Washington, D.C. 20549

 

 

FORM 10-K

 

ANNUAL REPORT

 

(Mark One)

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended         December 31, 2003
OR
o		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)

 

 

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     ý       No     o

 

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.     ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes     ý       No     o

 

$1,300,014,641

 

Aggregate market value of the voting stock held by nonaffiliates of the registrant based on the last sale price for such stock at June 30, 2003 (assuming solely for the purposes of this calculation that all Directors and executive officers of the registrant are “affiliates”).

 

45,667,619

 

Number of shares of Common Stock, $.01 par value, outstanding at February 15, 2004.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K

 

IDENTITY OF DOCUMENT		PARTS OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Annual Meeting of		PART III
Shareholders to be held May 4, 2004

 

 

ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana

 

Annual Report to Securities and Exchange Commission
December 31, 2003

 

PART I

 

Item 1.           BUSINESS.

 

You should keep in mind the following points as you read this report:

 

•                  References in this document to “we,” “us,” “our” and “ITT/ESI” refer to ITT Educational Services, Inc. and its subsidiaries.

•                  The terms “ITT Technical Institutes,” “technical institutes” or “institutes” (in singular or plural form) refer to the individual schools owned and operated by ITT/ESI. The terms “institution” or “campus group” (in singular or plural form) mean a main campus and its additional locations or branch campuses, if any.

 

Background

 

We are a Delaware corporation incorporated in 1946.  Our principal executive offices are located at 13000 North Meridian Street, Carmel, Indiana 46032-1404, and our telephone number is (317) 706-9200.  From 1966 until our initial public offering on December 27, 1994, we were wholly owned by ITT Corporation, formerly a Delaware corporation and now known as ITT Industries, Inc., an Indiana corporation (“Old ITT”).  On September 29, 1995, ITT Corporation, a Nevada corporation (“ITT”), succeeded to the interests of Old ITT in the beneficial ownership of 83.3% of our common stock.  On February 23, 1998, Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation, acquired ITT.  Public offerings of our common stock by ITT in June 1998 and February 1999 and our repurchase of 1,500,000 shares of our common stock from ITT in February 1999 completely eliminated ITT’s beneficial ownership of any of our common stock.

 

Overview

 

We are a leading provider of technology-oriented postsecondary degree programs in the United States based on revenues and student enrollment. We offer associate, bachelor and master degree programs and non-degree diploma programs to more than 37,000 students. We currently have 77 institutes located in 30 states. Each of our institutes is (a) authorized by the applicable education authorities of the states in which they operate and recruit and (b) accredited by an accrediting commission recognized by the U.S. Department of Education (“ED”). We design our education programs, after consultation with employers, to help graduates prepare for careers in various fields involving their areas of study. As of December 31, 2003, more than 99% of our program offerings were degree programs, and we were seeking authorization to award a degree in the remaining programs. We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name, and our institutes have graduated over 175,000 students since 1976.

 

We opened one new institute in 2001, four new institutes in 2002 and three new institutes in 2003. We plan to open three or four new institutes in the remainder of 2004.  All of our associate degree programs and most of our resident bachelor degree programs were being taught on a three-day-per-week class schedule at the end of 2003.  We expect to complete the conversion of our five-day-per-week class schedule in all of our resident bachelor degree programs to a three-day-per-week class schedule in 2004, except for a few isolated program offerings.  In 2003, we developed three new resident bachelor degree programs, three new resident associate degree programs and one new online master degree program.  In 2003, we expanded the use of our hybrid education delivery model to several additional institutes, pursuant to which certain program courses are taught in residence on campus and others are taught online over the Internet (the “Hybrid Delivery Model”).  Most of our remaining institutes will begin using the Hybrid Delivery Model in 2004.  In 2003, we expanded our alliances with international educators pursuant to which more of our curricula are offered to students in foreign countries either by us through online programs offered over the Internet or by the international educators through residence programs under a license to use our curricula.  We

 

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intend to continue expanding by opening new institutes, offering a broader range of both resident and online programs at our existing institutes (including new business and criminal justice programs) and pursuing new and expanded alliances with both domestic and international educators.  We also intend to further expand our Hybrid Delivery Model by teaching more of the courses in each of our programs online over the Internet and fewer courses in residence on campus.

 

Business Strategy

 

Our strategy is to pursue multiple opportunities for growth. We are implementing a growth strategy designed to increase revenues and operating efficiencies by increasing the number and types of program offerings and student enrollment at existing institutes, opening new institutes across the United States, licensing the use of our curricula to third parties and offering our curricula in international markets. The principal elements of this strategy include the following:

 

Enhance Results at the Institute Level.

 

Increase Enrollments at Existing Institutes.  We intend to increase recruiting efforts aimed at enrolling more working adults at our existing institutes. In addition, we believe that current demographic and employment trends will allow us to enroll a greater number of recent high school graduates.

 

Broaden Availability of Current Program Offerings. We intend to continue expanding the number of program offerings at our existing institutes. Our objective is to offer multiple programs at each institute. Our 77 institutes provide significant potential for the introduction of existing programs to a broader number of institutes.  We believe that introducing new programs at existing institutes will attract more students. In 2003, we added a total of 181 program offerings among 47 existing institutes, and in 2004 we intend to add a total of approximately 230 program offerings among 66 existing institutes.

 

Develop or Acquire Additional Programs. We plan to introduce both resident and online programs in additional fields of study and at different levels.  We developed three new resident bachelor degree programs, three new resident associate degree programs and one new online master degree program in 2003.  In 2004, we intend to begin offering our new resident bachelor and associate degree programs at many of our institutions.  We also intend to develop and begin offering at one or more of our institutes additional degree programs of study in 2004. The new degree programs are expected to involve disciplines in information technology (“IT”), design, business and/or criminal justice, and be at the associate, bachelor and master degree levels.  We are also considering developing one or more short-term, non-degree programs of study in 2004.  We intend to develop both a resident and online version of many of the new programs planned for 2004, and we expect that most, if not all, of the resident versions of these programs will be taught under our Hybrid Delivery Model.  We believe that introducing new programs and making our programs more convenient for students can attract a broader base of students, motivate current students to extend their studies and help us improve the utilization of our facilities.

 

Extend Total Program Duration.  In 2003, we increased the number of our institutes that offer bachelor degree programs from 41 to 51.  In 2004, we intend to increase the number of our institutes that offer bachelor degree programs to 57.  The average combined total program time that graduates of one or more of our programs were enrolled has increased from 18 months in 1986 to 27 months in 2003, as a result of approximately 30% of the graduates of our associate degree programs enrolling in bachelor degree programs at our institutes, a decrease in the average number of credit hours taken each academic quarter by full-time students in our residence degree programs of study as a consequence of our conversion to a three-day-per-week class schedule (from a five-day-per-week class schedule) in those programs, the elimination of shorter, non-degree programs and the increased duration of some of our associate degree programs from 18 months to 24 months.  We expect that the average combined total program time of our students will increase further as the number of our institutes offering bachelor degree programs increases, additional bachelor degree programs are added at our institutes and we expand our online curricula offerings to include additional master degree programs.

 

Improve Student Outcomes. We strive to improve the graduation and graduate employment rates of our undergraduate students by providing academic and career services and dedicating administrative resources to those services.

 

Geographic Expansion of Our Institutes and Program Offerings.  We plan to add new institutes at sites throughout the United States. Using our proprietary methodology, we determine locations for new institutes based on

 

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a number of factors, including demographics and population and employment growth. We opened one new institute in 2001, four new institutes in 2002 and three new institutes in 2003.  We plan to open three or four new institutes in the remainder of 2004.  In addition to new institutes, we also plan to begin adding learning sites in 2004.  A learning site is an institute location where educational activities are conducted and student services are provided away from the institute’s campus.  We plan to open two or three learning sites in the remainder of 2004.  We will also continue to consider acquiring schools.  In 2003, we expanded the number of states in which we offer at least one of our online bachelor degree programs from 36 to 47.  We intend to continue expanding our online program offerings into more states in 2004. We also expanded alliances with international educators in 2003, pursuant to which more of our curricula are offered to students in foreign countries either by us through online programs offered over the Internet or by the international educators through residence programs under a license to use our curricula.

 

Increase Margins By Leveraging Fixed Costs at Institute and Headquarters Levels.  Our efforts to optimize school capacity and class size have allowed us to increase student enrollment without incurring a proportionate increase in fixed costs at our institutes.  We believe that our online programs and Hybrid Delivery Model will help us to improve the utilization of our facilities by eliminating student usage of our facilities with respect to our online program offerings and reducing student usage of our facilities with respect to our Hybrid Delivery Model.  In addition, we have realized substantial operating efficiencies by centralizing management functions and implementing operational uniformity among our institutes.  We will continue to seek to improve margins by increasing enrollments and revenues without incurring a proportionate increase in fixed costs.

 

Programs of Study

 

As of December 31, 2003, we were offering 20 degree programs and several diploma programs in various fields of study. All of our institutes were offering programs involving IT, electronics technology and drafting and design.  Six institutes were offering a program involving business, and five institutes were offering a program involving criminal justice.  The table below sets forth information regarding the programs of study we were offering as of December 31, 2003.

 

		Number of Institutes Offering the Programs at December 31, 2003
		Master Degree		Bachelor Degree		Associate Degree		Diploma (1)
School of Business
Business Administration		1	(2)	5		—		—
Business Accounting Technology		—		5		—		—
Technical Project Management (3) (4)		—		51		—		—
School of Criminal Justice
Criminal Justice		—		5		—		—
School of Drafting and Design
Computer Drafting and Design		—		—		70		2
Computer Visualization Technology		—		2		—		—
Digital Entertainment and Game Design		—		30		—		—
Industrial Design		—		3		—		—
Multimedia (5)		—		—		76		1
School of Electronics Technology
Automated Manufacturing Technology		—		4		—		—
Computer and Electronics Engineering Technology		—		—		77		—
Electronics and Communications Engineering Technology		—		47		—		—
Electronics Engineering Technology		—		10		—		—
Industrial Automation Engineering Technology		—		5		—		—
School of Information Technology
Computer Network Systems (5)		—		—		77		—
Data Communication Systems Technology		—		45		—		—
Information Systems Security (3)		—		49		—		—
Software Applications and Programming (5)		—		—		75		2
Software Engineering Technology		—		30		—		—
Web Development (5)		—		—		75		2

 

(1)             We have submitted, or are in the process of submitting, the requisite applications to the applicable state education authorities for approval to offer the diploma programs identified in this column as associate degree programs at each of the affected ITT Technical Institutes.

(2)             Online program.  Our institute in Indianapolis is the only institute that presently offers online programs.

(3)             Resident and online program. Our institute in Indianapolis is the only institute that presently offers online programs.

 

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(4)             The name of this program at some of our institutes is Technical Project Management for Electronic Commerce.

(5)             Depending on the location of the ITT Technical Institute, this program of study may have been approved by the applicable state education authority(ies) either as a separate program or one of as many as four disciplines of one program of study.  For purposes of this table, this program is considered to be a separate program of study at every ITT Technical Institute where it was taught.

 

As of December 31, 2003, approximately 39% of our students were enrolled in IT programs, approximately 35% were enrolled in electronics technology programs, approximately 25% were enrolled in drafting and design programs and approximately 1% were enrolled in business programs.  We design our programs to help graduates prepare for careers in various fields involving their education by offering students a broad-based foundation in a variety of skills used in those fields.  Graduates of our IT programs have obtained a variety of entry-level positions in various fields involving IT, such as network administrator, technical support, network technician and systems technician.  Graduates of our electronics technology programs have obtained a variety of entry-level positions in various fields involving electronics, such as electronics product design and fabrication, communications, computer technology, industrial electronics, instrumentation, telecommunications and consumer electronics. Graduates of our drafting and design programs have obtained a variety of entry-level positions in various fields involving drafting and design, such as computer-aided drafting, electrical and electronics drafting, mechanical drafting, architectural and construction drafting, civil drafting, interior design, landscape architecture and multimedia communications.  Graduates of our business programs are expected to obtain a variety of positions in various types of businesses involving the subject matter of their programs of study.

 

We generally organize the academic schedule for programs of study offered at our institutes on the basis of four 12-week academic quarters in a calendar year, with new students beginning at the start of each academic quarter. Students can complete our associate degree programs in eight academic quarters, bachelor degree programs in at least 12 academic quarters and master degree program in seven academic quarters. We typically offer classes in most resident programs in 3.5 to 5 hour sessions three or five days a week (or two days a week under the Hybrid Delivery Model with one course taught online over the Internet each academic quarter), Monday through Saturday.  Depending on student enrollment, class sessions are generally available in the morning, afternoon and evening. Each of our courses that is taught online over the Internet is delivered through an asynchronous learning network and has a prescribed schedule for completion of the coursework.  The class schedule for our resident courses and the coursework completion schedule for our online courses generally provide students with the flexibility to pursue employment opportunities concurrently with their studies. Based on student surveys, we believe that a substantial majority of our students work at least part-time during their programs of study.

 

Most of our 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 most programs offered at our institutes involves practical study in a lab environment.

 

The content of most courses in each program of study is substantially standardized among our institutes to provide greater uniformity and to better enable students to transfer, if necessary, to other institutes offering the same programs with less disruption to their education. We regularly review each curriculum to respond to changes in technology and industry needs. Each of our institutes has established an advisory committee for each field of study, which is comprised of representatives of local employers. These advisory committees assist our institutes in assessing and updating curricula, equipment and laboratory design. In addition to courses directly related to a student’s program of study, our programs also include general education courses, such as economics, mathematics, communications and sociology.

 

Tuition for a student entering an undergraduate residence program in December 2003 for 36 quarter credit hours (the minimum course load of a full-time student for an academic year at traditional two- and four-year colleges) is $12,996 for all of our undergraduate residence programs, except as adjusted in some states to reflect applicable taxes and fees.  We typically adjust the tuition for our programs of study at least annually.  The majority of students attending resident programs at our institutes lived in that institute’s metropolitan area prior to enrollment. We do not provide any student housing.

 

Student Recruitment

 

We strive to attract students with the motivation and ability to complete the career-oriented educational programs offered by our institutes. To generate interest among potential students, we engage in a broad range of

 

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activities to inform potential students and their parents about our institutes and the programs they offer. These activities include television, Internet and other media advertising, direct mailings and high school visits.

 

We centrally coordinate and develop our television advertising. We direct our television advertising at a combination of both the national market and the local markets in which our institutes are located. Our television commercials generally include a toll free telephone number and a website address for direct responses and information about the location of our institutes in the area. We centrally receive, track and forward responses to our television advertising to the appropriate institute representatives to contact prospective students and schedule interviews. We target our direct mail campaigns at different groups of potential postsecondary students, including, among others, high school students and working adults. We centrally receive, track and forward responses to direct mail campaigns to the appropriate institute representatives.

 

We employ a director of recruitment at each of our institutes, who reports to the director of that institute. We centrally establish, but implement at the local level, recruiting policies and procedures, as well as standards for hiring and training sales representatives. We employ approximately 800 sales representatives to assist in local recruiting efforts.  These representatives perform most of their services in student recruitment offices located at each of our institutes.  Our sales representatives, along with other employees, also make presentations to students at high schools. These presentations promote our institutes and obtain information about high school juniors and seniors who may be interested in attending our institutes.

 

Local sales representatives of an institute pursue expressions of interest from potential students for our resident programs of study by contacting prospective students and arranging for interviews either at such institute or at prospective students’ homes. We have designed these interviews to establish a prospective student’s qualifications, academic background, interests, motivation and goals for the future.  Occasionally, we also pursue expressions of interest from graduate students for our resident programs of study by contacting them and arranging for their attendance at an informational seminar providing information about the institute and its programs.  We pursue expressions of interest from potential students for our online programs of study by providing program and resource information on our website and through telecommunications and the mail.

 

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 our representatives and other employees involved in student recruitment. Our Vice President, Recruitment and the directors of field recruitment and training oversee the implementation of recruitment policies and procedures. In addition, our internal audit department generally reviews student recruiting practices relating to student presentations and the execution and completion of enrollment agreements at each of our institutes on an annual basis.

 

Student Admission and Retention

 

We strive to admit incoming students that have the ability to complete their chosen programs of study. We require all applicants for admission to any of our institutes’ undergraduate programs to have a high school diploma or a recognized equivalent and: (a) for resident programs, either pass an admission examination administered by the school, demonstrate achievement of a desired score on one of the two more widely recognized college entrance examinations, or possess at least 36 quarter credit hours (or the equivalent) with an overall cumulative grade point average of 2.0 on a 4.0 scale from an accredited postsecondary educational institution; or (b) for online programs, possess at least 60 quarter credit hours (or the equivalent) with an overall cumulative grade point average of 2.0 on a 4.0 scale from an accredited postsecondary educational institution. Students interested in our graduate program must first earn a bachelor degree. Students of varying ages and backgrounds attend our institutes.  At December 31, 2003, approximately 19% of the students were 19 years of age or younger, 40% were between 20 and 24 years of age, 23% were between 25 and 30 years of age and 18% were age 31 or over. Male students accounted for approximately 82% of total enrollment as of December 31, 2003, while total minority enrollment at our institutes (based on applicable federal classifications) was approximately 46%.

 

The faculty and staff at each of our institutes 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 students, they also have a negative regulatory, financial and marketing effect on the institute. To minimize student withdrawals, each of our institutes devotes staff resources to assist and advise students regarding academic and financial matters. We encourage academic advising and tutoring in the case of students

 

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experiencing academic difficulties. We also offer assistance and advice to students in our resident programs who are looking for part-time employment and housing. In addition, we consider factors relating to student retention in the performance evaluation of all of our instructors.

 

In December 2002, we discontinued admitting new students at two of our ITT Technical Institutes: one in Hayward, California and the other in Santa Clara, California.  Since then, we have been gradually ceasing all operations at each of those two institutes and expect all operations to finally cease by approximately the end of 2004 as the institute fulfills its obligations to the students enrolled in programs of study at the insti