<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 September 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 [_]
27,011,202
Number of shares of Common Stock, $.01 par value,
outstanding at October 30, 1998
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
September 30, 1998
PART I
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
INDEX
-----
Page
----
<S> <C>
Statements of Income (unaudited) for the nine months ended September 30,
1998 and 1997 and the three months ended September 30, 1998 and 1997........ 3
Balance Sheets as of September 30, 1998 and 1997 (unaudited) and
December 31, 1997........................................................... 4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 1998 and 1997 and the three months ended September 30, 1998
and 1997.................................................................... 5
Notes to Financial Statements................................................ 6
</TABLE>
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ITT EDUCATIONAL SERVICES, INC.
STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Tuition $69,139 $61,849 $185,999 $165,848
Other educational 12,561 11,211 33,065 30,100
------- ------- -------- --------
Total revenues 81,700 73,060 219,064 195,948
------- ------- -------- --------
Costs and Expenses
Cost of educational services 45,778 41,616 132,186 119,407
Student services and administrative expenses 20,986 19,159 60,763 55,151
Legal settlement 12,858 -- 12,858 --
Offering, change in control and other
one-time expenses -- -- 1,872 --
------- ------- -------- --------
Total costs and expenses 79,622 60,775 207,679 174,558
------- ------- -------- --------
Operating income 2,078 12,285 11,385 21,390
Interest income, net 1,417 1,478 3,852 4,051
------- ------- -------- --------
Income before income taxes 3,495 13,763 15,237 25,441
Income taxes 1,398 5,505 6,472 10,176
------- ------- -------- --------
Net income $ 2,097 $ 8,258 $ 8,765 $ 15,265
======= ======= ======== ========
Earnings per common share
(basic and diluted) $ 0.08 $ 0.30 $ 0.32 $ 0.56
</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>
September 30, 1998 December 31, 1997 September 30, 1997
(unaudited) (unaudited)
------------------ ----------------- ------------------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 63,265 $ 29 $ 3
Restricted cash 1,161 3,860 911
Cash invested with ITT Corporation -- 94,800 99,630
Marketable debt securities 35,540 -- --
Accounts receivable, net 17,303 9,680 10,881
Deferred income tax 4,494 2,019 1,463
Prepaids and other current assets 4,221 2,570 3,397
------------------ ----------------- ------------------
Total current assets 125,984 112,958 116,285
Property and equipment, net 24,931 22,886 21,857
Direct marketing costs 7,773 6,882 6,687
Other assets 3,182 3,188 2,147
------------------ ----------------- ------------------
Total assets $ 161,870 $ 145,914 $ 146,976
================== ================= ==================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 20,442 $ 14,974 $ 15,382
Accrued compensation and benefits 6,395 3,245 4,085
Other accrued liabilities 14,711 6,877 6,924
Deferred tuition revenue 21,381 30,850 34,953
------------------ ----------------- ------------------
Total current liabilities 62,929 55,946 61,344
Other liabilities 2,361 2,153 1,675
------------------ ----------------- ------------------
Total liabilities 65,290 58,099 63,019
------------------ ----------------- ------------------
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 63,797 55,032 51,174
------------------ ----------------- ------------------
Total shareholders' equity 96,580 87,815 83,957
------------------ ----------------- ------------------
Total liabilities and shareholders'
equity $ 161,870 $ 145,914 $ 146,976
================== ================= ==================
</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 Nine Months
Ended September 30, Ended September 30,
------------------------ ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,097 $ 8,258 $ 8,765 $ 15,265
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,202 1,743 6,763 5,797
Provision for doubtful accounts 1,092 559 2,551 1,416
Deferred taxes (2,517) (20) (2,246) 288
Increase/decrease in operating assets and liabilities:
Marketable debt securities (35,540) -- (35,540) --
Accounts receivable (5,077) (2,348) (10,174) (2,919)
Direct marketing costs (293) (310) (891) (913)
Accounts payable and accrued liabilities 8,625 (1,381) 16,429 4,245
Prepaids and other assets (272) 1,145 (1,645) (1,555)
Deferred tuition revenue 178 642 (9,469) (8,579)
--------- -------- -------- -------
Net cash provided by (used for) operating activities (29,505) 8,288 (25,457) 13,045
--------- -------- -------- -------
Cash flows used for investing activities:
Capital expenditures, net (3,003) (1,628) (8,806) (8,294)
Net decrease in cash invested with ITT Corporation -- (6,570) 94,800 (9,822)
--------- -------- -------- --------
Net cash provided by (used for) investing activities (3,003) (8,198) 85,994 (18,116)
--------- -------- -------- --------
Net increase (decrease) in cash, cash equivalents and restricted cash (32,508) 90 60,537 (5,071)
Cash, cash equivalents and restricted cash at beginning of period 96,934 824 3,889 5,985
--------- -------- -------- -------
Cash, cash equivalents and restricted cash at end of period $ 64,426 $ 914 $ 64,426 $ 914
========= ======== ======== ========
</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 NINE MONTHS ENDED SEPTEMBER 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 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. 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 were incurred. The
Company adopted this SOP effective July 1, 1998 which increased net income
by $0.3 million ($0.01 per share) in the three and nine months ended
September 30, 1998.
The results of operations for the nine months ended September 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 "June 1998 Offering"). Starwood, Inc.
presently owns 35% of the outstanding shares of the Company's Common Stock.
The June 1998 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 or marketable debt securities at
September 30, 1998. The marketable debt securities have maturity dates in
excess of 90 days at the time of purchase and are recorded at their market
value. Debt securities with maturity dates less than 90 days at the time of
purchase are included in cash and cash equivalents and are recorded at cost
which approximates market value.
In June 1998, the Company incurred total expenses for the June 1998 Offering
of $1.1 million. In addition, the Company incurred expenses of $0.8 million
in the nine months ended September 30, 1998 (none in three months ended
September 30, 1998) 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 in the
normal course of business. In September 1998, the Company agreed to settle
eight legal proceedings (including Eldredge, et al. v. ITT Educational
Services, Inc., et al.) involving 25 former students and the claims of 15
other former students that related primarily to the Company's marketing and
recruitment practices and included allegations of
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<PAGE>
misrepresentation, fraud and violations of certain federal and state
statutes. As part of the settlement of these legal proceedings and claims,
the Company will seek court approval of a class settlement of the claims of
(a) approximately 1,200 other persons who attended an associate degree
program in hospitality at the ITT Technical Institute in Maitland, San
Diego, Portland or Indianapolis and (b) approximately 19,000 other persons
who attended any technology program at any ITT Technical Institute in
California from January 1, 1990 through December 31, 1997. If the Company
obtains court approval of the class settlements, the members of each class
may still elect to opt out of the settlement and pursue any claims they may
have against the Company. The Company recorded a $12.9 million provision for
legal settlements in the three months ended September 30, 1998 as a result
of the settlement of these legal proceedings and claims.
In the opinion of management, the ultimate outcome of the pending legal and
other claims, excluding the settlement discussed above, should not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
-7-
<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 $8.6 million, or 11.8%, to $81.7 million in the three months
ended September 30, 1998 from $73.1 million in the three months ended September
30, 1997. Revenues increased $23.2 million, or 11.8%, to $219.1 million in the
nine months ended September 30, 1998 from $195.9 million in the nine months
ended September 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
September 1998 was 8,787 compared to 8,070 for the same period in 1997. First-
time students numbered 7,815 in September 1998 compared to 7,156 in September
1997. The total student enrollment on September 30, 1998 was 27,313, compared to
25,811 on September 30, 1997, an increase of 5.8%.
Cost of educational services increased $4.2 million, or 10.1%, to $45.8 million
in the three months ended September 30, 1998 from $41.6 million in the three
months ended September 30, 1997. Cost of educational services increased $12.8
million, or 10.7%, to $132.2 million in the nine months ended September 30, 1998
from $119.4 million in the nine months ended September 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 decreased in the three and nine months ended
September 30, 1998 compared to the three and nine months ended September 30,
1997 as a result of no provision for legal expenses in the three months ended
September 30, 1998 and a $1.2 million provision in the nine months ended
September 30, 1998 (compared to a $0.5 million and $1.5 million provision for
legal expenses in the three and nine months ended September 30, 1997,
respectively) associated with the legal actions involving the hospitality
program. (See Note 3 of Notes to Financial Statements.) Excluding this
provision, cost of educational services in the three months ended September 30,
1998 would have been 56.0% of revenues, a 0.3% improvement from the three months
ended September 30, 1997, and cost of educational services in the nine months
ended September 30, 1998 would have been 59.8% of revenues, a 0.4% improvement
from the nine months ended September 30, 1997.
Student services and administrative expenses increased $1.8 million, or 9.4%, to
$21.0 million in the three months ended September 30, 1998 from $19.2 million in
the three months ended September 30, 1997. Student services and administrative
expenses increased $5.6 million, or 10.1%, to $60.8 million in the nine months
ended September 30, 1998 from $55.2 million in the nine months ended September
30, 1997. The Company increased its media advertising expenses in the three and
nine months ended September 30, 1998 by approximately 11.5% and 9.6%,
respectively, over the same expenses incurred in the three and nine months ended
September 30, 1997. Student services and administrative expenses decreased to
25.7% of revenues in the three months ended September 30, 1998 compared to
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<PAGE>
26.2% in the three months ended September 30, 1997, 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 nine 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 nine months ended September 30, 1998 were $1.3 million and $3.9
million, respectively, compared to $0.6 million and $2.6 million for the three
and nine months ended September 30, 1997, respectively.
The Company recorded a $7.7 million after tax ($0.28 per share) provision for
the settlement of certain legal proceedings and claims in the three months ended
September 30, 1998. (See Note 3 of Notes to Financial Statements). In June
1998, the Company incurred total expenses for the June 1998 Offering of $1.0
million after tax ($0.04 per share). In addition, the Company incurred expenses
of $0.5 million after tax ($0.02 per share) in the nine months ended September
30, 1998 (none in the three months ended September 30, 1998) associated with the
Company's change in control and establishment of new employee benefit plans.
The following table sets forth the operating income (in thousands) for the three
and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating income as reported $ 2,078 $12,285 $11,385 $21,390
Legal settlement 12,858 12,858
June 1998 Offering expenses 1,117
Change in control and other one-time costs 755
------- ------- ------- -------
Operating income before one-time costs $14,936 $12,285 $26,115 $21,390
======= ======= ======= =======
</TABLE>
Interest income in the three months ended September 30, 1998 was equal to the
interest income for the three months ended September 30, 1997. Interest income
decreased $0.2 million in the nine months ended September 30, 1998 compared to
the nine months ended September 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 in 1997 and
for the three months ended September 30, 1998 was 40%. The Company's 1998
federal and state tax provision will be greater than 40%, because $0.9 million
of the June 1998 Offering expenses are not tax deductible.
The following table sets forth the net income (in thousands) for the three and
nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------- ---------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net income $2,097 $8,258 $ 8,765 $15,265
Legal settlement (after tax) 7,715 7,715
June 1998 Offering expenses (after tax) 1,048
Change in control and other
one-time expenses (after tax) 453
------ ------ ------- -------
Net income before one-time expenses $9,812 $8,258 $17,981 $15,265
====== ====== ======= =======
</TABLE>
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<PAGE>
Financial Condition, Liquidity and Capital Resources
Due to the seasonal pattern of enrollments and the receipt of tuition payments,
comparisons of financial position and cash generated from operations should be
made both to the end of the previous year and to the corresponding period during
the previous year.
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 September 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" or "marketable debt securities" in the September 30, 1998 balance
sheet. The marketable debt securities have maturity dates in excess of 90 days
at the time of purchase and are recorded at their market value. Debt securities
with maturity dates less than 90 days at the time of purchase are included in
cash and cash equivalents and are recorded at cost which approximates market
value.
Regulations of the U.S. Department of Education ("DOE") that became effective
July 1, 1997 revised the procedures governing how an institution participating
in federal student financial aid programs under Title IV ("Title IV Programs")
of the Higher Education Act of 1965, as amended ("HEA") 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 September 30, 1998 by approximately $17.0
million compared to September 30, 1997 and decreased interest income in the
three and nine months ended September 30, 1998 by approximately $0.2 million and
$0.6 million from interest income in the three and nine months ended September
30, 1997, respectively.
Net cash provided by operating activities, excluding the $35.5 million increase
in marketable debt securities, was $10.1 million in the nine months ended
September 30, 1998 compared to $13.0 million in the nine months ended September
30, 1997. This $2.9 million decrease was due primarily to the decrease in
deferred tuition revenues or increase in accounts receivable discussed above and
the decrease in net income as a result of the one-time expenses, offset by an
increase in the amount due ITT under intercompany agreements that the Company
entered into with ITT at the time of the June 1998 Offering. As of September
30, 1998, the Company had not paid ITT $6.5 million for estimated federal income
taxes, pension expenses and medical expenses accrued from January 1, 1998
through the June 1998 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 settlement of the
intercompany 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") program and the William D. Ford Federal
Direct Loan ("FDL") program 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 addition, amendments to the HEA enacted in connection with the
reauthorization of the HEA in October 1998 (the "1998 HEA Amendments") provide
that if an institution becomes ineligible to participate in the FFEL and FDL
programs as a result of its 1996 (or any subsequent) federal fiscal year
FFEL/FDL cohort default rate, the institution will also be ineligible to
participate in the Federal Pell Grant ("Pell") program for the same period of
time.
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 Garland institute had an FFEL/FDL cohort default rate
below 25% for the 1996 federal fiscal year, the most
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recent year 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 has also decided to stop enrolling new students in the
Garland institute at least temporarily, while it continues teaching the students
already enrolled. The Company is considering whether to close the Garland
institute once the students already enrolled have completed their programs of
study or transferred to another ITT Technical Institute.
No ITT Technical Institute campus group (defined as the main campus and its
additional locations or branch campuses) had FFEL/FDL cohort default rate equal
to or greater than 25% for the 1996 federal fiscal year. 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 had FFEL/FDL cohort default rates
below 25% for the 1993 and 1996 federal fiscal years.
Prior to the 1998 HEA Amendments, the HEA limited how much an institution could
charge a student who withdrew from the institution before the end of the
student's first period of enrollment (i.e., quarter, semester, trimester, etc.)
at the institution. A student was only obligated for a pro rata portion of the
education costs charged by the institution, if the student withdrew during the
first 60% of the student's first period of enrollment. Any monies collected by
the institution in excess of the pro rata portion had to be refunded to lenders
or certain Title IV Programs in a particular order. The 1998 HEA Amendments
deleted the limitation on how much an institution can charge a withdrawing
student (although the laws and/or regulations of most state education
authorities that regulate the ITT Technical Institutes (the "SEAs") and the
standards of the accrediting commissions that accredit the ITT Technical
Institutes (the "Accrediting Commissions") continue to impose such a limitation)
and, instead, impose a limit on the amount of Title IV Program funds a
withdrawing student can use to pay his or her education costs of attending the
institution. This new limitation is applicable to any period of enrollment in
which the student withdraws, not just the first period of enrollment. The 1998
HEA Amendments permit a student to use only a pro rata portion of the Title IV
Program funds for which the student would otherwise be eligible to use, if the
student withdraws during the first 60% of the period of enrollment. Any Title
IV Program funds that the institution receives by or on behalf of a withdrawing
student in excess of the amount the student can use for such period of
enrollment must be refunded by the institution to lenders or certain Title IV
Programs in a particular order. Institutions have until October 1, 2000 to
begin complying with these new refund requirements.
Depending on the refund policies of the applicable state education authorities
and accrediting commission that limit how much an institution can charge a
student who withdraws during any period of enrollment, in a variety of instances
withdrawing students will still be obligated to the institution under the new
HEA refund requirements for education costs that the students can no longer pay
with Title IV Program funds. In these instances, the Company expects that many
withdrawing students will be unable to pay such costs and that the Company will
be unable to collect a significant portion of such costs. If the new refund
requirements remain unchanged, they could have a material adverse effect on the
Company's financial condition, results of operations or cash flows beginning
with the Company's 2001 fiscal year, because payments of Title IV Program funds
are generally paid sooner and are more collectible than certain other
receivables.
A proprietary institution, such as each ITT Technical Institute campus group,
becomes ineligible to participate in Title IV Programs if, on a cash accounting
basis, the institution derives more than 85% of its applicable revenues for a
fiscal year from Title IV Programs. For each of its 1996 and 1997 fiscal years,
the Company has calculated that no ITT Technical Institute campus group derived
more than 81% of its revenues from Title IV Programs, and for its 1997 fiscal
year, the range of the campus groups was from approximately 61% to approximately
80%. The 1998 HEA Amendments increased from 85% to 90% the percentage of
applicable fiscal year revenues that a proprietary institution can derive from
Title IV Programs and still remain eligible to participate in Title IV Programs.
The DOE has not yet issued regulations or guidance regarding the institution's
fiscal year to which this amendment first applies. The 5% increase in the
percentage of applicable fiscal year revenues that the Company can derive from
Title IV
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Programs and still remain eligible to participate therein will increase the
aggregate amount of Title IV Program funds that students can use to pay their
education costs of attending the ITT Technical Institutes. This change should
have a positive impact on the Company's results of operations and cash flows
beginning in the Company's 1999 fiscal year, because payments of Title IV
Program funds are generally paid sooner and are more collectible than certain
other receivables.
The DOE, the Accrediting Commissions and most of the SEAs have laws, regulations
and/or standards (collectively "Regulations") pertaining to the change in
ownership and/or control (collectively "change in control") of educational
institutions, but these Regulations do not uniformly define what constitutes a
change in control. Upon the occurrence of a change in control under the DOE's
Regulations, an institution immediately becomes ineligible to participate in
Title IV Programs and can only receive and disburse certain Title IV Program
funds that were previously committed to its students, until it has applied for
certification and is reinstated by the DOE to continue Title IV Program
participation under such institution's new ownership and control. The time
required for the DOE to act on such an application can vary substantially and
may take several months. The DOE's Regulations also require that all of the ITT
Technical Institutes in a particular campus group have their state
authorizations and accreditations reaffirmed or reestablished before any
institute in that campus group can regain its eligibility from the DOE to
continue participation in Title IV Programs. The 1998 HEA Amendments provide
that the DOE may provisionally certify an institution undergoing a change in
control. This provisional certification would allow the institution temporarily
to maintain its eligibility to participate in Title IV Programs following a
change in control while the DOE considers the institution's application for
reinstatement. The DOE has not yet issued regulations or guidance regarding how
it will interpret or apply this amendment to the HEA.
At present, 9.45 million shares, or 35%, of the Company's outstanding common
stock ("Common Stock") are owned by ITT and 17.55 million shares, or 65%, of the
Common Stock are publicly traded. On October 14, 1998, Starwood Hotels &
Resorts Worldwide, Inc. ("Starwood") announced that it intends to have ITT (a
wholly owned subsidiary of Starwood) divest its 9.45 million shares of the
Common Stock (the "Divestiture"). Depending on market conditions, the
Divestiture is expected to occur in January or February 1999 after the Company
obtains all of the necessary approvals from the applicable regulatory bodies.
The Company has notified the DOE, the SEAs and the Accrediting Commissions of
the Divestiture. The Company believes that it is probable that the DOE and some
of the SEAs (but not the Accrediting Commissions) may consider the Divestiture
to constitute a change in control of the Company and/or the ITT Technical
Institutes. The Company will pursue all approvals from the DOE, the SEAs and
the Accrediting Commissions necessitated by the Divestiture. If the Divestiture
constitutes a change in control under the Regulations of the DOE, effective upon
the Divestiture, each ITT Technical Institute campus group will become
immediately ineligible to participate in all of the Title IV Programs, unless
the DOE provisionally certifies each ITT Technical Institute campus group to
temporarily continue participating in Title IV Programs while the DOE considers
the campus group's application for reinstatement. The Company will obtain all
approvals of the Divestiture from the SEAs and any temporary continuance of
accreditation from the Accrediting Commissions required before the Divestiture
occurs. Following the Divestiture, the Company will seek the approvals of the
Divestiture from the SEAs and any temporary reinstatement of accreditation from
the Accrediting Commissions required after the Divestiture occurs, and will also
seek the DOE's reinstatement of each ITT Technical Institute campus group's
continued participation in Title IV Programs if it is lost as a result of a
change in control caused by the Divestiture. The Company believes that it will
be able to obtain all of the necessary SEA approvals (with the possible
exception of the California SEA), Accrediting Commission reaccreditation and DOE
reinstatement of each ITT Technical Institute campus group required as a result
of the Divestiture. There can be no assurance, however, that all such approvals,
reaccreditations and reinstatements can be obtained in a timely manner. In
particular, obtaining any such approval required by the California SEA could be
adversely affected by a state statute that prohibits the California SEA from
approving a change in control application by any applicant that has been found
in any judicial or administrative proceeding to have violated certain provisions
of the California Education Code ("CEC"). In October 1996, a state court jury
determined that the Company, through its ITT Technical Institute in San Diego,
California violated those provisions of the CEC. The Company appealed the jury's
verdict in that case and has recently settled the case. The Company and the
plaintiffs in that case have filed a joint application and stipulation with the
appellate court to reverse the judgment against the Company and remand the case
back to the trial court with instructions to dismiss the case with prejudice. If
the appellate court reverses the judgment against the Company in that case, the
Company believes
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that it will not have been found in any judicial or administrative proceeding to
have violated the CEC and the California SEA will no longer be prohibited from
approving any subsequent application for a change in control submitted by the
Company for any of the 11 ITT Technical Institutes in California. See "Part II,
Item 1. Legal Proceedings."
In order to assure that the students attending an ITT Technical Institute can
receive all of the Title IV Program funds necessary to pay their costs of
education for any academic quarter following the academic quarter in which the
Divestiture occurs, that institute must be either: (a) provisionally certified
by the DOE to temporarily continue participating in Title IV Programs while the
DOE considers the institute's application for reinstatement; or (b) reinstated
by the DOE to participate in Title IV Programs before the end of such subsequent
academic quarter. Otherwise, none of the students enrolled in that institute
could receive any Title IV Program grants to pay their costs of education for
such subsequent academic quarter, and any such students whose loan period began
after the institute became ineligible and ended before the campus group regained
its eligibility would not receive any Title IV Program loans to pay such costs
for such subsequent academic quarter(s). Failure by a material number of ITT
Technical Institute campus groups to either (a) obtain provisional certification
by the DOE to temporarily continue participating in Title IV Programs while the
DOE considers the campus groups' applications for reinstatement or (b) have
their eligibility to participate in Title IV Programs reinstated before the end
of the first such subsequent academic quarter would have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.
A change in control of the Company and the ITT Technical Institutes could occur
in the future as a result of certain transactions involving the ITT Technical
Institutes, the Company or a principal stockholder, including, but not limited
to, certain corporate reorganizations and certain changes in the boards of
directors of such corporations. 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 their SEAs,
reaccredited by their Accrediting Commissions or recertified by the DOE to
participate in Title IV Programs.
Capital expenditures were $8.8 million in the nine months ended September 30,
1998 compared to $8.3 million in the nine months ended September 30, 1997. This
increase was due primarily to increased capital expenditures in 1998 for new
institutes and curricula additions at existing institutes offset by a decrease
of approximately $3.0 million used to purchase new computers in the first
quarter of 1997 (required to accommodate a software upgrade for the Company's
computer-aided drafting technology curriculum). The Company expects that the
capital expenditures for the full 1998 year will be approximately $11.5 million,
the same as in 1997.
Capital expenditures for a new technical institute are approximately $0.4
million and capital expenditures for each new curriculum at an existing
institute are approximately $0.3 million. The Company anticipates that its
planned capital expenditures 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.
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. 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 were incurred. The Company adopted this SOP
effective July 1, 1998 which increased net income by $0.3 million ($0.01 per
share) in the three and nine months ended September 30, 1998.
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 costs and requires the cost of start-up activities to be
expensed
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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.
Year 2000 Compliance
The Year 2000 Problem. Many information technology ("IT") hardware and software
systems ("IT Systems") and non-IT systems containing embedded technology, such
as microcontrollers and microchip processors ("Non-IT Systems") can only process
dates with six digits (e.g., 06/26/98), instead of eight digits (e.g.,
06/26/1998). This limitation may cause IT Systems and Non-IT Systems to
experience problems processing information with dates after December 31, 1999
(e.g., 01/01/00 could be processed as 01/01/2000 or 01/01/1900) or with other
dates, such as September 9, 1999, which was a date traditionally used as a
default date by computer programmers. These problems may cause IT Systems and
Non-IT Systems to suffer miscalculations, malfunctions or disruptions. These
problems are commonly referred to as "Year 2000" or "Y2K" problems. The Company
is unable at this time to assess the possible impact on its financial condition,
results of operations and cash flows that may result from any disruptions to its
business caused by Y2K problems in any IT Systems and Non-IT Systems that the
Company, or any third party with which the Company has a material relationship,
uses. Management does not believe at the current time, however, that the cost
to remedy the Company's internal Y2K problems will have a material adverse
effect on the Company's results of operations or cash flows.
The Company's State of Readiness. The Company has begun to implement a plan to
ensure that its IT Systems and material Non-IT Systems controlled by the Company
are Y2K compliant before January 1, 2000. The first phase of the plan was to
assess the potential exposure of the Company's IT Systems and material Non-IT
Systems to Y2K problems. This phase has been completed. In the second phase,
which has also been completed, the Company designed a procedure to remediate the
Company's exposure to Y2K problems in its IT Systems and material Non-IT Systems
that it controls. The Company is currently in the third phase, which involves
the actual remediation of the Company's IT Systems and material Non-IT Systems
that it controls. After the third phase is completed, the Company will begin
the fourth and final phase of testing the remediation to the Company's IT
Systems and material Non-IT Systems that it controls to ensure Y2K compliance.
The testing phase is scheduled to be completed by June 30, 1999. The Company
believes that it has identified all IT Systems and material Non-IT Systems
controlled by the Company that may require Y2K remediation. The Company has 12
people (both employees and outside consultants) dedicated to completing
enhancements to its IT Systems, which include its accounting, human resources,
financial services, admissions, education, recruitment and career services
systems. These enhancements, which have been ongoing since 1996 and were not
accelerated due to any Y2K problems, will also address the Y2K problems with the
Company's IT Systems. The enhancements are scheduled to be completed by March
31, 1999. The Company has dedicated two employees to either remediate or cause
the remediation of material Non-IT Systems controlled by the Company that have
been identified as possessing a Y2K problem. The remediation of the Company's
material Non-IT Systems controlled by the Company is scheduled to be completed
by March 31, 1999. The Company acquired many of these Non-IT Systems during the
past few years and does not believe that a substantial number of these newer
systems possess a Y2K problem and many have been warranted by the vendor to be
Y2K compliant. The Company has contacted the third parties who control the
Company's other material Non-IT Systems (including, without limitation, the
Company's communication systems, security systems, electrical systems and HVAC
systems) to assess whether any of these systems possess a Y2K problem that could
adversely affect the Company's operations if a malfunction occurred. The
Company has also implemented procedures to help ensure that any new Non-IT
Systems acquired or utilized by the Company are Y2K compliant. In addition, the
Company has identified and begun to contact the third parties whose lack of Y2K
compliance may pose problems for the Company, such as federal and state
regulators, Accrediting Commissions, guaranty agencies, lenders, computer
software and hardware suppliers and book vendors. The General Accounting Office
("GAO") reported in September 1998 that the DOE's delay in addressing the Y2K
problems in its IT Systems and the DOE's limited progress in making contingency
plans should its IT Systems fail could result in serious disruptions in the
DOE's administration of, and disbursement of funds under, the Title IV Programs.
This report followed a negative assessment of the DOE's Y2K preparedness by the
House Government
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Reform and Oversight Committee. The DOE responded to the GAO report that it is
optimistic that it will resolve its material Y2K problems before January 1,
2000.
The Costs to Address the Company's Year 2000 Issues. The Company has expended
approximately $25,000 in direct costs through September 30, 1998 to identify and
remediate its Y2K problems. This amount does not include: (a) the salaries of
the Company's employees involved in the remediation process; (b) the cost of the
enhancements to the Company's IT Systems, because the enhancements have not been
accelerated due to Y2K problems; and (c) the cost to the Company of replacing
any Non-IT Systems or acquiring any new Non-IT Systems in the normal course of
the Company's operations and not because of any Y2K problems. Based on its
current assessment of the Company's Y2K problems, the Company estimates that its
remediation efforts will cost between $50,000 and $100,000 for the Company's IT
Systems and material Non-IT Systems controlled by the Company to become Y2K
compliant, representing up to 10% of the Company's IT budget. Approximately 75%
of this amount will be used, if necessary, to replace computer hardware and
software and other Non-IT Systems equipment owned by the Company at the ITT
Technical Institutes. This amount does not include any costs associated with
remediating any Y2K problems suffered by any third parties' IT Systems and Non-
IT Systems that may affect the Company's operations. The source of the funds
for the Company's Y2K remediation efforts will be the Company's operations.
The Risks of the Company's Year 2000 Issues. The remediation of the Company's
Y2K problems will increasingly result in the deferral of some existing and
contemplated projects, particularly those involving the Company personnel
conducting the Y2K remediation. Although the Company is unable at this time to
quantify its internal indirect costs resulting from its Y2K problems, management
does not believe that the cost of remediating the Company's internal Y2K
problems or the lost opportunity costs arising from diverting the efforts of
Company personnel to the remediation will have a material adverse effect on its
financial condition, results of operations or cash flows. The Company does not
intend to use any independent verification or validation processes to assure the
reliability of the Company's risk or cost estimates associated with its Y2K
problems. The Company has begun to outline several possible worst case scenarios
that could arise from its Y2K problems. At this time, however, the Company has
insufficient information to assess the likelihood of any worst case scenario.
The Company's most reasonably likely worst case Y2K scenarios involve
significant (a) delays in the Company's receipt of federal and state student
financial aid in payment of students' education costs of attending the ITT
Technical Institutes, (b) delays or interruptions in the eligibility to
participate in Title IV Programs, approval to operate or accreditation of the
ITT Technical Institutes that are undergoing their initial, or a renewal of,
such eligibility, approval or accreditation and (c) delays in obtaining
authorization to offer new programs of study for which the ITT Technical
Institutes have applied. In 1997, the Company derived approximately 70% of its
revenues from Title IV Programs administered by the DOE. In addition, a number
of the Company's ITT Technical Institutes participate in various state student
financial aid programs administered by the SEAs that, in total, generate a
material portion of the Company's revenues. In the Company's 1997 fiscal year,
one lending institution provided approximately 62% of all federally guaranteed
student loans to ITT Technical Institute students, and one student loan guaranty
agency guaranteed approximately 94% of all FFEL program loans made to ITT
Technical Institute students. As a result, the Company is dependent on the
ability of the DOE, the SEAs and its primary student loan lender and guaranty
agency to resolve their Y2K problems. If any of these parties experienced a Y2K
problem that significantly delayed the Company's receipt of federal or state
student financial aid in payment of students' education costs of attending the
ITT Technical Institutes, such a Y2K problem could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows. Similarly, an interruption in the ITT Technical Institutes' operations
could occur if the DOE, any SEA or either Accrediting Commission is unable to
timely grant or renew an ITT Technical Institute's eligibility to participate in
Title IV Programs, approval to operate or accreditation, respectively, due to a
Y2K problem. A prolonged delay or interruption for a significant number of
institutes could have a material adverse effect on the Company's financial
condition, results of operations and cash flows. The Company is unable to
independently assess the Y2K readiness of any of these third parties at this
time.
Contingency Plan. The Company has developed a contingency plan for the
Company's IT Systems and material Non-IT Systems controlled by the Company. The
Company has dedicated two employees to remediate a Company IT System that will
become obsolete after the enhancements to the Company's IT Systems are finished.
The remediation of this IT System is scheduled to be completed by March 31,
1999. If the enhancements to the Company's IT Systems
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are not finished before January 1, 2000, the Company hopes to avoid any
disruption to its business by using this other IT System. The Company's
contingency plan with respect to the material Non-IT Systems that it controls
includes, among other things, investigating the availability and replacement
cost of such Non-IT Systems that have Y2K problems, isolating such systems that
are not Y2K compliant so that they do not affect other systems, and adjusting
the clocks on such Non-IT Systems that are not date sensitive. The Company
believes that it could substitute other student loan lenders and guaranty
agencies for its primary lender and guaranty agency if either of these parties
experienced a Y2K problem that could significantly delay the Company's receipt
of federal or state student financial aid in payment of students' education
costs of attending the ITT Technical Institutes. The Company's current financial
resources would also help the Company weather any such delay. Otherwise, the
Company has no contingency plan, and does not intend to create a contingency
plan, for the IT systems and Non-IT Systems that are not controlled by the
Company, including the third party IT Systems of the DOE, the SEAs and the
Accrediting Commissions on which the Company relies.
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 consummation of the proposed settlements of student litigation and
claims related to the Company's technology programs in California and the
Company's hospitality programs; 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; loss of lender
access to the Company's students for student loans; and a substantial increase
in the shares of the Company's common stock available for sale in the market
upon ITT Corporation's divestment of its holdings of the Company's common stock.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is subject to litigation in the ordinary course of its business.
Among the legal actions currently pending are:
1. Eldredge, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 689376) (the "Eldredge Case"), was filed on June 8, 1995 in
the Superior Court of San Diego County in San Diego, California by
seven graduates of the hospitality program at the San Diego ITT
Technical Institute. The suit alleged, among other things,
misrepresentation, civil conspiracy and statutory violations of the
California Education Code ("CEC"), California Business and Professions
Code ("CBPC") and California Consumer Legal Remedies Act ("CCLRA") by
the Company, ITT and three employees of the Company. The plaintiffs
claimed that the defendants (a) made misrepresentations and engaged in
deceptive acts in the recruitment of the plaintiffs for, and/or in the
promotion of, the program, (b) provided inadequate instruction to the
plaintiffs, (c) used inadequate facilities and equipment in the
program and inappropriate forms of contracts with the plaintiffs, (d)
failed to provide the plaintiffs with all required information and
disclosures and (e) misrepresented the plaintiffs' prospects for
employment upon graduation, the employment of the program's graduates
and the plaintiffs' ability to transfer program credits. The jury
rendered a verdict against the Company and ITT in this action in
October 1996. General damages of approximately $0.2 million were
assessed against the Company and ITT, jointly, on the plaintiffs'
misrepresentations and CEC claims. Exemplary damages of $2.6 million
and $4.0 million were assessed against the Company and ITT,
respectively. The judge also awarded the plaintiffs attorney's fees
and costs in the amount of approximately $0.9 million. Prejudgment
interest was assessed on the general damages award and post-judgment
interest was assessed on the entire award. The plaintiffs' CBPC and
CCLRA claims and their claims against the Company employees were
dismissed, and the judge vacated the jury verdict against ITT. The
Company appealed the awards rendered against it, and the plaintiffs
appealed the vacated verdict against ITT.
In September 1998, the Company agreed to settle all of the plaintiffs'
claims in the Eldredge case in conjunction with the settlement of
other related legal proceedings and claims discussed below. The
Company recorded a $12.9 million provision for legal settlements in
September 1998 associated with such settlements, including the legal
and administrative expenses the Company expects to incur to consummate
the settlements. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations Results of Operations."
All of the parties in the Eldredge case have dismissed their
respective appeals and have filed a joint application and stipulation
with the appellate court to reverse the judgment against the Company
and remand the case back to the trial court with instructions to
dismiss the case with prejudice. A California statute prohibits the
California SEA from approving an application for a change in control
of any institution submitted by an applicant that has been found in
any judicial or administrative proceeding to have violated Chapter 7
(formerly Chapter 3) of the CEC ("Chapter 7"). If the appellate court
reverses the judgment against the Company in the Eldredge case, the
Company believes that it will not have been found in any judicial or
administrative proceeding to have violated Chapter 7 and the
California SEA will no longer be prohibited from approving any
subsequent application for a change in control submitted by the
Company for any of the 11 ITT Technical Institutes in California.
Other related legal proceedings and claims (as discussed below) have
resulted and may continue to result from other persons alleging
similar claims of misrepresentation and violations of certain
statutory provisions.
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2. Robb, et al. v. ITT Educational Services, Inc., et al. (Civil Action
No. 00707460) (the "Robb Case"), was filed on January 24, 1997 in the
Superior Court of San Diego County in San Diego, California by four
graduates of the San Diego ITT Technical Institute. The suit, as
originally filed, alleged, among other things, statutory violations of
the CEC and CBPC by the Company and ten employees of the Company. The
plaintiffs in the original complaint sought compensatory damages,
civil penalties, injunctive relief, disgorgement of ill-gotten gains,
restitution (including return of educational costs) on behalf of
plaintiffs and all other persons similarly situated who attended an
ITT Technical Institute in California, attorney's fees and costs, and
also sought to have the action certified as a class action. The
plaintiffs amended their complaint on August 14, 1997. The amended
complaint deleted three and added two named plaintiffs. Each of the
three plaintiffs was a student who attended one of three different
programs (i.e., hospitality, electronics engineering technology and
computer-aided drafting technology) at an ITT Technical Institute in
California. The plaintiffs in the amended complaint alleged only
violations of the CEC, based on the plaintiffs' claims that the
defendants (a) made misrepresentations and engaged in deceptive acts
in the recruitment of students for, and/or in the promotion of, the
programs offered in California, (b) failed to provide students with
all required information and disclosures and (c) misrepresented
students' prospects for employment upon graduation and the employment
of the programs' graduates. The plaintiffs sought (a) a refund of an
unspecified amount representing all consideration paid to the Company
by the plaintiffs and all other persons similarly situated who
attended any of the programs in California at any time from January 1,
1991 through December 31, 1996, (b) a state statutory penalty equal to
two times the refund amount, (c) injunctive relief and (d) an
unspecified amount of attorney's fees and costs.
In May 1998, the Company agreed to settle all of the claims of one of
the three plaintiffs in this legal proceeding. In September 1998, the
Company agreed to settle all of the claims of the two remaining
plaintiffs in this legal proceeding and to seek a class settlement of
the claims of the approximately 19,000 other persons who attended any
technology program at any ITT Technical Institute in California from
January 1, 1990 through December 31, 1997. The class settlement, which
is subject to court approval, would provide class members with
nontransferable tuition credits to attend a different educational
program at an ITT Technical Institute in the amount of: (a) $250.00
per quarter off the then prevailing quarterly tuition for class
members who completed at least 50% of an associate degree program at
an ITT Technical Institute in California; (b) $125.00 per quarter off
the then prevailing quarterly tuition for class members who completed
(i) less than 50% of an associate degree program at an ITT Technical
Institute in California or (ii) at least 50% of a bachelor degree
program at an ITT Technical Institute in California; and (c) $62.50
per quarter off the then prevailing quarterly tuition for class
members who completed less than 50% of a bachelor degree program at an
ITT Technical Institute in California. The class member could use the
tuition credit toward the cost of attending any ITT Technical
Institute program that the class member had not previously attended.
In addition to the issuance of tuition credits, the Company has also
agreed to stipulate to a permanent injunction that would enjoin the
Company from certain recruitment practices (none of which the Company
currently follows) and to pay the plaintiffs' reasonable attorneys'
fees and expenses. If more than 1% of the class members opt out of the
class settlement, the Company may, in its sole discretion, terminate
the class settlement.
3. Iverson, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 00707705); Ohrt v. ITT Educational Services, Inc., et al.
(Civil Action No. 00707706); Sayers v. ITT Educational Services, Inc.,
et al. (Civil Action No. 00707707); Barrent, et al. v. ITT Educational
Services, Inc., et al. (Civil Action No. 00707708) (the "Barrent
Case"); and Kellum, et al. v. ITT Educational Services, Inc., et al.
(Civil Action No. 00707709) (the "Kellum Case"), were each filed on
January 31, 1997 in the Superior Court of San Diego County in San
Diego, California. Each of the five actions (involving, in total, 16
former students who attended the hospitality program at the San Diego
ITT Technical Institute) alleged statutory violations of the CEC, the
CBPC and the California Consumer Contract Awareness Act of 1990,
intentional misrepresentation and/or concealment, and civil
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conspiracy by the Company, ITT and a Company employee. The plaintiffs
claimed that the defendants (a) made misrepresentations and engaged in
deceptive acts in the recruitment of the plaintiffs for, and/or in the
promotion of, the program, (b) used inadequate facilities and
equipment in the program and inappropriate forms of contracts with the
plaintiffs, (c) failed to provide the plaintiffs with all required
information and disclosures and a fully executed copy of their
contracts with the Company and (d) misrepresented the plaintiffs'
prospects for employment upon graduation, the employment of the
program's graduates and the plaintiffs' externship portion of the
program. The plaintiffs in each action sought various forms of
recovery, including (a) an unspecified amount for compensatory
damages, disgorgement of ill-gotten gains, restitution, attorney's
fees and costs, (b) state statutory penalties equal to two times
actual damages, (c) injunctive relief and (d) $10 million in exemplary
damages.
In May 1998, the Company agreed to settle all of the claims of four of
the five plaintiffs in the Kellum Case and five of the six plaintiffs
in the Barrent Case. In September 1998, the Company agreed to settle
all of the claims of the remaining seven plaintiffs in these five
legal proceedings.
4. Collins, et al. v. ITT Educational Services, Inc., et al. (Civil
Action No. 98 cv 0659 BTM) (the "Collins Case"), was filed on April 6,
1998 in the U.S. District Court for the Southern District of
California in San Diego, California by nine former students who
attended the hospitality program at either the Maitland or San Diego
ITT Technical Institute. The suit alleged violations of the federal
Racketeer Influenced and Corrupt Organizations Act, the CEC, the CBPC,
the CCLRA, the Florida Deceptive and Unfair Trade Practices Act, the
Florida Civil Remedies for Criminal Practices Act and Florida statutes
prohibiting misleading advertising, common law fraud and/or
concealment and civil conspiracy by the Company and ITT. The
plaintiffs claimed that the defendants (a) made misrepresentations and
engaged in deceptive acts in the recruitment of students for, and/or
in the promotion of, the program, (b) failed to provide students with
all required information and disclosures and (c) misrepresented
students' prospects for employment upon graduation, the employment of
the program's graduates and the students' externship portion of the
program. The plaintiffs sought various forms of recovery on behalf of
the plaintiffs and all other persons similarly situated who attended
the program at the Indianapolis, Maitland, Portland or San Diego ITT
Technical Institute at any time from January 1, 1990 through December
31, 1996, including (a) an unspecified amount for compensatory
damages, exemplary damages, rescission and the return of all tuition
and fees paid to the Company by or on behalf of students who attended
the program, the disgorgement of ill-gotten gains, restitution,
attorney's fees and costs, (b) state statutory penalties of two and
three times actual damages, (c) a federal statutory penalty of $45
million and (d) injunctive relief.
In September 1998, the Company agreed to seek a class settlement of
the claims of the nine plaintiffs in this legal proceeding and of the
approximately 1,200 other persons who attended an associate degree
program in hospitality at the ITT Technical Institute in Maitland,
Florida, San Diego, California, Portland, Oregon or Indianapolis,
Indiana. The class settlement, which is subject to court approval,
involves the Company's payment of cash to the class members and the
plaintiffs' reasonable attorneys' fees and expenses. If more than 1%
of the class members opt out of the class settlement, the Company may,
in its sole discretion, terminate the class settlement.
5. In August 1998, 15 former students who attended the hospitality
program at the ITT Technical Institute in San Diego or Maitland
threatened to commence legal proceedings against the Company and
others. The claimants alleged, among other things, statutory
violations, misrepresentation, fraud and concealment by the Company
and others arising out of their recruitment to attend, and their
education at, the ITT Technical Institute. In September 1998, the
Company agreed to settle all of the claims of the 15 claimants.
-19-
<PAGE>
There can be no assurance as to the ultimate outcome of any litigation involving
the Company. Nevertheless, management does not believe any pending legal
proceeding will result in a judgment or settlement that will have, after taking
into account the Company's existing provisions (including the $12.9 million
provision in September 1998 described above) for such liabilities, a material
adverse effect on the Company's financial condition, results of operations or
cash flows, unless (a) the Company fails to obtain court approval of the class
settlement in the Robb Case or the Collins Case and a significant amount of
litigation against the Company results from such failure or (b) a significant
number of class members opt out of either class settlement and pursue litigation
against the Company. Any litigation alleging violations of education or consumer
protection laws and/or regulations, misrepresentation, fraud or deceptive
practices may also subject the affected ITT Technical Institute to additional
regulatory scrutiny.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
A list of exhibits required to be filed as part of this report is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30, 1998.
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<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: November 2, 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
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------------------------------------------------------------------------------
<S> <C>
10.16 *ESI Pension Plan....................................................
11 Statement re Computation of Per Share Earnings......................
27 Financial Data Schedule.............................................
</TABLE>
- ----------------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-K.
S-2
<PAGE>
Exhibit 10.16
ESI PENSION PLAN
<PAGE>
ESI PENSION PLAN
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
GENERAL PROVISIONS ..................................................... 1
Section 1.01. .......................................................... 1
Designation and Purpose ................................................ 1
Section 1.02. Trust Agreement ......................................... 1
ARTICLE II
DEFINITIONS ............................................................ 1
Section 2.01. Terms Defined ........................................... 1
Section 2.02. Rules of Construction ................................... 13
ARTICLE III
MEMBERSHIP ............................................................. 13
Section 3.01. Date of Membership ...................................... 13
Section 3.02. Cessation of Membership ................................. 14
Section 3.03. Transfers of Employment ................................. 14
ARTICLE IV
FUNDING OF BENEFITS .................................................... 14
Section 4.01. Funding Policy and Method ............................... 14
Section 4.02. Actuarial Valuations .................................... 14
Section 4.03. Funding Standard Account ................................ 14
Section 4.04. Nondiversion and Exclusive Benefit ...................... 14
ARTICLE V
VESTING ................................................................ 15
Section 5.01. Nonforfeitability ....................................... 15
Section 5.02. Vesting of Member's Benefit ............................. 15
Section 5.03. Deemed Distributions .................................... 16
ARTICLE VI
MEMBER BENEFITS ........................................................ 16
Section 6.01. Cash Balance Accounts ................................... 16
Section 6.02. Standard Pay Credits .................................... 16
Section 6.03. Transition Member Pay Credits ........................... 17
Section 6.04. Interest Credits ........................................ 18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
PAYMENT OF BENEFITS .................................................... 18
Section 7.01. Normal Retirement Benefits .............................. 18
Section 7.02. Disability Retirement Benefits .......................... 20
Section 7.03. Other Termination Benefits .............................. 21
Section 7.04. Death Benefits .......................................... 21
Section 7.05. Equivalent Benefits and Present Value ................... 23
Section 7.06. Written Explanation of Benefits ......................... 23
Section 7.07. Purchase of Annuity Contracts ........................... 24
Section 7.08. Top-Heavy Benefits ...................................... 24
Section 7.09. Other Distribution Rules Imposed by Federal Law ......... 24
Section 7.10. Effect of Government Regulation on Payment of Benefits .. 26
Section 7.11. Inalienability of Benefits .............................. 26
Section 7.12. Payments for Benefit of Incompetents .................... 26
Section 7.13. Qualified Domestic Relations Orders ..................... 26
Section 7.14. Direct Rollovers ........................................ 27
ARTICLE VIII
ADMINISTRATION ......................................................... 27
Section 8.01. Administrator ........................................... 27
Section 8.02. Removal and Replacement of Committee Members ............ 27
Section 8.03. Resignation ............................................. 27
Section 8.04. Chairman, Services, and Counsel ......................... 27
Section 8.05. Meetings ................................................ 27
Section 8.06. Quorum .................................................. 27
Section 8.07. Action Without Meeting .................................. 27
Section 8.08. Notice to Trustee of Changes in Membership .............. 28
Section 8.09. Correction of Defects ................................... 28
Section 8.10. Reliance Upon Legal Counsel ............................. 28
Section 8.11. Expenses ................................................ 28
Section 8.12. Indemnification ......................................... 28
Section 8.13. Powers and Duties of Committee .......................... 28
Section 8.14. Matters Specifically Excluded from Jurisdiction ......... 29
Section 8.15. Investment Manager ...................................... 29
ARTICLE IX
CLAIMS PROCEDURES ...................................................... 30
Section 9.01. Presentation of Claims .................................. 30
Section 9.02. Denial of Claim ......................................... 30
Section 9.03. Claimant's Right to Appeal Denial of Claim .............. 31
ARTICLE X
LIMITATIONS ON RIGHTS OF EMPLOYEES AND OTHER PERSONS ................... 31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 10.01. In General ............................................. 31
Section 10.02. No Increase or Impairment of Other Rights .............. 32
Section 10.03. Trust Sole Source of Benefits .......................... 32
Section 10.04. Other Limitations of Liability ......................... 32
ARTICLE XI
PROVISIONS DESIGNED TO COMPLY WITH LIMITATIONS ON BENEFITS AND
OTHER ADDITIONS ........................................................ 32
Section 11.01. Purpose and Construction of This Article ............... 32
Section 11.02. General Statement of Limitation ........................ 32
ARTICLE XII
AMENDMENT, MERGER AND TERMINATION ...................................... 34
Section 12.01. Amendment of Plan ...................................... 34
Section 12.02. Amendments Necessary to Bring Plan into Compliance
with the Code and ERISA ................................ 34
Section 12.03. Amendments to Vesting Provisions ....................... 34
Section 12.04. Merger or Consolidation ................................ 35
Section 12.05. Termination of Plan .................................... 35
Section 12.06. Limitation Concerning 25 Highest Paid Employees ........ 35
ARTICLE XIII
PROVISIONS RELATING TO TOP-HEAVY PLAN .................................. 36
Section 13.01. Construction of this Article ........................... 36
Section 13.02. Top-Heavy Determination ................................ 36
Section 13.03. Special Rules Relating to Determination of
Top-Heavy Status ....................................... 37
ARTICLE XIV
MISCELLANEOUS PROVISIONS ............................................... 38
Section 14.01. ......................................................... 38
No Duplication of Benefits ............................................. 38
Section 14.02. Named Fiduciaries ...................................... 38
Section 14.03. Bonding ................................................ 38
Section 14.04. Qualified Military Service ............................. 38
</TABLE>
iii
<PAGE>
ESI PENSION PLAN
ARTICLE I
GENERAL PROVISIONS
Section 1.01. Designation and Purpose. The name of this Plan is
the ESI Pension Plan. The Plan is a cash balance defined benefit plan. The
Plan's purpose is to provide retirement income for Eligible Employees. The Plan
is designed to meet the requirements of Code subsections 401(a) and 501(a) and
the requirements of ERISA.
Section 1.02. Trust Agreement. Effective as of the date of its
execution, ESI entered into a Trust Agreement with NBD Bank, N.A., providing for
a trust to support and implement the operation of the Plan. The Trust
Agreement, as amended from time to time, is part of this Plan.
ARTICLE II
DEFINITIONS
Section 2.01. Terms Defined. As used in the Plan, the following
words and phrases, when capitalized, will have the following meanings, unless a
different meaning is plainly required by the context.
"Actuarial Equivalent" means, with respect to a benefit, another
benefit that has the same actuarially determined value. The determination
of an Actuarial Equivalent will be computed using the mortality table as
prescribed from time to time by the Secretary pursuant to Code subclause
417(e)(3)(A)(ii)(I), and an interest rate equal to the Applicable
Percentage for that Plan Year.
"Aggregation Group" means either a Required Aggregation Group or a
Permissive Aggregation Group.
"Annual Addition" means, with respect to a Member for a Plan Year, the
following amounts credited to a Member's accounts in any qualified defined
contribution plan maintained by the Employer or a Related Employer for the
Plan Year: employer contributions, employee contributions (other than
rollover contributions); forfeitures; amounts allocated, after March 31,
1984, to an individual medical account, as defined in Code paragraph
415(l)(2), that is part of a pension or annuity plan maintained by the
Employer or a Related Employer; and amounts derived from contributions paid
or accrued after March 31, 1984, that are attributable to post-retirement
medical benefits, allocated to the separate account of a Key Employee,
under a welfare benefit fund, as defined in Code subsection 419(e),
maintained by the Employer or a Related Employer.
<PAGE>
"Annuity Starting Date" means, with respect to a Member, the first day
of the first period for which a Plan benefit is paid as an annuity or, in
the case of a benefit not paid in the form of an annuity, the first day on
which all events have occurred that entitle the Member to the benefit.
"Applicable Election Period" means, in the case of an election to
waive a Qualified Joint and Survivor Annuity or Life Annuity (a) the 90-day
period ending on the Annuity Starting Date or (b) the 30-day period
beginning on the date the Committee provides the Member with the written
explanation described in Section 7.06, whichever ends later. In the case
of an election to waive the Qualified Preretirement Survivor Annuity,
"Applicable Election Period" means (a) the period that begins on the first
day of the Plan Year in which the Member reaches age 35 and ends on the
date of the Member's death or (b) if a Member's employment is earlier
terminated, with respect to benefits accrued before the termination, the
period that begins no later than the date of the termination and ends on
the date of the Member's death.
"Applicable Percentage" means, with respect to a Plan Year, the
annual rate of interest on 30-year Treasury securities for November of the
year preceding that Plan Year, as specified by the Commissioner of Internal
Revenue.
"Beneficiary" means, with respect to each Member, the person or
persons who are to receive benefits under the Plan after the Member's
death.
"Board of Directors" means the Board of Directors of ESI.
"Break in Service" means a Plan Year during which an Employee
completes 500 or fewer Hours of Service.
"Cash Balance Account" means a bookkeeping account maintained for a
Member pursuant to Section 5.01.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and interpretive rulings and regulations.
"Committee" means the Plan Committee established pursuant to Article
VIII.
"Compensation" means, with respect to an Employee for a Plan Year, the
Employee's wages, salaries, fees for professional services, and other
amounts received for personal services actually rendered in the course of
employment with the Employer to the extent that the amounts are included in
gross income. Compensation also includes amounts contributed by the
Employer pursuant to a salary reduction agreement that are not includable
in the gross income of the Member under Code section 125 or 457, subsection
402(h) or 403(b), or paragraph 402(e)(3), and Employee contributions
described in Code paragraph 414(h)(2) that are treated as Employer
contributions.
-2-
<PAGE>
Compensation does not include, whether or not included in gross income,
reimbursements or other expense allowances, fringe benefits (cash and non-
cash), moving expenses (including settling in allowances), nonqualified
deferred compensation, welfare benefits, or amounts realized from the
exercise of a nonqualified stock option, or when restricted stock (or
property) held by an employee either becomes freely transferable or is no
longer subject to a substantial risk of forfeiture. Except as permitted by
the Code for purposes of Section 6.08 and Articles XI and XIII, an
Employee's Compensation will not exceed $150,000, as adjusted to reflect
increases in the limitation pursuant to Code paragraph 401(a)(17).
"Compensation Limit" means the limitation on annual benefits described
with reference to a Member's average Compensation at Subsection 11.02(a).
"Defined Benefit Plan Fraction" means, with respect to an individual
participating in one or more qualified defined benefit plans for any Plan
Year, the fraction, the numerator of which is the individual's "projected
annual benefits" under the qualified defined benefit plans determined as of
the end of the Plan Year, and the denominator of which is the lesser of (a)
the product of 1.25 (1.0 if the Plan is a Top-Heavy Plan for the particular
Plan Year) multiplied by the dollar limitation in effect under Code
subparagraph 415(b)(1)(A) for that Plan Year or (b) the product of 1.4
multiplied by the amount that may be taken into account under Code
subparagraph 415(b)(1)(B) with respect to the individual under the
qualified defined benefit plans for the Plan Year. For purpose of this
definition, "projected annual benefits" means, with respect to a qualified
defined benefit plan, the annual straight life annuity benefit to which the
Member would be entitled if he continued employment until his normal
retirement age under the plan and the Member's compensation and all other
factors used to determine the benefit remained constant until his normal
retirement age.
"Defined Contribution Plan Fraction" means, with respect to an
individual participating in one or more qualified defined contribution
plans for any Plan Year, the fraction, the numerator of which is the sum of
the Annual Additions with respect to the Member determined as of the close
of the Plan Year, and the denominator of which is the lesser of the
following amounts determined for that Plan Year and for each prior Plan
Year of service with the Employer: (a) the product of 1.25 (1.0 if the
Plan is a Top-Heavy Plan for the particular Plan Year) multiplied by the
dollar limitation in effect under Code subparagraph 415(c)(1)(A) for the
Plan Year determined without regard to Code paragraph 415(c)(6), or (b) the
product of 1.4 multiplied by the amount that may be taken into account
under Code subparagraph 415(c)(1)(B) with respect to that individual under
all qualified defined contribution plans for the Plan Year.
"Determination Date" means, for purposes of determining whether the
Plan is a Top-Heavy Plan for any Plan Year, the last day of the preceding
Plan Year; for the first Plan Year, the last day of the Plan Year.
-3-
<PAGE>
"Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
"Disability" means a total disability within the meaning of ESI's
long-term disability insurance plan, as amended from time to time, whether
or not the Member actually participates in ESI's long-term disability
insurance plan.
"Disability Date" means, with respect to a Member, the date the Member
is first determined by the Committee to have a Disability.
"Distributee" means an Employee or former Employee. In addition, the
Employee's or former Employee's surviving Spouse and the Employee's or
former Employee's Spouse or former Spouse who is the alternate payee under
a Qualified Domestic Relations Order are Distributees with regard to the
interest of the Spouse or former Spouse.
"Dollar Limit" means the limitation on annual benefits described with
reference to $90,000 at Subsection 11.02(a).
"Effective Date" means June 9, 1998.
"Eligible Employee" means an Employee other than (a) a college work
study student; (b) a non-resident alien; (c) a Leased Employee; (d) an
Employee who is covered by a collective bargaining agreement that does not
provide for Plan membership; or (e) an Employee accruing benefits for
current service under any other qualified defined benefit plan or qualified
defined contribution plan maintained by the Employer or a Related Employer
(other than the ESI 401(k) Plan).
"Eligible Retirement Plan" means an individual retirement account
described in Code subsection 408(a), an individual retirement annuity
described in Code subsection 408(b), an annuity plan described in Code
subsection 403(a), or a qualified trust described in Code subsection
401(a), that accepts the Distributee's Eligible Rollover Distribution.
However, in the case of an Eligible Rollover Distribution to a surviving
Spouse, an Eligible Retirement Plan is an individual retirement account or
individual retirement annuity.
"Eligible Rollover Distribution" means any distribution of all or a
portion of the balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include any distribution that is
one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Distributee or the joint lives (or joint life expectancies) of the
Distributee and the Distributee's Beneficiary, or for a specified period of
ten years or more; any distribution to the extent that the distribution is
required under Code paragraph 401(a)(9); and the portion of any
distribution that is not includable in gross income (determined without
-4-
<PAGE>
regard to the exclusion for net unrealized appreciation with respect to
employer securities).
"Employee" means any person employed by the Employer as a salaried
employee, who is paid from a payroll maintained in the United States, and
who receives compensation that the Employer initially reports on a federal
wage and tax statement (Form W-2). For purposes of crediting Years of
Eligibility Service or Years of Vesting Service and, except as otherwise
provided, for purposes of Articles XI and XIII, the term "Employee"
includes a Leased Employee.
"Employer" means ESI and any Related Employer that adopts the Plan.
For purposes of crediting service for eligibility to participate and,
except as otherwise provided, for purposes of the rules set out in Articles
XI and XIII, the term "Employer" includes any Related Employer.
"Entry Date" means the first day of each calendar month.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and interpretive rulings and regulations.
"ESI" means ITT Educational Services, Inc., and any corporation that
succeeds to its business and adopts the Plan.
"Highly Compensated Member" means a highly compensated active Employee
or a highly compensated former Employee.
(a) With respect to a Plan Year, a highly compensated active
Employee includes any Employee who performs service for the Employer
during the Plan Year and who (1) is a 5% owner for that Plan Year or
was a 5% owner for the prior Plan Year or (2) for the prior Plan Year
received Compensation from the Employer in excess of $80,000 (as
adjusted pursuant to Code subsection 415(d)). The Employer does not
elect to require that a highly compensated active employee must be a
member of the Employer's top-paid group for the preceding Plan Year.
(b) With respect to a Plan Year, a highly compensated former
Employee includes any Employee who terminated employment (or was
deemed to have terminated employment) prior to the Plan Year, performs
no service for the Employer during the Plan Year, and was a highly
compensated active Employee for either the Plan Year during which he
terminated employment or any Plan Year ending on or after the
Employee's 55th birthday.
(c) The determination of who is a Highly Compensated Member will
be made in accordance with Code subsection 414(q).
-5-
<PAGE>
"Hour of Service" means each hour for which an Employee is entitled to
credit under this Subsection.
(a) An Employee is entitled to credit for each hour for which he
is paid, or entitled to payment, for the performance of duties for the
Employer. Subject to the provisions of Paragraph (f), an Hour of
Service described in this Paragraph will be credited to an Employee
for the computation period in which the duties are performed.
(b) An Employee is entitled to credit for each hour for which he
is paid, or entitled to payment, by the Employer on account of a
period during which no duties are performed (irrespective of whether
the employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including disability), layoff, jury duty,
military duty, or leave of absence; provided, however, that no Hours
of Service will be credited under this Paragraph if payment is made or
due solely to reimburse an Employee for medical or medically related
expenses or solely for the purpose of complying with applicable
workers' compensation, unemployment compensation, or disability
insurance laws. No more than 501 Hours of Service will be credited to
an Employee on account of any single continuous period during which
the Employee performs no duties (whether or not this period occurs in
a single Plan Year) unless the Hours of Service are credited pursuant
to Paragraph (d). Subject to the provisions of Paragraph (f), an Hour
of Service credited to an Employee pursuant to this Paragraph will be
credited to the computation period or periods during which no duties
are performed.
(c) An Employee is entitled to credit for each hour for which
back pay, irrespective of mitigation of damages, is either awarded or
agreed to by the Employer. The same Hour of Service will not be
credited under Paragraph (a) or Paragraph (b), as the case may be, and
under this Paragraph. An Hour of Service described in this Paragraph
will be credited to the computation period or periods to which the
award or agreement for back pay pertains, rather than to the
computation period in which the award, agreement, or payment is made.
(d) For eligibility and vesting purposes only, "Hours of Service"
will be credited to an Employee for military leave for training or
service, or both, if that Employee is entitled to be credited with
service for his period of military leave upon his reemployment with
the Employer under applicable federal law. An Employee will be
credited with 190 Hours of Service for each month of military leave.
(e) Solely for purposes of determining whether a Break in Service
has occurred for eligibility and vesting purposes, an Employee who is
absent from work for maternity or paternity reasons will receive
credit for the Hours of Service that would otherwise have been
credited to the Employee but for the absence, or
-6-
<PAGE>
in any case in which those hours cannot be determined, eight Hours of
Service per day of the absence. For purposes of this Paragraph, an
absence from work for maternity or paternity reasons means an absence
(1) by reason of the pregnancy of the Employee, (2) by reason of a
birth of a child of the Employee, (3) by reason of the placement of a
child with the Employee in connection with the adoption of the child
by the Employee, or (4) for purposes of caring for the child for a
period beginning immediately following its birth or placement. The
total number of hours treated as Hours of Service under this Paragraph
by reason of any absence may not exceed 501. The Hours of Service
credited under this Paragraph will be credited (1) to the computation
period in which the absence begins if the crediting is necessary to
prevent a Break in Service in that period or (2) in all other cases,
to the following computation period. No Hours of Service will be
credited pursuant to this Paragraph unless the Employee furnishes to
the Committee such timely information as the Committee may reasonably
require to establish (1) that the absence from work is for reasons
referred to in this Paragraph and (2) the number of days of the
absence.
(f) All regulations promulgated by the U.S. Secretary of Labor or
his delegate applicable to the computation and crediting of Hours of
Service under ERISA, including 29 C.F.R. (S) 2530.200(b)-2, are
incorporated as part of the Plan. The provisions of the Plan are
intended to comply with the regulations and will be construed and
applied to effect compliance.
"ITT Plan" means the ITT Retirement Plan for Salaried Employees of ITT
Corporation, as in effect immediately prior to June 9, 1998.
"Key Employee" means the following:
(a) Any Employee or former Employee (including a Beneficiary of
the Employee or former Employee) who at any time during the Plan Year
or any of the four preceding Plan Years is included in a
classification described in Paragraph (b), determined in accordance
with the rules of Code paragraph 416(i)(1).
(b) The following are Key Employee classifications:
(1) an officer of the Employer having an annual Compensation
greater than 50% of the amount in effect under Code subparagraph
415(b)(1)(A) for the Plan Year;
(2) one of the 10 Employees having an annual Compensation
from the Employer of more than the limitation in effect under
Code subparagraph 415(c)(1)(A) and owning (or considered as
owning within the meaning of Code section 318) the largest
interests of the Employer;
-7-
<PAGE>
(3) a person owning (or considered as owning within the
meaning of Code section 318) more than 5% of the outstanding
stock of the Employer or stock possessing more than 5% of the
total combined voting power of all stock of the Employer; or
(4) a person who has an annual Compensation from the
Employer of more than $150,000 and who would be described in
Subparagraph (3) if 1% were substituted for 5%.
"Leased Employee" means any person who performs services for the
Employer, but who is not an employee of the Employer, if the services are
provided pursuant to an agreement between the Employer and any other
person, the person has performed the services for the Employer (or for the
Employer and related persons) on a substantially full-time basis for a
period of at least one year, and the services are performed under the
primary direction and control of the Employer. A person will not be
considered a Leased Employee if:
(a) the person is covered by a money purchase pension plan providing:
(1) a non-integrated employer contribution rate of at least 10%
of compensation, as defined in Code paragraph 415(c)(3), which
includes amounts contributed pursuant to a salary reduction agreement
that are excludable from the person's gross income under Code section
125, subsection 402(h) or 403(b), or paragraph 402(a)(8),
(2) immediate participation, and
(3) full and immediate vesting; and
(b) the person, together with all other persons who would otherwise be
considered Leased Employees, do not constitute more than 20% of the
Employer's non-highly compensated workforce.
"Life Annuity" means a level monthly annuity beginning on the
applicable Annuity Starting Date and continuing for the life of the Member.
"Member" means any Eligible Employee who has met the eligibility
requirements set forth in Article III and for whom benefits are to be
provided under the Plan.
"Non-Key Employee" means any Employee (including a Beneficiary of the
Employee) who is not a Key Employee.
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<PAGE>
"Normal Retirement Date" means, with respect to each Member, the first
day of the month following the date the Member has both reached age 55 and
completed five Years of Vesting Service.
"Permissive Aggregation Group" means an Aggregation Group that may
include any other plan not required to be included in the Required
Aggregation Group, provided the resulting group, taken as a whole, would
continue to satisfy the provisions of Code paragraph 401(a)(4) and Code
section 410.
"Plan" means the ESI Pension Plan, as amended from time to time.
"Plan Year" means the period from the Effective Date through December
31, 1998 and any subsequent calendar year.
"Qualified Domestic Relations Order" means a qualified domestic
relations order within the meaning of Code subsection 414(p).
"Qualified Joint and Survivor Annuity" means an immediate level
monthly annuity beginning on the applicable Annuity Starting Date and
continuing for the life of the Member, with a survivor annuity to and for
the life of his Spouse, in a monthly amount equal to one-half of the
monthly amount payable during the joint lives of the Member and his Spouse.
"Qualified Preretirement Survivor Annuity" means a level monthly
annuity beginning on the applicable Annuity Starting Date and continuing
for the life of a Member's Spouse.
"Related Employer" means any employer that, together with the
Employer, is under common control or a member of an affiliated service
group, as determined under Code subsections 414(b), (c), (m), and (o). In
determining whether an Employer is a member of a controlled group for
purposes of Article XI, the rules of Code subsections 414(b) and (c) will
be applied as modified by Code subsection 415(h).
"Required Aggregation Group" is a group of Retirement Plans
comprising:
(a) each Retirement Plan of the Employer, including any
terminated Retirement Plan, in which a Key Employee has been a Member
in the Plan Year containing the Determination Date or any of the four
preceding Plan Years; and
(b) each other Retirement Plan of the Employer that has enabled a
Retirement Plan described in Paragraph (a) to meet the requirements of
Code paragraph 401(a)(4) or Code section 410 during the period
described in Paragraph (a).
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<PAGE>
"Required Beginning Date" means, with respect to a Member who is not a
5% owner as described in Code section 416 and who did not reach age 70 1/2
before January 1, 1997, April 1 of the calendar year following the later of
(a) the calendar year in which the Member Separates from Service and (b)
the calendar year in which the Member reaches age 70 1/2. "Required
Beginning Date" means, with respect to a Member who is a 5% owner as
described in Code section 416 or a Member who reached age 70 1/2 before
January 1, 1997, April 1 of the calendar year following the calendar year
in which the Member reaches age 70 1/2.
"Retirement Plan" means a retirement program of the Employer intended
to qualify under Code subsection 401(a).
"Secretary" means the U.S. Secretary of Treasury or his delegate.
"Separates from Service" or "Separation from Service" means any
termination of the employment relationship between an Employee and the
Employer; provided, however, that it does not mean:
(a) temporary absence of the Employee due to vacation, sickness,
strike, seasonal layoff, or similar cause,
(b) a leave of absence for any reason approved by the Employer on
a nondiscriminatory basis,
(c) military leave to the extent that the Employee is credited
with Hours of Service for the leave, or
(d) the first 12 months of a period of total disability as
determined by the Social Security Administration or the Plan
Committee.
For this purpose, the term "Employer" includes all Related Employers, and
an Employee or former Employee will not be treated as having incurred a
Separation from Service until the employment relationship between the
Employee and all Related Employers is terminated.
"Social Security Retirement Age" means (a) age 65 for a Member born
before January 1, 1938, (b) age 66 for a Member born after December 31,
1937, but before January 1, 1955, and (c) age 67 for a Member born after
December 31, 1954.
"Spouse" means, with respect to any Member, the Member's lawfully
married spouse, if any, on the applicable date. The Plan will not
recognize common law marriages or similar arrangements unless required to
do so by federal law. A former Spouse will also be considered a Spouse to
the extent provided under a Qualified Domestic Relations Order.
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<PAGE>
"Top-Heavy Group" means an Aggregation Group described in Section
13.02(b).
"Top-Heavy Plan" means a Retirement Plan described in Section
13.02(a).
"Transition Member" means a Member who, as of December 31, 1998, has
either (a) reached age 50 and completed 10 Years of Benefit Service, or (b)
completed 15 Years of Benefit Service.
"Trust" means the trust established by the Employer under the Plan.
"Trust Agreement" means the agreement between the Employer and the
Trustee establishing the Trust to implement and support the operation of
the Plan.
"Trust Assets" means the assets of the Trust.
"Trustee" means the original trustee of the Trust and any person
becoming successor trustee of the Trust.
"Year of Benefit Service" means, for any Member, a Plan Year during
which the Member has completed at least 1,000 Hours of Service. A Year of
Benefit Service will always be measured in whole years, and any Plan Year
during which a Member has completed less than 1,000 Hours of Service will
be disregarded in determining the number of the Member's Years of Benefit
Service. If a Member Separates from Service and is subsequently reemployed
by an Employer, his benefit service accrued prior to his Separation from
Service will be restored to him immediately, and he will immediately begin
accruing benefit service upon his return. For purposes of this Subsection,
any benefit service with ITT Corporation or any of its affiliated companies
that was credited to an Employee under the ITT Plan as of the Effective
Date will be treated as benefit service with the Employer under this Plan.
"Year of Eligibility Service" means an eligibility computation period
during which an Employee completes at least 1,000 Hours of Service. The
first eligibility computation period is the 12-month period beginning on
the date the Employee first completes an Hour of Service. Thereafter, the
Employee's eligibility computation period is the Plan Year, beginning with
the first Plan Year that begins after the date on which the Employee's
employment began. If an Employee Separates from Service before completing a
Year of Eligibility Service, thereafter incurs a Break in Service, and is
later reemployed, his eligibility computation period for the period after
his reemployment will be recalculated as if he had not previously been
employed. The following will not be considered Years of Eligibility
Service:
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(a) in the case of any Employee who has a Break in Service, his
Years of Eligibility Service accrued before the Break in Service until
the Employee has completed one Year of Eligibility Service after
returning to employment with the Employer;
(b) Years of Eligibility Service before five or more consecutive
Breaks in Service, if the number of consecutive Breaks in Service
equals or exceeds the Years of Vesting Service credited to the
Employee and the Employee was not vested in any portion of his Plan
benefit at the time the Breaks in Service occurred, unless the
Employee completes a period of eligibility service with the Employer
after the Break in Service equal to the lesser of (1) the number of
the Employee's consecutive Breaks in Service or (2) 10 Years of
Eligibility Service.
For purposes of this Subsection, any eligibility service with ITT
Corporation or any of its affiliated companies that was credited to an
Employee under the ITT Plan as of the Effective Date will be treated as
eligibility service with the Employer under this Plan.
"Years of Vesting Service" means, for any Employee, a Plan Year during
which the Employee has completed not fewer than 1,000 Hours of Service;
provided, however, that the following shall not be considered Years of
Vesting Service:
(a) In the case of any Employee who has a Break in Service, Years
of Vesting Service accrued before the Break in Service until the
Employee has completed one Year of Eligibility Service after returning
to employment with the Employer;
(b) For purposes of determining the vested percentage of a
Member's benefit that accrued before five or more consecutive Breaks
in Service, Years of Vesting Service occurring after the Breaks in
Service; and
(c) For purposes of determining the vested percentage of a
Member's benefit for a member who was not vested in any portion of his
Plan benefit at the time the Breaks in Service occurred, Years of
Vesting Service before five or more consecutive Breaks in Service, if
the number of consecutive Breaks in Service equals or exceeds the
Years of Vesting Service credited to the Employee before the Breaks in
Service occurred, unless the Member completes a period of eligibility
service with the Employer after the Break in Service equal to the
lesser of (1) the number of his consecutive Breaks in Service or (2)
10 Years of Eligibility Service.
For purposes of this Subsection, any vesting service with ITT
Corporation or any of its affiliated Companies that was credited to an
Employee under the ITT Plan as of the Effective Date will be treated as
vesting service with the Employer under this Plan.
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Section 2.02. Rules of Construction. The following rules of
construction will govern in interpreting the Plan:
(a) In resolving any conflict between provisions of this Plan and any
other uncertainty as to the meaning or intention of any provision of this
Plan, the interpretation that will prevail is the interpretation that (1)
causes the Plan to constitute a qualified plan under the provisions of Code
section 401, with the contributions of the Employer to the Trust as items
deductible by the Employer from net income for federal income tax purposes
and (2) causes the Plan to comply with all applicable requirements of
ERISA.
(b) Other than as specified in Subsection (a), the provisions of this
Plan will be construed and governed in all respects under and by the
internal laws of the State of Indiana.
(c) Words used in the masculine gender will be construed to include
the feminine gender, where appropriate.
(d) Words used in the singular will be construed to include the
plural, where appropriate, and vice versa.
(e) The headings and subheadings in the Plan are inserted for
convenience of reference only and are not to be considered in the
construction of any provision of the Plan.
(f) If any provision of this Plan is held to violate the Code or ERISA
or to be illegal or invalid for any other reason, that provision will be
deemed to be null and void, but the invalidation of that provision will not
otherwise impair or affect the Plan.
ARTICLE III
MEMBERSHIP
Section 3.01. Date of Membership. Each Employee who is an Eligible
Employee on the Effective Date and who was a member in the ITT Plan on June 8,
1998 will become a Member on the Effective Date. Each other Eligible Employee
will become a Member on the later of the Effective Date or the first Entry Date
that occurs on or after the date he has both reached age 21 and has completed
one Year of Eligibility Service. A former Eligible Employee who has previously
completed one Year of Eligibility Service but who has not become a Member will
become a Member as of the first Entry Date after he completes an Hour of Service
upon his reemployment as an Eligible Employee, if he completes a Year of
Eligibility Service after he returns to employment with the Employer. An
Eligible Employee who becomes a Member and Separates from Service will again
become a Member on the date he first completes an Hour of Service after his
reemployment as an Eligible Employee.
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Section 3.02. Cessation of Membership. A Member will cease to be a
Member on the date as of which (a) he is no longer an Eligible Employee and (b)
all of his Plan benefits have been distributed.
Section 3.03. Transfers of Employment. If a Member transfers from
one Employer to another Employer and remains an Eligible Employee, his
membership in the Plan will continue as if no transfer occurred. If a Member
transfers from an Employer to a Related Employer that does not participate in
the Plan, or if a Member transfers to another Employer and is no longer
considered an Eligible Employee, the following will occur:
(a) The Member's benefit will remain in the Plan, and the Member's
Cash Balance Account will continue to be credited with interest pursuant to
Section 6.04;
(b) The Member will continue to accrue Years of Eligibility Service
and Years of Vesting Service; and
(c) The Member will not continue to accrue Years of Benefit Service,
and no further pay credits will be allocated to the Member's Cash Balance
Account pursuant to Section 6.02 or 6.03.
ARTICLE IV
FUNDING OF BENEFITS
Section 4.01. Funding Policy and Method. Each Plan Year, the
Employer will pay to the Trust an amount sufficient to fund the benefits
provided under the Plan pursuant to the requirements of Code section 412 and
ERISA.
Section 4.02. Actuarial Valuations. The Employer or the Committee
will designate an actuary for the Plan. The actuary will periodically perform
an actuarial valuation of the Plan and Trust and will certify to the Employer or
the Committee in writing the results of each valuation. The actuary will apply
all gains and forfeitures arising in the operation of the Plan to reduce the
Employer's contributions, all in accordance with the actuarial methods, factors,
and assumptions then employed by the actuary in accordance with the Plan and
ERISA.
Section 4.03. Funding Standard Account. The Committee will cause
the actuary to establish and maintain a funding standard account for the Plan
for purposes of measuring and determining compliance with the minimum funding
standards imposed by ERISA.
Section 4.04. Nondiversion and Exclusive Benefit. Except as
expressly provided in this Section, the Trust Assets will not revert to the
Employer and will be devoted exclusively to the payment of benefits to Members,
Beneficiaries, and other persons and for payment of reasonable administration
expenses as provided in the Plan and Trust Agreement. The Trustee
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<PAGE>
will, however, return to the Employer a contribution to the Plan under the
following circumstances:
(a) If the Plan receives an adverse determination letter from the
Internal Revenue Service regarding initial qualification of the Plan under
Code subsection 401(a), and an Employer requests in writing that its prior
contributions be returned, the Trustee will comply with the Employer's
request; provided, however, that no contribution will be returned to an
Employer pursuant to this Subsection more than one year after receipt of
the determination and, provided further, that the Employer filed a complete
application for determination within the time prescribed by law for filing
its return for the taxable year in which the Plan was adopted or any later
date prescribed by the Secretary.
(b) If any contribution is made to the Plan by mistake of fact and the
Employer requests in writing that the contribution be returned, the Trustee
will comply with the Employer's request; provided, however, that no
contribution may be returned to the Employer pursuant to this Subsection
more than one year after the date on which the contribution is made.
(c) To the extent that the deduction for a contribution made by the
Employer is disallowed, the contribution will be returned to the Employer
(to the extent disallowed) within one year after the disallowance of the
deduction, if the Employer so requests in writing.
(d) To the extent provided for under the terms of the Plan and
applicable law, as certified to the Trustee in writing by the Company, upon
termination of the Plan and after provision for the satisfaction of all
liabilities of the Plan to persons entitled to benefits under the Plan, any
amounts remaining in the Trust because of erroneous actuarial computation
will revert to and be returned to the Employer.
ARTICLE V
VESTING
Section 5.01. Nonforfeitability. For all purposes of the Plan, a
"vested" interest is an interest that is nonforfeitable in the sense that it
constitutes a claim that is unconditional and legally enforceable against the
Plan.
Section 5.02. Vesting of Member's Benefit. A Member's interest in
his Plan benefit will be forfeitable, except as that interest becomes vested
under this Section.
(a) A Member's interest in his Plan benefit will be 100% vested upon
the occurrence of any of the following events:
(1) his Normal Retirement Date;
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(2) his death or Disability while an Employee;
(3) partial termination of the Plan (within the meaning of the
Code), to the extent funded;
(4) termination of the Plan, to the extent funded; or
(5) completion of five Years of Vesting Service.
(b) Notwithstanding any other provision of this Section, for the first
Plan Year in which the Plan is a Top-Heavy Plan and for all subsequent Plan
Years in which the Plan is a Top-Heavy Plan, the interest of a Member in
his Plan benefit will become 100% vested upon the Member's completion of
three Years of Vesting Service. If the Plan ceases to be a Top-Heavy Plan,
the following will apply:
(1) A Member with at least three Years of Vesting Service as of
the beginning of the first Plan Year that succeeds a Top-Heavy Plan
Year will remain vested in his Plan benefit in accordance with the
Top-Heavy Plan vesting schedule;
(2) Any other Member will, as of the beginning of the first Plan
Year that succeeds a Top-Heavy Plan Year, again be subject to the
provisions of Subsection (a) with respect to all of his interest in
the Plan.
Section 5.03. Deemed Distributions. If upon a Separation from
Service, a Member is 0% vested in his Plan benefit, the vested portion of his
Plan benefit will be deemed distributed to him as of his Separation from
Service. No amount or benefit forfeited or lost in any manner under the
provisions of the Plan will be applied to increase the benefits of any Employee,
Member, or other person entitled to benefits under the Plan.
ARTICLE VI
MEMBER BENEFITS
Section 6.01. Cash Balance Accounts. The Committee will maintain a
separate Cash Balance Account for each Member. A Cash Balance Account is a
bookkeeping account used to determine the amount of a Member's benefit payable
under the Plan. A Member will have neither an actual account nor any interest
in particular Trust Assets.
Section 6.02. Standard Pay Credits. Subject to Section 6.03, pay
credits will be credited to a Member's Cash Balance Account as follows:
(a) Until he Separates from Service, a Member's Cash Balance Account
will be credited each Plan Year with a pay credit equal to a points-related
percentage of the
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Member's Compensation for that Plan Year. A Member's points for a Plan Year
will be equal to the sum of the Member's age and Years of Benefit Service
as of the last day of the Plan Year. For this purpose, the Plan will count
only whole years of age and Years of Benefit Service and will disregard
periods of less than a whole year. Pay credits will be allocated as of the
last day of the Plan Year based on the following schedule:
<TABLE>
<CAPTION>
Standard Schedule
Points Percentage of Compensation
------ --------------------------
<S> <C>
1-29 2.0
30-34 2.5
35-39 3.0
40-44 3.5
45-49 4.0
50-54 4.5
55-59 5.5
60-64 6.5
65-69 7.5
70-74 9.0
75-79 10.5
80+ 12.0
</TABLE>
(b) In the event a Member Separates from Service before the last day
of a Plan Year, he will not receive an allocation for that Plan Year if he
has completed less than 1,000 Hours of Service during that Plan Year. If a
Member completes 1,000 or more Hours of Service during that Plan Year, he
will receive a pay credit for that Plan Year based on his age and Years of
Benefit Service as of the date he Separates from Service and the
Compensation he earned during the Plan Year up to the date of his
Separation from Service.
Section 6.03. Transition Member Pay Credits. If a Member is a
Transition Member, his Cash Balance Account will not be credited under Section
6.02 but his Cash Balance Account will instead be credited with pay credits
under this Section as follows:
(a) A Transition Member's Cash Balance Account will be credited each
Plan Year with a pay credit equal to a points-related percentage of his
Compensation for that Plan Year. A Transition Member's points will be
determined in accordance with Section 6.02. A Transition Member's pay
credits will be allocated as of the last day of the Plan Year based on the
following schedule:
<TABLE>
<CAPTION>
Transition Schedule
Points Percentage of Compensation
------ --------------------------
<S> <C>
1-29 2.0
</TABLE>
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<TABLE>
<S> <C>
30-34 2.5
35-39 3.0
40-44 3.5
45-49 4.0
50-54 4.5
55-59 5.5
60-64 7.0
65-69 8.5
70-74 10.5
75-79 13.0
80+ 16.0
</TABLE>
(b) In the event a Transition Member Separates from Service before
the last day of a Plan Year, he will not receive an allocation for that
Plan Year if he has completed less than 1,000 Hours of Service during that
Plan Year. If a Transition Member completes 1,000 or more Hours of Service
during that Plan Year, he will receive a pay credit for the Plan Year based
on his age and Years of Benefit Service as of the date he Separates from
Service and the Compensation he earned during the Plan Year up to the date
of his Separation from Service.
Section 6.04. Interest Credits. Until his Annuity Starting Date, a
Member's Cash Balance Account will be credited each Plan Year with an interest
credit of 8% of the balance of the Member's Cash Balance Account as of the last
day of the prior Plan Year. Interest credits will be credited as of the last day
of the Plan Year, except that if a Member's Annuity Starting Date is other than
the last day of a Plan Year, the Member's interest credit for the Plan Year in
which his Annuity Starting Date occurs (a) will be credited to his Cash Balance
Account on or before his Annuity Starting Date and (b) will be equal to 8%,
reduced as described in the following sentence, of the balance of the Member's
Cash Balance Account as of the last day of the prior Plan Year. A Member's
reduced interest credit will be equal to 8% multiplied by a fraction, the
numerator of which is the number of calendar months in the Plan Year up to but
not including the month in which his Annuity Starting Date occurs and the
denominator of which is 12.
ARTICLE VII
PAYMENT OF BENEFITS
Section 7.01. Normal Retirement Benefits. Subject to Section 7.05,
if a Member Separates from Service on or after his Normal Retirement Date, a
benefit equal to the value of his Cash Balance Account will be paid as follows:
(a) If the value of the balance of the Member's Cash Balance Account
on the date of his Separation from Service is $5,000 or less, his benefit
will be paid to him in a
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lump sum cash payment as soon as administratively feasible after his
Separation from Service.
(b) If the value of the Member's Cash Balance Account on the date of
his Separation from Service is greater than $5,000, his benefit will be
paid as follows:
(1) If the Member is married on his Annuity Starting Date, a
benefit equal to the value of his Cash Balance Account will be paid to
him in the form of a Qualified Joint and Survivor Annuity beginning as
soon as administratively feasible after his Separation from Service,
unless he waives this form of payment and elects a lump sum cash
payment in accordance with Paragraphs (3) and (4). A Member may elect
to defer payment of his benefit to the first day of any month
occurring after the Member's Separation from Service and on or before
the Member's Required Beginning Date.
(2) If the Member is not married on his Annuity Starting Date, a
benefit equal to the value of his Cash Balance Account will be paid to
him in the form of a Life Annuity beginning as soon as
administratively feasible after his Separation from Service, unless he
waives this form of benefit and elects a lump sum cash payment in
accordance with Paragraphs (3) and (4). A Member may elect to defer
payment of his benefit to the first day of any month occurring after
the Member's Separation from Service and on or before the Member's
Required Beginning Date.
(3) A Member may elect to waive the Qualified Joint and Survivor
Annuity or the Life Annuity, whichever is applicable, and elect to
receive the value of his Cash Balance Account in a single lump sum
cash payment paid as of the first day of any month occurring after the
Member Separates from Service and on or before the Member's Required
Beginning Date.
(4) A Member's election of a lump sum cash payment in lieu of a
Qualified Joint and Survivor Annuity or Life Annuity must be made in
writing and received by the Committee during the Applicable Election
Period. If the Member is married, his Spouse must consent in writing
to his election. The Spouse's consent must be irrevocable, must be
made and received by the Committee during the Applicable Election
Period, must acknowledge the effect of the consent and election, and
must be witnessed by a notary public or Plan representative. If the
Member establishes to the satisfaction of the Committee that the
Spouse's consent cannot be obtained because there is no Spouse or the
Spouse cannot be located, the Spouse's consent will be deemed to have
been given. If a Member is legally separated from his Spouse or has
been abandoned by his Spouse within the meaning of local law, and the
Member has a court order to that effect, the Spouse's consent will not
be required unless a Qualified Domestic Relations Order provides
otherwise. Any consent will be valid only with respect
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to the Spouse who signs the consent or, in the event of a deemed
consent, the designated Spouse. If a Member's Spouse is legally
incompetent to give consent, the Spouse's legal guardian (even if the
guardian is the Member) may give consent. A Member may revoke a prior
election at any time prior to the commencement of his benefits.
Section 7.02. Disability Retirement Benefits. Subject to Section
7.05, if a Member becomes disabled while he is employed by the Employer, he will
be entitled to receive a benefit equal to the present value of his Cash Balance
Account on any date that is at least 12 months after his Disability Date,
provided that he is still disabled on that date. The present value of the
disabled Member's Cash Balance Account will be paid as follows:
(a) If the present value of the balance of the Member's Cash Balance
Account on the date that is the first anniversary of his Disability Date,
is $5,000 or less, his benefit will be paid to him as soon as
administratively feasible after the first anniversary of his Disability
Date.
(b) If the present value of the balance of the Member's Cash Balance
Account on the date that is the first anniversary of his Disability Date,
together with the amount of any prior distributions from the Plan, is
greater than $5,000, the value of his Cash Balance Account will be paid as
follows:
(1) If the Member is married on his Annuity Starting Date, a
benefit equal to the present value of his Cash Balance Account will be
paid to him in the form of a Qualified Joint and Survivor Annuity
beginning as soon as administratively feasible after the first
anniversary of his Disability Date, unless he waives this form of
payment and elects a lump sum cash payment in accordance with
Paragraph (3). A Member may elect to defer payment of his benefit to
the first day of any month occurring after the first anniversary of
his Disability Date and on or before the Member's Required Beginning
Date.
(2) If the Member is not married on his Annuity Starting Date, a
benefit equal to the present value of his Cash Balance Account will be
paid to him in the form of a Life Annuity beginning as soon as
administratively feasible after the first anniversary of his
Disability Date, unless he waives this form of payment and elects a
lump sum cash payment in accordance with Paragraph (3). A Member may
elect to defer payment of his benefit to the first day of any month
occurring after the first anniversary of his Disability Date and on or
before the Member's Required Beginning Date.
(3) A Member may elect to waive the Qualified Joint and Survivor
Annuity or the Life Annuity, whichever is applicable, and elect to
receive his benefit in a single lump sum cash payment paid as of the
first day of any month occurring after the first anniversary of the
Member's Disability Date and on or
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before the Member's Required Beginning Date. A Member's election of an
optional form of benefit must comply with the requirements of Section
7.01(b)(4).
Section 7.03. Other Termination Benefits. Subject to Section 7.05,
if a Member Separates from Service for any reason other than retirement,
disability, or death, and his benefit has become vested in accordance with
Subsection 5.02(b), his benefit is to be paid as follows:
(a) If the present value of the balance of the Member's Cash Balance
Account on the last day of the Plan Year in which his Separation from
Service occurs, is $5,000 or less, a benefit equal to the present value of
his Cash Balance Account will be paid to him in a single lump sum cash
payment as soon as administratively feasible after the last day of the Plan
Year in which his Separation from Service occurs.
(b) If the present value of the balance of the Member's Cash Balance
Account on the last day of the Plan Year in which his Separation from
Service occurs, is greater than $5,000, a benefit equal to the present
value of his Cash Balance Account will be paid as follows:
(1) If the Member is married on his Annuity Starting Date, his
benefit will be paid to him in the form of a Qualified Joint and
Survivor Annuity beginning on the first day of the month coinciding
with or next following the date on which he reaches age 55, unless he
waives this form of benefit and elects a lump sum cash payment in
accordance with Paragraph (3). A Member may elect to defer payment of
his benefit to the first day of any month occurring after the Member
reaches age 55 and on or before the Member's Required Beginning Date.
(2) If the Member is not married on his Annuity Starting Date, a
benefit equal to the present value of his Cash Balance Account will be
paid to him in the form of a Life Annuity beginning on the first day
of the month coinciding with or next following the date on which he
reaches age 55, unless he waives this form of payment and elects a
lump sum cash payment. A Member may elect to defer payment of his
benefit to the first day of any month occurring after the Member
reaches age 55 and on or before the Member's Required Beginning Date.
(3) A Member may waive the Qualified Joint and Survivor Annuity
or the Life Annuity, whichever is applicable, and elect to receive his
benefit in a single lump sum cash payment paid as of the first day of
any month occurring after the Member reaches age 55 and on or before
the Member's Required Beginning Date. A Member's election of an
optional form of benefit must comply with the requirements of Section
7.01(b)(4).
Section 7.04. Death Benefits. Subject to Section 7.05, if a Member
dies before his Annuity Starting Date, his benefit will be paid as follows:
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(a) If the present value of the balance of the Member's Cash Balance
Account on the date of his death, together with the amount of any prior
distributions from the Plan, is $5,000 or less, a benefit equal to the
present value of the Member's Cash Balance Account will be paid to his
Beneficiary in a single lump sum cash payment as soon as administratively
feasible after his death.
(b) If the present value of the balance of the Member's Cash Balance
Account on his death, together with the amount of any prior distributions
from the Plan, is greater than $5,000, a death benefit will be paid as
follows:
(1) If the Member is married on his death, a benefit equal to
the present value of his Cash Balance Account will be paid to his
Spouse in the form of a Qualified Preretirement Survivor Annuity
beginning as soon as administratively feasible after the date on which
the Member would have reached age 55 (or the date of the Member's
death if he died after reaching age 55), unless (A) the Member waives
this form of benefit and elects an optional form of benefit in
accordance with Paragraph (3), (B) the Member does not waive this form
of benefit but, after the Member's death, the Spouse elects to
receive, in lieu of this form of benefit, a single lump sum cash
payment as of the first day of any month the Spouse designates
(subject to Section 7.09), or (C) the Member does not waive this form
of benefit but, after the Member's death, the Spouse elects to begin
payment of the Qualified Preretirement Survivor Annuity as soon as
administratively feasible after the Member's death.
(2) If the Member is not married on his death, a benefit equal
to the present value of the balance of his Cash Balance Account will
be paid to his Beneficiary in a single lump sum cash payment as soon
as administratively feasible after his death.
(3) A Member may waive the Qualified Preretirement Survivor
Annuity and elect to have any death benefit paid to his Beneficiary in
a single lump sum cash payment as soon as administratively feasible
after his death. A Member's election of the lump sum benefit must be
made in writing and received by the Committee during the Applicable
Election Period, and his Spouse must consent in writing to his
election. The Spouse's consent must be irrevocable, must be received
by the Committee during the Application Election Period, must
acknowledge the effect of the consent and the election, and must be
witnessed by a Plan representative or notary public. If the Member
establishes to the satisfaction of the Committee that the Spouse's
consent cannot be obtained because there is no Spouse or the Spouse
cannot be located, the Spouse's consent will be deemed to have been
given. If a Member is legally separated from his Spouse or has been
abandoned by his Spouse within the meaning of local law and the Member
has a court order to that effect, the Spouse's consent will not be
required unless a Qualified Domestic Relations Order provides
otherwise. Any
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consent will be valid only with respect to the Spouse who signs the
consent, or in the event of a deemed consent, the designated Spouse.
If a Member's Spouse is legally incompetent to give consent, the
Spouse's legal guardian (even if the guardian is the Member) may give
consent. A Member may revoke a prior election at any time prior to his
death.
Section 7.05. Equivalent Benefits and Present Value. Each form of
benefit paid pursuant to Sections 7.01, 7.02, 7.03, or 7.04 will be the
Actuarial Equivalent of the present value of the balance of the Member's Cash
Balance Account as of the applicable Annuity Starting Date. To calculate the
present value of a Member's Cash Balance Account for any benefit payable before
the Member reaches age 55 (or would have reached age 55 but for his death), the
Plan will include future interest accruals to age 55.
Section 7.06. Written Explanation of Benefits. The Committee will
provide the following written explanations:
(a) The Committee will provide to each Member within the period that
begins 90 days prior to, and ends 30 days prior to, the Annuity Starting
Date a written explanation of (1) the terms and conditions of a Qualified
Joint and Survivor Annuity or Life Annuity, (2) the Member's right to make
and the effect of a waiver of a Qualified Joint and Survivor Annuity or
Life Annuity, (3) the rights of a Member's Spouse with respect to the
election of optional forms of benefit, and (4) the right to make and the
effect of a revocation of a previous waiver of the Qualified Joint and
Survivor Annuity or Life Annuity. A Member may waive any requirement that
the Applicable Election Period extend at least 30 days after the Committee
provides the Member with the written explanation if the distribution
commences more than seven days after the written explanation is provided.
If the Member is married, the Member's Spouse must consent to the waiver in
writing before a notary public or a Plan representative.
(b) The Committee will provide to each Member a written explanation
of the death benefits under the Plan in such terms and in such manner as
would be comparable to the explanation provided for meeting the
requirements of Subsection (a) applicable to a Qualified Joint and Survivor
Annuity or Life Annuity. The time for providing the written explanation of
the death benefits will be governed by the following provisions:
(1) If an Employee becomes a Member before he reaches age 35,
the Committee will provide the written explanation to the Member
within the period beginning on the first day of the Plan Year in which
the Member reaches age 32 and ending on the first day of the Plan Year
in which the Member reaches age 35.
(2) If a Member becomes a Member after reaching age 35, the
Committee will provide the written explanation to each Member within a
reasonable period after he becomes a Member.
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(3) If a Member Separates from Service before reaching age 35,
the Committee will provide the written explanation to the Member
within one year after the Separation from Service. If the Member is
later reemployed, the written explanation will again be provided to
him after his reemployment pursuant to the provisions of Paragraphs
(1) and (2).
Section 7.07. Purchase of Annuity Contracts. If a Member's benefits
are payable in the form of an annuity, the Committee may cause the Trustee to
apply an amount equal to the present value of the Member's Cash Balance Account
for the purchase of an annuity contract from an appropriate insurance company.
Section 7.08. Top-Heavy Benefits. If the Plan is a Top-Heavy Plan
for a Plan Year, the minimum benefit requirements of Code subsection 416(c) will
be satisfied by the Employer as follows:
(a) A Non-Key Employee who is a Member and has completed at least
1,000 Hours of Service during the Plan Year will accrue a minimum benefit
for the Plan Year that, when expressed as a single life annuity beginning
on the Employee's Normal Retirement Date, must equal at all times at least
the product of (1) the Employee's average Compensation for the five
consecutive Plan Years when the Employee had the highest aggregate
Compensation and (2) the lesser of (A) 2% per each Plan Year or (B) 20%.
(b) A Non-Key Employee who is entitled to accrue a minimum benefit
for a Top-Heavy Plan Year pursuant to Subsection (a) and who is otherwise
entitled to receive a minimum contribution for the same Plan Year under a
top-heavy defined contribution plan maintained by the Employer will be
entitled to accrue the minimum benefit under this Plan in lieu of the
minimum contribution under the defined contribution plan.
Section 7.09. Other Distribution Rules Imposed by Federal Law. This
Section has been included in the Plan to comply with the limitations imposed by
Code paragraphs 401(a)(9) and 401(a)(14), and it will not be construed as
providing for a form of benefit not otherwise provided for under the Plan.
Notwithstanding any provision of this Plan to the contrary, any distribution
under the Plan will be made in accordance with regulations under Code paragraph
401(a)(9), including proposed federal income tax regulation 1.401(a)(9)-2, and
will comply with the following rules:
(a) Unless a Member elects otherwise, the payment of his benefits
under the Plan must begin not later than the 60th day after the end of the
Plan Year in which occurs the latest of (1) the Member's 65th birthday, (2)
the 10th anniversary of the Plan Year in which the Member began
participation in the Plan, or (3) termination of the Member's employment
with the Employer.
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(b) Notwithstanding any other provision of this Plan, the entire
interest of each Member will be distributed either (1) in a single lump sum
payment not later than the Required Beginning Date or (2) in a series of
payments beginning not later than the Required Beginning Date over the life
of the Member or over the lives of the Member and a designated Beneficiary
(or over a period not extending beyond the life expectancy of the Member or
the life expectancy of the Member and a designated Beneficiary). If a
Member's entire interest is to be distributed in other than a lump sum,
then the amount to be distributed each year must be at least an amount
equal to the quotient obtained by dividing the Member's entire interest by
the life expectancy of the Member or joint and last survivor expectancy of
the Member and designated Beneficiary. Life expectancy and joint and last
survivor expectancy are computed by the use of the expected return
multiples contained in Tables V and VI of 26 C.F.R. (S) 1.72-9. For
purposes of this computation, life expectancies will not be recalculated.
(c) If (1) the distribution of a Member's interest has begun in
accordance with Subsection (b) and (2) the Member dies before his entire
interest has been distributed to him, the remaining portion of his interest
will be distributed at least as rapidly as under the method of distribution
being used under Subsection (b) as of the date of his death.
(d) Except as provided in Subsection (e), if a Member dies before the
distribution of his interest has begun in accordance with Subsection (b),
the entire interest of the Member will be distributed within five years
after his death.
(e) For purposes of Subsection (d), any portion of a distribution
that is payable to or for the benefit of a designated Beneficiary will be
treated as completely distributed on the date the distributions begin if:
(1) that portion is to be distributed (in accordance with
regulations prescribed by the Secretary) over the life of the
designated Beneficiary (or over a period not extending beyond the life
expectancy of the Beneficiary), and
(2) those distributions begin by the latest of (A) one year
after the date of the Member's death, (B) any later date that the
Secretary may establish by regulations, or (C) if the Beneficiary is
the Member's surviving Spouse, the date that the Member would have
reached age 70-1/2.
(f) If the designated Beneficiary is the surviving Spouse of the
Member, and if the surviving Spouse dies before the distributions to the
Spouse begin, Subsections (c), (d), and (e) will be applied as if the
surviving Spouse were the Member.
(g) For purposes of Subsection (e), payments will be calculated by
use of the expected return multiples specified in Tables V and VI of 26
C.F.R. (S) 1.72-9. Life expectancies of Beneficiaries will be calculated at
the time payment first commences without further recalculation.
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(h) For purposes of Subsections (b), (c), (d), and (e), if any amount
paid to a child of the Member becomes payable to the surviving Spouse when
the child reaches the age of majority, that amount will be treated as if it
had been paid to the surviving Spouse.
(i) Unless paid to the surviving Spouse under a Qualified Joint and
Survivor Annuity, the method of distribution selected must assure that at
least 50% of the present value of the amount available for distribution is
paid within the life expectancy of the Member.
(j) If a Member reaches age 70-1/2 on or after June 9, 1998, but
before January 1, 1999, the Plan will deem the Member's Required Beginning
Date to be April 1 of the calendar year following the calendar year in
which the Member reaches age 70-1/2 unless the Member elects, with his
Spouse's consent, to defer commencement of his Plan benefit until a date no
later than April 1 of the calendar year following the calendar year in
which the Member retires.
Section 7.10. Effect of Government Regulation on Payment of
Benefits. If any regulation of the federal government or a federal agency
prohibits or prevents the payment or distribution of benefits in the manner
provided in the Plan, the Committee will conform to the regulation without
amendment of the Plan.
Section 7.11. Inalienability of Benefits. Except as provided in
this Section, no Plan benefit will be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge, whether
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, or charge a Plan benefit will be void. The
prohibition set out in the preceding sentence will not apply to the creation,
assignment, or recognition of a right to any benefit payable with respect to a
Member pursuant to a Qualified Domestic Relations Order.
Section 7.12. Payments for Benefit of Incompetents. If any benefit
is payable to a minor or other person legally incompetent and the Committee is
aware of that person's status, the Committee will direct that payments be made
to the legal guardian of that person or to such other person or organization as
a court of competent jurisdiction may direct.
Section 7.13. Qualified Domestic Relations Orders. If a Qualified
Domestic Relations Order provides for the payment of all or a portion of the
value of a Member's benefit to an alternate payee, distribution to the alternate
payee may be made at the time specified in the Qualified Domestic Relations
Order, provided the order does not require distribution prior to the date the
Member reaches the "earliest retirement age," as defined in Code subsection
414(p). Notwithstanding the preceding sentence, if the present value of the
alternate payee's interest in the Plan is less than $5,000, a Qualified Domestic
Relations Order may provide for the immediate payment of all or a portion of the
value of the Member's benefit to the alternate payee, and distribution will be
made pursuant to the order as soon as administratively feasible following the
Committee's determination that the order is a Qualified Domestic Relations
Order.
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Section 7.14. Direct Rollovers. Notwithstanding any provision of
the Plan to the contrary that would otherwise limit a Distributee's election
under this Section, a Distributee may elect, at the time and in the manner
prescribed by the Committee, to have any portion of an Eligible Rollover
Distribution paid directly to an Eligible Retirement Plan specified by the
Distributee in a Direct Rollover.
ARTICLE VIII
ADMINISTRATION
Section 8.01. Administrator. The Plan Committee will be the
administrator of the Plan within the meaning of ERISA section 3(16)(A). The
Committee will consist of the number of Members, not fewer than three, that is
specified from time to time by the Board of Directors or its designee. A person
must be an officer or employee of ESI to be a member of the Committee. All
members of the Committee will serve without compensation.
Section 8.02. Removal and Replacement of Committee Members. The
members of the Committee will hold membership at the pleasure of the Board of
Directors or its designee and may be removed by the Board of Directors or its
designee with or without cause. Any vacancy among the members will be filled by
the Board of Directors or its designee.
Section 8.03. Resignation. A member of the Committee may resign by
delivering his written resignation to any other member of the Committee or to
the Board of Directors. A resignation will become effective on the date
specified in the instrument of resignation.
Section 8.04. Chairman, Services, and Counsel. The members of the
Committee will elect one of their members as Chairman and will elect a
Secretary, who may be, but need not be, one of the members of the Committee.
The Employer will provide the Committee, at the Employer's expense, with such
clerical, accounting, actuarial, and other services as the Committee may
reasonably require in carrying out its responsibilities. The Committee may
employ counsel, who may be, but need not be, counsel to the Employer.
Section 8.05. Meetings. The Committee will hold meetings upon such
notice, at such places, and at such times as the Committee may from time to time
determine.
Section 8.06. Quorum. A majority of the members of the Committee at
the time holding office will constitute a quorum for the transaction of
business. All resolutions and other actions taken by the Committee at any
meeting will be by the vote of the majority of the members of the Committee
present at the meeting.
Section 8.07. Action Without Meeting. Any decision, order,
direction, or other action, including orders and directions to the Trustee, made
in writing signed by a majority of the members of the Committee at the time
holding office will constitute valid and effective action of
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the Committee, whether or not the matter to which that decision, order,
direction, or other action pertains has already been acted upon at a duly called
and held meeting of the Committee.
Section 8.08. Notice to Trustee of Changes in Membership. The
Trustee will not be charged with notice of any change in the membership of the
Committee unless and until it has received a certified copy of the resolution or
vote of the Board of Directors effecting the change.
Section 8.09. Correction of Defects. The Committee may correct any
defect or supply any omission or reconcile any error or inconsistency in its
previous proceedings, decisions, orders, directions, or other actions in such
manner and to such extent as it will deem advisable to carry out the purposes of
the Plan.
Section 8.10. Reliance Upon Legal Counsel. The members of the
Committee, and the Employer and its officers and directors, will be entitled to
rely upon all opinions given by legal counsel selected by the Committee.
Section 8.11. Expenses. In the performance of its duties, the
Committee is authorized to incur reasonable expenses, including counsel fees,
which will, to the extent permitted by ERISA, be chargeable against the funds of
the Trust if the expenses are not paid by the Employer.
Section 8.12. Indemnification. The Employer agrees to indemnify and
hold harmless each member of the Committee against any cost, expense, or
liability (including any sum paid in settlement of any claim with the approval
of the Board of Directors) arising out of any act or omission to act as a member
of the Committee, except only acts and omissions representing willful
misconduct, fraud, or lack of good faith.
Section 8.13. Powers and Duties of Committee. Subject to the
specific limitations stated in this Plan, the Committee will have the following
powers, duties, and responsibilities:
(a) To carry out the general administration of the Plan;
(b) To cause to be prepared all forms necessary or appropriate for the
administration of the Plan;
(c) To keep appropriate books and records, including minutes of the
meetings of the Committee;
(d) To determine, consistent with the provisions of this Plan, the
manner in which the Trust Assets will be allocated and disbursed;
(e) To give directions to the Trustee as to the amounts to be
disbursed to Members and others under the provisions of the Plan;
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(f) To establish written procedures for determining, and to determine
in accordance with those procedures, whether a domestic relations order is
a Qualified Domestic Relations Order.
(g) To exercise all other powers and duties specifically conferred
upon the Committee elsewhere in this Plan and the Trust Agreement;
(h) To exercise all duties and responsibilities imposed by ERISA upon
the Committee as administrator of the Plan;
(i) To interpret, with discretionary authority, the provisions of the
Plan and to resolve, with discretionary authority, all disputed questions
of Plan interpretation including eligibility, rights, and status of Members
and others under the Plan; and
(j) To employ agents to assist it in performing its administrative
duties.
The Committee will at all times make similar decisions on similar questions
involving similar circumstances. Subject to the provisions of ERISA and to the
provisions of Article IX relating to claims, all decisions of the Committee made
in good faith on all matters within the scope of its authority under the
provisions of this instrument will be final and binding upon all persons.
Section 8.14. Matters Specifically Excluded from Jurisdiction.
Notwithstanding any other provision of this Plan, the Committee will have no
power, duty, or authority with respect to determination of the amounts to be
contributed by the Employer to the Trust.
Section 8.15. Investment Manager. The Employer may appoint an
investment manager or managers to manage (including the power to acquire and
dispose of any Trust Assets) those Trust Assets specified by the Employer,
subject to the conditions of this Section.
(a) An appointed investment manager must (1) be registered as an
investment adviser under the Investment Advisers Act of 1940; (2) be a bank
as defined in that Act; or (3) be an insurance company qualified to perform
investment management services in more than one state.
(b) An appointed investment manager must, prior to acting with respect
to the Trust Assets, acknowledge in writing that he accepts the duties
given him under the Plan and that he is a fiduciary with respect to the
Plan.
(c) Upon the appointment of an investment manager, the Employer will
notify the Trustee of the appointment in writing, and will deliver to the
Trustee a copy of the instruments evidencing the appointment, copies of the
written acknowledgement referred to in Subsection (b), and written
directions concerning the proper segregation of the Trust Assets into
separate investment accounts, if appropriate. The Employer's written
notification will constitute a warranty as to the investment manager's
qualifications under
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section 3(38) of ERISA, and the Trustee will be fully protected in relying
on the investment manager's continued qualification and authority until
otherwise notified in writing by the Employer. The Trustee will follow the
directions of an appointed investment manager regarding investment and
reinvestment of Trust Assets. The Trustee will be under no obligation to
review or give advice with respect to the investment manager's directions.
(d) The Trustee will not be liable for the acts or omissions of the
investment manager or be under an obligation to invest or otherwise manage
any Trust Assets that are subject to management by the investment manager.
The Trustee will have no liability arising out of following the directions
of the investment manager.
(e) The Employer may remove an investment manager upon written notice
to the Trustee, in which case the Trustee will, until notified of the
appointment of a successor investment manager, accept and manage the Trust
Assets previously managed by the investment manager.
ARTICLE IX
CLAIMS PROCEDURES
Section 9.01. Presentation of Claims. Any person believing himself
to be entitled to a benefit under the Plan may file an application or claim for
the benefit with the Committee. The Committee may adopt and supply forms for
benefit applications, but no claim will be adversely affected because the
claimant has not used the form adopted by the Committee. A claim for a benefit
will be deemed to have been made upon receipt by any member of the Committee of
a written request for the benefit, signed by the claimant or his representative.
Section 9.02. Denial of Claim. Failure of a majority of the members
of the Committee to agree as to the allowance of a claim or any part of it
within 90 days after receipt of the claim by the Committee will be considered to
be a denial of the claim or the part of it as to which an agreement has not been
reached. If a claim is denied in whole or in part, the Committee, within 90
days after receipt of the claim, will give the claimant written notice of the
denial. If special circumstances require extension of the 90-day response
period, the Committee may extend the period for up to 90 additional days by
notifying the claimant, within the original 90-day period, of the extension, the
reason for it, and when a decision can be expected. The notice of a claim
denial will state, in a manner calculated to be understood by the claimant, the
following:
(a) The specific reason or reasons for the denial;
(b) Specific reference to the Plan provision or provisions on which
the denial is based;
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(c) A description of any additional material or information that the
claimant may need to perfect the claim, with an explanation of why the
material or information is necessary; and
(d) An explanation of the appeal right and procedure described in
Section 9.03.
Section 9.03. Claimant's Right to Appeal Denial of Claim. A
claimant whose claim is denied, in whole or in part, will have the right of an
appeal to the Committee for review of the denial. The following provisions will
apply to that right of appeal:
(a) The request for review must be filed with the Committee within 60
days after written notice of denial of the claim.
(b) The request must be in writing signed by the claimant or his
authorized representative.
(c) The claimant will have the right, upon request, to review records
and documents in the possession of the Committee relating to the claim.
(d) The claimant may submit issues, arguments, and other comments in
writing to the Committee, with any documentary evidence in support of his
claim.
(e) The decision by the Committee will be given to the claimant in
writing within 60 days after receipt by the Committee of the claimant's
request for review. If special circumstances require extension of the 60-
day period, the Committee may extend the 60-day period for up to 60
additional days by notifying the claimant, within the original 60-day
period, of the extension, the reason for it, and when a decision can be
expected. If the decision denies the claim, in whole or in part, the
decision will state the specific reasons for the denial, including specific
references to the Plan provision or provisions on which the denial is
based, all stated in language calculated to be understood by the claimant.
ARTICLE X
LIMITATIONS ON RIGHTS OF
EMPLOYEES AND OTHER PERSONS
Section 10.01. In General. The Plan is strictly a voluntary
obligation on the part of the Employer and will not be deemed to constitute a
contract between the Employer and any Employee or to be a consideration for, an
inducement to, or a condition of the employment of any Employee. Neither the
Employer, the Committee, nor the Trustee in any way guarantees against loss or
depreciation of any Trust Assets or guarantees the payment of any benefit or
amount that may become due under the Plan to any Member, his Beneficiaries, or
to any creditor
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of the Trust. Except as may be otherwise provided by ERISA, neither the Employer
nor the Committee will be liable to any person for any act or omission of the
Trustee, nor will the Trustee be liable to any person for any act or omission of
the Employer or the Committee.
Section 10.02. No Increase or Impairment of Other Rights. Nothing
contained in the Plan will be deemed to give any Employee the right to be
retained in the Employer's service or will interfere with the Employer's right
to discharge or otherwise terminate any Employee's employment.
Section 10.03. Trust Sole Source of Benefits. Except as may be
otherwise provided by ERISA, no person will be entitled to any right or claim to
benefits except to the extent that the right is specifically fixed under the
terms of the Plan and there are Trust Assets available for payment of the
benefits.
Section 10.04. Other Limitations of Liability. Except as may be
otherwise provided by ERISA, neither the Employer, the Committee, nor the
Trustee will be under any liability or responsibility for the validity or
effectiveness of the Plan or the Trust Agreement, or for any failure of this
Plan or the Trust to qualify at any time or for any period as a tax-exempt plan
or trust under the provisions of the Code or any applicable law or for any tax
or increase in tax on a Member or Beneficiary because of any benefits.
ARTICLE XI
PROVISIONS DESIGNED TO COMPLY WITH
LIMITATIONS ON BENEFITS AND OTHER ADDITIONS
Section 11.01. Purpose and Construction of This Article. This
Article is included in the Plan to comply with limitations imposed by Code
section 415, and all provisions of this Article will be construed and applied
accordingly.
Section 11.02. General Statement of Limitation. Notwithstanding any
other provisions of the Plan, the following limitations on benefits will apply:
(a) When expressed as a benefit payable annually in the form of a
straight life annuity, the maximum annual benefit payable to a Member under
the Plan, when added to any benefit payable to the Member under any other
qualified defined benefit plan maintained by the Employer, is equal to the
lesser of (1) $90,000 or (2) the Member's average Compensation for the
three consecutive Plan Years when the Member was an active Member and had
the highest aggregate Compensation, or during all of the Plan Years in
which he was an active Member if less than three, subject to the following
adjustments:
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(1) If the benefit begins before the Member's Social Security
Retirement Age, the Dollar Limit will be adjusted in accordance with
regulations prescribed by the Secretary to a limit that equals an
annual benefit beginning at the earlier age that is equivalent to a
$90,000 annual benefit beginning at the Social Security Retirement
Age.
(2) If the benefit begins after the Member's Social Security
Retirement Age, the Dollar Limit will be adjusted in accordance with
regulations prescribed by the Secretary to a limit that equals an
annual benefit beginning at the later age that is equivalent to a
$90,000 annual benefit beginning at the Social Security Retirement
Age.
(3) If the benefit is payable in a form other than a straight
life annuity, the benefit will be adjusted in accordance with
regulations prescribed by the Secretary to an equivalent benefit. For
this purpose, the portion of a joint and survivor annuity that
constitutes a Qualified Joint and Survivor Annuity and any ancillary
benefits will not be taken into account.
(4) Except as provided in the following sentence, for purposes of
adjusting the limit under Paragraph (1) and any benefit under
Paragraph (3), the interest rate assumption will be the greater of 5%
or the rate used to compute an Actuarial Equivalent. For purposes of
adjusting the limit under Paragraph (2), the interest rate assumption
will be the lesser of 5% or the rate used to compute an Actuarial
Equivalent. For purposes of adjusting any limit or benefit under
Paragraphs (1), (2) and (3), the mortality table used will be the
table prescribed from time to time by the Secretary for this purpose.
(5) Notwithstanding the preceding Paragraphs of this Subsection,
the benefit payable to a Member will be deemed not to exceed the
limitations of this Subsection if the Member has at no time
participated in any defined contribution plan maintained by the
Employer and the benefit payable to the Member under this Plan and all
other defined benefit plans maintained by the Employer do not exceed
$10,000 for the Plan Year or any prior Plan Year.
(6) If the Member's benefit begins when he has fewer than 10
years of participation in the Plan, the Dollar Limit will instead be a
limit equal to the product of the Dollar Limit and a fraction, the
numerator of which is the number of years of participation in the Plan
and the denominator of which is 10. The preceding sentence will apply
to the Compensation Limit, the limit described at Paragraph (5), and,
for Plan Years ending before January 1, 2000, the limit described at
Subsection (b), except that it will be applied with respect to Years
of Eligibility Service rather than years of participation in the Plan.
In no event will the preceding provisions of this Paragraph reduce the
Dollar Limit, the
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Compensation Limit, or the limit described at Paragraph (5) to an
amount less than 1/10 of the particular limit.
(b) If a Member is also a participant in a qualified defined
contribution plan maintained by the Employer, the sum of his Defined
Benefit Fraction and Defined Contribution Fraction may not exceed 1.0 in
any Plan Year ending before January 1, 2000. If in any Plan Year ending
before January 1, 2000 the sum would otherwise exceed 1.0, the benefits
under this Plan will be reduced so that the sum equals 1.0.
(c) For purposes of this Section, all references to $90,000, a $90,000
annual benefit, the Dollar Limit, and the Compensation Limit are references
to the amounts as adjusted for cost-of-living pursuant to Code subsection
415(d).
ARTICLE XII
AMENDMENT, MERGER AND TERMINATION
Section 12.01. Amendment of Plan. The Board of Directors reserves
the right at any time and from time to time, and retroactively if deemed
necessary or appropriate, to amend in whole or in part any or all of the
provisions of the Plan. With the prior authorization of the Board of Directors,
the President of ESI may also amend the Plan. A certified copy of the
resolution of the Directors or the written directive of the President making the
amendment will be delivered to the Trustee. The Plan will be amended in the
manner and effective as of the date set forth in the resolution or directive,
and the Employees, Members, Beneficiaries, the Trustee, and all others having
any interest under the Plan will be bound by the amendment. However, no
amendment will make it possible for any part of the funds of the Plan to be used
for, or diverted to, purposes other than for the exclusive benefit of persons
entitled to benefits under the Plan, before the satisfaction of all liabilities
with respect to them. No amendment will be made that has the effect of
decreasing the accrued benefit of any Member or of reducing the nonforfeitable
percentage of the accrued benefit of any Member below the nonforfeitable
percentage computed under the Plan as in effect on the date on which the
amendment is adopted or, if later, the date on which the amendment becomes
effective.
Section 12.02. Amendments Necessary to Bring Plan into Compliance
with the Code and ERISA. Notwithstanding any other provision of the Plan, any
modification or amendment of the Plan may be made, retroactively if necessary,
that may be required (a) to cause the Trust to constitute a qualified trust
under the provisions of Code section 401, or (b) to comply in every respect with
ERISA.
Section 12.03. Amendments to Vesting Provisions. If the Plan's
vesting provisions are amended, each Member with at least three Years of Vesting
Service may elect, within the period specified in the following sentence, to
have his nonforfeitable percentage computed under the Plan without regard to the
amendment. The period during which the election may be made will begin with the
date the amendment is adopted and will end 60 days after the
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<PAGE>
latest of the following events occurs: (1) the amendment is adopted, (2) the
amendment becomes effective, or (3) the Member is issued written notice of the
amendment by the Employer.
Section 12.04. Merger or Consolidation. The Plan may not be merged
or consolidated with, and its assets or liabilities may not be transferred to,
any other plan unless each person entitled to benefits under the Plan would, if
the resulting plan were then terminated, receive a benefit immediately after the
merger, consolidation, or transfer that is equal to or greater than the benefit
he would have been entitled to receive immediately before the merger,
consolidation, or transfer if the Plan had then terminated.
Section 12.05. Termination of Plan. The Plan is intended to be
permanent, and the Trust created in support of the Plan is intended to be
irrevocable, except in the manner and to the extent otherwise provided in the
Plan or in the Trust Agreement. The Board of Directors may terminate the Plan
for any reason at any time. A certified copy of the resolution of the Directors
terminating the Plan will be delivered to the Trustee, and the Plan will be
terminated as of the date of termination specified in the resolution. In
addition, the Plan will terminate upon (a) the cessation of business operations
by the Employer unless a successor employer continues the Plan and becomes a
party to the Trust Agreement or (b) the legal adjudication of the Employer as a
bankrupt; a general assignment by the Employer to or for the benefit or its
creditors; or the voluntary or involuntary dissolution of the Employer. In case
of termination of the Plan, the rights of Members to the benefits accrued under
the Plan to the date of the termination, to the extent then funded or guaranteed
by the Pension Benefit Guaranty Corporation, if greater, will be nonforfeitable.
The funds of the Plan will be used for the exclusive benefit of persons entitled
to benefits under the Plan as of the date of termination, except as provided in
Section 4.04. However, any funds not required to satisfy all liabilities of the
Plan for benefits because of erroneous actuarial computation will revert to and
be returned to the Employer. The Committee will determine on the basis of
actuarial valuation the share of the funds of the Plan allocable to each person
entitled to benefits under the Plan in accordance with section 4044 of ERISA, or
corresponding provision of any applicable law in effect at the time. In the
event of a partial termination of the Plan, the provisions of this Section will
be applicable to the Members affected by that partial termination.
Section 12.06. Limitation Concerning 25 Highest Paid Employees.
(a) The provisions of this Section will apply (1) if the Plan is
terminated, to any Member who is a Highly Compensated Member and (2) in any
other event, to any Member who is one of the 25 Highly Compensated Members
with the greatest compensation in any Plan Year. The amount of the annual
payments to any of the Members to whom this Section applies will not be
greater than an amount equal to the payments that would be made on behalf
of the Member under a single life annuity that is the Actuarial Equivalent
of the present value of the balance of the Member's Cash Balance Account.
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<PAGE>
(b) If, (1) after payment to any one of the 25 Highly Compensated
Members described above to whom this Section applies of his benefits, the
value of Plan assets equals or exceeds 110 percent of the value of current
liabilities (as that term is defined in Code paragraph 412(1)(7)) of the
Plan, or (2) the value of the benefits of any one of the 25 Highly
Compensated Members to whom this Section applies is less than one percent
of the value of current liabilities of the Plan, the provisions of
Subsection (a) will not be applicable to the payment of benefits to that
Member.
(c) Notwithstanding Subsection (a), if the Plan is terminated, the
restriction of this Section will not be applicable if the benefits payable
to any Highly Compensated Member is limited to a benefit that is
nondiscriminatory under Code paragraph 401(a)(4).
(d) If it should subsequently be determined by statute, court decision
acquiesced in by the Commissioner of Internal Revenue, or ruling by the
Commissioner of Internal Revenue, that the provisions of this Section are
no longer necessary to qualify the Plan under the Code, this Section will
have no further effect without the necessity of further amendment to the
Plan.
ARTICLE XIII
PROVISIONS RELATING TO TOP-HEAVY PLAN
Section 13.01. Construction of this Article. This Article will be
construed in accordance with Code section 416 and the regulations thereunder.
Section 13.02. Top-Heavy Determination. For each Plan Year, the
Committee will determine whether the Plan is a Top- Heavy Plan.
(a) The Plan will be determined to be a Top-Heavy Plan if it
satisfies either Paragraph (1) or Paragraph (2).
(1) Except as provided in Paragraph (3), the Plan will be a Top-
Heavy Plan for a Plan Year if, as of the Determination Date, the
present value of the accumulated accrued benefits under the Plan of
Key Employees exceeds 60% of the present value of the accumulated
accrued benefits under the Plan of all Employees.
(2) Except as provided in Paragraph (3), the Plan will be a Top-
Heavy Plan for a Plan Year if it is included in a Required Aggregation
Group that is a Top-Heavy Group for the Plan Year.
(3) The Plan will not be a Top-Heavy Plan for a Plan Year if it
is included in an Aggregation Group (whether a Required Aggregation
Group or a Permissive Aggregation Group) that is not a Top-Heavy Group
for the Plan Year.
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<PAGE>
(b) An Aggregation Group will be a Top-Heavy Group for the Plan Year
if (as of the respective Determination Dates that occur in the same
calendar year for each of the plans in the Aggregation Group) the sum of:
(1) the present value of the cumulative accrued benefits for Key
Employees under all defined benefit Retirement Plans included in the
Aggregation Group, and
(2) the aggregate balances of the accounts of Key Employees
under all defined contribution Retirement Plans included in the
Aggregation Group,
exceeds 60% of a similar sum determined for all Employees.
(c) In making the determinations required by this Section, the rules
of Section 13.03 will apply.
Section 13.03. Special Rules Relating to Determination of Top-Heavy
Status. In making the determinations required by this Article, the following
rules will apply:
(a) In determining the present value of an Employee's accrued
benefits under any defined benefit Retirement Plan, the mortality table and
interest rate used for actuarial equivalents in that Retirement Plan will
be used.
(b) For purposes of determining the present value of an Employee's
cumulative accrued benefits and the aggregate balances of his accounts
under this Article, distributions made with respect to the Employee during
the 5-year period ending on the Determination Date will be taken into
account. The preceding sentence will also apply to distributions under a
terminated Retirement Plan that would have been required to be included in
the Aggregation Group if the Retirement Plan had not been terminated.
(c) All Retirement Plans included in the Required Aggregation Group
must be aggregated to determine whether they constitute a Top-Heavy Group.
(d) If an individual is a Non-Key Employee with respect to any
Retirement Plan for a Plan Year, but the individual was a Key Employee with
respect to the Retirement Plan for any prior Plan Year, no accrued benefit
or account of the Employee will be taken into account in determining top-
heavy status.
(e) If an individual has not performed any service for the Employer
at any time during the 5-year period ending on the Determination Date, the
accrued benefits and accounts of that individual will not be taken into
account.
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<PAGE>
(f) For purposes of determining the present value of the accrued
benefit of an Employee other than a Key Employee, the accrued benefit will
be determined (1) under the method used for accrual purposes for all
Retirement Plans of the Employer, or (2) if there is no method described in
Clause (1), as if the benefit accrued not more rapidly than the slowest
accrual rate permitted under Code subparagraph 411(b)(1)(C).
ARTICLE XIV
MISCELLANEOUS PROVISIONS
Section 14.01. No Duplication of Benefits. Nothing in this Plan
will be construed to permit any duplication of the benefits of a former Member
upon his re-entry into the Plan as a Member after Separation from Service. Any
such duplication of benefits is specifically prohibited.
Section 14.02. Named Fiduciaries. The Employer, the Committee, and
the Trustee are hereby designated as named fiduciaries with respect to the Plan.
Each named fiduciary will have only such authority as to the control and
management of the operation and administration of the Plan as is specifically
given to it by the provisions of the Plan. No named fiduciary will be subject
to the direction or control of another named fiduciary except to the extent, and
in the manner, specifically provided herein or in the Trust Agreement. Each
named fiduciary will discharge his duties with respect to the Plan in accordance
with the applicable provisions of ERISA.
Section 14.03. Bonding. Each fiduciary of the Plan and Trust and
each person who handles funds of the Plan and Trust will be bonded, except a
corporate Trustee who is exempt from the ERISA bonding requirements.
Section 14.04. Qualified Military Service. Notwithstanding any
other provisions of this Plan to the contrary, contributions, benefits and
service credits with respect to qualified military service will be provided in
accordance with Code subsection 414(u).
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<PAGE>
ITT Educational Services, Inc. has caused this ESI Pension Plan to be
executed by its duly authorized officer on this 12th day of October, 1998.
ITT EDUCATIONAL SERVICES, INC.
By: /S/ Clark D. Elwood
------------------------------------
(Signature)
Clark D. Elwood
------------------------------------
(Printed)
Senior Vice President
------------------------------------
(Title)
ATTEST:
/S/ Cheryl A. Love
- --------------------------------
(Signature)
Cheryl A. Love
- --------------------------------
(Printed)
Assistant Secretary
- --------------------------------
(Title)
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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 Nine Months Ended
September 30, September 30,
----------------------------- -------------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,097 $ 8,258 $ 8,765 $15,265
------- ------- ------- -------
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 206 103 178 105
------- ------- ------- -------
Outstanding shares for diluted
earnings per share calculation 27,206 27,103 27,178 27,105
Earnings per common share: $ 0.08 $ 0.30 $ 0.32 $ 0.56
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 64,426
<SECURITIES> 35,540
<RECEIVABLES> 18,405
<ALLOWANCES> (1,102)
<INVENTORY> 0
<CURRENT-ASSETS> 125,984
<PP&E> 77,568
<DEPRECIATION> (52,637)
<TOTAL-ASSETS> 161,870
<CURRENT-LIABILITIES> 62,929
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 96,310
<TOTAL-LIABILITY-AND-EQUITY> 161,870
<SALES> 0
<TOTAL-REVENUES> 219,064
<CGS> 0
<TOTAL-COSTS> 207,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,551
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 15,237
<INCOME-TAX> 6,472
<INCOME-CONTINUING> 8,765
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,765
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
