pension plans.
Retirement Savings Plan. The Company participates in The ITT 401k
Retirement Savings Plan (the "Savings Plan"), a defined contribution pension
plan which covers substantially all employees of the Company. Employees can
contribute (subject to certain Internal Revenue Service limitations) amounts
ranging from 2% to 16% of base pay. The Company contributes 1% of the employee's
covered pay and matches the employee's contributions at the rate of 50% up to a
maximum of 5% of covered pay, amounting to a maximum matching contribution of
2.5% of the employee's covered pay. The Company's non-matching and matching
contributions were, prior to the Merger, in the form of common shares of ITT and
are, since the Merger, in the form of paired shares of Starwood, Inc. common
stock and Starwood Trust beneficial interest. Federal legislation limits the
annual contributions which an employee may make to the Savings Plan, a tax-
qualified retirement plan. Accordingly, ITT adopted, and the Company
participated in, prior to the Merger, an ITT Excess Savings Plan (the "Excess
Savings Plan"), a non-qualified retirement plan, which enables employees who are
precluded by these limitations from contributing 5% of their salary to the
tax-qualified plan to make up the shortfall through salary deferrals and,
thereby, receive the 1% non-matching company contribution and the 2.5% matching
company contribution otherwise allowable under the tax-qualified plan. Salary
deferrals, company contributions and imputed earnings are entered into a book
reserve account maintained by ITT for each participant. The costs of the
Company's non-matching and matching contributions are charged by ITT to the
Company. For 1997, the costs of providing this benefit (including an allocation
of the administrative costs of the plan) were $2,104,000. The account balance
maintained on behalf of a participant will be immediately payable in a single
lump sum payment upon the occurrence of a change in control (as defined in the
Excess Savings Plan). The approval by ITT's shareholders of the Merger
constituted a change in control as defined in the Excess Savings Plan, which
resulted in a distribution of all the account balances maintained under the
Excess Savings Plan to participants. The Company has adopted its own 401(k) and
excess savings plans that will become effective on the closing of the Offering.
Group Medical and Life Benefits. During 1997, the Company's employees were
provided certain medical benefits and life insurance through ITT. In 1998, the
Company began providing all of its own medical and life insurance benefits to
its employees, but the Company continues to utilize ITT's services in the
administration of the Company's indemnity medical plan. The Company is
responsible for all claims incurred under its indemnity plan, subject to stop
loss coverage for individual medical claims greater than $50,000, for which the
Company pays an allocated share of all claims in excess of $50,000 for all ITT
subsidiaries in the United States. The Company also pays its share of the
administrative and stop loss pooling expenses incurred by ITT with respect to
these services. For 1997, payments by the Company to ITT for medical and life
insurance claims totaled $1,783,000.
Worker's Compensation and General Liability. The Company is self-insured
with respect to worker's compensation and general liability claims. During 1997,
the Company participated in the ITT claims program which provided stop loss
protection for claims greater than $100,000. Amounts equal to actual claims
applicable to the Company under $100,000 plus an allocation of the estimated
total ITT claims in excess of $100,000 are paid to ITT. For 1997, payments by
the Company for worker's compensation and general liability claims were
$1,074,000. In 1998, the Company began servicing its own claims and obtained
stop loss protection from a third party provider.
Federal Income Taxes. Prior to the Offering, the Company has been included
in the consolidated U.S. federal income tax return of ITT. Under an agreement
with ITT, income taxes are allocated among affiliates of ITT based upon the
amounts they would pay or receive if they filed a separate income tax return.
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<PAGE> 62
For 1997, the Company's allocated federal income taxes were $10,399,000. After
the Offering, the Company will no longer be included in the consolidated return
of ITT.
AGREEMENTS WITH SELLING STOCKHOLDER
Set forth below are descriptions of certain agreements between the Company
and ITT and/or its affiliates that are being entered into in connection with the
Offering.
Amended and Restated Registration Rights Agreement. An Amended and Restated
Registration Rights Agreement (the "Registration Rights Agreement"), among other
things, provides that, upon request of ITT, the Company will register under the
Securities Act any of the shares of Common Stock held by ITT for sale in
accordance with ITT's intended method of disposition thereof, and will take such
other action necessary to permit the sale thereof in other jurisdictions. ITT
has the right to request two such registrations after the Offering. The Company
will pay all registration expenses (other than underwriting discounts and
commissions and ITT's legal, accounting and advisors expenses) in connection
with such registrations. ITT also has the right, which it may exercise at any
time and from time to time during the term of the agreement, to include the
shares of Common Stock held by it in other registrations of shares of Common
Stock initiated by the Company on its own behalf or on behalf of any other
person. The Company will pay all registration expenses (other than underwriting
discounts and commissions related to the shares of Common Stock sold by ITT,
ITT's legal, accounting and advisors expenses, and the filing fees payable under
the Securities Act for the shares of Common Stock sold by ITT) in connection
with each such registration. The rights of ITT under the Registration Rights
Agreement are transferable by ITT. The Registration Rights Agreement terminates
five years after the closing of the Offering. The Company did not incur any cost
or expense under the Registration Rights Agreement or its predecessor in 1997;
however, the Company will be paying the costs of the Offering in 1998 pursuant
to the predecessor to the Registration Rights Agreement.
The Registration Rights Agreement prohibits the holder of any shares of
Common Stock registered by the Company pursuant to such agreement from disposing
of any such shares if the disposition would cause a change in control of the
Company or any of its ITT Technical Institutes, until the Company receives all
of the required prior approvals of the DOE, Accrediting Commissions and SEAs.
Trade Name and Service Mark License Agreement. A Trade Name and Service
Mark License Agreement (the "License Agreement"), among other things, provides
that ITT Sheraton Corporation ("Sheraton"), an ITT affiliate, grants to the
Company, for a period of seven years from the closing of the Offering (which
period may be extended for an additional five years if requested by the Company
and the Company and Sheraton agree upon the amount of royalties, if any, that
the Company would pay during such extension), a non-exclusive, non-transferable,
worldwide, royalty-free license to use the "ITT" corporate and trade name,
service mark and trademark "ITT" (the "Licensed Mark") solely in connection with
the operation of the Company's business and in a manner specifically identified
in the License Agreement. The License Agreement further provides that (a) the
Company's use of the Licensed Mark shall be consistent with Sheraton guidelines
and standards, (b) certain of the Company's materials bearing the Licensed Mark
must contain a prescribed notice and (c) certain changes in control of the
Company, as defined in the License Agreement, will terminate the License
Agreement. In 1997, the Company did not pay any amounts to ITT under the License
Agreement or its predecessor.
Amended and Restated Income Tax Sharing Agreement. Prior to the Offering,
the Company has been included in the consolidated United States federal income
tax return of ITT. The Company also has been included in certain state and local
tax returns of ITT or its subsidiaries. An Amended and Restated Income Tax
Sharing Agreement (the "Tax Agreement") which will become effective at the time
of the Offering provides, among other things, for the allocation of liability
for federal, state and local taxes between ITT and the Company. Under the Tax
Agreement, the Company is responsible for all federal, state and local taxes
related to the Company's operations before and after the Offering, and Starwood,
Inc. is responsible for all such taxes related to all other operations of
Starwood, Inc. and its subsidiaries before and after the Offering.
The Tax Agreement also sets forth procedures for filing returns, paying
estimated taxes, amending returns, allocating refunds, tax audits and contests
and certain tax elections. In particular, all tax refunds
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<PAGE> 63
attributable to the Company's operations will be paid to the Company and all tax
assessments, interest and penalties attributable to the Company's operations
will be paid by the Company. Starwood, Inc. is responsible for preparing and
filing all tax returns, and any amendments thereto, involving the Company's
operations prior to the Offering, and the Company is responsible for preparing
and filing all tax returns, and any amendments thereto, involving the Company's
operations following the Offering.
Stockholder Agreement. A Stockholder Agreement (the "Stockholder
Agreement"), among other things, provides that (a) the authorized number of
directors on the Company's Board of Directors (the "Board") shall not exceed 10,
(b) the authorized number of classes of directors of the Board shall not exceed
three, (c) in connection with each annual meeting of the Company's shareholders
the Board shall nominate and recommend such number of persons (rounded up to the
next whole number but not to exceed four) designated by ITT to be elected to the
Board so that the total number of ITT designees on the Board is in relative
proportion to the percentage of the outstanding shares of the Common Stock held
by ITT and its affiliates (collectively, the "ITT Group") and (d) the membership
of the Company's standing Nominating Committee of the Board shall be limited to
four members, two of whom must be directors who are ITT designees until the
number of ITT designees on the Board is two, in which event only one ITT
designated director must be on the Nominating Committee, and if there is one ITT
designee on the Board, such designee is not required to be on the Nominating
Committee (collectively, the "Board Rights"). The Stockholder Agreement also
provides that the Board Rights shall terminate when the ITT Group holds less
than 7.5% of the outstanding shares of the Common Stock. The ITT Group may
assign the Board Rights in whole, but not in part, to any one transferee from
the ITT Group of 10% or more of the outstanding shares of the Common Stock (the
"Rights Transferee"). The ITT designees currently on the Board are Tony Coelho,
Robin Josephs, Merrick R. Kleeman and Barry S. Sternlicht.
The Stockholder Agreement prevents the Company as a result of any statutory
anti-takeover or other anti-takeover provisions adopted by the Company from (a)
significantly limiting or restricting the ability of the ITT Group or any
transferee from the ITT Group of 10% or more of the outstanding shares of Common
Stock to transfer or vote the Common Stock held by it or (b) significantly
adversely affecting the value of the shares of Common Stock currently owned by
the ITT Group or any transferee from the ITT Group of 10% or more of the
outstanding shares of the Common Stock. The Stockholder Agreement also prevents
the Company from taking any action that would subject any such shares to any
restriction, limitation or provision of law to which other holders of Common
Stock are not subject. These restrictions will end when the ITT Group holds less
than 10% of the outstanding shares of the Common Stock.
The Stockholder Agreement prohibits the ITT Group or the Rights Transferee
from transferring any of the shares of the Common Stock if such transfer would
cause a change in control of the Company or any of the ITT Technical Institutes,
until the Company receives all of the required prior approvals of the DOE,
Accrediting Commissions and SEAs.
The Stockholder Agreement also includes reciprocal indemnifications of ITT
and the Company by the other against all losses, claims and expenses arising
after the closing of the Offering arising from (a) any misstatements or
omissions by the indemnifying party in the Registration Statement and Prospectus
for the Offering or (b) any current or future litigation involving the
indemnifying party's operations or business. Pursuant to these provisions, the
Company will indemnify ITT against all expenses and any liabilities incurred by
ITT in connection with the Eldredge case and other pending lawsuits described
under "Business -- Legal Proceedings."
The Stockholder Agreement preserves the Company's access to certain
insurance policies covering the Company when it was a subsidiary of ITT.
Employee Benefits Agreement. An Employee Benefits Agreement (the "Benefits
Agreement"), among other things, provides for the allocation and assignment of
the respective rights and obligations of the Company and ITT before and after
the Offering with respect to benefits and compensation matters pertaining to
current and former employees of the Company. The terms of the Benefits Agreement
provide that, as of the closing of the Offering, the Company will cease
participation in all ITT employee benefit plans and programs, the services
provided to the Company under its current Employee Benefits and Administrative
Services
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<PAGE> 64
Agreement with ITT will cease and the Company will be responsible for
establishing and maintaining its own employee benefit plans and programs.
In particular, the Benefits Agreement provides that the Company's employees
will cease participating in the Pension Plan, the Excess Pension Plan, the
Savings Plan and the Excess Savings Plan. The Pension Plan will retain all
assets and all liabilities for the benefits accrued thereunder by each current
and former employee of the Company prior to the closing of the Offering. The
Company will assume the liability for all benefits accrued under the Excess
Pension Plan by each participating employee of the Company since the date of the
Merger and prior to the closing of the Offering. The Savings Plan will transfer
all assets in such plan for the accounts of the Company's employees to a
qualified 401(k) plan established by the Company, and the Company will assume
all obligations with respect to such transferred assets. The Company will assume
the liability for all benefits accrued under the Excess Savings Plan by each
participating employee of the Company since the date of the Merger and prior to
the closing of the Offering. All benefits under the Excess Pension Plan and the
Excess Savings Plan as of the date of the Merger have been paid to the
participants.
The Benefits Agreement also provides that, during 1998, the Company will
utilize ITT's services in the administration of the Company's indemnity medical
plan. The Company will be responsible for all claims incurred under its
indemnity plan, subject to stop loss coverage for individual medical claims
greater than $50,000, for which the Company will pay an allocated share of all
claims in excess of $50,000 for all ITT subsidiaries in the United States. The
Company will also pay its share of the administrative and stop loss pooling
expenses incurred by ITT with respect to these services.
The Benefits Agreement further provides that ITT will transfer assets
relating to, and the Company will assume all obligations for, (a) all future
post-retirement medical plan obligations attributable to one Company employee
and (b) medical and life insurance coverage of those current and former disabled
employees of the Company entitled to such coverage. The Benefits Agreement also
provides that ITT will retain all assets relating to, and all obligations to
provide, (a) retiree life insurance coverage to former employees of the Company
entitled to such coverage as of December 31, 1997 and (b) disability payments to
current and former employees of the Company who were disabled as of December 31,
1997 and are receiving disability payments under ITT's long-term disability
plan.
In addition to the other employee benefit plans and programs currently
offered by the Company, the Company intends to establish its own 401(k) plan,
excess savings plan, pension plan and excess pension plan for the benefit of the
Company's employees, at a cost expected to be similar to what the Company paid
to participate in comparable plans offered by ITT.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"). As of March 31, 1998, 26,999,952 shares of Common Stock
(including the shares of Common Stock being offered by the Selling Stockholder)
were outstanding. No shares of Preferred Stock have been issued.
COMMON STOCK
All outstanding shares of the Common Stock are validly issued, fully paid
and non-assessable. Each outstanding share of Common Stock is entitled to such
dividends as may be declared from time to time by the Company's Board of
Directors consistent with the provisions of the Company's Restated Certificate
of Incorporation, By-Laws and applicable law. See "Dividend Policy." Each
outstanding share is entitled to one vote on all matters submitted to a vote of
stockholders. There are no cumulative voting rights, and therefore, the holders
of a majority of the shares voting for the election of the classified Board of
Directors can elect all of the Directors in any class up for election, if they
so choose. In the event of liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to receive on a pro rata basis any
assets remaining after provision for payment of creditors and after payment of
any liquidation preferences to holders of Preferred Stock. Holders of Common
Stock have no conversion rights or preemptive rights to purchase or
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subscribe for additional Common Stock or any other securities of the Company.
The rights, preferences and privileges of holders of shares of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock the Company may designate and issue in
the future.
PREFERRED STOCK
The authorized Preferred Stock of the Company is available for issuance
from time to time at the discretion of the Board of Directors of the Company
without stockholder approval. The Board of Directors has the authority to
prescribe for each series of Preferred Stock it establishes the number of shares
in that series, the consideration (not less than its par value) for such shares
in that series and the designations, powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof. Depending upon the rights of such Preferred
Stock, the issuance of Preferred Stock could have an adverse effect on holders
of Common Stock by delaying or preventing a change in control of the Company,
making removal of the present management of the Company more difficult or
resulting in restrictions upon the payment of dividends and other distributions
to the holders of Common Stock. The Company currently has no intention to issue
any shares of any class or series of its Preferred Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Immediately after the Offering, there will continue to be approximately
23,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock
available for future issuance. Delaware law does not require stockholder
approval for any issuance of authorized shares. However, the listing
requirements of the NYSE, which would apply so long as the Common Stock remained
listed on the NYSE, require stockholder approval of certain issuances equal to
or exceeding 20% of the then-outstanding voting power of the Company. These
additional shares may be used for a variety of corporate purposes, including
future public offerings to raise additional capital or to facilitate corporate
acquisitions. The Company currently does not have any plans to issue additional
shares of Common Stock or Preferred Stock.
If the Company did not have a controlling stockholder, one of the effects
of the existence of unissued and unreserved Common Stock and Preferred Stock may
be to enable the Board of Directors to issue shares to persons friendly to
current management, which issuance could render more difficult or discourage an
attempt to obtain control of the Company by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of the Company's
management and possibly deprive the stockholders of opportunities to sell their
shares of Common Stock at prices higher than prevailing market prices. Such
additional shares also could be used to dilute the stock ownership of persons
seeking to obtain control of the Company pursuant to the operation of a
stockholders' rights plan or otherwise.
PROVISIONS OF RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS AFFECTING CHANGE
IN CONTROL
The Restated Certificate of Incorporation and By-Laws provide that the
Board of Directors will be divided into three classes of directors, each class
to be as nearly equal in number as possible. The term of office of one class of
directors expires each year in rotation so that one class is elected at each
annual meeting of stockholders for a full three-year term. Under Delaware law,
members of a classified Board of Directors can be removed by stockholders only
for "cause" unless a corporation's certificate of incorporation provides
otherwise. The Company's Restated Certificate of Incorporation does not provide
for removal without cause. The Restated Certificate of Incorporation provides
that the Board of Directors shall consist of not less than three nor more than
20 members. The number of directors will be fixed from time to time by
resolution of the Board of Directors. The affirmative vote of the holders of a
majority of the outstanding shares of capital stock of the Company entitled to
vote is required to amend, alter, change or repeal the classified board of
directors provisions of the Restated Certificate of Incorporation or to remove a
director with cause prior to the expiration of his or her term. Under the
classified board of directors provisions described above, it would take at least
two elections of directors for any individual or group to gain control of the
Board of Directors. Accordingly, these provisions would tend to discourage
unfriendly takeovers.
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The Company's By-Laws also contain provisions that may limit or restrict
the ability of stockholders to effect changes in control. Under the Company's
By-Laws, stockholders do not have the right to call special meetings of
stockholders. In addition, stockholders must comply with the advance notice
provisions of the Company's By-Laws to make nominations for members of the Board
of Directors and to submit matters for a vote at meetings of stockholders.
DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"). In general, Section 203 provides that a corporation may not
engage in a "business combination" with an "interested stockholder" for a period
of three years from the date that such person became an interested stockholder
unless (a) the transaction that results in the person's becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder, (b) upon
consummation of the transaction which results in the stockholder becoming an
interested stockholder, the interested stockholder owns 85% or more of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and officers, and
shares owned by employee stock plans or (c) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by holders of at least two-thirds of the
corporation's outstanding voting stock, excluding shares owned by the interested
stockholder, at a meeting of stockholders. Under Section 203, an "interested
stockholder" is defined as any person, other than the corporation and any direct
or indirect majority-owned subsidiaries, that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder or (c) an affiliate or associate of such person. Section
203 defines a "business combination" to include, without limitation, mergers,
consolidations, stock sales and asset based transactions and other transactions
resulting in a financial benefit to the interested stockholder.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Company's Restated Certificate of Incorporation does not exclude
the Company from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage companies interested in acquiring the Company to
negotiate in advance with the Company's Board of Directors, because the
stockholder approval requirement would be avoided if a majority of the directors
then in office approve either the business combination or the transaction which
results in the stockholder becoming an interested stockholder. Such provisions
also may have the effect of preventing changes in the management of the Company.
It is possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
Section 203 excludes from the definition of "interested stockholder" any
stockholder of the Company that owned over 15% of the Company's outstanding
voting stock on December 23, 1987, so long as such holder continues to own over
15% of outstanding voting stock of the Company. Accordingly, ITT is not subject
to the restrictions of Section 203.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of the Company's Common Stock is The Bank
of New York.
SHARES ELIGIBLE FOR FUTURE SALE
No predictions can be made as to the effect, if any, that future sales of
shares of Common Stock, or the availability of shares of Common Stock for future
sale, will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of the Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect the market price of
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the Common Stock and may make it more difficult for the Company to sell its
equity securities in the future at a time and price which it deems appropriate.
Immediately after the Offering, the Company will continue to have
outstanding 26,999,952 shares of Common Stock. The Shares sold in the Offering
will be freely tradeable without restriction or further registration under the
Securities Act except for any of those Shares that are beneficially owned at any
time by an "affiliate" of the Company (an "Affiliate") within the meaning of
Rule 144 under the Securities Act (which sales will be subject to the timing,
volume and manner of sale limitations of Rule 144). The 11,150,000 outstanding
shares of Common Stock held by the Selling Stockholder after the Offering
(9,450,000 shares if the over-allotment option is exercised in full) are
"restricted" securities within the meaning of Rule 144 under the Securities Act
and may not be publicly resold, except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, including that provided by Rule 144 under the Securities Act. The
Selling Stockholder has certain registration rights with respect to the shares
of Common Stock owned by it. See "Relationship with Selling Stockholder and
Related Transactions."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of beneficial ownership of restricted shares of
Common Stock from the Company or any Affiliate, the acquiror or subsequent
holder thereof is entitled to sell within any three-month period a number of
such shares that does not exceed the greater of 1% of the then outstanding
shares of Common Stock or the reported average weekly trading volume of the
Common Stock on national securities exchanges during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain provisions
regarding the manner of sale, notice requirements and the availability of
current public information about the Company. If two years have elapsed since
the date of acquisition of restricted shares of Common Stock from the Company or
any affiliate and the acquiror or subsequent holder is not deemed to have been
an Affiliate of the Company for at least 90 days prior to a proposed
transaction, such person would be entitled to sell such shares under Rule 144
without regard to the limitations described above.
The Company, its executive officers, ITT and Starwood, Inc. have agreed
that they will not offer, sell, contract to sell, announce the intention to
sell, pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock, without the prior
written consent of Credit Suisse First Boston Corporation, for a period of 180
days after the date of this Prospectus; provided, however, that such
restrictions will not affect the ability of the Company to grant options for
Common Stock pursuant to the Stock Plans, or to issue Common Stock pursuant to
the exercise of stock options currently outstanding or granted pursuant to the
Stock Plans.
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UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation, Bear, Stearns & Co. Inc., BT Alex. Brown Incorporated,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated and Smith Barney Inc. are acting as the representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Selling Stockholder the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Bear, Stearns & Co. Inc. ...................................
BT Alex. Brown Incorporated.................................
Merrill Lynch, Pierce, Fenner & Smith.......................
Incorporated
Morgan Stanley & Co. Incorporated...........................
Smith Barney Inc............................................
----------
Total.................................................. 11,350,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of nondefaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Selling Stockholder has granted to the Underwriters an option, expiring
at the close of business on the 30th day after the date of this Prospectus, to
purchase up to 1,700,000 additional shares from the Selling Stockholder at the
public offering price, less the underwriting discounts and commissions, all as
set forth on the cover page of this Prospectus. Such option may be exercised
only to cover over-allotments in the sale of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer shares of Common Stock to
the public initially at the public offering price set forth on the cover page of
this Prospectus and, through the Representatives, to certain dealers at such
price less a concession of $ per share, and the Underwriters and such
dealers may allow a discount of $ per share on sales to certain other
dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.
At the request of the Company, the Underwriters are reserving up to 1.1
million shares of Common Stock from the Offering for sale to certain persons
identified by the Company at the public offering price. Up to 800,000 of such
shares may be purchased by the ESI 401(k) Plan. Any shares of Common Stock not
purchased in this reserve program will be sold to the general public in the
Offering.
The Company, its executive officers, ITT and Starwood, Inc. have agreed
that they will not offer, sell, contract to sell, announce an intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
shares of Common Stock or securities or other rights convertible into or
exchangeable or exercisable for any shares of Common Stock, without the prior
written consent of Credit Suisse First Boston Corporation, for a period of 180
days after the
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date of this Prospectus; provided, however, that such restrictions will not
affect the ability of the Company to grant options for Common Stock pursuant to
the Stock Plans or to issue Common Stock, pursuant to the exercise of stock
options currently outstanding or granted pursuant to the Stock Plans.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments that the Underwriters may be required
to make in respect thereof.
The Common Stock is listed on the NYSE under the symbol "ESI."
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase shares of Common Stock so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of shares
of Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
shares of Common Stock originally sold by such syndicate member are purchased in
a syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the shares of Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the NYSE or otherwise and, if commenced, may be discontinued at any
time.
Certain of the Underwriters have provided advisory and investment banking
services to the Company in the past, for which customary compensation has been
received.
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of the Common Stock are effected.
Accordingly, any resale of the Common Stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Common Stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling Stockholder
and the dealer from whom such purchase confirmation is received that (a) such
purchaser is entitled under applicable provincial securities laws to purchase
such Common Stock without the benefit of a prospectus qualified under such
securities laws, (b) where required by law, that such purchaser is purchasing as
principal and not as agent, and (c) such purchaser has reviewed the text above
under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission of rights of action under
the civil liability provisions of the U.S. federal securities laws.
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ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein and the Selling Stockholder may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer, such persons or the Selling Stockholder.
All or a substantial portion of the assets of the issuer, such persons and the
Selling Stockholder may be located outside of Canada and, as a result, it may
not be possible to satisfy a judgment against the issuer, such persons or the
Selling Stockholder in Canada or to enforce a judgment obtained in Canadian
courts against the issuer, such persons or the Selling Stockholder outside of
Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of Common Stock should consult their own legal and tax
advisers with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
legislation.
CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States ("U.S.")
federal income and estate tax consequences of the ownership and disposition of
Common Stock applicable to a beneficial owner thereof that is a "Non-U.S.
Holder." As used herein, the term "Non-U.S. Holder" means a person or entity
other than (a) a citizen or individual resident of the United States, (b) a
corporation or partnership created or organized in or under the laws of the
United States or any political subdivision thereof, (c) an estate the income of
which is subject to U.S. federal income tax regardless of its source, or (d) in
general, a trust if (i) a court within the United States is able to exercise
primary supervision over the administration of the trust and (ii) one or more
United States persons have the authority to control all substantial decisions of
the trust.
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, all as of the date hereof,
and all of which are subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be important to Non-U.S. Holders in light of their particular
circumstances (including tax consequences applicable to certain former citizens
or long-term residents of the United States and to certain Non-U.S. Holders that
are, or hold interests in Common Stock through, partnerships or other fiscally
transparent entities (including "hybrid entities")) and does not address United
States state and local or non-United States tax consequences. PROSPECTIVE
NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
PARTICULAR UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO THEM OF
OWNING AND DISPOSING OF COMMON STOCK, AS WELL AS THE TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY OTHER TAXING JURISDICTION.
DIVIDENDS
The Company anticipates that it will not pay dividends on shares of Common
Stock for the foreseeable future. See "Dividend Policy." In the event, however,
that the Company does pay dividends on shares of
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Common Stock, a Non-U.S. Holder of Common Stock generally will be subject to
withholding of U.S. federal income tax at a rate of 30% of the gross amount of
the dividend, or such lower rate as may be specified by an income tax treaty
between the United States and a foreign country of which the Non-U.S. Holder is
treated as a resident within the meaning of the applicable tax treaty. Under
currently effective United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary), and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
lower rate of withholding tax provided by a tax treaty. Under United States
Treasury regulations published on October 14, 1997, as modified by IRS Notice
98-16 released on March 27, 1998 (the "New Withholding Regulations"), a Non-U.S.
Holder of Common Stock who wishes to claim the benefit of an applicable treaty
rate (and avoid backup withholding as discussed below) generally will be
required to satisfy specified certification and other requirements with respect
to dividends paid after December 31, 1999 (and, in certain circumstances, may be
required to satisfy such certification and other requirements with respect to
dividends paid after December 31, 1998). In addition, the New Withholding
Regulations contain special rules regarding the availability of treaty benefits
for payments made to (a) foreign intermediaries, (b) U.S. or foreign
wholly-owned entities that are disregarded for U.S. federal income tax purposes
and (c) partnerships and other entities that are treated as fiscally transparent
in the United States, the applicable income tax treaty jurisdiction, or both.
Prospective investors should consult their own tax advisors as to the effect, if
any, of the New Withholding Regulations on an investment in the Common Stock.
Dividends paid to a Non-U.S. Holder that are either (a) effectively
connected with the Non-U.S. Holder's conduct of a trade or business within the
United States or (b) if a tax treaty applies, attributable to a permanent
establishment maintained by the Non-U.S. Holder, will not be subject to the
withholding tax (provided in either case the Non-U.S. Holder files the
appropriate documentation with the Company or its agent), but, instead, will be
subject to regular U.S. federal income tax at the graduated rates in the same
manner as if the Non-U.S. Holder were a U.S. resident. In addition to such
graduated tax, in the case of a Non-U.S. Holder that is a corporation,
effectively connected dividends or, if a tax treaty applies, dividends
attributable to a U.S. permanent establishment of the corporate Non-U.S. Holder,
may be subject to a "branch profits tax" which is imposed, under certain
circumstances, at a rate of 30% (or such lower rate as may be specified by an
applicable tax treaty) of the non-U.S. corporation's "effectively connected
earnings and profits," subject to certain adjustments.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts withheld by filing a timely claim for refund with the
Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other taxable disposition of Common
Stock unless (a) the gain is effectively connected with a trade or business of
the Non-U.S. Holder in the United States or, if a tax treaty applies,
attributable to a United States permanent establishment of the Non-U.S. Holder,
(b) in the case of a Non-U.S. Holder who is a nonresident alien individual and
holds the Common Stock as a capital asset, such individual is present in the
United States for 183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, or (c) the Company is or has
been a "U.S. real property holding corporation" for United States federal income
tax purposes at any time within the shorter of the five-year period preceding
such disposition or the period such Non-U.S. Holder held the Common Stock. A
corporation is a "U.S. real property holding corporation" if the fair market
value of the United States real property interests held by the corporation is
50% or more of the aggregate fair market value of certain assets of the
corporation. The Company believes that it is not and has not been, and the
Company does not anticipate becoming, a "U.S. real property holding
corporation." If the Company were, or were to become, a U.S. real property
holding corporation, so long as the Common Stock is "regularly traded" on an
established securities market within the meaning of the Code, only a Non-U.S.
Holder that owns, directly or pursuant to certain attribution rules, more
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than 5% of the Common Stock (at any time during the shorter of the periods
described above) will be subject to U.S. federal income tax on the sale or other
disposition of the Common Stock.
If an individual Non-U.S. Holder is described in clause (a) above, he or
she will be taxed on the net gain derived from the sale or other disposition at
regular graduated U.S. federal income tax rates. If an individual Non-U.S.
Holder falls under clause (b) above, he or she will be subject to a flat 30% tax
on the gain derived from the sale or other disposition, which may be offset by
certain U.S.-source capital losses (notwithstanding the fact that such
individual is not considered a resident of the United States). If a Non-U.S.
Holder that is a corporation falls under clause (a) above, it will be taxed on
its net gain derived from the sale or other disposition at regular graduated
U.S. federal income tax rates and may be subject to an additional branch profits
tax at a rate of 30% (or such lower rate as may be specified by an applicable
tax treaty) on the non-U.S. corporation's "effectively connected earnings and
profits," subject to certain adjustments.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
Generally, the Company must report annually to the Internal Revenue Service
the amount of dividends paid to a Non-U.S. Holder and the amount, if any, of tax
withheld with respect to, such Non-U.S. Holder. A similar report is sent to the
Non-U.S. Holder. Pursuant to tax treaties or certain other agreements, the
Internal Revenue Service ("IRS") may make its reports available to tax
authorities in the recipient's country of residence.
Currently, United States backup withholding tax (which generally is a
withholding tax imposed at a rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) will generally not apply to dividends paid on Common
Stock to a Non-U.S. Holder at an address outside the United States, unless the
payor has actual knowledge that the payee is a U.S. Holder. Backup withholding
tax generally will apply to dividends paid on Common Stock at addresses inside
the United States to Non-U.S. Holders who fail to provide certain identifying
information in the manner required.
In addition, information reporting and backup withholding imposed at a rate
of 31% will apply to the proceeds of a disposition of Common Stock paid to or
through a U.S. office of a broker unless the disposing holder, under penalties
of perjury, certifies as to its non-U.S. status or otherwise establishes an
exemption. Generally, U.S. information reporting and backup withholding will not
currently apply to a payment of disposition proceeds if the payment is made
outside the United States through a non-U.S. office of a non-U.S. broker.
However, U.S. information reporting requirements (but not backup withholding)
will apply to a payment of disposition proceeds outside the United States if the
payment is made through an office outside the United States of a broker that is
(a) a U.S. person, (b) a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) a "controlled foreign corporation" for U.S. federal income tax
purposes, unless the broker maintains documentary evidence that the holder is a
Non-U.S. Holder and certain other conditions are met, or the holder otherwise
establishes an exemption.
Under the New Withholding Regulations, which generally are effective for
payments made after December 31, 1999 (but which, in certain circumstances, may
apply to payments made after December 31, 1998), the payment of dividends, and
the payment of proceeds from the disposition of Common Stock through brokers
having certain connections with the United States, may be subject to information
reporting and backup withholding at a rate of 31% unless certain IRS
certification requirements are satisfied or an exemption is otherwise
established. Prospective investors should consult with their own tax advisers
regarding the application of the New Withholding Regulations to their particular
circumstances.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by a credit for the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained, provided that the required information is furnished to the IRS.
68
<PAGE> 73
FEDERAL ESTATE TAX
Shares of Common Stock owned or treated as owned by an individual who is
not a citizen or resident of the United States at the time of his or her death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and may
be subject to United States federal estate tax. Estates of non-resident aliens
are generally allowed a statutory credit which has the effect of offsetting the
United States federal estate tax imposed on the first $60,000 of the taxable
estate.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Baker & Daniels, Indianapolis, Indiana. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Dewey
Ballantine LLP, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 included
in this Prospectus have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing.
69
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Statements of Income and Retained Earnings for the years
ended December 31, 1997, December 31, 1996 and December
31, 1995 and for the three months ended March 31, 1998 and
1997 (unaudited).......................................... F-3
Balance Sheets as of December 31, 1997 and December 31, 1996
and March 31, 1998 (unaudited)............................ F-4
Statements of Cash Flows for years ended December 31, 1997,
December 31, 1996 and December 31, 1995 and the three
months ended March 31, 1998 and 1997 (unaudited).......... F-5
Notes to Financial Statements............................... F-6
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of ITT Educational Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of income and retained earnings and of cash flows present fairly, in all
material respects, the financial position of ITT Educational Services, Inc. at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
Indianapolis, Indiana
January 10, 1998, except for
Note 1 which is
as of April 7, 1998,
Note 3 which is
as of April 28, 1998 and
Note 10 which is as of May 7, 1998
F-2
<PAGE> 76
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ --------------------------------
1998 1997 1997 1996 1995
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Tuition...................................... $62,587 $55,746 $222,457 $196,692 $171,936
Other educational............................ 9,700 8,730 39,207 35,627 29,895
------- ------- -------- -------- --------
Total revenues..................... 72,287 64,476 261,664 232,319 201,831
COSTS AND EXPENSES
Cost of educational services................. 41,438 37,984 163,053 145,197 130,338
Student services and administrative
expenses................................... 19,436 17,536 72,388 66,546 57,268
Change in control expenses................... 443 -- -- -- --
------- ------- -------- -------- --------
Total costs and expenses........... 61,317 55,520 235,441 211,743 187,606
Operating income............................. 10,970 8,956 26,223 20,576 14,225
Interest income, net......................... 1,244 1,380 5,565 4,119 4,802
------- ------- -------- -------- --------
Income before income taxes................... 12,214 10,336 31,788 24,695 19,027
Income taxes................................. 4,886 4,134 12,665 9,844 7,636
------- ------- -------- -------- --------
Net income................................... 7,328 6,202 19,123 14,851 11,391
Retained earnings, beginning of period....... 55,032 35,909 35,909 21,058 9,667
------- ------- -------- -------- --------
Retained earnings, end of period............. $62,360 $42,111 $ 55,032 $ 35,909 $ 21,058
======= ======= ======== ======== ========
Earnings per common share (basic and
diluted)................................... $ .27 $ .23 $ .71 $ .55 $ .42
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 77
ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................... $ 90,217 $ 29 $ 74
Restricted cash......................................... 6,689 3,860 5,911
Cash invested with ITT Corporation...................... -- 94,800 89,808
Accounts receivable, less allowance for doubtful
accounts of $932, $1,393 and $1,044.................. 12,770 9,680 9,378
Deferred income tax..................................... 1,843 2,019 1,455
Prepaids and other current assets....................... 3,939 2,570 1,823
-------- -------- --------
Total current assets............................ 115,458 112,958 108,449
Property and equipment, net............................... 22,937 22,886 19,360
Direct marketing costs.................................... 7,054 6,882 5,774
Other assets.............................................. 3,338 3,188 2,166
-------- -------- --------
Total assets.................................... $148,787 $145,914 $135,749
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................ $ 11,639 $ 14,974 $ 12,188
Accrued compensation and benefits....................... 5,054 3,245 4,253
Other accrued liabilities............................... 11,729 6,877 5,432
Deferred tuition revenue................................ 23,041 30,850 43,532
-------- -------- --------
Total current liabilities....................... 51,463 55,946 65,405
Other liabilities......................................... 2,181 2,153 1,652
-------- -------- --------
Total liabilities............................... 53,644 58,099 67,057
-------- -------- --------
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 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 35,909
-------- -------- --------
Total shareholders' equity...................... 95,143 87,815 68,692
-------- -------- --------
Total liabilities and shareholders' equity...... $148,787 $145,914 $135,749
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 78
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- ------------------------------------
1998 1997 1997 1996 1995
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 7,328 $ 6,202 $ 19,123 $ 14,851 $ 11,391
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 2,214 1,958 7,939 7,493 7,542
Provision for doubtful accounts..... 674 453 2,354 1,738 1,173
Deferred taxes...................... 232 227 202 (443) (240)
Increase/decrease in operating
assets and liabilities:
Accounts receivable............... (3,764) (872) (2,656) (3,524) (2,189)
Direct marketing costs............ (172) (195) (1,108) (743) 23
Accounts payable and accrued
liabilities.................... 3,298 2,240 2,958 3,083 1,438
Prepaids and other assets......... (1,519) (2,205) (1,769) 220 683
Deferred tuition revenue.......... (7,809) (12,732) (12,682) 3,469 (908)
------- -------- -------- -------- --------
Net cash provided by (used for) operating
activities............................. 482 (4,924) 14,361 26,144 18,913
------- -------- -------- -------- --------
Cash flows used for investing activities:
Capital expenditures, net.............. (2,265) (4,027) (11,465) (7,868) (8,206)
Net decrease ( increase) in cash
invested with ITT Corporation....... 94,800 3,872 (4,992) (17,923) (15,975)
------- -------- -------- -------- --------
Net cash provided by (used for) investing
activities............................. 92,535 (155) (16,457) (25,791) (24,181)
------- -------- -------- -------- --------
Net increase (decrease) in cash and
restricted cash........................ 93,017 (5,079) (2,096) 353 (5,268)
Cash and restricted cash at beginning of
period................................. 3,889 5,985 5,985 5,632 10,900
------- -------- -------- -------- --------
Cash and restricted cash at end of
period................................. $96,906 $ 906 $ 3,889 $ 5,985 $ 5,632
======= ======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Income taxes........................ $ 121 $ 2,619 $ 12,352 $ 10,051 $ 8,168
Interest............................ 67 55 291 273 550
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 79
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995, AND MARCH 31, 1998
AND 1997 (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)
1. OWNERSHIP AND CHANGE IN CONTROL
Since the ITT Educational Services, Inc. (the "Company") initial public
offering in 1994, 83.3% of the outstanding Common Stock of the Company has been
owned by ITT Corporation ("ITT") and 16.7% has been owned by others.
On February 23, 1998, Starwood Hotels & 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 federal student
financial aid programs. Effective March 20, 1998, the eligibility of each ITT
Technical 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.
2. SUMMARY OF ACCOUNTING PRINCIPLES AND POLICIES
Business Activities. The Company is a leading proprietary postsecondary
education system primarily offering career-focused, technical degree programs of
study. At December 31, 1997, the Company operated sixty-two (62) technical
institutes throughout the United States (63 at March 31, 1998). The Company
maintains corporate headquarters in Indianapolis, Indiana.
Interim Financial Information (unaudited). The results of operations for
the three months ended March 31, 1998 and 1997 are not necessarily indicative of
the results to be expected for the full fiscal year. All information as of March
31, 1998 and for the three months ended March 31, 1998 and 1997 is unaudited
but, in the opinion of management, contains all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
condition, results of operation and cash flows of the Company.
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-6
<PAGE> 80
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other educational revenue is comprised of laboratory fees and textbook
sales. Laboratory 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 $7,054, $6,882 and
$5,774 at March 31, 1998, December 31, 1997 and December 31, 1996, respectively,
net of accumulated amortization of $7,326, $5,861 and $5,065 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 March 31, 1998, December 31, 1997
and December 31, 1996, deferred start-up costs included in other assets in the
balance sheet totaled $1,286, $1,316 and $521, respectively, net of accumulated
amortization of $454, $174 and $799 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 for all periods have
been calculated in conformity with SFAS No. 128, "Earnings Per Share." Such data
is based on historical net income and the average number of shares of Common
Stock outstanding during each period. The number of average shares outstanding
utilized for basic earnings per share were 26,999,952 in the three months ended
March 31, 1998, and in 1997, 1996 and 1995. Average shares outstanding utilized
for diluted earnings per share were 27,105,000, 27,092,000 and 27,032,000, for
1997, 1996 and 1995, respectively (27,144,000 and 27,109,000 for the three
months ended March 31, 1998 and 1997, respectively). The difference in shares
utilized in calculating basic and diluted earnings per share represents the
average number of shares issued under the Company's stock option plan less
shares assumed to be purchased with proceeds from the exercise of the stock
options.
3. RELATED PARTY TRANSACTIONS
At December 31, 1997, and during the three-year period then ended, the
relationship between the Company and ITT was governed by various agreements
summarized 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. The Company
earns 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 12-month
F-7
<PAGE> 81
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 and 1996, of $94,800
and $89,808, respectively. On February 5, 1998, ITT transferred approximately
$83,000 to the Company and since that date the Company has been performing its
own cash management function.
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 $654, $578 and $504
for the years ended December 31, 1997, 1996 and 1995, respectively ($15 and $163
for the three months ended March 31, 1998 and 1997, respectively).
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 $159, $280 and $464 in 1997, 1996 and 1995,
respectively.
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 it 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.
Management believes the statements of income include a reasonable
allocation of costs incurred by ITT which benefit the Company. The
aforementioned 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.
4. FINANCIAL AID PROGRAMS
The Company participates in various Title IV Programs. Approximately 70% of
the Company's 1997 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 $8,517 and $8,235 at December 31, 1997 and 1996,
respectively. The Company has recorded in its financial statements only its
aggregate mandatory contributions to this program which at December 31, 1997 and
1996 aggregated $1,588 and $1,572, respectively. The Company has provided $971
and $955, respectively, for potential losses related to funds committed by the
Company at December 31, 1997 and 1996.
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 DOE
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
F-8
<PAGE> 82
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
default rates rise to 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. Currently, the Company has been informed by the DOE that
one ITT Technical Institute in Garland, Texas has default rates that are
considered excessive. The Company is in the process of appealing that decision.
Should the appeal be denied by the DOE, the Company does not believe the loss of
Title IV Program funding at this one institute will have a material adverse
effect on the Company's financial position, results of operations or cash flows.
5. RESTRICTED CASH
The Company participates in the Electronic Funds Transfer ("EFT") program
through the DOE. All monies transferred to the Company via the EFT system are
subject to certain holding period restrictions, generally from three to seven
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>
MARCH 31, DECEMBER 31,
----------- --------------------
1998 1997 1996
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and equipment................... $ 64,068 $ 62,514 $ 52,317
Leasehold improvements.................... 7,941 7,848 7,017
Land and land improvements................ 110 110 110
Construction in progress.................. 200 325 1,142
-------- -------- --------
72,319 70,797 60,586
Less accumulated depreciation............. (49,382) (47,911) (41,226)
-------- -------- --------
$ 22,937 $ 22,886 $ 19,360
======== ======== ========
</TABLE>
7. TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Federal................. $3,898 $3,273 $10,399 $ 8,673 $6,571
State................... 756 634 2,064 1,614 1,305
------ ------ ------- ------- ------
4,654 3,907 12,463 10,287 7,876
Deferred
Federal................. 194 189 168 (370) (200)
State................... 38 38 34 (73) (40)
------ ------ ------- ------- ------
232 227 202 (443) (240)
------ ------ ------- ------- ------
$4,886 $4,134 $12,665 $ 9,844 $7,636
====== ====== ======= ======= ======
</TABLE>
F-9
<PAGE> 83
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) include the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -----------------------------
1998 1997 1996 1995
----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Direct marketing costs........... $(2,767) $(2,698) $(2,263) $(1,973)
Institute start-up costs......... (504) (516) (204) (392)
Depreciation..................... 759 759 785 744
Reserves and other............... 2,224 2,399 1,828 1,324
------- ------- ------- -------
Net deferred tax assets
(liabilities).................. $ (288) $ (56) $ 146 $ (297)
======= ======= ======= =======
</TABLE>
Differences between effective income tax rates and the statutory U.S.
federal income tax rates are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------- --------------------
1998 1997 1997 1996 1995
----- ----- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statutory U.S. federal income tax
rate................................ 35.0% 35.0% 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit............................. 4.1 4.1 4.1 4.1 4.3
Permanent differences and other....... .9 .9 .7 .8 .8
----- ----- ---- ---- ----
Effective income tax rate............. 40.0% 40.0% 39.8% 39.9% 40.1%
===== ===== ==== ==== ====
</TABLE>
8. RETIREMENT PLANS
Employee Pension Benefits. The Company participates in the Retirement Plan
for Salaried Employees of ITT Corporation, a non-contributory 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, 1997, 1996 and 1995, pension expense as a percentage of
covered compensation for employees over age 21 who had more than one year of
service was 6.84%, 6.57% and 5.52%, respectively (6.00% and 5.50% for three
months ended March 31, 1998 and 1997, respectively) which resulted in charges to
the Company of $4,458, $3,783 and $2,983, respectively ($1,050 and $900 for the
three months ended March 31, 1998 and 1997, respectively).
Retirement Savings Plan. The Company participates in The ITT 401K
Retirement Savings Plan, a defined contribution 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, 1997, 1996
and 1995, the costs of providing this benefit (including an allocation of the
administrative costs of the plan) were $2,104, $1,749 and $1,369, respectively
($395 and $555 for the three months ended March 31, 1998 and 1997,
respectively).
9. STOCK OPTION AND KEY EMPLOYEE INCENTIVE PLANS
The Company adopted and the stockholders approved the ITT Educational
Services, Inc. 1994 Stock Option Plan ("1994 Plan") and the 1997 ITT Educational
Services, Inc. Incentive Stock Plan ("1997 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 or the 1997 Plan. The Company has
elected, as permitted by the standard, to continue following its intrinsic value
based method of accounting for stock options consistent with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic method,
compensation cost for stock options
F-10
<PAGE> 84
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
is measured as the excess, if any, of the quoted market price of the company's
stock at the measurement date over the exercise price.
Under the 1994 Plan, a maximum of 405,000 shares of Common Stock may be
issued upon exercise of options. Under the 1997 Plan, a maximum of 1.5% of the
outstanding common shares may be issued each year commencing in 1997, with any
unissued shares issuable in later years. Under the 1997 Plan, a maximum of
4,050,000 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. The options outstanding at March 31, 1998 and December 31, 1997, are as
follows:
1994 PLAN
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
------------------- -------------------
NUMBER OF OPTION NUMBER OF OPTION
DATE OF GRANT SHARES PRICE SHARES PRICE
------------- --------- ------ --------- ------
<S> <C> <C> <C> <C>
December 27, 1994................... 135,000 $ 4.44 135,000 $ 4.44
October 2, 1995..................... 56,250 8.89 56,250 8.89
February 12, 1996................... 67,500 11.94 67,500 11.94
February 10, 1997................... 146,250 24.25 146,250 24.25
------- -------
405,000 405,000
======= =======
1997 PLAN
January 13, 1998.................... 405,000 21.69
======= ======
</TABLE>
During 1997, 1996 and 1995 no options were exercised, expired or canceled.
At December 31, 1997 and March 31, 1998, 195,000 and 266,250 stock options,
respectively, were exercisable with a weighted average price of $6.16 and $9.96,
respectively.
Compensation costs for the 1994 Plan, calculated in accordance with SFAS
No. 123, are not significant for the years ending December 31, 1996 and 1995.
Had compensation costs been determined based upon the fair value of the stock
options at grant date consistent with SFAS No. 123, the Company's net income and
earnings per share for the year ended December 31, 1997 would have been reduced
to the pro forma amounts of $18,519 and $.69 (basic earnings per share) and $.68
(diluted earnings per share), respectively, from the as reported amounts of
$19,123 and $.71.
The fair value of each option grant was estimated on the date of grant
using the Black-Sholes option-pricing model with the following assumptions for
1997, 1996 and 1995, respectively: risk-free interest rates of 6.6%, 5.7% and
6.4%; expected lives of 10 years; volatility of 46% and no dividend yield.
In January 1998, an additional 405,000 stock options, at an option price of
$21.69 each, were granted by the Board of Directors.
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-11
<PAGE> 85
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense was composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Minimum rentals............................... $18,961 $17,131 $15,842
Contingent rentals............................ 272 249 223
------- ------- -------
$19,233 $17,380 $16,065
======= ======= =======
</TABLE>
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998.................................................... $ 20,855
1999.................................................... 19,681
2000.................................................... 19,818
2001.................................................... 15,982
2002.................................................... 13,547
Later Years............................................. 43,885
--------
$133,768
========
</TABLE>
Operating leases related to four institutes that are still in the
developmental phase at December 31, 1997 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
$4,290 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, 1997
aggregated $1,457. Additionally, the Company is required to maintain on deposit
with the lender 15% of the aggregate principal balance of outstanding loans.
This interest bearing 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 is Eldredge, et al. v.
ITT Educational Services, Inc., et al. (the "Eldredge Case"). This action was
filed on June 8, 1995 in San Diego, California, by seven graduates of the San
Diego ITT Technical Institute. In October 1996, the jury in this action rendered
a verdict against the Company and awarded the plaintiffs general damages of
approximately $0.2 million and exemplary damages of $2.6 million. The judge also
awarded the plaintiffs attorney's fees and costs, in the amount of approximately
$0.9 million, and interest. The Company is seeking to overturn the awards and
has appealed the decision. Management, based on the advice of counsel, believes
it is probable that it will prevail in its appeal, thus no provision (other than
the Company's legal expenses) for these awards has been made. If the Company's
appeal of the judgment in the Eldredge Case is unsuccessful, a charge to
earnings would be taken at that time in the amount of the awards, including the
general and exemplary damages assessed against the Company, the plaintiffs'
attorney's fees and costs and the interest assessed thereon.
In January 1997, six legal actions were filed against the Company in San
Diego, California by a total of 21 former students of the San Diego ITT
Technical Institute. In June 1997, a legal action was filed against the Company
in Orlando, Florida by three former students of the Maitland ITT Technical
Institute. The plaintiffs
F-12
<PAGE> 86
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in one of the California actions and in the Florida action seek to have each of
their actions certified as a class action. Recently, the court denied the
plaintiffs' request to have the California action certified as a class action.
In April 1998, the legal action in Florida was dismissed without prejudice by
the plaintiffs. The claims alleged in all seven 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. 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 May
1998, the Company increased its provision for litigation costs related to
certain of the aforementioned legal actions by $1.2 million. This additional
provision will be recorded in the three month period ending June 30, 1998. The
Company believes that it has meritorious defenses and intends to vigorously
defend itself against these claims.
In the opinion of management, the ultimate outcome of these matters will
not have a material adverse effect on the Company's financial position, results
of operations or cash flows.
F-13
<PAGE> 87
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Documents Incorporated by Reference... 3
Available Information................. 3
Prospectus Summary.................... 4
Risk Factors.......................... 9
Price Range of Common Stock........... 19
Dividend Policy....................... 19
Capitalization........................ 20
Selected Financial and Operating
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 30
Management............................ 55
Principal and Selling Stockholder..... 55
Relationship With Selling Stockholder
and Related Transactions............ 56
Description of Capital Stock.......... 60
Shares Eligible for Future Sale....... 62
Underwriting.......................... 64
Notice to Canadian Residents.......... 65
Certain U.S. Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 66
Legal Matters......................... 69
Experts............................... 69
Index to Financial Statements......... F-1
</TABLE>
======================================================
ITT EDUCATIONAL SERVICES, INC. LOGO
11,350,000 Shares
Common Stock
($.01 par value)
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN
MERRILL LYNCH & CO.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
- ------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered which will be paid by
the Company. All the amounts shown are estimates, except the Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Commission registration fee................................. $ 98,015
NASD filing fee............................................. 30,500
Blue sky fees and expenses.................................. 5,000
Accounting fees and expenses................................ 150,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 300,000
Miscellaneous expenses...................................... 116,485
----------
Total.................................................. $1,000,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides that under certain circumstances a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation or is or was serving
at its request in such capacity in another corporation or business association,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The Restated Certificate of Incorporation and By-Laws of the registrant
provide that (a) the registrant shall indemnify to the full extent permitted by
law any person made, or threatened to be made, a party to any action, suit or
proceeding (whether civil, criminal, administrative or investigative) by reason
of the fact that he or she is or was a director or officer of the registrant or
is or was serving or has agreed to serve at the request of the registrant as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (including the heirs, executor,
administrators or estate of such person) and (b) the registrant shall pay the
expenses, including attorney's fees, incurred by a director or officer in
defending or investigating a threatened or pending action, suit or proceeding,
in advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it is ultimately determined that the director or officer is not
entitled to be indemnified with respect to such amount by the registrant. The
Restated Certificate of Incorporation also provides that, to the extent
permitted by law, the directors of the registrant shall have no liability to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director.
The Company's directors and officers are insured under directors and
officers insurance policies maintained by the Company (and, until the Offering,
by Starwood, Inc.), within the limits and subject to the limitations of the
policies, against certain expenses in connection with the defense of actions,
suits or proceedings, and certain liabilities which might be imposed as a result
of such actions, suits or proceedings, to which they are parties by reason of
being or having been such directors or officers.
The form of Underwriting Agreement filed as Exhibit 1 provides for the
indemnification of the registrant, its controlling persons, its directors and
certain of its officers by the Underwriters against certain liabilities under
the Securities Act.
S-1
<PAGE> 89
ITEM 16. EXHIBITS
The list of exhibits is incorporated herein by reference to the Index to
Exhibits on page E-1.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
S-2
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Indianapolis, State of Indiana, on the 7th day
of May, 1998.
ITT EDUCATIONAL SERVICES, INC.
By: /s/ RENE R. CHAMPAGNE
--------------------------------------
Rene R. Champagne
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons in their
respective capacities and on the respective dates set forth opposite their
names. Each person whose signature appears below hereby authorizes each of Rene
R. Champagne and Gene A. Baugh, each with full power of substitution, to execute
in the name and on behalf of such person any amendment or any post-effective
amendment to this Registration Statement and any subsequent registration
statement filed pursuant to Rule 462(b) under the Securities Act of 1933 and to
file the same, with exhibits thereto, and other documents in connection
therewith, making such changes in this Registration Statement and any such
subsequent registration statement as the Registrant deems appropriate, and
appoints each of Rene R. Champagne and Gene A. Baugh, each with full power of
substitution, attorney-in-fact to sign any amendment and any post-effective
amendment to this Registration Statement and any such subsequent registration
statement and to file same, with exhibits thereto, and other documents in
connection therewith.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ *RENE R. CHAMPAGNE Chairman, President, Chief Executive May 7, 1998
- --------------------------------------------------- Officer and Director (Principal
Rene R. Champagne Executive Officer)
/s/ *GENE A. BAUGH Senior Vice President and Chief May 7, 1998
- --------------------------------------------------- Financial Officer (Principal
Gene A. Baugh Financial Officer and Principal
Accounting Officer)
/s/ *RAND V. ARASKOG Director May 7, 1998
- ---------------------------------------------------
Rand V. Araskog
/s/ *TONY COELHO Director May 7, 1998
- ---------------------------------------------------
Tony Coelho
/s/ *JOHN E. DEAN Director May 7, 1998
- ---------------------------------------------------
John E. Dean
/s/ *JAMES D. FOWLER, JR. Director May 7, 1998
- ---------------------------------------------------
James D. Fowler, Jr.
/s/ *ROBIN JOSEPHS Director May 7, 1998
- ---------------------------------------------------
Robin Josephs
/s/ *MERRICK R. KLEEMAN Director May 7, 1998
- ---------------------------------------------------
Merrick R. Kleeman
</TABLE>
S-3
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ *LESLIE LENKOWSKY Director May 7, 1998
- ---------------------------------------------------
Leslie Lenkowsky
/s/ *BARRY S. STERNLICHT Director May 7, 1998
- ---------------------------------------------------
Barry S. Sternlicht
/s/ *VIN WEBER Director May 7, 1998
- ---------------------------------------------------
Vin Weber
*By /s/ GENE A. BAUGH
----------------------------------------------
Gene A. Baugh
Attorney-in-Fact
</TABLE>
S-4
<PAGE> 92
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1* Form of Underwriting Agreement.
4.1 Restated Certificate of Incorporation of the Registrant, as
amended to date. (The copy of this Exhibit filed as Exhibit
3.1 to the Registrant's 1996 second fiscal quarter report on
Form 10-Q is incorporated herein by reference.)
4.2 By-Laws of the Registrant, as amended to date. (The copy of
this Exhibit filed as Exhibit 4.2 to the Registrant's
Registration Statement on Form S-8 (Registration 333-38883)
is incorporated herein by reference.)
5 Opinion of Baker & Daniels.
23.1* Consent of Price Waterhouse LLP.
23.2 Consent of Baker & Daniels. (Included in the Baker & Daniels
Opinion filed as Exhibit 5.)
24 Power of Attorney (Included on the Signature Page of the
Registration Statement.)
</TABLE>
- ---------------
* Filed with this amendment.
E-1
<PAGE> 1
EXHIBIT 1
11,350,000 SHARES
ITT EDUCATIONAL SERVICES, INC.
COMMON STOCK
($.01 PAR VALUE)
UNDERWRITING AGREEMENT
___________, 1998
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. ITT Corporation, a Nevada corporation (the "Selling
Stockholder") and a wholly-owned subsidiary of Starwood Hotels & Resorts
Worldwide, Inc., a Maryland corporation ("Starwood"), proposes to sell (the
"Offering") an aggregate of 11,350,000 outstanding shares (the "Firm
Securities") of the common stock, par value $.01 per share (the "Securities") of
ITT Educational Services, Inc., a Delaware corporation (the "Company"), to the
several underwriters named in Schedule A hereto (the "Underwriters"), for whom
Credit Suisse First Boston Corporation ("CSFBC"), Bear, Stearns & Co. Inc., BT
Alex. Brown Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated and Smith Barney Inc. are acting as
Representatives. The Selling Stockholder also proposes to sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
1,700,000 additional shares of Securities (the "Optional Securities"). The Firm
Securities and the Optional Securities are herein collectively referred to as
the "Offered Securities".
The Company and the Selling Stockholder hereby agree with the several
Underwriters as follows:
2. Representations and Warranties of the Company and the Selling
Stockholder. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
<PAGE> 2
(i) A registration statement (No. 333-46267) relating to the
Offered Securities, including a form of prospectus, has been filed
with the Securities and Exchange Commission ("Commission") and either
(A) has been declared effective under the Securities Act of 1933, as
amended ("Act"), and is not proposed to be amended or (B) is proposed
to be amended by amendment or post-effective amendment. If such
registration statement (the "initial registration statement") has been
declared effective, either (A) an additional registration statement
(the "additional registration statement") relating to the Offered
Securities may have been filed with the Commission pursuant to Rule
462(b) ("Rule 462(b)") under the Act and, if so filed, has become
effective upon filing pursuant to such Rule and the Offered Securities
all have been duly registered under the Act pursuant to the initial
registration statement and, if applicable, the additional registration
statement or (B) such an additional registration statement is proposed
to be filed with the Commission pursuant to Rule 462(b) and will
become effective upon filing pursuant to such Rule and upon such
filing the Offered Securities will all have been duly registered under
the Act pursuant to the initial registration statement and such
additional registration statement. If the Company does not propose to
amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose
to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case
of the additional registration statement, Rule 462(b). For purposes of
this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and
delivery of this Agreement, the additional registration statement
means (A) if the Company has advised the Representatives that it does
not propose to amend such registration statement, the date and time as
of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the
Commission or has become effective upon filing pursuant to Rule
462(c), or (B) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such
registration statement, as amended by such amendment or post-effective
amendment, as the case may be, is declared effective by the
Commission. If an additional registration statement has not been filed
prior to the execution and delivery of this Agreement but the Company
has advised the Representatives that it proposes to file one,
"Effective Time" with respect to such additional registration
statement means the date and time as of which such registration
statement is filed and becomes effective pursuant to Rule 462(b).
"Effective Date" with respect to the initial registration statement or
the additional registration statement (if any) means the date of the
Effective Time thereof. The initial registration statement, as amended
at its Effective Time, including all material incorporated by
reference therein, including all information contained in the
additional registration statement (if any) and deemed to be a part of
the initial registration statement as of the Effective Time of the
additional registration statement pursuant to the General Instructions
of the Form on which it is filed and including all information (if
any) deemed to be a part of the initial registration statement as of
its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the
Act, is hereinafter referred to as the "Initial Registration
Statement". The additional registration statement, as amended at its
Effective Time, including the contents of the initial registration
statement incorporated by reference therein and including all
information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is
2
<PAGE> 3
hereinafter referred to as the "Additional Registration Statement".
The Initial Registration Statement and the Additional Registration
Statement are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act. No stop
order suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceeding for that purpose has
been instituted or, to the best knowledge of the Company, threatened
by the Commission.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the rules and regulations of the
Commission ("Rules and Regulations") and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (C) on the date of this Agreement, the
Initial Registration Statement and, if the Effective Time of the
Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) on the Effective Date of the
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform in all material
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement: on the Effective Date of the Initial
Registration Statement, the Initial Registration Statement and the
Prospectus will conform in all material respects to the requirements
of the Act and the Rules and Regulations, neither of such documents
will include any untrue statement of a material fact or will omit to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and no Additional
Registration Statement has been or will be filed. The two preceding
sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and
agreed that the only such information is that described as such in
Section 7(c) hereof.
(iii) The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business as a
foreign corporation in good standing in all other jurisdictions in
which its ownership,
3
<PAGE> 4
leasing or operation of property or the conduct of its business
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the condition
(financial or other), business, prospects, results of operations or
general affairs of the Company.
(iv) The Company does not have any subsidiaries.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized and validly
issued, fully paid and nonassessable and conform in all material
respects to the description thereof contained in the Prospectus; and
the stockholders of the Company have no preemptive rights with respect
to the Offered Securities or any other securities of the Company.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
third party that would give rise to a valid claim against the Company
or any Underwriter for a brokerage commission, finder's fee or other
like payment in connection with the transactions contemplated by this
Agreement.
(vii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
third party (whether acting in an individual, fiduciary or other
capacity) granting such third party the right to require the Company
to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such third party or
to require the Company to include such securities in the Offered
Securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(viii) The Offered Securities are listed on the New York Stock
Exchange.
(ix) Except as disclosed in the Prospectus, no consent, approval
or authorization, and no order, registration or qualification of, or
filing with, any third party (whether acting in an individual,
fiduciary or other capacity) or any governmental, regulatory or
accrediting agency or body or any court is required to be obtained or
made by the Company for the consummation of the transactions
contemplated by this Agreement, except such as have been obtained and
made under the Act and such as may be required under state securities
laws.
(x) Except as disclosed in the Prospectus, the execution,
delivery and performance of this Agreement and the agreements,
documents or instruments entered into by the Company in connection
with the transactions described in the Prospectus (including, without
limitation, the transactions described under the caption "Relationship
with Selling Stockholder and Related Transactions"), and the
consummation of the transactions herein and therein contemplated, do
not and will not conflict with or result in a breach or violation of
any of the terms and provisions of, and do not and will not constitute
a default (or an event which with the giving of notice or the lapse or
both could reasonably be likely to constitute a default) under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any assets or properties of the Company under (A) the
charter, by-laws or other organizational documents of the Company, (B)
any statute, any rule, regulation, requirement, order or decree of any
governmental, regulatory or accrediting agency or body or any court,
domestic or foreign, having jurisdiction over
4
<PAGE> 5
the Company or any of its properties, assets or operations, including,
without limitation, The Higher Education Act of 1965, as amended, and
the regulations promulgated thereunder (the "HEA"), or (C) any
indenture, mortgage, loan or credit agreement, note, lease, permit,
license or other agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of the
properties, assets or operations of the Company is subject, that
reasonably could be expected to have, individually or in the
aggregate, a material adverse effect on the condition (financial or
other), business, prospects, results of operations or general affairs
of the Company. The sale of the Offered Securities or consummation of
the other transactions contemplated by this Agreement or the
Prospectus will not constitute a change in ownership resulting in a
"change of control" of the Company as defined in the HEA.
(xi) This Agreement and the agreements, documents or instruments
entered into by the Company in connection with the transactions
described in the Prospectus (including, without limitation, the
transactions described under the caption "Relationship with Selling
Stockholder and Related Transactions") have been duly authorized,
executed and delivered by the Company and constitute the legal, valid
and binding obligations of the Company enforceable against the Company
in accordance with their respective terms.
(xii) The Company has good and marketable title to all real
properties and all other properties and assets owned by it free and
clear of any mortgage, pledge, lien, security interest, claim or other
encumbrance or defect that reasonably could be expected to,
individually or in the aggregate, materially affect the value thereof,
materially interfere with the use made or to be made thereof by it, or
have a material adverse effect on the condition (financial or other),
business, prospects, results of operations or general affairs of the
Company; the Company holds any leased real or personal property under
valid, subsisting and enforceable leases or subleases with no
exceptions that would materially interfere with the use made or to be
made thereof by them; except as disclosed in the Prospectus, the
Company is not in default under any such lease or sublease; and no
claim of any sort has been asserted by anyone adverse to the rights of
the Company under any such lease or sublease or affecting or
questioning the right of the Company to the continued possession of
the leased or subleased properties under any such lease or sublease
that reasonably could be expected to have, individually or in the
aggregate, a material adverse effect on the condition (financial or
other), business, prospects, results of operations or general affairs
of the Company.
(xiii) Except as described in the Prospectus, the Company
(including any individual institution within the Company) possesses
all accreditations, approvals, authorizations, certificates, permits
and licenses (collectively, "Licenses") issued by appropriate
governmental, regulatory or accrediting agencies or bodies, including,
without limitation, all authorizations required for participation in
federal aid programs under Title IV Programs of the HEA ("Title IV
Programs"), as are necessary to own, lease or operate its properties
and conduct the business now operated by it and all such Licenses are
in full force and effect. The Company is in substantial compliance
with its obligations under such Licenses, subject to such
qualifications as are described in the Prospectus, and, except as
disclosed in the Prospectus, the Company has not received notice of
any proceedings, investigations or inquiries (or is aware of any facts
that would form a reasonable basis for any proceedings, investigations
or inquiries) relating to the revocation, modification, termination or
suspension of any such License or impairment of the rights of the
Company thereunder that, if determined adversely to the Company,
reasonably could be expected to have, individually or in the
aggregate, a material adverse
5
<PAGE> 6
effect on the condition (financial or other), business, prospects,
results of operations or general affairs of the Company.
(xiv) No consent, approval, authorization, order, registration or
qualification of, or filing with, the U.S. Department of Education
under Title IV of the HEA or with any state agency under any state
statute pertaining to the authorization to operate postsecondary
educational institutions or any accrediting agency that presently
accredits any of the Company's schools is required to be obtained or
made by the Selling Stockholder for the consummation of the
transactions contemplated by this Agreement and the Prospectus.
(xv) No labor dispute with the employees of the Company exists
or, to the best knowledge of the Company, is imminent that reasonably
could be expected to have, individually or in the aggregate, a
material adverse effect on the condition (financial or other),
business, prospects, results of operations or general affairs of the
Company.
(xvi) The Company owns or has obtained valid licenses for all
trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, copyright registrations,
patents, inventions, know-how, confidential information and any other
intellectual property described in the Prospectus as being owned,
licensed or used by the Company or that are necessary for the conduct
of its business (collectively, "Intellectual Property") and the
Company is not aware of any claim (or of any facts that would form a
reasonable basis for any claim) to the contrary or any challenge by
any third party to the rights of the Company with respect to any such
Intellectual Property or to the validity or scope of any such
Intellectual Property and the Company has no claim against a third
party with respect to the infringement by such third party to any such
Intellectual Property that, if determined adversely to the Company or
any of its subsidiaries, reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the
condition (financial or other), business, prospects, results of
operations or general affairs of the Company. The Company has a good
faith belief in the distinctiveness and enforceability of all
trademarks, service marks and trade names and in the validity and
enforceability of all patents comprising the Intellectual Property.
(xvii) Except as described in the Prospectus, the properties,
assets and operations of the Company are in compliance with all
applicable federal, state, local and foreign laws (including, without
limitation, common law), rules and regulations, orders, decrees,
judgments, permits and licenses relating to public and worker health
and safety, and to the protection and clean-up of the natural
environment and to the protection or preservation of natural resources
and of plant and animal species, and activities or conditions related
thereto, including, without limitation, those relating to the
production, extraction, processing, manufacturing, generation,
handling, disposal, transportation or release of hazardous materials
(collectively, "Environmental Laws"), except where noncompliance
reasonably could not be expected to have, individually or in the
aggregate, a material adverse effect on the condition (financial or
other), business, prospects, results of operations or general affairs
of the Company. With respect to such properties, assets and operations
(including any previously owned, leased or operated properties, assets
or operations with respect to such prior period of ownership or
operation), there are no past, present or, to the best knowledge of
the Company, reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of
the Company that may interfere with or prevent compliance
6
<PAGE> 7
or continued compliance by the Company with applicable Environmental
Laws or otherwise result in liability to the Company pursuant to
applicable Environmental Law. Except as described in the Prospectus,
the Company is not the subject of any federal, state, local or foreign
investigation, and the Company has not received any notice or claim
(or is aware of any facts that would be expected to result in any such
claim), nor entered into any negotiations or agreements with any third
party relating to any liability or potential liability or remedial
action or potential remedial action under Environmental Laws, nor are
there any pending, reasonably anticipated or, to the best knowledge of
the Company, threatened actions, suits or proceedings against or
affecting the Company or its properties, assets or operations in
connection with any Environmental Laws. The term "hazardous materials"
shall mean those substances that are regulated by or form the basis
for liability under any applicable Environmental Laws.
(xviii) Except as disclosed in the Prospectus, there are no
pending actions, suits, proceedings or investigations against or
affecting the Company (including any individual institution within the
Company) or any of its properties, assets or operations that, if
determined adversely to the Company, reasonably could be expected to
have, individually or in the aggregate, a material adverse effect on
the condition (financial or other), business, prospects, results of
operations or general affairs of the Company, or could materially and
adversely affect the ability of the Company to perform its obligations
under this Agreement or which are otherwise material in the context of
the sale of the Offered Securities; and no such actions, suits,
proceedings or investigations are threatened or, to the best knowledge
of the Company, contemplated.
(xix) The financial statements and related schedules and notes
included in each Registration Statement and the Prospectus comply with
the requirements of the Act and the Rules and Regulations, present
fairly the financial position of the Company as of the dates shown and
its results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis. The financial information and statistical data
set forth in the Prospectus under the captions "Summary Financial and
Operating Data", "Selected Financial and Operating Data" and
"Capitalization" present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited
consolidated financial statements included in the Registration
Statements.
(xx) Since the dates as of which information is given in each
Registration Statement and the Prospectus, (A) the Company has not
incurred any material liability or obligation (indirect, direct or
contingent) or entered into any material, verbal or written agreement
or other transaction that is not in the ordinary course of business or
that reasonably could be expected to result in a material reduction in
the future earnings of the Company; (B) there has been no change
except as contemplated by the Prospectus, in the indebtedness of the
Company, no change in the capital stock of the Company and no dividend
or distribution of any kind declared, paid or made by the Company on
any class of its capital stock; and (C) there has been no material
adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other),
business, prospects or results of operations or general affairs of the
Company.
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<PAGE> 8
(xxi) The Company is not and, after giving effect to the offering
and sale of the Offered Securities, will not be an "investment
company" as defined in the Investment Company Act of 1940, as amended.
(xxii) Except as set forth in the Prospectus, there are no
outstanding (A) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of the Company to issue
such shares, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or obligations.
(xxiii) Each "employee benefit plan" within the meaning of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
that the Company sponsors and in which employees of the Company
participate (the "ERISA Plans") is in compliance with the applicable
provision of ERISA and the Internal Revenue Code of 1986, as amended
(the "Code"). The Company has no liability, with respect to the ERISA
Plans or otherwise and whether or not contingent, under Title IV of
ERISA, nor does the Company expect that any such liability will be
incurred. The Company has no liability, whether or not contingent,
with respect to any ERISA Plan that provides post-retirement welfare
benefits that would, individually or in the aggregate, have an adverse
effect on the condition (financial or other), business, prospects,
results of operations or general affairs of the Company in an amount
greater than $3,000,000.
(xxiv) The Company has filed on a timely basis all federal,
state, local and foreign tax returns required to be filed by the
Company (or such returns were included in the consolidated federal,
state, local or foreign tax returns of the Selling Stockholder), such
returns are complete and correct in all material respects, and all
taxes shown by such returns (or included in any consolidated returns
of the Selling Stockholder) or otherwise due and payable by the
Company have been paid, except such taxes as are being contested in
good faith and as to which adequate reserves have been provided. The
charges, accruals and reserves on the books of the Company in respect
of any tax liability of the Company for any year not finally
determined are adequate to meet any assessments or reassessments for
additional taxes; and there has been no formal or informal tax
deficiency asserted against the Company and the Company is not aware
of any facts that would form a reasonable basis for the assertion of
any tax deficiency against the Company that reasonably could be
expected to have, individually or in the aggregate, a material adverse
effect on the condition (financial or other), business, prospects,
results of operations or general affairs of the Company. The Company
is not now and has never been a "United States real property holding
corporation" as defined in Section 897(c)(2) of the Code and the
Treasury Regulations promulgated thereunder.
(xxv) The Company maintains a system of internal accounting
controls sufficient for purposes of the prevention or detection of
errors or irregularities in amounts that reasonably could be expected
to be material to the Company's consolidated financial statements and
the recording of transactions so as to permit the preparation of such
consolidated financial statements in conformity with generally
accepted accounting principles.
(xxvi) The Company (including any individual institution within
the Company) is not in violation of (A) its charter, by-laws or other
organizational documents or (B) any applicable law, ordinance,
administrative or governmental or regulatory rule, regulation
8
<PAGE> 9
or accreditation requirement or standard or any order, decree or
judgment of any court or governmental, regulatory or accrediting
agency or body having jurisdiction over the Company; and no event of
default or event that, but for the giving of notice or the lapse of
time or both, would constitute an event of default exists, or upon
consummation of the transactions contemplated by this Agreement and
the Prospectus (including, without limitation, the transactions
described under the caption "Relationship with Selling Stockholder and
Related Transactions") will exist, under any indenture, mortgage, loan
or credit agreement, note, lease, permit, license or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the properties, assets or operations of
the Company is subject, that reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the
condition (financial or other), business, prospects, results of
operations or general affairs of the Company. There are no statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statements or the Prospectus or to be
filed as an exhibit to the Registration Statements that are not
described or filed as required.
(xxvii) The Company carries or is entitled to the benefits of
insurance in such amounts and covering such risks as are generally
maintained by companies of established repute engaged in the same or
similar business, and all such insurance is in full force and effect.
(xxviii) On the date each Registration Statement was first filed
with the Commission, and at the Effective Time, the Company met the
conditions for use of Form S-3 under the Act and the Rules and
Regulations.
(xxix) The Company has not taken and will not take, directly or
indirectly, any action designed to, or that reasonably could be
expected to, cause or result in stabilization or manipulation of the
price of the Offered Securities to facilitate the sale or resale of
the Offered Securities.
(b) The Selling Stockholder represents and warrants to, and
agrees with, the Underwriters that:
(i) The Selling Stockholder has and on each Closing Date
hereinafter mentioned will have valid and unencumbered title to the
Offered Securities to be delivered by the Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by the Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities pursuant to this Agreement on each Closing Date hereunder
the several Underwriters will acquire valid and unencumbered title to
the Offered Securities to be delivered by the Selling Stockholder on
such Closing Date.
(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all material respects to the
requirements of the Act and the Rules and
9
<PAGE> 10
Regulations and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed, or will conform, in all material
respects to the requirements of the Act and the Rules and Regulations
did not include, or will not include, any untrue statement of a
material fact and did not omit, or will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective
Time of the Additional Registration Statement is prior to the
execution and delivery of this Agreement, the Additional Registration
Statement each conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b) or (if no such filing is required) at the
Effective Date of the Additional Registration Statement in which the
Prospectus is included, and on each Closing Date, each Registration
Statement and the Prospectus will conform, in all material respects to
the requirements of the Act and the Rules and Regulations, and neither
of such documents includes, or will include, any untrue statement of a
material fact or omits, or will omit, to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: (A) on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and
the Rules and Regulations, neither of such documents will include any
untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading and (B) on each Closing
Date, the Initial Registration Statement and the Prospectus will
conform, in all material respects to the requirements of the Act and
the Rules and Regulations, and neither of such documents includes, or
will include, any untrue statement of a material fact or omits, or
will omit, to state any material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made)
not misleading. The two preceding sentences apply only to the extent
that any statements in or omissions from a Registration Statement or
the Prospectus are based on written information furnished to the
Company by the Selling Stockholder specifically for use therein.
(iii) This Agreement and, to the extent applicable to the Selling
Stockholder, the agreements, documents or instruments entered into by
the Selling Stockholder in connection with the transactions described
in the Prospectus under the caption "Relationship with Selling
Stockholder and Related Transactions" have been duly authorized,
executed and delivered by or on behalf of the Selling Stockholder and
constitute the legal, valid and binding obligations of the Selling
Stockholder enforceable against the Selling Stockholder in accordance
with their terms.
(iv) No consent, approval, authorization, order, registration or
qualification of, or filing with, any third party (whether acting in
an individual, fiduciary or other capacity) or any governmental or
regulatory agency or body or court is required to be obtained or made
by the Selling Stockholder for the consummation of the transactions
contemplated by this Agreement and the Prospectus, except such as have
been obtained and made under the Act and such as may be required under
state securities laws or as may be required to be made with the U.S.
Department of Education under Title IV of the HEA or with any state
agency under any state statute pertaining to the authorization to
operate postsecondary educational institutions or any accrediting
agency that presently accredits any of the Company's schools.
(v) The Selling Stockholder has caused the Company to file, or
has filed, on a timely basis all federal, state, local and foreign tax
returns required to be filed (a) by the Company or (b) by the Selling
Stockholder that include the Company, such returns are
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<PAGE> 11
complete and correct in all material respects, and all taxes shown by
such returns or otherwise due and payable have been paid, except such
taxes as are being contested in good faith and as to which adequate
reserves have been provided. The Selling Stockholder is not aware of
any facts that would form a reasonable basis for the assertion of any
tax deficiency against the Company that reasonably could be expected
to have, individually or in the aggregate, a material adverse effect
on the condition (financial or other), business, prospects, results of
operations or general affairs of the Company.
(vi) Each "employee benefit plan," within the meaning of ERISA,
that the Selling Stockholder sponsors and in which employees of the
Company participate or as to which the Company has any control group
liability (the "ITT ERISA Plans") is in compliance with the applicable
provision of ERISA and the Code. The Selling Stockholder has no
liability, with respect to the ITT ERISA Plans or otherwise and
whether or not contingent, under Title IV of ERISA, nor does the
Selling Stockholder expect that any such liability will be incurred.
The Selling Stockholder has no liability, whether or not contingent,
with respect to any ITT ERISA Plan that provides post-retirement
welfare benefits which would, individually or in the aggregate, have a
material adverse effect on the condition (financial or other),
business, prospects, results of operations or general affairs of the
Selling Stockholder.
(vii) The execution, delivery and performance by the Selling
Stockholder of this Agreement, the sale of the Offered Securities
being sold by the Selling Stockholder and the consummation by the
Selling Stockholder of any of the transactions contemplated by this
Agreement, the Prospectus, do not and will not conflict with or result
in a breach or violation of any of the terms and provisions of, or
constitute or will constitute a default (or an event which with the
giving of notice or the lapse of time or both could reasonably be
likely to constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon the Offered
Securities to be sold by the Selling Stockholder under (A) the
charter, by-laws or other organizational documents of the Selling
Stockholder (B) any statute, any rule, regulation, requirement, order
or decree of any governmental or regulatory agency or body, or any
court, domestic or foreign, having jurisdiction over the Selling
Stockholder or any of its properties, assets or operations or (C) any
indenture, mortgage, loan or credit agreement, note, lease, permit,
license of other agreement or instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder is bound or
to which any of the properties, assets or operations of the Selling
Stockholder is subject, that reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the
ability of the Selling Stockholder to consummate the transactions
contemplated by this Agreement.
(viii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Selling
Stockholder and any third party that would give rise to a valid claim
against the Selling Stockholder or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the
transactions contemplated by this Agreement.
(ix) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to, or that reasonably
could be expected to, cause or result in the stabilization or
manipulation of the price of the Offered Securities to facilitate the
sale or resale of the Offered Securities.
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<PAGE> 12
3. Purchase, Sale and Delivery of Offered Securities. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Selling Stockholder agrees to sell to
the Underwriters, and the Underwriters agree, severally and not jointly, to
purchase from the Selling Stockholder, at a purchase price of $[ ] per share,
the respective numbers of shares of Firm Securities set forth opposite the names
of the Underwriters in Schedule A hereto.
The Selling Stockholder will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price in Federal (same day) funds by wire transfer to an account of the
Selling Stockholder at a bank acceptable to CSFBC, at the office of Dewey
Ballantine LLP, 1301 Avenue of the Americas, New York, New York 10019-6092, at
10:00 A.M., New York time, on _____________, 1998, or at such other time not
later than seven full business days thereafter as CSFBC and the Selling
Stockholder determine (such time being herein referred to as the "First Closing
Date"). For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934,
the First Closing Date (if later than the otherwise applicable settlement date)
shall be the settlement date for payment of funds and delivery of securities for
all the Offered Securities sold pursuant to the Offering. The certificates for
the Firm Securities so to be delivered will be in definitive form, in such
denominations and registered in such names as CSFBC requests and will be made
available for checking and packaging at the office of Credit Suisse First Boston
Corporation, New York, New York, at least 24 hours prior to the First Closing
Date.
In addition, upon written notice from CSFBC given to the Company and the
Selling Stockholder from time to time not more than 30 days subsequent to the
date of the Prospectus, the Underwriters may purchase all or less than all of
the Optional Securities at the purchase price per Security to be paid for the
Firm Securities. The Selling Stockholder agrees to sell to the Underwriters the
number of shares of Optional Securities specified in such notice and the
Underwriters agree, severally and not jointly, to purchase such Optional
Securities. Such Optional Securities shall be purchased for the account of each
Underwriter in the same proportion as the number of Firm Securities set forth
opposite such Underwriter's name in Schedule A hereto bears to the total number
of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and
may be purchased by the Underwriters only for the purpose of covering
over-allotments made in connection with the sale of the Firm Securities. No
Optional Securities shall be sold or delivered unless the Firm Securities
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Optional Securities or any portion thereof may be exercised from
time to time and to the extent not previously exercised may be surrendered and
terminated at any time upon notice by CSFBC to the Selling Stockholder. It is
understood that CSFBC is authorized to make payment for and accept delivery of
such Optional Securities on behalf of the Underwriters pursuant to the terms of
CSFBC's instructions to the Selling Stockholder.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Selling Stockholder will
deliver the Optional Securities being purchased on each Optional Closing Date to
the Representatives for the accounts of the several Underwriters, against
payment of the purchase price therefor in Federal (same day) funds by wire
transfer to an account of the Selling Stockholder at a bank acceptable to CSFBC,
at the above office of Dewey Ballantine LLP. The certificates for the Optional
Securities being purchased on each Optional Closing Date will be in definitive
form, in
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<PAGE> 13
such denominations and registered in such names as CSFBC requests upon
reasonable notice prior to such Optional Closing Date and will be made available
for checking and packaging at the above office of CSFBC, at a reasonable time in
advance of such Optional Closing Date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Offered Securities for sale to the public as set forth in
the Prospectus.
5. Certain Agreements of the Company, the Selling Stockholder, Starwood and
the Underwriters.
(A) The Company agrees with the several Underwriters that:
(a) If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day after
the Effective Date of the Initial Registration Statement.
The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or the
related prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without CSFBC's prior consent; and the Company will
also advise CSFBC promptly of the effectiveness of each Registration Statement
(if its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best efforts
to prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with sales by
any Underwriter or dealer, any event occurs as a result of which the Prospectus
as then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend the Prospectus to comply
with the Act, the Company will promptly notify CSFBC of such event and will
promptly prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance. Neither CSFBC's consent to,
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nor the Underwriters' delivery of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the Availability Date
(as defined below), the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the Effective Date of the Initial Registration Statement (or, if
later, the Effective Date of the Additional Registration Statement) which will
satisfy the provisions of Section 11(a) of the Act. For the purpose of the
preceding sentence, "Availability Date" means the 45th day after the end of the
fourth fiscal quarter following the fiscal quarter that includes such Effective
Date, except that, if such fourth fiscal quarter is the last quarter of the
Company's fiscal year, "Availability Date" means the 90th day after the end of
such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of each
Registration Statement (two of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities as
CSFBC reasonably requests. The Prospectus shall be so furnished on or prior to
3:00 P.M., New York time, on the business day following the later of the
execution and delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished as soon
as available. The Company will pay the expenses of printing and distributing to
the Underwriters all such documents.
(f) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates and
will continue such qualifications in effect so long as required for the
distribution.
(g) During the period of two years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its annual
report to stockholders for such year; and the Company will furnish to the
Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to
time, such other information concerning the Company as CSFBC may reasonably
request.
(h) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, announce the intention to sell, pledge or otherwise dispose of,
directly or indirectly, or file with the Commission a registration statement
under the Act relating to, any Securities or securities or other rights
convertible into or exchangeable or exercisable for any Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC; except in connection with
grants of employee stock options pursuant to the terms of a plan in effect on
the date hereof or issuances of Securities pursuant to the exercise of such
options.
(i) The Company will use its reasonable best efforts to cause the
executive officers of the Company listed on Schedule B hereto to agree that for
a period of 180 days after the date of the initial public offering of the
Offered Securities, they will not offer, sell, contract to sell, announce the
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
request or demand the filing with the Commission of a registration statement
under the Act
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<PAGE> 15
relating to, any Securities or securities or other rights convertible into or
exchangeable or exercisable for any Securities, or publicly disclose the
intention to make any such offer, sale, pledge, disposition or filing, without
the prior written consent of CSFBC.
(j) Upon the written request of CSFBC or any Underwriter, the Company
shall (i) furnish to CSFBC or any other Underwriter, a certification, as
contemplated by and in compliance with Treasury regulations Section 1.897-2(h),
that as of any Closing Date (or such other date as may be specified in such
request), the Offered Securities are not United States real property interests
as defined in Section 897(c)(1) of the Code, (ii) file such certification with
the Internal Revenue Service in the manner and within the time period specified
in Treasury regulations Section 1.897-2(h) and (iii) promptly after such filing,
furnish to CSFBC or the Underwriter that has requested a certificate, as the
case may be, proof of such filing.
(k) The Company agrees with the several Underwriters that the Company
will pay all expenses incident to the performance of the obligations of the
Selling Stockholder and the obligations of the Company under this Agreement, for
any filing fees and other expenses (including fees and disbursements of counsel)
in connection with qualification of the Offered Securities for sale under the
laws of such jurisdictions as CSFBC designates and the printing of memoranda
relating thereto, for the filing fee incident to, and the fees and disbursements
of counsel to the Underwriters in connection with the review by the National
Association of Securities Dealers, Inc. of the Offered Securities, for any
travel expenses of the Company's officers and employees and any other expenses
of the Company in connection with attending or hosting meetings with prospective
purchasers of the Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectuses (including any amendments and
supplements thereto) to the Underwriters; provided, however, that the Selling
Stockholder shall be responsible for any transfer taxes on the sale by the
Selling Stockholder of the Offered Securities to the Underwriters.
(B) The Selling Stockholder and Starwood agree with the several
Underwriters that:
(a) The Selling Stockholder agrees with the Underwriters that the
Selling Stockholder shall be responsible for any transfer taxes on the sale of
its Offered Securities to the Underwriters.
(b) The Selling Stockholder agrees to deliver to CSFBC, Attention:
Transactions Advisory Group, on or prior to the First Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
(c) For a period of 180 days after the date of the initial public
offering of the Offered Securities, neither the Selling Stockholder nor Starwood
will offer, sell, contract to sell, announce the intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Act relating to, any Securities or securities
or other rights convertible into or exchangeable or exercisable for any
Securities, or, except as required by law or stock exchange requirement,
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC.
(C) The several Underwriters agree with the Company that the Underwriters
will not sell Offered Securities to the public in the Offering such that, to the
knowledge of the Underwriters, such sale would result in any stockholder of the
Company (other than the Selling Stockholder)
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<PAGE> 16
acquiring beneficial ownership (as defined in Rule 13d-3 of the Exchange Act) of
ten percent or more of the issued and outstanding Securities immediately after
the Offering.
6. Conditions of the Obligations of the Underwriters. The obligations of
the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein and to
the performance by the Company, the Selling Stockholder and Starwood of their
obligations hereunder and to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated the date
of delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Price Waterhouse LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and schedules examined
by them and included in the Registration Statements comply as to form in
all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations;
(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in Statement of Auditing Standards No. 71, Interim
Financial Information, on the unaudited interim financial statements
included in the Registration Statements;
(iii) on the basis of the review referred to in clause (ii) above, a
reading of the latest available interim financial statements of the
Company, a reading of the minutes of all meetings of the stockholders and
directors (including each committee thereof of the Company), inquiries of
officials of the Company who have responsibility for financial and
accounting matters, nothing came to their attention that caused them to
believe that:
(A) the unaudited interim financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and
the related published Rules and Regulations or any material
modifications should be made to such unaudited interim financial
statements for them to be in conformity with generally acceptable
accounting principles;
(B) at the date of the latest available balance sheet read by
such accountants, or at a subsequent specified date not more than
three days prior to the date of this Agreement, there was any decrease
in shareholders' equity or change in the capital stock or any increase
in short-term indebtedness or long-term debt of the Company or, at the
date of the latest available balance sheet read by such accountants,
there was any decrease in net current assets or net assets, as
compared with amounts shown on the latest balance sheet included in
the Registration Statements and the Prospectus; or
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<PAGE> 17
(C) for the period from the date of the latest income
statement included in the Registration Statements and the
Prospectus to the date, not more than three business days
prior to the date of this Agreement, of the latest available
income statement read by such accountants there were any
decreases, as compared with the corresponding period of the
previous year and with the period of corresponding length
ended the date of the latest income statement included in the
Registration Statements and the Prospectus, in net revenues or
net income, or in the total or per share amounts of net income
or income from continuing operations before extraordinary
item, or any increases or decreases, as the case may be, in
other items specified by the Representatives;
except in all cases set forth in clauses (B) and (C) above for changes,
increases or decreases which the Prospectus discloses have occurred;
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other financial
information contained in the Registration Statements and the Prospectus
(in each case to the extent that such dollar amounts, percentages,
numerical data and other financial information are derived from the
general accounting records of the Company subject to the internal
controls of the Company's accounting system or are derived directly
from such records by analysis or computation) with the results obtained
from inquiries, a reading of such general accounting records and other
procedures specified in such letter and have found such dollar amounts,
percentages, numerical data and other financial information to be in
agreement with such results.
For purposes of this subsection, (i) if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, "Registration Statements" shall mean the initial registration
statement as proposed to be amended by the amendment or post-effective amendment
to be filed shortly prior to its Effective Time, (ii) if the Effective Time of
the Initial Registration Statement is prior to the execution and delivery of
this Agreement but the Effective Time of the Additional Registration is
subsequent to such execution and delivery, "Registration Statements" shall mean
the Initial Registration Statement and the additional registration statement as
proposed to be filed or as proposed to be amended by the post-effective
amendment to be filed shortly prior to its Effective Time, and (iii)
"Prospectus" shall mean the prospectus included in the Registration Statements.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Registration
Statements for purposes of this subsection.
(b) If the Effective Time of the Initial Registration Statement
is not prior to the execution and delivery of this Agreement, such Effective
Time shall have occurred not later than 10:00 P.M., New York time, on the date
of this Agreement or such later date as shall have been consented to by CSFBC.
If the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of this
Agreement or, if earlier, the time the Prospectus is printed and distributed to
any Underwriter, or shall have occurred at such later date as shall have been
consented to by CSFBC. If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Prospectus shall have been filed with the Commission in accordance with the
Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing
Date, no stop order suspending the effectiveness of a Registration Statement
shall have been issued and no proceedings for that
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<PAGE> 18
purpose shall have been instituted or, to the knowledge of the Company, the
Selling Stockholder or the Representatives, shall be contemplated by the
Commission.
(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of the Company which, in the judgment of a majority in
interest of the Underwriters including the Representatives, is material and
adverse and makes it impractical or inadvisable to proceed with completion of
the public offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by any
"nationally recognized statistical rating organization" (as defined for purposes
of Rule 436(g) under the Act), or any public announcement that any such
organization has under surveillance or review its rating of any debt securities
of the Company (other than an announcement with positive implications of a
possible upgrading, and no implication of a possible downgrading, of such
rating); (iii) any suspension or limitation of trading in securities generally
on the NYSE or any setting of minimum prices for trading on any such exchange,
or any suspension of trading of any securities of the Company on any exchange or
in the over-the-counter market; (iv) any banking moratorium declared by either
U.S. Federal or New York authorities; or (v) any outbreak or escalation of major
hostilities in which the United States is involved, any declaration of war by
Congress or any other substantial national or international calamity or
emergency if, in the judgment of a majority in interest of the Underwriters
including the Representatives, the effect of any such outbreak, escalation,
declaration, calamity or emergency makes it impractical or inadvisable to
proceed with completion of the public offering or the sale of and payment for
the Offered Securities.
(d) The Representatives shall have received an opinion, dated such
Closing Date, of Baker & Daniels, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus.
(ii) The Offered Securities delivered on such Closing Date and all
other outstanding shares of capital stock of the Company have been duly
authorized and validly issued, are fully paid and nonassessable; no further
approval or authority of the shareholders or the Board of Directors of the
Company is or will be required for the sale of the Offered Securities as
contemplated by this Agreement; and the shareholders of the Company have no
preemptive or similar rights with respect to the Securities.
(iii) Except as disclosed in the Prospectus, to the best knowledge of
such counsel, there are no contracts, agreements or understandings between
the Company and any third party (whether acting in an individual, fiduciary
or other capacity) granting such third party the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such third party or to
require the Company to include such securities in the Offered Securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by the
Company under the Act.
(iv) Except as disclosed in the Prospectus, no consent, approval,
authorization, order, registration or qualification of, or filing with, any
third party (whether acting in an individual, fiduciary or other capacity)
or any governmental,
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<PAGE> 19
regulatory or accrediting agency or body or any court is required to
be obtained or made by the Company for the consummation of the
transactions contemplated by the Agreement in connection with the sale
of the Offered Securities, except such as have been obtained and made
under the Act and such as may be required under state securities laws.
(v) Except as disclosed in the Prospectus, the execution,
delivery and performance of this Agreement by the Company and the
agreements, documents or instruments entered into by the Company in
connection with the transactions described in the Prospectus
(including, without limitation, the transactions described under the
caption "Relationship with Selling Stockholder and Related
Transactions") do not and will not conflict with or result in a breach
or violation of any of the terms and provisions of, and do not and
will not constitute a default (or an event which with the giving of
notice or the lapse of time or both could reasonably be likely to
constitute a default) under, or result in the creation or imposition
of any lien, charge or encumbrance upon any assets or properties of
the Company under, and the Company is not in violation of (A) the
charter, by-laws or other organizational documents of the Company, (B)
to the best knowledge of such counsel, any statute, any rule,
regulation, requirement, order or decree of any governmental,
regulatory or accrediting agency or body or any court having
jurisdiction over the Company or any of its properties, assets or
operations or (C) to the best knowledge of such counsel, any
indenture, mortgage, loan or credit agreement, note, lease, permit,
license or other agreement or instrument to which the Company is a
party or by which the Company or any subsidiary is bound or to which
any of the properties, assets or operations of the Company is subject,
that reasonably could be expected to have, individually or in the
aggregate, a material adverse effect on the condition (financial or
other), business, prospects, results of operations or general affairs
of the Company.
(vi) This Agreement and the agreements, documents or instruments
entered into by the Company in connection with the transactions
described in the Prospectus (including, without limitation, the
transactions described under the caption "Relationship with Selling
Stockholder and Related Transactions") have been duly authorized,
executed and delivered by the Company and, to the extent required, its
stockholders.
(vii) Except as disclosed in the Prospectus, to the best
knowledge of such counsel, there are no pending or threatened actions,
suits, proceedings or investigations against or affecting the Company
or any of its properties, assets or operations that could materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement or which are otherwise material in
the context of the sale of the Offered Securities.
(viii) The Company is not and, after giving effect to the
offering and sale of the Offered Securities, will not be an
"investment company" as defined in the Investment Company Act of 1940,
as amended.
(ix) To the best knowledge of such counsel, the descriptions in
the Registration Statements and the Prospectus of statutes, legal and
governmental proceedings and contracts and other documents are
accurate in all material respects and fairly present the information
required to be shown and such counsel do not know of any legal or
governmental proceedings required to be described or any contracts or
documents of a character required to be described in a Registration
Statement or the
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<PAGE> 20
Prospectus or to be filed as exhibits to a Registration Statement
which are not described and filed as required.
(x) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in
such opinion on the date specified therein or was included in the
Initial Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best knowledge of such
counsel, no stop order suspending the effectiveness of a Registration
Statement or any part thereof has been issued and no proceedings for
that purpose have been instituted or are pending or contemplated under
the Act, and each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective effective or
issue dates, complied as to form in all material respects with the
requirements of the Act and the Rules and Regulations. Such counsel
have participated in the preparation of the Registration Statements
and the Prospectus and have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its effective
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto, as of its issue date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel need express no
opinion as to (i) the financial statements or other financial data
contained in the Registration Statements and the Prospectus, (ii) the
portions of the Registration Statements and the Prospectus as to which
Dow, Lohnes & Albertson, PLLC is providing an opinion to the
Underwriters or (iii) any federal, state or accrediting commission
laws, regulations and/or standards pertaining to federal student
financial aid programs or accrediting or licensing of educational
institutions. Such opinion shall be to such further effect with
respect to other legal matters relating to this Agreement and the
transactions contemplated hereby as the Representatives and counsel to
the Underwriters may reasonably request.In rendering such opinion,
such counsel may rely as to matters governed by the laws of
jurisdictions other than the laws of jurisdictions in which such
counsel are admitted to practice and the federal laws of the United
States upon the opinions of counsel reasonably satisfactory to the
Representatives and counsel to the Underwriters.
(e) The Representatives shall have received an opinion, dated
such Closing Date, of Clark D. Elwood, Senior Vice President, General Counsel
and Secretary of the Company, to the effect that:
(i) The Company is duly qualified to transact business as a
foreign corporation in good standing in all jurisdictions other than
the jurisdiction of its incorporation in which it owns, leases or
operates properties or in which the conduct of its business or its
ownership, leasing or operation of property requires such
qualification, except for such jurisdictions where the failure to
qualify would not have a material adverse effect on the condition
(financial or other), business, prospects, results of operations or
general affairs of the Company.
(ii) The Company does not have any subsidiaries.
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(iii) All outstanding shares of the capital stock of the Company
have been duly authorized, are validly issued, are fully paid and
non-assessable and have been issued in compliance with applicable
federal and state securities laws; the authorized and outstanding
shares of capital stock of the Company are as set forth in the
Prospectus under the captions "Capitalization" and "Description of
Capital Stock" and conform in all material respects to the
descriptions thereof contained in the Prospectus; and the shareholders
of the Company have no preemptive or similar rights with respect to
any securities of the Company.
(iv) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
third party (whether acting in an individual, fiduciary or other
capacity) granting such third party the right to require the Company
to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such third party or
to require the Company to include such securities in the Offered
Securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Act.
(v) Except as disclosed in the Prospectus, no consent, approval,
authorization, order, registration or qualification of, or filing
with, any state agency under any state statute pertaining to the
authorization to operate postsecondary educational institutions, or
any accrediting agency that presently accredits any of the Company's
schools is required for the consummation by the Company of the
transactions contemplated by this Agreement or the Prospectus in
connection with the sale of the Offered Securities.
(vi) To the best knowledge of such counsel, the execution,
delivery and performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated in the
Prospectus (including, without limitation, the consummation of the
transactions described in the Prospectus under the caption
"Relationship with Selling Stockholder and Related Transactions"), do
not and will not conflict with or result in a violation of (A) any
state statute pertaining to the authorization to operate postsecondary
educational institutions, or (B) the standards of accreditation of any
accrediting agency that presently accredits any of the Company's
schools, except for such conflicts or violations which would not be
reasonably likely to, individually or in the aggregate, have a
material adverse effect on the Company.
(vii) To the best knowledge of such counsel, except as disclosed
in the Prospectus, the Company possesses all necessary Licenses issued
by appropriate governmental, regulatory or accrediting agencies or
bodies, including, without limitation, all authorizations required
for, or pertaining to, (A) the ownership, leasing or operation of the
Company's properties and the conduct of the business now operated by
the Company, (B) participation in federal aid programs under Title IV
Programs, (C) state authorization to operate postsecondary educational
institutions as are required for participation in Title IV Programs as
described in the Registration Statement and the Prospectus and (D)
accrediting agency approvals as are required for participation in
Title IV Programs as described in the Registration Statement and the
Prospectus, and all such Licenses are in full force and effect, except
where the failure to possess such Licenses or the failure of such
Licenses to be in full force and effect would not be reasonably likely
to, individually or in the aggregate, have a material adverse effect
on the Company. Except as disclosed in the Prospectus, to the
knowledge of such counsel, the Company has not received notice
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of any proceedings, investigations or inquiries, nor are any such
proceedings, investigations or inquiries threatened, relating to the
revocation, modification, termination or suspension of any such
License, except where any such revocation, modification, termination
or suspension would not be reasonably likely to, individually or in
the aggregate, have a material adverse effect on the Company.
(viii) Except as disclosed in the Prospectus, there are no
pending or, to the best knowledge of such counsel, threatened actions,
suits, proceedings or investigations against or affecting the Company
or any of its properties, assets or operations that could individually
or in the aggregate have a material adverse effect on the Company.
(ix) Except as set forth in the Prospectus, there are no
outstanding (A) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (B)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations or (C) obligations of the Company to issue
such shares, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or obligations.
(x) The Company (including any individual institution within the
Company) is not in violation of (A) its charter, by-laws or other
organizational documents or (B) to the best knowledge of such counsel,
any order, decree or judgment of any governmental, regulatory or
accrediting agency or body or any court having jurisdiction over the
Company or any of its properties, assets or operations and no event of
default or event that, but for the giving of notice or the lapse of
time or both, would constitute an event of default exists, or upon
consummation of the transactions contemplated by this Agreement and
the Prospectus (including, without limitation, the transactions
described under the caption "Relationship with Selling Stockholder and
Related Transactions") will exist, under any indenture, mortgage, loan
or credit agreement, note, lease, permit, license or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the properties, assets or operations of
the Company is subject, that reasonably could be expected to have,
individually or in the aggregate, a material adverse effect on the
condition (financial or other), business, prospects, results of
operations or general affairs of the Company.
(xi) Such counsel has participated in the preparation of the
Registration Statements and the Prospectus and has no reason to
believe that any part of the Registration Statement or any amendment
thereto, as of its effective date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
amendment or supplement thereto, as of its issue date or as of such
Closing Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being
understood that such counsel need express no opinion as to the
financial statements and schedules or other financial data contained
in the Registration Statements and the Prospectus).
Such opinion shall be to such further effect with respect to other
legal matters relating to this Agreement and the transactions contemplated
hereby as the Representatives and counsel to the Underwriters may reasonably
request. In rendering such opinion, such counsel may rely as to matters
governed by the laws of jurisdictions other than the laws of jurisdictions in
which such
22
<PAGE> 23
counsel is admitted to practice and the federal laws of the United States upon
opinions of counsel reasonably satisfactory to the Representatives and counsel
for the Underwriters.
(f) The Representatives shall have received an opinion, dated
such Closing Date, of Sidley & Austin, counsel for the Selling Stockholder, to
the effect that:
(i) To the best knowledge of such counsel, immediately prior to
such Closing Date, the Selling Stockholder was the sole registered
owner of the Offered Securities and has the corporate power and
authority to enter into this Agreement and to sell, assign, transfer
and deliver the Offered Securities delivered by the Selling
Stockholder on such Closing Date;
(ii) This Agreement has been duly authorized, executed and
delivered by or on behalf of each of the Selling Stockholder and
Starwood and, to the extent required, their shareholders.
(iii) To the best knowledge of such counsel, no consent,
approval, authorization, order, registration or qualification of, or
filing with, any third party (whether acting in an individual,
fiduciary or other capacity) or any governmental or regulatory agency
or body or any court is required to be obtained or made by either the
Selling Stockholder or Starwood for the consummation of the
transactions contemplated by this Agreement and the Prospectus in
connection with the sale of the Offered Securities except such as have
been obtained and made under the Act and such as may be required under
state securities laws or as may be required to be made with the U.S.
Department of Education under Title IV of the HEA or with any state
agency under any state statute pertaining to the authorization to
operate postsecondary educational institutions or any accrediting
agency that presently accredits any of the Company's schools.
(iv) The execution, delivery and performance by the Selling
Stockholder and Starwood of this Agreement, the sale of the Offered
Securities being sold by the Selling Stockholder and the consummation
of any of the transactions contemplated by this Agreement and the
Prospectus in connection with the sale of the Offered Securities, do
not and will not conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute or will constitute a
default (or an event which with the giving of notice or the lapse of
time or both could reasonably be likely to constitute a default)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon the Offered Securities to be sold by the Selling
Stockholder under (A) the charter, by-laws or other organizational
documents of the Selling Stockholder and Starwood, (B) to the best
knowledge of such counsel, any statute, any rule, regulation,
requirement, order or decree of any governmental or regulatory agency
or body, or any court, domestic or foreign, having jurisdiction over
the Selling Stockholder and Starwood or any of their properties,
assets or operations or (C) to the best knowledge of such counsel, any
indenture, mortgage, loan or credit agreement, note, lease, permit,
license of other agreement or instrument to which the Selling
Stockholder or Starwood is a party or by which the Selling Stockholder
or Starwood is bound or to which any of the properties, assets or
operations of the Selling Stockholder or Starwood is subject, that
reasonably could be expected to have, individually or in the
aggregate, a material adverse effect on the ability of the Selling
Stockholder to consummate the transactions contemplated by this
Agreement.
23
<PAGE> 24
(g) The Representatives shall have received from Dow, Lohnes &
Albertson, PLLC, special regulatory counsel to the Company, such opinion or
opinions, dated as of such Closing Date, to the effect that:
(i) The statements contained in the Prospectus under the captions
"Risk Factors -- Potential Adverse Effects of Regulation -- Change in
Control"; "Risk Factors -- Potential Adverse Effects of Regulation --
Risk of Legislative Action"; "Risk Factors -- Potential Adverse
Effects of Regulation -- Student Loan Defaults"; "Risk Factors --
Potential Adverse Effects of Regulation -- Financial Responsibility
Standards"; "Risk Factors -- Potential Adverse Effects of Regulation
-- "The '85/15 Rule'"; "Risk Factors -- Potential Adverse Effects of
Regulation -- Additional Locations and Program Offerings of ITT
Technical Institutes"; "Risk Factors -- Potential Adverse Effects of
Regulation -- Availability of Lenders and Guarantors"; "Risk Factors
-- Potential Adverse Effects of Regulation -- State Authorization and
Accreditation"; "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General"; "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources"; "Business --
Regulation of Federal Financial Aid Programs"; "Business -- Regulation
of Federal Financial Aid Programs -- Risk of Legislative Action";
"Business -- Regulation of Federal Financial Aid Programs -- Student
Loan Defaults"; "Business -- Regulation of Federal Financial Aid
Programs -- Financial Responsibility Standards"; "Business --
Regulation of Federal Financial Aid Programs -- "The '85/15 Rule'";
"Business -- Regulation of Federal Financial Aid Programs --
Additional Locations and Program Offerings of ITT Technical
Institutes"; "Business -- Regulation of Federal Financial Aid Programs
-- Administrative Capability"; "Business -- Regulation of Federal
Financial Aid Programs -- Eligibility and Certification Procedures";
"Business -- Regulation of Federal Financial Aid Programs -- Title IV
Program Funds Management"; "Business -- Regulation of Federal
Financial Aid Programs -- Availability of Lenders and Guarantors";
"Business -- Regulation of Federal Financial Aid Programs --
Compliance with Regulatory Standards and Effect of Regulatory
Violations"; "Business -- State Authorization and Accreditation"; and
"Business -- Change in Control" (collectively, "Regulatory Matters"),
insofar as such statements constitute a summary of legal matters,
documents or proceedings with respect to the operation of
postsecondary educational institutions and the offering of programs of
postsecondary education, are accurate and complete in all material
respects.
(ii) Although (a) such counsel have not independently verified
any statements in the Prospectus (except for the particular portions
of the Prospectus under the captions referred to and specified in
paragraph (i) above) and cannot and do not assume responsibility for
the accuracy or completeness of any statements in the Prospectus
(except for the particular portions of the Prospectus under the
captions referred to and specified in paragraph (i) above), and (b)
such counsel's participation in the preparation of the Prospectus
(consisting of intermittent participation in certain of the
conferences between officers and representatives of the Company,
counsel for the Company, representatives of the Underwriters,
Underwriters' counsel and independent accountants of the Company, as
well as a review of certain documents provided to such counsel) has
been limited solely to certain matters relating to Title IV of the
HEA, no facts have come to the attention of such counsel in the course
of such participation which cause such counsel to believe that the
statements in the Registration Statement collectively defined in the
Underwriting Agreement as Regulatory Matters (and specifically
excluding the financial statements and the notes and schedules annexed
thereto, as well as any financial, statistical or accounting
information), contain any untrue
24
<PAGE> 25
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that any such information contained in the
Prospectus or any amendment or supplement thereto, as of its issue
date or as of such Closing Date, contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(iii) Except as disclosed in the Prospectus, no consent,
approval, authorization, order, registration or qualification of, or
filing with, the U.S. Department of Education under Title IV of the
HEA is required for the consummation by the Company of the
transactions contemplated by this Agreement in connection with the
sale of the Offered Securities.
(iv) To the best knowledge of such counsel, the execution,
delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated herein and the
execution, delivery and performance by the Company of the agreements
contemplated and described in the Prospectus under the caption
"Relationship with Selling Stockholder and Related Transactions --
Agreements with Selling Stockholder" do not and will not conflict with
or result in a violation of Title IV of the HEA or any rule,
regulation or requirement of the U.S. Department of Education
promulgated under Title IV of the HEA, except for such conflicts or
violations which would not be reasonably likely to, individually or in
the aggregate, have a material adverse effect on the Company.
(v) The consummation of the transactions contemplated by this
Agreement in connection with the sale of the Offered Securities will
not constitute a change in ownership resulting in a "change in
control" as defined in the HEA. In giving this opinion, Dow, Lohnes &
Albertson, PLLC will have received from Baker & Daniels a legal
opinion to the effect that the sale of the Offered Securities does not
give rise to the obligation to file a Form 8-K with the Commission
notifying the Commission of a change of control.
(vi) To the best knowledge of such counsel, except as disclosed
in the Prospectus, the Company possesses all necessary Licenses issued
by the U.S. Department of Education as are required for the Company's
schools to participate in Title IV Programs as described in the
Registration Statement and the Prospectus, and all such Licenses are
in full force and effect, except where the failure to possess such
Licenses or the failure of such Licenses to be in full force and
effect would not be reasonably likely to, individually or in the
aggregate, have a material adverse effect on the Company. Except as
disclosed in the Prospectus, to the knowledge of such counsel, the
Company has not received notice of any proceedings, investigations or
inquiries, nor are any such proceedings, investigations or inquiries
threatened, relating to the revocation, modification, termination or
suspension of any such License, except where any such revocation,
modification, termination or suspension would not be reasonably likely
to, individually or in the aggregate, have a material adverse effect
on the Company.
(h) The Representatives shall have received from Dewey Ballantine
LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectuses and other related
matters as the Representatives may require, and the Company
25
<PAGE> 26
shall have furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(i) The Representatives shall have received a certificate, dated
such Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers shall
state that, to the best of their knowledge after reasonable investigation: the
representations and warranties of the Company in this Agreement are true and
correct; the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to
such Closing Date; no stop order suspending the effectiveness of any
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission; the Additional
Registration Statement (if any) satisfying the requirements of subparagraphs (1)
and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of
the applicable filing fee in accordance with Rule 111(a) or (b) under the Act,
prior to the time either Prospectus was printed and distributed to any
Underwriter; subsequent to the dates of the most recent financial statements in
the Prospectus, there has been no material adverse change, nor any development
or event involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of the
Company except as set forth in or contemplated by the Prospectus; and they have
carefully examined the Registration Statements and the Prospectus and neither
any Registration Statement nor the Prospectus or any amendment or supplement
thereto, as of their respective effective or issue dates and as of such Closing
Date, contained an untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(j) The Representatives shall have received a letter, dated such
Closing Date, of Price Waterhouse LLP which meets the requirements of subsection
(a) of this Section, except that the specified date referred to in such
subsection will be a date not more than three business days prior to such
Closing Date for the purposes of this subsection.
(k) The Representatives shall have received the written
undertakings of the executive officers of the Company listed on Schedule B to
the effect contemplated by subsection (A)(i) of Section 5 hereof, unless
otherwise waived or agreed to by the Representative.
(l) The Representatives shall have received such other opinions,
certificates, letters and other documents from or on behalf of the Company or
the Selling Stockholder as the Representatives shall reasonably request.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof, only if they are reasonably satisfactory
in form and substance to CSFBC and counsel for the Underwriters. The Company and
the Selling Stockholder will furnish the Representatives with such conformed
copies of such opinions, certificates, letters and documents as the
Representatives reasonably requests. CSFBC may in its sole discretion waive on
behalf of the Underwriters compliance with any conditions to the obligations of
the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged
26
<PAGE> 27
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement in or omission or alleged omission from
any of such documents in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided, further,
that with respect to any untrue statement or alleged untrue statement in or
omission or alleged omission from any preliminary prospectus, the indemnity
agreement contained in this subsection (a) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of the sale of such Offered Securities to such person, a copy of
the Prospectus correcting such untrue statement or alleged untrue statement in
or omission or alleged omission from such preliminary prospectus if the Company
had previously furnished such quantity of copies thereof to such Underwriter as
reasonably requested by or on behalf of such Underwriter.
(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Selling Stockholder will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged omission
from any of such documents in reliance upon and in conformity with written
information furnished to the Company by an Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below; and provided, further,
that with respect to any untrue statement or alleged untrue statement in or
omission or alleged omission from any preliminary prospectus, the indemnity
agreement contained in this subsection (b) shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages or
liabilities purchased the Offered Securities concerned, to the extent that a
prospectus relating to such Offered Securities was required to be delivered by
such Underwriter under the Act in connection with such purchase and any such
loss, claim, damage or liability of such Underwriter results from the fact that
there was not sent or given to such person, at or prior to the written
confirmation of
27
<PAGE> 28
the sale of such Offered Securities to such person, a copy of the Prospectus
correcting such untrue statement or alleged untrue statement in or omission or
alleged omission from such preliminary prospectus if the Company had previously
furnished such quantity of copies thereof to such Underwriter as reasonably
requested by or on behalf of such Underwriter.
(c) Each Underwriter will severally and not jointly indemnify and
hold harmless the Company, the Selling Stockholder and Starwood against any
losses, claims, damages or liabilities to which the Company, the Selling
Stockholder and Starwood may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any related preliminary prospectus, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through the
Representative specifically for use therein, and will reimburse any legal or
other expenses reasonably incurred by the Company, the Selling Stockholder and
Starwood in connection with investigating or defending any such loss, claim,
damage, liability or action as such expenses are incurred, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the following information in the Prospectus furnished on behalf of each
Underwriter: the information appearing [in the fourth paragraph] under the
caption "Underwriting" with respect to concession and discount figures and the
information in the [ninth] paragraph appearing under the caption "Underwriting".
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(e) If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) above, then each of the Company, the Selling
Stockholder, Starwood and the Underwriters (collectively, the "Contributing
Parties") shall contribute to the amount paid or payable by such indemnified
party as a result of the losses, claims, damages or liabilities referred to in
subsection (a), (b) or (c)
28
<PAGE> 29
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company, the Selling Stockholder and Starwood, as the case may
be, on the one hand and the Underwriters on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Stockholder and Starwood, as the case may be,
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company, the Selling Stockholder and Starwood, as the
case may be, on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Selling Stockholder bear to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by a
Contributing Party and the Contributing Party's relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company, the Selling Stockholder and
Starwood under this Section shall be in addition to any liability which the
Company, the Selling Stockholder and Starwood may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, the Selling Stockholder or
Starwood, to each officer of the Company who has signed a Registration Statement
and to each person, if any, who controls the Company within the meaning of the
Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Offered Securities hereunder on either the First
Closing Date or any Optional Closing Date and the number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the Selling Stockholder for the purchase of
such Offered Securities by other persons, including any of the Underwriters, but
if no such arrangements are made by such Closing Date the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the Offered Securities that such defaulting
Underwriters agreed but failed to purchase on such Closing Date. If any
Underwriter or Underwriters so default and the aggregate number of shares
29
<PAGE> 30
of Offered Securities with respect to which such default or defaults occur
exceeds 10% of the total number of shares of Offered Securities that the
Underwriters are obligated to purchase on such Closing Date and arrangements
satisfactory to CSFBC and the Selling Stockholder for the purchase of such
Offered Securities by other persons are not made within 36 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company, the Selling Stockholder except as
provided in Section 9 (provided that if such default occurs with respect to
Optional Securities after the First Closing Date, this Agreement will not
terminate as to the Firm Securities or any Optional Securities purchased prior
to such termination). As used in this Agreement, the term "Underwriter" includes
any person substituted for an Underwriter under this Section. Nothing herein
will relieve a defaulting Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company, the Selling Stockholder and Starwood, and their respective officers and
of the several Underwriters set forth in or made pursuant to this Agreement will
remain in full force and effect, regardless of any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter, the Company,
the Selling Stockholder, Starwood, or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company, the Selling Stockholder, Starwood and the
Underwriters pursuant to Section 7 shall remain in effect and if any Offered
Securities have been purchased hereunder the representations and warranties in
Section 2 and all obligations under Section 5 shall also remain in effect. If
the purchase of the Offered Securities by the Underwriters is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv), or (v) of Section 6(c), the Company will reimburse the Underwriters for
all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Offered
Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to the Representatives c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department " Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 5975 Castle Creek
Parkway North Drive, P.O. Box 50466, Indianapolis, Indiana 46250 Attention:
Clark D. Elwood or if sent to the Selling Stockholder or Starwood, will be
mailed, delivered or telegraphed and confirmed to [ ] at [ ] ;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 7, and no other person
will have any right or obligation hereunder.
12. Representation of Underwriters. The Representatives will act for the
several Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CSFBC will be binding upon all the Underwriters.
30
<PAGE> 31
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS.
The Company, the Selling Stockholder and Starwood each hereby submit to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
31
<PAGE> 32
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Company, the Selling Stockholder, Starwood and the several Underwriters in
accordance with its terms.
Very truly yours,
ITT EDUCATIONAL SERVICES, INC.
By__________________________________
Name:
Title:
ITT CORPORATION
By__________________________________
Name:
Title:
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
By__________________________________
Name:
Title:
32
<PAGE> 33
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the
date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
BEAR, STEARNS & CO. INC.
BT ALEX. BROWN INCORPORATED
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
SMITH BARNEY INC.
Acting on behalf of themselves and as the
Representatives of the several Underwriters.
BY CREDIT SUISSE FIRST BOSTON CORPORATION
By_______________________________________
Name:
Title:
33
<PAGE> 34
<TABLE>
<CAPTION>
SCHEDULE A
NUMBER OF
FIRM SECURITIES
TO BE PURCHASED
-----------------
<S> <C>
Credit Suisse First Boston Corporation............................
Bear, Stearns & Co. Inc...........................................
BT Alex. Brown Incorporated.......................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated................
Morgan Stanley & Co. Incorporated.................................
Smith Barney Inc.................................................. ------------
Total.................................. 11,350,000
============
</TABLE>
<PAGE> 35
SCHEDULE B
EXECUTIVE OFFICERS OF THE COMPANY
Rene R. Champagne
Gene A. Baugh
Clark D. Elwood
Edward G. Hartigan
Thomas W. Lauer
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated January 10, 1998, except
for Note 1 which is as of April 7, 1998, Note 3 which is as of April 28, 1998
and Note 10 which is as of May 7, 1998, relating to the financial statements of
ITT Educational Services, Inc. which appear in such prospectus. We also consent
to the incorporation by reference in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated January 10, 1998
appearing on page F-1 of ITT Educational Services, Inc. Annual Report on Form
10-K for the year ended December 31, 1997. We also consent to the references to
us under the headings "Experts" and "Selected Financial Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
Indianapolis, Indiana
May 7, 1998
