-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcicN84o1jhqBbNIc4PVsIucSmPsa5SvXGsMC6x3DH/aT6cbRH8xI2r2EYpoAYYI DbioTZ2762Hur0x5wBBXhQ== 0000950131-98-000862.txt : 19980225 0000950131-98-000862.hdr.sgml : 19980225 ACCESSION NUMBER: 0000950131-98-000862 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19980210 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITT EDUCATIONAL SERVICES INC CENTRAL INDEX KEY: 0000922475 STANDARD INDUSTRIAL CLASSIFICATION: 8200 IRS NUMBER: 362061311 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-13144 FILM NUMBER: 98527408 BUSINESS ADDRESS: STREET 1: 5975 CASTLE CREEK PKWY N DR STREET 2: PO BOX 50466 CITY: INDIANAPOLIS STATE: IN ZIP: 46250 BUSINESS PHONE: 3175944289 MAIL ADDRESS: STREET 1: 5975 CASTLE CREEK PKWY N DR STREET 2: P O BOX 50466 CITY: INDIANAPOLIS STATE: IN ZIP: 46250-0466 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT AMENDMENT NO. 1 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ____________ to __________ Commission file number 1-13144 ITT EDUCATIONAL SERVICES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-2061311 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5975 CASTLE CREEK PARKWAY N. DRIVE P.O. BOX 50466 INDIANAPOLIS, INDIANA 46250-0466 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (317) 594-9499 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE, INC. Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] $112,246,998 Aggregate market value of the voting stock held by nonaffiliates of the Registrant based on the last sale price for such stock at January 31, 1997 (assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates"). 26,999,952 Number of shares of Common Stock, $.01 par value, outstanding at February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K IDENTITY OF DOCUMENT PARTS OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED Definitive Proxy Statement for PART III the Annual Meeting of Shareholders to be held May 13, 1997 The Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 is being amended to correct Part IV, Item 14. Specifically, page 30, which was inadvertently omitted from the Annual Report, is being filed with this amendment. No other parts of the Annual Report are being amended. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements:
Page No. In This Filing ------------- Report of Independent Accountants.................................. F-1 Statements of Income and Retained Earnings for the years ended December 31, 1996, December 31, 1995 and December 31, 1994........ F-2 Balance Sheets as of December 31, 1996 and December 31, 1995....... F-3 Statements of Cash Flows for the years ended December 31, 1996, December 31, 1995 and December 31, 1994........................... F-4 Notes to Financial Statements...................................... F-5
2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts of the Company for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. 3. Quarterly Results for 1996 and 1995 (unaudited) appear on page F-11. 4. Exhibits: A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits appearing on page S-3, which immediately precedes such exhibits, and is incorporated herein by reference. (b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended December 31, 1996. -30- Report of Independent Accountants To the Board of Directors and Shareholders of ITT Educational Services, Inc. In our opinion, the financial statements listed in the index appearing under item 14 (a) (1) and (2) on page 30, present fairly, in all material respects, the financial position of ITT Educational Services, Inc. at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP January 8, 1997, except for Note 10 which is as of February 12, 1997 F - 1 ITT EDUCATIONAL SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Revenues Tuition $196,692 $171,936 $159,575 Other educational 35,627 29,895 27,332 -------- -------- -------- Total revenue 232,319 201,831 186,907 Costs and Expenses Cost of educational services 145,197 130,338 121,594 Student services and administrative expenses 66,546 57,268 53,481 -------- -------- -------- 211,743 187,606 175,075 Operating income 20,576 14,225 11,832 Interest income, net 4,119 4,802 232 -------- -------- -------- Income before income taxes 24,695 19,027 12,064 Income taxes 9,844 7,636 4,902 -------- -------- -------- Net income 14,851 11,391 7,162 Retained earnings, beginning of period 21,058 9,667 19,567 Special dividend 0 0 (17,062) -------- -------- -------- Retained earnings, end of period $ 35,909 $ 21,058 $ 9,667 ======== ======== ======== Earnings per common share $ .55 $ .42 $ .32 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F - 2 ITT EDUCATIONAL SERVICES, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------ 1996 1995 -------- -------- ASSETS Currents assets Cash $ 74 $ 595 Restricted cash 5,911 5,037 Cash invested with ITT Corporation 89,808 71,885 Accounts receivable, less allowance for doubtful accounts of $1,044 and $963 9,378 7,592 Deferred income tax 1,455 950 Prepaids and other current assets 1,823 1,508 -------- -------- Total current assets 108,449 87,567 Property and equipment, net 19,360 18,985 Direct marketing costs 5,774 5,031 Other assets 2,166 2,701 -------- -------- Total assets $135,749 $114,284 ======== ======== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 12,188 $ 8,336 Accrued compensation and benefits 4,253 4,195 Other accrued liabilities 5,432 6,172 Deferred tuition revenue 43,532 40,063 -------- -------- Total current liabilities 65,405 58,766 Other liabilities 1,652 1,677 -------- -------- Total liabilities 67,057 60,443 -------- -------- Commitments and contingent liabilities (Note 10) Shareholders' equity Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding Common stock, $.01 par value, 50,000,000 and 25,000,000 shares authorized, 26,999,952 and 12,000,000 issued and outstanding 270 120 Capital surplus 32,513 32,663 Retained earnings 35,909 21,058 -------- -------- Total shareholders' equity 68,692 53,841 -------- -------- Total liabilities and shareholders' equity $135,749 $114,284 ======== ========
The accompanying notes are an integral part of these financial statements. F - 3 ITT EDUCATIONAL SERVICES, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net income $ 14,851 $ 11,391 $ 7,162 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,493 7,542 6,855 Provision for doubtful accounts 1,738 1,173 1,803 Deferred taxes (443) (240) 633 Increase/decrease in operating assets and liabilities: Accounts receivable (3,524) (2,189) (2,923) Direct marketing costs (743) 23 178 Accounts payable and accrued liabilities 3,083 1,438 1,051 Prepaids and other assets 220 683 2,327 Deferred tuition revenue 3,469 (908) 6,348 -------- -------- -------- Net cash provided by operating activities 26,144 18,913 23,434 -------- -------- -------- Cash flows used for investing activities: Capital expenditures, net (7,868) (8,206) (7,688) Net increase in cash invested with ITT Corporation (17,923) (15,975) ( 8,902) -------- -------- -------- Net cash used for investing activities (25,791) (24,181) (16,590) -------- -------- -------- Cash flows from financing activities: Proceeds from sale of common stock, 17,062 net of expenses Special dividend paid (17,062) -------- -------- -------- Net cash from financing activities 0 0 0 -------- -------- -------- Net increase (decrease) in cash and restricted cash 353 (5,268) 6,844 Cash and restricted cash at beginning of period 5,632 10,900 4,056 -------- -------- -------- Cash and restricted cash at end of period $ 5,985 $ 5,632 $ 10,900 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Income taxes $ 10,051 $ 8,168 $ 4,322 Interest 273 550 127
The accompanying notes are an integral part of these financial statements. F - 4 ITT EDUCATIONAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED) 1. Initial Public Offering and Stock Ownership On October 11, 1994, the Board of Directors of the Company approved an initial public offering (the "Offering") of 2,000,000 shares of the Company's Common Stock and declared a special dividend in the amount of the net proceeds of the "Offering." The net proceeds and dividend of $17,062 were received and paid on December 27, 1994. After the "Offering," 83.3% of the Common Stock is owned by ITT Corporation ("ITT") and 16.7% is owned by others. On March 22, 1996, the Company declared a 3 for 2 Common Stock split, effected by payment of a stock dividend on April 15, 1996, to all shareholders of record at the close of business on April 1, 1996. On May 14, 1996, the shareholders approved an increase in the number of authorized common shares of Common Stock from 25,000,000 to 50,000,000. On October 8, 1996, the Company declared a 3 for 2 Common Stock split, effected by payment of a stock dividend on November 4, 1996, to all shareholders of record at the close of business on October 21, 1996. The earnings per share amounts for all prior periods have been restated to reflect these stock splits. The change in Common Stock and capital surplus can be summarized as follows:
Common Common Capital Stock Shares Stock Surplus ------------ ------ ------- Balance December 31, 1994 and 1995 12,000,000 $120 $32,663 Common Stock Splits 14,999,952 150 (150) ---------- ---- ------ Balance December 31, 1996 26,999,952 $270 $32,513 ========== ==== =======
2. Summary of Accounting Principles and Policies Business Activities. The Company is a leading college system providing career-focused, technical degree programs of study. At December 31, 1996, the Company operated fifty-nine (59) technical institutes throughout the United States. The Company maintains corporate headquarters in Indianapolis, Indiana. Use of Estimates. The preparation of these financial statements, in conformity with generally accepted accounting principles, includes estimates that are determined by the Company's management. Property and Equipment. The Company includes all property and equipment in the financial statements at cost. Provisions for depreciation of property and equipment have generally been made using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Estimated useful lives generally range from three to ten years for furniture and equipment and leasehold improvements. Maintenance, repairs and renewals not of a capital nature are expensed as incurred. Fully depreciated assets no longer in use are removed from both the asset and accumulated depreciation accounts in the year of their retirement. Any gains or losses on dispositions are credited or charged to income, as appropriate. Fair Value of Financial Instruments. The carrying amounts reported in the balance sheets for cash, restricted cash, cash invested with ITT Corporation, accounts receivable, accounts payable, other accrued liabilities and deferred tuition revenue approximate fair value because of the immediate or short-term maturity of these financial instruments. Recognition of Revenues. Tuition revenue is recorded on a straight- line basis over the length of the applicable course. If a student discontinues training, the revenue related to the remainder of that quarter is recorded with the amount of refund resulting from the application of federal, state or accreditation requirements recorded as an expense. On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as deferred tuition revenue. F - 5 Other educational revenue is comprised of lab fees and textbook sales. Lab fees are recorded as revenue at the beginning of each quarter. Textbook sales are recognized when they occur. Advertising Costs. The Company expenses all advertising costs as incurred. Direct Marketing Costs. Direct costs incurred relating to the enrollment of new students are capitalized using the successful efforts method. Direct marketing costs include recruiting representatives' salaries, employee benefits and other direct costs less enrollment fees. Direct marketing costs are amortized on an accelerated basis over the average course length of 24 months commencing on the start date. Direct marketing costs on the balance sheet totaled $5,774 and $5,031 at December 31, 1996 and 1995, respectively, net of accumulated amortization of $5,065 and $5,099 at those dates, respectively. Institute Start-Up Costs. Deferred institute start-up costs consist of all direct costs incurred at a new institute (excluding advertising costs) that are incurred from the date a lease for a technical institute facility is entered into until the first class start. Such capitalized costs are amortized on a straight-line basis over a one year period. At December 31, 1996 and December 31, 1995, deferred start-up costs included in other assets in the balance sheet totaled $521 and $1,000, respectively, net of accumulated amortization of $799 and $166 at such dates, respectively. Income Taxes. The Company is included in the consolidated U.S. federal income tax return of ITT and determines its income tax provision principally on a separate return basis in conformity with Statement of Financial Accounting Standards ("SFAS") No. 109. Under a tax sharing policy with ITT, income taxes are allocated to members of the U.S. consolidated group based principally on amounts they would pay or receive if they filed a separate income tax return. Deferred income taxes are provided on the differences in the book and tax basis of assets and liabilities recorded on the books of the Company (temporary differences) at the statutory tax rates expected to be in effect when such differences reverse. Temporary differences related to SFAS No. 106, SFAS No. 112, pension and self- insurance costs are recorded on the books of ITT where the related assets and liabilities are recorded. ITT pays current federal income taxes on behalf of the Company, as calculated under the tax sharing policy, and reflects the funding through the cash invested with ITT Corporation account. Earnings Per Common Share. Earnings per common share data are based on historical net income and the average number of shares of Common Stock outstanding during each period. After restatement for stock splits described in Note 1, the number of average shares outstanding in 1996, 1995 and 1994 was 27,153,000, 27,052,000 and 22,561,000, respectively. 3. Related Party Transactions At the time of the Offering, the Company and ITT entered into various agreements, which remain in effect, as follows: Intercompany Activities. ITT provides the Company with certain centralized treasury and financing functions. The Company transfers all unrestricted cash receipts to ITT and receives funds from ITT for all disbursements. Prior to the Offering in 1994, neither the remittances to, nor advances from, ITT were interest bearing. After the Offering, the Company receives interest on the average net cash balance held by ITT, at an interest rate that is set for a 12-month period and is 30 basis points over the most recently published rate for twelve month treasury bills. The net of all such cash transfers as well as charges from ITT for expenses related to the Company's participation in ITT's plans such as pensions, medical insurance, federal income taxes, etc. resulted in a net balance of cash invested with ITT as of December 31, 1996 and 1995 of $89,808 and $71,885, respectively. ITT also provides certain risk management, tax and pension management services. The fee (contract service charge) for such services is 0.25% of the Company's annual revenue. The contract service charges were $578, $504 and $454 for the years ended December 31, 1996, 1995 and 1994, respectively. F - 6 The Company's employees participate in certain employee benefit programs which are sponsored and administered by ITT. Administrative costs relating to these services and participation in these plans are charged to the Company using allocation methods management believes are reasonable. The Company pays a processing fee related to its participation in ITT's consolidated medical plan. The processing fees were $280, $464 and $336 in 1996, 1995 and 1994, respectively. Service Agreements. The Company and ITT entered into service agreements relating to the provision of certain services by ITT to the Company. All services historically provided to the Company by ITT continue to be provided by ITT at comparable cost. Management believes the statements of income include a reasonable allocation of costs incurred by ITT which benefit the Company. The Company will be able to obtain advances from ITT for general corporate purposes in amounts in excess of any cash invested with ITT up to a maximum of $10,000. Interest on any loans made to the Company by ITT will accrue at prevailing market rates (reflecting a spread over a selected interbank lending rate) which will be determined at the time of any such loan. Any loans to the Company by ITT will be subject to a condition precedent that ITT directly or indirectly owns at least 50% of the outstanding common stock of the Company. Tax Agreement. ITT and the Company entered into a tax agreement providing, among other things, that the Company will pay ITT, with respect to federal income taxes for each period that the Company is included in ITT's consolidated federal return, that amount that the Company would have been required to pay had it filed a separate federal income tax return under the tax sharing policy described in Note 2. Similarly, with respect to state, corporate, franchise or income taxes for those states where ITT files a combined or consolidated state return that includes the Company, the Company will pay as if they filed a separate tax return. With respect to ITT's consolidated federal and state returns, the Company will be responsible for any deficiencies assessed with respect to such returns if such deficiencies relate to the Company. Similarly, the Company will be entitled to all refunds paid with respect to such returns that relate to the Company. The Company will be responsible for all taxes, including assessments, if any, for prior years with respect to all other taxes payable by the Company. 4. Financial Aid Programs The Company participates in various federal student financial aid programs under Title IV of the Higher Education Act of 1965, as amended ("Title IV Programs"). Approximately 74% of the Company's 1996 revenue was derived from funds distributed under these programs. The Company participates in the Federal Perkins Loan ("Perkins") program and administers on behalf of the federal government a pool of Perkins student loans which aggregated $8,235 and $8,671 at December 31, 1996 and 1995, respectively. The Company has recorded in its financial statements only its aggregate mandatory contributions to this program which at December 31, 1996 and 1995 aggregated $1,572 and $1,606, respectively. The Company has provided $955 for potential losses related to funds committed by the Company at December 31, 1996 and 1995. The Title IV Programs are administered by the Company in separate accounts as required by government regulation. The Company is required to administer the funds in accordance with the requirements of the Higher Education Act and U.S. Department of Education regulations and must use due diligence in approving and disbursing funds and servicing loans. In the event the Company does not comply with federal requirements, or if student loan default rates are at a level considered excessive by the federal government, the Company could lose its eligibility to participate in the Title IV Programs or could be required to repay funds determined to have been improperly disbursed. Management believes that it is in substantial compliance with the federal requirements. 5. Restricted Cash The Company participates in the Electronic Funds Transfer ("EFT") program through the U.S. Department of Education. All monies transferred to the Company via the EFT system are subject to certain holding period F - 7 restrictions, generally from 3 to 7 days, before they can be drawn into the Company's cash account. Such amounts are classified as restricted until they are applied to the students accounts. 6. Property and Equipment Fixed assets include the following:
DECEMBER 31, ------------------- 1996 1995 -------- -------- Furniture and equipment $ 52,317 $ 51,045 Leasehold improvements 7,017 6,620 Land and land improvements 110 110 Construction in progress 1,142 414 -------- -------- 60,586 58,189 Less accumulated depreciation (41,226) (39,204) -------- -------- $ 19,360 $ 18,985 ======== ========
7. Taxes The provision for income taxes includes the following:
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 -------- -------- ------- Current Federal $ 8,673 $ 6,571 $ 3,648 State 1,614 1,305 621 -------- -------- ------- 10,287 7,876 4,269 -------- -------- ------- Deferred Federal (370) (200) 543 State (73) (40) 90 -------- -------- ------- (443) (240) 633 -------- -------- ------- $ 9,844 $ 7,636 $ 4,902 ======== ======== =======
Deferred tax assets (liabilities) include the following:
DECEMBER 31, ---------------------------- 1996 1995 1994 -------- -------- -------- Direct marketing costs $(2,263) $(1,973) $(1,982) Institute start-up costs (204) (392) (495) Depreciation 785 744 102 Reserves and other 1,828 1,324 1,838 ------- ------- ------- Net deferred tax assets(liabilities) $ 146 $ (297) $ (537) ======= ======= =======
Differences between effective income tax rates and the statutory U.S. federal income tax rates are as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 1994 ----- ----- ----- Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.1% 4.3% 3.8% Permanent differences and other .8% .8% 1.8% ---- ---- ---- Effective income tax rates 39.9% 40.1% 40.6% ==== ==== ====
F - 8 8. Retirement Plans Employee Pension Benefits. The Company participates in the Retirement Plan for Salaried Employees of ITT Corporation, a noncontributory defined benefit, final average pay pension plan which covers substantially all employees of the Company. ITT determines the aggregate amount of pension expense on a consolidated basis based on actuarial calculations and such expense is allocated to participating units on the basis of compensation covered by the plan. For the years ended December 31, 1996, 1995 and 1994, pension expense as a percentage of covered compensation for employees over age 21 who had more than one year of service was 6.57%, 5.52% and 7.30%, respectively, which resulted in charges to the Company of $3,783, $2,983 and $3,642, respectively. The amount recorded as annual pension expense is paid to ITT through the cash invested with ITT Corporation account on a monthly basis. Retirement Savings Plan. The Company participates in The ITT 401K Retirement Savings Plan (formerly known as the ITT Investment and Savings Plan for Salaried Employees), a defined contribution pension plan which covers substantially all employees of the Company. The Company's non- matching and matching contributions under this plan are provided for through the issuance of common shares of ITT. The costs of the non-matching and matching Company contributions are charged by ITT to the Company. For the years ended December 31, 1996, 1995 and 1994, the costs of providing this benefit (including an allocation of the administrative costs of the plan) were $1,749, $1,369 and $1,259, respectively. 9. Stock Option and Key Employee Incentive Plans The Company adopted, effective at the date of the Offering, the ITT Educational Services, Inc. 1994 Stock Option Plan (the "1994 Plan"). The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized in the financial statements for the 1994 Plan. Compensation costs for the 1994 Plan calculated using the Black-Scholes method in accordance with SFAS No. 123 are not significant. Under the 1994 Plan, a maximum of 405,000 shares of Common Stock may be issued upon exercise of options. The option price may not be less than 100% of the fair market value of the Common Stock on the date of grant and the options will vest and become exercisable in three equal annual installments commencing with the first anniversary of the grant. A special grant of 135,000 stock options (at an option price of $4.44) was made to certain executive officers of the Company at the time of the Offering, and an additional 56,250 stock options (at an option price of $8.89) were granted in 1995. In 1996, 67,500 stock options were granted at an option price of $11.94. All amounts reflect the April 15, 1996 and October 21, 1996 3 for 2 Common stock splits as mentioned in Note 1. During 1996, 1995 and 1994, no options were exercised, expired or canceled. At December 31, 1996, 108,750 stock options are exercisable. 10. Commitments and Contingent Liabilities Lease Commitments. The Company leases substantially all of its facilities under operating lease agreements. A majority of the operating leases contain renewal options that can be exercised after the initial lease term. Renewal options are generally for periods of one to five years. All operating leases will expire over the next fourteen years and management expects that leases will be renewed or replaced by other leases in the normal course of business. There are no material restrictions imposed by the lease agreements and the Company has not entered into any significant guarantees related to the leases. The Company is required to make additional payments under the operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period. F - 9 Rent expense was composed of the following:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1995 1994 ------- ------- ------- Minimum rentals Contingent rentals $17,131 $15,842 $14,304 249 223 219 ------- ------- ------- $17,380 $16,065 $14,523
======= ======= ======= Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996 are as follows:
1997 $ 17,003 1998 18,568 1999 16,534 2000 15,460 2001 10,350 Later Years 33,913 -------- $111,828 ========
Operating leases related to four institutes that are still in the developmental phase at December 31, 1996 include special clauses that allow the Company to terminate the lease within one year of signing the lease if the new school is not accredited. If this were to occur, the Company would be liable, at the date of termination, for an agreed upon termination cost based on the lessor's tenant improvement costs. The future minimum rental payments schedule above includes such termination costs for the four institutes. If the institutes are accredited as expected, aggregate additional minimum rental payments of $3,742 will be required over the lease term. Rent expense and future minimum rental payments related to equipment leases are not material. Contingent Liabilities. In December, 1994, the Company entered into an agreement with an unaffiliated, private funding source to provide loans to students of certain technical institutes. The agreement requires the Company to guarantee repayment of the loans. Outstanding loans at December 31, 1996 aggregated $1,853. Additionally, the Company is required to maintain on deposit with the lender 15% of the aggregate principal balance of outstanding loans. This deposit is included in other assets in the balance sheet. The Company has a number of pending legal and other claims arising out of the normal course of business. Among the legal actions currently pending is Eldredge, et al. v. ITT Educational Services, Inc., et al. (the "Eldredge Case"). This action was filed on June 8, 1995 in San Diego, California by seven graduates of the San Diego ITT Technical Institute. In October 1996, the jury in this action rendered a verdict against the Company and awarded the plaintiffs general damages of approximately $0.2 million and exemplary damages of $2.6 million. The judge also awarded the plaintiffs attorney's fees and costs, in the amount of approximately $0.9 million, and interest. The Company is seeking to overturn the awards and has appealed the decision. Management, based on the advice of counsel, believes it is probable that it will prevail in its appeal, thus no provision (other than the Company's legal expenses) for these awards has been made. If the Company's appeal of the judgment in the Eldredge Case is unsuccessful, a charge to earnings would be taken at that time in the amount of the awards, including the general and exemplary damages assessed against the Company, the plaintiffs' attorney's fees and costs and the interest assessed thereon. In late January 1997, six legal actions were filed against the Company in San Diego, California by a total of 21 former students of the San Diego ITT Technical Institute. The plaintiffs in one such action seek to have the action certified as a class action. The claims alleged in these legal actions are similar to the claims alleged in the Eldredge Case and include misrepresentation and violations of certain statutory provisions of the California Education Code and California Business and Professions Code. In the opinion of management, the ultimate outcome of these matters should not have a material adverse effect on the Company's financial position, results of operations or cash flows. F - 10
ITT EDUCATIONAL SERVICES, INC. QUARTERLY RESULTS FOR 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Three Months Ended ------------------------------------------ 1995 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR ------- ------- -------- ------- -------- Revenues $51,169 $44,969 $56,017 $49,676 $201,831 Cost and expenses $45,682 $46,143 $48,466 $47,315 $187,606 Operating income $ 5,487 $(1,174) $ 7,551 $ 2,361 $ 14,225 Interest income, net $ 1,212 $ 801 $ 1,438 $ 1,351 $ 4,802 Net income $ 4,026 $ (224) $ 5,402 $ 2,187 $ 11,391 Earnings per share** $ 0.15 $ (0.01) $ 0.20 $ 0.08 $ 0.42 1996 Revenues $57,103 $51,568 $65,113 $58,535 $232,319 Cost and expenses $49,992 $51,954 $55,072 $54,725 $211,743 Operating income $ 7,111 $ (386) $10,041 $ 3,810 $ 20,576 Interest income, net $ 947 $ 909 $ 1,076 $ 1,187 $ 4,119 Net income $ 4,835 $ 314 $ 6,670 $ 3,032 $ 14,851 Earnings per share** $ 0.18 $ 0.01 $ 0.25 $ 0.11 $ 0.55 Supplemental data: Operating losses at new institutes, before income taxes* 1995 $ 2,091 $ 2,307 $ 1,523 $ 1,202 $ 7,123 1996 $ 1,405 $ 2,230 $ 1,227 $ 859 $ 5,721
*Represents operating losses before income taxes, including amortization of deferred pre-opening costs, for institutes in the first twenty-four months after their first class start. **Restated to reflect stock splits in April 1996 and November 1996. F-11 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ITT Educational Services, Inc. BY: /s/Rene R. Champagne --------------------------------------- Dated: February 9, 1998 Rene R. Champagne Chairman, President and Chief Executive Officer S-1 SCHEDULE II ITT EDUCATIONAL SERVICES, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
BALANCE AT BEGINNING CHARGED TO BALANCE AT END DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD - - -------------------- ---------- ---------- ---------- -------------- Allowance for Doubtful Accounts: Year Ended December 31, 1996 ................ $ 963 $ 1,738 ($ 1,657) $ 1,044 -------- ------- ------- ------- Year Ended December 31, 1995 ................ $ 1,171 $ 1,173 ($ 1,381) $ 963 -------- ------- ------- ------- Year Ended December 31, 1994 ................ $ 1,146 $ 1,803 ($ 1,778) $ 1,171 -------- ------- ------- ------- FFEL Reserve/(1)/: Year Ended December 31, 1996 ................ $ 955 $ 0 $ 0 $ 955 -------- ------- ------- ------- Year Ended December 31, 1995 ................ $ 893 $ 62 $ 0 $ 955 -------- ------- ------- ------- Year Ended December 31, 1994 ................ $ 834 $ 59 $ 0 $ 893 -------- ------- ------- ------- - - ---------------------- (1) Represents Federal Family Education Loan/Perkins Loan programs.
S-2 INDEX TO EXHIBITS
Page No. Exhibit In This No. Description Filing - - ------- ------------------------------------------------------------------------------ ------- 3.1 (1) Restated Certificate of Incorporation, as Amended to Date................... 3.2 (2) Amended By-laws............................................................. 10.1 (2) Registration Rights Agreement between the Company and ITT................... 10.2 (2) Tax Sharing Agreement between the Company and ITT........................... 10.3 (2) Intercompany Agreement between the Company and ITT.......................... 10.4 (2) Trade Name and Service Mark License Agreement between the Company and ITT..................................................................... 10.5 (2) Employee Benefits and Administrative Services Agreement between the Company and ITT............................................................. 10.6 (2) Treasury Services and Credit Facilities Agreement between the Company and ITT.................................................................... 10.7 *(3) ITT Educational Services, Inc. 1994 Stock Option Plan...................... 11 Statement re Computation of Per Share Earnings................................. 23 Consent of Price Waterhouse LLP................................................ 27 Financial Data Schedule........................................................
- - ---------------- *The indicated exhibit is a management contract, compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K. (1) The copy of this exhibit filed as the same exhibit number to the Company's 1996 second fiscal quarter report on Form 10-Q is incorporated herein by reference. (2) The copy of this exhibit filed as the same exhibit number to the Company's 1994 Annual Report on Form 10-K is incorporated herein by reference. (3) The copy of this exhibit filed as the same exhibit number to the Company's Registration Statement on Form S-1 (Registration No. 33-78272) is incorporated herein by reference. All other exhibits listed in this Index to Exhibits are incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1996. S-3 -----END PRIVACY-ENHANCED MESSAGE-----