January 27, 2015 Kevin M. Modany, CEO Educational Services, Inc. 13000 North Meridian Street Indianapolis, IN 46032-1404 RE: Provisional Certi?cation and Review of Audited Financial Statements OPE IDs: 00473100 - Daniel Webster College 00732900 ITT Technical Institute 03071800 'I?cehnieal Institute Dear Mr. Modany: The Multi- Regional and Foreign Schools Participation Division? (SPD) has completed its review of the ?scal year ended December 3 2013 audited ?nancial statements Educational Services, Inc. In assessing the ?nancial strength of ITT. our ?nancial analyst reviewed the ?nancial statements using the indicators that are set forth in regulations at 34 C.F.R. Subpart L. Financial Ratios 34 C.F.R. These statements yield a composite score of 0.9 out ofa possible 3.0. A minimum score of 1.5 is necessary to meet the requirement of the ?nancial standards. Accordingly: ITT fails to meet the standards of ?nancial responsibility as described in 34 CPR. 668.172, Financial Ratios. In addition. we note that the Department has reviewed October 2014 letter requesting that the Department exclude two expense items from the income statement when calculating the composite score. The ?rst item is described as a change in accounting estimates. and the second item is described as a loss on consolidation resulting from the consolidation ol?the PEAKS Trust into ITT's ?nancial statements. After reviewing the request and the audited ?nancial statements. the Department notes that FASB Accounting Standards Codi?cation (ASC) 250 and 360, in accordance with Generally Accepted Accounting Principles (GAAP) standards, require irregular items such as a change in accounting estimates and extraordinary gains or losses items to be presented on the income statement separately, below the entries for income from continuing and discontinued operations. FederalStudent Ar.- of the P. of ITT Educational Services. Inc. Page 2 of 5 income statement presented the PEA KS Trust funds as operating expenses and therefore are not considered extraordinary or a change in accounting principles. The Department included the "Loss related to loan program guarantees? for and ?(1.oss) on consolidation of PEAKS Trust" for in the composite score total expenses. The Department notes that in our review of I'f'f's audited financial statements we have considered the items and context: and agree with the presentation the auditors used in the financial statements. In our opinion, the auditors presented the audited financial statements fairly. in all materials respects. in accordance with accounting principles generally accepted in the United States ofAmeriea. Past Performance Citation for Late Audit Submission 34 C.F.R. ITT was cited by letter from the Department dated August 19. 2014 for late submission ofits annual audited financial statements and compliance audits. As described in more detail in that letter. this constitutes a failure ofthe ?nancial responsibility standards for past performance that is in effeet for ?ve years. ITT's failure to meet the financial responsibility standards requires l'l?T to participate in the Title lV. HHA programs under the Provisional Certification Alternative (34 CPR. Under this alternative, ITT must post a Letter ofCredit (LOC) in the amount of $79,707,879 anti be provisionally certified. This amount represents 10% of the Title EV, HEA program funds received by the institution during its most recently completed fiscal year. ITT has provided LOC: CPCS-805563 for the required amounts and this LOC is scheduled to expire on November 04. 2019. Please note. the amount of the LOC may need to be adjusted annually to correspond to increases in the amount of Title IV. HEA program funds received by institutions during the most recently completed fiscal year. ITT must continue to comply with all ofthe requirements specified for the Provisional Certification Alternative in 34 CPR. 668.] 7'50). including the Zone Alternative in 34 CPR. and (3). and Requesting Funds 668.162 including the disbursement of Title IV. HEA program funds under the Cash Monitoring 1. Compliance with Zone Alternative Requirements: 1) Method of Payment HT is required to make disbursements to eligible students and parents under either the cash monitoring or reimbursement payment method as described under 34 CFR. 668.162(d) and If the institution selects the provisional certi?cation alternative. the institution will be placed on the ash Monitoring 1 payment method. ITT Educational Services, Inc. Page 3 of 5 Under the Cash Monitoring 1 payment method as stated in 668.162td), the Institution must ?rst make disbursements to eligible students and parents before it requests or receives funds [or the amount ofthose disbursements from the Department. This "Records First" requirement is fully described in the 2013-2014 Funding Authorization and Disbursement Information eAnnounccment, issued March 15, 2013. The funding request may not exceed the amount of the actual disbursements that were made to the students and parents included in the funding request. Providing the student accounts are credited before the funding requests are initiated, the Institution is permitted to draw down funds through the Department?s electronic system for grants management and payments. (35. for the amount ofdisburscments it made to eligible students and parents. The Records First requirement also means that institutions on that are participating in the Direct Loan program will have their Current Funding Level (CFL) reduced to the greater of Net Approved and Posted Disbursements or Net Draws {processed payments less all refunds, returns, offsets, and drawdown adjustments). In the event of returning to Advanced Funded status, the institution will be expected to continue processing DL awards as Records First until the next DL global funding increase is processed. Refer to the following eAnnouncement. for additional information about the Records First requirement. 2) Notification Requirements HT is required to provide information to the SPD by certi?ed mail or electronic or facsimile transmission no later than 10 days after any ofthe oversight or financial events. as described below, occur. ITT must also include with the information it submits, written notice that details the circumstances surrounding the event(s) and. ifnecessary. what steps it has taken or plans to take, to resolve the issue. 0 Any adverse action. including probation or similar action. taken against the Institution by its accrediting agency. State authorizing agencies or other Federal agency: II Any event that causes the Institution. or related entity as defined in the Statement of Financial Accounting Standards (SPAS) :37. to realize any liability that was noted a contingent liability in the Institution's or related entity's most recent audited financial statements; I Any violation by the Institution of any loan agreement: 0 Any failure of the institution to make a payment in accordance with its debt obligations that results in a creditor ?ling suit to recover funds under those obligations; It Any withdrawal of owner's equityfnet assets from the Institution by any means, including by declaring a dividend: or Any extraordinary losses as defined in accordance with Accounting Principles Board (APB) Opinion No. 30 - Any tiling ofa petition by the Institution for relief in bankruptcy court. Letter of Credit Requirements Educational Services, Inc. Page 4 ofS The letter ot?credit is necessary in the event that the Institution would close or terminate classes at other than the end of an academic period. [t assures the Secretary that funds would be available from which to make refunds. provide teach-out facilities and meet institutional obligations to the Department. ITT is required to notify the Multi-Regional and Foreign Schools Participation Division within 3 calendar days. in the event the LOC issuing institution should fail, resulting in ?nancial transactions and operations being administered by the Federal Deposit Insurance Corporation. l'f'f will also be required to submit a new replacement LOC issued by a different and non-failed U.S. bank. within 75 calendar days. contact Henry A. Johnson. Payment Analyst for the Multi-chional and Foreign Schools Participation Division at (202) 377-4589 with any questions regarding the lTT?s current D1. award authorization level or the Records First requirements. If you have any questions regarding the financial responsibility determination. or disagree with the reason or methodology used for this determination. please contact Tiffany Hill. Financial Analyst. within 30 calendar days at (202) 377-4225. Sincerely. Michael J. Frola Director. Mold-Regional and Foreign Schools Participation Division Enclosures: Sample lrrevoeablc Letter ot?Credit cc: Kevin M. Modany. CEO (kmodanvr??rittesi.com) Michael E. Diffily. President Daniel M. Fitzpatrick. Executive Vice President, F0. [dtitzpatrickt?rilittesi.com) New England Association ofSchools and Colleges CHE (Higher Education) Accrediting Council for Independent Colleges and Schools WA Student Achievement Texas Work Force Commission PA Division of Private License Schools. Bureau of Services PA Division of Program Approval Bureau ofAcademie Programs AL Commission on Higher Education Arkansas Department of Higher Education Colorado Commission on Higher Education Commission for independent Education Florida Department of Education ID State Board of Education MO Coordinating Board for Higher Education TX Higher Education Coordinating Board Maryland Higher Education Commission ITT Educational Services- Inc. Page 5 015 WV Council for Community,r and Technical College Education State Council of Higher Education for Virginia Minnesota Of?ce of Higher Education NM Higher Education Department AL Department of Postsecondary Education AZ State Board for Private Postsecondary Education NE Department of Education SC Commission on Higher Education OH Board ot? Regents CA Bureau for Private Postsecondary Education MA Department of I Iigher Education (formerly MA Board oI'Higher Edu) Michigan Department of Labor Economic Growth Louisiana State Board of Regents Iowa College Student Aid Commission NY The State Education Department, Of?ce ofI-Iigher Education NV Commission on Postsecondary Education Oregon Student Assistance Commission Of?ce of Degree Authorization KY Council on Postseeondary Education Tennessee Higher Education Commission CIA Non-Public Postsecondary Education Commission The Board of Governors ofthe niversitv WI Educational Approval Board UT System of Higher Education MS Commission on Proprietary School 84: College Registration Ohio State Board ot?Carecr Colleges and Schools Oklahoma State Regents for Higher Education Illinois State Board ot?Education KS Board of Regents NJ Commission on Higher Education Indiana Commission for Higher Education Board for Proprietary Education Dept. of Education, Division of l-Iigher Education