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The following is an excerpt from a 10-Q SEC Filing, filed by ITT EDUCATIONAL SERVICES INC on 4/28/1998.
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ITT EDUCATIONAL SERVICES INC - 10-Q - 19980428 - NOTES_TO_FINANCIAL_STATEMENT

NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED)

1. The accompanying unaudited financial statements have been prepared by ITT Educational Services, Inc. (the "Company") without audit. In the opinion of management, the financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial condition and results of operations of the Company. Certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. The interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission for the year ended December 31, 1997.

The results of operations for the three months ended March 31, 1998 are not necessarily indicative of results for the entire calendar year.

2. Since the Company's initial public offering in 1994, 83.3% of the outstanding Common Stock of the Company has been owned by ITT Corporation ("ITT"). On February 23, 1998, Starwood Hotels and Resorts Worldwide, Inc. ("Starwood, Inc.") completed the acquisition (the "Merger") of ITT and ITT became a subsidiary of Starwood, Inc. As a result of the Merger, each ITT Technical Institute campus group became ineligible to participate in the federal student financial aid programs. Effective March 20, 1998, the eligibility of each ITT Technical Institute campus group to participate in federal student financial aid programs was reinstated by the U.S. Department of Education ("DOE") with certain conditions imposed by the DOE. The Company believes that it is in compliance with or satisfies these DOE conditions.

On February 13, 1998, the Company filed a registration statement with the Securities and Exchange Commission pursuant to which ITT plans to sell up to 13,050,000 shares of the Company's common stock to the public (48.3% of the outstanding shares) (the "Offering"). The Offering will not constitute a change of control under the DOE's regulations.

Since the Company's initial public offering in 1994, the relationship between the Company and ITT has been governed by various agreements pursuant to which ITT provided certain services to the Company. These agreements have been modified since the Merger and the new agreements will become effective upon the closing of the Offering. Management believes that the new agreements, including the transfer of any assets or liabilities from ITT to the Company contemplated thereunder, will not have a material effect on the Company's financial position, results of operations or cash flows.

Until February 5, 1998, the Company's cash receipts were forwarded to ITT on a daily basis and the Company's cash disbursements were generally funded by ITT out of the Company's cash balances invested with ITT. On February 5, 1998, ITT transferred approximately $83.0 million to the Company and the Company has since been performing its own cash management function. The invested funds are included in cash and cash equivalents at March 31, 1998.

3. The Company has a number of pending legal and other claims arising out of the normal course of business. Among the legal actions is Eldredge, et al. v. ITT Educational Services, Inc., et al. (the "Eldredge Case"). This action was filed on June 8, 1995 in San Diego, California by seven graduates of the San Diego ITT Technical Institute. In October 1996, the jury in this action rendered a verdict against the Company and awarded the plaintiffs general damages of approximately $0.2 million and exemplary damages of $2.6 million. The judge also awarded the plaintiffs attorney's fees and costs, in the amount of approximately $0.9 million, and interest. The Company is seeking to overturn the awards and has appealed the decision. Management, based on the advice of counsel, believes it is probable that it will prevail in its appeal, thus no provision (other than the Company's legal expenses) for these awards has been made. If the Company's appeal of the judgment in the Eldredge Case is unsuccessful, a charge to earnings would be taken at that time in the amount of the awards, including the general and exemplary damages assessed against the Company, the plaintiffs' attorney's fees and costs and the interest assessed thereon.

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In January 1997, six legal actions were filed against the Company in San Diego, California by a total of 21 former students of the San Diego ITT Technical Institute. The claims alleged in these legal actions are similar to the claims alleged in the Eldredge Case, relate primarily to the Company's marketing and recruitment practices and include misrepresentation and violations of certain state statutes. The plaintiffs in one of the California actions seek to have their action certified as a class action. Recently, the court denied such plaintiffs' request. In June 1997, a legal action was filed against the Company in Orlando, Florida by three former students of the Maitland ITT Technical Institute. In April 1998, the legal action in Florida was dismissed without prejudice by the plaintiffs. In April 1998, a legal action was filed against the Company in San Diego, California by nine former students who attended the hospitality program at either the Maitland or San Diego ITT Technical institute. The claims alleged in this action are similar to the claims alleged in the Eldredge Case, relate primarily to the Company's marketing and recruitment practices and include fraud and violations of certain federal and state statutes. The plaintiffs seek to have their action certified as a class action on behalf of all persons similarly situated who attended the hospitality program at the Indianapolis, Maitland, Portland or San Diego ITT Technical Institutes. If a class action is certified in either California action, the number of plaintiffs that may be awarded damages would increase significantly.

In the opinion of management, the ultimate outcome of these matters should not have a material adverse effect on the Company's financial position, results of operations or cash flows.

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