<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ____)
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
ITT EDUCATIONAL SERVICES, INC.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
----------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------
5) Total fee paid:
----------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
1998
NOTICE OF
ANNUAL MEETING
AND
PROXY STATEMENT
ITT EDUCATIONAL SERVICES, INC.
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
5975 CASTLE CREEK PARKWAY, N. DRIVE
P.O. BOX 50466
INDIANAPOLIS, IN 46250-0466
April 23, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders to be
held at 10:30 a.m. on Tuesday, May 12, 1998, at The Carlton, 923 16th & K
Streets, NW, Washington, D.C. 20006.
We urge you to participate in the business of the Annual Meeting by
completing and returning the enclosed proxy as promptly as possible. Your vote
is important.
The accompanying Notice of Annual Meeting and Proxy Statement provide
information about the matters to be acted upon by the shareholders. The Proxy
Statement also contains information about the role and responsibility of the
Board of Directors and the Committees of the Board and provides important
information about each nominee for election as Director.
Sincerely yours,
/s/ Rene R. Champagne
Rene R. Champagne
Chairman, President
and Chief Executive Officer
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 12, 1998
The 1998 Annual Meeting of Shareholders of ITT Educational Services, Inc.
("ESI") will be held at The Carlton, 923 16th & K Streets, NW, Washington,
D.C. 20006, on Tuesday, May 12, 1998, at 10:30 a.m., local time, for the
following purposes:
1. To elect three Directors to serve until the 2001 Annual Meeting of
Shareholders and until their successors are elected and have qualified.
2. To act upon such other matters that may properly come before the
meeting.
All shareholders of record at the close of business on March 13, 1998 will
be entitled to vote at the meeting.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THIS MEETING. WHETHER OR
NOT YOU EXPECT TO BE PRESENT, PLEASE FILL IN, DATE, SIGN AND RETURN THE
ENCLOSED PROXY FORM IN THE ACCOMPANYING ADDRESSED, POSTAGE-PREPAID ENVELOPE.
IF YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON.
By Order of the Board of Directors,
/s/ Clark D. Elwood
Clark D. Elwood
Senior Vice President, General
Counsel and Secretary
April 23, 1998
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
5975 CASTLE CREEK PARKWAY, N. DRIVE
P.O. BOX 50466
INDIANAPOLIS, IN 46250-0466
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 12, 1998
This Proxy Statement and accompanying proxy are being furnished to
shareholders on or about April 23, 1998, in connection with the solicitation
by the Board of Directors of ITT Educational Services, Inc. ("ESI") of proxies
to be voted at the 1998 Annual Meeting of Shareholders to be held at 10:30
a.m., local time, Tuesday, May 12, 1998, at The Carlton, 923 16th & K Streets,
NW, Washington, D.C. 20006, for the purposes set forth in the accompanying
Notice.
The accompanying proxy represents all of the shares of ESI common stock,
$0.01 par value per share (the "ESI Common Stock"), you are entitled to vote
at the meeting. Each of the 26,999,952 shares of ESI Common Stock outstanding
at the close of business on March 13, 1998, the record date for the meeting,
are entitled to one vote at the meeting. The presence in person or by proxy of
shareholders holding a majority of such shares will constitute a quorum for
the transaction of business at the meeting.
If the enclosed form of proxy is executed and returned, it may nevertheless
be revoked at any time insofar as it has not been exercised. The proxy may be
revoked by giving written notice of revocation to ESI, executing a
subsequently dated proxy that is delivered to ESI or attending the meeting and
voting in person. Unless revoked, a proxy will be voted at the meeting in
accordance with the instructions of the shareholder specified on the proxy,
or, if no instructions are given, for the election as Directors of the
nominees listed under the caption "Election of Directors." Election of
Directors will be determined by the vote of the holders of a plurality of the
shares voting on such election. A proxy may indicate that all or a portion of
the shares represented by such proxy are not being voted with respect to a
specific proposal. This could occur, for example, when a broker is not
permitted to vote shares held in street name on certain proposals in the
absence of instructions from the beneficial owner. Shares that are not voted
with respect to a specific proposal will be considered as not present and
entitled to vote on such proposal, even though such shares will be considered
present for purposes of determining a quorum and voting on other proposals.
Abstentions on a specific proposal will be considered as present, but not as
voting in favor of such proposal. As a result, neither broker non-votes nor
abstentions will affect the determination of whether a nominee will be
elected.
The Board of Directors knows of no matters, other than the election of three
Directors, which are to be brought before the meeting. If other matters
properly come before the meeting, however, it is the intention of the persons
named in the enclosed form of proxy to vote such proxy in accordance with
their judgment on such matters.
Present and former officers, Directors and other employees of ESI may
solicit proxies by telephone, facsimile or mail, or by meetings with
shareholders or their representatives. ESI will reimburse brokers, banks or
other custodians, nominees and fiduciaries for their charges and expenses in
forwarding proxy material to beneficial owners. All expenses of solicitation
of proxies will be borne by ESI.
ITT Corporation, a Nevada corporation ("ITT"), beneficially owns 83.3% of
the outstanding shares of ESI Common Stock. Starwood Hotels & Resorts
Worldwide, Inc., a Maryland corporation formerly known as Starwood Lodging
Corporation ("Starwood, Inc."), beneficially owns 100% of the outstanding
shares of ITT common stock. Accordingly, ITT has sufficient shares of ESI
Common Stock to elect all nominees for Director and control the outcome of any
other matters that may properly come before the meeting, and Starwood, Inc.
has sufficient control of ITT to dictate how ITT votes its shares of ESI
Common Stock.
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors of ESI currently consists of 10 Directors divided
into three classes. The first and second classes contain three Directors each
and the third class contains four Directors. The term of one class expires
each year. Generally, each Director serves until the annual meeting of
shareholders held in the year that is three years after such Director's
election and thereafter until such Director's successor is elected and has
qualified.
At the meeting, three Directors are to be elected to hold office for a
three-year term to expire at the 2001 Annual Meeting of Shareholders and until
their successors are elected and have qualified. Unless there is a contrary
indication, the persons named in the accompanying form of proxy intend to vote
such proxy for the election to the Board of Directors of Rene R. Champagne,
James D. Fowler, Jr. and Barry S. Sternlicht, the current Directors whose
terms expire this year.
Each of the nominees has consented to serve as a Director. If for any reason
a nominee should become unable or unwilling to accept nomination or election,
the persons named in the accompanying form of proxy intend to vote such proxy
for the election of such other person as the Board may recommend.
Alternatively, the Board may reduce the number of Directors to eliminate the
vacancy.
A brief summary of each Director's principal occupation, business
affiliations and other information follows. Unless otherwise indicated, the
principal occupation of each Director has been the same for the past five
years. There is no family relationship between any of the Directors or
executive officers of ESI. On February 25, 1998, ESI's Board of Directors
elected Tony Coelho, Robin Josephs, Merrick R. Kleeman and Barry S. Sternlicht
to the ESI Board upon the recommendation of Starwood, Inc. It is anticipated
that ITT and ESI will enter into a Stockholder Agreement that will cover,
among other things, the representation of ITT and its affiliates (the "ITT
Group") on ESI's Board of Directors and the nominating committee. See "Certain
Transactions--Agreements With Selling Shareholder."
NOMINEES FOR DIRECTOR
Nominees for Term Expiring at 2001 Annual Meeting.
Rene R. Champagne, age 56, has been Chairman of ESI since October 1994,
President and Chief Executive Officer of ESI since September 1985 and a
Director of ESI since October 1985.
James D. Fowler, Jr., age 53, has served as president of Fowler &
Associates, a consulting firm based in the Washington, D.C. area, since
February 1996, and as executive director and administrator of the Executive
Leadership Council and Foundation, a non-profit, non-partisan charitable and
educational organization, since October 1997. Mr. Fowler served as director of
government and community relations of ITT Corporation, formerly a Delaware
corporation and now known as ITT Industries, Inc., an Indiana corporation and
ITT's former parent corporation ("Old ITT"), from November 1993 through
January 1996. From January 1992 to November 1993, Mr. Fowler served as
executive vice president and director of product management, marketing and
administration at ITT Consumer Financial Corporation, a consumer lending
company and subsidiary of Old ITT. Mr. Fowler has been a Director of ESI since
April 1994.
Barry S. Sternlicht, age 37, has served as chairman of Starwood, Inc., a
hotel management and operating company and the parent corporation of ITT,
since 1997 and chairman and chief executive officer of Starwood Hotels &
Resorts, a Maryland real estate investment trust ("Starwood Trust") since
1995. Mr. Sternlicht has also served as the general manager of Starwood
Capital Group, L.L.C. ("Starwood Capital"), a real estate investment company,
since 1991 and president and chief executive officer of Starwood Capital L.P.,
a real estate investment company, since its formation in 1991. He is also a
director of Starwood, Inc. and U.S. Franchise Systems, Inc. and a trustee of
Starwood Trust, Equity Residential Properties Trust and Starwood Financial
Trust. Mr. Sternlicht has been a Director of ESI since February 1998.
2
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES LISTED
ABOVE.
DIRECTORS CONTINUING IN OFFICE
Term Expiring at 1999 Annual Meeting.
John E. Dean, age 47, is a founding partner of the Washington, D.C. law firm
Dean Blakey & Moskowitz, established July 1995. Prior to July 1995, Mr. Dean
was a founding partner of the Clohan & Dean law firm, the predecessor to Dean
Blakey & Moskowitz. Mr. Dean has been a Director of ESI since December 1994.
Robin Josephs, age 38, has served as an independent advisor to various real
estate entities since September 1996. Ms. Josephs served as a vice president
of Goldman Sachs & Co., an investment banking firm, from September 1986
through July 1996. She is also a director of Starwood Financial Trust. Ms.
Josephs has been a Director of ESI since February 1998.
Vin Weber, age 45, is a partner at Clark & Weinstock Inc., a Washington,
D.C. public relations firm. He is vice chairman and co-founder of Empower
America, a public interest group. Mr. Weber is also a senior fellow at the
University of Minnesota's Humphrey Institute of Public Affairs and co-director
of the Institute's Policy Forum. He is also a director of Department 56, Inc.,
Mark Centers Trust, Inc., TCF Financial Corporation and OneLink
Communications, Inc. Mr. Weber has been a Director of ESI since December 1994.
Term Expiring at 2000 Annual Meeting.
Rand V. Araskog, age 66, served as chairman and chief executive of ITT from
December 1995, and chairman of ITT Sheraton Corporation, a hotel and gaming
company, and Caesar's World, Inc., a gaming company, from December 1996, until
his retirement in February 1998. ITT Sheraton Corporation and Caesar's World,
Inc. are affiliates of ESI. Mr. Araskog served as chief executive of Old ITT
from 1979 to December 1995, chairman of Old ITT from 1980 to December 1995 and
president of Old ITT from March 1991 to December 1995. He is also a director
of The Hartford Financial Services Group, Inc., ITT Industries, Inc., Alcatel
Alsthom of France, Dow Jones & Company, Inc., Rayonier, Inc. and Shell Oil
Company. Mr. Araskog has been a Director of ESI since April 1994.
Tony Coelho, age 55, has served as a consultant to Tele-Communications,
Inc., a cable television company, since September 1997. From October 1995 to
September 1997, Mr. Coelho served as chairman and chief executive officer of
ETC w/tci, Inc., an education and training technology subsidiary of Tele-
Communications, Inc. From 1989 to June 1995, he served as a managing director
of Wertheim Schroeder & Company, an investment banking firm. From 1990 to June
1995, Mr. Coelho also served as president and chief executive officer of
Wertheim Schroeder Investment Services, an asset management company. He is
also a director of Service Corporation International, Cyberonics, Inc., ICF
Kaiser International, Inc., Autolend Group, Inc., TEI, Inc. and Kistler
Aerospace Corporation. Mr. Coelho has been a Director of ESI since February
1998.
Merrick R. Kleeman, age 34, has served as managing director of Starwood
Capital since August 1992. He is also a director of Starwood Financial Trust.
Mr. Kleeman has been a Director of ESI since February 1998.
Leslie Lenkowsky, age 51, has been professor of philanthropic studies and
public policy at Indiana University since September 1997. Dr. Lenkowsky served
as president of Hudson Institute, a public policy research institute, from
August 1990 through August 1997. He is also a director of American United Life
Pooled Equity Fund B and American United Life American Series Fund. Dr.
Lenkowsky has been a Director of ESI since December 1994.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The standing committees of the Board of Directors are the Audit and
Corporate Governance Committee, the Compensation Committee and the Nominating
Committee.
3
<PAGE>
The Audit and Corporate Governance Committee (a) supports the independence
of ESI's independent and internal auditors and the objectivity of ESI's
financial statements, (b) reviews ESI's principal policies for accounting,
internal control and financial reporting, (c) reviews the annual financial
statements of ESI, (d) assesses the independence of the independent auditors,
(e) recommends to the Board of Directors the engagement or discharge of the
independent auditors, (f) reviews with the independent auditors the plan,
scope and timing of their audit, (g) reviews the independent auditors' fees,
(h) reviews with management the independent auditors' report after completion
of the audit, (i) reviews and considers major claims and litigation as well as
legal, regulatory and related governmental policy matters affecting ESI, (j)
reviews and approves management policies and programs relating to compliance
with legal and regulatory requirements, business integrity and ethics,
conflicts of interest and environmental matters and (k) reviews and defines
ESI's social responsibilities, including issues of significance to ESI, its
shareholders, employees and customers. The Audit and Corporate Governance
Committee was created on September 26, 1997 when the Board of Directors
amended the By-Laws to combine the Audit Committee and the Legal and Public
Affairs Committee into one standing Board committee. The Audit and Corporate
Governance Committee held one meeting during 1997, the former Audit Committee
held three meetings during 1997 and the former Legal and Public Affairs
Committee held two meetings during 1997. The members of the Audit and
Corporate Governance Committee are John E. Dean, Robin Josephs, Leslie
Lenkowsky and Vin Weber.
The Compensation Committee (a) reviews and makes recommendations to the
Board of Directors with respect to the direct and indirect compensation and
employee benefits of the Chairman and other elected officers of ESI, (b)
reviews, administers and makes recommendations to the Board of Directors with
respect to any incentive plans and bonus plans that include elected officers,
(c) reviews ESI's policies relating to the compensation of senior management
and other employees, (d) reviews management's long-range planning for
executive development and succession, (e) establishes and periodically reviews
policies on perquisites and (f) performs certain other review functions
relating to management compensation and employee relations policies. The
Compensation Committee held two meetings during 1997. The members of the
Compensation Committee are John E. Dean, James D. Fowler, Jr., Merrick R.
Kleeman and Barry S. Sternlicht.
The Nominating Committee (a) makes recommendations concerning the
organization, size and composition of the Board of Directors and its standing
committees, (b) proposes nominees for election to the Board and its standing
committees and (c) considers the qualifications, compensation and retirement
of Directors. The Nominating Committee held one meeting during 1997. The
members of the Nominating Committee are Rand V. Araskog, Tony Coelho, Robin
Josephs and Vin Weber. In considering persons to nominate for election as
Directors, the Nominating Committee will entertain recommendations from
shareholders that are submitted in writing to ESI in accordance with the
procedures set forth in the By-Laws.
During 1997, there were six regular meetings and no special meetings of the
Board of Directors. Each of the Directors attended 75% or more of the
aggregate number of meetings of the Board of Directors and the standing Board
committees on which he or she served, except for Rand V. Araskog and Vin Weber
who attended 63% and 67% of such meetings, respectively.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the executive officers and Directors of ESI, and persons who own more than 10%
of ESI Common Stock, to file reports of ownership with the Securities and
Exchange Commission. Such persons also are required to furnish ESI with copies
of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, ESI believes that, during 1997, all of its
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements.
4
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Rene R. Champagne 56 Chairman, President and Chief Executive Officer
Gene A. Baugh 55 Senior Vice President and Chief Financial Officer
Clark D. Elwood 37 Senior Vice President,
General Counsel and
Secretary
Edward G. Hartigan 58 Senior Vice President
Thomas W. Lauer 51 Senior Vice President
</TABLE>
Rene R. Champagne has served as Chairman of ESI since October 1994,
President and Chief Executive Officer of ESI since September 1985 and a
Director of ESI since October 1985.
Gene A. Baugh has served as Chief Financial Officer of ESI since December
1996 and Senior Vice President of ESI since January 1993. From 1981 through
November 1996 he served as Treasurer and Controller of ESI.
Clark D. Elwood has served as Senior Vice President of ESI since December
1996, Secretary of ESI since October 1992 and General Counsel of ESI since May
1991. From January 1993 through November 1996, he served as Vice President of
ESI.
Edward G. Hartigan has served as Senior Vice President of ESI since January
1993.
Thomas W. Lauer has served as Senior Vice President of ESI since January
1993.
5
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid or accrued during each of the last three fiscal years to ESI's Chief
Executive Officer and each of ESI's four other most highly compensated
executive officers, based on salary and bonus earned during the 1997 fiscal
year (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL
COMPENSATION AWARDS PAYOUTS
----------------- ---------- ----------
SECURITIES
NAME AND PRINCIPAL UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS(1) OPTIONS(2) PAYOUTS(3) COMPENSATION(4)
- ------------------ ---- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Rene R. Champagne....... 1997 $275,000 $175,000 45,000 $ 0 $ 5,675
Chairman, President and 1996 225,000 150,000 33,750 400,000 7,875
Chief Executive Officer 1995 217,725 100,000 0 0 35,393
Thomas W. Lauer......... 1997 161,833 80,000 18,750 0 5,266
Senior Vice President 1996 148,758 82,000 11,250 140,000 4,746
1995 144,556 52,000 0 0 27,419
Gene A. Baugh........... 1997 150,877 80,000 18,750 0 5,162
Senior Vice President 1996 144,280 80,600 11,250 140,000 4,680
and Chief Financial
Officer 1995 137,793 50,000 0 0 25,342
Edward G. Hartigan...... 1997 145,418 60,000 18,750 0 5,090
Senior Vice President 1996 136,593 70,200 11,250 140,000 4,574
1995 133,770 46,500 0 0 25,024
Clark D. Elwood......... 1997 124,000 63,000 18,750 0 4,299
Senior Vice President, 1996 110,000 56,500 0 0 3,850
General Counsel and
Secretary 1995 96,486 33,000 22,500 0 16,394
</TABLE>
- --------
(1) Amounts shown represent bonus compensation accrued in the stated year and
paid in the subsequent year, except the amount shown for 1997 was accrued
in 1997 and paid in November 1997.
(2) Stock options relate solely to shares of ESI Common Stock and reflect
adjustments made to such options in connection with the April and November
1996 three-for-two stock splits. None of the Named Executive Officers have
received any SARs or restricted stock from ESI, Old ITT, ITT, Starwood,
Inc. or Starwood Trust.
(3) Amounts shown have been earned under the Old ITT Long-Term Performance
Plan.
(4) Amounts shown represent employer contributions under The ITT 401k
Retirement Savings Plan (formerly known as the "ITT Investment and Savings
Plan"), which is a defined contribution plan. Under this plan, ESI makes a
non-matching contribution equal to 1% of an employee's salary, and ESI
makes matching contributions in an amount equal to 50% of the employee's
contribution, such matching contribution not to exceed 2.5% of such
employee's salary. Prior to December 19, 1995, the matching contributions
were in the form of Old ITT common stock. From December 19, 1995 until
February 23, 1998, all matching contributions were in the form of Old ITT
common stock. From December 19, 1995 until February 23, 1998, all matching
contributions were in the form of ITT common stock. All matching
contributions after February 23, 1998 are in the form of paired shares of
Starwood, Inc. common stock and Starwood Trust
6
<PAGE>
beneficial interest (collectively, the "Paired Shares"). Prior to July
1995, ESI's 0.5% non-matching contributions were in the form of Old ITT
ESOP preferred stock. From July 1995 until December 19, 1995, the non-
matching contributions were in the form of Old ITT common stock. From
December 19, 1995 until February 23, 1998, all non-matching contributions
were in the form of ITT common stock. All non-matching contributions after
February 23, 1998 are in the form of Paired Shares. The designation of
shares to cover ESI's matching and non-matching contributions in 1995
resulted in a pro rata allocation to all plan participants in that year
which was greater than ESI's obligatory contribution. In addition, the
termination of the ESOP portion of the plan in July 1995 resulted in a
proportionate 1995 allocation to all plan participants which was
substantially greater than ESI's 0.5% non-matching contribution rate at the
time.
COMPENSATION OF DIRECTORS
No Director who is an employee of ESI, Starwood, Inc., Starwood Trust or any
of their respective affiliates is compensated for service as a member of the
Board of Directors or any committee of the Board of Directors. Compensation
for non-employee Directors consists of an annual retainer of $18,000, a $750
fee for each Board meeting attended and a $500 fee for each committee meeting
attended. Directors are reimbursed for reasonable, out-of-pocket travel
expenses incurred on behalf of ESI.
STOCK OPTIONS
1994 Stock Plan. The ITT Educational Services, Inc. 1994 Stock Option Plan
(the "1994 Stock Plan"), which became effective on December 27, 1994, provides
for awards of nonqualified stock options to key employees of ESI. An aggregate
of 405,000 shares (as adjusted for the April and November 1996 three-for-two
stock splits) of ESI Common Stock are subject to the 1994 Stock Plan (subject
to further adjustment in certain events). The 1994 Stock Plan will expire on
December 29, 2004.
The 1994 Stock Plan is administered by the Compensation Committee. Subject
to the limitations set forth in the 1994 Stock Plan, the Compensation
Committee has the authority to select the persons to whom awards will be made,
to designate the number of shares to be covered by each award, to establish
vesting schedules and, subject to certain restrictions, to specify other terms
of the awards, including the status of awards subsequent to the termination of
a participant's employment with ESI. Awards of options as to which
restrictions have not lapsed are not transferable other than by will or
pursuant to the laws of descent and distribution.
The exercise price of a stock option awarded under the 1994 Stock Plan may
not be less than 100% of the fair market value of the ESI Common Stock on the
date of grant. No option may be exercised prior to one year after the date of
the grant. Subject to the discretion of the Compensation Committee, options
granted under the 1994 Stock Plan will generally expire upon the termination
of an employee's employment other than by reason of an employee's death,
disability or retirement. Notwithstanding the foregoing, the Compensation
Committee has the authority to establish different terms and conditions
relating to the exercise of an option subsequent to the termination of a
participant's employment. The maximum term of options awarded under the 1994
Stock Plan will be ten years and two days from the date of grant. ESI Common
Stock issued upon the exercise of options under the 1994 Stock Plan may be
made available from treasury shares or authorized but unissued shares.
No individual may receive options for more than 67,500 shares of ESI Common
Stock under the 1994 Stock Plan in any given calendar year. The option price
may be paid (a) by check, (b) in ESI Common Stock, (c) through a simultaneous
sale through a broker of ESI Common Stock acquired upon the exercise of the
option or (d) by any combination of the foregoing.
During 1997, the Compensation Committee granted nonqualified stock options
under the 1994 Stock Plan to purchase an aggregate of 120,000 shares of ESI
Common Stock to the Named Executive Officers at an exercise price of $24.250
per share. A total of 26,250 nonqualified stock options were granted to other
ESI officers in 1997 under the 1994 Stock Plan at the same exercise price. No
other options were granted in 1997 under the 1994 Stock Plan.
7
<PAGE>
1997 Stock Plan. The 1997 ITT Educational Services, Inc. Incentive Stock
Plan (the "1997 Stock Plan"), which became effective on May 13, 1997, provides
for the grant of stock options that are intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). It also provides for the grant of nonqualified stock
options, SARs, performance shares and restricted stock, or any combination of
the foregoing, as the Compensation Committee may determine, as well as
substitute stock options, stock appreciation rights and restricted stock
(collectively, including incentive stock options, "Awards"). The 1997 Stock
Plan will expire on May 15, 2007.
Recipients of Awards under the 1997 Stock Plan must be, or have been at the
time of grant, key employees (including any officer or director who is also an
employee) whose responsibilities and decisions directly affect the performance
of ESI or any subsidiary or other affiliate of ESI. ESI presently has
approximately 100 employees who fall within the category of key employees and
may be considered for Awards under the 1997 Stock Plan.
The 1997 Stock Plan contains a formula for establishing an annual limit on
the number of shares which may be awarded (or with respect to which non-stock
Awards may be made) in any given calendar year (the "Annual Limit"). The
Annual Limit formula is expressed as a percentage of the total issued and
outstanding ESI Common Stock as of the year end immediately preceding the year
of the Awards (the "Plan Year"). Under the Annual Limit formula, the maximum
number of shares of ESI Common Stock for which Awards may be granted in each
Plan Year shall be 1.5% of the total of the issued and outstanding shares of
ESI Common Stock as reported in the Annual Report on Form 10-K of ESI for the
fiscal year ending immediately prior to any Plan Year. Any unused portion of
the Annual Limit for any Plan Year shall be carried forward and be made
available for Awards in succeeding Plan Years. In addition to the foregoing,
in no event shall more than 4,050,000 shares of ESI Common Stock be
cumulatively available for Awards of incentive stock options under the 1997
Stock Plan (subject to adjustments in certain events), and provided further,
that no more than 20% of the total number of shares available on a cumulative
basis shall be available for restricted stock and performance share Awards.
For any Plan Year, no individual employee may receive stock options for more
than 67,500 shares. Until such time as ITT, in a transaction or series of
transactions approved by the ITT board of directors, ceases to own at least
80.1% of the issued and outstanding ESI Common Stock, in no event shall the
number of shares of ESI Common Stock available for Awards under the 1997 Stock
Plan be equal to or greater than a number which could cause ITT to own less
than 80.1% of the issued and outstanding ESI Common Stock. Subject to the
above limitations, shares of ESI Common Stock issued under the 1997 Stock Plan
may be made available from the authorized but unissued ESI Common Stock, from
treasury stock or from shares purchased on the open market.
The Compensation Committee administers the 1997 Stock Plan, including, but
not limited to, making determinations with respect to the designation of those
employees who shall receive Awards, the number of shares to be covered by
options, SARs and restricted stock awards, the exercise price of options
(which may not be less than 100% of the fair market value of ESI Common Stock
on the date of grant), other option terms and conditions and the number of
performance shares to be granted and the applicable performance objectives.
The Compensation Committee may impose such additional terms and conditions on
an Award as it deems advisable.
Incentive stock options and related SARs under the 1997 Stock Plan must
expire within ten years after grant; nonqualified stock options and related
SARs will expire not more than ten years and two days after grant. The
aggregate fair market value (determined on the date of grant) of the shares
subject to incentive stock options that become exercisable for the first time
by an employee in any calendar year may not exceed $100,000. No SAR may be
exercised until at least six months after it is granted. The exercise price
for options and SARs must be at least equal to the fair market value of the
ESI Common Stock on the date of grant. The exercise price for options must be
paid to ESI at the time of exercise and, in the discretion of the Compensation
Committee, may be paid in the form of cash or already-owned shares of ESI
Common Stock or a combination thereof. During the lifetime of an employee, an
option may be exercised only by the individual (or his or her estate or
designated beneficiary), no later than three months after his or her
termination of employment (or for longer periods as determined by the
Compensation Committee if termination is caused by retirement, total
disability or death, but in no event later than the expiration of the original
term of the option). If an optionee voluntarily resigns or is terminated for
cause, the options and SARs are canceled immediately.
8
<PAGE>
Performance shares under the 1997 Stock Plan are contingent rights to
receive future payments based on the achievement of individual or company
performance objectives as prescribed by the Compensation Committee. The
maximum number of performance shares that may be granted to any individual
employee in any given year is 100,000. The amounts paid will be based on
actual performance over a period from two to five years, as determined by the
Compensation Committee, using one or more of the following objective criteria,
as it deems appropriate: earnings per share, return on equity, cash flow or
total shareholder return of ESI. Payments may be made in the form of shares of
ESI Common Stock, cash or a combination of ESI Common Stock and cash. The
ultimate payments are determined by the number of shares earned and the price
of ESI Common Stock at the end of the performance period. In the event an
employee terminates employment during such a performance period, the employee
will forfeit any right to payment. In the case of retirement, total
disability, death or cases of special circumstances, however, the employee
may, in the discretion of the Compensation Committee, be entitled to an Award
prorated for the portion of the performance period during which he or she was
employed by ESI.
Restricted shares of ESI Common Stock awarded under the 1997 Stock Plan will
be issued subject to a restriction period set by the Compensation Committee
during which time the shares may not be sold, transferred, assigned or
pledged. In the event an employee terminates employment during a restriction
period, all such shares still subject to restrictions will be forfeited by the
employee and reacquired by ESI. The Compensation Committee may provide for the
lapse of restrictions in installments where deemed appropriate and it may also
require the achievement of predetermined performance objectives in order for
such shares to vest. The recipient, as owner of the awarded shares, shall have
all other rights of a shareholder, including the right to vote the shares and
receive dividends and other distributions during the restriction period. The
restrictions may be waived, in the discretion of the Compensation Committee,
in the event of the awardee's retirement, total disability, death or in cases
of special circumstances.
During 1997, the Compensation Committee did not make any Awards under the
1997 Stock Plan.
OPTION GRANTS IN LAST FISCAL YEAR. The following table sets forth
information with respect to nonqualified stock options granted by ESI under
the 1994 Stock Plan to the Named Executive Officers during 1997. No stock
options were granted under the 1997 Stock Plan during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
------------------------------------------------------ -------------------
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES IN EXPIRATION
NAME GRANTED(1) FISCAL YEAR EXERCISE PRICE(2) DATE 5% 10%
- ---- ----------- ------------- ----------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rene R. Champagne....... 45,000 30.77% $24.250 2/12/07 $686,295 $1,739,160
Thomas W. Lauer......... 18,750 12.82% 24.250 2/12/07 285,956 724,650
Gene A. Baugh........... 18,750 12.82% 24.250 2/12/07 285,956 724,650
Edward G. Hartigan...... 18,750 12.82% 24.250 2/12/07 285,956 724,650
Clark D. Elwood......... 18,750 12.82% 24.250 2/12/07 285,956 724,650
</TABLE>
- --------
(1) Numbers shown represent nonqualified stock options to purchase ESI Common
Stock.
(2) Nonqualified stock options granted at 100% of the fair market value of ESI
Common Stock on the date of grant. The options granted are exercisable in
thirds on February 10 of each of the years 1998, 1999 and 2000.
9
<PAGE>
(3) The amounts shown are the result of calculations at the 5% and 10% rates
set by the Securities and Exchange Commission and, therefore, are not
intended to forecast possible future appreciation, if any, of ESI's stock
price. ESI did not use an alternative formula for a grant date valuation,
as ESI is not aware of any formula which will determine with reasonable
accuracy a present value based on future unknown or volatile factors. At
the end of the term of the options granted on February 10, 1997, the
projected price per share of ESI Common Stock would be $39.501 and $62.898
at an assumed annual appreciation rate of 5% and 10%, respectively.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES. The following table sets forth information with respect to the
exercise of options to purchase ESI Common Stock by the Named Executive
Officers during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rene R. Champagne....... 0 $ 0 78,750 67,500 $1,322,691 $233,269
Thomas W. Lauer......... 0 0 26,250 26,250 440,897 77,756
Gene A. Baugh........... 0 0 26,250 26,250 440,897 77,756
Edward G. Hartigan...... 0 0 26,250 26,250 440,897 77,756
Clark D. Elwood......... 0 0 15,000 26,250 201,353 100,676
</TABLE>
- --------
(1) The closing price for ESI Common Stock on the New York Stock Exchange on
December 31, 1997 was $22.3125. Value is calculated on the basis of the
difference between the option exercise price and $22.3125, multiplied by
the number of "In-the-Money" shares of ESI Common Stock underlying the
option.
The following table sets forth information with respect to the exercise of
options to purchase ITT common stock by the Named Executive Officers during
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS
SHARES END AT FISCAL YEAR-END
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rene R. Champagne....... 17,409 $551,545 0 0 $ 0 $ 0
Thomas W. Lauer......... 3,918 109,534 0 0 0 0
Gene A. Baugh........... 3,918 109,293 0 0 0 0
Edward G. Hartigan...... 3,918 106,599 0 0 0 0
Clark D. Elwood......... 2,611 72,344 0 0 0 0
</TABLE>
SEVERANCE PAY PLAN
None of the Named Executive Officers has an employment contract with ESI.
Rene R. Champagne is a participant in ITT's Senior Executive Severance Pay
Plan (the "Severance Plan"). Under this plan, Mr. Champagne will be entitled
to severance benefits, unless Mr. Champagne's employment is terminated by ESI:
(a) for cause; (b) on or after his normal retirement date; or (c) as a result
of (i) acceptance of
10
<PAGE>
employment, or refusal of comparable employment, with a purchaser of ESI, (ii)
voluntary resignation, (iii) voluntary retirement, (iv) failure to return from
an approved leave of absence (including a medical leave of absence), (v) death
or (vi) disability. The severance benefits include: (a) severance pay in an
amount equal to the lower of (i) 24 months' base salary, (ii) base salary for
the number of months remaining between the termination of employment and his
normal retirement date or (iii) two times his total annual compensation during
the year immediately preceding his termination; and (b) continued
participation in ESI's employee benefit plans (except for any short-term or
long-term disability plans, the business travel accident plan and any new
employee benefit plan or any improvement to any existing employee benefit plan
adopted by ESI after his termination) during the period he receives severance
pay.
The Severance Plan includes offset provisions for other compensation from
ESI and requirements on the part of executives, including Mr. Champagne, with
respect to non-competition and compliance with ITT's Code of Corporate
Conduct. While severance payments would ordinarily be made monthly over the
scheduled term of such payments, ESI has the option to make such payments in
the form of a single lump-sum payment discounted to present value.
PENSION PLAN
The Retirement Plan for Salaried Employees of ITT Corporation (the "Pension
Plan") covers substantially all eligible salaried employees of ESI, including
executive officers of ESI. The cost of the Pension Plan for ESI employees is
borne entirely by ESI. Annual amounts of normal retirement pension commencing
at age 65 based on average final compensation and benefit service, but before
Social Security reductions and subject to the offset described below, are
illustrated in the following table.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------
REMUNERATION 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000.................. $ 15,000 $ 20,000 $ 25,000 $ 28,750 $ 32,500 $ 36,250
100,000.................. 30,000 40,000 50,000 57,500 65,000 72,500
200,000.................. 60,000 80,000 100,000 115,000 130,000 145,000
300,000.................. 90,000 120,000 150,000 172,500 195,000 217,500
400,000.................. 120,000 160,000 200,000 230,000 260,000 290,000
500,000.................. 150,000 200,000 250,000 287,500 325,000 362,500
</TABLE>
The annual pension amounts to 2% of a member's average final compensation
(as defined below) for each of the first 25 years of benefit service, plus
1.5% of a member's average final compensation for each of the next 15 years of
benefit service, reduced by 1.25% of the member's primary Social Security
benefit for each year of benefit service to a maximum of 40 years; provided
that no more than 50% of the member's primary Social Security benefit is used
for such reduction. A member's average final compensation (including salary
plus approved bonus payments) is defined under the Pension Plan as the total
of (a) a member's average annual base salary for the five calendar years of
the last 120 consecutive calendar months of eligibility service affording the
highest such average, plus (b) a member's average annual compensation not
including base salary for the five calendar years of the member's last 120
consecutive calendar months of eligibility service affording the highest such
average. The amounts shown under "Salary" and "Bonus" in the Summary
Compensation Table comprise the compensation which is used for purposes of
determining "average final compensation" under the Pension Plan. The Pension
Plan also provides for undiscounted early retirement pensions for members who
retire at or after age 60 following completion of 15 years of eligibility
service. A member is vested in benefits accrued under the Pension Plan upon
completion of five years of eligibility service. Prior to December 19, 1995,
ESI participated in the Retirement Plan for Salaried Employees of Old ITT
("Old Pension Plan"). The terms of the Old Pension Plan were substantially
identical to the terms of the Pension Plan. The Old Pension Plan remained with
Old ITT following the division of Old ITT's businesses among itself and two of
its wholly owned
11
<PAGE>
subsidiaries (including ITT) and the distribution of all the outstanding
common stock of ITT and the other subsidiary to the shareholders of Old ITT,
which occurred on December 19, 1995. Old ITT is responsible for administering
the benefits under the Old Pension Plan with respect to its own employees as
well as ESI retirees. As sponsor of the Old Pension Plan, Old ITT will be
responsible for all benefits accrued thereunder. To the extent the assets in
the Old Pension Plan are insufficient to satisfy the benefit liabilities
thereunder, Old ITT will be responsible, in accordance with applicable law,
for satisfying those liabilities with its own assets. The Pension Plan
recognizes service with other companies that were part of Old ITT prior to
December 19, 1995 for eligibility, vesting and benefit accrual purposes and
further provides for an offset of any benefit payable from any retirement plan
of such companies covering the same period of service.
Federal legislation limits the amount of benefits that can be paid and
compensation that may be recognized under a tax-qualified retirement plan. ITT
has adopted a non-qualified unfunded retirement plan ("Excess Pension Plan")
for payment of those benefits at retirement that cannot be paid from the
qualified Pension Plan. The practical effect of the Excess Pension Plan is to
continue calculation of retirement benefits to all employees on a uniform
basis. Benefits for ESI employees under the Excess Pension Plan will generally
be paid directly by ESI. Any "excess" benefit accrued to any such employee
will be immediately payable in the form of a single discounted lump sum
payment upon the occurrence of a change in corporate control (as defined in
the Excess Pension Plan). The approval by ITT's shareholders on February 12,
1998 of the merger transaction between ITT and Starwood, Inc. constituted a
change in corporate control as defined in the Excess Pension Plan, which
resulted in a distribution of all of the assets of the Excess Pension Plan to
the participants.
Respective years of benefit service under the Pension Plan, through December
31, 1997, are as follows: Mr. Baugh--20.15; Mr. Champagne--12.25; Mr. Elwood--
13.57; Mr. Hartigan--10.93; and Mr. Lauer--29.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, the members of the Compensation Committee (the "Committee")
were Bette B. Anderson, Rand V. Araskog and Margita E. White. Except for Rand
V. Araskog, none of the Committee members during 1997 were involved in a
relationship requiring disclosure as an interlocking executive
officer/director or under Item 404 of Regulation S-K or as an officer or
employee of ESI. Prior to February 24, 1998, Mr. Araskog was an executive
officer of ITT, which has provided certain administrative, financial,
treasury, accounting, tax and other services to ESI and has made available
certain of its employee benefit plans to ESI's employees. ITT and ESI have
also been parties to a number of intercompany agreements covering matters such
as corporate governance, tax sharing arrangements, the use of the "ITT" name
and registration rights. See "Certain Transactions."
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report sets forth the executive compensation policies of the Committee
with respect to ESI's executive officers in general and the rationale for the
specific decisions affecting the 1997 compensation of Mr. Champagne, ESI's
Chief Executive Officer. This report also discusses the relationship between
the compensation of the Named Executive Officers and the performance of ESI.
The Committee reviewed the compensation policies adopted and followed by the
Committee with respect to all of ESI's executive officers and confirmed the
guiding principles contained therein that executive officer compensation must
be related to ESI's performance and must emphasize increasing shareholder
value. The Committee also determined that the general components of the
compensation policies pertaining to ESI executive officers (i.e., salaries,
bonuses, long-term incentives and employee benefits) are sufficiently tied to
ESI's performance.
The Committee determined that ESI's continued success is due in part to its
skilled executives. In setting and administering ESI's compensation policies
and programs, the Committee considers compensation provided to executives of
corporations similar to ESI in terms of assets, sales, revenues and earnings.
ESI's executive
12
<PAGE>
compensation programs are designed to attract, reward and retain skilled
executives and to provide incentives which vary upon the attainment of short-
term operating performance objectives and long-term performance goals. The
main objective is to provide ESI executives with incentives directly linked to
the creation of shareholder value.
THE COMMITTEE'S ROLE. The Committee is responsible for the administration of
the executive compensation program and reviews all proposed new or amended
employee benefit plans. During 1997, the Committee was composed of Bette B.
Anderson, Rand V. Araskog and Margita E. White, none of whom was eligible to
participate in any of the plans which make up ESI's executive compensation
program. As of February 23, 1998, Bette B. Anderson and Margita E. White
resigned from the Board of Directors and no longer serve on the Committee.
Rand V. Araskog is no longer a member of the Committee, but remains a Director
of ESI and participated in the deliberations concerning compensation reported
in 1997. The Committee is currently composed of four Directors, John E. Dean,
James D. Fowler, Jr., Merrick R. Kleeman and Barry S. Sternlicht, none of whom
participated in the deliberations concerning compensation reported in 1997. As
a result, this report is being published over the name of Mr. Araskog only.
The Committee may select consultants from nationally recognized independent
compensation and benefits consulting firms to provide expert advice on any
aspect of the ESI executive compensation program. The Committee may request
written reports or hold private meetings with such consultants in order to
obtain independent opinions on compensation proposals. The Committee has met,
and will continue to meet, in executive sessions which are not attended by any
ESI executives or managers. The Committee regularly reports its activities to
the Board of Directors.
PERFORMANCE EVALUATION. The Committee met in executive session in December
1997 to review the overall performance of the Chief Executive Officer,
particularly with respect to ESI's long range strategies and the achievement
of both financial and non-financial objectives. Paramount consideration was
given to the Chief Executive Officer's role in building shareholder value and
improving the return on the shareholders' investment.
THE COMPENSATION PROGRAM. The compensation program for ESI executives
presently consists of base salary, annual incentive bonus, long-term
incentives and employee benefits. It remains the intent of the Committee that
incentives based on long-term performance should be the major component in the
pay package for senior executives. Discussed below is each element of the
compensation program.
Base Salary. Salaries are set and administered to reflect the value of the
job in the marketplace and individual contribution and performance. Salaries
provide a necessary element of stability in the total pay program and, as
such, are not subject to significant variability. Salary increases are based
primarily on merit. During 1997, ESI executive salaries were evaluated in
relation to a competitive annualized merit increase guideline of 4.5% for
expected levels of individual performance. Actual increases can vary from the
guideline depending primarily on individual performance.
The Committee authorized a salary increase for Mr. Champagne effective
January 1, 1998 of $40,000, bringing his annual salary to $315,000. This merit
increase, which followed a 12-month interval since his last salary review, was
equivalent to 14.5% on an annualized basis and was based on an evaluation of
his performance during the measurement period and a comparison of the base
salaries of the chief executive officers of companies similar in size to ESI
in terms of assets, sales, revenues and earnings.
Among the other named officers, Mr. Lauer's annual salary was increased
effective May 1, 1997 to $168,200, an increase of $19,100 or 12.8% after 15
months (10.2% on an annual basis). Mr. Baugh's annual salary was increased
effective September 1, 1997 to $159,570, an increase of $13,040 or 8.9% after
15 months (7.1% on an annual basis). Mr. Hartigan's annual salary was
increased effective February 1, 1997 to $146,200, an increase of $9,380 or
6.9% after 12 months. Mr. Elwood's annual salary was increased effective
January 1, 1997 to $124,000, an increase of $14,000 or 12.7% after 12 months.
13
<PAGE>
Annual Incentive Bonus. The amounts of annual bonus awards are based on
corporate financial performance for the year compared to an annual performance
goal established at the beginning of the year. For 1997, such performance goal
was 1997 earnings before interest, taxes, depreciation and amortization
compared to 1996 earnings before interest, taxes, depreciation and
amortization. This formula generated a performance factor of 155%.
Mr. Champagne was awarded a bonus of $175,000 for 1997. This amount was
$17,200 higher than the formula-based target award.
Stock Option Awards. Stock option awards provide long-term incentives which
are directly related to the performance of ESI Common Stock. Options generally
have ten-year terms and closely align the executive's interests with those of
other shareholders.
In order to create performance incentives and promote equity ownership in
ESI by certain officers, stock options were granted on February 10, 1997 under
the 1994 Stock Plan to seven officers of ESI at an option exercise price of
$24.250 per share.
Employee Benefits. Executives also participate in ESI's broad-based employee
benefits program which includes a pension program, an investment and savings
plan, group medical and dental coverage and other benefit plans.
DISCUSSION OF THE COMMITTEE'S POLICY REGARDING QUALIFYING COMPENSATION FOR
DEDUCTIBILITY UNDER SECTION 162(M) OF THE INTERNAL REVENUE CODE. Tax
legislation known as the Omnibus Budget Reconciliation Act of 1993 ("OBRA")
created a new Code subsection 162(m), under which the allowable deduction for
compensation paid or accrued with respect to the chief executive officer and
each of the four most highly compensated executive officers of a publicly held
corporation is limited to no more than $1 million per year for taxable years
on or after January l, 1994. Certain types of compensation are exempted from
this deduction limitation, including payments subject to: (a) the attainment
of an objective performance goal or goals; (b) an outside director
requirement; and (c) a shareholder approval requirement.
It is the policy of the Committee to establish a competitive executive
compensation program and to design and administer incentive plans which relate
rewards directly to ESI's overall performance and the individual executive's
specific contribution.
In light of OBRA, it is the policy of the Committee to modify where
necessary the executive compensation plans so as to maximize the tax
deductibility of compensation paid to its executive officers, and the
Committee does not anticipate paying any compensation in 1998 that is not
fully tax deductible. Accordingly, the 1994 Stock Plan and 1997 Stock Plan
each include a fixed limit on the number of options that may be granted to any
individual in any given year. Any future gains that may be realized upon the
exercise of stock options granted under the 1994 Stock Plan or the 1997 Stock
Plan will qualify as "performance-based compensation" and will be fully
deductible by ESI.
This report is furnished by:
COMPENSATION COMMITTEE
RAND V. ARASKOG
14
<PAGE>
PERFORMANCE GRAPH
The performance graph set forth below compares the cumulative total
shareholder return on ESI Common Stock with the S&P 500 Index and an Industry
Group Index for the period from December 20, 1994 through December 31, 1997.
The industry group consists of the following companies selected on the basis
of the similar nature of their business: DeVry, Inc., Sylvan Learning Systems,
Inc. and The Tesseract Group, Inc. (formerly known as Education Alternatives,
Inc.). ESI believes that, including itself, these companies represent a
significant portion of the market value of publicly traded companies whose
primary business is education. ESI Common Stock commenced trading on the New
York Stock Exchange on December 20, 1994.
CUMULATIVE TOTAL RETURN
(BASED ON $100 INVESTED ON DECEMBER 20, 1994 AND ASSUMES
THE REINVESTMENT OF ALL DIVIDENDS)
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
12/20/94 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ESI................................ 100.00 101.25 246.25 519.79 501.53
Industry Group Index............... 100.00 103.71 140.49 225.46 303.73
S&P 500 Index...................... 100.00 100.00 137.58 169.17 225.61
</TABLE>
Notwithstanding anything to the contrary set forth in any of ESI's previous
filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that may incorporate future filings
(including this Proxy Statement, in whole or in part), the preceding
Compensation Committee Report on Executive Compensation and the stock price
Performance Graph shall not be incorporated by reference in any such filings.
15
<PAGE>
INDEPENDENT AUDITORS
In accordance with the recommendation of the Audit and Corporate Governance
Committee, the Board of Directors has reappointed Price Waterhouse LLP as
independent auditors of ESI for 1998. A representative of Price Waterhouse LLP
will attend the meeting, will have the opportunity to make a statement if he
or she desires to do so, and will be available to respond to appropriate
questions. The Board of Directors reserves the right to replace the auditors
at any time upon the recommendation of the Audit and Corporate Governance
Committee.
SECURITY OWNERSHIP
The following table sets forth, as of February 25, 1998, the number of
shares of ESI Common Stock owned by any person (including any group) known by
management to beneficially own more than 5% of ESI Common Stock. Unless
otherwise indicated in a footnote, each individual or group possesses sole
voting and investment power with respect to the shares indicated as
beneficially owned.
<TABLE>
<CAPTION>
ESI COMMON STOCK
--------------------
NUMBER OF
SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OF
OF BENEFICIAL OWNER OWNED CLASS
------------------- ------------ -------
<S> <C> <C>
Starwood Hotels & Resorts Worldwide, Inc.(1)......... 22,500,000 83.3%
2231 E. Camelback Road
Suite 400
Phoenix, AZ 85016
</TABLE>
- --------
(1) The shares are held of record by ITT, a wholly owned subsidiary of
Starwood, Inc.
The following table sets forth, as of February 25, 1998, the number of
shares of ESI Common Stock and the number of Paired Shares owned by each
Director, by each of the Named Executive Officers, and by all current
Directors and executive officers of ESI as a group. Unless otherwise indicated
in a footnote, each individual or group possesses sole voting and investment
power with respect to the shares indicated as beneficially owned.
<TABLE>
<CAPTION>
STARWOOD, INC. AND
STARWOOD TRUST
ESI COMMON STOCK PAIRED SHARES
--------------------- -----------------------
NUMBER OF NUMBER OF
SHARES PERCENT SHARES PERCENT
NAME OF BENEFICIALLY OF BENEFICIALLY OF
BENEFICIAL OWNER OWNED(1) CLASS OWNED(1) CLASS
---------------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Rene R. Champagne........... 127,500(2) * 19,721(10) *
Gene A. Baugh............... 41,875(3) * 10,671(11) *
Clark D. Elwood............. 21,850(4) * 2,602(12) *
Edward G. Hartigan.......... 37,825(5) * 1,606(13) *
Thomas W. Lauer............. 40,450(6) * 5,638(14) *
Rand V. Araskog............. 40,000(7) * 1,584,356(15) *
Tony Coelho................. 0 * 0 *
John E. Dean................ 1,875(8) * 154 *
James D. Fowler, Jr......... 3,750 * 1,891(16) *
Robin Josephs............... 0 * 1,000 *
Merrick R. Kleeman.......... 0 * 55,170(17) *
Leslie Lenkowsky............ 225 * 0 *
Barry S. Sternlicht......... 0 * 10,223,750(18) 5.2%
Vin Weber................... 2,250 * 0 *
All current Directors and
executive officers as a
group(14).................. 317,600(9) 1.2% 11,906,559(19) 6.4%
</TABLE>
- --------
*Less than 1%.
16
<PAGE>
(1) All shares of ESI Common Stock and all Paired Shares are owned directly
except as hereinafter otherwise indicated. Pursuant to regulations of the
Securities and Exchange Commission, shares (a) receivable by Directors
and executive officers upon exercise of employee stock options
exercisable within 60 days after February 25, 1998 or (b) allocated to
the accounts of certain Directors and executive officers under The ITT
401k Retirement Savings Plan at February 25, 1998 are deemed to be
beneficially owned by such Directors and executive officers.
(2) This number includes 22,500 shares owned directly and 105,000 shares
subject to presently exercisable options.
(3) This number includes 5,625 shares owned directly and 36,250 shares
subject to presently exercisable options.
(4) This number includes 600 shares owned directly and 21,250 shares subject
to presently exercisable options.
(5) This number includes 1,575 shares owned directly and 36,250 shares
subject to presently exercisable options.
(6) This number includes 4,200 shares owned directly and 36,250 shares
subject to presently exercisable options.
(7) This number includes 30,000 shares owned directly and 10,000 shares owned
by Mr. Araskog's spouse.
(8) This number includes 1,425 shares owned directly and 450 shares owned by
Mr. Dean's spouse.
(9) This number includes 235,000 shares subject to presently exercisable
options.
(10) This number includes 7,812 shares owned directly and 11,909 shares owned
under The ITT 401k Retirement Savings Plan.
(11) This number includes 273 shares owned directly and 10,398 shares owned
under The ITT 401k Retirement Savings Plan.
(12) This number includes 2,602 shares owned under The ITT 401k Retirement
Savings Plan.
(13) This number includes 1,606 shares owned under The ITT 401k Retirement
Savings Plan.
(14) This number includes 435 shares owned directly and 5,203 shares owned
under The ITT 401k Retirement Savings Plan.
(15) This number includes: 705,254 shares owned directly; 732,924 shares
subject to presently exercisable options; 31,290 shares owned under The
ITT 401k Retirement Savings Plan; and 114,888 shares owned by Mr.
Araskog's spouse.
(16) This number includes 1,891 shares owned under Old ITT's 401(k) savings
plan.
(17) This number includes partnership units in SLC Operating Limited
Partnership, a Delaware limited partnership ("SLC"), and partnership
units in SLT Realty Limited Partnership, a Delaware limited partnership
("SLT"), which are exchangeable for an aggregate of 55,170 Paired Shares.
This number does not include Paired Shares or partnership units in SLC or
SLT which are held in the portfolios of entities in which Mr. Kleeman may
be deemed to have an unallocated partnership or membership interest.
(18) This number includes: 467,069 Paired Shares that may be deemed to be
beneficially owned by Mr. Sternlicht, either directly or through entities
controlled by him; 1,763,167 Paired Shares subject to presently
exercisable options; Class A and Class B Exchangeable Preference Shares
of Starwood Trust that may be deemed to be beneficially owned by Mr.
Sternlicht, either directly or through entities controlled by him, that
are exchangeable for an aggregate of 4,014,809 Paired Shares; and
partnership units in SLC and SLT that may be deemed to be beneficially
owned by Mr. Sternlicht, either directly or through entities controlled
by him, that are exchangeable for an aggregate of 3,978,705 Paired
Shares. Mr. Sternlicht has disclaimed beneficial ownership of all such
Paired Shares except to the extent of his actual pecuniary interest
therein.
(19) This number includes 2,496,091 shares subject to presently exercisable
options; 63,008 shares owned under The ITT 401k Retirement Savings Plan;
Class A and Class B Exchangeable Preference Shares of Starwood Trust that
are exchangeable for an aggregate of 4,014,809 Paired Shares; partnership
units in SLC and SLT that are exchangeable for an aggregate of 4,033,875
Paired Shares; and 1,891 shares owned under Old ITT's 401(k) savings
plan.
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PRINCIPAL SHAREHOLDER
ITT beneficially owns 83.3% of the outstanding shares of ESI Common Stock.
Starwood, Inc. beneficially owns 100% of the outstanding shares of ITT common
stock. Consequently, ITT and Starwood, Inc. have significant influence over
the policies and affairs of ESI and are in a position to determine the outcome
of corporate actions requiring shareholder approval, including the election of
Directors, the adoption of amendments to ESI's Restated Certificate of
Incorporation and the approval of mergers and sales of ESI's assets.
CHANGE IN CONTROL
On February 23, 1998, Starwood Trust and Starwood, Inc. (collectively
"Starwood Hotels") completed the acquisition of ITT in accordance with the
Amended and Restated Agreement and Plan of Merger dated as of November 12,
1997 (the "Merger Agreement") among Starwood, Inc., Chess Acquisition Corp., a
Nevada corporation and a subsidiary of Starwood, Inc. ("Chess"), Starwood
Trust and ITT. Pursuant to the terms of the Merger Agreement, Chess was merged
with and into ITT (the "Merger") and ITT became a subsidiary of Starwood, Inc.
Under the terms of the Merger Agreement, each outstanding share of common
stock, no par value, of ITT ("ITT Common Stock"), together with the associated
right to purchase shares of Series A Participating Cumulative Preferred Stock
of ITT (the "Rights" and, together with the ITT Common Stock, "ITT Shares"),
other than those that were converted into cash pursuant to a cash election by
the holder (and other than ITT Shares owned directly or indirectly by ITT or
Starwood Hotels, which shares were cancelled), was converted into 1.543 Paired
Shares of Starwood Hotels, each Paired Share consisting of one share of common
stock, par value $.01 per share, of Starwood, Inc. and one share of beneficial
interest, par value $.01 per share, of Starwood Trust. Pursuant to cash
election procedures, 35,195,664 ITT Shares, representing approximately 30% of
the outstanding ITT Shares, were converted into $85 in cash per share. In
addition, each ITT Share was converted into additional cash consideration in
the amount of $.37493151, which amount represents the interest that would have
accrued (without compounding) on $85 at an annual rate of 7% during the period
from and including January 31, 1998 to but excluding the date of the closing
(February 23, 1998). The aggregate value of the acquisition of ITT in cash,
Paired Shares and assumed debt was approximately $14.6 billion.
Starwood Hotels borrowed the cash portion of the consideration under a $3.1
billion credit facility co-administered by Bankers Trust Company and The Chase
Manhattan Bank and co-syndicated by Lehman Commercial Paper Inc. and Bank of
Montreal and a $2.5 billion senior secured increasing rate note facility
arranged by Lehman Commercial Paper Inc., co-syndicated by BT Alex. Brown
Incorporated and Chase Securities, Inc. and for which NationsBank, N.A. serves
as documentation agent.
As a result of the Merger, Starwood, Inc. also acquired control of ESI. ITT
holds 22,500,000 shares, or 83.3%, of the outstanding ESI Common Stock, and
4,499,952 shares, or 16.7%, of the outstanding ESI Common Stock are owned by
the general public. At the time the Merger was consummated, four of the ten
members of the Board of Directors of ESI (Bette B. Anderson, Robert A. Bowman,
Richard S. Ward and Margita E. White, all of whom were directors and/or
executive officers of ITT prior to the Merger) resigned effective February 23,
1998. On February 25, 1998, the remaining members of the Board of Directors of
ESI elected four individuals recommended by Starwood, Inc. (Tony Coelho, Robin
Josephs, Merrick R. Kleeman and Barry S. Sternlicht) to fill the vacancies
caused by such resignations and to serve as Directors for terms expiring at
the 2000, 1999, 2000 and 1998 Annual Meeting of Shareholders, respectively,
and until such Director's successor is duly elected and qualified. Starwood,
Inc. has previously announced that it is exploring a range of disposition
strategies for the Company. To that end, on February 13, 1998, ESI filed with
the Securities and Exchange Commission a registration statement on Form S-3
(the "Registration Statement") for an underwritten public offering of
11,000,000 shares of ESI Common Stock held by ITT (the "Offering"). The
Registration Statement also covers an additional 1,650,000 shares of Common
Stock held by ITT to cover over-allotments, if any.
The ownership and operation of educational institutions in the United States
are subject to extensive federal and state laws and regulations. In this
regard, ESI must obtain certain approvals under the applicable laws,
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regulations and standards of the U.S. Department of Education ("DOE"), the two
accrediting commissions that accredit ESI's ITT Technical Institutes (the
"Accrediting Commissions") and the state education authorities that regulate
ESI's ITT Technical Institutes (the "SEAs"). The DOE, the Accrediting
Commissions and most of the SEAs have laws, regulations and/or standards
(collectively "Regulations") pertaining to changes in ownership and/or control
(collectively "change in control") of educational institutions, but these
Regulations do not uniformly define what constitutes a change in control. The
DOE, the Accrediting Commissions and most of the SEAs considered the Merger to
constitute a change in control of ESI and the ITT Technical Institutes under
their respective Regulations. As a result, effective upon the Merger, each ITT
Technical Institute campus group (defined as the main campus and its
additional locations or branch campuses) immediately became ineligible to
participate in all of the federal student financial aid programs under Title
IV ("Title IV Programs") of the Higher Education Act of 1965, as amended. ESI
obtained all required approvals of the Merger and, effective March 20, 1998,
the DOE reinstated each ITT Technical Institute campus group's participation
in Title IV Programs.
The Offering will constitute a change in control under the Regulations of
certain SEAs, but not under the Regulations of the DOE or of either
Accrediting Commission. Thus, certain ITT Technical Institutes will be subject
to review by their applicable SEAs to reaffirm their authorization. A
significant delay in obtaining or the failure to obtain SEA authorization of
any ITT Technical Institute could have a material adverse effect on ESI's
financial condition or results of operations. ESI does not believe it will
experience any material delay or difficulty in obtaining SEA authorization for
any affected institute. ESI will obtain all prior approvals of the Offering
from the SEAs required before the Offering occurs.
A change in control under the federal securities laws and/or under the
Regulations of the DOE, the Accrediting Commissions and most of the SEAs could
also occur as a result of certain future transactions involving the ITT
Technical Institutes, ESI or a principal shareholder, including but not
limited to ITT's disposition of a significant portion of the shares of ESI
Common Stock that it retains after the Offering, certain corporate
reorganizations and certain changes in the boards of directors of such
corporations.
Under agreements with ESI, since ESI's initial public offering in December
1994 ("Initial Public Offering"), ITT has provided certain administrative,
financial, treasury, accounting, tax and other services to ESI and has made
available certain of its employee benefit plans to ESI's employees. In
addition, ITT and ESI are also parties to a number of intercompany agreements
covering matters such as corporate governance, tax sharing arrangements, the
use of the "ITT" name and registration rights. See "Certain Transactions."
If ITT or Starwood, Inc. were to seek to reacquire the shares of ESI held by
the public, it would likely have the power to do so over the objection of
other shareholders, subject to any applicable provisions of Delaware law
requiring such a transaction to be "fair" to minority shareholders.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH PRINCIPAL SHAREHOLDER
ITT holds 83.3% of the outstanding shares of ESI Common Stock. In addition,
prior to the Merger on February 23, 1998, three directors of ESI (Rand V.
Araskog, Robert A. Bowman and Richard S. Ward) served as executive officers of
ITT and three other directors of ESI (Bette B. Anderson, Vin Weber and Margita
E. White) served on ITT's board of directors. Mr. Araskog and Mr. Bowman also
served on ITT's board of directors. Mrs. Anderson, Mr. Bowman, Mr. Ward and
Mrs. White resigned from the ESI Board of Directors, effective February 23,
1998. On February 25, 1998, the remaining members of the Board of Directors of
ESI elected four individuals recommended by Starwood, Inc. (Tony Coelho, Robin
Josephs, Merrick R. Kleeman and Barry S. Sternlicht) to fill the vacancies
caused by such resignations and to serve as Directors for terms expiring at
the 2000, 1999, 2000 and 1998 Annual Meeting of Shareholders, respectively,
and until such Director's successor is duly elected and qualified. Mr.
Sternlicht serves as chairman and a director of Starwood, Inc. and as
chairman, chief executive officer and a trustee of Starwood Trust. Mr.
Sternlicht is also the general manager of
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Starwood Capital, which, together with its affiliates and Mr. Sternlicht,
beneficially owns approximately 5.3% of the outstanding Paired Shares. Mr.
Kleeman is also a managing director of Starwood Capital. Mr. Coelho and Ms.
Josephs are not affiliated with ITT, Starwood, Inc., Starwood Trust or
Starwood Capital.
SERVICES
Set forth below are descriptions of certain services provided by ITT to ESI
prior to the Offering. As described below and in "--Agreements With Selling
Shareholder," there have been changes in such arrangements in connection with
the Merger and the Offering.
TREASURY AND FINANCING SERVICES. Until February 5, 1998, ITT provided ESI
with centralized treasury and financing services. As part of these functions,
surplus cash receipts of ESI were remitted to ITT, and ITT advanced cash, as
necessary, to ESI. For 1997, the net amount of cash transferred from ESI to
ITT, exclusive of payments for the services described below, was $24,293,000
and aggregate payments for the services described below were $20,472,000. ITT
paid interest to ESI on the average net cash balances of ESI held by ITT. The
interest rate for the 12-month period ended December 31, 1997 was 6.3%. For
1997, ESI received net interest income from ITT in the amount of $5,682,000.
Since February 5, 1998, ESI manages and invests its own cash. Depending upon
current interest rates on short-term investments, ESI may not be able to
obtain the same yields on its cash balances that were being paid by ITT.
Accordingly, interest income, net may decrease in 1998.
GENERAL AND ADMINISTRATIVE SERVICES. Under agreements in place since the
Initial Public Offering, ITT periodically provides advice and assistance to
ESI with regard to certain risk management, accounting, tax and other
management services. The fee for such services (the "contract service charge")
is 0.25% of ESI's annual revenues. For 1997, the contract service charge was
$654,000. ESI ceased utilizing substantially all of these services at the time
of the Merger.
PENSION PLAN. ESI participates in the Pension Plan, a non-contributory
defined benefit pension plan which covers substantially all employees of ESI.
ITT determines the aggregate amount of pension expense on a consolidated basis
based on actuarial calculations, and such expense is allocated to
participating units on the basis of compensation covered by the plan. Prior to
December 19, 1995, ESI participated in the Old Pension Plan, which was
substantially identical to the terms of the Pension Plan. For 1997, pension
expense as a percentage of covered compensation for employees over age 21 who
had more than one year of service was 6.84%, which resulted in charges to ESI
of $4,458,000. Federal legislation limits the amount of benefits that can be
paid and compensation that may be recognized under a tax-qualified retirement
plan. ITT has adopted a non-qualified unfunded retirement plan ("Excess
Pension Plan") for payment of those benefits at retirement that cannot be paid
from the qualified Pension Plan. The practical effect of the Excess Pension
Plan is to continue calculation of retirement benefits to all employees on a
uniform basis. Benefits for ESI's employees under the Excess Pension Plan will
generally be paid directly by ESI. Any "excess" benefit accrued to any such
employee will be immediately payable in the form of a single discounted lump
sum payment upon the occurrence of a change in corporate control (as defined
in the Excess Pension Plan). The approval by ITT's shareholders of the Merger
constituted a change in corporate control as defined in the Excess Pension
Plan, which resulted in a distribution of all of the accrued benefits under
the Excess Pension Plan to the participants. After the Offering, ESI will
implement its own pension and excess pension plans.
RETIREMENT SAVINGS PLAN. ESI participates in The ITT 401k Retirement Savings
Plan (the "Savings Plan"), a defined contribution pension plan which covers
substantially all employees of ESI. Employees can contribute (subject to
certain Internal Revenue Service limitations) amounts ranging from 2% to 16%
of base pay. ESI contributes 1% of the employee's covered pay and matches the
employee's contributions at the rate of 50% up to a maximum of 5% of covered
pay, amounting to a maximum matching contribution of 2.5% of the employee's
covered pay. ESI's non-matching and matching contributions were, prior to the
Merger, in the form of common shares of ITT and are, since the Merger, in the
form of Paired Shares. Federal legislation limits the annual contributions
which an employee may make to the Savings Plan, a tax-qualified retirement
plan. Accordingly,
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ITT adopted, and ESI participated in, prior to the Merger, an ITT Excess
Savings Plan (the "Excess Savings Plan"), a non-qualified retirement plan,
which enables employees who are precluded by these limitations from
contributing 5% of their salary to the tax-qualified plan to make up the
shortfall through salary deferrals and, thereby, receive the 1% non-matching
company contribution and the 2.5% matching company contribution otherwise
allowable under the tax-qualified plan. Salary deferrals, company
contributions and imputed earnings are entered into a book reserve account
maintained by ITT for each participant. The costs of ESI's non-matching and
matching contributions are charged by ITT to ESI. For 1997, the costs of
providing this benefit (including an allocation of the administrative costs of
the plan) were $2,104,000. ESI has adopted its own 401(k) and excess savings
plans that will become effective on the closing of the Offering.
GROUP MEDICAL AND LIFE BENEFITS. During 1997, ESI's employees were provided
certain medical benefits and life insurance through ITT. In 1998, ESI began
providing all of its own medical and life insurance benefits to its employees,
but ESI continues to utilize ITT's services in the administration of ESI's
indemnity medical plan. ESI is responsible for all claims incurred under its
indemnity plan, subject to stop loss coverage for individual medical claims
greater than $50,000, for which ESI pays an allocated share of all claims in
excess of $50,000 for all ITT subsidiaries in the United States. ESI also pays
its share of the administrative and stop loss pooling expenses incurred by ITT
with respect to these services. For 1997, payments by ESI to ITT for medical
and life insurance claims totaled $1,783,000.
WORKER'S COMPENSATION AND GENERAL LIABILITY. ESI is self-insured with
respect to worker's compensation and general liability. ESI participates in
the ITT claims program which provides stop loss protection for claims greater
than $100,000. Amounts equal to actual claims applicable to ESI under $100,000
plus an allocation of the estimated total ITT claims in excess of $100,000 are
paid to ITT. For 1997, payments by ESI for worker's compensation and general
liability claims were $1,074,000. After the Offering, ESI will service its own
claims and obtain similar stop loss protection.
FEDERAL INCOME TAXES. Prior to the Offering, ESI has been included in the
consolidated U.S. federal income tax return of ITT. Under an agreement with
ITT, income taxes are allocated among affiliates of ITT based upon the amounts
they would pay or receive if they filed a separate income tax return. For
1997, ESI's allocated federal income taxes were $10,399,000. After the
Offering, ESI will no longer be included in the consolidated return of ITT.
AGREEMENTS WITH SELLING SHAREHOLDER
Set forth below are descriptions of certain agreements currently in effect
between ESI and ITT.
REGISTRATION RIGHTS AGREEMENT. A Registration Rights Agreement (the
"Registration Rights Agreement"), among other things, provides that, upon
request of ITT, ESI will register under the Securities Act of 1933 any of the
shares of ESI Common Stock held by ITT for sale in accordance with ITT's
intended method of disposition thereof, and will take such other action
necessary to permit the sale thereof in other jurisdictions. ITT has the right
to request three such registrations. ESI will pay all registration expenses
(other than underwriting discounts and commissions and lTT's legal expenses)
in connection with such registrations. ITT also has the right, which it may
exercise at any time and from time to time in the future, to include the
shares of ESI Common Stock held by it in other registrations of common equity
securities of ESI initiated by ESI on its own behalf or on behalf of its
shareholders. ITT will pay its pro rata share of all incremental costs and
expenses in connection with each registration by ESI or its shareholders. The
rights of ITT under the Registration Rights Agreement are transferable by ITT.
The Registration Rights Agreement terminates five years after the date on
which ITT ceases to own at least 50% of the outstanding voting stock of ESI.
ESI did not incur any cost or expense under the Registration Rights Agreement
in 1997; however, ESI will be paying the costs of the Offering in 1998
pursuant to the Registration Rights Agreement.
TRADE NAME AND SERVICE MARK LICENSE AGREEMENT. Pursuant to a Trade Name and
Service Mark License Agreement (the "License Agreement"), ITT has granted to
ESI, for so long as ITT continues to beneficially
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own at least 50% of the outstanding shares of ESI Common Stock and for a
period of five years thereafter (which period may be extended for an
additional five years if requested by ESI and agreed to by ITT), a non-
exclusive non-assignable license to use the trade name "ITT" and certain
service marks specifically identified in the License Agreement. The License
Agreement further provides that all advertising, promotion and use of the ITT
trade name and service marks by ESI shall be consistent with ITT guidelines
and standards, as well as subject to ITT approval in certain circumstances. In
1997, ESI did not pay any amounts to ITT under the License Agreement. The
License Agreement, however, would require ESI to pay to ITT after the Offering
a fee equal to 0.50% of the Company's annual gross revenues.
In connection with the Offering, ESI contemplates entering into several new
agreements with ITT and/or its affiliates. These agreements are expected to
include a new registration rights agreement, trade name and service mark
license agreement, tax sharing agreement, stockholder agreement and employee
benefits agreement.
The new registration rights agreement will govern ITT's rights to require
registration of the shares of ESI Common Stock held by ITT or its transferees
after the Offering. The new trade name and service mark license agreement will
govern ESI's use of the "ITT" name after the Offering and the tax sharing
agreement will allocate tax liabilities and filing and other responsibilities
between ESI and ITT.
It is anticipated that the stockholder agreement will cover, among other
things, such matters as the size of ESI's Board of Directors, the
representation of the ITT Group on ESI's Board and the nominating committee,
limitations on ESI's ability to restrict the transferability or voting rights
of the ESI Common Stock held by the ITT Group or its transferees and certain
indemnification obligations. The employee benefits agreement is expected to
provide for the allocation and assignment of the respective rights and
obligations of ESI and ITT before and after the Offering with respect to
employee benefit and welfare plans for current and former employees of ESI.
DIRECTORS' AND OFFICERS' INSURANCE
For so long as Starwood, Inc. continues to beneficially own, whether
directly or indirectly through a subsidiary, at least 50% of the outstanding
shares of ESI Common Stock, Starwood, Inc.'s insurance policies will provide
for the indemnification of ESI Directors and officers, as well as for the
reimbursement to ESI for amounts paid by ESI above certain limits in
indemnifying its Directors and officers, with respect to covered claims that
are brought during such time. On February 21, 1998, ESI acquired its own
directors' and officers' insurance policies.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
The date by which shareholder proposals must be received by ESI for
inclusion in proxy materials relating to the 1999 Annual Meeting of
Shareholders is December 24, 1998.
In order to be considered at the 1999 Annual Meeting of Shareholders,
shareholder proposals must comply with the advance notice and eligibility
requirements contained in ESI's By-Laws. ESI's By-Laws provide that
shareholders are required to give advance notice to ESI of any nomination by a
shareholder of candidates for election as Directors and of any business to be
brought by a shareholder before a shareholders' meeting. With respect to
annual meetings, the By-Laws provide that a shareholder of record entitled to
vote at such meeting may nominate one or more persons for election as Director
or Directors or may properly bring business before such meeting only if the
shareholder gives written notice thereof to the Secretary of ESI not less than
70 days nor more than 90 days prior to the anniversary date of the immediately
preceding annual meeting. In the event the annual meeting is more than 30 days
earlier or more than 60 days later than such anniversary date, notice by the
shareholder must be delivered or received not earlier than the 90th day prior
to such annual meeting and not later than the later of the 70th day prior to
such annual meeting or the tenth day following the day on which
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public announcement of the date of such meeting is first made. The notice must
contain specified information about each nominee or the proposed business and
the shareholder making the nomination or proposal.
The advance notice provisions in ESI's By-Laws also provide that in the case
of a special meeting of shareholders called for the purpose of electing
Directors, to be timely, a shareholder's notice must be delivered or received
not earlier than the 90th day prior to such special meeting and not later than
the later of the 60th day prior to such special meeting or the tenth day
following the day on which public announcement of the date of the special
meeting is first made and of nominees to be elected at such meeting.
The specific requirements of these advance notice and eligibility provisions
are set forth in Article II, Section 8 and Article III, Section 2 of ESI's By-
Laws, a copy of which is available upon request. Such requests and any
shareholder proposals should be sent to the Secretary of ESI at 5975 Castle
Creek Parkway, North Drive, P.O. Box 50466, Indianapolis, IN 46250-0466.
23
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ITT Educational Services, Inc.
5975 Castle Creek Parkway, N. Drive
P.O. Box 50466
Indianapolis, IN 46250-0466
Dear Shareholder:
You are cordially invited to attend the 1998 Annual Meeting of Shareholders
of ITT Educational Services, Inc. ("ESI") to be held at 10:30 a.m. on Tuesday,
May 12, 1998, at The Carlton, 923 16th & K Streets, NW, Washington, D.C. 20006,
for the following purposes:
1. To consider and vote upon one proposal described in the Proxy Statement
providing for:
Proposal One: Election of three Directors to serve until the 2001 Annual
Meeting of Shareholders and until their successors are
elected and have qualified.
2. To act upon such other matters that may properly come before the meeting.
All shareholders of record at the close of business on March 13, 1998 will be
entitled to vote at the meeting.
To be sure that your vote is counted, please complete and sign the proxy/
voting instruction card below, detach it from this letter and return it in
the postage paid envelope enclosed in this package. The giving of such proxy
does not affect your right to vote in person if you attend the meeting. The
prompt return of your signed proxy will help reduce the expense of additional
proxy solicitation.
If you plan to attend the Annual Meeting in person, detach and bring this letter
to the meeting as an admission ticket.
Sincerely yours,
/s/ Rene R. Champagne
Rene R. Champagne
Chairman, President
and Chief Executive Officer
.Detach Proxy Card Here.
- --------------------------------------------------------------------------------
Directors recommend a vote FOR proposal one.
ONE: Election of Directors FOR all nominees [ ] WITHHOLD AUTHORITY to vote [ ]
listed below for all nominees listed below
*EXCEPTIONS [ ]
Director Nominees: Rene R. Champagne, James D. Fowler, Jr. and Barry S.
Sternlicht.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee, mark
the "Exceptions" box and write that nominee's name in the space provided below.)
*Exceptions_____________________________________________________________________
In their discretion, the Proxies are
authorized to vote upon such other matters as
may properly come before the meeting or any
adjournment or postponement thereof.
Change of Address and [ ]
or Comments Mark Here
Note: Please add your title if you are
signing for a corporation or other
business entity, or as attorney,
administrator, executor, guardian,
trustee or in any other representative
capacity.
Date: ___________________________, 1998
_______________________________________
Signature
Votes MUST be indicated
(x) in Black or Blue Ink. [ ]
Please mark, sign, date and return
this proxy promptly using the enclosed
envelope.
<PAGE>
.Detach Proxy Card Here.
- --------------------------------------------------------------------------------
ITT EDUCATIONAL SERVICES, INC.
5975 CASTLE CREEK PARKWAY, N. DRIVE
P.O. BOX 50466
INDIANAPOLIS, IN 46250-0466
P R O X Y
PROXY SOLICITED BY BOARD OF DIRECTORS FOR ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Clark D. Elwood or Edward G. Hartigan or Gene A.
Baugh, as proxy, each with power to appoint his or her substitute and hereby
authorizes each of them at the annual meeting of shareholders of ITT Educational
Services, Inc. ("ESI") to be held at 10:30 a.m. on May 12, 1998 at The Carlton,
923 16th & K Streets, NW, Washington, D.C. 20006, and at any adjournments
thereof to vote all shares of ESI common stock which the undersigned could vote
if personally present as designated on the reverse side of this proxy and
confers discretionary authority upon each such proxy to vote upon any other
matter properly brought before the meeting.
Please specify your choices by marking the appropriate boxes on the reverse side
of this proxy. The shares represented by this proxy will be voted as designated
by you on the reverse side, or if no designation is made will be voted for
proposal one. The proxy committee cannot vote your shares unless you sign and
return this proxy.
SEE REVERSE SIDE ITT EDUCATIONAL SERVICES, INC.
P.O. Box 11170
NEW YORK, NY 10203-0170
