UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

 

(Mark One)

ý

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

 

For the quarterly period ended March 31, 2003

 

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
incorporation or organization)

 

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

 

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

 

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

 

44,775,305

 

Number of shares of Common Stock, $.01 par value, outstanding at March 31, 2003

 

 



 

ITT EDUCATIONAL SERVICES, INC.

Indianapolis, Indiana

 

Quarterly Report to Securities and Exchange Commission
March 31, 2003

 

PART I

FINANCIAL INFORMATION

 

Item 1.                              FINANCIAL STATEMENTS.

 

INDEX

 

Consolidated Statements of Income (unaudited) for the three months ended March 31, 2003 and 2002

 

Consolidated Balance Sheets as of March 31, 2003 and 2002 (unaudited) and December 31, 2002

 

Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2003 and 2002

 

Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2003 (unaudited) and the year ended December 31, 2002

 

Notes to Consolidated Financial Statements

 

1



 

ITT EDUCATIONAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2003

 

2002

 

Revenues

 

$

122,399

 

$

107,543

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Cost of educational services

 

71,732

 

65,886

 

Student services and administrative expenses

 

36,998

 

31,777

 

Total costs and expenses

 

108,730

 

97,663

 

 

 

 

 

 

 

Operating income

 

13,669

 

9,880

 

 

 

 

 

 

 

Interest income, net

 

448

 

487

 

 

 

 

 

 

 

Income before income taxes

 

14,117

 

10,367

 

 

 

 

 

 

 

Income taxes

 

5,435

 

3,960

 

 

 

 

 

 

 

Net income

 

$

8,682

 

$

6,407

 

 

 

 

 

 

 

Earnings per common share (a):

 

 

 

 

 

Basic

 

$

0.19

 

$

0.14

 

Diluted

 

$

0.19

 

$

0.14

 

 


(a) Earnings per common share in the prior period have been restated to reflect the two-for-one stock split declared on May 10, 2002 that became effective on June 6, 2002.

 

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

 

2



 

ITT EDUCATIONAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

 

March 31, 2003

 

December 31, 2002

 

March 31, 2002

 

 

 

(unaudited)

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,451

 

$

123,934

 

$

95,307

 

Restricted cash

 

 

7,103

 

 

Marketable debt securities

 

28,264

 

25,671

 

15,510

 

Accounts receivable, net

 

9,162

 

8,973

 

11,560

 

Deferred and prepaid income tax

 

2,609

 

1,988

 

3,415

 

Prepaids and other current assets

 

8,232

 

5,597

 

12,609

 

Total current assets

 

154,718

 

173,266

 

138,401

 

Property and equipment, net

 

66,566

 

62,584

 

47,469

 

Direct marketing costs

 

10,555

 

10,609

 

10,483

 

Other assets

 

1,707

 

1,248

 

978

 

Total assets

 

$

233,546

 

$

247,707

 

$

197,331

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

24,695

 

$

18,162

 

$

27,621

 

Accrued compensation and benefits

 

4,900

 

9,196

 

3,842

 

Other accrued liabilities

 

9,306

 

12,140

 

6,845

 

Deferred revenue

 

98,323

 

102,997

 

77,879

 

Total current liabilities

 

137,224

 

142,495

 

116,187

 

Deferred income tax

 

5,318

 

6,204

 

7,328

 

Minimum pension liability

 

8,041

 

8,041

 

3,022

 

Other liabilities

 

2,038

 

1,943

 

1,587

 

Total liabilities

 

152,621

 

158,683

 

128,124

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding

 

––

 

––

 

––

 

Common stock, $.01 par value, 150,000,000 shares authorized,  54,068,904 issued (a)

 

540

 

540

 

270

 

Capital surplus

 

45,014

 

40,393

 

39,394

 

Retained earnings

 

181,999

 

184,409

 

149,453

 

Accumulated comprehensive income

 

(4,888

)

(4,888

)

(1,837

)

Treasury stock, 9,293,599, 8,986,267, and 8,279,056 shares (a), at cost

 

(141,740

)

(131,430

)

(118,073

)

Total shareholders' equity

 

80,925

 

89,024

 

69,207

 

Total liabilities and shareholders' equity

 

$

233,546

 

$

247,707

 

$

197,331

 

 


(a) The number of shares in the prior period have been restated to reflect the two-for-one stock split declared on May 10, 2002 that became effective June 6, 2002.

 

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

 

3



 

ITT EDUCATIONAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2003

 

2002

 

Cash flows provided by (used for) operating activities:

 

 

 

 

 

Net income

 

$

8,682

 

$

6,408

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

5,416

 

5,262

 

Provision for doubtful accounts

 

2,002

 

2,063

 

Deferred taxes

 

(1,507

)

403

 

Increase/decrease in operating assets and liabilities:

 

 

 

 

 

Marketable debt securities

 

(2,593

)

25,558

 

Accounts receivable

 

(2,191

)

(944

)

Direct marketing costs

 

54

 

37

 

Accounts payable and accrued liabilities

 

(493

)

11,220

 

Prepaids and other assets

 

(3,094

)

(5,201

)

Deferred revenue

 

(4,674

)

727

 

Net cash provided by (used for) operating activities

 

1,602

 

45,533

 

 

 

 

 

 

 

Cash flows provided by (used for) investing activities:

 

 

 

 

 

Facility purchases

 

(7,641

)

 

Capital expenditures, net

 

(1,757

)

(3,138

)

Net cash provided by (used for) investing activities

 

(9,398

)

(3,138

)

 

 

 

 

 

 

Cash flows provided by (used for) financing activities:

 

 

 

 

 

Purchase of treasury stock

 

(27,958

)

(24,551

)

Exercise of stock options

 

11,168

 

8,299

 

Net cash provided by (used for) financing activities

 

(16,790

)

(16,252

)

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

(24,586

)

26,143

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at beginning of period

 

131,037

 

69,164

 

 

 

 

 

 

 

Cash, cash equivalents and restricted cash at end of period

 

$

106,451

 

$

95,307

 

 

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

 

4



 

ITT EDUCATIONAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

 

 

 

Common Stock

 

Capital
Surplus

 

Retained
Earnings

 

Compre-
hensive
Income

 

Accumulated
Other
Compre-
hensive
Income

 

Treasury Stock

 

Total

 

Shares (a)

 

Amount

 

 

Shares (a)

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2001

 

54,069

 

$

270

 

$

37,355

 

$

148,602

 

$

 

 

$

(1,837

)

(7,748

)

$

(106,202

)

$

78,188

 

Exercise of stock options

 

 

 

 

 

3,308

 

(7,925

)

 

 

 

 

885

 

18,218

 

13,601

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,174

)

(44,451

)

(44,451

)

Issue treasury stock for employee incentive plan

 

 

 

 

 

 

 

(122

)

 

 

 

 

48

 

968

 

846

 

Issue treasury stock for board of directors plan

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

37

 

37

 

2-for-1 stock split

 

 

 

270

 

(270

)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income for 2002

 

 

 

 

 

 

 

43,854

 

43,854

 

 

 

 

 

 

 

43,854

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

 

 

(3,051

)

(3,051

)

 

 

 

 

(3,051

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

(3,051

)

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

$

40,803

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2002

 

54,069

 

540

 

40,393

 

184,409

 

 

 

(4,888

)

(8,986

)

(131,430

)

89,024

 

For the three months ended March 31, 2003 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

4,621

 

(11,092

)

 

 

 

 

742

 

17,639

 

11,168

 

Purchase of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,050

)

(27,958

)

(27,958

)

Issue treasury stock for board of directors plan

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

9

 

9

 

Net income

 

 

 

 

 

 

 

8,682

 

$

8,682

 

 

 

 

 

 

 

8,682

 

Balance as of March 31, 2003

 

54,069

 

$

540

 

$

45,014

 

$

181,999

 

 

 

$

(4,888

)

(9,293

)

$

(141,740

)

$

80,925

 

 


(a) The number of shares in all prior periods have been restated to reflect the two-for-one stock split declared on May 10, 2002 that became effective June 6, 2002.

 

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

 

5



 

ITT EDUCATIONAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Dollar amounts in thousands, unless otherwise stated)

 

1.      Basis of Presentation

 

We prepared the accompanying unaudited consolidated financial statements in accordance with generally accepted accounting principles for interim periods.  In the opinion of our management, the financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial condition and results of operations.  Certain information and footnote disclosures, including significant accounting policies, normally included in a complete presentation of financial statements prepared in accordance with generally accepted accounting principles, have been omitted.  The interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2002.

 

2.      Earnings Per Share

 

On May 10, 2002, we declared a two-for-one split of our common stock, effected on June 6, 2002 by payment of a stock dividend to all shareholders of record at the close of business on May 28, 2002 of one share on each one share of our common stock issued and outstanding or held as treasury stock on May 28, 2002.  Our earnings per share amounts for all prior periods have been restated to reflect this stock split.

 

Earnings per common share for all periods have been calculated in conformity with Statement of Financial Accounting Standard No. 128, “Earnings Per Share.”  This data is based on historical net income and the average number of shares of our common stock outstanding during each period (as adjusted to reflect the stock split described above).

 

 

 

Average Shares Outstanding
(in thousands)

 

 

 

Three Months Ended
March 31,

 

 

 

2003

 

2002

 

Basic

 

45,014

 

46,148

 

Diluted

 

46,042

 

47,242

 

 

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

 

3.      Property and Equipment

 

During the three months ended March 31, 2003, we purchased two of our facilities, which we previously leased under operating lease agreements, for a total of $7.6 million.  The estimated useful lives for the buildings included on the property range from 20 to 40 years

 

6



 

4.      Stock Option Plans

 

We adopted and our stockholders approved the ITT Educational Services, Inc. 1994 Stock Option Plan and the 1997 ITT Educational Services, Inc. Incentive Stock Plan, and we also established the 1999 Outside Directors Stock Option Plan (collectively, the “Plans”).  We have adopted the disclosure only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, ‘‘Accounting for Stock-Based Compensation.’’ Accordingly, no compensation cost has been recognized in the financial statements for the Plans. We have elected, as permitted by the standard, to continue following the intrinsic value based method of accounting for stock options consistent with Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees.’’ Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of our common stock at the measurement date over the exercise price.

 

If compensation costs for the Plans had been determined based on the fair value of the stock options at grant date consistent with SFAS No. 123, our compensation costs would have increased and our net income and earnings per share for the three months ended March 31, 2003 would have been reduced to the proforma amounts indicated below:

 

 

 

Three Months
Ended March 31,

 

 

 

2003

 

2002

 

Net income as reported

 

$

8,682

 

$

6,407

 

 

 

 

 

 

 

Deduct:   Total stock-based employee compensation expense determined under the fair value based method for stock options, net of tax

 

(1,161

)

(886

)

 

 

 

 

 

 

Proforma net income

 

$

7,521

 

$

5,521

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic as reported

 

$

0.19

 

$

0.14

 

Basic proforma

 

$

0.17

 

$

0.12

 

 

 

 

 

 

 

Diluted as reported

 

$

0.19

 

$

0.14

 

Diluted proforma

 

$

0.16

 

$

0.12

 

 

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for the three months ended March 31, 2003 and 2002:

 

 

 

Three Months
Ended March 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Risk free interest rates

 

2.7

%

4.4

%

Expected lives (in years)

 

5

 

5

 

Volatility

 

57

%

56

%

Dividend yield

 

None

 

None

 

 

7



 

5.      Contingencies

 

We are subject to litigation in the ordinary course of our business.  When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure.  If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we record a liability for the loss.  If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the claim in the notes to our financial statements if the likelihood of a potential loss is reasonably possible and the amount involved is material.

 

Among the legal actions currently pending is United States ex rel. Dan Graves and Susan Newman v. ITT Educational Services, Inc., et al.  This action is a qui tam action that was filed on November 5, 1999 in the United States District Court for the Southern District of Texas by two former employees (“relators”) on behalf of themselves and the federal government (the “Qui Tam Action”).  The Qui Tam Action alleges, among other things, violations of the False Claims Act, 31 U.S.C. § 3730, by us, one of our employees and our independent auditor in connection with how we compensated our sales representatives. The relators seek various forms of recovery on behalf of themselves and the federal government, including: (a) treble the amount of unspecified damages sustained by the federal government; (b) a civil penalty of up to $10,000 for each violation of the False Claims Act; (c) double back pay for Susan Newman; and (d) attorney’s fees, costs and interest.

 

A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam “relator”) on behalf of the federal government for an alleged submission to the federal government of a false claim for payment.  A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice (“DOJ”) decides whether to intervene in the litigation.  Whenever a relator files a qui tam action, the DOJ typically initiates an investigation in order to determine whether to intervene in the litigation.  If the DOJ intervenes, it has primary control over the litigation.  If the DOJ declines to intervene, the relator may pursue the litigation on behalf of the federal government and, if successful, receives a portion of the federal government’s recovery. On May 25, 2001, the DOJ declined to intervene in the Qui Tam Action.  On March 31, 2002, the court dismissed all of the claims against all of the defendants for failure to allege facts sufficient to support their claims and gave the relators 20 days to file an amended complaint.  The relators filed an amended complaint on April 22, 2002 against all of the defendants.  On March 31, 2003, the court issued a final judgment in the Qui Tam Action dismissing with prejudice all of the relators’ claims against us and all of the other defendants for failure to state a claim.  The relators and the federal government have through May 30, 2003 to file a notice of appeal, if they intend to appeal the judgment.

 

In the opinion of our management, based on the information currently available to them, the ultimate outcome of the pending legal and other claims should not have a material adverse effect on our financial condition, results of operations or cash flows.

 

In March 2003, the U.S. Department of Education (“ED”) officially closed its investigation of whether our method of compensating employees involved in student recruitment was in compliance with the provision of the HEA that 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 ED closed its investigation without issuing any findings, and it formally withdrew, lifted and removed all sanctions and limitations contained in an August 2000 letter which provided that, during the pendency of the ED’s investigation, the ED would not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution).  In order to expedite the closure of the ED’s investigation and the withdrawal of its August 2000 letter, we paid the ED an immaterial amount.

 

8



 

Item 2.                              MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2002 for discussion of, among other matters, the following items:

 

              Cash receipts from financial aid programs

              Nature of capital additions

              Seasonality of revenues

              Components of income statement captions

              Marketable debt securities and market risk

              Federal regulations regarding:

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

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

                                          Return of Title IV Program funds for withdrawn students

              Default rates

              College Advantage Loan Program (“CALP”)

              Our programs in information technology, computer and electronics engineering technology and computer drafting and design

 

Results of Operations

 

Three Months Ended March 31, 2003 Compared with Three Months Ended March 31, 2002

 

Revenues increased $14.9 million, or 13.8%, to $122.4 million in the three months ended March 31, 2003 from $107.5 million in the three months ended March 31, 2002.  This increase was due primarily to a 5% increase in tuition rates in March 2003 and a 6.0% increase in the total student enrollment at January 1, 2003 compared to January 1, 2002.  The number of students attending ITT Technical Institutes at January 1, 2003 was 32,631 compared to 30,778 at January 1, 2002.

 

The total number of new students beginning classes in the three months ended March 31, 2003 was 7,233, compared to 6,818 in the three months ended March 31, 2002.  The total student enrollment on March 31, 2003 was 32,313, compared to 30,986 on March 31, 2002, an increase of 4.3%.

 

Cost of educational services increased $5.8 million, or 8.9%, to $71.7 million in the three months ended March 31, 2003 from $65.9 million in the three months ended March 31, 2002.  The principal causes of this increase included:

 

•           the costs required to service the increased enrollment;

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

•           increased costs due to opening new institutes (one opened in June 2002 and three opened in September 2002).

 

Cost of educational services as a percentage of revenues decreased to 58.6% in the three months ended March 31, 2003 from 61.3% in the three months ended March 31, 2002.  This decrease was primarily due to:

 

              continued facility and faculty utilization efficiencies;

                                          certain fixed costs at our institutes did not increase proportionately with increases in our revenues resulting from a larger number of students;

                                          a reduction of rent expense that resulted from our purchase of eight facilities that we had previously leased in the three months ended March 31, 2002; and

 

9



 

                                          the reclassification of certain Indiana taxes in the Consolidated Statements of Income from Cost of educational services to Income taxes, based on changes in Indiana tax law.

 

Student services and administrative expenses increased $5.2 million, or 16.4%, to $37.0 million in the three months ended March 31, 2003 from $31.8 million in the three months ended March 31, 2002, primarily due to increased media advertising expenses (up 25.8%).  Student services and administrative expenses increased to 30.2% of revenues in the three months ended March 31, 2003 from 29.5% in the three months ended March 31, 2002, primarily due to the increased media advertising expenses offset by a reduction in bad debt expense from 1.9% of revenues in the three months ended March 31, 2002 to 1.6% of revenues in the three months ended March 31, 2003.

 

Operating income increased $3.8 million, or 38.4%, to $13.7 million in the three months ended March 31, 2003 from $9.9 million in the three months ended March 31, 2002.  The operating margin increased to 11.2% of revenues in the three months ended March 31, 2003 from 9.2% in the three months ended March 31, 2002, primarily due to greater facility and faculty utilization efficiencies.

 

Our combined effective federal and state income tax rate for the three months ended March 31, 2003 was 38.5% compared to 38.2% for the three months ended March 31, 2002, primarily due to changes in Indiana tax law.

 

Financial Condition, Liquidity and Capital Resources

 

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

 

Net cash provided by operating activities was $1.6 million in the three months ended March 31, 2003 compared to $45.5 million in the three months ended March 31, 2002.  This $43.9 million decrease was primarily due to (a) a $25.6 million reduction of marketable debt securities in 2002 to generate cash for facility and treasury stock purchases in 2002 and (b) the timing of payments to vendors.

 

In the three months ended December 31, 2002, we recorded a $5.0 million minimum liability adjustment with respect to our obligations under the ESI Pension Plan.  This adjustment resulted in a $5.0 million increase in accrued compensation and benefits and a corresponding $3.1 million reduction in shareholders’ equity, which is net of a $1.9 million deferred tax asset, as of March 31, 2003 and December 31, 2002.

 

Deferred revenue, which represents the unrecognized portion of revenue received from students, increased $20.4 million to $98.3 million at March 31, 2003 from $77.9 million at March 31, 2002.  This increase was primarily due to the students’ use of the CALP and increased tuition revenue resulting from higher tuition rates and a larger number of students.

 

Capital expenditures (excluding facility purchases) were $1.8 million in the three months ended March 31, 2003 compared to $3.1 million in the three months ended March 31, 2002.  We expect that capital expenditures (excluding facility purchases) for the full 2003 year will be approximately $20.0 to $25.0 million.  Capital expenditures for each new institute are approximately $0.4 million, and the capital expenditures for each new curriculum at an existing institute are approximately $0.3 million.  We expect to be able to fund our planned capital expenditures for the remainder of 2003 from cash flows from operations.

 

During the three months ended March 31, 2003, we purchased two of our facilities for a total of $7.6 million.  Previously, we leased these facilities under operating lease agreements.  As of March 31, 2003, we had committed to purchase the facility of one additional institute in 2003 for $4.1 million.  We may purchase additional facilities in 2003.

 

We currently lease most of our facilities under operating lease agreements. A majority of the operating leases contain renewal options that can be exercised after the initial lease term. Renewal options are generally for periods of one to five years. All operating leases will expire over the next 14 years and management expects that leases will be renewed or replaced by other leases in the normal course of business. There are no material restrictions imposed

 

10



 

by the lease agreements, and we have not entered into any significant guarantees related to the leases.  We are required to make additional payments under the operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period.

 

Future minimum rental payments (in thousands) that were required under operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2002 are as follows and include the rental payments required under the operating leases related to the two facilities that we purchased in the three months ended March 31, 2003:

 

2002

 

$

27,245

 

2003

 

27,379

 

2004

 

21,236

 

2005

 

17,210

 

2006

 

14,704

 

Later years

 

40,899

 

 

 

$

148,673

 

 

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

 

We do not have any off-balance sheet arrangements or any other significant long-term obligations, lines of credit, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments.  There are no commitments or guarantees that provide for the potential issuance of shares of our common stock.

 

On May 10, 2002, we declared a two-for-one split of our common stock, effected on June 6, 2002 by payment of a stock dividend to all shareholders of record at the close of business on May 28, 2002 of one share on each one share of our common stock issued and outstanding or held as treasury stock on May 28, 2002 (“Stock Split”).  Our earnings per share amounts for all prior periods have been restated to reflect the Stock Split.

 

Our Board of Directors has authorized us to repurchase outstanding shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended.  In the three months ended March 31, 2003, we repurchased 1,050,000 shares of our common stock at an average cost of $26.63 per share, or $28.0 million in total.  In the three months ended March 31, 2002, we repurchased 1,150,000 shares of our common stock at an average cost of $21.35 per share, or $24.6 million in total.  All of the repurchased shares of our common stock became treasury shares upon repurchase and most of the repurchased shares continue to be held as treasury shares.  As of March 31, 2003, our existing repurchase authorizations permit us to repurchase an additional 4,244,300 shares of our common stock.  We may elect to repurchase additional shares of our common stock from time to time in the future, depending on market conditions and other considerations.  The purpose of the stock repurchase program is to help us achieve our long-term goal of enhancing shareholder value.

 

Forward-Looking Statements

 

All statements, trend analyses and other information contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  Forward-looking statements are made based upon our management’s current expectations and beliefs concerning future developments and their potential effects on us.  There can be no assurance that future developments affecting us will be those anticipated by our management.

 

These forward-looking statements involve a number of risks and uncertainties.  Among the factors that could cause actual results to differ materially are the following:

 

              business conditions and growth in the postsecondary education industry and in the general economy;

              changes in federal and state governmental regulations with respect to education and accreditation

 

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standards, or the interpretation or enforcement thereof, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students;

                                          the results of the Qui Tam Action which, if adversely determined, could result in a demand for repayment of Title IV Program funds, trebled under the False Claims Act and penalties;

              our ability to hire and retain qualified faculty;

                                          effects of any change in our ownership resulting in a change in control, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of the institutes;

              our ability to implement our growth strategies;

              receptivity of students and employers to our existing technology-oriented program offerings and new curricula; and

              loss of lender access to our students for student loans.

 

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC.  We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

 

Item 3.                            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

Item 4.                              CONTROLS AND PROCEDURES.

 

We maintain a set of disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  In addition, we maintain a set of internal controls and procedures for financial reporting (“ICP”) that are designed to provide reasonable assurances that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our transactions are properly recorded and reported to permit the preparation of our financial statements in conformity with generally accepted accounting principles. As of the end of our first fiscal quarter of 2003, we conducted an evaluation, under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer, President and Chief Operating Officer and Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our DCP and ICP pursuant to Rule 13a-14 of the Exchange Act.  Based on that evaluation, our Chairman and Chief Executive Officer, President and Chief Operating Officer and Senior Vice President and Chief Financial Officer concluded that our DCP and ICP are effective.

 

There have been no significant changes in our ICP or other factors that could significantly affect those controls and procedures subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

PART II

OTHER INFORMATION

 

Item 1.                              LEGAL PROCEEDINGS.

 

The information set forth in Note 5 of the Notes to Consolidated Financial Statements set forth elsewhere in this report is incorporated herein by reference.

 

We cannot assure you of the ultimate outcome of any litigation involving us.  Based on the information currently available to us, we do not believe any pending legal proceeding will result in a judgment or settlement that will have, after taking into account our existing insurance and provisions for such liabilities, a material adverse effect on our financial condition, results of operations or cash flows. Any litigation alleging violations of education or consumer

 

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protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

 

Item 2.                              CHANGES IN SECURITIES AND USE OF PROCEEDS.

 

The following information is furnished as to our securities sold during the three months ended March 31, 2003 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”):

 

(a)     On January 1, 2003, we issued 382 treasury shares of our common stock to one non-employee  director under the ESI Non-Employee Director Deferred Compensation Plan (“ENDDCP”) as the stock portion of the semi-annual installment payment of his annual retainer.

 

(b)     On January 1, 2003, we credited 382 treasury shares of our common stock to the deferred share accounts of three other non-employee directors under the ENDDCP as the stock portion of the semi-annual installment payment of their annual retainer.  These shares of our common stock will be issued upon  the termination of the non-employee director’s service as a non-employee director for any reason, including retirement or death.

 

The transactions described in paragraphs (a) and (b) above are exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof.

 

The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis during the first quarter of 2003:

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number
of Shares (or
Units)
Purchased

 

Average
Price
Paid per
Share

 

Identity of
Broker
dealer(s)
Used to
Effect
Purchases

 

Number of
Shares (or Units
Purchased as
Part of Publicly
Announced
Plans or
Programs (1)

 

Maximum Number
(or Approximate
Dollar Value of
Shares (or Units)
that May Yet Be
Purchased Under the
Plans or Programs

 

January 1, 2003 through January 31, 2003

 

 

$

 

 

 

5,294,300

 

February 1, 2003 through February 28, 2003

 

976,300

 

26.62

 

(2

)

976,300

 

4,318,000

 

March 1, 2003 through March 31, 2003

 

73,700

 

26.71

 

(2

)

73,700

 

4,244,300

 

Total

 

1,050,000

 

$

26.63

 

 

 

1,050,000

 

 

 

 


(1)                   On April 13, 2000, we announced that our Board of Directors on April 12, 2000 authorized us to repurchase up to 2.0 million shares of our common stock, as subsequently adjusted by our Board of Directors to give effect to the 2002 Stock Split (the “2000 Repurchase Program”).  As of December 31, 2002, 294,300 shares remained to be repurchased under the 2000 Repurchase Program.  On October 17, 2002, we announced that our Board of Directors on October 15, 2002 authorized us to repurchase an additional 5.0 million shares of our common stock (the “2002 Repurchase Program”).  As of December 31, 2002, 5.0 million shares remained to be repurchased under the 2002 Repurchase Program.  The terms of both the 2000 Repurchase Program and 2002 Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act.

(2)                   First Manhattan Co.

 

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Item 6.                              EXHIBITS AND REPORTS ON FORM 8-K.

 

(a) Exhibits.

 

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.

 

(b) Reports on Form 8-K.

 

No reports on Form 8-K were filed or furnished during the quarter ended March 31, 2003.

 

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SIGNATURES

 

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

 

 

ITT Educational Services, Inc.

 

 

Date: April 28, 2003

 

 

 

 

By:

/s/ Kevin M. Modany

 

Kevin M. Modany

 

Senior Vice President and Chief Financial Officer

 

(Duly Authorized Officer and Principal Financial Officer)

 

CERTIFICATIONS

 

I, Rene R. Champagne, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to

 

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the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: April 28, 2003

 

 

 

 

/s/ Rene R. Champagne

 

 

Chairman and Chief Executive Officer

 

 

I, Omer E. Waddles, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: April 28, 2003

 

 

 

 

/s/ Omer E. Waddles

 

 

President and Chief Operating Officer

 

 

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I, Kevin M. Modany, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: April 28, 2003

 

 

 

 

/s/ Kevin M. Modany

 

 

Senior Vice President and Chief Financial Officer

 

 

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INDEX TO EXHIBITS

 

 

Exhibit No.

 

Description

 

 

 

11

 

Statement re Computation of Per Share Earnings

 

 

 

99.1

 

Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350

 

 

 

99.2

 

Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350

 

S-4