<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 / /
24,932,952
Number of shares of Common Stock, $.01 par value, outstanding at August 4, 1999
<PAGE>
ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana
Quarterly Report to Securities and Exchange Commission
June 30, 1999
PART I
ITEM 1. FINANCIAL STATEMENTS.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Income (Loss) (unaudited) for the six months ended June 30, 1999 and 1998
and the three months ended June 30, 1999 and 1998 ..................................................... 3
Consolidated Balance Sheets as of June 30, 1999 and 1998 (unaudited) and December 31, 1998 ............... 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 1999 and 1998
and the three months ended June 30, 1999 and 1998...................................................... 5
Notes to Consolidated Financial Statements................................................................ 6
</TABLE>
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ---------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Tuition $59,605 $54,273 $129,306 $116,860
Other educational 11,033 10,804 21,304 20,504
------- ------- -------- --------
Total revenues 70,638 65,077 150,610 137,364
------- ------- -------- --------
COSTS AND EXPENSES
Cost of educational services 46,995 44,970 93,463 86,408
Student services and administrative expenses 22,053 20,341 43,571 39,777
Offering, change in control and other one-time
expenses -- 1,429 900 1,872
------- ------- -------- --------
Total costs and expenses 69,048 66,740 137,934 128,057
------- ------- -------- --------
Operating income (loss) 1,590 (1,663) 12,676 9,307
Interest income, net 436 1,191 1,292 2,435
------- ------- -------- --------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle 2,026 (472) 13,968 11,742
Income taxes 775 188 5,375 5,074
------- ------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle 1,251 (660) 8,593 6,668
Cumulative effect of change in accounting
principle for institute start-up costs, net
of tax -- -- (823) --
------- ------- -------- --------
Net income (loss) $ 1,251 $ (660) $ 7,770 $ 6,668
------- ------- -------- --------
------- ------- -------- --------
Earnings (loss) per common share (basic and
diluted):
Income (loss) before cumulative effect of
change in accounting principle $ 0.05 $ (0.02) $ 0.33 $ 0.25
Cumulative effect of change in accounting
principle for institute start-up
costs, net of tax -- -- (0.03) --
------- ------- -------- --------
Net income (loss) $ 0.05 $(0.02) $ 0.30 $ 0.25
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
(Unaudited) (Unaudited)
------------- ----------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 31,847 $ 77,335 $ 95,875
Restricted cash 969 3,617 1,059
Marketable debt securities 19,792 38,316 --
Accounts receivable, net 12,049 10,772 13,318
Deferred and prepaid income tax 9,643 5,969 1,811
Prepaids and other current assets 6,744 2,749 4,011
-------- -------- --------
Total current assets 81,044 138,758 116,074
Property and equipment, net 26,713 24,985 24,128
Direct marketing costs 8,382 7,915 7,480
Other assets 3,288 3,913 3,120
-------- -------- --------
Total assets $119,427 $175,571 $150,802
-------- -------- --------
-------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 27,590 $ 15,992 $ 22,459
Accrued compensation and benefits 6,834 6,488 4,585
Accrued legal settlements -- 7,604 --
Other accrued liabilities 6,538 7,896 5,881
Deferred tuition revenue 22,578 32,261 21,203
-------- -------- --------
Total current liabilities 63,540 70,241 54,128
Other liabilities 3,509 3,474 2,191
-------- -------- --------
Total liabilities 67,049 73,715 56,319
-------- -------- --------
Shareholders' equity
Preferred stock, $.01 par value,
5,000,000 shares authorized, none
issued or outstanding -- -- --
Common stock, $.01 par value, 150,000,000
shares authorized, 27,034,452, 27,011,202
and 26,999,952 issued 270 270 270
Capital surplus 33,912 32,613 32,513
Retained earnings 76,743 68,973 61,700
Treasury stock, 1,893,300 shares (58,547) -- --
-------- -------- --------
Total shareholders' equity 52,378 101,856 94,483
-------- -------- --------
Total liabilities and shareholders' equity $119,427 $175,571 $150,802
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,251 $ (660) $ 7,770 $ 6,668
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,756 2,347 5,292 4,561
Provision for doubtful accounts 1,076 785 1,965 1,459
Deferred taxes 2,720 39 3,252 271
Increase/decrease in operating assets and liabilities:
Marketable debt securities (58) -- 18,524 --
Accounts receivable (505) (1,333) (3,242) (5,097)
Direct marketing costs (374) (426) (467) (598)
Accounts payable and accrued liabilities (6,200) 4,506 (3,248) 7,804
Prepaids and other assets (1,298) 146 (3,370) (1,373)
Deferred tuition revenue (1,003) (1,838) (9,683) (9,647)
----------- ---------- ---------- -----------
Net cash provided by (used for) operating activities (1,635) 3,566 16,793 4,048
----------- ---------- ---------- -----------
Cash flows provided by (used for) investing activities:
Capital expenditures, net (3,391) (3,538) (7,021) (5,803)
Net decrease in cash invested with ITT Corporation -- -- -- 94,800
----------- ---------- ---------- -----------
Net cash provided by (used for) investing activities (3,391) (3,538) (7,021) 88,997
----------- ---------- ---------- -----------
Cash flows provided by (used for) finance activities:
Purchase of treasury stock (9,459) -- (58,547) --
Exercise of stock options 56 -- 639 --
----------- ---------- ---------- -----------
Net cash provided by (used for) finance activities (9,403) -- (57,908) --
----------- ---------- ---------- -----------
Net increase (decrease) in cash, cash
equivalents and restricted cash (14,429) 28 (48,136) 93,045
Cash, cash equivalents and restricted cash at
beginning of period 47,245 96,906 80,952 3,889
----------- ---------- ---------- -----------
Cash, cash equivalents and restricted cash at
end of period $ 32,816 $ 96,934 $32,816 $96,934
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
ITT EDUCATIONAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Dollar amounts in thousands, unless otherwise stated)
1. ITT Educational Services, Inc. ("ESI") prepared the accompanying unaudited
financial statements 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 ESI. 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 ESI's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended December 31, 1998.
The American Institute of Certified Public Accountants issued Statement of
Position ("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
as incurred. ESI adopted this standard effective January 1, 1999 and
expensed $1,354 of institute costs, less $531 of deferred tax, as a
cumulative effect of change in accounting principle in the three months
ended March 31, 1999.
2. From ESI's initial public offering in 1994 until June 9, 1998, ITT
Corporation ("ITT") owned 83.3% of the outstanding shares of ESI common
stock.
On February 23, 1998, Starwood Hotels & Resorts Worldwide, Inc. ("Starwood
Hotels") completed the acquisition of ITT (the "Merger") and ITT became a
subsidiary of Starwood Hotels. As a result of the Merger, a change in
control of ESI occurred under regulations of the U.S. Department of
Education ("DOE") and each ITT Technical Institute campus group became
ineligible to participate in federal student financial aid programs.
Effective March 20, 1998, the eligibility of each ITT Technical Institute
campus group to participate in federal student financial aid programs was
reinstated by the DOE with certain conditions imposed by the DOE. ESI
believes that it is in compliance with or satisfies these DOE conditions.
On June 9, 1998, ITT sold 13,050,000 shares of ESI's common stock held by
ITT to the public (48.3% of the outstanding shares) (the "June 1998
Offering"). After the June 1998 Offering, ITT owned 35% of the outstanding
shares of ESI common stock. The June 1998 Offering did not constitute a
change in control of ESI under the DOE's regulations.
On February 1, 1999, ITT sold 7,950,000 shares of ESI common stock held by
ITT to the public (the "February 1999 Offering"). The February 1999
Offering did not constitute a change in control of ESI under the DOE's
regulations. Simultaneous with the close of the February 1999 Offering, ESI
repurchased 1,500,000 shares of ESI common stock from ITT at the February
1999 Offering price to the public, less underwriters' commissions and
discounts, for an aggregate cost of $49,088 (the "February 1999 Stock
Repurchase"). Following the February 1999 Offering and February 1999 Stock
Repurchase, ITT no longer owned any shares of ESI's common stock.
3. On April 21, 1999, ESI's Board of Directors authorized ESI to repurchase up
to 2,000,000 outstanding shares of ESI common stock in the open market or
through privately negotiated transactions in accordance with Rule 10b-18 of
the Securities Exchange Act of 1934, as amended. During the three months
ended June 30, 1999, ESI repurchased 393,300 shares of ESI common stock at
an average cost of $24.05 per share or $9.5 million. ESI is currently
holding all of the repurchased shares of ESI common stock as treasury
shares. ESI may elect to repurchase additional shares of ESI common stock
from time to time in the future, depending on market conditions and other
considerations. The purpose of the stock repurchase program is to help ESI
achieve its long-term goal of enhancing shareholder value.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This management's discussion and analysis of financial condition and
results of operations should be read in conjunction with the same titled
section contained in our Annual Report on Form 10-K as filed with the
Securities and Exchange Commission for the year ended December 31, 1998 for
discussion of, among other matters, the following items:
- Cash receipts from financial aid programs
- Nature of capital additions
- Seasonality of revenues
- Components of income statement captions
- Cash invested with ITT
- Cash transferred from ITT
- Legal settlements
- Marketable debt securities and market risk
- Change in ownership and control of ESI
- Changes in federal regulations regarding:
- Timing of receipt of funds from the federal student
financial aid programs under Title IV of the Higher
Education Act of 1965, as amended (the "Title IV
Programs")
- Refunds
- Percentage of applicable revenues that may be derived
from Title IV Programs
- Default rates
We earn tuition revenue on a weekly basis, pro rata over the length of
each of the four 12-week academic quarters in our fiscal year. Due to the
two-week vacations in June and December at most of our institutes, the first
and third quarters include 13 weeks of revenue and the second and fourth
quarters include 11 weeks of revenue. Our 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.
In 1998, we began offering a new program in information technology,
called Computer Network Systems Technology ("CNST"), at three ITT Technical
Institutes. We began offering the CNST program at an additional 12 ITT
Technical Institutes in the three months ended March 31, 1999 and at an
additional six ITT Technical Institutes in the three months ended June 30,
1999. We intend to begin offering this program at six additional ITT
Technical Institutes in the third quarter of 1999, at seven additional ITT
Technical Institutes in the fourth quarter of 1999, and at 33 additional
schools in 2000. We incur a loss with respect to each CNST program offered
at an ITT Technical Institute until the revenue from the number of enrolled
students is high enough to offset the fixed costs associated with the
program offering, such as salaries, equipment depreciation, rent and
marketing. We incurred estimated losses with respect to the CNST program of
approximately $1.3 million in the three months ended June 30, 1999 and $2.4
million in the six months ended June 30, 1999, compared to none in the three
or six months ended June 30, 1998. We have been developing four separate
information technology programs, each with a different area of
concentration: computer networking, computer programming, web administration
and multimedia. To date, the rollout of our information technology curricula
has primarily focused on the CNST program. One ITT Technical Institute began
offering the computer programming curriculum in the June 1999 term. We
intend to begin offering the computer programming curriculum at other ITT
Technical Institutes prior to the end of 1999 and intend to begin offering
the remaining two information technology programs starting in 2000. The
expenses associated with our accelerated rollout of the information
technology programs will temporarily depress our earnings in the second half
of 1999 and the first half of 2000. The amount of capital required to offer
the CNST program at an ITT Technical Institute is approximately $0.2
million.
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<PAGE>
RESULTS OF OPERATIONS
Revenues increased $5.5 million, or 8.4%, to $70.6 million in the three
months ended June 30, 1999 from $65.1 million in the three months ended June 30,
1998. Revenues increased $13.2 million, or 9.6%, to $150.6 million in the six
months ended June 30, 1999 from $137.4 million in the six months ended June 30,
1998. These increases were due primarily to a 5% increase in tuition rates in
September 1998 and a 4.5% increase in the total student enrollment at January 1,
1999 compared to January 1, 1998. The number of students attending ITT Technical
Institutes at January 1, 1999 was 25,608 compared to 24,498 at January 1, 1998.
The total number of new students beginning classes in June 1999 was
7,272, compared to 6,951 in June 1998, an increase of 4.6%. The total student
enrollment on June 30, 1999 was 25,858, compared to 24,909 on June 30, 1998, an
increase of 3.8%.
Cost of educational services increased $2.0 million, or 4.4%, to $47.0
million in the three months ended June 30, 1999 from $45.0 million in the three
months ended June 30, 1998. Cost of educational services increased $7.1 million,
or 8.2%, to $93.5 million in the six months ended June 30, 1999 from $86.4
million in the six months ended June 30, 1998. The principal causes of these
increases include:
- the costs required to service the increased enrollment;
- normal inflationary cost increases for wages, rent and other costs
of services;
- increased costs at new institutes (one opened in March 1998, one in
June 1998, one in October 1998, two in January 1999 and one in
April 1999); and
- increased costs associated with offering the CNST program at 21
institutes.
Cost of educational services included $1.2 million of legal expenses
in the three and six months ended June 30, 1998 (none in 1999). Cost of
educational services as a percentage of revenues decreased to 66.5% in the
three months ended June 30, 1999 compared to 69.1% in the three months ended
June 30, 1998, and decreased to 62.1% in the six months ended June 30, 1999
compared to 62.9% in the six months ended June 30, 1998. The principal causes
of these decreases include the absence of a legal provision in 1999 and a
reduction of book costs, which resulted from lower bookstore sales in 1999.
Student services and administrative expenses increased $1.8 million,
or 8.9%, to $22.1 million in the three months ended June 30, 1999 from $20.3
million in the three months ended June 30, 1998. Student services and
administrative expenses increased $3.8 million, or 9.5%, to $43.6 million in
the six months ended June 30, 1999 from $39.8 million in the six months ended
June 30, 1998. These increases were primarily due to increased media
advertising expenses (up 9% in the three months ended June 30, 1999 and 13%
in the six months ended June 30, 1999). Student services and administrative
expenses were 31.2% of revenues in the three months ended June 30, 1999 and
28.9% of revenues in the six months ended June 30, 1999, which were
approximately the same percentages as in the three and six months ended June
30, 1998.
We incurred net one-time expenses of $0.9 million in the six months
ended June 30, 1999 (none in the three months ended June 30, 1999) associated
with the costs of the February 1999 Offering (from which we did not receive
any proceeds) and special bonus payments to employees for extraordinary
services since 1997, net of amounts reimbursed by ITT. We incurred one-time
expenses of $1.4 million in the three months ended June 30, 1998 and $1.9
million in the six months ended June 30, 1998 associated primarily with our
June 1998 Offering and change in control resulting from the Merger.
We incur operating losses when we open new institutes. We opened
three new institutes in 1996, three in 1997, three in 1998 and three in the
six months ended June 30, 1999. 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 were$1.6 million during the three months ended June
30, 1999 and $3.3 million during the six months ended June 30, 1999, compared
to $1.5 million during the three months ended June 30, 1998 and $2.5 million
during the six months ended June 30, 1998.
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<PAGE>
Our operating income increased $3.3 million to $1.6 million in the
three months ended June 30, 1999 from an operating loss of $1.7 in the three
months ended June 30, 1998. Our operating income increased $3.4 million to
$12.7 million in the six months ended June 30, 1999 from $9.3 million in the
six months ended June 30, 1998.
The following table sets forth our operating income (in millions) for
the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating income (loss) as reported................................. $1.6 $(1.7) $12.7 $ 9.3
Offering, change in control and other one-time expenses............. -- 1.4 0.9 1.9
Operating losses from new institutes................................ 1.6 1.5 3.3 2.5
Estimated losses from CNST program.................................. 1.3 -- 2.4 --
Legal provision..................................................... -- 1.2 -- 1.2
------- -------- --------- --------
Adjusted operating income before one-time expenses, losses from
new institutes and CNST program and legal provision............. $4.5 $2.4 $19.3 $14.9
------- -------- --------- --------
------- -------- --------- --------
Percent of revenue.................................................. 6.4% 3.7% 12.8% 10.8%
</TABLE>
Interest income decreased $0.8 million in the three months ended
June 30, 1999 from the three months ended June 30, 1998 and $1.1 million in
the six months ended June 30, 1999 from the six months ended June 30, 1998
primarily due to less cash and investments in 1999 as a result of our
repurchase of 1.5 million shares of our common stock from ITT on February 1,
1999 for $49.1 million and our repurchase of an additional 393,300 shares for
$9.5 million in the three months ended June 30, 1999.
Our combined effective federal and state income tax rate for the
three and six months ended June 30, 1999 was 38.5% compared to 40% for the
three and six months ended June 30, 1998 (before non-deductible offering
expenses). This decrease was a result of lower state income taxes.
The following table sets forth the net income (in thousands, except per
share data) for the three and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) as reported......................................... $1,251 $(660) $7,770 $6,668
Cumulative effect of change in accounting principle for
institute start-up costs, net of tax............................. -- -- 823 --
Offering, change in control and other one time expenses (after tax) -- 1,235 554 1,501
----------- ---------- ----------- ----------
Net income before one-time expenses................................... 1,251 575 9,147 8,169
Operating losses from new institutes (after tax)...................... 1,007 885 2,041 1,521
Estimated losses from new CNST program offerings (after tax).......... 801 -- 1,491 --
Legal provision (after tax) .......................................... -- 720 -- 720
----------- ---------- ----------- ----------
Adjusted net income before one-time expenses, losses from new
institutes and CNST program and legal provision....................... $3,059 $2,180 $12,679 $10,410
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted average number of outstanding common shares................... 25,430 27,183 25,863 27,163
Diluted earnings per share............................................ $0.12 $0.08 $0.49 $0.38
</TABLE>
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<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Due to the seasonal pattern of enrollments and our 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.
Our net cash used for operating activities, excluding the $18.5
million decrease in marketable debt securities, was $1.7 million in the six
months ended June 30, 1999 compared to $4.0 million of net cash provided by
operating activities in the six months ended June 30, 1998. This $5.7 million
decrease was due primarily to our June 1999 payment of the legal settlement
amount in the student litigation related to our hospitality program that was
previously reported.
Our capital expenditures were $3.4 million in the three months ended
June 30, 1999 compared to $3.5 million in the three months ended June 30,
1998. Our capital expenditures were $7.0 million in the six months ended June
30, 1999 compared to $5.8 million in the six months ended June 30, 1998.
These increases were due primarily to increased capital expenditures in 1999
for offering of the CNST program at 18 additional ITT Technical Institutes.
We expect that our capital expenditures for the full 1999 year will be
approximately $17.0 million, which will represent a $5.6 million increase
over 1998 that is primarily due to our plans to offer the CNST program at a
minimum of 31 additional ITT Technical Institutes in all of 1999.
Capital expenditures for a new institute are approximately $0.4
million and capital expenditures for each new curriculum offered at an
existing institute are approximately $0.3 million ($0.2 million for the CNST
program). We expect to be able to fund our planned capital expenditures in
1999 from cash flows from operations.
On April 21, 1999, our Board of Directors authorized ESI to
repurchase up to 2,000,000 outstanding shares of ESI common stock in the open
market or through privately negotiated transactions in accordance with Rule
10b-18 of the Securities Exchange Act of 1934, as amended. During the three
months ended June 30, 1999, we repurchased 393,300 shares of ESI common stock
at an average cost of $24.05 per share or $9.5 million. We are currently
holding all of the repurchased shares of ESI common stock as treasury shares.
We may elect to repurchase additional shares of ESI common stock from time to
time in the future, depending on market conditions and other considerations.
The purpose of the stock repurchase program is to help ESI achieve its
long-term goal of enhancing shareholder value.
Cash flows on a long-term basis are highly dependent upon the
receipt of Title IV Programs funds and the amount of funds spent on new
institutes, curricula additions at existing institutes and possible
acquisitions.
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. We are unable at this time to assess the possible
impact on our financial condition, results of operations and cash flows that
may result from any disruptions to our business caused by Y2K problems in any
IT Systems and Non-IT Systems that we control or that any third party with
whom we have a material relationship controls. We do not believe at the
current time, however, that the cost to remedy our internal Y2K problems will
have a material adverse effect on our results of operations or cash flows.
OUR STATE OF READINESS. We have implemented a plan to ensure that
the IT Systems and material Non-IT Systems that we control are Y2K compliant
before January 1, 2000. In the first phase of the plan, which has been
completed, we assessed the potential exposure of our IT Systems and material
Non-IT Systems to Y2K problems.
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<PAGE>
In the second phase, which has also been completed, we designed a procedure
to remediate our exposure to Y2K problems in the IT Systems and material
Non-IT Systems that we control. We are currently in the third phase, which
involves the actual remediation of the IT Systems and material Non-IT Systems
that we control. After we complete the third phase, we will begin the fourth
and final phase of testing the remediation to the IT Systems and material
Non-IT Systems that we control to ensure Y2K compliance. We plan to complete
the testing phase by September 30, 1999.
We believe that we have identified all IT Systems and material
Non-IT Systems that we control that may require Y2K remediation. We have 12
people (both employees and outside consultants) dedicated to completing
enhancements to our IT Systems, which include our accounting, human
resources, financial services, admissions, education, recruitment and career
services systems. We have been enhancing our IT Systems on a continuous basis
since 1996 and we did not accelerate these enhancements due to any Y2K
problems. These enhancements will also address the Y2K problems with our IT
Systems. We plan to complete these enhancements by September 30, 1999.
We have dedicated two employees to either remediate or cause the
remediation of material Non-IT Systems that we control and that we have
identified as possessing a Y2K problem. We plan to complete the remediation
of these Non-IT Systems by September 30, 1999. We acquired many of these
Non-IT Systems during the past few years and we believe that a substantial
number of these newer systems do not possess a Y2K problem. In addition, the
vendors of many of these Non-IT Systems have warranted them to be Y2K
compliant. We have contacted the third parties who control our other material
Non-IT Systems (including, without limitation, our communication systems,
security systems, electrical systems and HVAC systems) to assess whether any
of these systems possess a Y2K problem that could adversely affect our
operations if a malfunction occurred. We have also implemented procedures to
help ensure that any new Non-IT Systems that we acquire or utilize are Y2K
compliant.
We have identified and contacted the third parties whose lack of Y2K
compliance may pose problems for us, such as the U.S. Department of Education
("DOE"), the state education authorities that regulate our institutes
("SEAs"), the accrediting commission that accredits our institutes
("Accrediting Commission"), student loan guaranty agencies, student loan
lenders, computer software and hardware suppliers and book vendors. In the
DOE's March 8, 1999 status report on the Y2K compliance of its
mission-critical IT Systems, the DOE stated that all of its 14
mission-critical IT Systems are Y2K compliant.
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES. We have expended
approximately $125,000 in direct costs through June 30, 1999 to identify and
remediate our Y2K problems. This amount does not include:
- the salaries of our employees involved in the remediation process;
- the cost of the enhancements to our IT Systems, because we did not
accelerate the enhancements due to Y2K problems; and
- the cost of replacing any Non-IT Systems or acquiring any new Non-IT
Systems in the normal course of our operations and not because of any
Y2K problems.
Based on our current assessment of our Y2K problems, we estimate
that our remediation efforts will cost between $150,000 and $200,000 for the
IT Systems and material Non-IT Systems that we control to become Y2K
compliant, representing up to 10% of our 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 us at our 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
our operations. Our operations will fund our Y2K remediation efforts.
THE RISKS ASSOCIATED WITH OUR YEAR 2000 ISSUES. The remediation of
our Y2K problems will increasingly cause us to defer some existing and
contemplated projects, particularly those involving our personnel conducting
the Y2K remediation. Although we are unable at this time to quantify our
internal indirect costs resulting from our Y2K problems, we do not believe
that the cost of remediating our internal Y2K problems or the lost
opportunity costs arising from diverting the efforts of our personnel to the
remediation will have a material adverse effect on our financial
-11-
<PAGE>
condition, results of operations or cash flows. We do not intend to use any
independent verification or validation processes to assure the reliability of
our risk or cost estimates associated with our Y2K problems.
We have outlined several possible worst case scenarios that could
arise from our Y2K problems. At this time, however, we have insufficient
information to assess the likelihood of any worst case scenario. Our most
reasonably likely worst case Y2K scenarios involve:
- significant delays in our receipt of federal and state student
financial aid in payment of students' education costs of attending our
institutes;
- significant delays or interruptions in the eligibility to participate
in Title IV Programs, approval to operate or accreditation of our
institutes that are undergoing their initial, or a renewal of, such
eligibility, approval or accreditation; and
- significant delays in obtaining authorization to offer new programs of
study for which our institutes have applied.
In 1998, we derived approximately 69% of our revenues from Title IV
Programs administered by the DOE. In addition, a number of our institutes
participate in various state student financial aid programs administered by
SEAs that, in the aggregate, generate a material portion of our revenues. In
1998, one lender provided approximately 65% of all Title IV Program loans
under the Federal Family Education Loan ("FFEL") program that were received
by our students, and one student loan guaranty agency guaranteed
approximately 94% of all FFEL program loans that were received by our
students. As a result, we must depend on the ability of the DOE, the SEAs and
our primary student loan lender and guaranty agency to resolve their Y2K
problems. If any of these parties were to experience a Y2K problem that
significantly delays our receipt of federal or state student financial aid in
payment of students' education costs, it could have a material adverse effect
on our financial condition, results of operations and cash flows. Similarly,
an interruption in our institutes' operations could occur if, due to a Y2K
problem:
- the DOE is unable to timely grant or renew an institute's eligibility
to participate in Title IV Programs;
- any SEA is unable to timely approve an institute to operate or renew
such approval; or
- the Accrediting Commission is unable to timely accredit an institute
or renew such accreditation.
A prolonged delay or interruption for a significant number of
institutes could have a material adverse effect on our financial condition,
results of operations and cash flows. We are unable to independently assess the
Y2K readiness of any of these third parties at this time.
CONTINGENCY PLAN. We have developed a contingency plan for the IT
Systems and material Non-IT Systems that we control. We have dedicated two
employees to remediate an IT System that will become obsolete after we finish
the enhancements to our IT Systems. We plan to complete the remediation of
this IT System by September 30, 1999. If the enhancements to our IT Systems
are not finished before January 1, 2000, we hope to avoid any disruption to
our business by using this other IT System. Our contingency plan with respect
to the material Non-IT Systems that we control 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. We believe that we could
substitute other student loan lenders and guaranty agencies for our primary
lender and guaranty agency if either of these parties experienced a Y2K
problem that could significantly delay our receipt of federal or state
student financial aid in payment of students' education costs of attending
our institutes. Our current financial resources would also help us weather
any such delay. Otherwise, we have no contingency plan, and do not intend to
create a contingency plan, for the IT Systems and Non-IT Systems that are not
controlled by us, including the third party IT Systems of the DOE, the SEAs
and the Accrediting Commission on which we rely.
-12-
<PAGE>
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 our eligibility to participate in, student financial aid
programs utilized by our students; the consummation of the proposed
settlement of student litigation related to our technology programs in
California; effects of any change in ownership of ESI resulting in a change
in control of ESI, including, but not limited to, the consequences of such
changes on the accreditation and federal and state regulation of the
institutes; our ability to implement our growth strategies, including our new
information technology programs; receptivity of students and employers to our
existing program offerings and new curricula; and loss of lender access to
our students for student loans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
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<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to litigation in the ordinary course of our
business. Among the legal actions currently pending and recently concluded is
the following case. We have agreed to settle all of the plaintiff's claims in
this case. The settlement is a class settlement which has been subject to
court approval and to the right of the class members to opt out of the
settlement.
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 our San Diego institute. The suit, as originally filed, alleged, among
other things, statutory violations of the California Educational Code (the
"CEC") and the California Business and Professions Code (the "CBPC") by us
and ten of our employees. 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
any of our institutes 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 a
California institute. The plaintiffs in the amended complaint alleged only
violations of the CEC, based on the plaintiffs' claims that the defendants
(1) made misrepresentations and engaged in deceptive acts in the recruitment
of students for, and/or in the promotion of, the programs offered in
California, (2) failed to provide students with all required information and
disclosures and (3) misrepresented students' prospects for employment upon
graduation and the employment of the programs' graduates. The plaintiffs
sought (1) a refund of an unspecified amount representing all consideration
paid to us 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, (2) a state statutory penalty equal to two times
the refund amount, (3) injunctive relief and (4) an unspecified amount of
attorney's fees and costs.
In May 1998, we settled all of the claims of one of the three
plaintiffs in this legal proceeding. In September 1998, we 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 program (other than the hospitality program)
at any of our institutes in California from January 1, 1990 through December
31, 1997. The class settlement, which was subject to court approval, provides
class members with nontransferable tuition credits to attend a different
educational program at any of our institutes in the amount of: (1) $250 per
quarter off the then prevailing quarterly tuition for class members who
completed at least 50% of an associate degree program at one of our
institutes in California; (2) $125 per quarter off the then prevailing
quarterly tuition for class members who completed (a) less than 50% of an
associate degree program at one of our institutes in California or (b) at
least 50% of a bachelor degree program at one of our institutes in
California; and (3) $62.50 per quarter off the then prevailing quarterly
tuition for class members who completed less than 50% of a bachelor degree
program at one of our institutes in California. The class member can use the
tuition credit toward the cost of attending any of our institutes' programs
that the class member had not previously attended. In addition to the
issuance of tuition credits, we stipulated to a permanent injunction that
enjoins us from certain recruitment practices (none of which we currently
follow) and agreed to pay the plaintiffs' reasonable attorneys' fees and
expenses. If more than 1% of the class members had opted out of the class
settlement, we could have, in our sole discretion, terminated the class
settlement. On July 2, 1999, the court granted final approval of the class
settlement and dismissed the Robb case with prejudice. Twenty-four of the
class members opted out of the class settlement.
We cannot assure you of the ultimate outcome of any litigation
involving us. We do not believe any pending legal proceeding will result in a
judgment or settlement that will have, after taking into account our existing
insurance and provisions for such liabilities, a material adverse effect on
our financial condition, results of operations or cash flows. Any litigation
alleging violations of education or consumer protection laws and/or
regulations, misrepresentation, fraud or deceptive practices may also subject
our affected institutes to additional regulatory scrutiny.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the second quarter of fiscal year 1999, we held the ESI 1999
annual meeting of shareholders on May 11, 1999 to elect directors and to
approve an amendment to our Restated Certificate of Incorporation. Our Board
of Directors currently consists of eight directors divided into three
classes. The first and third classes contain three directors each and the
second class contains two directors. The term of one class expires each year.
Generally, each director serves until the annual meeting of shareholders held
in the year that is three years after that director's election and thereafter
until that director's successor is elected and has qualified. At the ESI 1999
annual meeting of shareholders, our shareholders elected the following
persons to serve as directors of ESI in the second class of our Board of
Directors, each to hold office for the term of three years and until his
successor is elected and has qualified:
Second Class - Term expiring at 2002 Annual Meeting
------------
1. John E. Dean
2. Vin Weber
The final results of the vote taken at such meeting for the director
nominees are as follows:
<TABLE>
<CAPTION>
Broker
Votes For Votes Withheld Nonvotes Abstentions
---------- -------------- -------- -----------
<S> <C> <C> <C> <C>
John E. Dean 21,300,851 21,078 0 0
Vin Weber 21,301,276 20,653 0 0
</TABLE>
The ESI directors who continued in office after the meeting are as
follows:
First Class - Term expiring at 2001 Annual Meeting
-----------
1. Rene R. Champagne
2. James D. Fowler, Jr.
Third Class - Term expiring at 2000 Annual Meeting
-----------
1. Rand V. Araskog
2. Leslie Lenkowsky
3. Daniel P. Weadock
In addition, at its meeting on July 13, 1999, our Board of Directors elected
Harris N. Miller to serve as an ESI Director, as a member of the First Class.
At the ESI 1999 annual meeting of shareholders, our shareholders
also approved an amendment to our Restated Certificate of Incorporation to
increase the number of authorized shares of ESI's Common Stock, $0.01 par
value per share, from 50,000,000 to 150,000,000. The final results of the
vote taken at that meeting to approve the amendment to our Restated
Certificate of Incorporation are as follows:
<TABLE>
<CAPTION>
Percentage of Shares Broker
Votes For Outstanding Voting For Votes Against Nonvotes Abstentions
------------ ---------------------- ------------- -------- -----------
<S> <C> <C> <C> <C>
18,472,296 72.3% 2,839,226 0 10,407
</TABLE>
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 the 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 June 30,
1999.
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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: August 6, 1999
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>
3.1 Restated Certificate of Incorporation, as Amended to Date............
10.19 *ESI Excess 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 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
ITT EDUCATIONAL SERVICES, INC.
Pursuant to Sections 242 and 245
of the General Corporation Law
of the State of Delaware
------------------------
ITT EDUCATIONAL SERVICES, INC., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies as follows:
1. The name of the Corporation is ITT EDUCATIONAL SERVICES, INC. The
Corporation was originally incorporated under the name Allied School of
Mechanical Trades, Inc., and the original Certificate of Incorporation of the
Corporation was filed with the Secretary of the State of Delaware on June 27,
1946.
2. This Restated Certificate of Incorporation integrates, amends and
restates the Certificate of Incorporation of the Corporation.
3. The text of the Certificate of Incorporation as heretofore amended
is hereby integrated, amended and restated to read in its entirety as follows:
ARTICLE I: The name of the Corporation is:
ITT EDUCATIONAL SERVICES, INC.
ARTICLE II: The Corporation's registered office in the state of
Delaware is at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of Newcastle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III: The nature of the business of the Corporation and its
purpose are to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE IV:
SECTION 1. The amount of total authorized capital stock of the
Corporation is 30,000,000 shares, of which 25,000,000 shares shall be Common
Stock, having a par value of $.01 per share ("Common Stock"), and 5,000,000
shares shall be Preferred Stock, having a par value $.01 per share
("Preferred Stock").
<PAGE>
SECTION 2. Except for and subject to those rights expressly granted to
the holders of Preferred Stock, or any series thereof, by the Board of
Directors of the Corporation (the "Board of Directors"), pursuant to the
authority hereby vested in the Board of Directors or as provided by the laws
of the State of Delaware, the holders of the Corporation's Common Stock shall
have exclusively all rights of stockholders and shall possess exclusively all
voting power. Each holder of Common Stock of the Corporation shall be
entitled, on each matter submitted for a vote to holders of Common Stock, to
one vote for each share of Common Stock standing in such holder's name on the
books of the Corporation.
SECTION 3. The Board of Directors is hereby expressly authorized, at
any time and from time to time by a resolution or resolutions, to divide the
shares of Preferred Stock into one or more series, to issue from time to time
in whole or in part the shares of Preferred Stock or the shares of any series
thereof, and to fix and determine in the resolution or resolutions providing
for the issue of shares of Preferred Stock of a particular series the voting
rights, if any, of the holders of shares of such series, the designations,
preferences and relative, participating, optional and other special rights of
such series, and the qualifications, limitations and restrictions thereof, to
the fullest extent now or hereafter permitted by the laws of the State of
Delaware. The voting rights, if any, of each such series and the preferences
and relative, participating, optional and other special rights of each such
series, and the qualifications, limitations and restrictions thereof, if any,
may differ from those of any and all other series. Unless otherwise provided
in the resolution or resolutions of the Board of Directors providing for the
issuance thereof, shares of any series of Preferred Stock that shall be
issued and thereafter acquired by the Corporation through purchase,
redemption, exchange, conversion or otherwise shall return to the status of
authorized but unissued Preferred Stock.
Without limiting the generality of the foregoing authority of the Board
of Directors, the Board of Directors from time to time may (if otherwise
permitted under the General Corporation Law of the State of Delaware):
(a) designate a series of Preferred Stock, which may be
distinguished by number, letter or title from other Preferred Stock
of the Corporation;
(b) fix and thereafter increase or decrease (but not below the
number of shares thereof then outstanding) the number of shares of
Preferred Stock that shall constitute such series;
(c) provide for dividends on shares of Preferred Stock of such
series and, if provisions are made for dividends, determine the
dividend rate and the times at which holders of shares of Preferred
Stock of such series shall be entitled to receive the dividends,
whether the dividends shall be cumulative and, if so, from what date
or dates, and the other conditions, if any, including rights of
priority, if any, upon which the dividends shall be paid;
(d) determine the rights, if any, to which holders of the
shares of Preferred Stock of such series shall be entitled in the
event of any liquidation, dissolution or winding up of the
Corporation; PROVIDED, HOWEVER, that in the event of any such
liquidation, dissolution or winding up of the Corporation, the
holders of the shares of Preferred Stock of such series shall not be
entitled to be paid out of the assets of the Corporation available
for distribution to its shareholders, whether from capital, surplus
or earnings, an amount in cash greater than $100.00 per share, plus
accrued and unpaid dividends to the date fixed for liquidation,
dissolution or winding up, whether or not declared.
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<PAGE>
(e) provide for the redemption or purchase of shares of
Preferred Stock of such series and, if provisions are made for
redemption, determine the time or times and the price or prices at
which the shares of Preferred Stock of such series shall be subject
to redemption in whole or in part, and the other terms and
conditions, if any, on which shares of Preferred Stock of such
series may be redeemed or purchased;
(f) provide for a sinking fund or purchase fund for the
redemption or purchase of shares of Preferred Stock of such series
and, if any such fund is so provided for the benefit of such shares
of Preferred Stock, the amount of such fund and the manner of its
application;
(g) determine the extent of the voting rights, if any, of the
shares of Preferred Stock of such series, including but not limited
to the right of the holders of such shares to vote as a separate
class acting alone or with the holders of one or more other series of
Preferred Stock and the right to have more (or less) than one vote
per share;
(h) provide for whether or not the shares of Preferred Stock of
such series shall be convertible into, or exchangeable for, shares of
any other class or classes of capital stock, or any series thereof,
of the Corporation and, if so convertible or exchangeable, determine
the conversion or exchange price or rate, the adjustments thereof
and the other terms and conditions, if any, on which such shares of
Preferred Stock shall be so convertible or exchangeable; and
(i) provide for any other preferences, any relative,
participating, optional or other special rights, any qualifications,
limitations or restrictions thereof, or any other terms or provisions
of shares of Preferred Stock of such series as the Board of Directors
may deem appropriate or desirable.
SECTION 4. Shares of Common Stock or Preferred Stock may be issued by
the Corporation from time to time for such consideration, having a value of
not less than the par value, if any, thereof, as is determined from time to
time by the Board of Directors. Any and all shares issued and for which full
consideration has been paid or delivered shall be deemed fully paid stock and
the holder thereof shall not be liable for any further payment thereon.
ARTICLE V: The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation and for
the purpose of creating, defining, limiting and regulating the powers of the
Corporation and its Directors and stockholders:
SECTION 1. The business and affairs of the Corporation shall be managed
by and under the direction of the Board of Directors.
SECTION 2. (a) The Board of Directors shall consist of not less than
three (3) nor more than 20 (twenty) directors. The exact number of directors
shall be determined from time to time by a resolution or resolutions adopted
by the affirmative vote of a majority of the entire Board of Directors.
(b) The Board of Directors shall be divided into three classes, as
nearly equal in number as the then total number of directors constituting the
whole board permits, with the term of office of one class expiring each year.
At the next election of directors, directors of the first class shall be
elected to hold office for a term expiring at the next succeeding annual
meeting, directors of the second class shall be
-3-
<PAGE>
elected to hold office for a term expiring at the second succeeding annual
meeting and the directors of the third class shall be elected to hold office
for a term expiring at the third succeeding annual meeting. Subject to the
foregoing, at each annual meeting of stockholders the successors to the class
of directors whose term shall then expire shall be elected to hold office for
a term expiring at the third succeeding annual meeting and each director so
elected shall hold office until his successor is elected and qualified, or
until his earlier resignation or removal.
(c) If the number of directors is changed, any increase or decrease in
the number of directors shall be apportioned among the three classes so as to
make all classes as nearly equal in number as possible, and the Board of
Directors shall decide which class shall contain an unequal number of
directors.
(d) Notwithstanding the foregoing, whenever holders of any shares of
Preferred Stock, or any series thereof, shall be entitled, voting separately
as a class, to elect any directors, all directors so elected shall be
allocated, each time they are so elected, to the class whose term expires at
the next succeeding annual meeting of stockholders and the terms of all
directors so elected by such holders shall expire at the next succeeding
annual meeting of stockholders. The number of directors that may be elected
by such holders of Preferred Stock shall be in addition to the number of
directors fixed pursuant to paragraph (a) of this Section 2.
SECTION 3. Subject to the rights of the holders of any shares of
Preferred Stock, or any series thereof, newly created directorships resulting
from an increase in the number of directors or any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal from
office, retirement or other cause shall be filled solely by the affirmative
vote of the remaining directors then in office, even though less than a
quorum, or by the sole remaining director, and each director so chosen shall
hold office for a term expiring at the annual meeting of stockholders at
which the term of the class to which he has been elected expires and until
such director's successor shall have been duly elected and qualified. No
decrease in the authorized number of directors shall shorten the term of any
incumbent director.
SECTION 4. Any director may be removed from office with cause, by an
affirmative vote of the holders of a majority of the combined voting power of
the then outstanding shares of stock entitled to vote generally in the
election of directors, voting together as a single class. Any director may
be removed from office with cause by the affirmative vote of a majority of
the members of the Board of Directors, other than the director who is subject
to a removal vote.
SECTION 5. Advance notice of stockholder nominations for the election
of directors and of business to be brought by stockholders before any meeting
of stockholders of the Corporation shall be given if required by, and in the
manner provided in, the By-laws. At any annual meeting or special meeting of
stockholders of the Corporation, any such business shall be conducted as
shall have been brought before such meeting in the manner provided in the
By-laws.
SECTION 6. The Board of Directors shall have the express power, without a
vote of stockholders, to adopt any By-law not inconsistent with this Restated
Certificate of Incorporation or with any By-law adopted by vote of the
stockholders of the Corporation, and to amend, alter or repeal the By-laws of
the Corporation other than any By-law adopted by vote of the stockholders of the
Corporation, except to the extent that the By-laws or this Restated Certificate
of Incorporation otherwise provide. The Board of Directors may exercise such
power upon the affirmative vote of a majority of the entire Board of Directors.
Stockholders may adopt any By-law, or amend, alter or repeal the By-laws of the
Corporation,
-4-
<PAGE>
upon the affirmative vote of the holders of shares having at least a majority
of the voting power of the then outstanding shares of capital stock of the
Corporation entitled (at all times and without regard to the occurrence of a
contingency) to vote generally on the election of Directors and other matters
submitted for stockholder approval, voting together as a single class.
SECTION 7. No director shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
PROVIDED, HOWEVER, that to the extent required by the provisions of Section
102(b)(7) of the General Corporation Law of the State of Delaware or any
successor statute, as the same may be interpreted or amended from time to
time, or any other laws of the State of Delaware, nothing contained in this
Section 7 shall eliminate or limit the liability of a director (a) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (b) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (c) under Section 174
of the General Corporation Law of the State of Delaware, (d) for any
transaction from which the director derived an improper personal benefit or
(e) for any act or omission occurring prior to the date when this provision
becomes effective. If the General Corporation Law of the State of Delaware
hereafter is amended to authorize the further elimination or limitation of
the liability of directors, then the liability of a director of the
Corporation, in addition to the limitation provided herein, shall be limited
to the fullest extent permitted by such amendment. Any amendment,
modification or repeal of this Section 7 shall be prospective only, and shall
not adversely affect any limitation of the liability of a director existing
at the time of such amendment, repeal or modification.
ARTICLE VI: (a) Each person who is or was or had agreed to become a
director or officer of the Corporation, and each person who is or was serving
or who had agreed to serve at the request of the Corporation as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise (including the heirs, executor,
administrators or estate of such person), shall be indemnified by the
Corporation, and (b) each person who is or was or who had agreed to become an
employee or agent of the Corporation or who is or was serving or who had
agreed to serve at the request of the Corporation as an employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise (including the heirs, executor, administrators or estate
of such person) may be indemnified by the Corporation, in each case in
accordance with the By-laws, to the full extent permitted from time to time
by the General Corporation Law of the State of Delaware as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide
prior to such amendment) or any other applicable laws as presently or
hereafter in effect. Without limiting the generality or the effect of the
foregoing, the Corporation may enter into one or more agreements with any
person which provide for indemnification greater or different than that
provided in this Article VI. Any amendment or repeal of this Article VI
shall not adversely affect any right or protection existing hereunder
immediately prior to such amendment or repeal.
ARTICLE VII: No action shall be taken by the stockholders of the
Corporation except at a annual or special meeting of stockholders.
ARTICLE VIII: The Corporation reserves the right to amend or repeal any
provision contained in this Restated Certificate of Incorporation in the
manner now or hereafter prescribed by the laws of the State of Delaware, and
all rights herein conferred upon stockholders or Directors are granted
subject to this reservation.
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<PAGE>
4. This Restated Certificate of Incorporation has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware and by unanimous written consent of
the sole stockholder in accordance with Section 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the Restated Certificate of Incorporation has been
signed this 16th day of December 1994 by Clark D. Elwood, its Vice President,
General Counsel and Secretary and attested to by Cheryl A. Love, its
Assistant Secretary.
ITT EDUCATIONAL SERVICES, INC.
By: /s/ Clark D. Elwood
-------------------
ATTEST:
/s/ Cheryl A. Love
- --------------------------------
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF ITT EDUCATIONAL SERVICES, INC.
ITT Educational Services, Inc., a Delaware corporation (the
"Corporation"), hereby certifies as follows:
FIRST: Resolutions setting forth a proposed amendment to the
Restated Certificate of Incorporation of the Corporation (the
"Amendment"), declaring the Amendment to be advisable, and submitting
the Amendment to the stockholders of the Corporation for their
consideration at the Corporation's 1996 Annual Meeting of Shareholders
were duly adopted by the Board of Directors of the Corporation by
unanimous written consent. The resolution setting forth the Amendment
is set forth below:
RESOLVED, that it be and hereby is declared advisable to amend
Article IV, Section 1 of the Corporation's Restated Certificate of
Incorporation to increase the number of authorized shares of Common
Stock, $0.01 par value per share, of the Corporation from 25,000,000
to 50,000,000 shares, and for that purpose to amend Article IV,
Section 1 of the Corporation's Restated Certificate of Incorporation
(the "Amendment") to read in its entirety as follows:
"SECTION 1. The amount of total authorized capital stock of
the Corporation is 55,000,000 shares, of which 50,000,000 shares shall
be Common Stock, having a par value of $.01 per share ("Common
Stock"), and 5,000,000 shares shall be Preferred Stock, having a par
value of $.01 per share ("Preferred Stock")."
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<PAGE>
SECOND: Pursuant to the resolutions of the Board of Directors of
the Corporation, the 1996 Annual Meeting of Shareholders of the
Corporation was duly called and held, upon notice and in accordance
with the General Corporation Law of the State of Delaware, at which
meeting the affirmative vote of a majority of the shares of the
Corporation's voting securities outstanding and entitled to vote
thereon were voted in favor of the Amendment.
THIRD: The Amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, ITT Educational Services, Inc. has caused this
certificate to be signed by Clark D. Elwood, its Vice President, General
Counsel and Secretary, and attested by Cheryl A. Love, its Assistant
Secretary, on the 14th day of May, 1996.
ITT EDUCATIONAL SERVICES, INC.
By: /s/ Clark D. Elwood
----------------------------
Clark D. Elwood, Vice President,
General Counsel and Secretary
ATTEST:
/s/ Cheryl A. Love
- -----------------------------------
Cheryl A. Love, Assistant Secretary
CERTIFICATE OF AMENDMENT
OF RESTATED CERTIFICATE OF INCORPORATION
OF ITT EDUCATIONAL SERVICES, INC.
ITT Educational Services, Inc., a Delaware corporation (the
"Corporation"), hereby certifies as follows:
FIRST: Resolutions setting forth a proposed amendment to the
Restated Certificate of Incorporation of the Corporation (the
"Amendment"), declaring the Amendment to be advisable, and submitting
the Amendment to the stockholders of the Corporation for their
consideration at the Corporation's 1999 Annual Meeting of Shareholders
were duly adopted by the Board of Directors of the Corporation. The
resolution setting forth the Amendment is set forth below:
RESOLVED, that it be and hereby is declared advisable to
amend Article IV, Section 1 of the Corporation's Restated
Certificate of Incorporation to increase the number of authorized
shares of Common Stock, $0.01 par value per share, of the
Corporation from 50,000,000 to 150,000,000 shares, and for that
purpose to amend Article IV,
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<PAGE>
Section 1 of the Corporation's Restated Certificate of
Incorporation (the "Amendment") to read in its entirety
as follows:
"SECTION 1. The amount of total authorized capital stock of
the Corporation is 155,000,000 shares, of which 150,000,000
shares shall be Common Stock, having a par value of $.01 per
share ("Common Stock"), and 5,000,000 shares shall be Preferred
Stock, having a par value of $.01 per share ("Preferred Stock")."
SECOND: Pursuant to the resolutions of the Board of Directors of
the Corporation, the 1999 Annual Meeting of Shareholders of the
Corporation was duly called and held, upon notice and in accordance
with the General Corporation Law of the State of Delaware, at which
meeting the affirmative vote of a majority of the shares of the
Corporation's voting securities outstanding and entitled to vote
thereon were voted in favor of the Amendment.
THIRD: The Amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, ITT Educational Services, Inc. has caused this
certificate to be signed by Clark D. Elwood, its Senior Vice President, General
Counsel and Secretary, and attested by Cheryl A. Love, its Assistant Secretary,
on the 12th day of May, 1999.
ITT EDUCATIONAL SERVICES, INC.
By: /s/ Clark D. Elwood
------------------------------
Clark D. Elwood, Senior Vice President,
General Counsel and Secretary
ATTEST:
/s/ Cheryl A. Love
- -----------------------------------
Cheryl A. Love, Assistant Secretary
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<PAGE>
Exhibit 10.19
ESI EXCESS PENSION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I ESTABLISHMENT AND PURPOSE OF THE PLAN . . . . . . . . . . . . . . . 1
Section 1.01. Establishment of the Plan. . . . . . . . . . . . . . 1
Section 1.02. Purpose of the Plan. . . . . . . . . . . . . . . . . 1
ARTICLE II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III ELIGIBILITY AND MEMBERSHIP . . . . . . . . . . . . . . . . . . . . 3
Section 3.01. Eligibility. . . . . . . . . . . . . . . . . . . . . 3
Section 3.02. Membership . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE IV BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 4.01. Amount of Benefit . . . . . . . . . . . . . . . . . 3
Section 4.02. Form and Timing of Payment . . . . . . . . . . . . . 3
Section 4.03. Death Benefits . . . . . . . . . . . . . . . . . . . 4
Section 4.04. Small Benefits . . . . . . . . . . . . . . . . . . . 4
Section 4.05. Facility of Payment . . . . . . . . . . . . . . . . 4
ARTICLE V NONALIENATION OF BENEFITS . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE VI ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 6.01. Plan Administrator . . . . . . . . . . . . . . . . . 4
Section 6.02. Removal and Replacement of Committee Members . . . . 4
Section 6.03. Disqualification and Resignation . . . . . . . . . . 5
Section 6.04. Chairman, Services, and Counsel . . . . . . . . . . 5
Section 6.05. Meetings . . . . . . . . . . . . . . . . . . . . . . 5
Section 6.06. Quorum . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6.07. Action Without Meeting . . . . . . . . . . . . . . . 5
Section 6.08. Correction of Defects . . . . . . . . . . . . . . . 5
Section 6.09. Reliance Upon Legal Counsel. . . . . . . . . . . . . 5
Section 6.10. Expenses . . . . . . . . . . . . . . . . . . . . . . 5
Section 6.11. Indemnification. . . . . . . . . . . . . . . . . . . 5
Section 6.12. Powers and Duties of Committee . . . . . . . . . . . 6
ARTICLE VII BENEFIT CLAIMS PROCEDURES . . . . . . . . . . . . . . . . . . . . 6
ARTICLE VIII NATURE OF INTEREST OF MEMBER . . . . . . . . . . . . . . . . . . . 7
Section 8.01. Unsecured General Creditor . . . . . . . . . . . . . 7
Section 8.02. Trust Fund . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IX CONTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Section 9.01. No Member Contributions. . . . . . . . . . . . . . . 7
Section 9.02. Employer Contributions . . . . . . . . . . . . . . . 7
ARTICLE X AMENDMENT AND TERMINATION8
Section 10.01. Authority to Amend. . . . . . . . . . . . . . . . . 8
Section 10.02. Merger, Consolidation, or Change in Control . . . . 8
ARTICLE XI CONTINUED APPROVAL OF PENSION PLANS . . . . . . . . . . . . . . . . 8
ARTICLE XII MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 12.01. No Enlargement of Employee Benefits . . . . . . . . 8
Section 12.02. Board of Directors . . . . . . . . . . . . . . . . 9
Section 12.03. No Impact on Other Benefits . . . . . . . . . . . . 9
Section 12.04. No Individual Liability . . . . . . . . . . . . . . 9
Section 12.05. Notice of Address . . . . . . . . . . . . . . . . . 9
Section 12.06. Data . . . . . . . . . . . . . . . . . . . . . . . 9
Section 12.07. Misstatements . . . . . . . . . . . . . . . . . . . 9
Section 12.08. Taxes . . . . . . . . . . . . . . . . . . . . . . . 9
Section 12.09. Governing Laws . . . . . . . . . . . . . . . . . . 9
Section 12.10. Severability . . . . . . . . . . . . . . . . . . . 10
Section 12.11. Headings . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE XIII PARTICIPATION BY OTHER EMPLOYERS . . . . . . . . . . . . . . . . . 10
Section 13.01. Adoption of the Plan . . . . . . . . . . . . . . . 10
Section 13.02. Withdrawal from Participation . . . . . . . . . . . 10
Section 13.03. ESI as Agent for Employers . . . . . . . . . . . . 10
ARTICLE IV CONTINUANCE BY A SUCCESSOR . . . . . . . . . . . . . . . . . . . . 10
</TABLE>
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<PAGE>
ESI EXCESS PENSION PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE OF THE PLAN
SECTION 1.01. ESTABLISHMENT OF THE PLAN. ESI hereby establishes
the Plan, effective as of June 9, 1998, as an unfunded plan of deferred
compensation for the benefit of a select group of management and highly
compensated employees.
SECTION 1.02. PURPOSE OF THE PLAN. The purpose of the Plan is to
restore benefits earned, but not available, to Eligible Employees because of
certain limits imposed on qualified retirement plan benefits by the Code.
ARTICLE II
DEFINITIONS
As used in this document, the following words and phrases, when
capitalized, will have the meaning set forth below, unless a different
meaning is plainly required by the context:
SECTION 2.01. "Actuarial Equivalent" means "Actuarial Equivalent"
as defined in Section 2.01 of the Pension Plan.
SECTION 2.02. "Annuity Starting Date" means, with respect to a
Member, the Member's "Annuity Starting Date," as defined in Section 2.01 of
the Pension Plan.
SECTION 2.03. "Beneficiary" means, with respect to each Member,
the person or persons who are to receive benefits under the Pension Plan
after the Member's death.
SECTION 2.04. "Board of Directors" means the duly constituted
board of directors of ESI.
SECTION 2.05. "Claimant" means a person submitting a claim for
benefits under the Plan.
SECTION 2.06. "Code" means the Internal Revenue Code of 1986, as
amended from time to time, and interpretive rulings and regulations.
SECTION 2.07. "Committee" means the committee established pursuant
to Section 6.01 to serve as administrator of the Plan.
SECTION 2.08. "Eligible Employee" means an Employee who is (1) a
highly compensated employee within the meaning of Code subsection 414(q), (2)
eligible to participate
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<PAGE>
in the Pension Plan, and (3) designated by the compensation committee of the
Board of Directors as a key management employee who is eligible for
membership in the Plan pursuant to Article III.
SECTION 2.09. "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
the Federal Wage and Tax Statement (Form W-2).
SECTION 2.10. "Employer" means ESI and any Related Employer that
adopts the Plan pursuant to Article XIII.
SECTION 2.11. "ESI" means ITT Educational Services, Inc. and any
corporation that succeeds to its business and adopts the Pension Plan and
this Plan.
SECTION 2.12. "Limitations" means (a) the limitation on
compensation imposed by Code paragraph 401(a)(17), as reflected in the
applicable provisions of the Pension Plan; and (b) the limitations on
benefits imposed by Code subsections 415(b) and (e), as reflected in the
applicable provisions of the Pension Plan.
SECTION 2.13. "Maximum Benefit" means the maximum benefit
permitted by Limitations payable to a Member under the Pension Plan.
SECTION 2.14. "Member" means any Employee who has been designated
as an Eligible Employee pursuant to Article III and for whom benefits are to
be provided under the Plan.
SECTION 2.15. "Pension Plan" means the Code qualified pension plan
known as the "ESI Pension Plan," as amended from time to time.
SECTION 2.16. "Plan" means the unfunded, nonqualified pension plan
known as the "ESI Excess Pension Plan," as set forth in this instrument, as
it may be amended from time to time.
SECTION 2.17. "Plan Year" means the period from June 9, 1998
through December 31, 1998, and any subsequent calendar year.
SECTION 2.18. "Related Employer" means any employer that, together
with ESI, is under common control or a member of an affiliated service group,
as determined under Code subsections 414(b), (c), (m), and (o).
SECTION 2.19. "Unrestricted Benefit" means, with respect to any
Member, the benefit to which the Member would have been entitled under
Pension Plan, if that benefit had been determined without regard to the
Limitations.
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<PAGE>
The use of singular and masculine words are for practical purposes
only and will be deemed to include the plural and feminine, respectively, unless
the context plainly indicates a distinction. Certain other definitions, as
required, appear in the following Articles of the Plan.
ARTICLE III
ELIGIBILITY AND MEMBERSHIP
SECTION 3.01. ELIGIBILITY. The Plan is intended to be an unfunded
plan of deferred compensation for a select group of management and highly
compensated Employees. An Employee shall be an Eligible Employee and thereby
eligible for membership in this Plan only if (1) the Employee is a highly
compensated employee within the meaning of Code subsection 414(q); (2) the
Employee is eligible to participate in the Pension Plan; and (3) the Employee
is designated by the Compensation Committee of the Board of Directors as a
key management employee who is eligible for membership in the Plan.
SECTION 3.02. MEMBERSHIP.
(a) An Eligible Employee shall become a Member as of the date
designated by the compensation committee of the Board of Directors.
(b) A Member shall cease to be a Member as of the date his
benefits under the Plan are totally distributed to him or on his behalf.
(c) If a former Member is reemployed by the Employer, he shall
become a Member again only if and when he satisfies, subsequent to his
reemployment, the eligibility and membership requirements of Sections 3.01
and 3.02, respectively.
ARTICLE IV
BENEFITS
SECTION 4.01. AMOUNT OF BENEFIT. Upon a Member's Annuity Starting
Date, the between his Unrestricted Benefit and his Maximum Benefit. The benefit
payable under this Plan will be calculated after the Member's benefits payable
under the Pension Plan are calculated.
SECTION 4.02. FORM AND TIMING OF PAYMENT.
(1) The form of an excess benefit payable under the Plan to a Member
will be the same form in which a benefit is payable to the Member under
Article VII of the Pension Plan.
(2) The payment of a Member's excess pension benefits under this
Plan will begin as of the same date his benefits under the Pension Plan
begin.
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<PAGE>
SECTION 4.03. DEATH BENEFITS. If a Member dies before his Annuity
Starting Date, the Committee or its designee will pay the Member's excess
pension benefit under the Plan to the Member or his Beneficiary at the same time
and in the same form that a death benefit is paid to the Beneficiary under
Article VII of the Pension Plan.
SECTION 4.04. SMALL BENEFITS. Notwithstanding any other provision of
the Plan, where the Actuarial Equivalent present value of a Member's excess
pension payable under this Plan does not exceed $5,000, the Committee or its
designee will pay the excess pension benefit to the Member or his Beneficiary in
a single-sum cash payment equal to the Actuarial Equivalent of the excess
pension benefit otherwise payable.
SECTION 4.05. FACILITY OF PAYMENT. If any benefit under the Plan is
payable to a person whom the Committee knows is a minor or otherwise under legal
incapacity, the Committee or its designee may have the payment made to the legal
guardian of that person or to the person or organization as a court of competent
jurisdiction may direct. To the extent permitted by law, any payment under this
Section will be a complete discharge of any liability under the Plan to that
person.
ARTICLE V
NONALIENATION OF BENEFITS
The Plan will not in any manner be liable for, or subject to, the
debts or liabilities of any Member, Beneficiary, or any other person entitled
to any Plan benefit. No payee may assign any payment due him under the Plan.
No pension or other benefits at any time payable under the Plan will be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, attachment, garnishment, levy, execution, or other legal
or equitable process, or encumbrance of any kind. Any attempt to alienate,
sell, transfer, assign, or otherwise encumber any such benefit, whether
presently or thereafter payable, will be void.
ARTICLE VI
ADMINISTRATION
SECTION 6.01. PLAN ADMINISTRATOR. The ESI Employee Benefits
Plan Administration and Investment Committee will be the administrator of the
Plan. The Committee will consist of the number of members, not fewer than 3,
that is specified from time to time by the Board of Directors or its
designee. A person must be an officer or employee of the Employer to be a
member of the Committee. All members of the Committee will serve without
compensation.
SECTION 6.02. REMOVAL AND REPLACEMENT OF COMMITTEE MEMBERS. The
members of the Committee will hold membership at the pleasure of the Board of
Directors 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.
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<PAGE>
SECTION 6.03. DISQUALIFICATION AND RESIGNATION. On the date when
a Committee member is neither an employee nor an officer of an Employer, he
will be disqualified from membership on the Committee. 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 6.04. 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 to carry out its responsibilities. The Committee may
employ counsel, who may be, but need not be, counsel to the Employer.
SECTION 6.05. MEETINGS. The Committee will hold meetings upon
such notice, at the places, and at such times as the Committee may from time
to time determine.
SECTION 6.06. 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 6.07. ACTION WITHOUT MEETING. Any decision, order,
direction, or other action made in writing and signed by a majority of the
members of the Committee at the time holding office will constitute valid and
effective action of 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 6.08. 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 the extent as it deems advisable to carry out the Plan's
purposes.
SECTION 6.09. 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 6.10. EXPENSES. In the performance of its duties, the
Committee is authorized to incur reasonable expenses, including counsel fees,
which will be paid by the Employer.
SECTION 6.11. 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.
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<PAGE>
SECTION 6.12. POWERS AND DUTIES OF COMMITTEE. Subject to the
specific limitations stated in this document, the Committee will have the
following powers, duties, and responsibilities:
(a) to carry out the Plan's general administration;
(b) to cause to be prepared all forms necessary or appropriate for
the Plan's administration;
(c) to keep appropriate books and records, including minutes of the
Committee's meetings;
(d) to give directions as to the amounts to be disbursed to
Participants and others under the Plan's provisions;
(e) to determine, with discretionary authority and consistent with
the provisions of this Plan, all questions of the eligibility, rights, and
status of Members and others under the Plan;
(f) to exercise all other powers, duties, and responsibilities
specifically conferred upon the Committee elsewhere in this document;
(g) to interpret, with discretionary authority, the provisions of
the Plan and to resolve, with discretionary authority, all disputed
questions of Plan interpretation and benefit eligibility; and
(h) 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 Article VII,
all decisions of the Committee made in good faith on all matters within the
scope of its authority under the provisions of this Plan will be final and
binding upon all persons.
ARTICLE VII
BENEFIT CLAIMS PROCEDURES
Claims for benefits under the Plan will be made in writing to the
Committee or its designee. If a claim for benefits is wholly or partially
denied, the Committee or its designee will notify the Claimant of the claim's
denial within a reasonable period of time. The Committee or its designee is
authorized to develop more fully the Plan's benefit claims procedures by
establishing from time to time various rules and procedures.
Within 60 days after the Claimant's receipt of written notice of
the claim's denial, the Claimant, or his duly authorized representative, may
file a written request with the Committee requesting a full and fair review
of the denial of the Claimant's claim for benefits. In
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<PAGE>
connection with the Claimant's appeal of the denial of his claim for
benefits, the Claimant may review pertinent documents in the Committee's
possession and may submit issues and comments in writing. The Committee will
make a decision on review promptly after receipt of the Claimant's request
for review. The decision on review will be in writing and written in a
manner calculated to be understood by the Claimant, and will set forth the
specific reason or reasons for the decision and will contain a specific
reference to the pertinent Plan provisions on which the decision is based.
If the decision on review is not furnished to the Claimant within 60 days of
receipt of the request for review, the claim will be deemed denied on review.
ARTICLE VIII
NATURE OF INTEREST OF MEMBER
SECTION 8.01. UNSECURED GENERAL CREDITOR. The interest of Members
and Beneficiaries in the Plan shall be that of unsecured general creditors,
with no secured or preferential right to any assets of ESI or any Employer or
any other party for payment of benefits under this Plan. Any property held
by ESI or any Employer for the purpose of generating cash flow for benefit
payment shall remain as general, unpledged, and unrestricted assets. Any
Employer's obligation under the Plan shall be an unfunded and unsecured
promise to pay benefits in the future.
SECTION 8.02. TRUST FUND. The applicable Employer shall be
responsible for the payment of benefits provided under the Plan. At its
discretion, the Employer may establish one or more trusts, with such trustees
as the Board of Directors may approve, for the purpose of providing for the
payment of Plan benefits. Any trustees that are appointed shall be bonded in
a manner satisfactory to the Employer. Whether or not such a trust is
irrevocable, its assets shall at all times be subject to the claims of the
Employer's general creditors in the event of the Employer's insolvency. To
the extent any benefits provided under the Plan are paid from such a trust,
the Employer shall have no further obligation to pay Plan benefits. Plan
benefits not paid from the trust shall remain the obligations of the
Employer.
ARTICLE IX
CONTRIBUTIONS
SECTION 9.01. NO MEMBER CONTRIBUTIONS. No contributions to the Plan
by Members will be required or permitted under the Plan.
SECTION 9.02. EMPLOYER CONTRIBUTIONS. During the continuance of the
Plan and for purposes of providing the benefits contemplated under the Plan,
each Employer intends to pay out of its general assets, from time to time, those
sums of money that the Committee deems sufficient to provide the benefits under
the Plan.
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<PAGE>
ARTICLE X
AMENDMENT AND TERMINATION
SECTION 10.01. AUTHORITY TO AMEND. ESI, by resolution of its
Board of Directors or by any person or persons duly authorized by resolution
by ESI's Board of Directors, will have the right, authority, and power to
alter, amend, modify, revoke, or terminate the Plan, and ESI, by resolution
of its Board of Directors or by any person or persons duly authorized by
resolution by the Board of Directors, will also have the right, authority,
and power to terminate the Plan and to discontinue or suspend the payment of
benefits under the Plan.
SECTION 10.02. MERGER, CONSOLIDATION, OR CHANGE IN CONTROL. If
ESI should be reorganized by merger, consolidation, transfer of assets, or
otherwise, so that a corporation, partnership, or person shall succeed to all
or substantially all of ESI's business, then the obligations and
responsibilities of ESI under the Plan will be assumed by any successor,
acquiring corporation, or controlling entity, and all of the rights,
privileges, and benefits of the Members under the Plan will continue.
ARTICLE XI
CONTINUED APPROVAL OF PENSION PLANS
The Plan, as set forth in this document, is intended to provide
pension benefits supplemental to those provided under the Pension Plan. The
Plan's implementation and continuance are expressly conditioned upon the
absence of any disqualifying effects of implementation and continuance upon
the Pension Plan under the Code. Any modification, amendment, or termination
of the Plan may be made, retroactive or otherwise, as necessary or
appropriate to maintain the qualification of Pension Plan under the Code or
otherwise to cause the Pension Plan to comply with any applicable
requirements of the Employee Retirement Income Security Act of 1974, as
amended from time to time.
ARTICLE XII
MISCELLANEOUS
SECTION 12.01. NO ENLARGEMENT OF EMPLOYEE BENEFITS. This Plan is
strictly a voluntary undertaking on the part of each Employer and will not be
deemed to constitute a contract between the Employer and any Employee or to be
consideration for, or an inducement to, or a condition of, the employment of any
Employee. Nothing contained in the Plan will be deemed to give any Employee the
right to be retained in the service of any Employer or to interfere with the
right of any Employer to discharge any Employee at any time. No person will
have any right to benefits except to the extent provided in the Plan.
-8-
<PAGE>
SECTION 12.02. BOARD OF DIRECTORS' POWER TO DELEGATE AUTHORITY.
The Board of Directors may, in its discretion, delegate to any person or
persons all or any part of the Board of Directors' authority and
responsibility under the Plan, including, without limitation, the authority
to amend the Plan.
SECTION 12.03. NO IMPACT ON OTHER BENEFITS. Amounts accrued under
this Plan shall not be included in any Member's compensation for purposes of
calculating benefits under any other plan, program, or arrangement sponsored
by an Employer.
SECTION 12.04. NO INDIVIDUAL LIABILITY. It is the express purpose
and intention of the Plan that no individual liability whatever will attach
to, or be incurred by, the shareholders, officers, or members of the Board of
Directors of any Employer, or the Committee or its members, or any fiduciary
designated pursuant to Article VIII or X, or any representative appointed by
ESI, under or by reason of any of the terms or conditions of the Plan.
SECTION 12.05. NOTICE OF ADDRESS. Each Member and Beneficiary
entitled to benefits under the Plan must submit to the Committee or its
designee his post office address and each change of post office address. Any
communication, statement, or notice addressed to a person at his latest post
office address as filed with the Committee or its designee will, upon deposit
in the United States mail with postage prepaid, be binding upon that person
for all Plan purposes, and the Committee will not be obliged to search for,
or to ascertain the whereabouts of, any person, except as otherwise required
by law.
SECTION 12.06. DATA. Members and Beneficiaries must furnish to
the Committee or its designee any documents, evidence, or information that
the Committee considers necessary or desirable for the purpose of
administering the Plan, or to protect the Committee; and it will be a
condition of the Plan that each person must furnish this information promptly
and sign required documents before any benefits become payable under the Plan.
SECTION 12.07. MISSTATEMENTS. If the age, sex, or any other
relevant facts relating to any person is found to have been misstated, the
benefits payable to a Member or Beneficiary shall be the benefits that would
have been provided on the basis of the correct information. Any excess
payments due to misstatement shall be refunded to the Employer or withheld by
it from any further amounts otherwise payable, and any underpayment shall be
paid in full with the next payment due the Member or Beneficiary.
SECTION 12.08. TAXES. To the extent required by law, amounts
credited under the Plan shall be subject to federal social security and
unemployment taxes during the years of service giving rise to such
contributions or performed (or, if later, when the amount are not subject to
a substantial risk of forfeiture). Each Employer shall withhold from any
distributions made pursuant to the Plan such amounts as may be required by
federal, state, or local law.
SECTION 12.09. GOVERNING LAWS. The Plan will be construed and
administered according to the internal laws of the State of Indiana to the
extent that those laws are not preempted by federal law.
-9-
<PAGE>
SECTION 12.10. SEVERABILITY. If any part of the Plan is adjudged
by a court of competent jurisdiction to be contrary to the laws governing the
Plan, then the Plan will, in all other respects, be and remain legally
effective and binding to the full extent permissible under the law.
SECTION 12.11. HEADINGS. The headings of Articles, Sections,
Subsections, Paragraphs, or other parts of the Plan are for convenience of
reference only and do not define, limit, construe, or otherwise affect the
contents of this document.
ARTICLE XIII
PARTICIPATION BY OTHER EMPLOYERS
SECTION 13.01. ADOPTION OF THE PLAN. With ESI's consent, any Related
Employer may become a participating Employer under the Plan by (a) taking any
action necessary to adopt the Plan, (b) filing with ESI a copy of the
resolutions adopted by the Related Employer's board of directors to adopt the
Plan, and (c) executing and delivering any documents and taking any other action
as may be necessary or desirable to put the Plan into effect with respect to
that corporation or entity.
SECTION 13.02. WITHDRAWAL FROM PARTICIPATION. Any Employer may, with
ESI's consent, withdraw from participation in the Plan at any time by filing
with ESI a copy of a resolution of its board of directors to that effect and
giving notice of its intended withdrawal to ESI prior to the effective date of
withdrawal.
SECTION 13.03. ESI AS AGENT FOR EMPLOYERS. Each Related Employer
that becomes a participating Employer pursuant to Section 13.01 (Adoption of the
Plan) or Article XIV (Continuance by a Successor) by so doing will be deemed to
have appointed ESI its agent to exercise on its behalf all of the powers and
authorities conferred upon ESI by the terms of the Plan, including, but not
limited to, the power to amend and terminate the Plan. Each Employer must, from
time to time, upon ESI's request, furnish to ESI any data and information as ESI
requires in the performance of its duties.
ARTICLE IV
CONTINUANCE BY A SUCCESSOR
If ESI or any other Employer is reorganized by way of merger,
consolidation, transfer of assets, or otherwise, so that a corporation,
partnership, or person other than an Employer succeeds to all or substantially
all of an Employer's business, the successor may be substituted for the Employer
under the Plan by adopting the Plan. Benefit payments by the Employer will
automatically be suspended from the effective date of any reorganization until
the date upon which the substitution of the successor corporation for the
Employer under the Plan becomes effective. If, within 90 days following the
effective date of any reorganization, the successor has not elected to become a
party to the Plan, or if the Employer adopts a plan of complete liquidation
other than in connection with a reorganization, the Plan will automatically be
terminated with respect to employees of that Employer as of the close of
business on the 90th day following the effective date of the reorganization or
as of the close of business on the date of adoption of the plan of complete
liquidation, as the case may be.
-10-
<PAGE>
ITT Educational Services, Inc. has caused this Plan document for the
ESI Excess Pension Plan to be executed and adopted, effective June 9, 1998, as
evidenced by the signature of its duly authorized officer, this 28th day of
June, 1999.
ITT EDUCATIONAL SERVICES, INC.
BY: /s/ Clark D. Elwood
----------------------------
Name Clark D. Elwood
Senior Vice President, General Counsel and Secretary
----------------------------------------------------
Title
-11-
<PAGE>
Exhibit 11
ITT EDUCATIONAL SERVICES, INC.
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 1,251 $ (660) $ 7,770 $ 6,668
----------------- ----------------- --------------- ----------------
----------------- ----------------- --------------- ----------------
Shares:
Weighted average number of shares
of common stock outstanding 25,279 27,000 25,668 27,000
Shares assumed issued
less shares assumed purchased
on stock options 151 183 195 163
----------------- ----------------- --------------- ----------------
Outstanding shares for diluted earnings
per share calculation 151 183 195 163
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Earnings (loss) per common share:
Basic $ 0.05 $ (0.02) $ 0.30 $ 0.25
Diluted $ 0.05 $ (0.02) $ 0.30 $ 0.25
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,816
<SECURITIES> 19,792
<RECEIVABLES> 13,435
<ALLOWANCES> (1,386)
<INVENTORY> 0
<CURRENT-ASSETS> 81,044
<PP&E> 85,869
<DEPRECIATION> (59,156)
<TOTAL-ASSETS> 119,427
<CURRENT-LIABILITIES> 63,540
<BONDS> 0
0
0
<COMMON> 270
<OTHER-SE> 52,108
<TOTAL-LIABILITY-AND-EQUITY> 119,427
<SALES> 0
<TOTAL-REVENUES> 150,610
<CGS> 0
<TOTAL-COSTS> 137,934
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,965
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,968
<INCOME-TAX> 5,375
<INCOME-CONTINUING> 8,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (823)
<NET-INCOME> 7,770
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.30
</TABLE>
