<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-13144
ITT EDUCATIONAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2061311
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5975 Castle Creek Parkway N. Drive
P.O. Box 50466
Indianapolis, Indiana 46250-0466
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 594-9499
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
26,999,952
Number of shares of Common Stock, $.01 par value, outstanding at July 24, 1998
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
June 30, 1998
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
Statements of Income (unaudited) for the six months ended June 30, 1998
and 1997 and the three months ended June 30, 1998 and 1997............. 3
Balance Sheets as of June 30, 1998 and 1997 (unaudited) and December
31, 1997............................................................... 4
Statements of Cash Flows (unaudited) for the six months ended June 30,
1998 and 1997 and the three months ended June 30, 1998 and 1997........ 5
Notes to Financial Statements............................................ 6
</TABLE>
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- -----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Tuition $ 54,273 $ 48,253 $ 116,860 $ 103,999
Other educational 10,804 10,159 20,504 18,889
--------- --------- ---------- ----------
Total revenues 65,077 58,412 137,364 122,888
--------- --------- ---------- ----------
Costs and Expenses
Cost of educational services 44,970 39,807 86,408 77,791
Student services and
administrative expenses 20,341 18,456 39,777 35,992
Offering, change in control and
other one-time expenses 1,429 -- 1,872 --
--------- --------- ---------- ----------
Total costs and expenses 66,740 58,263 128,057 113,783
========= ========= ========== ==========
Operating income (loss) (1,663) 149 9,307 9,105
Interest income, net 1,191 1,193 2,435 2,573
--------- --------- ---------- ----------
Income (loss) before income taxes (472) 1,342 11,742 11,678
Income taxes 188 537 5,074 4,671
--------- --------- ---------- ----------
Net income (loss) $ (660) $ 805 $ 6,668 $ 7,007
========= ========= ========== ==========
Earnings (loss) per common
share (basic and diluted) $ (.02) $ 0.03 $ 0.25 $ 0.26
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 June 30, 1997
(unaudited) (unaudited)
------------- ----------------- -------------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 95,875 $ 29 $ 182
Restricted cash 1,059 3,860 642
Cash invested with ITT -- 94,800 93,060
Corporation
Accounts receivable, net 13,318 9,680 9,092
Deferred income tax 1,811 2,019 1,302
Prepaids and other current assets 4,011 2,570 4,529
--------- --------- ---------
Total current assets 116,074 112,958 108,807
--------- --------- ---------
Property and equipment, net 24,128 22,886 21,972
Direct marketing costs 7,480 6,882 6,377
Other assets 3,120 3,188 2,160
--------- --------- ---------
Total assets $ 150,802 $ 145,914 $ 139,316
========= ========= =========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 22,459 $ 14,974 $ 20,594
Accrued compensation and benefits 4,585 3,245 3,141
Other accrued liabilities 5,881 6,877 3,943
Deferred tuition revenue 21,203 30,850 34,311
--------- --------- ---------
Total current liabilities 54,128 55,946 61,989
Other liabilities 2,191 2,153 1,628
--------- --------- ---------
Total liabilities 56,319 58,099 63,617
--------- --------- ---------
Shareholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized, none
issued or outstanding -- -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
26,999,952 issued and outstanding 270 270 270
Capital surplus 32,513 32,513 32,513
Retained earnings 61,700 55,032 42,916
--------- --------- ---------
Total shareholders' equity 94,483 87,815 75,699
--------- --------- ---------
Total liabilities and
shareholders' equity $ 150,802 $ 145,914 $ 139,316
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (660) $ 805 $ 6,668 $ 7,007
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,347 2,096 4,561 4,054
Provision for doubtful accounts 785 404 1,459 857
Deferred taxes 39 81 271 308
Increase/decrease in operating assets
and liabilities:
Accounts receivable (1,333) 301 (5,097) (571)
Direct marketing costs (426) (408) (598) (603)
Accounts payable and accrued liabilities 4,506 3,386 7,804 5,626
Prepaids and other assets 146 (495) (1,373) (2,700)
Deferred tuition revenue (1,838) 3,511 (9,647) (9,221)
------- ------- ------- -------
Net cash provided by operating activities 3,566 9,681 4,048 4,757
------- ------- ------- -------
Cash flows used for investing activities:
Capital expenditures, net (3,538) (2,639) (5,803) (6,666)
Net decrease in cash invested with
ITT Corporation -- (7,124) 94,800 (3,252)
------- ------- ------- -------
Net cash provided by (used for)
investing activities (3,538) (9,763) 88,997 (9,918)
------- ------- ------- -------
Net increase (decrease) in cash,
cash equivalents and restricted cash 28 (82) 93,045 (5,161)
Cash, cash equivalents and restricted cash
at beginning of period 96,906 906 3,889 5,985
------- ------- ------- -------
Cash, cash equivalents and restricted cash
at end of period $96,934 $ 824 $96,934 $ 824
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(Dollar amounts in thousands, unless otherwise stated)
1. The accompanying unaudited financial statements have been prepared by ITT
Educational Services, Inc. (the "Company") without audit. In the opinion of
management, the financial statements contain all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
financial condition and results of operations of the Company. Certain
information and footnote disclosures, including significant accounting
policies, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. The
interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission for
the year ended December 31, 1997.
The results of operations for the six months ended June 30, 1998 are not
necessarily indicative of results for the entire calendar year.
2. From the Company's initial public offering in 1994 until June 9, 1998, 83.3%
of the outstanding Common Stock of the Company was owned by ITT Corporation
("ITT"). On February 23, 1998, Starwood Hotels and Resorts Worldwide, Inc.
("Starwood, Inc.") completed the acquisition (the "Merger") of ITT and ITT
became a subsidiary of Starwood, Inc. On June 9, 1998, Starwood, Inc. sold
13,050,000 shares of the Company's Common Stock held by ITT to the public
(48.3% of the outstanding shares) (the "Offering"). Starwood, Inc. presently
owns 35% of the outstanding shares of the Company's Common Stock. The
Offering did not constitute a change of control under the U.S. Department of
Education regulations.
Until February 5, 1998, the Company's cash receipts were forwarded to ITT on
a daily basis and the Company's cash disbursements were generally funded by
ITT out of the Company's cash balances invested with ITT. On February 5,
1998, ITT transferred the balance to the Company and the Company has since
been performing its own cash management function. The invested funds are
included in cash and cash equivalents at June 30, 1998.
In June 1998, the Company incurred total expenses for the Offering of $1.1
million. In addition, the Company incurred expenses of $0.3 million and $0.8
million in the three and six months ended June 30, 1998, respectively,
associated with the Company's change in control and establishment of new
employee benefit plans.
3. The Company has a number of pending legal and other claims arising out of
the normal course of business. Among the legal actions is Eldredge, et al.
v. ITT Educational Services, Inc., et al. (the "Eldredge Case"). This action
was filed on June 8, 1995 in San Diego, California by seven graduates of the
San Diego ITT Technical Institute. In October 1996, the jury in this action
rendered a verdict against the Company and awarded the plaintiffs general
damages of approximately $0.2 million and exemplary damages of $2.6 million.
The judge also awarded the plaintiffs attorney's fees and costs, in the
amount of approximately $0.9 million, and interest. The Company is seeking
to overturn the awards and has appealed the decision. Management, based on
the advice of counsel, believes it is probable that it will prevail in its
appeal, thus no provision (other than the Company's legal expenses) for
these awards has been made. If the Company's appeal of the judgment in the
Eldredge Case is unsuccessful, a charge to earnings would be taken at that
time in the amount of the awards, including the general and exemplary
damages assessed against the Company, the plaintiffs' attorney's fees and
costs and the interest assessed thereon.
In January 1997, six legal actions were filed against the Company in San
Diego, California by a total of 21 former students of the San Diego ITT
Technical Institute. The claims alleged in these legal actions are
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<PAGE>
similar to the claims alleged in the Eldredge Case, relate primarily to the
Company's marketing and recruitment practices and include misrepresentation
and violations of certain state statutes. The plaintiffs in one of the
California actions seek to have their action certified as a class action.
Recently, the court denied such plaintiffs' request. In June 1997, a legal
action was filed against the Company in Orlando, Florida by three former
students of the Maitland ITT Technical Institute. In April 1998, the legal
action in Florida was dismissed without prejudice by the plaintiffs. In
April 1998, a legal action was filed against the Company in San Diego,
California by nine former students who attended the hospitality program at
either the Maitland or San Diego ITT Technical Institute. The claims alleged
in this action are similar to the claims alleged in the Eldredge Case,
relate primarily to the Company's marketing and recruitment practices and
include fraud and violations of certain federal and state statutes. The
plaintiffs seek to have their action certified as a class action on behalf
of all persons similarly situated who attended the hospitality program at
the Indianapolis, Maitland, Portland or San Diego ITT Technical Institutes.
If a class action is certified in either California action, the number of
plaintiffs that may be awarded damages would increase significantly. In the
three months ended June 30, 1998, the Company increased its provision for
litigation costs related to certain of the aforementioned legal actions by
$1.2 million. The Company believes that it has meritorious defenses and
intends to vigorously defend itself against these claims.
In the opinion of management, the ultimate outcome of these matters will not
have a material adverse effect on the Company's financial position, results
of operations or cash flows.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the same titled section contained
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission for the year ended December 31, 1997 for discussion of cash
receipts from financial aid programs, nature of capital additions, seasonality
of revenues, components of income statement captions, interest payments on cash
invested with ITT, default rates and other matters.
The Company records its revenues as students attend class. Due to the two week
vacations in June and December, the first and third quarters include 13 weeks of
revenue and the second and fourth quarters include 11 weeks of revenue. The
Company's incurrence of costs, however, is generally not affected by the
academic schedule and such costs do not fluctuate significantly on a quarterly
basis. As a result, net income in the second and fourth quarters is
significantly less than in the first and third quarters.
Results of Operations
- ---------------------
Revenues increased $6.7 million, or 11.5%, to $65.1 million in the three months
ended June 30, 1998 from $58.4 million in the three months ended June 30, 1997.
Revenues increased $14.5 million, or 11.8%, to $137.4 million in the six months
ended June 30, 1998 from $122.9 million in the six months ended June 30, 1997.
These increases were due primarily to a 5% increase in tuition rates in
September 1997 and an 8.2% increase in the total student enrollment at January
1, 1998 compared to January 1, 1997. The number of students attending ITT
Technical Institutes at January 1, 1998 was 24,498 compared to 22,633 at January
1, 1997.
The total number of first-time and re-entering students beginning classes in
June 1998 was 6,951 compared to 6,879 for the same period in 1997. First-time
students numbered 6,075 in June 1998 compared to 6,158 in June 1997. The total
student enrollment on June 30, 1998 was 25,185, compared to 23,994 on June 30,
1997, an increase of 5.0%.
Cost of educational services increased $5.2 million, or 13.1%, to $45.0 million
in the three months ended June 30, 1998 from $39.8 million in the three months
ended June 30, 1997. Cost of educational services increased $8.6 million, or
11.1%, to $86.4 million in the six months ended June 30, 1998 from $77.8 million
in the six months ended June 30, 1997. These increases were principally a result
of costs required to service the increased enrollment, normal inflationary cost
increases for wages, rent and other costs of services, and increased costs at
new technical institutes (one opened in June 1997, two in December 1997, one in
March 1998, and one in June 1998). Cost of educational services as a percentage
of revenue increased in the three and six months ended June 30, 1998 compared to
the three and six months ended June 30, 1997 as a result of a $1.2 million
provision for legal expenses in the three months ended June 30, 1998 (compared
to a $0.5 million and $1.0 million provision for legal expenses in the three and
six months ended June 30, 1997, respectively) associated with the legal actions
involving the hospitality program. (See Note 3 of Notes to Financial
Statements.) Excluding these provisions, cost of educational services in the
three months ended June 30, 1998 would have been 67.3% of revenues, the same as
the three months ended June 30, 1997 and 62.0% of revenues for the six months
ended June 30, 1998, a 0.5% improvement from the six months ended June 30, 1997.
Student services and administrative expenses increased $1.8 million, or 9.7%, to
$20.3 million in the three months ended June 30, 1998 from $18.5 million in the
three months ended June 30, 1997. Student services and administrative expenses
increased $3.8 million, or 10.6%, to $39.8 million in the six months ended June
30, 1998 from $36.0 million in the six months ended June 30, 1997. The Company
increased its media advertising expenses in the three and six months ended June
30, 1998 by approximately 8.9% and 8.5%, respectively, over the same expenses
incurred in the three and six months ended June 30, 1997. Student services and
administrative expenses decreased to 31.3% of revenues in the three months ended
June 30, 1998 compared to 31.6% in the three months ended June 30, 1997,
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<PAGE>
primarily because the greater revenues did not cause an increase in the fixed
portion of the marketing and headquarters expenses.
The Company incurs operating losses when opening new institutes. Three new
institutes were opened in 1996, three in 1997 and two in the first six months of
1998. A new institute typically is open for approximately 24 months before it
experiences a profit. The revenues and expenses of these institutes are included
in the respective captions in the statements of income. The amount of operating
losses (pre-tax) for institutes open less than 24 months during the three and
six months ended June 30, 1998 were $1.5 million and $2.5 million, respectively,
compared to $1.0 million and $2.0 million for the three and six months ended
June 30, 1997, respectively.
In June 1998, the Company incurred total expenses for the Offering of $1.0
million after tax ($0.04 per share). In addition the Company incurred expenses
of $0.4 million ($0.01 per share) in the three months ended March 31, 1998 and
$0.3 million ($0.01 per share) in the three months ended June 30, 1998
associated with the Company's change in control and establishment of new
employee benefit plans.
Operating income (excluding the Offering, change in control and other one-time
expenses and legal provisions discussed above) increased $0.4 million to $1.0
million in the three months ended June 30, 1998 from $0.6 million in the three
months ended June 30, 1997. Operating income (excluding such one-time costs and
legal provisions) increased $2.3 million, or 22.8%, to $12.4 million in the six
months ended June 30, 1998 from $10.1 million in the six months ended June 30,
1997. The operating margin (excluding such one-time costs and legal provisions)
increased to 1.5% of revenues in the three months ended June 30, 1998, from a
1.1% operating margin in the three months ended June 30, 1997. The operating
margin (excluding such one-time costs and legal provisions) for the six months
ended June 30, 1998 was 9.0% compared to 8.2% for the six months ended June 30,
1997.
Interest income in the three months ended June 30, 1998 was equal to the
interest income for the three months ended June 30, 1997. Interest income
decreased $0.1 million in the six months ended June 30, 1998 compared to the six
months ended June 30, 1997, which was primarily due to the lower interest rate
earned on the cash invested by the Company (i.e., 5.5% in 1998 compared to 6.3%
in 1997) offset by the earnings on increased cash balances.
The Company's combined effective federal and state income tax rate was 40% in
1997. The Company's 1998 federal and state tax provision will be greater than
40%, because $0.9 million of the Offering expenses incurred in the three months
ended June 30, 1998 are not tax deductible.
The following table sets forth the net income (in thousands) for the three and
six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ (660) $805 $6,668 $7,007
Offering expense (after tax) 1,048 1,048
Change in control and other
one-time expenses (after tax) 187 453
------ ------ ------ ------
Net income before one-time expenses 575 805 8,169 7,007
Legal provision (after tax) 720 300 720 600
------ ------ ------ ------
Net income before one-time expenses
and legal provision $1,295 $1,105 $8,889 $7,607
====== ====== ====== ======
</TABLE>
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
Due to the seasonal pattern of enrollments and the receipt of tuition payments,
comparisons of financial position and
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<PAGE>
cash generated from operations should be made both to the end of the previous
year and to the corresponding period during the previous year.
Until February 5, 1998, the Company's cash receipts were forwarded to ITT on a
daily basis and the Company's cash disbursements were generally funded by ITT
out of the Company's cash balances invested with ITT. The Company's cash
invested with ITT Corporation is separately shown on the balance sheets as of
December 31, 1997 and June 30, 1997. On February 5, 1998, ITT transferred the
balance to the Company. The Company has been performing its own cash management
functions since February 5, 1998 and no longer has any cash invested with ITT.
The invested funds are included in the caption "cash and cash equivalents" in
the June 30, 1998 balance sheet.
The U.S. Department of Education ("DOE") issued new regulations in November
1996, which became effective July 1, 1997, that revised the procedures governing
how an institution participating in federal student financial aid programs under
Title IV of the Higher Education Act of 1965, as amended ("Title IV Programs")
requests, maintains, disburses and otherwise manages Title IV Program funds.
These new regulations require the Company to receive Title IV Program loan funds
in three equal quarterly disbursements rather than the two disbursements
previously permitted. The Company estimates that this change decreased deferred
tuition revenues or increased accounts receivable at June 30, 1998 by
approximately $15.0 million compared to June 30, 1997 and decreased interest
income in the three and six months ended June 30, 1998 by approximately $0.2
million and $0.4 million from interest income in the three and six months ended
June 30, 1997, respectively.
Net cash provided by operating activities was $4.0 million in the six months
ended June 30, 1998 compared to $4.8 million in the six months ended June 30,
1997. This $0.8 million decrease in cash provided by operating activities was
due primarily to the decrease in deferred tuition revenues or increase in
accounts receivable discussed above offset by an increase in the amount due ITT
under intercompany agreements that the Company entered into with ITT at the time
of the Offering. As of June 30, 1998, the Company had not paid ITT $6.8 million
for estimated federal income taxes, pension expenses and medical expenses
accrued from January 1, 1998 through the Offering date, pending the
reconciliation of all accounts between ITT and the Company pursuant to the terms
of such intercompany agreements. Management does not believe that the Company's
reconciliation of accounts with ITT will have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
An educational institution may lose its eligibility to participate in some or
all Title IV Programs if student defaults on federal student loans exceed
certain rates. An institution whose cohort default rate on loans under the
Federal Family Education Loan ("FFEL") programs and the Federal Direct Loan
("FDL") programs is 25% or greater for three consecutive federal fiscal years
loses eligibility to participate in those programs for the remainder of the
federal fiscal year in which the DOE determines that the institution has lost
its eligibility and for the two subsequent federal fiscal years.
In June 1998, the ITT Technical Institute in Garland, Texas, which accounted for
approximately 1.7% of the Company's revenues in 1997, lost its eligibility to
participate in the FFEL and FDL programs until at least October 1, 2000, because
it had FFEL/FDL cohort default rates exceeding 25% for the 1993, 1994 and 1995
federal fiscal years, the three most recent years for which the DOE has
published official FFEL/FDL cohort default rates. The Company has arranged for
an unaffiliated private funding source ("PFS") to provide loans to the students
enrolled in the Garland institute. This alternative source of student financial
aid requires the Company to guarantee repayment of the PFS loans. Based on the
Company's experience with the repayment of Title IV program loans by students
who attended the Garland institute, the Company believes that such guaranty
should not result in a material adverse effect on the Company's financial
condition, results of operations or cash flows. The Company is also considering
whether to stop enrolling new students in the Garland institute, continue
teaching the students already enrolled and close the institute once the students
already enrolled have completed their programs of study.
The ITT Technical Institute in San Antonio, Texas, which accounted for
approximately 2.4% of the Company's revenues in 1997, had FFEL/FDL cohort
default rates exceeding 25% for the 1994 and 1995 federal fiscal years, but
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<PAGE>
had an FFEL/FDL cohort default rate below 25% for the 1993 federal fiscal year
and a preliminary FFEL/FDL cohort default rate below 25% for the 1996 federal
fiscal year. If the San Antonio institute receives an official 1996 FFEL/FDL
cohort default rate equal to or greater than 25% and cannot reduce that rate to
less than 25% through an appeal to the DOE, such institute will become
ineligible to participate in the FFEL and FDL programs. Loss of eligibility to
participate in the FFEL and FDL programs by both the Garland and San Antonio,
Texas ITT Technical Institutes (but not by the Garland institute alone) could
have a material adverse effect on the Company's financial condition or results
of operations.
Other than the Garland and San Antonio, Texas ITT Technical Institutes, no ITT
Technical Institute campus group had an FFEL/FDL cohort default rate equal to or
greater than 25% for the 1995 federal fiscal year. No ITT Technical Institute
campus group had a preliminary FFEL/FDL cohort default rate equal to or greater
than 25% for the 1996 federal fiscal year, which preliminary rates were issued
by the DOE in May 1998. The official FFEL/FDL cohort default rates for the 1996
federal fiscal year are expected to be published by the DOE in the last calendar
quarter of 1998.
Any corporate reorganization of, or future disposition of the Common Stock by,
ITT could constitute a change in control of the Company and the ITT Technical
Institutes. A material adverse effect on the Company's financial condition,
results of operations and cash flows would result if a change in control of the
Company occurred and a material number of ITT Technical Institutes failed, in a
timely manner, to be reauthorized by the state education authorities,
reaccredited by their accrediting commissions or recertified by the DOE to
participate in Title IV Programs.
Capital expenditures were $5.8 million in the six months ended June 30, 1998
compared to $6.7 million in the six months ended June 30, 1997. This decrease
was due primarily to the acquisition of approximately $3.0 million of new
computers in the first quarter of 1997 (required to accommodate a software
upgrade for the Company's computer-aided drafting technology curriculum) offset
by increased capital expenditures in 1998 for new institutes and curricula
additions at existing institutes. The Company expects that the capital additions
for the full 1998 year will be approximately $10.0 million or a $1.5 million
decrease from 1997.
The capital additions for a new technical institute are approximately $0.4
million and the capital additions for each new curriculum at an existing
institute are approximately $0.3 million. The Company anticipates that its
planned capital additions can be funded through cash flows from operations.
Cash flows from operations on a long-term basis are highly dependent upon the
receipt of funds from Title IV Programs and the amount of funds spent on new
technical institutes, curricula additions at existing institutes and possible
acquisitions.
Management, based on the advice of counsel, believes that it is probable that it
will prevail in its appeal in the Eldredge Case (see Note 3 to the Financial
Statements), thus no provision for the awards in that case has been made. If the
Company's appeal of the judgment in the Eldredge Case is unsuccessful, a charge
to earnings would be taken at that time in the amount of the awards, including
the general and exemplary damages assessed against the Company, the plaintiffs'
reasonable attorney's fees and costs, and the prejudgment and post-judgment
interest assessed thereon.
The American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," in March 1998. SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use and requires costs incurred in the application
development stage (whether internal or external) to be capitalized. This SOP is
applicable to all financial statements for fiscal years beginning after December
15, 1998, and should be applied to internal-use computer software costs incurred
in those fiscal years for all projects, including those projects in progress
upon initial application of this SOP. Costs incurred prior to initial
application of this SOP, whether or not capitalized, should not be adjusted to
the amounts that would have been capitalized had this SOP been in effect when
those costs
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were incurred. The adoption of this SOP is not expected to have a material
impact on the annual operating results of the Company.
Additionally, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," in April 1998. SOP 98-5 provides guidance on the financial
reporting of start-up cost and requires the cost of start-up activities to be
expensed as incurred. This SOP is applicable to all financial statements for
fiscal years beginning after December 15, 1998. Initial application should be
reported as a cumulative effect of a change in accounting principle as described
in Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes." The
Company intends to adopt this standard in the first quarter of 1999. The
cumulative effect of the change in accounting is not expected to have a material
effect on the 1999 annual operating results of the Company.
Factors That May Affect Future Results
- --------------------------------------
This report contains certain forward looking statements that involve a number of
risks and uncertainties. Among the factors that could cause actual results to
differ materially are the following: business conditions and growth in the
postsecondary education industry and in the general economy; changes in federal
and state governmental regulations with respect to education and accreditation
standards, or the interpretation or enforcement thereof, including, but not
limited to, the level of government funding for, and the Company's eligibility
to participate in, student financial aid programs utilized by the Company's
students; the results of the Company's appeal in Eldredge, et al. v. ITT
Educational Services, Inc., et al. and the results of any related litigation;
effects of any change in ownership of the Company resulting in a change in
control of the Company, including, but not limited to, the consequences of such
changes on the accreditation and federal and state regulation of the institutes;
receptivity of students and employers to the Company's existing program
offerings and new curricula; and loss of lender access to the Company's students
for student loans.
- 12 -
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the second quarter of fiscal year 1998, the Company held its 1998 annual
meeting of shareholders on May 12, 1998 to elect directors. The Company's Board
of Directors currently consists of ten 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 Company's 1998 annual
meeting of shareholders, the shareholders elected the following persons to serve
as directors of the Company in the first class of the Company's Board of
Directors, each to hold office for the term of three years and until his
successor is elected and has qualified:
First Class - Term expiring at 2001 Annual Meeting
-----------
1. Rene R. Champagne
2. James D. Fowler, Jr.
3. Barry S. Sternlicht
The final results of the vote taken at such meeting for the director nominees
are as follows:
<TABLE>
<CAPTION>
Broker
Votes For Votes Withheld Nonvotes Abstentions
---------- -------------- -------- -----------
<S> <C> <C> <C> <C>
Rene R. Champagne 26,208,327 13,787 0 0
James D. Fowler, Jr. 26,208,077 14,037 0 0
Barry S. Sternlicht 25,205,077 17,037 0 0
</TABLE>
The directors of the Company continuing in office are as follows:
Second Class - Term expiring at 1999 Annual Meeting
------------
1. John E. Dean
2. Robin Josephs
3. Vin Weber
Third Class - Term expiring at 2000 Annual Meeting
-----------
1. Rand V. Araskog
2. Tony Coelho
3. Merrick R. Kleeman
4. Leslie Lenkowsky
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K.
On April 8, 1998, the Company filed a Current Report on Form 8-K dated March 31,
1998 to report, under Item 5 of Form 8-K, a press release issued by the Company
reporting student enrollment data for its March 1998 term.
- 13 -
<PAGE>
On April 16, 1998, the Company filed a Current Report on Form 8-K dated April
16, 1998 to report, under Item 5 of Form 8-K, a press release issued by the
Company reporting the Company's financial results for the quarter ended March
31, 1998.
On April 17, 1998, the Company filed Amendment No. 1 on Form 8-K/A to the
Company's Current Report on Form 8-K dated April 16, 1998 to correct the column
headings on the Statements of Income.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ITT Educational Services, Inc.
Date: July 27, 1998
By: /s/ Gene A. Baugh
-------------------------------------------------
Gene A. Baugh
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
S-1
<PAGE>
INDEX TO EXHIBITS
Exhibit
No. Description
- --------------------------------------------------------------------------------
10.9 Employee Benefits Agreement between the Company and ITT Corporation
10.10 Income Tax Sharing Agreement between the Company, ITT Corporation
and Starwood Hotels & Resorts Worldwide, Inc........................
10.11 Trade Name and Service Mark License Agreement between the
Company and ITT Sheraton Corporation................................
10.12 (1)Amended and Restated Registration Rights Agreement between the
Company and ITT Corporation.........................................
10.13 (2)Stockholder Agreement between the Company and ITT Corporation......
10.14 *(3)ESI 401(k) Plan...................................................
10.15 *ESI Excess Savings Plan..............................................
11 Statement re Computation of Per Share Earnings........................
27 Financial Data Schedule...............................................
- ----------------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
(1) The copy of this exhibit filed as Exhibit 99.2 to Starwood Hotels & Resorts
Worldwide, Inc.'s and ITT Corporation's Amendment No. 1 to Schedule 13D
dated June 29, 1998 is incorporated herein by reference.
(2) The copy of this exhibit filed as Exhibit 99.1 to Starwood Hotels & Resorts
Worldwide, Inc.'s and ITT Corporation's Amendment No. 1 to Schedule 13D
dated June 29, 1998 is incorporated herein by reference.
(3) The copy of this exhibit filed as Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-55903) is incorporated herein
by reference.
<PAGE>
Exhibit 10.9
EMPLOYEE BENEFITS AGREEMENT
This Employee Benefits Agreement (the "Benefits Agreement") is hereby
entered into this 3rd day of June, 1998 by and among ITT Corporation, a Nevada
corporation ("ITT"), and ITT Educational Services, Inc., a Delaware corporation
("ESI").
WHEREAS, ITT is a wholly-owned subsidiary of Starwood Hotels & Resorts
Worldwide, Inc., a Maryland corporation ("Starwood, Inc." and, together with
Starwood Hotels and Resorts, a Maryland real estate investment trust,
"Starwood");
WHEREAS, ITT is currently the owner of 22,500,000, or approximately
83%, of the issued and outstanding shares of common stock (the "Common Stock")
of ESI;
WHEREAS, ITT is offering and selling to the public by means of a
Registration Statement (File No. 333-46267) first filed with the Securities and
Exchange Commission on Form S-3 on February 13, 1998 (the "Registration
Statement") shares of the Common Stock (the "Offering");
WHEREAS, ITT (as the successor to ITT Industries, Inc., an Indiana
corporation formerly a Delaware corporation known as ITT Corporation) and ESI
are parties to an Employee Benefits and Administrative Services Agreement, dated
as of December 19, 1994 (the "Prior Benefits Agreement") under which agreement
ESI has participated in various employee benefit plans sponsored by ITT;
WHEREAS, effective as of the Offering Date, the Prior Benefits
Agreement shall be terminated and ITT and ESI recognize that it is now necessary
and desirable to allocate and assign responsibility for certain employee benefit
liabilities of the parties and to provide certain transitional support for ESI.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and other good and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Benefits
Agreement hereby agree as follows:
1. Purpose and Definitions.
1.1 Purpose. The purpose of this Benefits Agreement is to set forth
the agreement of ITT and ESI regarding the allocation and assignment of the
respective rights and obligations of ITT and ESI before and after the Offering
with respect to benefits and compensation matters pertaining to current and
former employees of ESI.
1.2 Definitions. The following terms shall have the following
meanings:
"Code" means the Internal Revenue Code of 1986, as amended.
-1-
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESI Employee" means an individual who is employed (including an
individual who is not actively employed due to an approved disability, lay-off
with right of recall or an authorized leave of absence (or who is receiving
salary continuation severance payments)) by ESI or any of ESI's subsidiaries
immediately prior to the Offering Date.
"ESI Former Employee" means a former employee of ESI whose employment
with ESI terminated prior to the Offering Date.
"ESI Individual" means each ESI Employee and ESI Former Employee.
"ITT Excess Pension Plan" means the ITT Excess Pension Plan II, IA or
IB, as applicable.
"ITT Excess Savings Plan" means the ITT Excess Savings Plan.
"ITT Retirement Plan" means the ITT Corporation Salaried Retirement
Plan.
"ITT Savings Plan" means the ITT 401(k) Retirement Savings Plan.
"Merger Date" means February 23, 1998.
"Offering Date" means the closing of the sale of shares of Common
Stock offered by ITT pursuant to the Registration Statement.
2. General Provisions. Except as otherwise specifically provided
herein, as of the Offering Date, ESI shall cease participation in all ITT
employee benefit plans and programs, the services provided to ESI under the
Prior Benefits Agreement shall cease, and ESI shall be responsible for
establishing and maintaining its own employee benefit plans and programs. As
soon as reasonably practicable after the Offering Date, ITT will provide ESI
with an accounting of the outstanding charges under the Prior Benefits Agreement
that have not been settled prior to the Offering Date and, together with ESI,
shall determine any reconciliation payment that is necessary between the
parties.
3. Provisions of Employee Benefits.
3.1 ITT Retirement Plan.
(a) Effective as of the Offering Date, ESI shall cease to be a
participating employer under the ITT Retirement Plan, and the ESI employees will
cease to accrue further benefits under the ITT Retirement Plan. The ITT
Retirement Plan shall retain all assets of the ITT Retirement Plan and all
liabilities for the benefits accrued thereunder by each ESI Individual as of the
Offering Date (the "ITT Accrued Benefit"). As of the Offering Date, ITT shall
amend the ITT Retirement Plan to recognize the service rendered by each ESI
Employee with ESI on and after the Offering Date for purposes of (i) determining
the ESI Employee's vested percentage in his or her Accrued Benefit and (ii)
determining whether the ESI Employee is eligible to receive his or her Accrued
Benefit under
-2-
<PAGE>
the pre-retirement death benefit and early retirement benefit provisions of the
ITT Retirement Plan. Notwithstanding the above, an ESI Employee's benefit
accrued under the ITT Retirement Plan shall not be based on any service rendered
with, or compensation received from, ESI after the Offering Date.
(b) Any ESI Employee who, on the Offering Date, is employed by ESI and
for whom service rendered on and after the Offering Date is recognized pursuant
to this Section 3.1 under the ITT Retirement Plan shall not, while he or she is
employed with ESI, (i) be deemed either to have terminated employment or to be
in retirement status under the ITT Retirement Plan or (ii) be eligible to
receive payment of his or her vested benefit or retirement allowance under the
ITT Retirement Plan, except to the extent required by law.
(c) The service rendered on and after the Offering Date by an ESI
Employee with ESI that will be recognized for purposes of this Section 3.1 shall
be the same years of service and portions thereof that would have been
recognized for similar purposes under the ITT Retirement Plan if ESI had
remained a participating employer in such plan. In no event shall the ITT
Retirement Plan be required to recognize service with ESI that (i) is not
recognized under any ESI defined benefit retirement plan or (ii) is rendered
during any period after the ITT Retirement Plan is terminated. Nothing herein
shall prevent ITT or Starwood, or any successor thereto, from amending or
modifying the ITT Retirement Plan in any respect that is not prohibited by law
and is not contrary to the terms of this Agreement.
(d) No asset or liability of the ITT Retirement Plan shall be
transferred from the ITT Retirement Plan to any plan maintained or sponsored by
ESI.
(e) ESI shall cooperate with ITT and shall provide to ITT the
information and data that is necessary so that ITT can properly and accurately
compute the benefit entitlement of the ESI Individuals under the ITT Retirement
Plan. ESI shall be fully responsible to provide true and accurate ESI employment
information to ITT regarding the ESI Individuals and ITT shall be able to rely
that such information is true and accurate and shall be under no obligation to
verify such information. ESI shall indemnify ITT with respect to any loss or
liability that arises on account of ESI's failure to provide true and accurate
ESI employment information regarding the ESI Individuals. ITT shall, within a
reasonable period after the Offering Date and at its expense, provide to ESI an
estimate of the benefits accrued, as of the Offering Date, under the ITT
Retirement Plan by each ESI Employee (which shall include ITT's estimate of the
benefit accrued under the ITT Industries pension plan); provided, ESI shall
cooperate, and provide ITT on a timely basis, with the ESI employment
information necessary for such purpose.
(f) The amount that ESI shall pay to ITT for ESI's participation under
the ITT Retirement Plan and which is attributable to the ESI Individuals for the
period of January 1, 1998 until the Offering Date shall equal the Service Cost
for such period as determined by the plan's actuary in the ordinary course but
without taking into account any salary increases for the ESI employees after the
Offering Date.
3.2 ITT Excess Pension Plan. Effective as of the Offering Date, ESI
shall cease participation in the ITT Excess Pension Plan and the Rabbi Trust for
ITT Corporation Excess Pension
-3-
<PAGE>
Plans and shall assume all obligations (whether funded or unfunded) accrued
prior to the Offering Date under the ITT Excess Pension Plan with respect to
each ESI Employee. In no event shall any assets be transferred to ESI by ITT or
from any funds set aside with respect to such plan. Promptly following the
Offering Date, ITT will notify ESI of the amount of all obligations accrued
prior to the Offering Date under the ITT Excess Pension Plan with respect to
each ESI Employee.
3.3 ITT Savings Plan.
(a) Effective as of May 16, 1998, ESI shall cease participation in
the ITT Savings Plan, and no new contributions shall be accepted by the ITT
Savings Plan with respect to ESI Employees. ESI shall take all necessary actions
to establish, and have in place as of May 16, 1998, a 401(k) plan that will be
qualified under Sections 401(a) and 401(k) of the Code (the "ESI Savings Plan").
The ESI Savings Plan shall (i) be tax-qualified under Sections 401(a) and 401(k)
of the Code, (ii) preserve all optional forms of benefits and other rights
within the scope of Section 411(d)(6) of the Code that are provided under the
ITT Savings Plan and (iii) contain a qualified cash or deferred arrangement
under Section 401(k) of the Code.
(b) ITT shall instruct the trustee of the ITT Savings Plan to
liquidate prior to the Offering Date each ESI Individual's account balance that
is (1) invested in the Hartford and ITT Industries stock funds and attributable
to the Company Matching or Company Retirement contributions or to the ESI
Individual's contributions; (2) invested in the Starwood Stock Fund-II and
attributable to the ESI Individual's contributions; or (3) with respect to those
ESI Individuals over age 55, invested in the Starwood Stock Fund-II and
attributable to Company Matching or Company Retirement contributions
(collectively, the "Prior Stock Funds"). Prior to the Offering Date, ITT shall
cause the trustee of the ITT Savings Plan to transfer the cash proceeds
resulting from the sale of the Prior Stock Funds to the ESI Savings Plan. ESI
shall use the cash proceeds transferred to the ESI Savings Plan pursuant to the
preceding sentence to purchase Common Stock as part of the Offering on behalf of
the participants to whom such cash proceeds relate; except for such cash
proceeds that are attributable to the ESI Individuals' contributions invested in
the Hartford and ITT Industries stock funds, which cash proceeds will be
invested in the American Century Strategic Allocation's Moderate fund on behalf
of the participants to whom such cash proceeds relate. The ESI Individuals will
be instructed that the portion of their account balance representing their
contributions that are invested in the Prior Stock Funds must be invested in
other fund options one week before the Offering Date or such contributions shall
be liquidated as part of the conversion process.
(c) Contemporaneously with the transfer of the Prior Stock Funds to
the ESI Savings Plan, ITT shall also cause the trustee of the ITT Savings Plan
to transfer the remaining portion of the ESI Individuals' account balances under
the ITT Savings Plan other than the balance invested in the Starwood Stock Funds
(other than as noted above) to be transferred to the ESI Savings Plan. Loan
balances outstanding as of the transfer date shall be transferred to the ESI
Savings Plan after the date of the transfer and no new loans will be available
under the ITT Savings Plan after May 14, 1998.
(d) Prior to the transfer of assets from the ITT Savings Plan as
described herein, ESI shall furnish to ITT the following: (i) executed copies of
the ESI Savings Plan and trust agreement, together with any amendments thereto,
(ii) a copy of the most recent determination letter
-4-
<PAGE>
issued by the IRS with respect to the qualification of the plan under Section
401(a) and 401(k) of the Code or a letter from counsel to ESI, satisfactory to
ITT, that provides that the plan and related trust satisfy the requirements of
the Code and ERISA for qualification under Sections 401(a), 401(k) and 501(a) of
the Code and that ESI will timely make any and all amendments as may be required
by the IRS to receive a favorable IRS determination letter, and (iii) evidence
satisfactory to ITT that the ESI Savings Plan has language providing for the
receipt of the transferred assets as provided herein.
(e) The portion of the account invested in the Starwood Stock Funds
(other than as specified above with respect to the Starwood Stock Fund-II) will
remain in the ITT Savings Plan until such date as ITT determines the transfer
should occur, but in no event later than December 31, 1998 (the "Starwood Stock
Fund Transfer Date"). As of the Starwood Stock Fund Transfer Date, the trustee
of the ITT Savings Plan shall cause an amount equal to the account balances
remaining under the ITT Savings Plan as of such date to be transferred to the
ESI Savings Plan in cash. Upon the completion of the transfer contemplated
herein, neither ITT nor the ITT Savings Plan shall have any liability to the ESI
Individuals for benefits under the ITT Savings Plan.
3.4 ITT Excess Savings Plan. Effective as of the Offering Date, ESI
shall cease participation in the ITT Excess Savings Plan, and ESI will assume
all obligations accrued prior to the Offering Date under the ITT Excess Savings
Plan with respect to the ESI Individuals. In no event shall any assets be
transferred to ESI by ITT or from any funds set aside with respect to such plan
unless ESI has paid ITT an amount on behalf of such plan for a period arising
after the Merger Date and prior to the Offering Date, in which event ITT shall
cause the amount it received to be returned to ESI. Promptly following the
Offering Date, ITT will notify ESI of the amount of all obligations accrued
prior to the Offering Date under the ITT Excess Savings Plan with respect to
each ESI Individual.
3.5 ITT Educational Services, Inc. Group Benefits Plan (medical and
dental). ESI Employees shall continue to be eligible to participate under the
ITT Educational Services, Inc. Group Benefits Plan (the "ESI Group Plan")
through December 31, 1998, and ITT shall continue to provide, or make available,
the services they provided immediately prior to the Offering Date with respect
to the ESI Group Plan for a reasonable period thereafter. ESI will be
responsible for all claims incurred under the ESI Group Plan plus its share of
the administrative and stop-loss pooling expense. For administrative
convenience, ITT shall pay all claims and expenses related to the ESI Group Plan
related to the period ending on December 31, 1998. For each calendar month
during 1998 after the Offering Date, ESI shall make a monthly payment to ITT
equal to $135,000 as a pre-payment of such costs. ITT and ESI shall settle all
charges under this arrangement within a reasonable period of time after the end
of the 1998 calendar year provided, however, that ITT shall not process nor pay
any claims submitted after March 31, 1999 and the settlement of all charges
shall be made no later than August 31, 1999. ITT and ESI shall also use their
best efforts to settle all claims and charges related to the 1997 year by August
31, 1998. ITT shall administer COBRA continuation coverage during 1998 with
respect to the ESI Group Plan, provided, however, that any person who has
elected COBRA continuation coverage under such plan shall be transferred to
another plan maintained by ESI or as otherwise permitted, and to the extent
required, by law as of January 1, 1999, and ITT shall have no liability or
obligation to provide COBRA continuation coverage with respect to such person
after such date.
-5-
<PAGE>
3.6 Retiree Medical. As of the Offering Date, ESI shall assume
liability for all future post-retirement medical plan obligations attributable
to Rene R. Champagne. ITT shall transfer $25,000 to ESI on or before the
Offering Date as a reimbursement of the FAS 106 inter-company charge previously
paid by ESI with respect to its participation in the ITT retiree medical plan.
3.7 Retiree Life Insurance. ITT shall retain all obligations to
provide retiree life insurance coverage to those ESI Former Employees who were
entitled to such coverage as of December 31, 1997, and ESI shall not assume any
obligation to provide such coverage with respect thereto. ESI shall not be
entitled to any of the assets held under the VEBA attributable to retiree life
insurance benefit coverage. ITT will notify all covered individuals in the event
the obligation is transferred to an insurance company.
3.8 Long-Term Disability. ITT shall retain all obligations to provide
disability payments to the ESI Individuals who were disabled as of December 31,
1997 and who are then receiving disability payments under the ITT Long-Term
Disability Plan for Salaried Employees. ESI shall not be entitled to any of the
assets held under the VEBA attributable to disability benefit coverage. ITT will
notify all covered individuals in the event the obligation is transferred to an
insurance company.
3.9 Disabled Medical and Life Insurance Coverage. ESI shall assume
all obligations to provide medical and life insurance coverage to those disabled
ESI Individuals who are entitled to receive such coverage as of the Offering
Date. ITT shall pay ESI on or before the Offering Date an amount equal to the
FAS 112 reserve recorded on the ITT financial statements that pertains to the
disability obligation assumed by ESI herein.
3.10 Severance. ESI shall be liable for any severance pay and benefits
(including salary continuation) owing, as of the Offering Date and thereafter,
to ESI Individuals.
3.11 Annual Service Recognition/Bonus Awards. ESI shall be responsible
for providing any accrued annual service recognition awards and bonus
compensation to which ESI Individuals would otherwise be entitled in respect of
the 1998 calendar year and thereafter to persons who are ESI Employees
immediately prior to the Offering Date.
4. Cooperation. ITT and ESI will cooperate in providing each other
and other necessary parties with such data as may be necessary to administer
their respective benefit plans in accordance with the terms of this Benefits
Agreement. ITT and ESI agree to cooperate in completing all necessary filings
with the Internal Revenue Service, Department of Labor and Pension Benefit
Guaranty Corporation, if any, with respect to the matters provided herein and
will apprise the other party hereto of any written or oral communication to or
from any such agency with respect thereto that may bear on such other party's
interests hereunder.
5. Amendment. This Benefits Agreement may not be amended or modified
in any respect except by a written agreement signed by all of the parties
hereto.
-6-
<PAGE>
6. Waiver. No waiver by either party hereto of any term or condition
of this Benefits Agreement, in any one or more instances, shall operate as a
waiver of such term or condition at any other time.
7. Severability. Whenever possible, each provision of this Benefits
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Benefits Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law or
rule in any jurisdiction, such invalidity, illegality or unenforceability shall
not affect the validity, legality or enforceability of any other provision of
this Benefits Agreement in such jurisdiction or affect the validity, legality or
enforceability of any provision in any other jurisdiction, but this Benefits
Agreement shall be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision had never been contained
herein.
8. Entire Agreement. Except as otherwise expressly set forth herein,
this Benefits Agreement embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understandings, agreements or representations by or among the
parties, written or oral, that may have related to the subject matter hereof in
any way.
9. Successors and Assigns; No Third-Party Beneficiaries. Except as
otherwise provided herein, this Benefits Agreement shall bind and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns. Notwithstanding anything to the contrary contained in
this Benefits Agreement, neither party shall have the right to assign, in whole
or in part, any of such party's rights, interests or liabilities under this
Benefits Agreement without the prior written consent of the other party. Except
as otherwise provided herein, nothing contained in this Benefits Agreement,
except as expressly set forth, is intended to confer upon any other person,
other than the parties hereto and their respective successors and permitted
assigns, any rights or remedies.
10. Counterparts. This Benefits Agreement may be executed in multiple
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
11. Remedies. ESI and ITT shall be entitled to enforce their rights
under this Benefits Agreement specifically, to recover damages by reason of any
breach of any provision of this Benefits Agreement and to exercise all other
rights existing in their favor. The parties hereto agree and acknowledge that
money damages would not be an adequate remedy for any breach of the provisions
of this Benefits Agreement and that ESI and ITT, in their sole discretion, may
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief (without posting a bond or other security)
in order to enforce or prevent any violation of the provisions of this Benefits
Agreement.
12. Notices. All notices, requests, demands and other communications
under this Benefits Agreement shall be in writing and shall be deemed to have
been duly given: (a) on the date of service if served personally on the party to
whom notice is to be given; (b) on the day of transmission if sent via facsimile
transmission to the facsimile number given below, and telephonic
-7-
<PAGE>
confirmation of receipt is obtained promptly after completion of transmission;
(c) on the day after delivery to Federal Express or similar overnight courier or
the Express Mail service maintained by the United States Postal Service; or (d)
on the fifth day after mailing, if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid and
properly addressed, to the party as follows:
If to ITT:
----------
ITT Corporation
777 Westchester Avenue
White Plains, New York 10604
Attn: General Counsel
Facsimile: (914) 640-8260
If to ESI:
----------
ITT Educational Services, Inc.
5975 Castle Creek Parkway N. Drive
P.O. Box 50466
Indianapolis, Indiana 46250-0466
Attn: General Counsel
Facsimile: (317) 594-4301
Any party may change its address for the purpose of this Section 12 by
giving the other party written notice of its new address in the manner set forth
above.
13. Governing Law. This Benefits Agreement shall be construed,
performed and enforced in accordance with, and governed by, the laws of the
State of New York applicable to contracts executed in and to be performed in
that state.
14. Descriptive Headings. The descriptive headings of this Benefits
Agreement are inserted for convenience only and do not constitute a part of this
Benefits Agreement.
* * * *
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Benefits
Agreement on the day and year first above written.
ITT CORPORATION
By /s/ Alan M. Schnaid
------------------------------
Alan M. Schnaid
Its Vice President
------------------------------
ITT EDUCATIONAL SERVICES, INC.
By /s/ Clark D. Elwood
------------------------------
Clark D. Elwood
Its Senior Vice President, General
------------------------------
Counsel and Secretary
-9-
<PAGE>
Exhibit 10.10
Amended and Restated Income Tax Sharing Agreement
This Amended and Restated Income Tax Sharing Agreement (this
"Agreement") is made and entered into effective as of June 3, 1998, by and among
Starwood Hotels & Resorts Worldwide, Inc. ("Starwood"), a Maryland corporation,
ITT Corporation ("ITT"), a Nevada corporation, and ITT Educational Services,
Inc. ("ESI"), a Delaware corporation. Capitalized terms not otherwise defined in
this Agreement shall have the meaning set forth for such terms on Exhibit A to
this Agreement.
RECITALS
Whereas, Starwood, ITT and others entered into the Amended and
Restated Agreement and Plan of Merger ("Merger Agreement"), dated November 12,
1997, and pursuant to the Merger Agreement, a subsidiary of Starwood merged (the
"Merger") with and into ITT, and ITT became a wholly-owned subsidiary of
Starwood;
Whereas, prior to the effective date of the Merger, ITT was the common
parent of an Affiliated Group, which elected to file Consolidated Tax Returns,
and Starwood was the common parent of another Affiliated Group, which also
elected to file Consolidated Tax Returns;
Whereas, after the effective date of the Merger, under Treas. Reg. (S)
1.1502-75(d)(3), the Affiliated Group of which Starwood was the common parent
ceases to exist and the Affiliated Group of which ITT was the common parent
remains in existence with Starwood as its new common parent (such Affiliated
Group being referred to herein as the "Starwood Affiliated Group");
Whereas, Starwood plans to have ITT sell a significant portion of the
ESI common stock it currently owns in a public offering ("ESI Public Offering");
Whereas, following the ESI Public Offering, ITT will own less than 80%
of ESI's outstanding common stock and, as a result, ESI will no longer be a
member of the Starwood Affiliated Group;
Whereas, ITT Industries, Inc., an Indiana corporation and formerly a
Delaware corporation known as ITT Corporation ("Old ITT"), and ESI entered into
the Tax Sharing Agreement ("First Tax Sharing Agreement"), dated December 27,
1994, and Old ITT assigned all of its right, title and interest in and to the
First Tax Sharing Agreement to ITT effective on or about September 29, 1995;
Whereas, the First Tax Sharing Agreement provides, among other things,
that for every taxable year or other period during which ESI is included in
ITT's Consolidated Tax Return, ESI is obligated to pay ITT an amount equal to
the tax ESI would have been required to pay had it filed a separate federal
income tax return;
<PAGE>
Whereas, ITT and ESI desire to amend and restate the First Tax Sharing
Agreement as set forth herein to reflect the fact that after the effective date
of the ESI Public Offering, ESI will no longer be a member of the Starwood
Affiliated Group;
Now Therefore, in consideration of the foregoing and the mutual
agreements contained in this Agreement, the parties agree as follows:
ARTICLE I.
ALLOCATION OF LIABILITY FOR TAXES
Section 1.01 Liability for Taxes. ESI shall be responsible for and pay
all federal income taxes related to Pre-Closing Operations and all federal
income taxes related to Post-Closing Operations ("ESI Tax Liabilities"). Except
as otherwise provided above, Starwood shall be responsible for and pay any
liability of ESI for the federal income taxes of any Person other than ESI
pursuant to Treas. Reg. (S) 1.1502-6 ("Starwood Tax Liabilities").
Section 1.02 Computations. The amount of taxable income, gain, loss and
any federal income tax thereon that is considered attributable to Pre-Closing
Operations and to Post-Closing Operations shall be determined by (a) assuming
that the ESI taxable year (including the taxable year of organizations in which
ESI owns a partnership interest or other equity interest, if any) ends as of the
close of business on the Closing Date, (b) closing on an actual basis ESI's
books as of the close of such date (or if an actual closing is not feasible, on
an equitable pro forma basis that has a comparable economic result to the result
that would have been obtained had an actual closing occurred) and (c) preparing
Tax Returns based on the income, gain, deductions and losses as so determined
under an accurate and appropriate accounting method and consistent with the
methodology and elections employed in prior years. ESI's liability for federal
income taxes related to Pre-Closing Operations shall be equal to the federal
income tax liability it would have had if it filed its own federal income tax
return for any and all such taxable years or other periods and not as a member
of the Starwood Affiliated Group, or any predecessor Affiliated Group.
Section 1.03 Estimated Taxes and Payments of Amounts Due. Starwood shall
have the right to assess ESI for estimated federal income tax payments, provided
that any such assessments are based upon the projected federal income tax
liability of ESI under Sections 1.01 and 1.02 and are otherwise consistent with
this Agreement. Thus, Starwood shall have the right to assess ESI for such
estimated federal income tax payments regardless of whether and when the
Starwood Affiliated Group files estimated federal income tax returns. Starwood
shall also have the right to assess ESI any amounts due under Sections 1.01 and
1.02 pursuant to the filing of the Starwood Affiliated Group's Consolidated Tax
Returns including Pre-Closing Operations or pursuant to assessments related to
revenue agent examinations of Pre-Closing Operations. After receiving an
assessment from Starwood, ESI shall be obligated to
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make payment to Starwood at least five Business Days before the required filing
of the Starwood Affiliated Group's quarterly estimated federal income tax
returns or Consolidated Tax Returns, or the required due date of any payment by
the Starwood Affiliated Group of any assessments related to revenue agent
examinations. ESI shall receive credit for any payments of estimated tax under
this Section 1.03 for any amounts due under Sections 1.01 and 1.02, and any
excess payments shall be promptly refunded to ESI within five Business Days
following the filing of the Starwood Affiliated Group's Consolidated Tax Return.
Section 1.04 State and Local Taxes. State and local taxes based upon
income from any state for which ESI and another Person file Tax Returns on a
consolidated, combined or unitary basis shall be treated and payments shall be
made in accordance with the principles of this Article I.
ARTICLE II.
PREPARING AND FILING TAX RETURNS AND PAYING TAXES
Section 2.01 Pre-Closing Date Returns and Taxes. Starwood shall be
responsible for preparing and filing all Pre-Closing Tax Returns (other than
stand alone state, local and other Tax returns). ESI shall be responsible for
providing Starwood with all requisite information regarding ESI for such Pre-
Closing Tax Returns in the same manner and form as ESI has previously provided
the information to ITT pursuant to the First Tax Sharing Agreement in periods
prior to the effective date of this Agreement. Subject to ESI Tax Liabilities
and ESI's obligations to make payments to Starwood pursuant to Article I,
Starwood shall be responsible for the payment of all Taxes due with respect to
such Pre-Closing Tax Returns, including any adjustments with respect to revenue
agent examinations. Except as previously consented to in writing by ESI (which
consent shall not be unreasonably withheld or delayed), every material position
concerning ESI taken on a Pre-Closing Tax Return shall be consistent with the
methodology and elections employed in prior years. Starwood shall deliver to ESI
a copy of all Pre-Closing Tax Returns filed after the Closing Date promptly
after filing.
Section 2.02 Other Returns and Taxes. Except as otherwise provided in
Section 2.01, ESI shall be responsible for preparing and filing all Tax Returns
pertaining to ESI Tax Liabilities, including Pre-Closing Operations and Post-
Closing Operations, and for paying all ESI Tax Liabilities with respect to such
returns. Except as previously consented to in writing by Starwood (which consent
shall not be unreasonably withheld or delayed), every material position taken by
ESI on a Tax Return filed after the Closing Date (other than a Pre-Closing Tax
Return) that may affect Starwood Tax Liabilities shall, for a period of three
years following the Closing Date, be consistent with the methodology and
elections employed in prior years.
Section 2.03 Cooperation. ESI, ITT and Starwood shall cooperate fully
with each
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other in connection with the preparation and filing of all Tax Returns or any
audit examinations for any period, including, but not limited to, the timely
furnishing or making available of records, books of account and any other
information necessary for the preparation of the Tax Returns, as well as making
employees available on a mutually convenient basis to provide additional
information and explanation. If Starwood is required to file a Pre-Closing Tax
Return after the Closing Date, ESI shall permit Starwood to sign such Pre-
Closing Tax Return on behalf of ESI under a limited power of attorney.
Starwood, ITT and ESI shall use their best efforts to obtain any certificates or
other documents from any governmental authority or any other persons as may be
necessary or helpful to mitigate, reduce or eliminate any Taxes that would
otherwise be imposed with respect to the transactions contemplated by the Merger
Agreement or this Agreement and which do not adversely affect any party to this
Agreement.
Section 2.04 Amended Return. ESI may, with the prior written consent of
Starwood (which consent may be withheld or delayed in Starwood's sole and
absolute discretion), request that Starwood (i) amend any Pre-Closing Tax
Returns to reflect the carryback of ESI net operating losses or other Tax
benefits from later years to earlier years or (ii) file a claim for refund of
Taxes paid with respect to Pre-Closing Operations due to the carryback of ESI
net operating losses or other Tax benefits from later years to earlier years.
Starwood shall cooperate with ESI in obtaining any related refund of Taxes, and
upon receiving any such refund shall promptly turn over such refund to ESI.
Copies of any such amended Tax Returns or refund claims shall be provided to
Starwood or ESI, as the case may be, within five days of filing.
Section 2.05 Record Retention. ESI shall retain all books, records,
returns, schedules, documents and other papers relating to its Taxes, for any
taxable year or portion thereof ending on or before the Closing Date, for the
full period of the applicable statutes of limitations, including extensions, for
the period to which such Taxes relate. Thereafter, ESI shall have the right to
dispose of or destroy any of such items, provided that Starwood shall have the
right, at its sole cost and expense, promptly to make copies of such items if it
notifies ESI of its intention to do so. Starwood shall notify ESI whenever the
applicable statute of limitations, including extensions, for any such taxable
year or portion thereof expires.
Section 2.06 Contests.
(i) With respect to any federal or state combined, unitary or
consolidated Pre-Closing Tax Return, Starwood and its duly appointed
representatives shall have the sole right, at its expense, to supervise or
otherwise coordinate any examination process and to negotiate, resolve, settle
or contest any asserted Tax deficiencies or assert and prosecute any claims for
refund. The foregoing notwithstanding, without the express written consent of
ESI, which consent shall not be unreasonably withheld or delayed, Starwood shall
not file any amended Tax Return, settle any Tax claim or assessment, or
surrender any right to claim a refund of Tax, if such action could have the
effect of increasing ESI Tax Liabilities.
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(ii) With respect to any other Tax Return of ESI, ESI and its duly
appointed representative shall have the sole right, at its expense, to supervise
or otherwise coordinate any examination process and to negotiate, resolve,
settle or contest any asserted Tax deficiencies or assert and prosecute any
claims for refund. The foregoing notwithstanding, without the express written
consent of Starwood, which consent shall not be unreasonably withheld or
delayed, ESI shall not file any amended Tax Return, settle any Tax claim or
assessment, or surrender any right to claim a refund of Tax, if such action
could have the effect of increasing Starwood Tax Liabilities.
(iii) Each party hereto shall, within 30 days (unless action is
required sooner, then as soon as practicable), notify the other of the assertion
of any claim or the commencement of any suit, action, proceeding, investigation
or audit with respect to any Tax Return that may affect ESI Tax Liabilities or
Starwood Tax Liabilities, and shall provide the other party with copies (subject
to deletion of nonrelevant information) of all correspondence relating to such
contest.
Section 2.07 Allocation of Refunds. Except as otherwise agreed upon in
writing, in the event an audit, amended Tax Return or other action results in a
refund of Taxes, such refund (including any interest paid thereon) shall be
paid: (i) to ESI if the deduction, loss, or other item that gives rise to the
refund is attributable to Pre-Closing Operations or Post-Closing Operations and
the refunded Tax was actually paid by ESI; and (ii) to Starwood in all other
circumstances. The parties shall lend mutual assistance to each other in taking
such action as may be necessary to procure a refund, including the preparation,
filing and processing of any requisite amended return or other documents.
ARTICLE III.
MISCELLANEOUS
Section 3.01 Certain Tax Elections.
(i) Except as required by the Code or the regulations promulgated
thereunder, without the prior written consent of ESI (not to be unreasonably
withheld or delayed), Starwood shall not make any new election or change any
existing election, change an annual accounting period or adopt or change any
accounting method if any such election, adoption or change would have the effect
of increasing ESI Tax Liabilities, provided, that ESI will waive such objection
on payment by Starwood to ESI of an amount equal to the increase in ESI Tax
Liabilities (including any penalties, interest and costs incurred by ESI with
respect thereto).
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(ii) Except as required by the Code or the regulations promulgated
thereunder, without the prior written consent of Starwood (not to be
unreasonably withheld or delayed), ESI shall not make any election, change an
annual accounting period or adopt or change any accounting method if any such
election, adoption or change would have the effect of increasing Starwood Tax
Liabilities, provided, that Starwood will waive such objection on payment by ESI
to Starwood of an amount equal to the increase in Starwood Tax Liabilities
(including any penalties, interest and costs incurred by Starwood with respect
thereto).
Section 3.02 Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed to
have been duly given: (a) on the day of service if served personally on the
party to whom notice is to be given; (b) on the day of transmission if sent via
facsimile transmission to the facsimile number given below, and telephonic
confirmation of receipt is obtained promptly after completion of transmission;
(c) on the day after delivery to Federal Express or similar overnight courier or
the Express Mail service maintained by the United States Postal Service; or (d)
on the fifth day after mailing, if mailed to the party to whom notice is to be
given, by first class mail, registered or certified, postage prepaid and
properly addressed, to the party as follows:
If to Starwood or ITT: ITT Corporation
777 Westchester Avenue
White Plains, New York 10604
Attention: General Counsel
Facsimile: (914) 640-8260
If to ESI: ITT Educational Services, Inc.
5975 Castle Creek Parkway N. Drive
P.O. Box 50466
Indianapolis, Indiana 46250-0466
Attention: General Counsel
Facsimile: (317) 594-4384
Any party may change its address for the purpose of this Section 3.02 by giving
the other party written notice of its new address in the manner set forth above.
Section 3.03 Other Agreements. This Agreement entirely supersedes and
replaces the First Tax Sharing Agreement, and the First Tax Sharing Agreement,
after the effective date of this Agreement, shall be null and void and of no
force and effect.
Section 3.04 Successors. This Agreement shall inure to the benefit of and
be binding upon the parties and their respective successors and assigns.
Section 3.05 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of New York without regard to its laws or
regulations relating to conflicts of laws.
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Section 3.06 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
In Witness Whereof, the parties by their duly authorized officers have
caused this Agreement to be executed as of the date above first written.
STARWOOD HOTELS & RESORTS
WORLDWIDE, INC., a Maryland corporation
By: /s/ Alan M. Schnaid
-------------------------------------
Name: Alan M. Schnaid
Title: Vice President
ITT CORPORATION, a Nevada corporation
By: /s/ Alan M. Schnaid
-------------------------------------
Name: Alan M. Schnaid
Title: Vice President
ITT EDUCATIONAL SERVICES, INC., a
Delaware corporation
By: /s/ Clark D. Elwood
-------------------------------------
Name: Clark D. Elwood
Title: Senior Vice President,
General Counsel and
Secretary
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Exhibit A
Certain Definitions
"Affiliated Group" means any affiliated group within the meaning of Code
Section 1504 (or any similar group defined under a similar provision of state or
local law).
"Business Day" means any weekday on which commercial banks in New York City
are open.
"Closing Date" means the effective date of the ESI Public Offering.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Tax Returns" means consolidated federal income tax returns
filed in accordance with Code Section 1501.
"Person" means a member or former member of the Starwood Affiliated Group.
"Post-Closing Operations" means all activities of ESI other than Pre-
Closing Operations.
"Pre-Closing Operations" means all activities attributable to, or conducted
by, ESI, during any period ending on or before the Closing Date, including the
entire Closing Date.
"Pre-Closing Tax Returns" means all Tax Returns, which include Pre-Closing
Operations.
"Tax" (and, with correlative meaning, "Taxes") shall mean: (i) any federal,
state, local or foreign net income, gross income, gross receipts, windfall
profit, severance, property, production, sales, use, license, excise, franchise,
employment, payroll, withholding, alternative or add-on minimum, ad valorem,
value-added, transfer, stamp, or environmental tax, or any other tax, custom,
duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty, addition to tax or additional
amount imposed by any governmental authority; and (ii) any interest, penalties
or additions to tax or other additional amounts with respect to the amounts
described in clause (i).
"Tax Return" means any declaration, report, claim for refund, information
return, return or statement relating to Taxes, including any schedules or
attachments as well as any amendments (whether submitted on a consolidated,
combined, separate or unitary basis).
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Exhibit 10.11
TRADE NAME AND SERVICE MARK LICENSE AGREEMENT
---------------------------------------------
THIS TRADE NAME AND SERVICE MARK LICENSE AGREEMENT ("Agreement") is made as
of June 3, 1998 by and between ITT Sheraton Corporation, a Delaware corporation
("Licensor"), and ITT Educational Services, Inc., a Delaware corporation
("Licensee") (individually a "Party", and collectively, "Parties").
WHEREAS, pursuant to that certain Trade Name and Service Mark License
Agreement dated December 19, 1994 between ITT Corporation, formerly a Delaware
corporation and now named ITT Industries, Inc., an Indiana corporation ("ITT")
and Licensee ("Prior Agreement"), and that certain Intercompany Agreement dated
December 19, 1994 between ITT and Licensee ("Intercompany Agreement"), ITT
permitted Licensee to make specified uses of the Licensed Mark (as hereinafter
defined) of Licensor in connection with conducting the Business of Licensee (as
hereinafter defined);
WHEREAS, the Prior Agreement was assigned by ITT to ITT Destinations, Inc.
pursuant to an Assignment Agreement effective as of November 2, 1995;
WHEREAS, the Prior Agreement was assigned by ITT Destinations, Inc. to ITT
Sheraton Corporation pursuant to an Assignment Agreement effective as of
December 19, 1995;
WHEREAS, the Parties wish to terminate the Prior Agreement and the
provisions in the Intercompany Agreement relating to Licensee's use of the
Licensed Mark in connection with conducting the Business of Licensee and replace
such provisions with the provisions set forth herein;
WHEREAS, Licensor is the sole owner of the Licensed Mark and Licensee
desires to continue to use the Licensed Mark in its corporate and trade name and
as a service mark and trademark in connection with conducting the Business of
Licensee;
WHEREAS, ITT assigned all right, title and interest in and to the Licensed
Mark to ITT Destinations, Inc. pursuant to a Trademark Assignment Agreement
effective as of November 2, 1995;
WHEREAS, ITT Destinations, Inc. assigned all right, title, and interest in
and to the Licensed Mark to Licensor pursuant to a Trademark Assignment
Agreement effective as of December 19, 1995; and
WHEREAS, subject to the Licensee's observation of the terms, conditions and
provisions contained herein, Licensor is willing to grant Licensee certain
rights to use the Licensed Mark in connection with conducting the Business of
Licensee.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows.
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I. DEFINITIONS
A. Licensed Mark. The term "Licensed Mark" shall mean the "ITT" corporate
and trade name, service mark and trademark "ITT" as set forth in
Exhibit A.
B. Business of the Licensee. The term "Business of the Licensee" shall
mean the Licensee's business as currently conducted by the Licensee
and generally described in its Annual Report on Form 10-K for the year
ending December 31, 1997.
C. Affiliate. An "Affiliate" of any Person means any other Person
controlling, controlled by or under common control with such first
Person, where "Control" means the possession, directly or indirectly,
of the power to direct the management and policies of a Person whether
through the ownership of voting securities, contract or otherwise.
Without limiting the generality of the foregoing, for purposes of this
Agreement, ITT Corporation, a Nevada corporation, Starwood Hotels &
Resorts Worldwide, Inc. a Maryland corporation, and each of their
respective Affiliates are Affiliates of Licensor.
D. Person. The term "Person" means an individual, a partnership, a
corporation, a limited liability company, as association, a joint
stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or
political subdivision thereof.
E. Subsidiary. A "Subsidiary" of any Person means any other Person of
which (or in which) such first Person owns, directly or indirectly,
40% or more of the equity interests or has the power to direct the
management and policies of such second Person whether through the
ownership of voting securities, contract or otherwise.
F. "Change in Control". As it relates to Licensee, "Change in Control"
shall mean the occurrence of any one of the following events:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Securities
Exchange Act of 1934 (the "Act") disclosing that any person
(within the meaning of Section 13(d) of the Act) other than
Licensor, an Affiliate of Licensor, Licensee, a Subsidiary of
Licensee, or any employee benefit plan sponsored by Licensee, a
Subsidiary of Licensee, Licensor, or an Affiliate of Licensor is
the beneficial owner directly or indirectly of twenty percent
(20%) or more of the outstanding voting common stock and other
voting equity securities of Licensee (the "Common Stock")
provided, that an acquisition by any such person of Common Stock
from Licensor and its Affiliates in and of itself shall not
constitute a Change of Control under this clause;
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(ii) any person (within the meaning of Section 13(d) of the Act)
other than Licensee, a Subsidiary of Licensee, Licensor, or an
Affiliate of Licensor or any employee benefit plan sponsored by
Licensee, a Subsidiary of Licensee, Licensor, or an Affiliate
of Licensor shall purchase or acquire pursuant to a tender
offer or exchange offer any Common Stock (or securities
convertible into such Common Stock), for cash, securities or
any other consideration, provided that after consummation of
the offer, the person in question is the beneficial owner (as
such term is defined in Rule 13d-3 under the Act) directly or
indirectly of twenty percent (20%) or more of the outstanding
Common Stock (calculated as provided in paragraph (d) of Rule
13d-3 under the Act in the case of rights to acquire Common
Stock) unless such purchase was approved by the Board of
Directors of Licensor; or
(iii) the stockholders of Licensee shall approve (a) any
consolidation or merger of Licensee in which Licensee is not
the continuing or surviving corporation or pursuant to which
all shares of Common Stock would be converted into cash,
securities or other property, other than a merger of Licensee
in which holders of Common Stock immediately prior to the
merger have the same proportionate ownership of common stock of
the surviving corporation immediately after the merger as
immediately before, or (b) any sale, lease, exchange or other
transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of
Licensee.
G. "Permitted Manner of Use" shall mean use of the Licensed Mark in
accordance with all legal requirements and also with Licensor's
current Graphic Standards Manual as may be reasonably amended from
time to time by Licensor.
H. "Phaseout Period" shall be a period of twelve (12) months from the
termination of this Agreement during which period all use of the
Licensed Mark by Licensee and its sublicensees permitted under Section
II.B. hereof, as the case may be, shall be phased out in accordance
with the provisions of this Agreement.
I. "Effective Date" shall be the date that the shares of Common Stock
offered by ITT Corporation, a Nevada corporation, pursuant to the
Registration Statement (File No. 333-46267) first filed with the
Securities and Exchange Commission on Form S-3 on February 13, 1998
are sold.
II. LICENSE
A. Grant. Subject to the terms and conditions of this Agreement, Licensor
hereby grants to Licensee, during the term of this Agreement, a
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non-exclusive, non-transferable, worldwide, royalty-free license to
use the Licensed Mark in accordance with the applicable Permitted
Manner of Use solely in connection with the operation of the Business
of the Licensee and solely in the following manner:
(1) in its corporate name, in its popular name and in the name of its
schools in and only in the following manner: "ITT Educational
Services, Inc."; "ITT Educational Services"; "ITT Technical
Institute(s)"; "ITT Tech"; or, as may otherwise be authorized in
writing by Licensor; and
(2) as a trademark and service mark for the purpose of conducting the
Business of Licensee.
B. Sublicensing. Licensee shall not sublicense, sell, share or otherwise
transfer any of its rights under this Agreement to any other person or
entity, and any attempted sublicense shall be null and void and shall
immediately terminate this Agreement and the license granted herein.
Notwithstanding the foregoing, Licensee may sublicense its rights
hereunder to any of its current and future Subsidiaries conditioned
upon and so long as: (i) any and all sublicensees execute a written
agreement agreeing to be bound by the terms of this Agreement; (ii)
Licensee guarantees that the performance of any and all such
sublicensees shall be in compliance with the terms of this Agreement;
and (iii) such sublicensee continues to be a Subsidiary of License.
C. Reservation of Rights. No rights or licenses, express or implied,
other than those granted in Section II.A, are granted by this
Agreement to Licensee under any intellectual property owned or
controlled by Licensor. The rights granted to Licensee pursuant to
this Agreement are subject to all pre-existing contracts and to all
rights of third parties related to the Licensed Mark. Licensor
expressly reserves the right to use the Licensed Mark anywhere in the
world and for any purpose, including in connection with any business
operation, products manufactured or sold by or for Licensor or any
services rendered by or for Licensor.
D. Prior Agreement. The parties hereby agree that, as of the Effective
Date, no other agreements shall govern use of the Licensed Mark by
Licensee except for this Agreement. Therefore, the parties agree that
the Prior Agreement is hereby terminated in its entirety.
III. TERM AND TERMINATION
A. Term. This Agreement shall continue in full force and effect, unless
earlier terminated as provided herein, for seven (7) years from the
Effective Date; provided that, Licensee may extend the term of this
Agreement for up to an additional five (5) years (subject to earlier
termination as provided herein) by
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<PAGE>
giving written notice to Licensor no earlier than two (2) years and no
later than six (6) months prior to the seventh anniversary of the
Effective Date. If Licensee gives such notice, Licensee and Licensor
shall negotiate in good faith to determine the royalties, if any, to
be paid by Licensee to Licensor during any such extension. If the
parties are unable to reach agreement on such royalties, this
Agreement shall terminate on the seventh anniversary of the Effective
Date, unless earlier terminated as provided herein.
B. Termination. Licensor shall have the right to terminate this Agreement
immediately: (i) if Licensee breaches any term or condition of this
Agreement and fails to remedy such breach within thirty (30) days
after receipt of written notice from Licensor of such breach; (ii) if
proceedings are instituted by or against Licensee under federal or
state bankruptcy laws or an assignment or receivership is established
for the benefit of the creditors of Licensee; or (iii) upon any direct
or indirect Change in Control of Licensee.
C. Effect of Termination. Upon expiration or termination of this
Agreement for any reason, Licensee and its sublicensees shall phase
out all use of the Licensed Mark during the Phaseout Period. By the
end of the Phaseout Period Licensor and its sublicensees shall fully
discontinue all use of the Licensed Mark. Within five (5) business
days after the end of the Phaseout Period, an officer of Licensee
shall certify in writing to Licensor that Licensee has complied with
the terms of this Section III.C.
IV. LIMITATIONS
A. Usage. Except as provided in Section II.A, Licensee shall not make any
use of the Licensed Mark or any term, phrase or design which is
confusingly similar to, or a colorable imitation of, the Licensed Mark
in any manner whatsoever, including but not limited to: (i) any use as
part of a corporate, assumed or trade name; (ii) as a product name;
(iii) as a trademark or service mark; (iv) in advertising or
promotional activities; (v) on stationery, business cards or similar
materials; or (vi) directly or indirectly in connection with, or in
relation to, any activity or agreement.
B. Ownership. Any and all right, title or interest in, to or under the
Licensed Mark which may accrue to the benefit of, or be acquired by,
Licensee as a result of its exercise of the rights and licenses
granted pursuant hereto shall be assigned to and inure to the sole
benefit of Licensor; and Licensee hereby assigns to Licensor any and
all such right, title and interest, along with any goodwill pertaining
thereto. Licensee shall not assert any claim of ownership of, or any
claim to, any goodwill or reputation associated with the Licensed
Mark, by reason of Licensee's licensed use thereof or otherwise.
Licensee shall not take any action or omission in derogation of any of
the rights of Licensor in the Licensed Mark, either during the term of
this Agreement or thereafter.
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C. Markings. As of the Effective Date, for all new, revised or reprinted
pamphlets, catalogs, and other promotional and educational materials
(exclusive of television, radio and newspaper advertising and signage)
used in the Business of Licensee, Licensee shall place the following
notice prominently in connection with the use of the Licensed Mark:
"ITT is a registered mark of and is used under license granted by
ITT Sheraton Corporation."
V. QUALITY CONTROL
A. Quality Standards. In view of the past status of the Parties as
affiliated companies, each Party's intimate knowledge with standards
and procedures for assuring consistent quality, Licensor's knowledge
of the standards and procedures used by Licensee under the Prior
Agreement, the history of trouble-free services offered and provided
by Licensee, Licensor recognizes the current quality standards of
Licensee as acceptable standards. Licensee shall maintain such quality
standards in connection with its use of the Licensed Mark that are
substantially equivalent to or stricter than those standards used by
Licensee with respect to the Licensed Mark prior to the Effective
Date. Licensor shall have the right, at any time, to reasonably modify
or supplement the quality standards to be maintained by Licensee by
providing prior written notice to Licensee.
B. Samples. At the reasonable request of Licensor and at the expense of
Licensee, Licensee shall provide Licensor with copies, photographs or
representative samples of materials bearing the Licensed Mark so that
Licensor may determine whether Licensee is maintaining the quality
standards set forth in Section V.A.
VI. REGISTRATION AND ENFORCEMENT
A. Registration. Registration and any other form of protection for the
Licensed Mark shall only be obtained by Licensor in its name and at
its expense. Licensee shall furnish Licensor with all reasonably
requested information (including specimens and samples illustrative of
the manner of use of the Licensed Mark) and documentation (including
the execution and delivery of any and all true and correct affidavits,
declarations. oaths and other documentation) to assist Licensor in
obtaining and maintaining such trademark protection and registrations.
B. Enforcement. Licensee shall take all reasonable steps and shall
provide such materials. cooperation and assistance as may be
reasonably required to assist Licensor in maintaining and enforcing
the Licensed Mark. Licensee shall promptly notify Licensor of any
actual or suspected infringement or misuse of the Licensed Mark by
third parties. Licensor shall have the sole discretion to take action
against such infringers or misusers or suspected
-6-
<PAGE>
infringers or misusers, and any and all recoveries resulting from such
actions initiated by Licensor shall be retained by Licensor. Licensee
shall not take any action with respect to any third party in an
attempt to enforce any rights regarding the Licensed Mark without the
prior written approval of Licensor.
C. Licensed Mark Not Contested. Licensee shall not raise or cause to be
raised any questions concerning or objections to the validity of the
Licensed Mark in any jurisdiction, or to any registrations thereof or
applications therefor, or to the sole proprietary rights of Licensor
thereto, on any grounds whatsoever.
D. Execution of Documents. At Licensor's request, Licensee shall assist
Licensor in the procurement or maintenance of any filings or
registrations for the Licensed Mark in any jurisdiction by providing
any information available and executing any documents necessary
therefor. The rights granted or to be granted hereunder to Licensee
shall be recorded in any jurisdiction where such recordation is
required by statute or in the sole discretion of Licensor is
advisable, and Licensee and its sublicensees shall extend to Licensor
their full cooperation in filing and completing any such recordation.
VII. REMEDY
Licensee acknowledges that its breach of this Agreement would cause
immediate and irreparable harm to Licensor for which money damages would be
inadequate. Therefore, Licensor shall be entitled to injunctive relief for
Licensee's breach of this Agreement without proof of actual damages and
without the posting of bond or other security. Such remedy shall not be
deemed to be the exclusive remedy for breach of this Agreement but shall be
in addition to all other remedies available at law or in equity.
VIII. COVENANTS
A. Registration. Licensee shall not seek to register the Licensed Mark or
any term, phrase or design that is confusingly similar to, or a
colorable imitation of, the Licensed Mark in any jurisdiction anywhere
in the world, except with Licensor's prior written consent.
B. Other Marks. Licensee shall not use the Licensed Mark in conjunction
or in combination with any other trademark, service mark, corporate or
trade name without Licensor's prior written consent, except with
respect to any other trademark, service mark, corporate or trade name
with which the Licensee is currently using the Licensed Mark in
conjunction or combination.
C. Proper Use. Except as specifically authorized in this Agreement,
Licensee shall not use the Licensed Mark in any way that may impair
Licensor's right, title or interest in or to the Licensed Mark or
create confusion, deception or mistake of the purchasing public with
respect to the source or origin or standards of quality of any
products or services bearing the Licensed Mark.
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<PAGE>
D. Compliance with Laws. Licensee shall use the Licensed Mark only In a
manner that complies with the laws and regulations of the
jurisdictions in which it is used.
IX. DEFENSE OF INFRINGEMENT CLAIMS. Licensor agrees to defend Licensee and/or
any permitted sublicensee to the extent that any and all demands, suit, or
actions ("Claims") solely arise out of an assertion or claim that the use
of the Licensed Mark by Licensee or such sublicensees pursuant to the terms
of this Agreement infringes the trade names or trademarks of a third party,
provided, Licensee shall cooperate with, and assist, Licensor with respect
to any such Claim by (i) promptly notifying Licensor of any such Claim,
(ii) agreeing to be defended by counsel of Licensor's choice and to any
reasonable settlement proposed by Licensor, except that if a third party
should institute a legal action against Licensee and/or such sublicensee
involving their alleged infringement of a third party mark based on their
use of the Licensed Mark in the Business of Licensee then choice of counsel
and the control of the legal action shall be mutual between Licensee and
Licensor, (iii) promptly providing to Licensor any reasonably requested
documents in its possession, custody, or control, and (iv) making its
personnel familiar with the facts available to Licensor. The costs
associated with any such defense shall be borne equally by Licensor and
Licensee.
X. LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE PROVIDED HEREIN, LICENSOR
SHALL NOT BE LIABLE TO LICENSEE, ITS AFFILIATES OR ANY THIRD PARTY FOR ANY
DAMAGES IN EXCESS OF $ 10,000 OR FOR ANY SPECIAL, CONSEQUENTIAL, EXEMPLARY
OR INCIDENTAL DAMAGES (INCLUDING LOST OR ANTICIPATED REVENUES OR PROFITS
RELATING TO THE SAME), ARISING FROM ANY CLAIM RELATING TO THIS AGREEMENT OR
THE LICENSED MARK, WHETHER SUCH CLAIM IS BASED ON WARRANTY, CONTRACT, TORT
(INCLUDING NEGLIGENCE OR STRICT LIABILITY) OR OTHERWISE, EVEN IF AN
AUTHORIZED REPRESENTATIVE OF LICENSOR IS ADVISED OF THE POSSIBILITY OR
LIKELIHOOD OF SAME. LICENSEE ACKNOWLEDGES AND AGREES THAT PAYMENT BY
LICENSOR OR THE RETENTION BY LICENSEE OF SUCH AMOUNT IS LIMITED BY THE
FOREGOING SENTENCE AND SHALL BE ITS SOLE AND EXCLUSIVE REMEDY IN EXHAUSTION
OF ALL OTHER REMEDIES UNDER THIS AGREEMENT, AT LAW OR IN EQUITY AND THAT
SUCH REMEDY SHALL NOT BE DEEMED OR ALLEGED BY LICENSEE TO HAVE FAILED OF
ITS ESSENTIAL PURPOSE.
XI. INDEMNIFICATION. Except for the Claims specifically provided for in Section
IX of this Agreement, Licensee agrees to indemnify and hold harmless
Licensor, its affiliates and its and their stockholders, directors,
officers, employees, agents and assignees harmless and shall pay all
losses, damages, fees, expenses or costs (including reasonable attorneys'
fees) incurred by them based upon any claim demand, suit or proceeding
alleging that Licensee's actions related to this Agreement violate any
rights of any third party or alleging any breach by Licensee of any of its
obligations herein. Licensor shall promptly notify Licensee of any such
-8-
<PAGE>
claim, demand, suit or proceeding, and Licensee, upon written request by
Licensor, shall promptly defend and continue the defense of such claim,
demand, suit or proceeding at Licensee's expense. If Licensee fails to
undertake and continue such defense, Licensor shall have the right (but not
the obligation) to make and continue such defense as it considers
appropriate, and the expenses and costs thereof, including but not limited
to attorneys' fees, out-of-pocket costs and the costs of an appeal and bond
thereof, together with the amounts of any judgment rendered against
Licensor shall be paid by Licensee upon demand. Nothing herein shall
prevent Licensor from defending, if it so desires in its own discretion,
any such claim, demand, suit or proceeding at its own expense through its
own counsel, notwithstanding that the defense thereof may have been
undertaken by Licensee.
XII. GENERAL
A. Amendment and Waiver. This Agreement may be amended and any provision
of this Agreement may be waived, provided that any such amendment or
waiver will be binding only if such amendment or waiver is set forth
in a writing executed by Licensor and Licensee. No course of dealing
between or among any persons or entities having any interest in this
Agreement will be deemed effective to modify, amend or discharge any
part of this Agreement or any rights or obligations of any Party under
or by reason of this Agreement.
B. Notices. All notices, demands and other communications given or
delivered under this Agreement shall be in writing and shall be deemed
to have been given when personally delivered, mailed by first class
mail, return receipt requested, or delivered by express courier
service or telecopied (with hard copy to follow). Notices, demands and
communications shall, unless another address is specified in writing,
be sent to the address or telecopy number indicated below.
Notices to Licensor:
--------------------
ITT Sheraton Corporation
777 Westchester Avenue
White Plains, New York 10604
ATTN: Vice President & Associate General
Counsel - Intellectual Property
Facsimile: (914) 640-8277
Notices to Licensee:
-------------------
ITT Educational Services, Inc.
5975 Castle Creek Parkway N. Drive
P. O. Box 50466
Indianapolis, IN 46250-0466
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<PAGE>
ATTN: General Counsel
Telecopy: 317/594-4384
C. Binding Agreement Assignment. This Agreement and all of the provision
hereof shall be binding upon and inure to the benefit of each of the
Parties' successors and permitted assigns; provided, however, that
Licensee may not assign, transfer, encumber or grant to any third
party any interest in this Agreement or in any of its rights, duties
or obligations hereunder, by operation of law or otherwise, without
the prior written consent of Licensor. Notwithstanding the foregoing,
(i) Licensee may assign its rights and obligations hereunder to its
successor-in-interest as part of a merger or consolidation of Licensee
in which the holders of Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger as immediately before, and
(ii) Licensor may assign any of its rights and obligations hereunder,
including without limitation in connection with any merger, sale of
assets (whether or not as part of any sale of substantially all the
assets of Licensor or as part of any group of assets) or otherwise.
D. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provisions or the remaining
provisions of this Agreement.
E. No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by both Parties to express their
mutual intent, and no rule of strict construction shall be applied
against either Party.
F. Caption. The captions used in this Agreement are for convenience of
reference only and do not constitute a part of this Agreement and
shall not be deemed to limit, characterize or in any way affect any
provision of this Agreement, and all provisions of this Agreement
shall be enforced and construed as if no caption had been used in this
Agreement.
G. Entire Agreement. This Agreement contains the entire agreement between
the Parties with respect to the subject matter hereof and supersedes
any previous understandings or agreements, whether written or oral, in
respect of such subject matter.
H. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.
I. Governing Law. All questions concerning the construction, validity and
interpretation of this Agreement shall be governed by and construed in
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<PAGE>
accordance with the domestic laws of the State of New York, without
giving effect to any choice of law or conflict of law provision
(whether of the State of New York or any other jurisdiction) that
would cause the application of the laws of any jurisdiction other than
the State of New York.
J. Parties in Interest. Nothing in this Agreement, express or implied, is
intended to confer on any person or entity other than the Licensor and
Licensee and their respective successors and permitted assigns any
rights or remedies under or by virtue of this Agreement, and no third-
party beneficiaries shall be deemed created hereby.
K. Survival. The obligations and the rights of the Parties under Sections
III.C and lV.B and under Articles VI, VII, IX, X, XI and XII shall
survive the expiration or termination of this Agreement for any
reason.
L. Required Approvals. Licensee shall obtain all necessary licenses,
permits and approvals of this Agreement required by any government or
governmental agency, at Licensee's sole cost and expense.
M. Compliance with Laws. Each of the Parties shall comply with all
applicable laws, rules, regulations and orders of the United States,
all other jurisdictions and any agency or court thereof
N. Relationship of Parties. Neither of the Parties shall act or represent
or hold itself out as having authority to act as an agent or partner
of the other Party, or in any way bind or commit the other Party to
any obligations. Any such act will create a separate liability in the
Party so acting to any and all third parties affected thereby. The
rights, duties, obligations and liabilities of the Parties shall be
several and not joint or collective, and nothing contained in this
Agreement in shall be construed as creating a partnership, joint
venture, agency, trust or other association of any kind, each Party
being individually responsible only for its obligations as set forth
in this Agreement.
O. Further Assurances. Each Party agrees to execute such other documents
and take all such actions as the other Party may reasonably request to
effect the terms of this Agreement.
* * * * * *
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective Date.
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<PAGE>
ITT SHERATON CORPORATION ITT EDUCATIONAL SERVICES, INC.
By: /s/ James D. Latham By: /s/ Clark D. Elwood
--------------------- ---------------------------------
Name: James D. Latham Name: Clark D. Elwood
-------------------- -------------------------------
Title: Sr. Vice President Title: Senior Vice President, General
------------------- ------------------------------
Counsel and Secretary
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EXHIBIT A
---------------------------
ITT
---------------------------
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Exhibit 10.15
ESI EXCESS SAVINGS PLAN
INTRODUCTION
------------
The ESI Excess Savings Plan (the "Plan") has been authorized and
adopted by the Board of Directors of ITT Educational Services, Inc., to take
effect as of the Offering Date.
The purpose of the Plan is to provide Eligible Employees participating
in the Savings Plan (1) a means of restoring the contributions lost under the
Savings Plan due to the application of the limitations imposed on qualified
plans by Section 415 of the Code, (2) a means for restoring the matching and
other employer contributions lost under the Savings Plan due to the application
of the limitations imposed on qualified plans by Sections 401(a)(17), 402(g)(1),
401(k)(3), and 401(m) of the Code; and a means of providing Eligible Employees
with an opportunity to defer a portion of their Salary.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1. Definitions..................................................... 1
1.01. "Acceleration Event"............................................ 1
1.02. "Account"....................................................... 1
1.03. "Act"........................................................... 2
1.04. "Actual Contribution Percentage Limit".......................... 2
1.05. "Actual Deferral Percentage Limit".............................. 2
1.06. "Basic Savings"................................................. 2
1.07. "Beneficiary"................................................... 2
1.08. "Board of Directors"............................................ 2
1.09. "Code".......................................................... 2
1.10. "Committee"..................................................... 2
1.11. "Company"....................................................... 2
1.12. "Compensation Committee"........................................ 2
1.13. "Corporation"................................................... 2
1.14. "Deferral Account".............................................. 2
1.15. "Effective Date"................................................ 2
1.16. "Elective Deferral Limit"....................................... 2
1.17. "Eligible Employee"............................................. 3
1.18. "Employee"...................................................... 3
1.19. "ERISA"......................................................... 3
1.20. "Excess Matching Contributions"................................. 3
1.21. "Excess Retirement Contribution"................................ 3
1.22. "Highly Compensated Employee"................................... 3
1.23. "Matching Company Contribution"................................. 3
1.24. "Matching Contribution Account"................................. 3
1.25. "Offering Date"................................................. 3
1.26. "Participant"................................................... 3
1.27. "Participating Company"......................................... 3
1.28. "Plan".......................................................... 3
1.30. "Retirement Contribution"....................................... 4
1.31. "Retirement Contribution Account"............................... 4
1.32. "Salary"........................................................ 4
1.34. "Salary Reduction Agreement".................................... 4
1.35. "Savings Plan".................................................. 4
1.36. "Statutory Compensation Limitation"............................. 4
1.37. "Statutory Limitations"......................................... 4
Article 2. Participation................................................... 5
2.01. Eligibility..................................................... 5
2.02. Participation................................................... 5
</TABLE>
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<TABLE>
<S> <C>
2.03. Termination of Participation.................................... 5
Article 3. Excess Savings Plan Contributions............................... 5
3.01. Amount of Contributions......................................... 5
3.02. Salary Deferrals................................................ 6
3.03. Excess Matching Contributions................................... 7
3.04. Excess Retirement Contributions................................. 7
3.05. Investment of Account........................................... 7
3.06. Vesting of Account.............................................. 7
3.07. Individual Accounts............................................. 8
Article 4. Payment of Contributions........................................ 8
4.01. Commencement of Payment......................................... 8
4.02. Method of Payment............................................... 8
4.03. Payment Upon the Occurrence of an Acceleration Event............ 8
Article 5. General Provisions.............................................. 8
5.01. Funding......................................................... 8
5.02. Non-Contract Employment......................................... 8
5.03. Facility of Payment............................................. 9
5.04. Withholding Taxes............................................... 9
5.05. Nonalienation................................................... 9
5.06. Transfers....................................................... 9
5.07. Claims Procedure................................................ 10
5.08. Construction.................................................... 11
Article 6. Amendment or Termination........................................ 11
Article 7. Administration.................................................. 11
</TABLE>
-ii-
<PAGE>
ESI EXCESS SAVINGS PLAN
-----------------------
Article 1. Definitions
- ------------------------
As used in the Plan, the following words and phrases, when
capitalized, have the following meanings, except when used in a context that
plainly requires a different meaning:
1.01. "Acceleration Event" means one of the following events:
(a) A report on Schedule 13D is filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Act disclosing that any person
(within the meaning of Section 13(d) of the Act), other than the Corporation, or
a subsidiary of the Corporation or any employee benefit plan sponsored by the
Corporation or a subsidiary of the Corporation, is the beneficial owner directly
or indirectly of 20% or more of the outstanding common stock of the Corporation;
(b) Any person (within the meaning of Section 13(d) of the Act), other
than the Corporation or a subsidiary of the Corporation or any employee benefit
plan sponsored by the Corporation or a subsidiary of the Corporation, purchases
shares pursuant to a tender offer or exchange offer to acquire any common stock
of the Corporation (or securities convertible into common stock of the
Corporation) for cash, securities, or any other consideration, provided that,
after consummation of the offer, the person in question is the beneficial owner
(as that term is defined in Rule 13(d)-3 under the Act), directly or indirectly,
of 15% or more of the outstanding common stock of the Corporation (calculated as
provided in paragraph (d) of Rule 13(d)-3 under the Act in the case of rights to
acquire common stock);
(c) The stockholders of the Corporation approve (i) any consolidation
or merger of the Corporation in which the Corporation is not the continuing or
surviving corporation or pursuant to which shares of common stock of the
Corporation would be converted into cash, securities, or other property, other
than a merger of the Corporation in which holders of common stock of the
Corporation immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger as immediately before, or (2) any sale, lease, exchange, or other
transfer (in one transaction or a serious of related transactions) of all or
substantially all of the assets of the Corporation; or
(d) A change in the majority of the members of the Board of Directors
within a 12-month period, unless the election or nomination for election by the
Corporation's stockholders of each new director during the 12-month period was
approved by the vote of two-thirds of the directors then still in office who
were directors at the beginning of the 12-month period.
1.02. "Account" means, with respect to a Participant, the Deferral
Account, the Matching Contribution Account, and the Retirement Contribution
Account of that Participant.
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1.03. "Act" means the Securities Exchange Act of 1934, as amended
from time to time.
1.04. "Actual Contribution Percentage Limit" means the limitation set
forth in Section 401(m) of the Code as in effect each year for the Savings Plan.
1.05. "Actual Deferral Percentage Limit" means the limitation set
forth in Section 401(k)(3) of the Code as in effect each year for the Savings
Plan.
1.06. "Basic Savings" means, with respect to a Participant for a
calendar year, the Participant's "basic pre-tax savings," as defined in the
Savings Plan, under the Savings Plan for the calendar year.
1.07. "Beneficiary" means, with respect to a Participant, the
person or persons designated pursuant to the provisions of the Savings Plan to
receive benefits under the Savings Plan after the Participant's death.
1.08. "Board of Directors" means the Corporation's Board of
Directors.
1.09. "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
1.10. "Committee" means the ESI Benefits Plan Investment and
Administration Committee created pursuant to the Savings Plan.
1.11. "Company" means (1) the Corporation, with respect to its
employees; and (2) any Participating Company, with respect to its employees.
1.12. "Compensation Committee" means the Compensation Committee of
the Board of Directors.
1.13. "Corporation" means ITT Educational Services, Inc., or any
successor by merger, purchase, or otherwise.
1.14. "Deferral Account" means, with respect to a Participant, the
bookkeeping account maintained for the Participant to record the amounts
credited on his behalf under Section 3.02(a) and earnings on those amounts
pursuant to Section 3.05.
1.15. "Effective Date" means the Offering Date.
1.16. "Elective Deferral Limit" means the limitation set forth in
Section 402(g)(1) of the Code.
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1.17. "Eligible Employee" means an Employee of the Company who is
eligible to participate in the Plan as provided in Section 2.01.
1.18. "Employee" means an "employee," as defined in the Savings Plan.
1.19. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
1.20. "Excess Matching Contributions" means the amount of
contributions credited on a Participant's behalf under Section 3.03.
1.21. "Excess Retirement Contribution" means the amount of
contributions credited on a Participant's behalf under Section 3.04.
1.22. "Highly Compensated Employee" means an Employee who, as of the
pertinent date, is a "highly compensated employee" as defined in Code Section
414(q).
1.23. "Matching Company Contribution" means a "matching company
contribution" as defined in the Savings Plan.
1.24. "Matching Contribution Account" means, with respect to a
Participant, the bookkeeping account maintained for the Participant to record
all amounts credited on his behalf under Section 3.03 and earnings on those
amounts pursuant to Section 3.05.
1.25. "Offering Date" means the date of the underwritten public
offering by the Corporation pursuant to a registration statement on Form S-3
filed with the Securities Exchange Commission February 13, 1998.
1.26. "Participant" means each Eligible Employee who participates in
the Plan pursuant to Section 2.02 and who has not ceased to be a Participant
pursuant to Section 2.03.
1.27. "Participating Company" means a Related Employer that, by
appropriate action of the Board of Directors, or by a designated officer of the
Corporation pursuant to authorization delegated to him by the Board of
Directors, has been designated as a Participating Company in the Plan as to all
of its Eligible Employees or as to the Eligible Employees of one or more of its
operating or other units, provided that the board of directors of that company
has taken appropriate action to adopt this Plan.
1.28. "Plan" means this ESI Excess Savings Plan.
1.29. "Related Employer" means any employer that, together with the
Corporation, is under common control or a member of an affiliated service group
as defined under Code Sections 414(b), (c), (m), and (o).
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<PAGE>
1.30. "Retirement Contribution" means a "retirement contribution" as
defined in the Savings Plan.
1.31. "Retirement Contribution Account" means, with respect to a
Participant, the bookkeeping account maintained for the Participant to record
all amounts credited on his behalf under Section 3.04 and earnings on those
amounts pursuant to Section 3.05.
1.32. "Salary" means, with respect to an Eligible Employee, the
Eligible Employee's compensation from the Company at his base rate, excluding
any compensation deferred under a deferred compensation plan other than the
Plan, and determined prior to any election by the Participant to make salary
deferrals under the Savings Plan, prior to any election by the Participant to
make Salary Deferrals under this Plan, and prior to any election by the
Participant pursuant to Section 125 of the Code, excluding any overtime, bonus,
foreign service allowance, or any other form of compensation, except to the
extent otherwise deemed "Salary" for purposes of the Savings Plan under such
nondiscriminatory rules as are adopted by the Committee. For purposes of this
Plan, Salary shall be determined without regard to the Statutory Compensation
Limitation.
1.33. "Salary Deferrals" means, with respect to a Participant, the
amount the Participant has elected to defer pursuant to a Salary Reduction
Agreement in accordance with the provisions of Section 3.02(a).
1.34. "Salary Reduction Agreement" means, with respect to a
Participant, the agreement entered into by the Participant pursuant to Section
3.02 under which he elects to defer a portion of his salary under this Plan.
1.35. "Savings Plan" means the ESI 401(k) Plan.
1.36. "Statutory Compensation Limitation" means the limitation set
forth in Section 401(a)(17) of the Code as in effect each year for the Savings
Plan.
1.37. "Statutory Limitations" mean the Actual Contribution
Percentage Limit, the Actual Deferral Percentage Limit, the Elective Deferral
Limit, and the Statutory Compensation Limit.
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Article 2. Participation
- -------------------------
2.01. Eligibility.
(a) The Plan is intended to be an unfunded plan of deferred
compensation for a select group of management and highly compensated Employees.
An Employee shall be an Eligible Employee and thereby eligible to participate in
this Plan with respect to a calendar year only if (i) the Employee is a Highly
Compensated Employee for that calendar year; (ii) the Employee is eligible to
participate in the Savings Plan during the calendar year; and (iii) the Employee
is designated by the Compensation Committee as a key management employee who is
eligible to participate in the Plan. An Eligible Employee shall be notified of
his eligibility for participation in the Plan prior to the date the Eligible
Employee may first commence participation in the Plan.
(b) Upon reemployment by the Company, an Employee shall become an
Eligible Employee again only if and when he again meets the eligibility
requirements described in Section 2.01(a) after his reemployment date.
2.02. Participation. An Eligible Employee shall become a
Participant when contributions are credited on his behalf pursuant to Article 3.
2.03. Termination of Participation.
(a) A Participant shall cease to be a Participant when the vested
values of his accounts under the Plan are totally distributed to him or on his
behalf.
(b) If a former Participant is reemployed by the Company, he shall
become a Participant again only if and when he satisfies, subsequent to his
reemployment, the eligibility and participation requirements of Sections 2.01
and 2.02, respectively.
Article 3. Excess Savings Plan Contributions
- ---------------------------------------------
3.01. Amount of Contributions.
(a) For any calendar year, the amount of contributions to be recorded
on the books of the Company on behalf of a Participant pursuant to this Article
3 shall be equal to the sum of the Salary Deferrals, Excess Matching
Contributions, and Excess Retirement Contributions for the Participant
determined under Sections 3.02, 3.03, and 3.04.
(b) Notwithstanding any provisions of the Plan to the contrary, no
further Salary Deferrals by a Participant shall be permitted, and no further
Excess Matching Contributions or Excess Retirement Contributions shall be
credited on the Participant's behalf, once the Participant is no longer an
Eligible Employee.
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3.02. Salary Deferrals.
(a) Any Eligible Employee who has met the eligibility requirements of
Section 2.01 as of the Offering Date and who wishes to have Salary Deferrals
credited to his Deferral Account must, within 30 days of the Offering Date,
execute an irrevocable Salary Reduction Agreement for the remainder of the Plan
Year, authorizing Salary Deferrals under this Plan in accordance with the
provisions of this Section. Any Eligible Employee who has met the eligibility
requirements of Section 2.01 as of the beginning of a subsequent calendar year
and who wishes to have Salary Deferrals credited to his Deferral Account in that
calendar year must, prior to the beginning of that calendar year, execute an
irrevocable Salary Reduction Agreement for the Plan Year, authorizing Salary
Deferrals under this Plan in accordance with the provisions of this Section.
Notwithstanding any other provision of this Section, Salary Deferrals will not
be credited on behalf of a Participant with respect to a particular calendar
year until the Participant's Basic Savings under the Savings Plan for that
calendar year have been suspended due to the Statutory Limitations. Salary
Deferrals shall be credited to the Participant's Account at the same time they
would have been credited to his account under the Savings Plan if not for the
application of the Statutory Limitations.
(b) Subject to the following sentence, the amount of Salary Deferrals
credited to a Participant for a calendar year shall be equal to (1) 5% of the
Participant's Salary or (2) the percentage of Salary that the Participant has
elected to defer under the Savings Plan, whichever is elected by the Participant
is his Salary Reduction Agreement. Notwithstanding the preceding sentence, the
allocation under the Plan and the reduction in the Participant's Salary
corresponding to his election shall be made only with respect to Salary (A)
otherwise payable to the Participant during the calendar year in excess of the
Statutory Compensation Limitation or (B) otherwise payable to the Participant
after he has reached the Elective Deferral Limitation for the calendar year or
after he has reached the limit, if any, set by the Committee for the Plan Year
to ensure compliance by the Savings Plan with the Actual Deferral Percentage
Limitation. The total Salary Deferral amount elected shall reduce the
Participant's Salary and shall not be applied against any amount deferred under
any other non-qualified plan maintained by the Company.
(c) A Participant may revoke or modify his Salary Reduction Agreement,
effective as of the beginning of any subsequent calendar year, by executing a
new Salary Deferral Agreement or a written revocation of the prior Salary
Reduction Agreement prior to the beginning of the calendar year for which the
modification or revocation is to be effective. Until a Salary Reduction
Agreement is so modified or revoked, it shall remain in effect for subsequent
calendar years, provided that the Participant continues to be an Eligible
Employee during the subsequent calendar year. Notwithstanding the foregoing,
Salary Deferrals for a subsequent calendar year shall not be credited to the
Participant until the Participant's Basic Savings under the Savings Plan for
that calendar year has been suspended due to the Statutory Limitations.
(d) Notwithstanding the foregoing, if any Participant receives a
hardship withdrawal of pre-tax contributions from the Savings Plan or any other
plan that is maintained by
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<PAGE>
the Company and meets the requirements of Section 401(k) of the Code (or any
successor to that provision), and the Participant is precluded from making
contributions to that plan for at least 12 months after receipt of hardship
withdrawal, and the Participant's Salary Deferrals, if any, shall be suspended
during the 12 month period commencing on the date the Participant receives the
hardship withdrawal distribution from the Savings Plan or other 401(k) plan.
Any Salary Deferral that would have been made pursuant to the Participant's
Salary Reduction Agreement but for the application of this Section 3.02(d) shall
be paid to the Participant as if he had not entered into the Salary Reduction
Agreement.
(e) As a condition of making Salary Deferrals, a Participant may also
be required by the Committee to provide such other information as the Committee
may deem necessary properly to administer the Plan.
3.03. Excess Matching Contributions. A Participant's Account shall
be credited with Excess Matching Contributions for a calendar year in an amount
equal to 50% of that portion of the Salary Deferrals credited to the Participant
for the calendar year that does not exceed 5% of the Participant's Salary for
the calendar year. The Excess Matching Contributions shall be credited to the
Participant's Account at the same time as the Salary Deferrals to which they
relate.
3.04. Excess Retirement Contributions. Each month, a Participant's
Account shall be credited with an Excess Retirement Contribution equal to the
difference between (a) 1% of the Participant's Salary and (b) the Retirement
Contribution made on the Participant's behalf for that month under the Savings
Plan. The Excess Retirement Contribution shall be credited to the Participant's
Retirement Contribution Account as of the last day of the month for which it is
made.
3.05. Investment of Account. A Participant shall have no choice or
election with respect to the investment of his Accounts. A Participant's
Account shall be credited with earnings at the rate of eight percent (8%) per
annum. Earnings shall be credited as of the end of each month, based on the
balance of the Participant's Accounts on that date.
3.06. Vesting of Account. A Participant shall be at all times fully
vested in his Deferral Account and his Retirement Contribution Account. The
Participant shall vest in his Matching Contribution Account at the same rate and
under the same conditions in which Matching Company Contributions vest under the
Savings Plan. In the event a Participant terminates employment prior to vesting
in all or any part of his Matching Contribution Account, the nonvested portion
of that Account shall be forfeited and shall not be restored in the event the
Participant is subsequently reemployed by the Company.
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<PAGE>
3.07. Individual Accounts. The Committee shall maintain, or cause
to be maintained, records showing the individual balances of each Participant's
Account. At least once a year, each Participant shall be furnished with a
statement setting forth the value of his Accounts.
Article 4. Payment of Contributions
- ------------------------------------
4.01. Commencement of Payment.
(a) The Participant shall be entitled to receive payment of his
Deferral Account and Retirement Contribution Account and the vested portion of
his Matching Contribution Account as determined under Section 3.03 upon his
termination of employment for any reason, other than death. The distribution of
the Participant's vested Accounts shall be made as soon as practicable following
the Participant's termination of employment.
(b) In the event of the death of a Participant prior to the full
payment of his Accounts, the unpaid portion of his vested Accounts shall be paid
to his Beneficiary as soon as practicable following his date of death.
4.02. Method of Payment. Payment of a Participant's Deferral
Account and Retirement Contribution Account and the vested portion of his
Matching Contribution Account shall be made in a single lump sum cash payment.
4.03. Payment Upon the Occurrence of an Acceleration Event. Upon
the occurrence of an Acceleration Event, all Participants shall automatically
receive the balance of their Accounts in a single lump sum payment. The payment
shall be made as soon as practicable on or after the Acceleration Event. If a
Participant dies after the Acceleration Event, or before receiving payment of
his Accounts, the payment shall be made to his Beneficiary.
Article 5. General Provisions
- ------------------------------
5.01. Funding. The Plan shall be unfunded. All amounts payable in
accordance with this Plan shall constitute a general unsecured obligation of the
Company. Plan benefits, as well as any administrative costs relating to the
Plan, shall be paid out of the general assets of the Company.
5.02. Non-Contract Employment. This Plan is not a contract of
employment, and the terms of employment of any Participant shall not be affected
in any way by this Plan or related instruments, except as specifically provided
therein. The establishment of the Plan shall not be construed as conferring any
legal rights upon any person or a continuation of employment, nor shall it
interfere with the rights of the Company to discharge any person and to treat
him without regard to the effect that such treatment might have upon him under
this Plan. Each Participant and all persons who may have or claim a right by
reason of his participation in the Plan shall be bound by the terms of the Plan
and all agreements entered into pursuant to those terms.
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<PAGE>
5.03. Facility of Payment. In the event that the Committee finds
that a Participant is unable to care for his affairs because of illness or
accident or because he is a minor or has died, the Committee may direct that any
benefit payment due him under the Plan be paid on his behalf to his spouse, a
child, a parent, or other blood relative, or to a person with whom he resides,
unless a duly appointed legal representative makes claim for the payment, in
which case it shall be made to the duly appointed legal representative. Any
payment made on behalf of a Participant pursuant to the preceding sentence shall
be a complete discharge of the liabilities of the Plan with respect to the
Participant.
5.04. Withholding Taxes. The Company shall have the right to deduct
from each payment to be made under the Plan any withholding taxes required by
federal, state, local, or other applicable law.
5.05. Nonalienation. Subject to any applicable law, no benefit
under the Plan shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so
shall be void. Similarly, except as otherwise required by applicable law, no
benefit under the Plan shall be in any manner liable or subject to garnishment,
attachment, execution, or levy, or liable or subject to the debts, contracts,
liabilities, engagements, or torts of a person entitled to those benefits.
5.06. Transfers.
(a) Notwithstanding any plan provision to the contrary, in the event
the Corporation (i) sells, causes the sale of, or sold the stock or assets of
any Related Employer to a third party, or (ii) distributes or distributed to the
holders of shares of the Corporation's stock, all of the outstanding shares of
common stock of a subsidiary or subsidiaries of the Corporation, and, as a
result of the sale or distribution, that company or its Employees are no longer
eligible to participate under the Plan, the liabilities with respect to the
benefits accrued under the Plan for a Participant who, as a result of the sale
or distribution, is no longer eligible to participate in the Plan, shall, at the
discretion and direction of the Corporation (and approval by the new employer),
be transferred to a similar plan of the new employer and become a liability
under that plan. Upon the transfer and acceptance of the liabilities for the
transferred benefits, those liabilities shall become the obligations of the new
employer, and the liability under this Plan for those benefits shall cease.
(b) Notwithstanding any other Plan provision to the contrary, at the
discretion and direction of the Corporation, liabilities with respect to
benefits accrued by a Participant under a plan maintained by the Participant's
former employer may be transferred to this Plan and upon that transfer become
the obligation of the Company.
-9-
<PAGE>
5.07. Claims Procedure.
(a) Submission of Claims. Claims for benefits under the Plan should
be submitted in writing to the Committee or to an individual designated by the
Committee for that purpose.
(b) Denial of Claim. If any claim for benefits is denied, in whole
or in part, the claimant shall be given written notice of the denial within 90
days time following the date on which the claim is filed. The notice shall set
forth the following:
(i) the specific reason or reasons for the denial;
(ii) the specific reference to the pertinent Plan provision upon
which the denial was based;
(iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why that material or information is necessary;
and
(iv) an explanation of the Plan's claim review procedure.
If special circumstances require an extension of time for processing
the claim, written notice of an extension shall be furnished to the claimant
prior to the end of the initial period of ninety days following the date on
which the claim is filed. The extension may not extend the period of more than
90 days beyond the end of the initial 90 day period.
If the claim has not been granted, and a written notice of the denial
of the claim is not furnished within ninety days following the date on which the
claim is filed, the claim should be deemed denied for the purpose of proceeding
to the claim review procedure.
(c) Claim Review Procedure. A claimant or his authorized
representative shall have 60 days after receipt of written notification of
denial of a claim to request review of the denial by making written request to
the Committee. In connection with the request for review, the claimant or his
authorized representative may review pertinent documents in the Committee's
possession or control and submit issues and comments in writing within the 60
day period following receipt of written notification of the claim denial.
Not later than 60 days after receipt of the request for review, the
Committee shall render and furnish to the claimant a written decision, which
shall include specific reasons for the decision and shall make specific
reference to the pertinent Plan provisions on which the decision is based. If
special circumstances require an extension of time for processing, the decision
shall be rendered as soon as possible, but not later than 120 days after receipt
of the request for review, provided that written notice and explanation of the
delay are given to the claimant prior to
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<PAGE>
commencement of the extension. The Committee's decision shall not be subject to
further review. If a decision on review is not furnished to a claimant within
the specified time period, the claim shall be deemed to have been denied on
review.
(d) Exhaustion of Remedy. No claimant shall institute any action or
proceeding in any state or federal court of law or equity or before any
administrative tribunal or arbitrator for a claim for benefits under the Plan
until the claimant has first exhausted the procedures set forth in this Section.
5.08. Construction.
(a) The Plan is intended to constitute an unfunded deferred
compensation arrangement maintained for a select group of management or highly
compensated employees within the meaning of Section 2.01(2), Section 301(a)(3),
and Section 401(a)(1) of ERISA, and all rights under this Plan shall be governed
by ERISA. Subject to the preceding sentence, the Plan shall be construed,
regulated, and administered in accordance with the internal laws of the State of
Indiana, subject to the provisions of applicable federal law.
(b) The masculine pronoun shall mean the feminine wherever
appropriate.
(c) The illegality of any particular provision of this document shall
not affect the other provisions, and the document shall be construed in all
respects as if the invalid provision were omitted.
Article 6. Amendment or Termination
- ------------------------------------
The Corporation, by action of its Board of Directors, reserves the
right to modify, amend, or terminate, in whole or in part, this Plan at any
time. However, no modification, amendment, or termination of the Plan shall
adversely affect the right of any Participant to receive the benefits granted
under the Plan in respect of the Participant as of the date of modification,
amendment, or termination.
Article 7. Administration
- --------------------------
The Committee shall have exclusive responsibility and complete
discretionary authority to control the operation, management, and administration
of the Plan, with all powers necessary to enable it properly to carry out those
responsibilities, including, but not limited to, the following powers:
(a) To interpret the Plan and any related documents, with
discretionary authority;
(b) To establish procedures for making an election called for under
the Plan;
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<PAGE>
(c) To make factual determinations regarding any and all known matters
arising under the Plan;
(d) The power to determine eligibility for benefits, with
discretionary authority;
(e) The right to construe, with discretionary authority, the terms of
the Plan and to remedy possible ambiguities, inequities, inconsistencies, or
omissions; and
(f) The right to resolve, with discretionary authority, all
interpretive, equitable, or other questions arising under the Plan.
All decisions of the Committee in all matters shall be final and
binding and conclusive on all persons.
This ESI Excess Savings Plan is executed on behalf of ITT Educational
Services, Inc., by its duly authorized officer, as of the 9th day of June,
1998.
ITT EDUCATIONAL SERVICES, INC.
By /s/ Clark D. Elwood
--------------------------------------
Signature
Clark D. Elwood
-----------------------------------------
Printed Name
Senior Vice President, General Counsel
and Secretary
-----------------------------------------
Office
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<PAGE>
Exhibit 11
ITT EDUCATIONAL SERVICES, INC.
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (660) $ 805 $ 6,668 $ 7,007
======= ======= ======= =======
Shares:
Weighted average number
of shares of common
stock outstanding 27,000 27,000 27,000 27,000
Shares assumed issued
(less shares assumed
purchased for treasury)
on stock options 183 103 163 107
------- ------- ------- -------
Outstanding shares for diluted
earnings per share calculation 27,183 27,103 27,163 27,107
======= ======= ======= =======
Earnings (loss) per common share: $ (.02) $ 0.03 $ 0.25 $ 0.26
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 96,934
<SECURITIES> 0
<RECEIVABLES> 14,308
<ALLOWANCES> (990)
<INVENTORY> 0
<CURRENT-ASSETS> 116,074
<PP&E> 74,814
<DEPRECIATION> (50,686)
<TOTAL-ASSETS> 150,802
<CURRENT-LIABILITIES> 54,128
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 94,213
<TOTAL-LIABILITY-AND-EQUITY> 150,802
<SALES> 0
<TOTAL-REVENUES> 137,364
<CGS> 0
<TOTAL-COSTS> 128,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,459
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,742
<INCOME-TAX> 5,074
<INCOME-CONTINUING> 6,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,668
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
