FORM 10-Q

-----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, OLzrmJiVCroGc9zCYhEy5q2vuOSpwCqTfaa09EcHCQEnOHP/xc4OVGcsD87HSwXL nr0iijwToUCW38rXpbwC6w== /in/edgar/work/0000950131-00-005961/0000950131-00-005961.txt : 20001102 0000950131-00-005961.hdr.sgml : 20001102 ACCESSION NUMBER: 0000950131-00-005961 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001031 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-Q SEC ACT: SEC FILE NUMBER: 001-13144 FILM NUMBER: 749531 BUSINESS ADDRESS: STREET 1: 5975 CASTLE CREEK PKWY N DR STREET 2: PO BOX 50466 CITY: INDIANAPOLIS STATE: IN ZIP: 46250 BUSINESS PHONE: 3175949499 MAIL ADDRESS: STREET 1: 5975 CASTLE CREEK PKWY N DR STREET 2: P O BOX 50466 CITY: INDIANAPOLIS STATE: IN ZIP: 46250-0466 10-Q 1 0001.htm FORM 10-Q FORM 10-Q

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2000

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 1-13144

ITT EDUCATIONAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction
of incorporation or organization)

5975 Castle Creek Parkway N. Drive
P.O. Box 50466
Indianapolis, Indiana

(Address of principal executive offices)

36-2061311

(I.R.S. Employer
Identification No.)

46250-0466

(Zip Code)

Registrant’s telephone number, including area code: (317) 594-9499

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

23,864,889

Number of shares of Common Stock, $.01 par value, outstanding at October 24, 2000

ITT EDUCATIONAL SERVICES, INC.

Indianapolis, Indiana

Quarterly Report to Securities and Exchange Commission

September 30, 2000

PART I

FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS.

INDEX

		Page
Consolidated Statements of Income (unaudited) for the three and nine months ended September 30, 2000 and 1999		3
Consolidated Balance Sheets as of September 30, 2000 and 1999 (unaudited) and December 31, 1999		4
Consolidated Statements of Cash Flows (unaudited) for the three and nine months ended September 30, 2000 and 1999		5
Notes to Consolidated Financial Statements		6

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2000	1999	2000		1999
Revenues	$88,479	$87,465	$252,416		$238,075

Costs and Expenses
Cost of educational services	53,681	49,005	157,667		142,468
Student services and administrative expenses	23,337	22,730	71,800		66,300
Offering and other one-time expenses	—	—	—		900

Total costs and expenses	77,018	71,735	229,467		209,668

Operating income	11,461	15,730	22,949		28,407
Interest income, net	593	422	1,748		1,713

Income before income taxes and cumulative effect of change in accounting principle	12,054	16,152	24,697		30,120
Income taxes	4,581	6,102	9,385		11,477

Income before cumulative effect of change in accounting principle	7,473	10,050	15,312		18,643
Cumulative effect of change in accounting principle, net of tax	—	—	(2,776	)	(823	)

Net income	$ 7,473	$10,050	$ 12,536		$ 17,820

Earnings (loss) per common share (basic and diluted):
Income before cumulative effect of change in accounting principle	$ 0.31	$ 0.40	$ 0.63		$ 0.73
Cumulative effect of change in accounting principle, net of tax	—	—	(0.11	)	(0.03	)

Net income	$ 0.31	$ 0.40	$ 0.52		$ 0.70

The accompanying notes are an integral part of these financial statements.

ITT EDUCATIONAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	September 30, 2000 (unaudited)			December 31, 1999			September 30, 1999 (unaudited)
Assets
Current assets
Cash and cash equivalents	$	43,730		$	48,510		$	39,505
Restricted cash		1,542			4,354			1,244
Marketable debt securities		8,350			15,097			14,937
Accounts receivable, net		15,873			11,685			16,300
Deferred income tax		5,476			5,441			4,266
Prepaids and other current assets		7,407			3,995			4,951

Total current assets		82,378			89,082			81,203
Property and equipment, net		45,808			31,686			30,006
Direct marketing costs		9,911			8,712			8,646
Other assets		1,731			1,522			1,563

Total assets	$	139,828		$	131,002		$	121,418

Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$	22,286		$	17,730		$	25,211
Accrued compensation and benefits		3,169			8,576			6,626
Other accrued liabilities		5,291			5,751			6,984
Deferred tuition revenue		43,485			36,565			23,993

Total current liabilities		74,231			68,622			62,814
Other liabilities		5,943			4,609			4,003

Total liabilities		80,174			73,231			66,817

Shareholders’ equity
Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding		—			—			—
Common stock, $.01 par value, 150,000,000 shares authorized, 27,034,452 issued		270			270			270
Capital surplus		33,938			33,912			33,912
Retained earnings		104,942			92,501			86,793
Treasury stock, 3,119,563, 2,419,000 and 2,291,500 shares, at cost		(79,496	)		(68,912	)		(66,374	)

Total shareholders’ equity		59,654			57,771			54,601

Total liabilities and shareholders’ equity	$	139,828		$	131,002		$	121,418

The accompanying notes are an integral part of these financial statements.

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2000		1999		2000		1999
Cash flows provided by (used for) operating activities:
Income before cumulative effect of change in accounting principle	$ 7,473		$10,050		$ 15,312		$ 18,643
Adjustments to reconcile income to net cash provided by operating activities:
Depreciation and amortization	3,493		2,664		10,570		7,956
Provision for doubtful accounts	1,012		990		3,164		2,955
Deferred taxes	198		(67	)	2,512		3,185
Increase/decrease in operating assets and liabilities:
Marketable debt securities	(142	)	4,855		6,747		23,379
Accounts receivable	(3,447	)	(5,241	)	(7,352	)	(8,483	)
Direct marketing costs	(554	)	(264	)	(1,199	)	(731	)
Accounts payable and accrued liabilities	5,435		3,797		(530	)	549
Prepaids and other assets	(574	)	2,671		(3,621	)	(1,522	)
Deferred tuition revenue	9,229		1,415		2,443		(8,268	)

Net cash provided by (used for) operating activities	22,123		20,870		28,046		37,663

Cash flows provided by (used for) investing activities:
Capital expenditures, net	(4,365	)	(5,110	)	(24,692	)	(12,131	)

Net cash provided by (used for) investing activities	(4,365	)	(5,110	)	(24,692	)	(12,131	)

Cash flows provided by (used for) finance activities:
Purchase of treasury stock	—		(7,827	)	(11,040	)	(66,374	)
Exercise of stock options	94		—		94		639

Net cash flow provided by (used for) finance activities	94		(7,827	)	(10,946	)	(65,735	)

Net increase (decrease) in cash, cash equivalents and restricted cash	17,852		7,933		(7,592	)	(40,203	)
Cash, cash equivalents and restricted cash at beginning of period	27,420		32,816		52,864		80,952

Cash, cash equivalents and restricted cash at end of period	$45,272		$40,749		$ 45,272		$ 40,749

The accompanying notes are an integral part of these financial statements.

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000

(Dollar amounts in thousands, except per share data and unless otherwise stated)

ITT Educational Services, Inc. (“ESI”) prepared the accompanying unaudited financial statements without audit. In the opinion of management, the financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition and results of operations of ESI. Certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The interim financial statements should be read in conjunction with the financial statements and notes thereto contained in ESI’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 1999.

During the three months ended March 31, 2000, ESI issued 21,737 treasury shares of ESI common stock to key executives in partial payment of amounts due under ESI’s 1999 incentive plans. In addition, ESI repurchased 401,400 shares of ESI common stock at an average cost of $13.56 per share or $5,441 in total. During the three months ended June 30, 2000, ESI repurchased 324,900 shares of ESI common stock at an average cost of $17.23 per share or $5,599 in total. All of the repurchased shares of ESI common stock became treasury shares upon repurchase. ESI may elect to repurchase additional shares of ESI common stock from time to time in the future, depending on market conditions and considerations. The purpose of the stock repurchase program is to help ESI achieve its long-term goal of enhancing shareholder value.

The Securities and Exchange Commission (“SEC”) issued Staff Acounting Bulletin No. 101, “Revenue Recognition in Financial Statements” ( “SAB No. 101”) on December 3, 1999. ESI began following the guidance provided by SAB No. 101 effective January 1, 2000 and recorded a cumulative effect of change in accounting of $4,477, less $1,701 of deferred taxes, in the three months ended March 31, 2000. In conformity with SAB No. 101, ESI changed the method by which it recognizes the laboratory and application fees charged to a student as revenue. Previously, the quarterly laboratory fee was recognized as revenue at the beginning of each academic quarter and the application fee was recognized as revenue when ESI received the fee. As of January 1, 2000, ESI began recognizing those fees as revenue on a straight-line basis over the student’s program length which ranges from 12 to 24 months. If a student withdraws or is terminated from school, all unrecognized revenue relating to those fees will be recognized upon the student’s departure. ESI believes that the change in accounting with respect to those fees will not have a significant effect on ESI’s fiscal year revenues in 2000 or in subsequent years, but will have an effect on ESI’s quarterly revenues in 2000 and in subsequent years.

The American Instititute of Certified Public Accountants issued Statement of Position (“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. ESI adopted this standard effective January 1, 1999 and expensed $1,354 of institute costs, less $531 of deferred tax, as a cumulative effect of change in accounting principle in the three months ended March 31, 1999.

ESI reported 12 weeks of tuition revenue in the three months ended September 30, 2000 compared to 13 weeks of tuition revenue in the third quarter of 1999. Effective with its first fiscal quarter of 2000, ESI began reporting 12 weeks of tuition revenue in each of its four fiscal quarters. Previously, ESI’s first and third fiscal quarters had 13 weeks of tuition revenue while the second and fourth fiscal quarters had 11 weeks of tuition revenue. ESI elected to standardize the number of weeks of revenue reported in each fiscal quarter, because the timing of student breaks in a calendar quarter is expected to fluctuate from quarter to quarter during the next two to three years. The total number of weeks of school during each year will remain at 48.

5.	Earnings per common share for all periods have been calculated in conformity with Statement of Financial Accounting Standard No. 128, “Earnings Per Share.” This data is based on historical net income and the average number of shares of ESI common stock outstanding during each period.

	Average shares outstanding (in thousands)
	Three Months Ended September 30,		Nine Months Ended September 30,
	2000	1999	2000	1999
Basic	23,912	24,935	24,147	25,424
Diluted	24,146	25,032	24,305	25,586

The difference in the number of shares used to calculate basic and diluted earnings per share represents the average number of shares issued under ESI’s stock option plans less shares assumed to be purchased with proceeds from the exercise of those stock options.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 1999 for discussion of, among other matters, the following items:

·	Cash receipts from financial aid programs

·	Nature of capital additions

·	Seasonality of revenues

·	Components of income statement captions

·	Marketable debt securities and market risk

·	Change in ownership and control of ESI

·	Changes in federal regulations regarding:

Timing of receipt of funds from the federal student financial aid programs under Title IV of the Higher Education Act of 1965, as amended (the “Title IV Programs”)

Percentage of applicable revenues that may be derived from Title IV Programs

Return of Title IV Program funds for withdrawn students

·	Default rates

Effective January 1, 2000, we implemented SAB No. 101 and changed the method by which we recognize the laboratory and application fees charged to a student as revenue. We began recognizing those fees as revenue on a straight-line basis over the student’s program length (i.e., 12 to 24 months). Previously, we recognized the quarterly laboratory fee as revenue at the beginning of each academic quarter and the application fee as revenue when we received the fee. We recorded the cumulative effect of the change in accounting as a one-time charge of$2.8 million, net of taxes, in the three months ended March 31, 2000.

We reported 12 weeks of tuition revenue in the three months ended September 30, 2000, compared to 13 weeks of tuition revenue in the third quarter of 1999. Effective with our first fiscal quarter of 2000, we began reporting 12 weeks of tuition revenue in each of our four fiscal quarters. Previously, our first and third fiscal quarters had 13 weeks of tuition revenue while the second and fourth fiscal quarters had 11 weeks of tuition revenue. We elected to standardize the number of weeks of revenue reported in each fiscal quarter, because the timing of student breaks in a calendar quarter is expected to fluctuate from quarter to quarter during the next two to three years. The total number of weeks of school during each year will remain at 48.

The following table sets forth pro forma operating results for the three and nine months ended September 30, 1999 as if we had followed the SAB No. 101 revenue recognition guidance and reported the same number of weeks of tuition revenue during each period. All subsequent comparisons to the 1999 results in this management’s discussion and analysis of financial condition and results of operations are made to the pro forma results for the three and nine months ended September 30, 1999.

	Three Months Ended September 30, 2000			Three Months Ended September 30, 1999						Nine Months Ended September 30, 2000			Nine Months Ended September 30, 1999
	Three Months Ended September 30, 2000			Proforma			As Reported			Nine Months Ended September 30, 2000			Proforma			As Reported
		(In thousands, except per share and operating data)
		(unaudited)
Revenues	$	88,479		$	81,027		$	87,465		$	252,416		$	231,565		$
Revenues	$	88,479		$	81,027		$	87,465		$	252,416		$	231,565		$	238,075
Costs and Expenses:
Cost of educational services		53,681			49,005			49,005			157,667			142,468			142,468
Student services and administrative expenses		23,337			22,730			22,730			71,800			66,300			66,300
Offering and other one-time expenses		—			—			—			—			900			900

Total costs and expenses		77,018			71,735			71,735			229,467			209,668			209,668

Operating income		11,461			9,292			15,730			22,949			21,897			28,407
Interest income, net		593			422			422			1,748			1,713			1,713

Income before income taxes and cumulative effect of change in accounting principle		12,054			9,714			16,152			24,697			23,610			30,120
Income taxes		4,581			3,670			6,102			9,385			9,004			11,477

Income before cumulative effect of change in accounting principle		7,473			6,044			10,050			15,312			14,606			18,643
Cumulative effect of change in accounting principle, net of tax		—			—			—			(2,776	)		(823	)		(823	)

Net income	$	7,473		$	6,044		$	10,050		$	12,536		$	13,783		$	17,820

Earnings (loss) per common share (basic and diluted):
Income before cumulative effect of change in accounting principle	$	0.31		$	0.24		$	0.40		$	0.63		$	0.57		$	0.73
Cumulative effect of change in accounting principle, net of tax		—			—			—			(0.11	)		(0.03	)		(0.03	)

Net income	$	0.31		$	0.24		$	0.40		$	0.52		$	0.54		$	0.70

Supplemental Data:
Cost of educational services		60.7	%		60.5	%		56.0	%		62.5	%		61.5	%		59.8	%
Student services and administrative expenses		26.4	%		28.0	%		26.0	%		28.4	%		28.6	%		27.9	%
Offering and other one-time expenses		—			—			—			—			0.4	%		0.4	%
Operating margin		12.9	%		11.5	%		18.0	%		9.1	%		9.5	%		11.9	%
Operating losses from new institutes (after-tax)	$	725		$	771		$	771		$	2,485		$	2,812		$	2,812
Student enrollment at end of period		28,639			28,095			28,095			28,639			28,095			28,095
Technical institutes at end of period		68			67			67			68			67			67
Shares for earnings per share calculation:
Basic		23,912			24,935			24,935			24,147			25,424			25,424
Diluted		24,146			25,032			25,032			24,305			25,586			25,586

In 1998, we began offering a new information technology program of study involving computer network systems (“CNS”) at three ITT Technical Institutes. We began offering the CNS program at an additional 24 ITT Technical Institutes in the nine months ended September 30, 1999, at an additional seven ITT Technical Institutes in the three months ended December 31, 1999, and at an additional 32 ITT Technical Institutes in the nine months ended September 30, 2000. We intend to begin offering this program at an additional three ITT Technical Institutes in the remainder of 2000. We incur a loss with respect to each CNS program offered at an ITT Technical Institute until the revenue from the number of enrolled students is high enough to offset the fixed costs associated with the program offering (such as salaries, equipment depreciation, rent and marketing), which typically has not occurred until the program has been offered for three or four quarters. The initial amount of capital required to offer the CNS program at an ITT Technical Institute is approximately $0.2 million.

Results of Operations

Revenues increased $7.5 million, or 9.3%, to $88.5 million in the three months ended September 30, 2000 from $81.0 million in the three months ended September 30, 1999. Revenues increased $20.8 million, or 9.0%, to $252.4 million in the nine months ended September 30, 2000 from $231.6 million in the nine months ended September 30, 1999. These increases were due primarily to a 5% increase in tuition rates in September 1999, a 5% increase in tuition rates in June 2000 and a 3.2% increase in the total student enrollment at January 1, 2000 compared to January 1, 1999. The number of students attending ITT Technical Institutes at January 1, 2000 was 26,428 compared to 25,608 at January 1, 1999.

The total number of new students beginning classes in September 2000 was 9,394, compared to 9,733 in September 1999, a decrease of 3.5%. The total student enrollment on September 30, 2000 was 28,639, compared to 28,095 on September 30, 1999, an increase of 1.9%.

Cost of educational services increased $4.7 million, or 9.6%, to $53.7 million in the three months ended September 30, 2000 from $49.0 million in the three months ended September 30, 1999. Cost of educational services increased $15.2 million, or 10.7%, to $157.7 million in the nine months ended September 30, 2000 from $142.5 million in the nine months ended September 30, 1999. The principal causes of these increases include:

·	normal inflationary cost increases for wages, rent and other costs of services;

·	the costs required to service the increased enrollment;

·	increased costs at new institutes (two opened in January 1999, one opened in April 1999 and one opened in March 2000); and

·	increased costs associated with offering the CNS program at 66 institutes (as compared to only 27 institutes in the third quarter of 1999).

Cost of educational services as a percentage of revenues increased to 60.7% in the three months ended September 30, 2000 from 60.5% in the three months ended September 30, 1999, and increased to 62.5% in the nine months ended September 30, 2000 from 61.5% in the nine months ended September 30, 1999. These increases were primarily due to the costs associated with the CNS program offerings and the new institutes, including salaries, equipment depreciation and rent.

Student services and administrative expenses increased $0.6 million, or 2.6%, to $23.3 million in the three months ended September 30, 2000 from $22.7 million in the three months ended September 30, 1999. Student services and administrative expenses increased $5.5 million, or 8.3%, to $71.8 million in the nine months ended September 30, 2000 from $66.3 million in the nine months ended September 30, 1999. These increases were primarily due to increased media advertising expenses (up 11.2% in the nine months ended September 30, 2000).

Student services and administrative expenses as a percentage of revenues decreased to 26.4% in the three months ended September 30, 2000 from 28.0% in the three months ended September 30, 1999, and decreased to 28.4% in the nine months ended September 30, 2000 from 28.6% in the nine months ended September 30, 1999. These decreases were primarily due to the reorganization of our sales force in the three months ended September 30, 2000.

We did not incur any one-time expenses in the nine months ended September 30, 2000, compared to one-time expenses of $0.9 million in the nine months ended September 30, 1999 associated with ITT Corporation’s (“ITT”) February 1999 public offering of our common stock and special bonus payments to employees for extraordinary services, net of amounts reimbursed by ITT.

We incur operating losses when we open new institutes. We opened three new institutes in 1997, three in 1998, three in 1999, and one in the nine months ended September 30, 2000. A new institute typically is open for approximately 24 months before it experiences a profit. The revenues and expenses of these institutes are included in the respective captions in the consolidated statements of income. The amount of operating losses (pre-tax) for institutes open less than 24 months were $1.2 million in the three months ended September 30, 2000 and $4.0 million in the nine months ended September 30, 2000, compared to $1.3 million in the three months ended September 30, 1999 and $4.6 million in the nine months ended September 30, 1999.

Our operating income increased $2.2 million, or 23.7%, to $11.5 million in the three months ended September 30, 2000 from $9.3 million in the three months ended September 30, 1999. Our operating income increased $1.0 million, or 4.6%, to $22.9 million in the nine months ended September 30, 2000 from $21.9 million in the nine months ended September 30, 1999. Our operating margin increased to 12.9% of revenues in the three months ended September 30, 2000 from 11.5% in the three months ended September 30, 1999, and decreased to 9.1% in the nine months ended September 30, 2000 from 9.5% in the nine months ended September 30, 1999. The nine-month decrease is primarily due to the costs associated with offering the CNS program at 32 additional institutes in the nine months ended September 30, 2000, compared to 24 additional institutes in the nine months ended September 30, 1999.

Financial Condition, Liquidity and Capital Resources

Due to the seasonal pattern of enrollments and our receipt of tuition payments, comparisons of financial position and cash generated from operations should be made both to the end of the previous year and to the corresponding period during the previous year.

Our net cash provided by operating activities, excluding the $6.7 million decrease in marketable debt securities, was $21.3 million in the nine months ended September 30, 2000, compared to $14.3 million of net cash provided by operating activities, excluding $23.4 million in marketable debt securities, in the nine months ended September 30, 1999. This $7.0 million increase is primarily due to an increase in collected tuition and fees that have not yet been recognized as revenue in accordance with SAB No. 101.

Our capital expenditures were $4.4 million in the three months ended September 30, 2000, compared to $5.1 million in the three months ended September 30, 1999. Our capital expenditures were $24.7 million in the nine months ended September 30, 2000, compared to $12.1 million in the nine months ended September 30, 1999. This increase was due primarily to increased capital expenditures in 2000 for offering the CNS program at 8 more additional ITT Technical Institutes than in the same period in 1999 (32 additional in the nine months ended September 30, 2000, compared to 24 additional in the nine months ended September 30, 1999), equipment necessary to outfit additional computer laboratories at institutes that commenced offering the CNS program in 1999 and changes in our electronics engineering technology curriculum. We expect that our capital expenditures for the full 2000 year will be approximately $30 million, which will represent a $13 million increase over 1999. This increase is primarily due to our plans to offer the CNS program at 35 additional ITT Technical Institutes in 2000 (compared to 31 additional ITT Technical Institutes in 1999), purchase $4 million of equipment for computer laboratories at institutes that commenced offering the CNS programs initiated in 1999 and incur $7 million of capital expenditures for changes in our electronics engineering technology curriculum.

Capital expenditures for a new institute are approximately $0.4 million and capital expenditures for each new curriculum offered at an existing institute are approximately $0.3 million ($0.2 million for the CNS program). We expect to be able to fund our planned capital expenditures in 2000 from cash flows from operations.

Cash flows on a long-term basis are highly dependent upon the receipt of Title IV Program funds and the amount of funds spent on new institutes, curricula additions at existing institutes and possible acquisitions.

On April 12, 2000, our Board of Directors authorized us to repurchase up to an additional 2.0 million shares of ESI common stock. As of September 30, 2000, our total remaining repurchase authorization from our Board of Directors was for approximately 2.4 million shares of ESI common stock. We may repurchase the shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. During the nine months ended September 30, 2000, we repurchased 726,300 shares of ESI common stock at an average cost of $15.20 per share or approximately $11.0 million. All of the repurchased shares of our common stock became treasury shares upon repurchase and most of the repurchased shares continue to be held as treasury shares. We may elect to repurchase additional shares of our common stock from time to time in the future, depending on market conditions and other considerations. The purpose of the stock repurchase is to help us achieve our long-term goal of enhancing shareholder value.

We have received an inquiry from the Office of Inspector General (“OIG”) of the U.S. Department of Education (“ DOE”). Based on the information being requested, we believe that the inquiry relates primarily to the compensation of our employees that recruit students for our ITT Technical Institutes. Federal law and the DOE’s regulations prohibit an institution participating in Title IV Programs from providing any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments to any person or entity engaged in any student recruitment activity. Our employees involved in student recruitment receive only a salary.

We are currently in the process of responding to the OIG’s inquiry. We have not been informed what the OIG is investigating or how long the investigation will last. The OIG has not asserted any claims against us. We believe that our method of compensating persons and entities engaged in student recruitment activity complies with the requirements of federal law and the DOE’s regulations. Neither the law nor the regulations, however, establish clear standards for compliance, and we cannot assure you that the OIG will not find any deficiencies in our present or former methods of compensating our employees that recruit students. We also cannot assure you that, if the OIG determines that any of our institutes violated the prohibition against paying incentives to student recruiters, we would not be subjected to monetary fines or penalties or other sanctions that could have a material adverse effect on our business, results of operations or financial condition.

We have been advised by the DOE that the ITT Technical Institutes that currently participate in the Title IV Programs remain eligible to participate in the Title IV Programs in accordance with the terms of their present eligibility. During the OIG investigation, however, the DOE will not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). A material adverse effect on our expansion plans, results of operations, financial condition and liquidity would result if the DOE’s restrictions are not lifted prior to 2003. We cannot assure you that the DOE will lift its restrictions prior to 2003 or that the DOE will not place additional or other more severe restrictions on our ITT Technical Institutes’ ability to participate in Title IV Programs.

Factors That May Affect Future Results

This report contains certain forward-looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions and growth n the postsecondary education industry and in the general economy; changes in federal and state governmental regulations with respect to education and accreditation standards, or the interpretation or enforcement thereof, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students; the results of the investigation being conducted by the OIG of the DOE; our ability to hire and retain qualified faculty; effects of any change in ownership of ESI resulting in a change in control of ESI, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of the institutes; our ability to implement our growth strategies, including our information technology programs; receptivity of students and employers to our existing program offerings and new curricula; and loss of lender access to our students for student loans.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

PART II

OTHER INFORMATION

Item 6.

EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes the 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 September 30, 2000.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ITT Educational Services, Inc.

Date: October 31, 2000

By:	/s/ Gene A. Baugh

Gene A. Baugh

Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

INDEX TO EXHIBITS

Exhibit No.		Description
10.23		*First Amendment of ESI Pension Plan

10.24		Second Amendment to Trade Name and Service Mark License Agreement Between ESI and ITT Manufacturing Enterprises, Inc. (assignee of ITT Sheraton Corporation)

10.25		*First Amendment to ESI Excess Savings Plan

11		Statement re Computation of Per Share Earnings

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.

EX-10.23 2 0002.txt FIRST AMENDMENT OF ESI PENSION PLAN Exhibit 10.23 FIRST AMENDMENT OF ESI PENSION PLAN ------------------- This First Amendment of ESI Pension Plan (the "Plan") is adopted by ITT Educational Services, Inc. (the "Employer"). Background ---------- The Employer originally established the Plan effective June 9, 1998. The Employer now wishes to amend the Plan as permitted under Section 12.01of the Plan. Amendment --------- Effective June 9, 1998, Plan is amended as follows: The definition of "Beneficiary" at Section 2.01 is amended to read as follows: "Beneficiary" means the person or persons designated pursuant to Section 7.15 to receive benefits under the Plan after a Member's death. A new Section 7.15 is added to the Plan to read as follows: Section 7.15. Beneficiaries. A Member's Beneficiary will be ------------ ------------- determined pursuant to this Section. (a) Except as provided pursuant to a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity, the Member's Beneficiary will be the person or persons, including a trustee, designated in writing by a Member pursuant to practices of, or rules prescribed by, the Committee, as the recipient of a benefit payable under the Plan following the Member's death. To be effective, a Beneficiary designation must be filed with the Committee during the Member's life. (b) If no person has been designated as the Beneficiary of a Member, or if no person so designated survives the Member, then the Beneficiary will be determined as follows: (1) If the Member is survived by a Spouse, the Spouse will be the Member's Beneficiary. -1- (2) If the Member is not survived by a Spouse, the Member's estate will be the Member's Beneficiary. If any amount becomes payable under the Plan to a Beneficiary who survives the Member but dies before receiving the benefit due him, and if the Member has not named a contingent Beneficiary who survives the Member, that amount will be paid in a lump sum as soon as administratively feasible following the Beneficiary's death to the Beneficiary's estate. This First Amendment of the Plan is executed this 20th day of March, 2000. ITT EDUCATIONAL SERVICES, INC. By: /s/ J.B. Rainier --------------------------------- (Signature) J.B. Rainier --------------------------------- (Printed) VP Dir. HR ---------------------------------- (Title) ATTEST: /s/ Jenny Yonce - -------------------------- (Signature) Jenny Yonce - -------------------------- (Printed) Mgr., Benefits & HRIS - ---------------------------- (Title) -2- EX-10.24 3 0003.txt 2ND AMENDMENT TO TRADE NAME AND LICENSE AGGMNT Exhibit 10.24 SECOND AMENDMENT TO TRADE NAME ------------------------------ AND SERVICE MARK LICENSE AGREEMENT ---------------------------------- This Second Amendment to Trade Name and Service Mark License Agreement (this "Second Amendment") is entered into as of August 7, 2000, by and between ITT Manufacturing Enterprises, Inc., a Delaware corporation, having a place of business at 1105 North Market Street, Suite 1217, Wilmington, Delaware, 19801 ("Licensor"), and ITT Educational Services, Inc., a Delaware corporation having a place of business at 5975 Castle Creek Parkway North Drive, Indianapolis, Illinois, 46250-0466. ("Licensee") (individually a "Party" and collectively, "Parties"). RECITALS WHEREAS, pursuant to an Agreement between and among Licensor, ITT Industries, Inc., Starwood Hotels & Resorts Worldwide, Inc., and ITT Sheraton Corporation dated November 22, 1999 (the "ITT Trademark Sale Agreement"), all right, title and interest in and to the ITT Name, ITT Marks and ITT License Rights (as such terms are defined in such Sale Agreement) and the goodwill associated therewith were transferred from ITT Sheraton Corporation to Licensor; WHEREAS, ITT Sheraton Corporation and Licensee are parties to a Trade Name and Service Mark License Agreement dated June 3, 1998 (the "License Agreement"); and WHEREAS, ITT Sheraton Corporation and Licensee are parties to a First Amendment to Trade Name and Service Mark License Agreement dated February 1, 1999 ("First Amendment"). NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: I. DEFINITIONS A. Generally. Except as otherwise specified in this Second Amendment, --------- all capitalized terms in this Second Amendment shall have the meanings provided in the License Agreement. B. Amendment Effective Date. "Amendment Effective Date" means the date ------------------------ this Second Amendment is executed by both Parties. II. SCOPE OF LICENSE A. As of the Amendment Effective Date, Section IV.C of the License Agreement shall be amended and restated to read in its entirety as follows: "C. Markings. For all new, revised or reprinted pamphlets, catalogs, -------- and other promotional and educational materials (exclusive of television, radio and newspaper advertising and signage) used in the Business of Licensee, Licensee shall place the following notice prominently in connection with the use of the Licensed Mark: 'ITT is a registered mark of and is used under license granted by ITT Manufacturing Enterprises, Inc.'" 1 B. As of the Amendment Effective Date, Section II.E.4 of the First Amendment to the License Agreement shall be amended and restated to read in its entirety as follows: "4. Copies of all notices to Licensor under this Section II.E shall be given or delivered in a manner specified in Section XII.B hereof concurrently with the giving of such notice to Licensor at the following address: ITT Manufacturing Enterprises, Inc. 4 West Red Oak Lane White Plains, New York 10604 Attention: General Counsel with a copy (which shall not constitute notice) to: Peter Abruzzese, Esq. Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, New York 10022 or to such other or additional addresses as Licensor shall specify in writing. Notice to Licensor under this Section II.E shall be of no force or effect unless it and all required copies (i) are given or delivered in conformity with Section XII.B hereof, (ii) comply with all requirements of this Section II.E, and (iii) are actually received by Licensor or its successor. Notice to Licensee under this section II.E shall be effective if it is provided in accordance with Section XII.B hereof or if it is actually received by Licensee." C. As of the Amendment Effective Date, Section XII.B of the License Agreement shall be amended and restated to read in its entirety as follows: "B. Notices. All notices, demands and other communications given or ------- delivered under this Agreement shall be in writing and shall be deemed to have been given when personally delivered, mailed by first class mail, return receipt requested, or delivered by express courier service or telecopied (with hard copy to follow). Notices, demands and communications shall, unless another address is specified in writing, be sent to the address or telecopy number indicated below. Notices to Licensor: -------------------- ITT Manufacturing Enterprises, Inc. 4 West Red Oak Lane White Plains, New York 10604 Attention: General Counsel Notices to Licensee: -------------------- ITT Educational Services, Inc. 5975 Castle Creek Parkway N. Drive P.O. Box 50466 Indianapolis, IN 46250-0466 Attention: General Counsel Telecopy: 317/594-4384 2 III. COUNTERPARTS This Second Amendment may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Parties have executed this Second Amendment as of the date first above written. ITT MANUFACTURING ENTERPRISES, INC. ITT EDUCATIONAL SERVICES, INC. By: /s/ Keith Johnson By: /s/ Clark D. Elwood --------------------------- ------------------------------ Print Name: Keith Johnson Print Name: Clark D. Elwood ------------------- -------------------- Title: Vice President Title: Sr. Vice President --------------------- ----------------------- Date: August 7, 2000 Date: August 9, 2000 -------------------- -------------------------- 3 EX-10.25 4 0004.txt FIRST AMENDMENT TO ESI EXCESS SAVINGS PLAN Exhibit 10.25 FIRST AMENDMENT TO ESI EXCESS SAVINGS PLAN This First Amendment to ESI Excess Savings Plan is hereby adopted by ITT Educational Services, Inc. effective as of October 1, 2000. Recitals -------- A. ITT Educational Services, Inc. ("ESI") adopted the ESI Excess Savings Plan (the "Plan") in June of 1998. B. ESI now wishes to amend the Plan. Amendment --------- Effective October 1, 2000, Subsection 3.02(a) of the Plan is amended to read as follows: (a) Any Eligible Employee who has met the eligibility requirements of Section 2.01 as of the beginning of a calendar year and who wishes to have Salary Deferrals credited to his Deferral Account in that calendar year must, prior to the beginning of that calendar year, execute an irrevocable Salary Reduction Agreement for the Plan year, authorizing Salary Deferrals under this Plan in accordance with the provisions of this Section. If an individual first becomes an Eligible Employee after the beginning of a calendar year, that Eligible Employee may, within 30 days of the later of the date on which he first becomes an Eligible Employee or October 1, 2000, execute an irrevocable Salary Reduction Agreement for the remainder of the calendar year, authorizing Salary Deferrals under this Plan in accordance with the provisions of this Section. A Salary Reduction Agreement made pursuant to the preceding sentence shall apply only to the Eligible Employee's compensation earned after the date on which he executes the Salary Reduction Agreement. Notwithstanding any other provision of the Section, Salary Deferrals will not be credited on behalf of a Participant with respect to a particular calendar year until the Participant's Basic Savings under the Savings Plan for the calendar year have been suspended due to the Statutory Limitations. Salary Deferrals shall be credited to the Participant's Account at the same time they would have been credited to his Account under the Savings Plan if not for the application of the Statutory Limitations. This First Amendment to the ESI Excess Savings Plan is executed on behalf of ITT Educational Services, Inc. by its duly authorized officer on this 25th day of September, 2000. By /s/ Joseph B. Rainier --------------------------------- Signature Joseph B. Rainier --------------------------------- Printed Name VP Dir. HR --------------------------------- Title EX-11 5 0005.txt COMPUTATION OF BASIC & DILLUTED EARNINGS PER SHARE Exhibit 11 ITT EDUCATIONAL SERVICES, INC. COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (In thousands, except per share data)

EX-27 6 0006.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 45,272 8,350 17,361 (1,488) 0 82,378 117,770 (71,962) 139,828 74,231 0 0 0 270 59,384 139,828 0 252,416 0 229,467 0 3,164 0 24,697 9,385 0 0 0 (2,776) 12,536 0.52 0.52

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