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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13144
ITT EDUCATIONAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-2061311
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5975 CASTLE CREEK PARKWAY N. DRIVE
P.O. BOX 50466
INDIANAPOLIS, INDIANA 46250-0466
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (317) 594-9499
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. [ ]
$115,800,000
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at February 12, 1998
(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 9,
1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference
into this Annual Report on Form 10-K:
PARTS OF FORM 10-K INTO WHICH
IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Annual PART III
Meeting of Shareholders
to be held May 12, 1998
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ITT EDUCATIONAL SERVICES, INC.
INDIANAPOLIS, INDIANA
ANNUAL REPORT TO SECURITIES AND EXCHANGE COMMISSION
DECEMBER 31, 1997
PART I
ITEM 1. 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 Trust, a Maryland real estate
investment trust formerly known as Starwood Lodging Trust ("Starwood Trust"),
and their subsidiaries; 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.
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.
RECENT DEVELOPMENTS
Starwood/ITT Merger. Chess Acquisition Corp. ("Chess"), a wholly owned
subsidiary of Starwood, Inc., is expected to be merged with and into ITT in late
February 1998 (the "Merger") pursuant to an Amended and Restated Agreement and
Plan of Merger dated as of November 12, 1997 among Starwood, Inc., Chess,
Starwood Trust and ITT (the "Merger Agreement"). Pursuant to the Merger
Agreement, Starwood, Inc. will acquire all of the outstanding capital stock of
ITT for a combination of cash and shares of common stock of Starwood, Inc. and
shares of beneficial interest of Starwood Trust. After giving effect to the
Merger, Starwood will be the largest hotel and gaming company in the world in
terms of revenue and own, manage or franchise 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 will trigger a change in control of the Company
and its ITT Technical Institutes. As a result, each ITT Technical Institute
campus group will become ineligible to participate in federal student financial
aid programs until such campus group reestablishes its eligibility, which the
Company believes will be completed by May 29, 1998, although there can be no
assurance thereof. See "-- Change in Control."
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
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associate, bachelor and master degree programs and non-degree diploma programs
to over 24,000 students through 62 ITT Technical Institutes located in 27
states. The education programs are designed, after consultation with employers,
to help graduates prepare for careers in a variety of 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 49 new technical institutes since January 1, 1981. Of the 62
institutes currently operating, 19 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. The Company intends to
continue expanding by opening new technical institutes (including six new
institutes in 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 college 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
prepare for careers in a variety of 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 88% of the ITT Technical Institutes'
employable 1996 graduates had obtained employment or were already employed
in fields involving their programs of study as of April 25, 1997, 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
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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.
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 62 institutes provide significant potential for
the introduction of existing programs to a broader number of ITT Technical
Institutes. In the past five years, the Company has increased the number of
institutes which offer three or more programs from 16 to 28. In 1998, the
Company intends to increase the number of program offerings at
approximately 12 existing ITT Technical Institutes. 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
attracts a broader base of students and motivates current students to
extend their studies. ESI intends to test an associate degree program in
Computer Network Systems Technology ("CNS") at one institute in June 1998
to target the growing need for technically skilled personnel in the
computer systems field. The new CNS program is expected to be tested at
three to four additional institutes by the end of 1998.
Extend Total Program Time. By adding bachelor degree programs in more
institutes, 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 an ITT Technical Institute student can enroll has increased from 18
months in 1986 to 24 months in 1997. The Company expects that the average
total program time for which an ITT Technical Institute student can 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 1992 through 1996, the
percent of employable graduates of ITT Technical Institutes who were
employed in fields involving their programs of study increased from 80% to
88%. During the same period, average annual graduate salaries rose 24% from
approximately $16,900 to approximately $21,000.
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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 intends to open six new technical institutes in
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 62 institutes. Centralization and
uniformity have resulted in substantial operating efficiencies. Between
1993 and 1997, expenses incurred at headquarters (including the district
offices) have 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.
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.
PROGRAMS OF STUDY OFFERED AT ITT TECHNICAL INSTITUTES
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
------------- ------ -------- --------- ------- ------ -------- --------- ------- ------
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 Management.............. -- 1 1 -- -- 26 62 -- 88
Other Programs of Study(3).......... -- -- 3 2 -- -- 239 167 406
--- ----- ------ --- ------
Total........................... 115 1,497 22,170 716 24,498
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(1) EET related program.
(2) CAD related program.
(3) 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
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programs are designed to help graduates 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 entry-level positions in various fields involving EET, such as
electronics product design and fabrication, communications, computer technology,
industrial electronics, instrumentation, telecommunications and consumer
electronics. The Company's CAD program is designed to help graduates prepare for
careers in various fields involving CAD through the teaching of computer-aided
drafting techniques and conventional drafting methods. Graduates have obtained
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.
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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 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 institution 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
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and also must pass an admissions examination. Students interested in bachelor
degree programs or the MPM program must satisfy additional admissions criteria
which 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 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, but also
have a negative regulatory, financial and marketing effect on the institution.
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. 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
PERCENT OF EMPLOYABLE
GRADUATES WHO OBTAINED
EMPLOYMENT OR WERE ALREADY
GRADUATING NUMBER OF EMPLOYABLE EMPLOYED IN A FIELD INVOLVING
CLASSES GRADUATES(1) THEIR PROGRAMS OF STUDY
---------- -------------------- -----------------------------
1996........................... 8,422 88%
1995........................... 8,005 87%
1994........................... 7,459 85%
1993........................... 7,015 83%
1992........................... 6,878 80%
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(1) Employable graduates exclude graduates who continue in a bachelor degree
program at an ITT Technical Institute.
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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 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.
Based on information from students and employers who responded to inquiries
from the Company, the Company estimates that average annual starting salaries
reported for 1996 graduates of certain programs offered by the ITT Technical
Institutes who obtained employment or were already employed in a field involving
their programs of study were as follows:
AVERAGE STARTING SALARIES
NUMBER OF AVERAGE ANNUAL
EMPLOYABLE SALARY UPON
PROGRAM GRADUATES GRADUATION
- ---------------------------------------------------------- ---------- ---------------
Automated Manufacturing Technology (Bachelor Degree)...... 331 $26,472
Electronics Engineering Technology (Bachelor Degree)...... 716 $24,636
Industrial Design (Bachelor Degree)....................... 47 $25,668
Computer-Aided Drafting Technology, Tool Engineering
Technology and Architectural Engineering Technology
(Associate Degree and Diploma).......................... 2,368 $19,859
Electronics Engineering Technology (Associate Degree
and Diploma)............................................ 4,548 $20,976
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.
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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 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 62 ITT Technical
Institutes, 30 are considered to be main campuses and 32 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 62
ITT Technical Institutes participate in Title IV Programs, and the other two
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 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 financial
condition or results of operations of the Company. 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. 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 derived indirectly 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, on the number of students who have
defaulted and 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 or 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. 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. See "-- Administrative Capability" and
"-- Eligibility and Certification Procedures."
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 FFEL/FDL cohort default rates. 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 a 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.
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
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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 to teach the students already enrolled, and
close the institute once the students already enrolled had completed their
programs of study.
Twenty-seven ITT Technical Institute campus groups (consisting of 53
institutes) had Perkins cohort default rates 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. 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 Perkins cohort default
rates 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," which 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. To date, no ITT
Technical Institute campus group has been placed on provisional
certification status because of its FFEL/FDL or Perkins cohort default
rates.
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 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 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 result of the Merger, the DOE will
again evaluate the financial responsibility of the ITT Technical Institute
campus groups and the Company, and may evaluate the
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financial statements of ITT and/or Starwood, Inc. The Company believes that
it will be able to satisfy the applicable financial responsibility
standards.
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 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
participate 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. The HEA requires proprietary educational
institutions, such as the ITT Technical Institutes, 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
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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 eligible programs that an institution may offer.
Fifty-seven 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 to
be 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 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.
Two ITT Technical Institutes (both additional locations) accredited by
the ACCSCT are on probation, four ITT Technical Institutes (three main
campuses and one additional location) accredited by the ACCSCT are subject
to a show cause order and 23 ITT Technical Institutes (14 main campuses and
nine additional locations) accredited by the ACCSCT are subject to outcomes
reporting. No ITT Technical Institute accredited by the ACICS is on
probation, subject to a show cause order 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 a show cause order or
outcomes reporting, for a variety of reasons. All of the ITT Technical
Institutes that are on probation, or are subject to a show cause order or
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) subject to a show cause order is required to
demonstrate to the accrediting commission that the institute's
accreditation should not be revoked, conditioned or otherwise adversely
affected; (c) subject to outcomes reporting is required to periodically
report its results in such areas to the accrediting commission; or (d)
subject 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
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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 that the institution 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 are available. Twenty-seven
ITT Technical Institute campus groups (consisting of 53 institutes) had a
Perkins cohort default rate in excess of 15% for the most recent federal
award year for which such rates have been calculated. See "-- Student Loan
Defaults." If the DOE determines that an ITT Technical Institute is not
administratively capable solely because it exceeds the cohort default rate
thresholds specified in this regulation, such institute's certification to
participate in Title IV Programs may become provisional. To date, no ITT
Technical Institute campus group has been placed on provisional
certification status due to its FFEL/FDL or Perkins cohort default rates.
The Company does not believe that its financial condition will be
materially affected if any ITT Technical Institute campus groups are
provisionally certified to participate in Title IV Programs. See
"-- 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
these employees 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
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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 has advised the Company that it
will combine each of these campus groups' applications for recertification
with their applications for reinstatement of participation in Title IV
Programs following the change in control to be caused by the Merger.
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, 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 is currently provisionally certified by the DOE. All of the
ITT Technical Institute campus groups are required to apply for
recertification by the DOE as a result of the change in control to be
caused by the Merger, and the Company expects that because of such change
in control, all of the ITT Technical Institute campus groups will be
recertified on a provisional basis.
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.
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 "Item 7. 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
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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 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.
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The DOE recently completed a program review of the ITT Technical
Institute in San Diego, California that began in 1994. In closing 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. These
requirements 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 62 ITT Technical
Institutes are currently authorized by one or more state education authorities.
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-seven 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. Two ITT Technical Institutes (both additional locations)
accredited by the ACCSCT are on probation, four ITT Technical Institutes (three
main campuses and one additional location) accredited by the ACCSCT are subject
to a show cause order and 23 ITT Technical Institutes (14 main campuses and nine
additional locations) accredited by the ACCSCT are subject to outcomes
reporting. No ITT Technical Institute accredited by the ACICS is on probation,
subject to a show cause order 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, subject to a show
cause order, subject to outcomes reporting or subject to a financial or outcomes
review for a variety of reasons. All of the ITT Technical Institutes that are on
probation, or are subject to a show cause order or 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.
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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) subject to a show cause order is required to demonstrate to the
accrediting commission that the institute's accreditation should not be revoked,
conditioned or otherwise adversely affected; (c) subject to outcomes reporting
is required to periodically report its results in such areas to the accrediting
commission; or (d) subject 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 or subject to a show cause order 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. 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 57 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
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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) consider 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
will immediately become ineligible to participate in all of the Title IV
Programs. The Company has obtained all prior approvals of the Merger from the
ACCSCT and the SEAs required before the Merger occurs. The Company will seek the
approvals of the Merger from the ACICS and those SEAs required after a change in
control occurs, and will also seek the DOE's reinstatement of each ITT Technical
Institute campus group's participation in Title IV Programs.
The time required to obtain these approvals can vary substantially and may
take several months. In order to assure that the students attending an ITT
Technical Institute can receive all of the Title IV Program funds necessary to
pay their costs of education for the institute's Spring 1998 quarter (which
starts March 9 and ends May 29), that institute must be recertified by the DOE
to participate in Title IV Programs by May 29, 1998. Otherwise, none of the
students enrolled in that institute could receive Title IV Program grants to pay
their costs of education for such quarter and those students whose loan period
began and ended with such quarter could not receive Title IV Program loans for
such quarter. The Company believes that each ITT Technical Institute campus
group will regain its eligibility to participate in Title IV Programs by May 29,
1998, but there can be no assurance thereof. Failure by a material number of ITT
Technical Institute campus groups to regain their eligibility to participate in
Title IV Programs by May 29, 1998 would have a material adverse effect on the
Company's financial condition, results of operations and cash flows. If no ITT
Technical Institute campus group regains its eligibility to participate in Title
IV Programs by May 29, 1998, the Company estimates that its financial condition,
results of operations and cash flows would be adversely affected by
approximately $8.0 million to $10.0 million (pre-tax). If any subsequent
academic quarter ends before an ITT Technical Institute campus group regains its
eligibility, the students attending any institute in that campus group would not
receive any Title IV Program grants to pay their costs of education for such
quarter, and any such students whose loan period began after the institute
became ineligible and ended before the campus group regained its eligibility
would not receive any Title IV Program loans to pay such costs for such quarter.
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 its shares of Common Stock of the Company, certain corporate
reorganizations and certain changes in the boards of directors of such
corporations.
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. Obtaining such approval from
the California SEA in California 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
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can be no assurance that it will approve any future change in control
application submitted by the Company. See "Item 3. 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 SEA which review a change in control after it occurs;
(c) become accredited (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 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
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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 in 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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ITEM 2. 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 facilities
leased by the Company as of December 31, 1997.
ITT TECHNICAL INSTITUTE FACILITIES LEASES
AREA IN
LOCATION (METROPOLITAN AREA) SQUARE FEET
- --------------------------------- -----------
Birmingham, Alabama.............. 23,907
Phoenix, Arizona................. 25,900
Tucson, Arizona.................. 17,818
Little Rock, Arkansas............ 22,766
Anaheim, California (Los
Angeles)....................... 35,646
Carson, California (Los
Angeles)....................... 22,695
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(2)
West Covina, California
(Los Angeles).................. 36,382
Aurora, Colorado (Denver)........ 23,450(3)
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(4)
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
Framingham, Massachusetts
(Boston)....................... 19,938
Grand Rapids, Michigan........... 25,000
Troy, Michigan (Detroit)......... 32,000
Arnold, Missouri (St. Louis)..... 21,000(1)
Earth City, Missouri (St.
Louis)......................... 29,360
AREA IN
LOCATION (METROPOLITAN AREA) SQUARE FEET
- --------------------------------- -----------
Omaha, Nebraska.................. 22,400
Henderson, Nevada (Las Vegas).... 11,166(1)
Albuquerque, New Mexico.......... 21,588
Albany, New York................. 21,000(4)
Getzville, New York (Buffalo).... 22,765
Liverpool, New York (Syracuse)... 21,000(4)
Dayton, Ohio..................... 45,591
Norwood, Ohio (Cincinnati)....... 21,272
Strongville, 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(4)
San Antonio, Texas............... 20,770
Murray, Utah (Salt Lake City).... 33,600
Norfolk, Virginia................ 25,572
Richmond, Virginia............... 21,000(4)
Bothell, Washington (Seattle).... 27,800
Seattle, Washington.............. 30,316
Spokane, Washington.............. 16,378
Greenfield, Wisconsin
(Milwaukee).................... 29,650
- ---------------
(1) Institutes in the first year of operation.
(2) Facility under lease to which the Company plans to relocate the ITT
Technical Institute from Carson, California.
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(3) 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.
(4) 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 will be deemed a change of control under certain of the
Company's leases and, absent the consent of the landlord, will cause such leases
to be in default. The Company is in the process of obtaining such consents and
believes that it will be able to obtain all such consents prior to the Merger.
ITEM 3. 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 who were residents
of California. 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
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
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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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 who reside in California. 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, attorney's fees
and costs, and to have the action certified as a class action. The
plaintiffs in this action amended their complaint on August 14, 1997
to: (a) delete three and add two named plaintiffs, each of whom was a
student who attended an ITT Technical Institute in California; (b)
allege only violations of the CEC; and (c) seek only statutory damages,
civil penalties, injunctive relief, 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, among other things,
statutory violations of the CEC and CBPC, intentional
misrepresentations and civil conspiracy by the Company, ITT and a
Company employee who resides in California. The plaintiffs in each
action seek various forms of recovery, including compensatory and
exemplary damages, civil penalties, injunctive relief, disgorgement of
ill-gotten gains, restitution, attorney's fees and costs. These actions
are currentl