<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
ITT CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
PRELIMINARY COPY
FOR PURPOSES OF THIS PRELIMINARY PROXY STATEMENT, ITT CORPORATION HAS
ASSUMED THAT, AT THE TIME THIS PROXY STATEMENT IS MAILED TO STOCKHOLDERS, THE
DISTRIBUTIONS (AS DEFINED HEREIN) SHALL HAVE OCCURRED. THE DISTRIBUTIONS ARE THE
SUBJECT OF LITIGATION PENDING IN THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEVADA. SHOULD THE DISTRIBUTIONS BE DELAYED, THIS PROXY STATEMENT
WILL BE REVISED ACCORDINGLY.
[ITT LOGO]
1997
NOTICE OF
ANNUAL
MEETING
AND
PROXY
STATEMENT
<PAGE> 3
[ITT Logo] ITT CORPORATION
Chairman and
Chief Executive Officer
, 1997
Dear Stockholder:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of ITT Corporation (the "Corporation") to be held at 10:30 a.m., local time, on
November , 1997 in the of .
At the 1997 Annual Meeting, you will be asked to approve (i) the election
of directors, (ii) the issuance (the "Proposed Issuance") of common stock of the
Corporation, warrants to purchase common stock and the issuance of common stock
upon exercise of such warrants in connection with a strategic investment (the
"Strategic Investment") in the Corporation by an affiliate of Clayton, Dubilier
& Rice, Inc. ("CD&R"), an investment firm, (iii) an amendment to the by-laws of
the Corporation in connection with the Strategic Investment, (iv) the change of
the Corporation's name to "ITT Information Services, Inc." and certain other
amendments to the restated articles of incorporation, (v) the ITT Information
Services, Inc. 1997 Long-Term Incentive Plan, (vi) the reappointment of Arthur
Andersen LLP as independent auditors of the Corporation and (vii) such other
matters as may properly come before the meeting. YOUR BOARD OF DIRECTORS HAS
APPROVED AND RECOMMENDS THAT YOU VOTE FOR THESE PROPOSALS.
Enclosed with this letter is a Notice of Annual Meeting, Proxy Statement,
Proxy Card and return envelope. I urge you to read the enclosed material
carefully.
The Board of Directors approved the terms of the Strategic Investment based
on a number of reasons, including its belief that (i) the Strategic Investment
will provide the Corporation's telephone directories publishing business with
the strong sponsorship and expertise of CD&R, which has a history of
successfully building the businesses in which the funds it manages invest and
(ii) the sale of common stock and warrants to an affiliate of CD&R pursuant to
the Strategic Investment will enhance the capital structure of the Corporation
by allowing the Corporation to repay a portion of its outstanding indebtedness
with the proceeds of additional equity of the Corporation. We strongly urge you
to vote for the Proposed Issuance.
Your vote is important. Whether or not you plan to attend the 1997 Annual
Meeting, please complete, sign and date the accompanying Proxy Card and return
it in the enclosed prepaid envelope as soon as possible. If you attend the 1997
Annual Meeting, you may vote your shares in person, even if you have previously
submitted a Proxy Card. Approval of the Proposed Issuance requires the approval
of a majority of the votes cast on the proposal at the 1997 Annual Meeting,
provided that the total vote cast represents a majority in voting power of the
Corporation's stockholders entitled to vote thereon, and, as a result, a failure
to vote will have the same effect as a vote against the Proposed Issuance.
Your continued support and interest in ITT Corporation is greatly
appreciated.
Sincerely yours,
Chairman and Chief Executive Officer
<PAGE> 4
PRELIMINARY COPY
[ITT LOGO] ITT CORPORATION
Victor M. Berger
Senior Vice President,
General Counsel and
Corporate Secretary
, 1997
NOTICE OF ANNUAL MEETING
The Annual Meeting of the stockholders of ITT Corporation (the
"Corporation") will be held in the of
, on , November , 1997 at 10:30 am, local
time, for the following purposes:
1. to elect directors;
2. to approve, in connection with the proposed strategic investment
(the "Strategic Investment") in the Corporation by CDRV Acquisition,
L.L.C., an affiliate of Clayton, Dubilier & Rice, Inc., an investment firm,
the issuance of (a) shares of common stock, no par value, of the
Corporation (the "Common Stock") representing 32.9% of the outstanding
shares of Common Stock as of the closing date of the transaction (the
"Closing Date") (after giving effect to the issuance of such shares of
Common Stock and assuming the exercise of all employee stock options
outstanding on such date), (b) warrants (the "Warrants") representing the
rights to purchase 0.78 shares of Common Stock for each share of Common
Stock so purchased on the Closing Date (subject to anti-dilution
adjustment) at an exercise price of 150% of the per share purchase price
paid on the Closing Date (subject to adjustment) and (c) shares of Common
Stock upon exercise of the Warrants;
3. to approve an amendment to the Amended and Restated By-laws of the
Corporation in connection with the Strategic Investment;
4. to approve a change of the Corporation's name to "ITT Information
Services, Inc." and certain other amendments to the Corporation's Restated
Articles of Incorporation;
5. to approve the ITT Information Services, Inc. 1997 Long-Term
Incentive Plan;
6. to ratify the reappointment of Arthur Andersen LLP as independent
auditors of the Corporation for 1997; and
7. to act upon such other matters as may properly come before the
meeting.
Stockholders of record at the close of business on , 1997 will be
entitled to notice of and to vote at the meeting.
STOCKHOLDERS ARE URGED TO COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED
PROXY PROMPTLY IN THE SELF-ADDRESSED ENVELOPE (WHICH IS POSTAGE-PAID FOR
STOCKHOLDERS IN THE UNITED STATES, CANADA AND THE UNITED KINGDOM) WHETHER OR NOT
THEY EXPECT TO ATTEND THE MEETING. A STOCKHOLDER MAY NEVERTHELESS VOTE IN PERSON
IF HE OR SHE DOES ATTEND.
Sincerely yours,
VICTOR M. BERGER
Senior Vice President,
General Counsel and
Corporate Secretary
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................. 1
VOTING PROCEDURES................................................................... 1
BACKGROUND.......................................................................... 2
INFORMATION CONCERNING EXECUTIVE OFFICERS........................................... 3
Executive Officers................................................................ 3
Employment and Severance Arrangements with Current Executives..................... 4
Stock Options Held by Current Executives.......................................... 5
INFORMATION CONCERNING THE BOARD OF DIRECTORS....................................... 5
Board Committees.................................................................. 5
Directors' Compensation........................................................... 6
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 7
LISTING AND TRADING OF THE COMMON STOCK............................................. 7
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS, NOMINEES AND CURRENT
EXECUTIVE OFFICERS................................................................ 8
ITEM NO. 1 -- ELECTION OF DIRECTORS................................................. 10
ITEM NO. 2 -- PROPOSED ISSUANCE IN CONNECTION WITH STRATEGIC INVESTMENT BY AN
AFFILIATE OF CLAYTON, DUBILIER & RICE, INC........................................ 12
Board of Directors' Recommendation................................................ 12
Description of the Principal Terms of the Investment Agreement and Related
Agreements..................................................................... 12
CD&R Consulting Agreement......................................................... 16
Information Concerning CDRV and CD&R; Source of Funds............................. 16
CDRV Nominees to the Board of Directors........................................... 16
Use of Proceeds................................................................... 17
Certain Considerations............................................................ 17
ITEM NO. 3 -- AMENDMENT TO THE CORPORATION'S AMENDED AND RESTATED BY-LAWS IN
CONNECTION WITH THE STRATEGIC INVESTMENT.......................................... 19
ITEM NO. 4 -- AMENDMENT TO THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION TO
CHANGE THE CORPORATION'S NAME TO "ITT INFORMATION SERVICES, INC." AND CERTAIN
OTHER AMENDMENTS TO THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION.......... 20
ITEM NO. 5 -- APPROVAL OF ITT INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE
PLAN.............................................................................. 21
General........................................................................... 21
Options Granted Under the LTIP.................................................... 21
Restricted Stock.................................................................. 22
Stock Appreciation Rights......................................................... 22
Performance Shares................................................................ 23
Approval and Amendment of the LTIP................................................ 23
Tax Consequences.................................................................. 23
New Plan Benefits................................................................. 24
Stockholder Approval.............................................................. 24
ITEM NO. 6 -- RATIFICATION OF THE REAPPOINTMENT OF INDEPENDENT AUDITORS............. 25
ITEM NO. 7 -- OTHER MATTERS......................................................... 26
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING....................................... 26
ADDRESS OF CHAIRMAN................................................................. 26
SOLICITATION OF PROXIES............................................................. 26
ADDITIONAL INFORMATION.............................................................. 27
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1996 Board of Directors............................................................. 27
Certain Relationships and Related Transactions.................................... 27
EXECUTIVE COMPENSATION.............................................................. 28
Excerpts from the Report of the Compensation and Personnel Committee filed with
the Commission on April 30, 1997............................................... 28
The Committee's Role........................................................... 28
The Compensation Program....................................................... 29
Discussion of the Committee's Policy Regarding Qualifying Compensation for
Deductibility Under Section 162(m) of the Internal Revenue Code............... 30
Compensation of Named ITT Executives.............................................. 31
Option Grants on ITT Common Stock to Named ITT Executives in Last Fiscal Year..... 32
Aggregated Option Exercises by Named ITT Executives in the Last Fiscal Year and
Fiscal Year-End Option Value................................................... 33
Pension Plans..................................................................... 33
Compensation Committee Interlocks and Insider Participation....................... 36
Security Ownership of Former Executive Officers................................... 36
Appendix A -- CONSOLIDATED FINANCIAL INFORMATION.................................... A-1
Appendix B -- INVESTMENT AGREEMENT BETWEEN ITT CORPORATION AND CDRV ACQUISITION,
L.L.C. DATED AS OF JULY 15, 1997.................................................. B-1
Appendix C -- PROPOSED AMENDMENTS TO THE RESTATED ARTICLES OF INCORPORATION......... C-1
Appendix D -- ITT INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE PLAN.......... D-1
</TABLE>
ii
<PAGE> 7
PRELIMINARY COPY
PROXY STATEMENT
ITT Corporation
1330 Avenue of the Americas
New York, New York 10019-5490
GENERAL INFORMATION
This Proxy Statement and accompanying proxy are being mailed to
stockholders commencing , 1997 in connection with the solicitation
of proxies by the Board of Directors of ITT Corporation (the "Corporation" or
"ITT") for the 1997 Annual Meeting of stockholders of the Corporation (the
"Annual Meeting"). The Corporation's Annual Report preceded this Proxy
Statement. The Corporation's Current Report on Form 8-K accompanies this Proxy
Statement. Neither of the foregoing reports are a part of this Proxy Statement.
At the Annual Meeting, stockholders will consider and vote upon the
election of directors to hold office until their successors are elected and
qualified. At the Annual Meeting, the stockholders will also consider and vote
upon: (i) the approval, in connection with the proposed strategic investment
(the "Strategic Investment") in the Corporation by CDRV Acquisition, L.L.C.
("CDRV"), the sole member of which is Clayton, Dubilier & Rice Fund V Limited
Partnership ("CD&R Fund V"), an investment fund managed by Clayton, Dubilier &
Rice, Inc. ("CD&R"), an investment firm, of the issuance (the "Proposed
Issuance") of (A) shares of common stock, no par value, of the Corporation (the
"Common Stock") representing 32.9% of the outstanding shares of Common Stock as
of the closing date of the transaction (the "Closing Date") (after giving effect
to the issuance of such shares and assuming the exercise of all employee stock
options outstanding on such date), (B) warrants (the "Warrants") representing
the right to purchase 0.78 shares of Common Stock for each share of Common Stock
so purchased on the Closing Date (subject to anti-dilution adjustment) at an
exercise price of 150% of the per share purchase price paid on the Closing Date
(subject to adjustment), and (C) shares of Common Stock upon exercise of the
Warrants, each pursuant to an investment agreement (the "Investment Agreement")
dated as of July 15, 1997 between ITT and CDRV; (ii) certain amendments to the
Amended and Restated By-Laws of the Corporation (the "By-laws") in connection
with the Strategic Investment; (iii) the approval of an amendment to the
Corporation's Restated Articles of Incorporation to change the Corporation's
name to "ITT Information Services, Inc." and certain other amendments to the
Corporation's Restated Articles of Incorporation; (iv) the approval of the ITT
Information Services, Inc. 1997 Long-Term Incentive Plan; (v) the ratification
of the reappointment of Arthur Andersen LLP as the Corporation's independent
auditors for 1997; and (vi) any other business that may properly come before the
Annual Meeting.
Your vote is important, regardless of how many shares of Common Stock you
own. Please sign and date the accompanying proxy card and mail it in the
enclosed self-addressed envelope (which is postage prepaid for stockholders in
the United States, Canada and the United Kingdom) as promptly as possible,
whether or not you expect to attend the Annual Meeting.
IF YOUR SHARES OF COMMON STOCK ARE HELD IN THE NAME OF A BANK, BROKER OR
OTHER NOMINEE, WE URGE YOU TO CONTACT THE PARTY RESPONSIBLE FOR YOUR ACCOUNT AND
DIRECT HIM OR HER TO SIGN AND RETURN THE CORPORATION'S PROXY CARD.
VOTING PROCEDURES
The Board has fixed the close of business on , 1997 as the
record date (the "Record Date") for determining the stockholders entitled to
notice of, and to vote at, the Annual Meeting. On the Record Date, there
were shares of Common Stock outstanding. All such shares of Common
Stock entitled to vote at the Annual Meeting are referred to herein as "Record
Shares." The holders of the Record
<PAGE> 8
Shares are entitled to one vote per share on each matter submitted to a vote at
the Annual Meeting. Stockholders do not have the right to cumulate votes in the
election of directors. The presence in person or by proxy of stockholders
holding a majority of the Record Shares will constitute a quorum for the
transaction of business at the Annual Meeting. Shares of Common Stock
represented by proxies that are marked "abstain" will be counted as Record
Shares present for purposes of determining the presence of a quorum on all
matters. Proxies relating to "street name" shares that are voted by brokers on
some but not all of the matters will be treated as Record Shares present for
purposes of determining the presence of a quorum on all matters, but they will
not be treated as shares entitled to vote at the Annual Meeting on those matters
as to which authority to vote is withheld by the broker ("broker non-votes").
Whether or not you plan to attend the Annual Meeting, you are urged to vote
by proxy. Duly executed and unrevoked proxies received by the Corporation prior
to the Annual Meeting will be voted in accordance with the stockholder's
specifications marked thereon. Any stockholder giving a proxy may revoke it at
any time prior to voting at the Annual Meeting by filing with the Secretary of
the Corporation a duly executed revocation, by submitting a later dated proxy
with respect to the same shares or by attending the Annual Meeting and voting in
person (although attendance at the Annual Meeting will not in and of itself
constitute a revocation of your proxy).
A stockholder may, with respect to the election of directors: (i) vote for
the election of all six director nominees proposed by the Board of Directors;
(ii) withhold authority to vote for all such director nominees; or (iii)
withhold authority to vote for any of such director nominees by so indicating in
the appropriate space on the accompanying proxy. The By-laws provide that at
each meeting of stockholders at which a quorum is present, directors shall be
elected by a plurality of votes cast by stockholders holding shares of Common
Stock entitled to vote for the election of directors. The six nominees receiving
the highest vote totals will be elected as directors of the Corporation.
Consequently, votes that are withheld in the election of directors and broker
non-votes will have no effect on the election.
With respect to the other items submitted for stockholder approval, a
stockholder may vote for or against such matters or abstain from voting.
Pursuant to the By-laws, each of the other items requires the affirmative vote
of a majority in voting power of the stockholders present in person or by proxy
and entitled to vote at the Annual Meeting (assuming a quorum is present). In
addition, under the rules of the New York Stock Exchange (the "NYSE"), the
Proposed Issuance requires approval of a majority of the votes cast on the
proposal at the Annual Meeting, provided that the total vote cast represents a
majority in voting power of the Corporation's stockholders entitled to vote
thereon, and, under the Nevada General Corporation Law, the proposed amendments
to the Corporation's Restated Articles of Incorporation require the approval of
a majority in voting power of the Corporation's stockholders entitled to vote
thereon. An abstention or a broker non-vote on any of these items thus will have
the effect of a "no" vote.
The accompanying proxy represents all of the shares you are entitled to
vote at the Annual Meeting, other than shares held through an employee plan. If
you have an account in the ITT 401(k) Retirement Savings Plan or a savings plan
for hourly employees, the trustee under that plan will provide you with a proxy
representing the shares you are entitled to vote under the plan.
The Board of Directors has appointed two current officers of The Bank of
New York to act as inspectors of election at the Annual Meeting. The By-laws
provide that, except in limited circumstances not applicable to the 1997 Annual
Meeting, stockholders shall be accorded privacy in voting and that the integrity
of the balloting process shall be assured. The vote of any stockholder is not
disclosed to management except as may be necessary to meet legal requirements.
However, all comments directed to management from stockholders, whether written
on the proxy card or elsewhere, will be forwarded to management. Among their
other duties, the inspectors of election will certify as to compliance with such
confidentiality provisions.
BACKGROUND
The Corporation is a leading provider of classified directory services and
telephone directory advertising outside of the continental United States, with
operations in Belgium, The Netherlands, Portugal, South Africa, Ireland, Puerto
Rico, the U.S. Virgin Islands and Japan. Attached as Appendix A are certain
selected
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consolidated historical financial and operating data, unaudited pro forma
consolidated financial statements, management's discussion and analysis of
financial conditions and results of operations, and audited and unaudited
financial statements for the year ended December 31, 1996, and six months ended
June 30, 1997, respectively, in each case solely as they relate to the telephone
directories publishing business of the Corporation and after giving effect to
the Distributions (as defined below). For the year ended December 31, 1996 and
the six months ended June 30, 1997, the Corporation had revenues of $647 million
and $276 million, respectively, operating income of $208 million and $83
million, respectively, and earnings before interest, taxes, depreciation,
amortization and miscellaneous expenses, net, of $224 million and $91 million,
respectively.
Until , 1997 (the "Distribution Date"), ITT operated three main
lines of business: (i) hotels and gaming, (ii) telephone directories publishing
and (iii) post-secondary technical education. On the Distribution Date, ITT
consummated a comprehensive plan (the "Comprehensive Plan"), pursuant to which
ITT separated itself into three distinct publicly owned companies along these
separate lines of business. As part of the Comprehensive Plan, ITT: (i)
distributed to its stockholders (A) all the shares of common stock of ITT
Destinations, Inc. ("Destinations"; such distribution, the "Destinations
Distribution"), ITT's hotels and gaming subsidiary, and (B) all of the shares of
common stock of ITT Educational Services, Inc. ("ESI"), ITT's post secondary
technical education subsidiary (together with the Destinations Distribution, the
"Distributions") owned by ITT; and (ii) retained its telephone directories
publishing business. The Comprehensive Plan also involved: (i) the repurchase by
ITT through a cash tender offer of up to 30 million shares of Common Stock,
representing approximately 25.7% of the Corporation's outstanding shares of
Common Stock, at a price of $70 per share (the "Equity Tender Offer"); (ii) the
allocation of indebtedness among ITT's three lines of business; and (iii)
refinancing of the ITT debt allocated to the Corporation through borrowings of
$1,275 million by the Corporation and its subsidiaries, including $225 million
to be borrowed by the Corporation under a senior secured credit facility (the
"Senior Facility"). References in this Proxy Statement to "ITT" are to ITT
Corporation prior to the Distributions and to the "Corporation" are to ITT
Corporation after the Distributions.
Following the Distributions, the Board of Directors of the Corporation was
reconstituted and new officers were elected. The following sections of this
Proxy Statement contain current information about the executive officers,
directors and beneficial owners of the Corporation. See "Additional Information"
for certain historical information about ITT and its officers and directors for
the fiscal year ended December 31, 1996.
INFORMATION CONCERNING EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
Set forth below is certain information about the executive officers of the
Corporation (the "Current Executives"). The Current Executives are primarily
responsible for the day to day management of the Corporation.
GERALD C. CROTTY, 45, is Chairman and Chief Executive Officer of the
Corporation. Immediately prior to the Distributions, Mr. Crotty was Chairman and
Chief Executive Officer of ITT's Information Services Group. Previously, Mr.
Crotty was President and Chief Operating Officer of ITT Consumer Financial
Corporation. Prior to joining ITT in 1991 as a Vice President in the Office of
the Chairman, Mr. Crotty served the State of New York in several key positions
for twelve years, finally as Secretary (chief of staff) to the Governor of New
York. He also served as Counsel to the Governor from 1983 to 1985 and before
that as the Governor's first assistant counsel. Earlier, Mr. Crotty was an
attorney with Hawkins, Delafield & Wood in New York City, specializing in public
securities and municipal finance.
ALBERT F. HAUSSENER, 63, is President of the Corporation. Prior to joining
ITT World Directories, Inc., ITT's telephone directories publishing business, in
1984, Mr. Haussener was a group vice president and division manager of Raychem
Corporation. Previously, he worked for The Celanese Corporation.
VICTOR M. BERGER, 58, is Senior Vice President, General Counsel and
Corporate Secretary of the Corporation. Mr. Berger joined ITT in 1967 as
assistant to the International Communications Operations Counsel and has held a
range of positions in ITT's legal department to support businesses in consumer
3
<PAGE> 10
products and services, publishing and telecommunications. Prior to joining ITT,
Mr. Berger was a staff attorney in the office of Satellite Communications for
the Federal Communications Commission and on the legal staff of the New York
State Mooreland Commission on the Alcoholic Beverage Control Law.
ROBIN A. BOLLAND, 54, is Senior Vice President, Chief Financial Officer and
Treasurer of the Corporation. Mr. Bolland joined ITT as Finance Manager of the
ITT Automotive Products Group in 1975 and has held a range of financial
management posts with the Corporation during the past 22 years. He joined ITT
World Directories, Inc. as Vice President and Controller in 1981. Previously,
Mr. Bolland held finance and auditing positions with British Leyland Motors,
NCR, and Blackburns Robson Coates & Co. He is a member of the Institute of
Chartered Accountants in England and Wales.
EMPLOYMENT AND SEVERANCE ARRANGEMENTS WITH CURRENT EXECUTIVES
The Corporation anticipates entering into an employment arrangement with
Mr. Crotty, effective upon the Distribution Date. The arrangement contemplates:
(i) a term of three years; (ii) a base salary of $450,000 per year; (iii) an
annual bonus target of 100% of base salary; (iv) an additional special long term
incentive award of $1 million in the year 2000, if annual bonus performance
targets are achieved in each of 1997, 1998 and 1999, which special long-term
incentive award may be adjusted upwards (up to a maximum of $2 million) or
downwards based on actual performance against approved bonus targets on the same
basis as the annual bonus adjustments are made; and (v) stock options as may be
awarded in the discretion of the Compensation Committee. Bonus targets will be
established by the Compensation Committee.
In addition, the arrangement contemplates that Mr. Crotty will receive
severance upon the terms of an amended and restated severance agreement entered
into with ITT in August 1997. That agreement provides that, if he is
involuntarily terminated other than for cause or he terminates for good reason
within two years following a change in control, Mr. Crotty will receive
severance consisting of: (i) a lump-sum payment equal to the sum of (A) three
times his annual base salary in effect immediately prior to his termination of
employment and (B) three times the highest bonus paid or awarded to him under
ITT's executive compensation plans in respect of the three years immediately
preceding the change in control; (ii) continued welfare benefits, fringe
benefits and perquisites for three years; and (iii) one year of outplacement
services. If Mr. Crotty is subject to an excise tax (an "Excise Tax") under
Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), in
respect of such severance benefits, Mr. Crotty will be entitled to a gross-up
payment to fully offset any Excise Tax imposed, as well as any additional
income, employment and excise taxes imposed on the gross-up payment (an
"Additional Payment").
The Corporation also expects to enter into employment arrangements through
December 31, 1999 with Messrs. Haussener, Bolland and Berger. Annual base salary
and bonus targets are as follows:
<TABLE>
<CAPTION>
BONUS TARGET
NAME POSITION BASE SALARY (% OF BASE SALARY)
- --------------------------------- ------------------------------- ----------- ------------------
<S> <C> <C> <C>
Albert F. Haussener.............. President $ 350,000 65%
Robin A. Bolland................. Senior Vice President, Chief L145,000 50%
Financial Officer and
Treasurer
Victor M. Berger................. Senior Vice President, General $ 220,000 40%
Counsel and Corporate
Secretary
</TABLE>
Each of Messrs. Haussener, Bolland and Berger will also be entitled to
receive additional incentive compensation in the year 2000 equal to one year of
base salary, plus the average of the bonuses paid in 1998 and 1999 pursuant to
such employment arrangements, provided that such executive officer remains with
the Corporation through December 31, 1999. Messrs. Haussener and Berger are also
covered by certain tax equalization and reimbursable expense arrangements that
are estimated for 1997 to be approximately $400,000 for Haussener and $210,000
for Berger. Mr. Bolland receives certain cost-of-living adjustments.
Messrs. Haussener, Bolland and Berger are each deemed to be employees
subject to the laws and practices of Belgium. Therefore, they may be entitled to
receive severance benefits under such laws and practices.
4
<PAGE> 11
STOCK OPTIONS HELD BY CURRENT EXECUTIVES
As of , 1997, each of the Current Executives held the following
number of stock options for Common Stock, of which the identified number were
exercisable: Mr. Crotty, ( exercisable); Mr. Haussener,
( exercisable); Mr. Bolland, ( exercisable); and Mr. Berger,
( exercisable). The number of shares of the Common Stock subject to
each such outstanding option (and the corresponding option exercise price) will
be adjusted under the 1995 ITT Corporation Incentive Stock Compensation Plan to
reflect the Distributions. Such adjustment will be made in a manner which is
intended to preserve the inherent economic value of such options immediately
prior to the Distribution Date. These option shares, as adjusted to reflect the
Distributions, will be in addition to any shares that may be issued under the
ITT Information Services, Inc. 1997 Long-Term Incentive Plan being presented to
stockholders at this meeting for approval.
INFORMATION CONCERNING THE BOARD OF DIRECTORS
The Board of Directors is responsible for establishing broad corporate
policies and for overseeing the overall performance of the Corporation. The
Board of Directors reviews significant developments affecting the Corporation
and acts on other matters requiring Board approval.
As of the Distribution Date, all of the Corporation's directors, other than
Rand V. Araskog, Edward C. Meyer and Margita E. White, resigned, and Gerald C.
Crotty, Arthur Hartman and H. Patrick Swygert were appointed to the Board. The
information under the caption "Additional Information" below relates to, among
other things, the composition and policies of the Board of Directors prior to
the Distributions. Messrs. Araskog, Crotty, Hartman, Meyer and Swygert and Mrs.
White are all nominees for election pursuant to this Proxy Statement.
If all six nominees for director are elected at the Annual Meeting, the
Board will consist of five directors who are not officers or employees of the
Corporation or its subsidiaries and one director, Gerald C. Crotty, who is an
officer of the Corporation. The directors elected to hold office at the Annual
Meeting will serve as directors until the next annual meeting of the
Corporation's stockholders and until their successors are elected and qualified.
The Corporation anticipates that, if the Corporation's stockholders approve
the Proposed Issuance and the Strategic Investment in the Corporation by CDRV is
consummated, five directors nominated by CDRV will be elected and qualified as
directors of the Corporation, no more than three of whom may be employees of
CD&R. See "Item No. 2 -- Proposed Issuance in Connection With Strategic
Investment by an Affiliate of Clayton, Dubilier & Rice, Inc. -- CDRV Nominees to
the Board of Directors." Such additional directors will also serve as directors
until the next annual meeting of the Corporation's stockholders and until their
successors are elected and qualified.
The former Board of Directors adopted a retirement policy that provides
that: (i) no person may be nominated for election or reelection as a
non-employee director after reaching age 72 and (ii) no employee of the
Corporation or of any of its subsidiaries (other than an employee who has served
as chief executive of the Corporation) may be nominated for election or
reelection as a director after reaching age 65, unless the Board has
specifically waived these age requirements. That policy will continue to apply
to the current Board of Directors, unless subsequently amended.
BOARD COMMITTEES
Effective as of the Distribution Date, the Board of Directors established
the following standing committees:
THE AUDIT COMMITTEE recommends the selection of independent auditors for
the Corporation, confirms the scope of audits to be performed by such auditors,
reviews audit results and internal accounting and control procedures and
policies, and reviews the fees paid to the Corporation's independent auditors.
The Committee reviews and recommends approval of the audited financial
statements of the Corporation and the annual report to stockholders. It also
reviews the expense accounts of senior executives. The Audit Committee currently
5
<PAGE> 12
consists of Rand V. Araskog and Edward C. Meyer. The Audit Committee is expected
to be reconstituted after the Annual Meeting. If the Proposed Issuance is
approved by the stockholders and the Strategic Investment is consummated, CDRV
will have the right to nominate two of the four members of the Audit Committee.
THE COMPENSATION COMMITTEE, which is comprised entirely of non-employee
directors, oversees the compensation and benefits of employees, evaluates
management performance and establishes executive compensation. In the
performance of its functions, the Committee has access to independent
compensation counsel. At present, there are no members of the Compensation
Committee, which is expected to be reconstituted following the Annual Meeting.
If the Proposed Issuance is approved by the stockholders and the Strategic
Investment is consummated, CDRV will have the right to nominate two of the four
members of the Compensation Committee, one of whom will be the Chairman of such
committee.
THE CORPORATE GOVERNANCE COMMITTEE makes recommendations to the Board of
Directors concerning the organization, size and composition of the Board of
Directors and its committees, proposes nominees for election to the Board and
its committees and considers the qualifications, compensation and retirement of
directors. At present, there are no members of the Corporate Governance
Committee, which is expected to be reconstituted following the Annual Meeting.
If the Proposed Issuance is approved by the stockholders and the Strategic
Investment is consummated, CDRV will have the right to nominate two of the five
members of the Corporate Governance Committee. The Corporate Governance
Committee will consider recommendations for director nominees that are submitted
by stockholders in writing to the Secretary of the Corporation. The By-laws
contain provisions relating to nominations for directors at stockholders'
meetings.
THE EXECUTIVE COMMITTEE exercises the powers of the Board of Directors in
the management of the business and affairs of the Corporation in the intervals
between meetings of the Board of Directors. At present, there are no members of
the Executive Committee, which is expected to be reconstituted following the
Annual Meeting. If the Proposed Issuance is approved by the stockholders and the
Strategic Investment is consummated, CDRV will have the right to nominate two of
the four members of the Executive Committee, one of whom will be the Chairman of
such committee.
DIRECTORS' COMPENSATION
Members of the Board of Directors who are not employees of the Corporation
or any of its subsidiaries will receive an Annual Retainer of $25,000, which
will be prorated for the period from the Distribution Date to December 31, 1997,
and which will be paid through grants of restricted stock under the
Corporation's 1996 Restricted Stock Plan for the Non-Employee Directors (the
"1996 Non-Employee Directors Plan"). At present, there are five directors who
are eligible to participate in the 1996 Non-Employee Directors Plan. The plan is
administered by the Compensation Committee, which has the responsibility of
interpreting the plan and establishing rules appropriate for the plan's
administration. Members of the Board of Directors who are employees of CD&R or
CDRV will not receive separate compensation for their service as directors of
the Corporation. CD&R will, however, receive an annual fee from the Corporation
for the provision of certain management advisory and consulting services. See
"Item No. 2 -- Proposed Issuance in Connection with Strategic Investment by an
Affiliate of Clayton, Dubilier & Rice, Inc. -- CD&R Consulting Agreement".
Under the 1996 Non-Employee Directors Plan, grants of restricted stock are
made automatically on the date of each annual meeting of the Corporation's
stockholders to each non-employee director (other than directors who are
employees of CD&R or CDRV) elected at the meeting or continuing in office
following such meeting. The amount of the award shall equal the Annual Retainer
in effect for the calendar year within which the award date falls (prorated as
described above for 1997), divided by the fair market value of the Common Stock
on the date granted. The Annual Retainer does not include meeting attendance
fees. The shares of Common Stock that are granted under the 1996 Non-Employee
Directors Plan are held in escrow and are subject to a restriction period (after
which restrictions lapse) which commences on the grant date and ends on the
earliest of: (i) the fifth anniversary of the grant date; (ii) upon retirement
at age 72; (iii) upon a "change of control" (as defined) of the Corporation;
(iv) death; (v) the onset of disability; or (vi) resignation in certain cases of
ill health, relocation or entering into any governmental, diplomatic or other
service or
6
<PAGE> 13
employment. Except as provided above, any resignation from Board service within
the restriction period will result in forfeiture of the shares. Shares may not
be sold, assigned, transferred, pledged or otherwise disposed of during the
restriction period. Until such risk of forfeiture lapses or the shares are
forfeited, a director will not have the right to vote and to receive dividends
on the shares granted under the 1996 Non-Employee Directors Plan. The Proposed
Issuance and the consummation of the Strategic Investment will not result in a
change of control under the 1996 Non-Employee Directors Plan.
Non-employee directors (other than directors who are employees of CD&R or
CDRV) will also receive a fee of $750 for each meeting of the Board of Directors
attended and a $750 fee for each committee meeting attended. Directors are
reimbursed for travel expenses incurred on behalf of the Corporation.
The non-employee directors are covered under a non-contributory group
accidental death and dismemberment program which provides each of them $750,000
of coverage during their service on the Board of Directors. Additional benefits
also may be purchased.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The By-laws provide for mandatory indemnification of directors and officers
(including payment of legal fees) to the fullest extent permitted by applicable
law. The By-laws also provide that the Corporation may maintain insurance to
indemnify its directors and officers against liabilities whether or not the
Corporation would be permitted to indemnify them. This type of insurance, as
well as policies under which the Corporation may be reimbursed for amounts paid
in indemnifying its directors and officers, are in force. The premiums thereon,
which aggregate $ for a twelve month period, are paid by the
Corporation. As authorized by the By-laws, the Corporation has entered into
indemnification agreements with its directors pursuant to which the Corporation
agrees to indemnify them against all expenses, liabilities or losses incurred by
the directors in their capacity as such: (i) to the fullest extent permitted by
applicable law; (ii) as provided in the By-laws as in effect on the date of such
agreement; and (iii) in the event the Corporation does not maintain the
aforementioned insurance or comparable coverage, to the full extent provided in
the applicable policies as in effect on January 1, 1997 (the Corporation's
obligations described in (ii) and (iii) being subject to certain exceptions).
Contractual rights under such indemnification agreements are believed to provide
the directors more protection than the By-laws, which are subject to change.
LISTING AND TRADING OF THE COMMON STOCK
Prior to the Distribution Date, the Common Stock traded on the NYSE under
the symbol "ITT." Immediately following the Distributions, the Common Stock
began trading on the NYSE under the new symbol "INF."
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<PAGE> 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS, NOMINEES AND CURRENT
EXECUTIVE OFFICERS
The following table shows as of , 1997 the beneficial ownership
of Common Stock by: (i) persons known to the Corporation to be the beneficial
owners of more than five percent of the Common Stock; (ii) each director and
nominee; (iii) each of the Current Executives; and (iv) the directors and
executive officers as a group. The information in the following table has not
been adjusted to reflect the Equity Tender Offer.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ---------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Bankers Trust New York Corporation.............................. 7,728,083(2) 8.9%
280 Park Avenue
New York, New York 10017
FMR Corp........................................................ 13,166,423(3) 11.3%
82 Devonshire Street
Boston, Massachusetts 02109
Rand V. Araskog................................................. 1,748,398(4) 1.5%
Gerald C. Crotty................................................ (5) *
Arthur Hartman.................................................. *
Edward C. Meyer................................................. 3,311 *
H. Patrick Swygert.............................................. *
Margita E. White................................................ 2,811 *
Victor M. Berger................................................ (5) *
Robin A. Bolland................................................ (5) *
Albert F. Haussener............................................. (5) *
All directors and executive officers as a group (nine).......... %
</TABLE>
- ---------------
* Less than one percent.
(1) All shares are owned directly except as hereinafter otherwise indicated.
Pursuant to regulations of the Securities and Exchange Commission (the
"Commission"), shares of Common Stock: (i) receivable by directors and
executive officers upon exercise of employee stock options exercisable
within 60 days after , 1997 and (ii) allocated to the accounts
of certain directors and executive officers under the ITT 401(k) Retirement
Savings Plan at , 1997, are deemed to be beneficially owned by
such directors and executive officers at said date. Of the number of shares
shown above, the following represent shares that could have been acquired
upon exercise of employee stock options for the accounts of: Mr. Araskog,
1,196,617 shares; Mr. Crotty, shares; Mr. Haussener,
common shares; Mr. Berger, shares; Mr. Bolland, common
shares; and all present directors and executive officers as a group,
shares. Of the number of shares shown above, the following amounts
were allocated under the ITT 401(k) Retirement Savings Plan to the accounts
of: Mr. Araskog, 20,255 shares; Mr. Crotty, 1,157 shares; Mr. Haussener,
shares, Mr. Berger, shares; and all present directors
and executive officers as a group, shares.
(2) A February 14, 1997 Schedule 13G filed with the Commission reflects that
Bankers Trust New York Corporation, through its wholly owned subsidiaries
Bankers Trust Company (as Trustee for various trusts and employee benefit
plans, and as investment advisor) beneficially owns 7,728,083 shares of
Common Stock. Of these shares, Bankers Trust Company was deemed to have: (i)
sole power to vote or to direct the vote with respect to 7,725,383 shares of
Common Stock; (ii) shared power to vote or to direct the vote with respect
to 2,700 shares of Common Stock; (iii) sole power to dispose or to direct
the disposition of 1,990,982 shares of Common Stock; and (iv) shared power
to dispose or to direct the disposition of 16,505 shares of Common Stock.
(3) A February 14, 1997 Schedule 13G provided to the Corporation reflects that
FMR Corp. ("FMR") beneficially owns 13,166,423 shares of Common Stock. Of
such reported shares, Fidelity Management &
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<PAGE> 15
Research Company ("Fidelity"), a wholly-owned subsidiary of FMR and an
investment adviser registered under Section 203 of the Investment Advisers
Act of 1940, beneficially owned 12,437,559 shares as a result of acting as
investment adviser to several investment companies registered under Section
8 of the Investment Company Act of 1940. Edward C. Johnson 3d, the Chairman
of FMR, FMR, through its control of Fidelity, and the Fidelity Funds each
has sole power to dispose of the 12,437,559 shares of Common Stock owned by
the Fidelity Funds. Neither FMR nor Mr. Johnson reported the sole power to
vote or direct the voting of the shares owned directly by the Fidelity
Funds, which power resides with the Funds' Boards of Trustees. Fidelity
carries out the voting of the shares under written guidelines established by
the Funds' Boards of Trustees. Fidelity Management Trust Company ("FMTC"), a
wholly-owned subsidiary of FMR, and a bank as defined in Section 3(a)(6) of
the Securities Exchange Act of 1934, as amended, was the beneficial owner of
725,464 shares of Common Stock as a result of its serving as investment
manager of institutional accounts. Mr. Johnson and FMR, through its control
of FMTC, has sole dispositive power over 725,464 shares and sole power to
vote or to direct the voting of 513,264 shares, and no power to vote or to
direct the voting of 212,000 shares of Common Stock owned by certain
institutional accounts. Members of the Edward C. Johnson 3d family and
trusts for their benefit are the predominant owners of Class B shares of
common stock of FMR, representing approximately 49% of the voting power of
FMR. Mr. Johnson owns 12% and Abigail Johnson owns 24.5% of the aggregate
outstanding voting stock of FMR. Ms. Johnson is a Director of FMR. The
Johnson family group and all other Class B stockholders have entered into a
stockholders' voting agreement under which all Class B shares will be voted
in accordance with the majority vote of Class B shares. Accordingly, through
their ownership of voting common stock and the execution of the
stockholders' voting agreement, members of the Johnson family may be deemed,
under the Investment Company Act of 1940, to form a controlling group with
respect to FMR. The number of shares of Common Stock reported includes 3,400
shares owned directly by Mr. Johnson or in trusts for the benefit of Mr.
Johnson or a Johnson family member for which Mr. Johnson serves as trustee.
Mr. Johnson has sole voting and dispositive power over 400 shares and shared
voting and dispositive power over 3,000 shares.
(4) In connection with the Distributions, Mr. Araskog will surrender options to
purchase 1,196,617 shares of Common Stock.
(5) In connection with the Distributions, the Corporation will adjust options to
purchase shares of Common Stock held by Current Executives in a manner
designed to preserve the economic benefits of such options following the
Distributions. See "Information Concerning Executive Officers -- Stock
Options Held by Current Executives."
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<PAGE> 16
ITEM NO. 1
ELECTION OF DIRECTORS
At the Annual Meeting, six directors are to be elected to the Board of
Directors, each of whom if elected will hold office until the next annual
meeting of the Corporation's stockholders and until their successors are elected
and qualified. UNLESS DIRECTED TO THE CONTRARY, THE SHARES OF COMMON STOCK
REPRESENTED BY VALID PROXIES WILL BE VOTED FOR THE ELECTION OF ALL SIX NOMINEES.
The Board of Directors has no reason to believe that any nominee will be
unable to serve as a director. If for any reason a nominee should become unable
to serve, the shares of Common Stock represented by valid proxies will be voted
for the election of such other person as the Board may recommend or the Board
may reduce the number of directors to eliminate the vacancy.
As noted subsequently herein, upon consummation of the Strategic
Investment, CDRV will have the right to appoint five (5) additional directors to
the Corporation's Board of Directors. See "Item No. 2 -- Proposed Issuance in
Connection with Strategic Investment by an Affiliate of Clayton, Dubilier &
Rice, Inc. -- Description of Principal Terms of the Investment Agreement and
Related Agreements -- CDRV Nominees to the Board of Directors."
A brief summary of each Board nominee's principal occupation, business
affiliations and other information follows:
RAND V. ARASKOG
Principal occupation --
Chairman and Chief Executive of
ITT Destinations, Inc.
Director since 1995
(Director of Old ITT 1977-1995)
Mr. Araskog, 65, is Chairman and Chief Executive of Destinations. Prior to the
Distributions, Mr. Araskog served as Chairman and Chief Executive of ITT. Mr.
Araskog became Chairman and Chief Executive of ITT in December 1995. In December
1996, Mr. Araskog became Chairman of ITT Sheraton Corporation and Caesars World,
Inc. Prior to December 1995, since 1966, he served with ITT Corporation (now ITT
Industries, Inc.) ("Old ITT"), including as Chief Executive from 1979, Chairman
from 1980 and President from 1991. He is a director of Alcatel Alsthom of
France, Destinations, ESI, Dow Jones & Company, Inc., The Hartford Financial
Services Group, Inc., ITT Industries, Inc., Rayonier Inc. and Shell Oil Company.
GERALD C. CROTTY
Principal occupation --
Chairman and Chief Executive Officer of the Corporation
Director since 1997
Mr. Crotty, 45, has served as Chairman and Chief Executive Officer of the
Corporation since , 1997. Immediately prior to the
Distributions, Mr. Crotty was Chairman and Chief Executive Officer of the
Corporation's Information Services Group. From December 1995 to ,
1997 he served as a Senior Vice President of ITT and Chairman of ITT World
Directories. From October 1994 to December 1995, he was a Senior Vice President
of Old ITT. From October 1993 to December 1995, he was also President and Chief
Operating Officer of ITT Consumer Financial Corporation. From February 1992
until September 1993, he was a Vice President of Old ITT.
ARTHUR HARTMAN
Principal occupation --
Senior Consultant to APCO Associates
Director since 1997
Mr. Hartman, 71, has been Senior Consultant to APCO Associates, Washington,
D.C., since 1989. Previously, he was the U.S. Ambassador to the former Union of
Soviet Socialist Republics and France. He is
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<PAGE> 17
a director of the Dreyfus Fund, The Hartford Financial Services Group, Inc.,
Lawter International Inc. and Ford Meter Box Co., Inc. He is also Chairman of
the First NIS Regional Fund-Barings/ING. Mr. Hartman is the former President of
the Board of Overseers of Harvard University, and he is a member of a number of
foundation boards and advisory councils.
EDWARD C. MEYER
Principal occupation --
Chairman of Mitretek Systems,
Professional and Technical Services Provider
Director since 1995
(Director of Old ITT 1986-1995)
General Meyer, 68, retired in 1983 as Chief of Staff of the United States Army.
He is a director of FMC Corporation and its joint venture company in Turkey,
Savunma Sanayii A.S., Aegon USA, the Brown Group and GRC International. General
Meyer is also a director of Destinations and ITT Industries, Inc. He is a
managing partner of Cilluffo Associates Limited Partnership, which owns
approximately 20% of GRC International.
H. PATRICK SWYGERT
Principal occupation --
President of Howard University
Director since 1997
Mr. Swygert, 54, has been the President of Howard University, Washington, D.C.,
since August 1995. Prior to that, he was President of the University of Albany,
State University of New York, since 1990. Mr. Swygert received his undergraduate
and law degrees from Howard University, has been a visiting professor and
lecturer abroad and is the author of numerous articles and publications on
higher education and the law. He is a member of the Board of Directors of The
Hartford Financial Services Group, Inc., Hartford Life, Inc. and the Victory
Funds, Cleveland, Ohio. Mr. Swygert also is Chairman of the Washington, D.C.
area Consortium of Colleges & Universities, a trustee of the Institute of Public
Administration and a member of the Commission on Women in Higher Education and
the Capital District Martin Luther King, Jr. Commission.
MARGITA E. WHITE
Principal occupation --
President of the Association
for Maximum Service
Television, Inc.,
Television Trade Association
Director since 1995
(Director of Old ITT 1980-1995)
Mrs. White, 60, has been President of the Association for Maximum Service
Television, Inc. since 1987. She served in the United States federal government
as a member of the Federal Communications Commission and as a Director of the
White House Office of Communications, Assistant Press Secretary to President
Ford, and Assistant Director of the United States Information Agency. She is a
director of Destinations, ESI, The Growth Fund of Washington, Leitch Technology
Corp. and Washington Mutual Investors Fund and a trustee of Mitretek Systems.
THE BOARD RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF EACH OF THE ABOVE
NOMINEES AS DIRECTORS OF THE CORPORATION.
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<PAGE> 18
ITEM NO. 2
PROPOSED ISSUANCE IN CONNECTION WITH STRATEGIC INVESTMENT BY
AN AFFILIATE OF CLAYTON, DUBILIER & RICE, INC.
Stockholders of the Corporation are being asked to approve the Proposed
Issuance in accordance with the rules of the NYSE, on which the Common Stock is
listed. Under the rules of the NYSE, because the Proposed Issuance involves
issuance of securities representing more than 20% of the voting power
outstanding prior to the issuance, such issuance requires the approval of a
majority of the votes cast on the proposal at the Annual Meeting, provided that
the total vote cast represents a majority in voting power of the Corporation's
stockholders entitled to vote thereon.
The following is a summary of the principal terms and conditions of the
Investment Agreement, pursuant to which the Strategic Investment will be made.
This description is qualified in its entirety by reference to the full text of
the Investment Agreement (a copy of which is attached hereto as Appendix B). In
addition, the pro forma consolidated financial statements contained in Appendix
A show the effects of the consummation of the Strategic Investment.
BOARD OF DIRECTORS' RECOMMENDATION
The Board of Directors has reviewed and considered the terms of the
Strategic Investment. On July 15, 1997, the Board of Directors unanimously
approved the terms of the Strategic Investment and the Investment Agreement. The
Board of Directors approved the terms of the Strategic Investment based on a
number of reasons, including: (i) the Strategic Investment will provide the
Corporation's telephone directories publishing businesses with the strong
sponsorship and expertise of CD&R, which has a history of successfully building
the businesses in which the funds it manages invest and (ii) the sale of Common
Stock and Warrants to CDRV pursuant to the Strategic Investment will enhance the
capital structure of the Corporation by allowing the Corporation to repay
indebtedness incurred in connection with the Comprehensive Plan with the
proceeds of additional equity of the Corporation.
DESCRIPTION OF THE PRINCIPAL TERMS OF THE INVESTMENT AGREEMENT AND RELATED
AGREEMENTS
Issuance and Sale of Common Stock and Warrants; Certain Fees. Pursuant to
the Investment Agreement, subject to certain conditions described below, CDRV
will purchase for an aggregate purchase price of $225 million: (i) shares of
Common Stock representing 32.9% of the outstanding shares of Common Stock as of
the Closing Date (giving effect to the issuance of such shares and assuming the
exercise of all employee stock options outstanding as of the Closing Date) and
(ii) Warrants representing the right to purchase 0.78 shares of Common Stock for
each share purchased by CDRV on the Closing Date (subject to anti-dilution
adjustment as described below) at an exercise price equal to 150% of the per
share purchase price paid on the Closing Date (subject to adjustment). Assuming
the exercise of the Warrants on the Closing Date, CDRV would own approximately
46.6% of the outstanding shares of Common Stock on the Closing Date.
Pursuant to the Investment Agreement, the Corporation also will pay CD&R a
$12 million fee in respect of the transaction and reimburse CD&R for up to $4
million in respect of certain fees and expenses upon the consummation of the
Strategic Investment.
Corporate Governance. The Investment Agreement provides that following the
consummation of the Strategic Investment, the Board of Directors will be
comprised of eleven members, consisting initially of the six directors elected
at the Annual Meeting (the "Non-Investor Directors") and five members designated
by CDRV (the "Investor Directors"). Thereafter, the Non-Investor Director
members of the Corporate Governance Committee will nominate for election by the
stockholders six candidates to serve as Non-Investor Directors and the Investor
Director members of the Corporate Governance Committee will nominate for
election by the stockholders five candidates to serve as Investor Directors, of
which no more than three nominees may be employees of CD&R. CDRV, through the
Investor Directors, has the right to nominate five directors as long as its
beneficial ownership (calculated as if the Warrants had been exercised) equals
or exceeds 35% of the outstanding Common Stock. CDRV will have the right to
nominate four directors, if its beneficial ownership is less than 35% but equals
or exceeds 25%; three directors, if its beneficial ownership is
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<PAGE> 19
less than 25% but equals or exceeds 10%; and two directors, if its beneficial
ownership is less than 10% but equals or exceeds 5%.
The Investment Agreement also provides for the establishment of certain
committees of the Board of Directors (the "Board Committees") and the required
representation thereon of both Investor and Non-Investor Directors. These Board
Committees include: (i) an Executive Committee to be composed of two Investor
and two Non-Investor Directors and chaired by an Investor Director; (ii) a
Compensation Committee to be composed of two Investor and two Non-Investor
Directors and chaired by an Investor Director; (iii) an Audit Committee to be
composed of two Investor and two Non-Investor Directors and chaired by a
Non-Investor Director; and (iv) a Corporate Governance Committee to be composed
of two Investor and three Non-Investor Directors and chaired by a Non-Investor
Director.
In addition, the Investment Agreement provides that the affirmative
approval of two-thirds of the Board of Directors (the "Super-Majority Voting
Requirements") is required prior to effecting: (i) equity issuances (other than
a specified amount pursuant to employee plans); (ii) mergers, consolidations or
other business combinations; (iii) the sale, lease, transfer or other
disposition of all or substantially all of the assets of the Corporation; (iv)
any major recapitalization; (v) any dissolution or partial liquidation of the
Corporation; or (vi) any modification to the Corporation's Amended and Restated
Articles of Incorporation or the By-laws that is inconsistent with CDRV's rights
under the Investment Agreement.
The corporate governance provisions of the Investment Agreement described
above survive until the earlier of: (i) the fifth anniversary of the Closing
Date and (ii) the date on which CDRV beneficially owns in excess of 50% of the
total voting power of the Corporation.
Subscription Rights. The Investment Agreement grants CDRV certain limited
rights to maintain its percentage ownership interest in the Corporation's equity
securities by requiring the Corporation to offer CDRV the right to purchase, on
the same terms as proposed for other purchasers, its pro rata share of certain
new equity securities offered for cash by the Corporation. CDRV's subscription
rights do not apply to equity securities issued: (i) to officers, directors or
employees pursuant to any existing employee stock offerings, plans or
arrangements or as approved by a majority of the Investor Directors; (ii) in
connection with an acquisition transaction; (iii) in registered public
offerings; (iv) in connection with any financing transaction in which sales or
resales are effected through Rule 144A or Regulation S under the Securities Act
of 1933, as amended (the "Securities Act"); or (v) sales to CDRV or its
affiliates.
Standstill Provisions. Under the Investment Agreement, CDRV and its
affiliates may not, prior to the fifth anniversary of the Closing Date, increase
the aggregate proportion of their beneficial ownership of the total voting power
of the Corporation, if such increase would reasonably be expected to result in
the Distributions becoming taxable to any of the Corporation, Destinations or
ESI, other than in connection with a tender offer, merger, sale or similar
transaction involving the Corporation in which all holders of Common Stock have
the opportunity to receive the same consideration (a "Buyout Transaction") that
(x) has been approved by a majority of the Non-Investor Directors and (y) occurs
following the second anniversary of the Closing Date; and provided that CDRV
delivers to the Corporation an opinion of a nationally recognized tax counsel,
which opinion is reasonably satisfactory to the Corporation, to the effect that
such Buyout Transaction will not cause either of the Distributions to result in
recognition of taxable gain to the Corporation, Destinations or ESI. Similarly,
other than in connection with a Buyout Transaction or as approved by a majority
of Non-Investor Directors, CDRV may not, prior to the fifth anniversary of the
Closing Date: (i) contrary to the Board of Directors, solicit proxies, seek to
influence any person with respect to voting the shares of the Common Stock, or
initiate, propose or otherwise solicit stockholder proposals; (ii) deposit
voting securities of the Corporation into any voting trust or otherwise become a
"person" within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"); (iii) seek to control the
Corporation's Board of Directors; or (iv) make a public request to the
Corporation to amend or waive any of the provisions of the Investment Agreement,
including the foregoing standstill provisions. Each of the foregoing
restrictions expires on the date on which CDRV beneficially owns equity
securities representing in excess of 50% of the Corporation's total voting
power.
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<PAGE> 20
Restrictions on Transfer. The Investment Agreement prohibits CDRV from
transferring its shares of Common Stock prior to the fifth anniversary of the
Closing Date without the approval of a majority of the Non-Investor Directors,
except: (i) pursuant to a registered underwritten public offering intended to
achieve a broad distribution; (ii) in accordance with the volume and manner of
sale restrictions of Rule 144 of the Securities Act; (iii) in an exempt
transaction to a person who does not beneficially own more than 3% of the
outstanding Common Stock or to a registered investment company; or (iv) in
connection with a Buyout Transaction. The foregoing restrictions expire on the
date on which CDRV beneficially owns equity securities representing in excess of
50% of the Corporation's total voting power of the Corporation.
Repurchase Restrictions. Until after the second anniversary of the later
of the Distributions, the Corporation is prohibited from repurchasing any
outstanding Common Stock. In addition, until after the fifth anniversary of the
later of the Distributions, the Corporation may not purchase any outstanding
Common Stock without obtaining an opinion of a nationally recognized tax counsel
to the effect that the purchase of Common Stock will not result in recognition
of taxable gain to the Corporation, Destinations or ESI.
Registration Rights. Pursuant to a registration rights agreement by and
between CDRV and the Corporation (the "Registration Rights Agreement"), which
will be entered into upon the consummation of the Strategic Investment, the
Corporation will effect up to four separate registrations (each a "Demand
Registration") of (i) the shares of Common Stock to be purchased by CDRV on the
Closing Date, upon the exercise of the Warrants or as otherwise permitted by the
Investment Agreement and (ii) the Warrants (such shares of Common Stock and
Warrants, the "Registrable Securities"), upon the request of CDRV or any
successive legal holder of such shares (each such party or parties for purposes
of this section, a "Holder"). The Corporation has also agreed to grant Holders
of Registrable Securities certain "piggy-back" rights, which would allow Holders
in certain instances to request inclusion of their Registrable Securities in
registrations of Common Stock effected by the Corporation.
Under the Registration Rights Agreement, the Corporation will agree to pay
registration fees and expenses and to provide customary indemnities against
certain liabilities, including liabilities under the Securities Act.
Conditions to the Strategic Investment. CDRV's obligation to consummate
the Strategic Investment is subject to the satisfaction or waiver of the
following conditions, among others: (i) approval of the Proposed Issuance by the
stockholders; (ii) the absence of any statute, order, decree or injunction
preventing the consummation of the transactions contemplated by the Investment
Agreement; (iii) the listing of the shares of Common Stock acquired by CDRV on
the NYSE; (iv) the accuracy of the Corporation's representations and warranties
in the Investment Agreement; (v) the execution of agreements effecting the
Distributions and the Strategic Investment (the "Reorganization Agreements") and
certain indemnity agreements in a form satisfactory to CDRV; (vi) performance by
the Corporation of its obligations under the Investment Agreement; (vii) the
execution of the Registration Rights Agreement in a form satisfactory to CDRV
(see "-- Registration Rights") and of a consulting agreement with CD&R in a form
satisfactory to CDRV (see "-- CD&R Consulting Agreement"); (viii) the assumption
by Destinations of certain indemnification obligations of the Corporation under
Article XI of the Investment Agreement; (ix) a debt capital structure reflecting
total indebtedness of the Corporation not exceeding $1,056 million on a pro
forma basis as though the Closing Date had occurred on September 30, 1997; (x)
amendment of the By-laws as necessary to permit CDRV to exercise its voting
rights in respect of the Common Stock and the Warrants to be acquired pursuant
to and as permitted by the Investment Agreement (see "Item No. 3 -- Amendment to
the Corporation's Amended and Restated By-laws in Connection with the Strategic
Investment"); (xi) the absence of litigation that would reasonably be expected
to have a material adverse effect on the Corporation and its subsidiaries; and
(xii) the absence of any event, change or development since March 31, 1997,
which has had or is reasonably likely to have a material adverse effect on the
Corporation and its subsidiaries.
The Corporation's obligation to consummate the Strategic Investment is
subject to the satisfaction or waiver of the conditions identified in clauses
(i), (ii) and (iii) of the preceding paragraph, as well as (a) the accuracy of
CDRV's representations and warranties in the Investment Agreement and (b) the
execution of the Registration Rights Agreement in a form satisfactory to the
Corporation.
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Termination. The Investment Agreement may be terminated at any time prior
to the Closing Date by mutual written consent or by either party (i) after
January 15, 1998, (ii) if the conditions to a given party's obligations to close
become impossible to fulfill or (iii) if a party fails to perform or breaches
any material obligations under the Investment Agreement and such defaulting
party does not cure such performance or breach within 10 days of written notice
thereof.
The Investment Agreement may be terminated at any time prior to the Closing
Date by CDRV for certain reasons, including: (i) in the event that the Board of
Directors (A) withdraws or modifies its recommendation of the Strategic
Investment, (B) approves a transaction to be consummated following the
Distributions involving the sale of a substantial amount of the assets of the
Corporation or the purchase of five percent or more of the equity or total
voting power of the Corporation (a "Directories Transaction Proposal") or (C)
publicly announces its decision not to consummate the Distributions, enters an
agreement for a transaction involving the sale of all or substantially all of
the assets of, or 50% or more of the voting securities of, the Corporation or
which would preclude the consummation of the Distributions (an "Alternative
Company Proposal"); (ii) if the stockholders of the Corporation do not approve
the Proposed Issuance at a meeting duly held for such purpose; (iii) if CDRV
determines that the Reorganization Agreements are inconsistent with its good
faith understanding of the transactions contemplated by the Investment Agreement
or if the Corporation makes any material amendment to any such Reorganization
Agreements without CDRV's approval thereof and which amendment CDRV in its good
faith judgment determines is materially adverse to the Strategic Investment;
(iv) if prior to the execution of all commitment letters for the new financing
for the Corporation, CDRV determines in good faith exercise of its reasonable
judgment based on its review thereof not to proceed with the Strategic
Investment; or (v) if CDRV objects to any change or addition to the schedules to
the Investment Agreement made by the Corporation after July 15, 1997.
The Investment Agreement may be terminated by the Corporation, if: (i) the
Corporation enters into an agreement for a superior Directories Transaction
Proposal involving the sale of 20% or more of the total voting power of the
Corporation following the Distributions or a substantial amount of the assets of
the Corporation following the Distributions (a "Superior Directories Proposal")
or (ii) the Board of Directors determines not to effect the Distributions and,
in either case, the Corporation pays the termination fees and expenses described
below.
Termination Fees. The Investment Agreement provides that the Corporation
will reimburse CDRV for up to $4 million of expenses (the "CDRV Expenses") and
pay a termination fee of $25 million (the "Termination Fee") if: (i) the
Corporation terminates the Investment Agreement in certain circumstances or (ii)
if CDRV terminates the Investment Agreement under certain conditions, including
without limitation, termination by CDRV due to (A) the withdrawal or
modification by the Board of Directors of its recommendation that the
stockholders approve the Proposed Issuance or the public announcement of its
determination not to effect the Distributions, (B) the approval or
recommendation by the Board of Directors of a Directories Transaction Proposal
or the execution of an agreement with respect to a Directories Transaction
Proposal or an Alternative Company Proposal, (C) the amendment of any
Reorganization Agreement without CDRV's consent which CDRV determines in good
faith to have a material adverse effect on the Strategic Investment, (D) CDRV's
determination that the Reorganization Agreements proposed by the Corporation are
inconsistent with CDRV's good faith understanding in the transactions
contemplated by the Investment Agreement, or (E) upon notice prior to the
execution of commitment letters in respect of the refinancing transactions
contemplated in respect of the Corporation, a determination by CDRV made in the
good faith exercise of its reasonable judgment not to proceed with the Strategic
Investment. If the Corporation or CDRV terminates the Investment Agreement
because the stockholders do not approve the Proposed Issuance and within twelve
months of such termination the Corporation enters into an agreement with respect
to an Alternative Company Proposal or a Directories Transaction Proposal, the
Corporation will pay the CDRV Expenses and Termination Fee; provided, however,
that if such Alternative Company Proposal agreement is with Hilton Hotels
Corporation, the Termination Fee payable shall be $15 million. If the closing of
the Strategic Investment has not occurred prior to January 15, 1998 because of a
material breach by the Corporation of any representation, warranty or covenant
under the Investment Agreement, the Termination
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Fee payable shall be $15 million. In addition, if the closing does not occur for
certain other reasons, the Corporation will reimburse CDRV for the CDRV
Expenses.
The Warrants. In respect of the Warrants, CDRV has the right, subject to
certain vesting requirements, to purchase 0.78 shares of Common Stock for each
share of Common Stock purchased by CDRV on the Closing Date, subject to the
anti-dilution protections described below. Assuming the exercise of the Warrants
on the Closing Date, CDRV would own 46.6% of the outstanding Common Stock on
such date. The exercise price of the Warrants is equal to 150% of the per share
purchase price of the Common Stock paid by CDRV on the Closing Date (subject to
adjustment). The Warrants have a term of ten years, and 20% of the Warrants
become exercisable per year over five years. During the first five years of the
term of the Warrants, the number of shares for which the Warrants are
exercisable is limited under certain circumstances. The Corporation has agreed,
however, not to repurchase shares of Common Stock from the public such that such
limitations would impair the ability of the holder of the Warrants to exercise
the Warrants. Upon a change of control of the Corporation, holders of the
Warrants will receive consideration equal to the fair market value of the
Warrants, after giving effect to the change of control as determined in good
faith by the Board of Directors. Upon vesting, the Warrants may be exercised on
a cashless basis. The Warrants provide for customary anti-dilution protection so
as to preserve the percentage interest in the Corporation represented by the
Warrants. The Warrants are transferable subject to the transfer restrictions
applicable to the Common Stock. (See "-- Transfer Restrictions"). The holder of
the Warrants is entitled to registration rights in respect of the Warrants or
any shares of Common Stock and any other security received upon exercise or in
respect of the Warrants on the terms provided for in the Registration Rights
Agreement. (See "-- Registration Rights"). In addition, the Corporation has
agreed to list on the NYSE any shares of Common Stock or other securities
received upon exercise or in respect of the Warrants and, upon the request of
CDRV, the Warrants.
CD&R CONSULTING AGREEMENT
Pursuant to a consulting agreement to be entered into between CD&R and the
Corporation in connection with the consummation of the Strategic Investment,
CD&R will receive an annual fee of $500,000 for providing management and
financial consulting services to the Corporation. Such services may include
assisting the Corporation to maintain and develop effective banking, legal and
other business relationships and assisting management in developing and
implementing strategies for improving the operational, marketing and financial
performance of the Corporation. The consulting agreement will also contain
certain other provisions as agreed upon by the parties, including indemnities
against certain liabilities.
INFORMATION CONCERNING CDRV AND CD&R; SOURCE OF FUNDS
CDRV is a Delaware limited liability company, the sole member of which is
CD&R Fund V, a Cayman Islands exempted limited partnership, which is a private
investment fund managed by CD&R. Amounts contributed to CD&R Fund V by its
limited partners are invested at the discretion of the general partner in equity
or equity-linked securities of entities formed to effect leveraged acquisition
transactions in the equity of corporations where the infusion of capital,
coupled with the provision of managerial assistance by CD&R, can be expected to
generate returns on investments comparable to returns historically achieved in
leveraged acquisition transactions. The managing general partner of CD&R Fund V
is CD&R Associates V Limited Partnership, a Cayman Islands exempted limited
partnership ("Associates V"). CD&R Fund V has committed to purchase up to $225
million of member interests in CDRV for the purpose of funding the Strategic
Investment.
CDRV NOMINEES TO THE BOARD OF DIRECTORS
CDRV has informed the Corporation that it intends to nominate the following
three individuals as initial Investor Directors. Each of these individuals will
be elected to the Board of Directors effective as of the closing of the
Strategic Investment. Following the closing of the Strategic Investment, CDRV
will identify and nominate two additional Investor Directors who will be elected
to the Board of Directors, neither of whom will be employees of CD&R or CDRV.
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EDMUND M. CARPENTER
Principal Occupation --
Professional Employee of CD&R
Mr. Carpenter, 55, has been a professional employee of CD&R since February 1997
and also served as a consultant of CD&R prior to such time. From 1988 to 1995,
Mr. Carpenter was chairman and chief executive officer of General Signal
Corporation. Prior to 1988, Mr. Carpenter served with Old ITT, including as
president and chief operating officer from 1985 and as executive vice president
from 1983 to 1985. Mr. Carpenter was also senior vice president and group
executive of ITT Automotive Products Worldwide from 1981 to 1983. Mr. Carpenter
is a director of Campbell Soup Company, Dana Corporation and Texaco Corporation.
Mr. Carpenter is a limited partner of Associates V.
BRIAN D. FINN
Principal Occupation --
Principal of CD&R
Mr. Finn, 37, has been a principal of CD&R since May 1997. Previously, Mr. Finn
was a managing director and co-head of mergers & acquisitions at Credit Suisse
First Boston. Mr. Finn is a director of Nu-kote Holding, Inc. and Nu-kote
International, Inc. Mr. Finn is a director of CD&R and a limited partner of
Associates V.
CHARLES P. PIEPER
Principal Occupation --
Principal of CD&R
Mr. Pieper, 51, has been a principal of CD&R since March 1997. Previously, Mr.
Pieper was president and chief executive officer of GE Lighting Europe and GE
Japan, Korea, Taiwan, GE Medical Systems Asia, Yokogawa Medical Systems and GE
Trading Co. Mr. Pieper is a director of Alliant Foodservice, Inc., and its
parent, CDRF Holding, Inc., a corporation in which an affiliate of CD&R Fund V,
The Clayton & Dubilier Private Equity Fund IV Limited Partnership, has invested.
Mr. Pieper is a director of CD&R and a limited partner of Associates V.
USE OF PROCEEDS
The proceeds of the Strategic Investment will be used by the Corporation to
repay approximately $225 million of indebtedness under the Senior Facility. The
Corporation incurred this indebtedness in connection with the consummation of
the Comprehensive Plan.
CERTAIN CONSIDERATIONS
Stockholders should consider the following in evaluating the Proposed
Issuance:
Dilution of Equity Ownership. If the Proposed Issuance is approved and the
Strategic Investment is consummated, the relative proportionate voting interest
of current stockholders will be reduced by virtue of the issuance of additional
shares of Common Stock and thereafter will be further reduced if additional
shares of Common Stock are issued pursuant to any exercise of Warrants.
Concentration of Ownership. CDRV's concentration of ownership of Common
Stock will mean that CDRV may have the ability to influence the Corporation's
actions to the extent that such actions require stockholder approval. CDRV will
have the power to designate five of eleven members of the Board of Directors and
will have equal representation on Board Committees. In addition, the
Super-Majority Voting Requirements grant CDRV an effective veto right over
certain major decisions of the Corporation. See "Description of Principal Terms
of the Investment Agreement and Related Agreements -- Corporate Governance."
Failure to Approve the Strategic Investment. In connection with the
consummation of the Comprehensive Plan, the Corporation incurred substantial
indebtedness. The level of the Corporation's indebtedness could have important
consequences, including the following: (i) the ability of the Corporation to
obtain additional financing on favorable terms may be impaired in the future;
(ii) a substantial portion of the
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Corporation's cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
to the Corporation for other purposes; (iii) the Corporation may be more
leveraged than some of its competitors, which may place it at a disadvantage;
and (iv) the Corporation's substantial degree of leverage may hinder its ability
to adjust rapidly to changing market conditions and could make it more
vulnerable in the event of a downturn in general economic conditions or in its
business.
As of June 30, 1997, on a pro forma basis after giving effect to the
Comprehensive Plan and the consummation of the related financings, the
Corporation would have had an aggregate of $1,275 million of outstanding
indebtedness. Approximately $225 million in principal amount of such
indebtedness would have been outstanding under the Senior Facility. This
indebtedness is expected to carry a relatively high interest rate, which may
increase over time, and, in the event such indebtedness is not repaid prior to
February 1, 1998, holders of such indebtedness may exercise warrants to purchase
shares of Common Stock. The Corporation expects to use the proceeds of the
Strategic Investment to repay the indebtedness incurred under the Senior
Facility, which will reduce the Corporation's outstanding long-term indebtedness
to approximately $1,050 million and will correspondingly reduce debt service
obligations. In the event the Strategic Investment is not consummated, such
indebtedness is expected to remain outstanding, unless otherwise refinanced.
There can be no assurance that the Senior Facility could be refinanced or that
the terms on which it could be refinanced would be favorable to the Corporation.
In addition, as noted above, if the Investment Agreement is terminated or
the Strategic Investment is not consummated, then, under certain circumstances,
the Corporation will be obligated to pay to CDRV certain transaction fees and
expenses of as much as $29 million.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE STRATEGIC
INVESTMENT AND RECOMMENDS THAT YOU VOTE FOR THE PROPOSED ISSUANCE.
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ITEM NO. 3
AMENDMENT TO THE CORPORATION'S
AMENDED AND RESTATED BY-LAWS
IN CONNECTION WITH THE STRATEGIC INVESTMENT
The stockholders are being asked to approve a proposed amendment to the
definition of "independent director" in Section 2.8(b) of the By-laws as it
relates to the composition of the Compensation Committee of the Board of
Directors. The proposed amendment (the "Proposed By-law Amendment") eliminates
from the definition of "independent director" set forth in such Section 2.8(b)
the requirement that such a director "is not, and is not affiliated with a
company or firm that is an advisor or consultant, to the Corporation." Pursuant
to its terms, the By-law set forth in Section 2.8(b) governing the composition
of Compensation Committee may not be amended without approval of a majority of
the voting power of the stockholders present in person or by proxy and entitled
to vote at a meeting at which a quorum is present.
Pursuant to the Investment Agreement, the Corporation and CDRV have agreed
that the Compensation Committee shall have four members and that CDRV will have
the right to designate two members. Because the Corporation will enter into a
consulting agreement with CD&R in connection with the Strategic Investment,
which would make CD&R affiliates ineligible to serve on the Compensation
Committee under the current By-laws, the Proposed By-law Amendment is necessary
to permit CDRV to designate employees and affiliates of CD&R as members of the
Compensation Committee in accordance with the Investment Agreement. See "Item
No. 2 -- Proposed Issuance in Connection with Strategic Investment by an
Affiliate of Clayton, Dubilier & Rice, Inc. -- Description of the Principal
Terms of the Investment Agreement and Related Agreements -- Corporate
Governance." The effectiveness of the Proposed By-law Amendment is conditioned
on stockholder approval of the Proposed Issuance.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSED BY-LAW
AMENDMENT.
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ITEM NO. 4
AMENDMENT TO THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION TO CHANGE THE
CORPORATION'S NAME TO "ITT INFORMATION SERVICES, INC." AND CERTAIN OTHER
AMENDMENTS TO THE CORPORATION'S RESTATED ARTICLES OF INCORPORATION
The stockholders are being asked to approve proposed amendments to the
Corporation's Restated Articles of Incorporation to change the name of the
Corporation to "ITT Information Services, Inc." and to delete certain provisions
applicable to ITT's gaming businesses. The text of the proposed amendments is
set forth in Appendix C. The Board of Directors believes these amendments are
desirable to reflect that, since the Distributions, the Corporation's principal
businesses are now its telephone directory publishing businesses. In connection
with the Distributions, the Corporation and Destinations entered into a
Distribution Agreement which provides, among other things, that the Corporation
will seek approval of its stockholders to change its name from "ITT Corporation"
to "ITT Information Services, Inc." at the first annual meeting of the
Corporation's stockholders following the Distributions.
In addition to the name change, because the Corporation no longer conducts
any gaming businesses, the stockholders are also being asked to approve an
amendment to the Corporation's Restated Articles of Incorporation that would
eliminate Article NINTH which contains provisions regarding ITT's former gaming
businesses.
If both these amendments are approved by the stockholders, the amendment
will be effected by the prompt filing in Nevada of a certificate of amendment to
the Corporation's Restated Articles of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT TO THE
CORPORATION'S RESTATED ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE
CORPORATION TO "ITT INFORMATION SERVICES, INC." AND TO DELETE ARTICLE NINTH
THEREOF.
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ITEM NO. 5
APPROVAL OF ITT INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE PLAN
The Board of Directors proposes that the Corporation's stockholders approve
the adoption of the ITT Information Services, Inc. 1997 Long-Term Incentive Plan
(the "LTIP"). The Board of Directors has adopted the LTIP, subject to approval
of the stockholders of the Corporation. The Board believes that it is
appropriate, in light of the changes in the Corporation's businesses and the
need to provide incentives for management, for the Corporation to adopt a new
stock plan.
Options granted prior to the Distributions to current executive officers or
employees of the Corporation under the 1995 ITT Corporation Incentive Stock Plan
will remain in effect, subject to certain adjustments. Upon approval by the
stockholders of the LTIP, no further options will be granted under the 1995 ITT
Corporation Incentive Stock Plan.
The following is a summary of the LTIP. This description is a fair and
complete summary of the proposed plan; however, it is qualified in its entirety
by reference to the full text of the LTIP, which is attached to this Proxy
Statement as Appendix D.
GENERAL
Purpose. The LTIP offers eligible employees the opportunity to purchase
shares of Common Stock or to receive certain other forms of incentive
compensation. The LTIP is intended to encourage employees to acquire an equity
interest in the Corporation and to afford such individuals the opportunity to
receive compensation based on the Corporation's performance, both of which
objectives will create a stronger incentive for such individuals to expend
maximum effort towards the growth and success of the Corporation and its
subsidiaries. Funds received by the Corporation in respect of rights exercised
under the LTIP may be used for any general corporate purpose.
Eligibility. All employees of the Corporation and certain subsidiaries are
eligible to participate in the LTIP. As of , 1997, there were
employees eligible to receive grants under this LTIP.
Shares Available Under the LTIP. The LTIP authorizes the issuance of up to
shares of Common Stock. The number of shares issuable under the LTIP will
be adjusted for stock dividends, stock splits, reclassifications and other
changes affecting the Common Stock. If any option granted under the LTIP expires
or terminates prior to exercise in full, the shares subject to that option will
be available for future grants thereunder. The maximum number of shares that may
be acquired under the LTIP by any individual is
shares, subject to adjustment for stock dividends, stock splits,
reclassifications, corporate transactions, or other changes affecting the Common
Stock. Because the LTIP provides for discretionary grants of options, the
specific amounts to be granted to particular persons cannot be determined in
advance.
Administration. The LTIP is administered by the Board of Directors or the
Compensation Committee of the Board of Directors (the "Administrator"), unless
the Board of Directors selects another committee or subcommittee of the Board.
The Administrator has the authority and discretion: (i) to select employees to
participate in the LTIP; (ii) to grant options to employees under the LTIP;
(iii) to specify the terms and conditions of options granted to employees
(within the limitations of the LTIP); and (iv) to otherwise interpret and
construe the terms of the LTIP and any agreements governing options granted
thereunder. In addition, the Administrator may delegate its authority, including
the authority to grant awards except to officers subject to Section 16(a) of the
Exchange Act.
OPTIONS GRANTED UNDER THE LTIP
General. Options granted under the LTIP will ordinarily be evidenced by a
written agreement setting forth the terms and conditions governing the option.
The Administrator has broad discretion to determine the timing, amount,
exercisability and other terms and conditions of options granted to employees.
Options Granted to Employees. Both incentive stock options and
non-qualified stock options are available for employees under the LTIP. For
incentive stock options, the option price will be not less than fair
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market value of a share of Common Stock on the date the option is granted.
However, if the employee receiving the option is a more than 10% owner of Common
Stock, the option price will not be less than the greater of par value or 110%
of the fair market value of a share of Common Stock on the date the option is
granted. For non-qualified options, the option price will be not less than the
fair market value of a share of Common Stock on the date of grant. The closing
price of a share of Common Stock, as reported on the NYSE on ,
1997 was $ .
Exercise. Options granted under the LTIP to employees may be exercised by
delivery to the Administrator of a written notice of exercise. The notice must
specify the number of shares being exercised and must be accompanied by payment
in full of the option price for the shares being exercised (unless the
optionee's written notice of exercise directs that the stock certificates for
the shares issued upon the exercise be delivered to a licensed broker acceptable
to the Corporation as the agent for the optionee and at the time the stock
certificates are delivered to the broker, the broker tenders to the Corporation
cash or cash equivalents acceptable to the Corporation equal to the exercise
price).
The option price may be paid as permitted by the option agreement which
includes: (i) in cash or certified check; (ii) by tendering shares of Common
Stock that the optionee has held for at least 6 months or acquired under an
option granted not less than 6 months prior and that will be valued at the fair
market value on the date of exercise; or (iii) any combination of these methods.
An optionee will not have any of the rights of a stockholder until payment in
full for the shares is received and a stock certificate is issued. In addition,
with respect to options granted to employees, options may be exercised by any
other method that the Administrator prescribes.
The Administrator may prescribe in the option agreement that the optionee
may elect to satisfy any federal, state, or local withholding tax requirements
by directing the Corporation to apply shares of Common Stock to which the
optionee is entitled as a result of the exercise of the option in order to
satisfy such withholding requirements.
Termination of Service. The Administrator has discretion to fix the period
in which options granted to employees may be exercised after termination of
employment.
Term of Options. Each option granted under the LTIP will terminate no
later than 10 years after the date the option is granted. However, options
intended to be incentive stock options granted to employees under the LTIP will
expire no later than five years after the date of the grant if the option is
granted to an employee who owns (or is deemed to own) more than 10% of the
outstanding Common Stock.
RESTRICTED STOCK
The Administrator can grant shares of Common Stock subject to restrictions
of its own selection ("Restricted Stock") that begin on the date of award and
lapse when the Administrator so specifies. The recipient of Restricted Stock
cannot transfer shares of Restricted Stock while such restrictions remain
applicable and will ordinarily forfeit the Restricted Stock if his employment
ends voluntarily during the restricted period and in some other circumstances.
The Administrator can designate that the restrictions will lapse in
installments, at once, or based only on the achievement of performance
objectives. The Administrator may require that shares of Restricted Stock be
held in a custodial account or that the recipient provide blank stock powers
with respect to such stock.
STOCK APPRECIATION RIGHTS
The Administrator can grant stock appreciation rights ("SARs") in addition
to or in lieu of other forms of compensation. Each SAR will entitle the
recipient to receive the excess, if any, of the fair market value of a share of
Common Stock on the date the SAR is exercised over the SAR's grant value. The
Administrator determines the grant value, and can set any value at least equal
to the fair market value of the Common Stock on the date of grant. The
Administrator can specify terms and conditions under which the recipient can
exercise the SAR (or under which the SAR will be automatically exercised). The
Administrator can also
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specify whether payments in satisfaction of a SAR will be in cash, Common Stock,
or a combination of these methods.
PERFORMANCE SHARES
The Administrator can also grant shares of Common Stock ("Performance
Shares") based on performance objectives achieved by the Corporation, a
subsidiary, or another business unit during a period determined by the
Administrator. The Administrator may revise objectives during a performance
period if there are significant changes in the Corporation during such period.
Each Performance Share will be equivalent to a share of Common Stock, and the
Administrator will determine whether payment will be made in actual shares of
Common Stock, in cash, or in a combination of each and whether it will be made
in a lump sum or annual installments. The performance objectives with respect to
any Performance Share award to any executive officer of the Corporation will be
based on one or more of the following criteria, as selected by the
Administrator: (i) earnings per share; (ii) total return to stockholders; (iii)
return on equity; (iv) operating revenues; (v) earnings before income taxes;
(vi) stock price; and (vii) improvements in debt to equity ratio. Performance
may be measured in relative or absolute terms, based on whatever periods the
Administrator specifies, and by reference to the performance of the Corporation,
a subsidiary, an affiliate, a division or unit of any of the foregoing or based
on performance relative to other companies. The maximum number of Performance
Shares that may be subject to award in a month period is shares, as
adjusted under the LTIP. To the extent necessary to qualify any Performance
Share award to any such executive officer as "other performance-based
compensation" for purposes of Section 162(m) of the Code, the Administrator will
be precluded from exercising any discretion otherwise available under the terms
of the LTIP.
APPROVAL AND AMENDMENT OF THE LTIP
The Board of Directors may amend or terminate the LTIP at any time and from
time to time; provided, however, that no amendment may, without the approval of
a majority of the stockholders, amend the provisions governing incentive stock
options other than as permitted under the Code. After the stockholders' initial
approval, the LTIP will only have to be presented to the stockholders for
additional approval with respect to the incentive stock options and only to the
extent necessary to preserve their tax treatment. The LTIP will terminate no
later than 10 years after its effective date.
TAX CONSEQUENCES
The following is a general summary of the federal income tax treatment of
incentive stock options and non-qualified stock options to be granted under the
LTIP based upon the current provisions of the Code and regulations issued
thereunder.
Incentive Stock Options. Incentive stock options granted to employees under
the LTIP are intended to meet the requirements of Section 422 of the Code. No
tax consequences result from the grant of the option. If an option holder
acquires stock upon the exercise, no income will be recognized by the option
holder for ordinary income tax purposes (although the difference between the
option exercise price and the fair market value of the stock subject to the
option may result in alternative minimum tax liability to the option holder) and
the Corporation will be allowed no deduction as a result of the exercise, if the
following conditions are met: (i) at all times during the period beginning with
the date of the granting of the option and ending on the day three months before
the date of such exercise, the option holder is an employee of the Corporation
or of a subsidiary; and (ii) the option holder makes no disposition of the stock
within two years from the date the option is granted nor within one year after
the stock is transferred to the option holder. In the event of a sale of such
stock by the option holder after compliance with these conditions, any gain
realized over the price paid for stock will ordinarily be treated as long-term
capital gain, and any loss will be treated as a long-term capital loss, in the
year of the sale.
If the option holder fails to comply with the employment or holding period
requirements discussed above, the option holder will recognize ordinary income
in an amount equal to the lesser of: (i) the difference between the fair market
value of the Common Stock received upon exercise and the option exercise price
or
23
<PAGE> 30
(ii) the excess of the amount realized upon such disposition over the exercise
price. If the option holder is treated as having received ordinary income
because of his failure to comply with either condition above, an equivalent
deduction will be allowed to the Corporation in the same year.
Nonqualified Stock Options. No tax consequences result from the grant of a
nonqualified stock option. An option holder who exercises a nonqualified stock
option with cash generally will realize compensation taxable as ordinary income
in an amount equal to the difference between the fair market value of the option
shares on the date of exercise and the option exercise price, and the
Corporation will be entitled to a deduction from income in the same amount. The
option holder's basis in such shares will be the fair market value of the shares
on the date exercised, and when the shares are disposed of, capital gain or
loss, either long-term or short-term, will be recognized depending on the
holding period of the shares.
NEW PLAN BENEFITS
No options or other awards have been granted under the LTIP. Since grants
under the LTIP are discretionary, it is not determinable what benefits, if any,
would have been paid to named executive officers, all current executive officers
as a group, and all employees as a group who are not executive officers if the
LTIP had been in effect for the 1996 calendar year.
STOCKHOLDER APPROVAL
Approval of the LTIP will require the affirmative vote of the holders of a
majority of the shares of the Common Stock present in person or by proxy at the
Annual Meeting. Failure of the stockholders to approve the LTIP will cause the
rescission of the LTIP, and any rights to purchase shares previously granted
pursuant to the LTIP will be void.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE ITT
INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE PLAN.
24
<PAGE> 31
ITEM NO. 6
RATIFICATION OF THE REAPPOINTMENT OF INDEPENDENT AUDITORS
In accordance with the recommendation of the Audit Committee, the Board of
Directors has reappointed Arthur Andersen LLP as independent auditors of the
Corporation for 1997, subject to ratification by the stockholders. If the
stockholders do not ratify the reappointment of Arthur Andersen LLP, the
selection of other independent auditors will be considered by the Audit
Committee and the Board of Directors.
Arthur Andersen LLP has served as independent auditors of the Corporation
and its predecessors and most of their respective subsidiaries for many years,
and its long-term knowledge of the Corporation has enabled it to carry out its
audits effectively and efficiently. In keeping with the established policy of
Arthur Andersen LLP, partners and employees of the firm engaged in auditing the
Corporation are periodically rotated, thus giving the Corporation the benefit of
new expertise and experience. Arthur Andersen LLP personnel regularly attend
meetings of the Audit Committee. Arthur Andersen LLP's fees for the 1996 audit
of ITT totaled approximately $2.3 million, of which $1.9 million related to
Destinations.
Representatives of Arthur Andersen LLP will attend the Annual Meeting, will
have the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR RATIFICATION OF THE
REAPPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT AUDITORS OF THE CORPORATION.
25
<PAGE> 32
ITEM NO. 7
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors has no
knowledge of any business which will be presented for consideration at the
Annual Meeting other than that described above. As to such other business, if
any, that may properly come before the Annual Meeting, the persons named as
proxies will vote in accordance with their judgment.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
Proposals submitted by stockholders for inclusion in next year's Proxy
Statement must be received by the Corporation no later than the close of
business on . Address your proposals to ITT Information Services, Inc.
or, if the proposed name change is not yet effective, ITT Corporation, Attn:
Victor M. Berger, Corporate Secretary, 1330 Avenue of the Americas, New York,
New York 10019-5490. Please note that proposals must comply with all of the
requirements of Rule 14a-8 under the Exchange Act as well as the requirements
set forth in the By-laws. A copy of the By-laws may be obtained from the
Corporate Secretary upon request.
ADDRESS OF CHAIRMAN
In addition to the matters described above, there will be an address by the
Corporation's Chairman and Chief Executive Officer at the Annual Meeting and a
general discussion period during which time stockholders will have an
opportunity to ask questions about the business and operations of the
Corporation.
SOLICITATION OF PROXIES
Proxies may be solicited by mail, advertisement, telephone or other methods
and in person. Solicitations may be made by directors, officers, investor
relations personnel and other employees of the Corporation, none of whom will
receive additional compensation for such solicitations.
The Corporation has retained Georgeson & Company, Inc. ("Georgeson") for
solicitation and advisory services in connection with the solicitation, for
which Georgeson is to receive a fee estimated at $ , together with
reimbursement for its reasonable out-of-pocket expenses and for payments made to
brokers and other nominees for their expenses in forwarding soliciting material.
Georgeson will distribute proxy materials to beneficial owners and solicit
proxies by personal interview, mail, telephone and telegram, and will request
brokerage houses and other custodians, nominees and fiduciaries to forward
soliciting material to the beneficial owners of the Common Stock held on
, 1997 by such person. The Corporation has also agreed to indemnify
Georgeson against certain liabilities and expenses. It is anticipated that
Georgeson will employ approximately persons to solicit stockholders for
the Annual Meeting.
All expenses of solicitation of proxies will be borne by the Corporation.
Costs incidental to the solicitations of proxies include expenditures for
printing, postage, legal, accounting, public relations, soliciting, advertising
and related expenses and are expected to be approximately $ in addition
to the fees of Georgeson described above (excluding the amount normally expended
by the Corporation for the solicitation of proxies at its annual meetings).
Total costs incurred to date for, in furtherance of, or in connection with these
solicitations of proxies are approximately $ .
By Order of the Board of Directors,
VICTOR M. BERGER
Senior Vice President, General
Counsel and Corporate Secretary
Dated: , 1997
26
<PAGE> 33
ADDITIONAL INFORMATION
The following sections provide certain historical information about ITT for
the fiscal year ended 1996, as required by applicable rules of the Securities
and Exchange Commission.
1996 BOARD OF DIRECTORS
During 1996, the following individuals served as directors: Bette B.
Anderson, Rand V. Araskog, Nolan D. Archibald, Robert A. Bowman, Robert A.
Burnett, Paul G. Kirk, Jr., Edward C. Meyer, Benjamin F. Payton, Vin Weber,
Margita E. White and Kendrick R. Wilson III. There were eight meetings of the
Board of Directors.
Director Compensation. In 1996 non-employee directors received: (i) a
$1,000 fee for each meeting of the Board of Directors; (ii) a $1,000 fee for
each Committee meeting attended; and (iii) an annual retainer fee of $48,000
payable solely in restricted shares of Common Stock under the 1996 Non-Employee
Directors Plan. Directors were reimbursed for travel expenses incurred on behalf
of ITT. Employee directors were not separately compensated for service on the
Board or any Committee of the Board. During 1996, 7,165 shares of Restricted
Stock were granted to non-employee directors under the 1996 Non-Employee
Directors Plan. Destinations has agreed to assume responsibility for any
obligations to directors under this plan relating to the period before the
Distributions, to the extent directors agree to surrender prior restricted share
grants.
Committees of the Board of Directors. During 1996, the Board of Directors
maintained, among other committees, standing Audit, Compensation and Personnel,
and Nominating Committees. Set forth below is information regarding these
Committees as they were constituted in 1996.
The Audit Committee recommended the selection of independent auditors for
ITT, confirmed the scope of audits to be performed by such auditors, reviewed
audit results and internal accounting and control procedures and policies, and
reviewed the fees paid to ITT's independent auditors. The Committee reviewed and
recommended approval of the audited financial statements of ITT and the annual
report to stockholders. It also reviewed the expense accounts of senior
executives. The Committee held five meetings during 1996. The members of the
Audit Committee were: Bette B. Anderson, Paul G. Kirk, Jr., Edward C. Meyer,
Benjamin F. Payton, Vin Weber and Kendrick R. Wilson III.
The Compensation and Personnel Committee, which was comprised entirely of
non-employee directors, oversaw the compensation and benefits of employees,
evaluated management performance and established executive compensation. In the
performance of its functions, the Committee had access to independent
compensation counsel. The Committee held seven meetings during 1996. The members
of the Compensation and Personnel Committee were: Bette B. Anderson, Nolan D.
Archibald, Robert A. Burnett, Paul G. Kirk, Jr., Edward C. Meyer and Margita E.
White.
The Nominating Committee made recommendations to the Board concerning the
organization, size and composition of the Board and its committees, proposed
nominees for election to the Board and its committees and considered the
qualifications, compensation and retirement of directors. The Committee held
three meetings during 1996. The members of the Nominating Committee were: Bette
B. Anderson, Nolan D. Archibald, Edward C. Meyer and Benjamin F. Payton.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Lazard Freres & Co. LLC ("Lazard Freres"), of which Mr. Kendrick R. Wilson
III is a Managing Director, performed various investment banking services for
ITT and its subsidiaries in 1996. Mr. Wilson receives a percentage of Lazard
Freres' income, including a percentage of any income from services for ITT. Mr.
Wilson is no longer a director of the Corporation.
The By-laws provide for mandatory indemnification of ITT directors and
officers (including payment of legal fees) to the fullest extent permitted by
applicable law. The By-laws also provide that ITT may maintain insurance to
indemnify its directors and officers against liabilities whether or not ITT
would be permitted to indemnify them. This type of insurance, as well as
policies under which ITT may be reimbursed for amounts
27
<PAGE> 34
paid in indemnification of its directors and officers, are in force. The
premiums thereon, which aggregate $1,164,755 for a twelve month period, were
paid by ITT. As authorized by the By-laws, ITT has entered into indemnification
agreements with its directors pursuant to which ITT agrees to indemnify them
against all expenses, liabilities or losses incurred by the directors in their
capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as
provided in the By-laws of ITT as in effect on the date of such agreement; and
(iii) in the event ITT does not maintain the aforementioned insurance or
comparable coverage, to the full extent provided in the applicable policies as
in effect on January 1, 1997 (ITT's obligations described in (ii) and (iii)
being subject to certain exceptions). Contractual rights under such
indemnification agreements are believed to provide the directors more protection
than the By-laws, which are subject to change.
EXECUTIVE COMPENSATION
Set forth below in this section is information regarding executive
compensation, pension and benefits for ITT's chief executive and its four most
highly compensated employees (the "Named ITT Executives") during 1996. Each of
the Named ITT Executives resigned from ITT effective as of ,
1997 upon the Distributions and became employees of Destinations. Except as
otherwise noted, all compensation and benefit arrangements for executive
officers described in this section have been assumed by Destinations. The tables
and other disclosure set forth below with respect to the Named ITT Executives is
provided to comply with applicable proxy disclosure requirements and should not
be deemed to reflect any policy or practices that will apply to the Current
Executives.
EXCERPTS FROM THE REPORT OF THE COMPENSATION AND PERSONNEL COMMITTEE FILED WITH
THE COMMISSION ON APRIL 30, 1997
The ITT executive compensation program is designed to attract, reward and
retain skilled executives and to provide incentives that vary depending upon the
attainment of short-term operating performance objectives and strategic
long-term performance goals. The major objective of the long-term incentive
program is to provide ITT executives with incentives directly linked to the
creation of stockholder value. The program overall is intended to be highly
leveraged so that when performance goals are exceeded, executives can earn
better than average compensation and, conversely, when such goals are not
achieved, compensation will be below competitive levels.
This report sets forth the executive compensation policies of the
Compensation and Personnel Committee of the Board with respect to ITT's
executive officers in general and the rationale for the specific decisions
affecting the 1996 compensation of Rand V. Araskog, Chief Executive. The amounts
of all compensation awarded to, earned by, or paid to the Named ITT Executives
at the end of the 1996 fiscal year are set forth on the Summary Compensation
Table below.
THE COMMITTEE'S ROLE
The Compensation and Personnel Committee is responsible for the
administration of the executive compensation program, and it reviews all
proposed new or amended employee benefit plans. The Committee is currently
composed of the six non-employee directors named at the end of the report, none
of whom is eligible to participate in any of the plans which make up ITT's
executive compensation program. It is the policy of the Board to periodically
rotate the members of the Committee to assure that fresh points of view are part
of the committee's deliberations.
The Committee may select consultants from nationally recognized independent
compensation and benefits consulting firms to provide expert advice on any
aspect of the ITT executive compensation program. The Committee may request
written reports or hold private meetings with such consultants in order to get
independent opinions on compensation proposals. The Committee may meet in
executive session, which is not attended by any ITT executives or managers. The
Committee regularly reports its activities to the Executive and Policy Committee
of the Board.
28
<PAGE> 35
THE COMPENSATION PROGRAM
General. The compensation program for ITT executives presently consists of
base salary, annual incentive bonus, long-term incentives and employee benefits.
It is the intent of the Committee that incentives based upon long-term
performance should be the major component of compensation for senior executives.
Base Salary. Salaries are set and administered to reflect the value of the
job in the marketplace and individual contribution and performance. Salaries
provide a necessary element of stability in the total pay program and, as such,
are not subject to significant variability. Salary increases are based primarily
on merit. During 1996, ITT evaluated executive salaries in relation to a
competitive annualized merit increase guideline of 4% for expected levels of
individual performance. Actual increases can vary from the guideline depending
primarily on individual performance. The normal interval between salary reviews
for senior executives is 18 months.
Mr. Araskog's base salary was not increased during 1996.
Among the other named officers, Mr. Bowman's annual salary was raised to
$800,000 effective August 1, 1996, an increase of $100,000 after 12 months. Mr.
Weadock's annual salary was increased from $525,000 to $600,000 on November 1,
1996 after an interval of 18 months. Mr. Boynton's annual salary was increased
from $650,000 to $725,000 during 1996. Ms. Reese's annual salary was increased
from $400,000 to $460,000 effective December 1, 1996 after 12 months.
Annual Incentive Bonus. Under the ITT Annual Incentive Bonus Plan, the
amounts of annual bonus awards are based upon corporate financial performance
for the year compared to annual performance goals established by the Committee
at the beginning of the year. For 1996, such performance goal for ITT was based
on EBITDA. Under a leveraged performance/payout schedule, the performance factor
generated a standard bonus adjustment factor of 113%. The calculated bonus
amounts for 1996 performance for Messrs. Araskog and Bowman and for Ms. Reese
are shown in the Summary Compensation Table following this report and were
determined strictly in accordance with the above described formula and standard
bonus adjustment factor. The bonus factor for Mr. Weadock reflects the
performance measurement formula applicable to ITT Sheraton Corporation; the
bonus amount for Mr. Boynton reflects the performance measurement formula
applicable to Caesars World, Inc. The bonus amounts paid to Messrs. Araskog,
Bowman, Weadock, and Boynton and Ms. Reese were reviewed and approved by the
Committee prior to payment.
Stock Option Awards. Stock option awards provide long-term incentives
which are directly related to the performance of ITT Common Stock. Options
generally have a 10-year term and closely align the executive's interests with
those of other stockholders.
During 1996, ITT awarded stock options to the Named ITT Executives as shown
in the table on page 31. These options are exercisable at the earliest of the
following events: (a) when the price of the Common Stock reaches $69.85 (125% of
grant price) at which time the options will become exercisable as to two-thirds;
(b) when the price of the Common Stock reaches $78.23 (140% of the grant price)
at which time the options will become fully exercisable; or (c) the ninth
anniversary of the grant or February 6, 2005, at which time the options will
become fully exercisable. The Committee believes that the requirement for
significant stock price appreciation for senior officers' stock option
exercisability underscores the primary objective of building stockholder value.
In determining the size of option grants, the Committee relied on surveys of
competitive practices and its assessment of each individual's performance.
There were no awards during 1996 under the ITT Long-Term Performance Plan
nor were there any awards of restricted stock.
Employee Benefits. The Named ITT Executives also participate in ITT's
broad-based employee benefits program which includes a pension program, a 401(k)
retirement savings plan, group medical and dental coverage, group life insurance
and other benefit plans. Further details on the pension plans in which Messrs.
Araskog, Bowman, Weadock, and Boynton and Ms. Reese participated are provided on
pages through .
29
<PAGE> 36
In 1996, we adopted the 1997 ITT Deferred Compensation Plan. Under this
plan, executives with a base salary of $200,000 or more may elect to defer
receipt of all or a portion of their 1996 bonus. ITT will credit interest on the
deferred compensation based upon the notional performance of certain benchmark
investment funds chosen by the executive.
DISCUSSION OF THE COMMITTEE'S POLICY REGARDING QUALIFYING COMPENSATION FOR
DEDUCTIBILITY UNDER SECTION 162(m) OF THE INTERNAL REVENUE CODE
Under Code subsection 162(m), the allowable deduction for compensation paid
or accrued with respect to the chief executive officer and each of the four most
highly compensated executive officers of a publicly held corporation is limited
to no more than $1 million per year for taxable years beginning on or after
January 1, 1994. Certain types of compensation are exempted from this deduction
limitation, including payments subject to: (i) the attainment of an objective
performance goal or goals; (ii) an outside director requirement; and (iii) a
stockholder approval requirement.
It is the policy of the Committee to establish a competitive executive
compensation program and to design and administer incentive plans which relate
rewards directly to the overall performance of ITT and the individual
executive's specific contribution. To qualify pay for exemption from Section
162(m) as "performance-based compensation," the requirements of the Code and
proposed regulations generally preclude the use of discretion in determining
specific amounts of compensation. Accordingly, base salaries are subject to the
$1 million limit on deductible compensation as are annual bonus amounts where
discretion is used to increase an executive's compensation above an amount
determined strictly by an objective formula.
It is the policy of the Committee to modify where practicable the executive
incentive plans so as to maximize the tax deductibility of compensation paid to
its top executive officers. Accordingly, the ITT Corporation Annual
Performance-Based Incentive Plan for Executive Officers, which was approved by
stockholders in 1996, will qualify annual bonuses under the plan as
"performance-based compensation".
The Committee believes that the overall performance of its most senior
executives cannot in all cases be reduced to a fixed formula and that the
prudent use of discretion in determining pay levels is in the best interest of
ITT and its stockholders. Under some circumstances (other than in the context of
the ITT Corporation Annual Performance-Based Incentive Plan for Executive
Officers) the Committee's use of discretion in determining appropriate amounts
of compensation may be essential. In those situations where discretion is used
by the Committee, compensation may not be fully deductible. The Committee does
not believe that such loss of deductibility will have any material impact on the
financial condition of ITT.
This report is furnished by the members of the Compensation and Personnel
Committee. The members of the Compensation and Personnel Committee are listed
below.
Bette B. Anderson
Nolan D. Archibald
Robert A. Burnett
Paul G. Kirk, Jr., Chairman
Edward C. Meyer
Margita E. White
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<PAGE> 37
COMPENSATION OF NAMED ITT EXECUTIVES
The following table discloses the compensation received by the Named ITT
Executives for services rendered to ITT (including compensation received from
Old ITT prior to the spinoff of ITT from Old ITT in 1995) for the three fiscal
years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
FOR 1994, 1995 AND 1996
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
----------------------------------
PAYOUTS
AWARDS ---------
ANNUAL COMPENSATION ---------------------- LONG-TERM
RESTRICTED SECURITIES INCENTIVE
--------------------- OTHER ANNUAL STOCK UNDERLYING PLAN ALL OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(2) ($) (3)(#) ($) (4)($)
- ---------------------------- ---- --------- --------- ------------ --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rand V. Araskog............. 1996 2,000,000 2,260,000 347,268 -- 150,000 -- 422,280
Chairman and Chief 1995 2,000,000 2,330,800 251,063 2,718,750 429,971 2,625,000 449,962
Executive 1994 1,625,000 2,405,000 219,457 -- 429,971 -- 58,656
Robert A. Bowman............ 1996 741,667 813,600 75,117 -- 100,000 -- 25,625
President and Chief 1995 583,333 611,800 44,942 1,087,500 143,324 900,000 37,380
Operating Officer 1994 456,250 471,750 25,534 -- 143,324 -- 13,844
Peter G. Boynton(1)......... 1996 682,583 15,200 694,276 -- 40,000 -- 11,705
Senior Vice President of
ITT; 1995 578,117 299,776 105,288 -- 59,718 -- 14,500
President and Chief 1994 -- -- -- -- -- -- --
Executive Officer
of Caesars World, Inc.
Ann N. Reese................ 1996 405,000 389,900 47,910 -- 40,000 -- 14,008
Executive Vice President
and 1995 303,571 252,300 45,369 543,750 71,662 113,600 30,018
Chief Financial Officer 1994 263,333 210,000 33,738 -- 71,662 -- 10,998
Daniel P. Weadock........... 1996 537,500 757,300 55,287 -- 40,000 -- 18,281
Senior Vice President of
ITT; 1995 516,667 398,800 433,646 -- 59,718 1,280,000 44,321
President and Chief 1994 500,000 385,000 13,408 -- 83,605 -- 17,500
Executive Officer
of ITT Sheraton
Corporation
</TABLE>
- ---------------
(1) Mr. Boynton became an executive officer of ITT following the January 1995
acquisition of Caesars World, Inc. As a result, the 1994 compensation paid
to Mr. Boynton by Caesars World, Inc. has not been included.
(2) Amounts shown in this column are tax reimbursement allowances, which are
intended to offset the inclusion in taxable income of the value of certain
benefits, except that: (a) the amounts shown for Mr. Araskog also include
$164,066, $92,224 and $128,873 in 1996, 1995 and 1994, respectively, for
personal benefits including tax and financial counseling and transportation
services, (b) the amount shown for Mr. Bowman in 1996 also includes $40,309
for personal benefits including tax and transportation services, (c) the
amounts shown for Mr. Boynton include $513,463 and $41,074 in 1996 and 1995,
respectively in relocation allowance, (d) the amounts shown for Ms. Reese
also include $25,602, $22,186 and $20,973 in 1996, 1995 and 1994,
respectively, for personal benefits including tax and transportation
services, and (e) the amount shown for Mr. Weadock in 1995 also includes
$426,597 in relocation allowance.
(3) The named executives do not hold any stock appreciation rights in connection
with the options shown above. The options shown for years prior to 1996 are
substitute options which replaced surrendered options originally granted by
Old ITT before the spin-off of ITT in 1995.
(4) The amounts shown in this column are contributions by ITT under the ITT
401(k) Retirement Savings Plan and, in the case of Messrs. Araskog, Bowman,
and Weadock and Ms. Reese, the ITT Excess Savings Plan, which are defined
contribution plans. Under such plans, ITT made a matching contribution
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<PAGE> 38
in an amount equal to 50% of an employee's contribution, such matching
contribution not to exceed two and one-half percent (2.5%) of such
employee's salary. Under these plans, ITT also made a non-matching
contribution equal to one percent (1%) of an employee's salary.
In the case of Mr. Araskog, the amount also include $353,113 and $354,156
paid in 1996 and 1995, respectively, by ITT and Old ITT for premiums on a
split-dollar life insurance policy maintained jointly for Mr. and Mrs.
Araskog. ITT is entitled to be reimbursed for its payments with respect to
such policy upon the earlier to occur of: (i) the death of Mr. Araskog or
Mrs. Araskog, whichever occurs later, and (ii) the date on which the cash
surrender value of the policy is sufficient to repay amounts paid by ITT
and continue to sustain the policy until the year 2035, which is expected
to occur at the end of the year 2008. Destinations is assuming these rights
and obligations as of the Distribution Date.
In the case of Mr. Boynton, the amount shown for 1996 includes a life
insurance premium of $8,538 paid by ITT.
OPTION GRANTS ON ITT COMMON STOCK TO NAMED ITT EXECUTIVES IN LAST FISCAL YEAR
The following table provides information about grants of options during the
1996 fiscal year to the Named ITT Executives to purchase shares of ITT Common
Stock. The stock options granted to each of the ITT executives listed below were
issued in 1996. All the stock options were surrendered to the Corporation in
connection with the Distributions.
<TABLE>
<CAPTION>
STOCK OPTION GRANTS IN 1996 POTENTIAL REALIZABLE
------------------------------------------------ VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR(4)
OPTIONS EMPLOYEES EXERCISE ------------------------
GRANTED(1) IN PRICE(3) EXPIRATION 5% 10%
NAME (#) 1996(2) ($/SHARE) DATE ($) ($)
- ----------------------- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog........ 150,000 8.6 55.88 2/8/06 5,271,000 13,359,000
Robert A. Bowman....... 100,000 5.7 55.88 2/8/06 3,514,000 8,906,000
Peter G. Boynton....... 40,000 2.3 55.88 2/8/06 1,405,600 3,562,400
Ann N. Reese........... 40,000 2.3 55.88 2/8/06 1,405,600 3,562,400
Daniel P. Weadock...... 40,000 2.3 55.88 2/8/06 1,405,600 3,562,400
</TABLE>
- ---------------
(1) The numbers in this column represent options to purchase ITT Common Stock.
Options to purchase Common Stock of the Corporation granted in 1996 to Named
ITT Executives have been surrendered in exchange for options to purchase
Destinations Common Stock.
(2) Percentages indicated are based on a total of 1,741,546 options granted to
457 employees during 1996.
(3) The exercise price per share is 100% of the fair market value of a share of
ITT Common Stock on the date of grant. The exercise price may be paid in
cash or in shares of ITT Common Stock valued at their fair market value on
the date of exercise.
Options granted on February 6, 1996 at the exercise price of $55.88 per
share are not exercisable until the trading price of ITT Common Stock equals
or exceeds $69.85 per share for five consecutive trading days at which time
two-thirds of the options will be exercisable; when the trading price equals
or exceeds $78.23 per share for five consecutive trading days, the options
will be fully exercisable. Notwithstanding the above, the options will be
fully exercisable after February 6, 2005, and expire February 8, 2006.
(4) At the end of the term of the options granted on February 6, 1996, the
projected price per share of ITT Common Stock would be $91.02 and $144.94 at
an assumed appreciation rate of 5% and 10%, respectively.
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<PAGE> 39
AGGREGATED OPTION EXERCISES BY NAMED ITT EXECUTIVES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUE
The following table provides information on option exercises in 1996 by the
named executives and the value of each such executive's unexercised options to
acquire ITT Common Stock at December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
SHARES OPTIONS AT FISCAL YEAR-END(#) IN-THE-MONEY OPTIONS HELD AT
ACQUIRED ON VALUE FISCAL YEAR-END(#)
EXERCISE REALIZED ----------------------------- -----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog..... -- -- 1,251,617 150,000 6,718,105 --
Robert A. Bowman.... -- -- 521,653 100,000 4,357,947 --
Peter G. Boynton.... -- -- 59,718 40,000 -- --
Ann N. Reese........ -- -- 236,544 40,000 1,797,819 --
Daniel P. Weadock... -- -- 322,186 40,000 3,569,868 --
</TABLE>
- ---------------
(1) Based on the NYSE consolidated trading closing price of Common Stock on
December 31, 1996 of $43.38.
PENSION PLANS
General. ITT maintained the ITT Salaried Retirement Plan and ITT Excess
Pension Plan prior to the Distributions. Each plan recognizes service with
companies affiliated with ITT prior to December 19, 1995 for eligibility,
vesting and benefit accrual purposes and further provides for an offset of any
benefit payable from any Old ITT retirement plan covering the same period of
service. Messrs. Araskog, Bowman and Weadock and Ms. Reese participate in these
retirement plans.
Executives of Caesars World, Inc. ("Caesars") do not participate in these
retirement plans. Accordingly, Mr. Boynton is covered by the Caesars Executive
Security Plans (collectively, the "Caesars Pension Plan").
Effective as of the Distributions, Destinations will assume responsibility
for each of the ITT Salaried Retirement Plan, ITT Excess Pension Plan and the
Caesars Pension Plan. Liabilities related to employees who remain with the
Corporation following the Distributions which are not payable from a qualified
retirement plan will be the subject of an agreement between the Corporation and
Destinations.
ITT Retirement Plan. The ITT Salaried Retirement Plan covers all eligible
salaried employees of ITT, including senior executive officers and other ITT
executives.
A member's annual pension equals two percent of the member's average final
compensation for each of the first 25 years of benefit service, plus one and
one-half percent of a member's average final compensation for each of the next
15 years of benefit service, reduced by one and one-quarter percent of the
member's primary Social Security benefit for each year of benefit service to a
maximum of 40 years; provided that no more than one-half of the member's primary
Social Security benefit is used for such reduction. A member's average final
compensation (including salary plus approved bonus payments) will be defined
under the Plan as the total of (i) a member's average annual base salary for the
five calendar years of the last 120 consecutive calendar months of eligibility
service affording the highest such average plus (ii) a member's average annual
compensation not including base salary for the five calendar years of the
member's last 120 consecutive calendar months of eligibility service affording
the highest such average. The Plan also provides for undiscounted early
retirement pensions for members who retire at or after age 60 following
completion of 15 years of eligibility service. A member is vested in benefits
accrued under the Plan upon completion of five years of eligibility service. The
amounts shown under "Salary" and "Bonus" opposite the names of the
33
<PAGE> 40
individuals in the Summary Compensation Table on page 31 comprise the
compensation which is used for purposes of determining "average final
compensation" under the Plan. The years of service of each of the individuals
for eligibility and benefit purposes as of December 31, 1996 are as follows:
Rand V. Araskog, 30.09 years; Robert A. Bowman, 5.73 years; Ann N. Reese, 9.16
years; and Daniel P. Weadock, 35.46 years.
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation which may be recognized under a tax-qualified retirement
plan. ITT has adopted a non-qualified unfunded retirement plan (the "ITT Excess
Pension Plan") for payment of those benefits at retirement that cannot be paid
from the qualified retirement plan. The practical effect of the ITT Excess
Pension Plan is to continue calculation of retirement benefits to all employees
on a uniform basis. Benefits under the ITT Excess Pension Plan will generally be
paid directly by ITT. ITT has also created an excess plan trust under which
excess benefits under the ITT Excess Pension Plan for certain officers of ITT
will be funded. Any such employee may indicate a preference, subject to certain
conditions, to receive any excess benefit in the form of a single discounted
lump sum payment. Any "excess" benefit accrued to any such employee will be
immediately payable in the form of a single discounted lump sum payment upon the
occurrence of a change in corporate control (as defined in the ITT Excess
Pension Plan). Consummation of the Strategic Investment will not constitute a
change in corporate control under the ITT Excess Pension Plan.
34
<PAGE> 41
Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Retirement Program at retirement at age 65 from
the ITT Salaried Retirement Plan and ITT Excess Pension Plan, determined without
regard to any possible reduction due to benefits payable from any Old ITT
retirement plan.
ITT PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL ----------------------------------------------------------------------
COMPENSATION 20 25 30 35 40
- ------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 50,000 $ 20,000 $ 25,000 $ 32,500 $ 28,750 $ 36,250
100,000 40,000 50,000 57,500 65,000 72,500
300,000 120,000 150,000 172,500 195,000 217,500
500,000 200,000 250,000 287,500 325,000 362,500
750,000 300,000 375,000 431,250 487,500 543,750
1,000,000 400,000 500,000 575,000 650,000 725,000
1,500,000 600,000 750,000 862,500 975,000 1,087,500
2,000,000 800,000 1,000,000 1,150,000 1,300,000 1,450,000
2,500,000 1,000,000 1,250,000 1,437,500 1,625,000 1,812,500
3,000,000 1,200,000 1,500,000 1,725,000 1,950,000 2,175,000
3,500,000 1,400,000 1,750,000 2,012,500 2,275,000 2,537,500
4,000,000 1,600,000 2,000,000 2,300,000 2,600,000 2,900,000
5,000,000 2,000,000 2,500,000 2,875,000 3,250,000 3,625,000
</TABLE>
The Caesars Pension Plan. The Caesars Pension Plan provides for annual
pension benefits for individuals retiring at age 65 payable in the form of a
straight life annuity for various levels of compensation and years of service.
Under the Caesars Pension Plan, benefits may also be payable as a lump sum,
subject to Committee approval and other specified conditions. The Caesars
Pension Plan is a defined benefit pension plan which is not a tax qualified plan
and covers all full time salaried officers and selected other key executives.
Benefits under the Caesars Pension Plan accrue at the rate of two percent of
average annual salary for each year of credited service with a one-time
additional 5% accrual after completion of ten years of credited service.
Benefits vest after five years of credited service. Under certain circumstances,
benefits may be forfeited concurrent with or following termination of
employment.
Based upon various assumptions as to remuneration and years of service, the
following table illustrates the estimated annual benefits payable from the
Caesars Pension Plan at retirement at age 65. The amounts shown in the table are
not subject to reduction for Social Security benefits or other offset amounts
and are based upon the assumption that the Caesars Pension Plan continues in its
present form.
35
<PAGE> 42
CAESARS PENSION PLAN TABLE
<TABLE>
<CAPTION>
FIVE YEAR YEARS OF SERVICE
AVERAGE ------------------------------------------------------------
SALARY 15 20 25 30 35
- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 43,750 $ 56,250 $ 68,750 $ 81,250 $ 81,250
150,000 52,500 67,500 82,500 97,500 97,500
175,000 61,200 78,750 96,250 113,750 113,750
200,000 70,000 90,000 110,000 130,000 130,000
225,000 78,750 101,250 123,750 146,250 146,250
250,000 87,500 112,500 137,500 162,500 162,500
300,000 105,000 135,000 165,000 195,000 195,000
400,000 140,000 180,000 220,000 260,000 260,000
500,000 175,000 225,000 275,000 325,000 325,000
600,000 210,000 270,000 330,000 390,000 390,000
800,000 280,000 360,000 440,000 520,000 520,000
1,000,000 350,000 450,000 550,000 650,000 650,000
1,200,000 420,000 540,000 660,000 780,000 780,000
</TABLE>
The remuneration covered by the Caesars Pension Plan is the average of the
participant's highest five years of salary earned during his last ten years of
employment with Caesars. The amount shown under "Salary" opposite the name of
Mr. Boynton in the Summary Compensation Table on page 31 will be used for
determining "average annual salary" under the plan. As of December 31, 1996, Mr.
Boynton had 20.67 years of credited service under the Caesars Pension Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no Compensation Committee interlocks. In 1996, the members of the
Nominating Committee were: Bette B. Anderson, Nolan D. Archibald, Edward C.
Meyer and Benjamin F. Payton and the members of the Compensation and Personnel
Committee were: Bette B. Anderson, Nolan D. Archibald, Robert A. Burnett, Paul
G. Kirk, Jr., Edward C. Meyer and Margita E. White.
36
<PAGE> 43
SECURITY OWNERSHIP OF FORMER EXECUTIVE OFFICERS
The following table shows, as of April 30, 1997, the beneficial ownership
of Common Stock by Named ITT Executives (other than Mr. Araskog).
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ----------------------------------------------------------------- ------------------ --------
<S> <C> <C>
Robert A. Bowman................................................. 549,005 *
Peter G. Boynton................................................. 60,850 *
Ann N. Reese..................................................... 251,023 *
Daniel P. Weadock................................................ 396,055 *
</TABLE>
- ---------------
* Less than one percent.
(1) All shares are owned directly except as hereinafter otherwise indicated.
Pursuant to regulations of the Commission, shares of Common Stock (i)
receivable by directors and executive officers upon exercise of employee
stock options exercisable within 60 days after April 30, 1997 and (ii)
allocated to the accounts of certain directors and executive officers under
the ITT 401(k) Retirement Plan (the "Retirement Plan") at April 30, 1997 are
deemed to be beneficially owned by such directors and executive officers at
that date. Of the number of shares shown above; (i) the following represent
shares that may be acquired upon exercise of employee stock options for the
accounts of (A) Mr. Bowman, 521,653 shares, (B) Mr. Boynton 59,718 shares,
(C) Ms. Reese, 236,544 shares, and (D) Mr. Weadock, 322,186 shares, all
present directors and officers as a group, shares and (ii) the
following amounts were allocated under the Retirement Plan to the accounts
of (a) Mr. Bowman, 2,424 shares, (b) Mr. Boynton, 132 shares, (c) Ms. Reese,
1,303 shares, Mr. Weadock, 52,790 shares, and all Named ITT Executives
(other than Mr. Araskog) as a group, shares.
37
<PAGE> 44
APPENDIX A
ITT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Selected Consolidated Historical Financial and Operating Data........................ A-2
Unaudited Pro Forma Consolidated Financial Statements................................ A-3
Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... A-7
Audited Consolidated Financial Statements as of and for the Years Ended December 31,
1994, 1995 and 1996................................................................ A-14
Unaudited Consolidated Financial Statements as of and for the Six Months Ended June
30, 1996 and 1997.................................................................. A-30
</TABLE>
A-1
<PAGE> 45
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION AND OPERATING DATA
Set forth below is certain selected consolidated financial information of
the Corporation which has been derived from the Corporation's audited
consolidated financial statements for the years ended December 31, 1994, 1995
and 1996 and as of December 31, 1995 and 1996 and the Corporation's unaudited
consolidated financial statements for the years ended December 31, 1992 and 1993
and as of December 31, 1992, 1993 and 1994 and for the six months ended June 30,
1997 and 1996 and as of June 30, 1997. The financial and operating data set
forth below reflect the Corporation's telephone directories publishing business
after the Distributions.
SELECTED CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND NUMBER OF EMPLOYEES)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------- -------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................... $ 276 $ 291 $ 647 $ 654 $ 646 $ 817 $ 993
Income before accounting changes........... $ 15 $ 26 $ 54 $ 21 $ 23 $ 68 $ 62
Earnings per share before accounting
changes.................................. $ .13 $ .21 $ .46 $ .18 $ .20 $ .58 $ .53
OPERATING DATA:
Operating income........................... $ 83 $ 103 $ 208 $ 160 $ 141 $ 161 $ 104
EBITDA(1).................................. $ 91 $ 111 $ 224 $ 177 $ 156 $ 177 $ 116
Cash from operating activities............. $ 16 $ 21 $ 58 $ 85 $ 10 $ 80 $ 116
Number of employees(2)..................... 2,373 2,340 2,331 2,484 2,252 2,391 3,182
</TABLE>
<TABLE>
<CAPTION>
AT
JUNE AT DECEMBER 31,
30, ------------------------------------------
1997 1996 1995 1994 1993 1992
------- ------ ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $ 459 $ 510 $519 $391 $385 $480
Long-term debt............................. $ 1,000 $1,000 $941 $ -- $ -- $ --
</TABLE>
- ---------------
(1) EBITDA, as defined herein, is presented here as an alternative measure of
the Corporation's ability to generate cash flow and should not be construed
as an alternative to operating income or to cash flows from operating
activities (which have been determined in accordance with generally accepted
accounting principles). EBITDA was computed above as earnings before
interest, taxes, depreciation, amortization and miscellaneous expense, net.
Management believes the EBITDA information presented supplementally allows
for a more complete analysis of results of operations. Because of the
significance of items excluded in determining EBITDA, this information
should not be considered as an alternative to any measure of performance or
liquidity nor should it be considered as an indicator of the overall
financial performance of the Corporation.
(2) Total number of employees on the last day of the period.
A-2
<PAGE> 46
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Unaudited Pro Forma Consolidated Financial Statements
reflect the Corporation's telephone directories publishing business after the
Distributions and give effect to: (i) the payment of a special dividend by ITT
World Directories, Inc., a subsidiary of the Corporation ("ITT WD"), in respect
of the 20% minority interest in ITT WD, the purchase of such minority interest
by the Corporation and the allocation of an additional $265 million of ITT debt
to the Corporation in connection with such dividend and purchase (the "Minority
Interest Transactions"); (ii) the refinancing of the Corporation's allocated
debt in connection with the Distributions, including borrowings under the Senior
Facility (the "Financing Transactions"); and (iii) the consummation of the
Strategic Investment and the use of the related proceeds to repay outstanding
borrowings under the Senior Facility. The Unaudited Pro Forma Consolidated
Balance Sheet as of June 30, 1997 gives effect to such transactions as if they
had occurred on June 30, 1997 and the Unaudited Pro Forma Consolidated
Statements of Income for the year ended December 31, 1996 and for the six months
ended June 30, 1997 give effect to such transactions as if they had occurred as
of the beginning of each period.
The Unaudited Pro Forma Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements for the Corporation set
forth as part of this Appendix A and do not purport to be indicative of the
results that would actually have been obtained had the transactions described
above been completed as of the dates indicated or that may be obtained in the
future.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
MINORITY AFTER MINORITY PRO FORMA
JUNE 30, INTEREST AND INTEREST AND AFTER
1997 FINANCING FINANCING STRATEGIC STRATEGIC
ACTUAL TRANSACTIONS TRANSACTIONS INVESTMENT INVESTMENT
-------- ------------ -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total current assets.................. $ 374 $ 10 $ 384 $ (16)(c) $ 368
Plant, property and equipment......... 25 25 25
Goodwill, net......................... 34 225(a) 259 259
Other assets.......................... 26 26 26
------ ---- ------- --- ------
$ 459 $ 235 $ 694 $ (16) $ 678
====== ==== ======= === ======
Notes payable and current maturities
of long-term debt................... $ 27 $ $ 27 $ $ 27
Other current liabilities............. 170 170 170
Allocated debt of ITT................. 1,000 265(a) 0 0
(1,265)(b)
Long-term debt........................ 0 1,275(b) 1,275 (225) 1,050
Deferred income taxes and other
liabilities......................... 17 17 17
Minority interest..................... 60 (40)(a) 20 20
Stockholders deficit.................. (815) (815) 209(d) (606)
------ ---- ------- --- ------
$ 459 $ 235 $ 694 $ (16) $ 678
====== ==== ======= === ======
</TABLE>
- ---------------
(a) Reflects (i) payment by ITT WD of a special dividend of $11 million in
respect of the 20% minority interest in ITT WD, (ii) the purchase of such
minority interest by the Corporation for $254 million and (iii) allocation
of indebtedness of ITT of $265 million to finance such purchase and such
dividend. Also reflects the preliminary allocation of the purchase price
for such minority interest to eliminate the minority interest of $29
million with the resulting excess of $225 million allocated to goodwill to
be amortized over a period of 40 years.
A-3
<PAGE> 47
(b) Reflects the Financing Transactions, pursuant to which the Corporation and
its subsidiaries are expected to refinance the debt of ITT allocated to
the Corporation as of June 30, 1997 and additional allocated debt of ITT
incurred to finance the Minority Interest Transactions. Such refinancing
is expected to consist of approximately $555 million of borrowings by the
Corporation's subsidiaries under secured credit facilities, approximately
$495 million of borrowings by the Corporation's subsidiaries pursuant to
the issuance of senior subordinated notes and approximately $225 million
of borrowings by the Corporation pursuant to the Senior Facility. Does not
reflect transaction fees and other expenses incurred in connection with
Financing Transactions.
(c) Reflects the payment to CDRV of $16 million in transaction fees and
expenses paid in connection with the Strategic Investment.
(d) Reflects $209 million of net proceeds from the Strategic Investment. Does
not reflect charges related to the transaction fees and expenses incurred
in connection with the Senior Facility.
A-4
<PAGE> 48
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS MINORITY AFTER MINORITY PRO FORMA
ENDED INTEREST INTEREST AND AFTER
JUNE 30, AND FINANCING FINANCING STRATEGIC STRATEGIC
1997 TRANSACTIONS TRANSACTIONS INVESTMENT(c) INVESTMENT
---------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 276 $ 276 $ 276
Costs
Salaries, benefits and other
operating....................... 143 143 143
Marketing, general and
administrative.................. 42 42 42
Depreciation and amortization...... 8 3(a) 11 11
---- --- ---- ----
193 3 196 196
---- --- ---- ----
Operating income..................... 83 (3) 80 80
Interest expense, net................ (36) (17)(b) (53) 15 (38)
Provision for income taxes........... (19) -- (19) (19)
Minority equity...................... (13) 10(a) (3) (3)
---- --- ---- --- ----
Net income........................... $ 15 $ (10) $ 5 $15 $ 20
==== ==== === ====
Pro forma earnings per share......... $ 0.17(d) $ 0.06 $0.15
==== ==== ====
Pro forma average number of
outstanding shares................. 88(d) 88 131(e)
</TABLE>
- ---------------
(a) Reflects amortization of goodwill resulting from purchase of 20% minority
interest in ITT WD and reinstatement of income for the period that was
previously allocated to such minority interest.
(b) Reflects incremental interest expense incurred by the Corporation and its
subsidiaries as a result of refinancing of allocated debt and debt under the
Senior Facility. The assumed weighted average interest rate for the
subsidiary debt is 7.62% and for the Senior Facility is 13.0%, as compared
with interest expense of 7.5% on the allocated debt.
(c) Eliminates interest expense attributable to the Senior Facility, which would
be repaid from proceeds of the Strategic Investment.
(d) After repurchase of 30 million shares of Common Stock pursuant to the Equity
Tender Offer. Actual earnings per share for the six months ended June 30,
1997 were $0.13 per share based on 118 million shares outstanding.
(e) Reflects issuance of 43 million shares of Common Stock to CDRV pursuant to
the Strategic Investment.
A-5
<PAGE> 49
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
MINORITY AFTER MINORITY PRO FORMA
YEAR ENDED INTEREST INTEREST AND AFTER
DECEMBER 31, AND FINANCING FINANCING STRATEGIC STRATEGIC
1996 TRANSACTIONS TRANSACTIONS INVESTMENT(c) INVESTMENT
------------ ------------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 647 $ 647 $ 647
Costs
Salaries, benefits and other
operating.................... 332 332 332
Marketing, general and
administrative............... 91 91 91
Depreciation and amortization... 16 6 22 22
---- --- ---- ----
439 6 445 445
---- --- ---- ----
Operating income.................. 208 (6) 202 202
Interest expense, net............. (72) (34)(b) (106) 29 (77)
Miscellaneous income (loss)....... (1) (1) (1)
Provision for income taxes........ (50) 1(b) (49) (49)
Minority equity................... (31) 24(a) (7) (7)
---- --- ---- --- ----
Net income........................ $ 54 $ (15) $ 39 $29 $ 68
==== === ==== === ====
Pro forma earnings per share...... $ 0.61(d) $0.43 $0.51
==== ==== ====
Pro forma average number of
outstanding shares.............. 88(d) 88 131(e)
</TABLE>
- ---------------
(a) Reflects amortization of goodwill resulting from purchase of 20% minority
interest in ITT WD and reinstatement of income for the period that was
previously allocated to such minority interest.
(b) Reflects incremental interest expense incurred by the Corporation and its
subsidiaries as a result of refinancing of allocated debt and debt under the
Senior Facility. The assumed weighted average interest rate for the
subsidiary debt is 7.62% and for the Senior Facility is 13.0%, as compared
with interest expense of 7.5% on the allocated debt. Reflects $1 million tax
benefit from increased interest expense.
(c) Eliminates interest expense attributable to the Senior Facility, which would
be repaid from proceeds of the Strategic Investment.
(d) After repurchase of 30 million shares of Common Stock pursuant to the Equity
Tender Offer. Actual earnings per share for the year ended December 31, 1996
were $0.46 per share based on 118 million shares outstanding.
(e) Reflects issuance of 43 million shares of Common Stock to CDRV pursuant to
the Strategic Investment.
A-6
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations is prepared to reflect the Corporation's classified directory
services and telephone directory advertising businesses after the Distribution,
and should be read in conjunction with the selected combined financial and other
data and the Corporation's consolidated financial results set forth in this
Appendix A to this Proxy Statement.
OVERVIEW
The following table summarizes the historical results of the Corporation's
classified directory services and telephone directory advertising operations as
a percentage of combined revenues for the years ended December 31, 1994, 1995
and 1996 and for the six-month periods ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Combined revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Fees to national telephone companies............... 34.7 19.0 21.2 17.2 17.0
Operating costs.................................... 27.1 33.3 30.1 30.2 34.8
----- ----- ----- ----- -----
Total salaries, benefits and other operating
costs............................................ 61.8 52.3 51.3 47.4 51.8
----- ----- ----- ----- -----
Consolidated gross profit.......................... 38.2 47.7 48.7 52.6 48.2
Marketing, general and administrative.............. 14.1 20.6 14.1 14.4 15.2
Depreciation and amortization...................... 2.3 2.6 2.5 2.8 2.9
----- ----- ----- ----- -----
Operating income................................... 21.8% 24.5% 32.1% 35.4% 30.1%
===== ===== ===== ===== =====
</TABLE>
Sources of Revenues and Operating Income. The Corporation's revenues and
operating income are derived from the sale of advertisements in the
Corporation's directories. Historically, increases in advertising revenues have
corresponded with general, regional and local economic recoveries in the
countries in which the Corporation operates and decreases have corresponded with
general, regional and local downturns. Because many of the Corporation's
customers are small and medium-sized businesses for which directory advertising
is the principal form of advertising, management believes that the Corporation's
revenues are less likely to be affected by minor economic fluctuations than
certain other forms of advertising. In addition, because of its publication and
billing patterns, the Corporation experiences variability in its quarterly
revenues, with the most significant fluctuation historically occurring in the
first quarter of each year. The Corporation also generates operating income ($7
million in 1996) from its joint venture in Japan.
Fees to National Telephone Companies. The Corporation operates under
contractual and/or joint venture agreements with the national telephone
companies in Portugal, South Africa, Ireland and Puerto Rico. These agreements
provide that the telephone companies receive a percentage of the Corporation's
advertising revenues. The telephone companies provide the necessary subscriber
data and certain other services to the Corporation. The fees paid to the
national telephone companies represented approximately 21% of consolidated
revenues in 1996.
Operating Costs. Total operating costs represented approximately 30% of
revenues in 1996. The major elements of operating costs are sales, paper and
printing costs.
The Corporation's principal operating cost is sales expense, consisting
largely of compensation and benefits for sales personnel. The Corporation
continually makes efforts to increase the productivity of its sales force. These
techniques include (i) the classification of existing and potential customers
based on historical usage, perceived renewal potential and perceived expansion
potential, (ii) the matching of existing or potential customers with the most
cost-effective segment of the sales force and (iii) the optimum use of
information technology to increase efficiency of its sales efforts. In 1996,
sales expense represented approximately 14% of consolidated revenues.
A-7
<PAGE> 51
The Corporation's principal raw material is paper. The Corporation used
approximately 45,500, 42,500 and 43,000 tons of directories grade paper in 1994,
1995 and 1996, respectively, resulting in total costs of paper during such
periods of $29 million, $33 million and $43 million, respectively. Paper costs
amounted to 6.6% of revenues in 1996.
The Corporation's printing requirements are met by a number of suppliers in
several countries with contracts being negotiated on a competitive basis. In
Portugal, the Corporation operates its own printing facility. Printing costs
amounted to 5% of revenues in 1996.
Exchange Rate Fluctuations. The Corporation's operations are conducted in
seven countries and its results of operations are subject to fluctuations in
exchange rates. In 1996, 73% of revenues and 78% of operating income were
accounted for by Belgium, Portugal and The Netherlands. The currencies of these
three countries, all of which operate within the European Exchange Rate
Mechanism (ERM), are maintained within narrow relative parities. Since the major
portion of the Corporation's revenues and operating expenses are in local
currencies, operating income in each country is not highly exposed to currency
fluctuations. However, the reported results of the Corporation's operations,
which are translated into U.S. dollars, are affected by fluctuations in the
exchange rate between the U.S. dollar and the local currency.
Seasonality. The Corporation publishes and distributes its directories on
an annual basis. Production of directories is concentrated in the months of
March through December. The Corporation accrues the income and related costs
attributable to directories in progress and only recognizes such income and
costs on the date the directories are distributed. The Corporation's
first-quarter results typically reflect significantly less activity than in
other quarters. In 1996, first quarter revenues represented 6.3% of the total
year revenues.
Interest Expense. Management believes the interest expense incurred in
previous periods is not indicative of the interest expense the Corporation
expects to incur in future periods due to the greater leveraging in connection
with the implementation and execution of the Comprehensive Plan. On a pro forma
basis, after giving effect to the Comprehensive Plan as though it had been
consummated, and all of the related transactions as if they had occurred on
January 1, 1996, net interest expense for 1996 is estimated to be approximately
$106 million excluding related financing fees. After giving effect to the
Strategic Investment as if it had occurred on January 1, 1996, such pro forma
net interest expense would be approximately $77 million excluding related
financing fees. Because a portion of the Corporation's indebtedness is expected
to be in U.S. dollars, the Corporation plans to enter into currency swaps and
other hedging activities to minimize the risk of currency fluctuations.
The following table sets forth the Corporation's historic revenues and
EBITDA by geographic market. The data shown below reflect 100% of the revenues,
EBITDA and operating income of the Corporation's operations in Portugal, South
Africa and Ireland, even though the Corporation owns less than all of the equity
in such entities.
A-8
<PAGE> 52
SUMMARY OF FINANCIAL RESULTS BY GEOGRAPHIC MARKET
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1994 1995 1996 1996 1997
------- ---- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BELGIUM:
Revenues......................................... $ 277 $216 $183 $ 95 $ 91
EBITDA(1)........................................ 42 68 70 38 32
Operating Income................................. 32 59 60 34 29
PORTUGAL:
Revenues......................................... 142 152 144 61 56
EBITDA(1)........................................ 42 40 34 11 9
Operating Income................................. 39 36 32 9 7
SOUTH AFRICA:
Revenues......................................... -- 26 73 8 9
EBITDA(1)........................................ -- 5 13 3 1
Operating Income................................. -- 5 13 3 1
IRELAND:
Revenues......................................... 30 36 37 24 25
EBITDA(1)........................................ 6 10 11 7 8
Operating Income................................. 6 9 10 7 8
THE NETHERLANDS:
Revenues......................................... 129 149 148 62 59
EBITDA(1)........................................ 51 67 72 31 30
Operating Income................................. 49 65 70 30 29
OTHER(2):
Revenues......................................... 68 75 62 41 36
EBITDA(1)........................................ 15 (13) 24 21 11
Operating Income................................. 15 (14) 23 20 9
TOTAL:
Revenues......................................... 646 654 647 291 276
EBITDA(1)........................................ 156 177 224 111 91
Operating Income................................. 141 160 208 103 83
</TABLE>
- ---------------
(1) EBITDA, as defined herein, is presented here as an alternative measure of
the Corporation's ability to generate cash flow and should not be construed
as an alternative to operating income or to cash flows from operating
activities (which have been determined in accordance with generally accepted
accounting principles). EBITDA was computed above as earnings before
interest, taxes, depreciation, amortization and miscellaneous expense, net.
Management believes the EBITDA information presented supplementally allows
for a more complete analysis of results of operations. Because of the
significance of items excluded in determining EBITDA, this information
should not be considered as an alternative to any measure of performance or
liquidity nor should it be considered as an indicator of the overall
financial performance of the Corporation.
(2) "Other" includes the results for the Corporation's operations in Puerto
Rico, the U.S. Virgin Islands and Japan, as well as results for ITT-Thomas
Publishing Europe in years ended December 31, 1994 and 1995. ITT-Thomas
Publishing Europe was discontinued in 1995. The Corporation's U.S.-related
headquarters expenses have been included in "Other" for purposes of
computing EBITDA and Operating Income.
A-9
<PAGE> 53
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE 30, 1996
Revenues. Revenues of $276 million for the first six months of 1997
decreased by 5.2% from $291 million in the corresponding period in 1996. This
decrease was due to unfavorable foreign exchange movements which were partially
mitigated by a 4% increase in revenues in local currency. In Belgium, revenues
increased by 8% in local currency primarily due to a change in a publication
date for a directory. Excluding this factor, sales were level with the prior
year. In Portugal, revenues were unchanged from the prior year in local currency
terms, with a slight decrease in average revenue per advertiser being offset by
an increase in the number of advertisers. In The Netherlands revenues increased
9% in local currency. This increase was due to a combination of price and volume
increases with continued growth of the advertiser base. South Africa had revenue
growth of 14% in local currency while revenues in Ireland increased by 9% in
local currency both due to higher prices and volume.
Fees to National Telephone Companies. Fees to national telephone companies
of $47 million in the first six months of 1997 decreased by $3 million from $50
million in the first six months of 1996, in line with the decrease in revenues
discussed above. In local currency, fees to national telephone companies were
essentially level with the 1996 period. As a percentage of revenues, these fees
were 17% for both periods.
Operating Costs. Operating costs in the first six months of 1997 increased
by approximately $8 million, or 9%, as compared to the 1996 corresponding
period. As a percentage of revenues, operating costs increased from 30.2% in the
first six months of 1996 to 34.8% in the corresponding period in 1997. In local
currency, operating costs in Belgium increased by 5%, in line with the revenue
increase primarily due to a change in the publication schedule. In Portugal,
operating costs increased by 9%, principally due to sales cost increases, while
in The Netherlands, costs increased slightly.
Marketing, General and Administrative. Marketing, general and
administrative expenses of $42 million in the first six months of 1997 were
essentially unchanged from the corresponding period in 1996. As a percentage of
revenues, marketing, general and administrative expenses increased from 14.4%
for the first six months in 1996 to 15.2% for the first six months in 1997. On a
local currency basis, the total marketing, general and administrative expenses
increased by approximately 6%. Expenses increased slightly in Portugal largely
due to employee severance costs incurred as a result of a headcount reduction
program. In addition, there was an increase in advertising expenses in Puerto
Rico.
Operating income. Operating income decreased by $20 million, from $103
million to $83 million, principally due to the decrease in revenues and the
increase in operating costs as discussed above.
Interest expense of $36 million for the first six months of 1997 was $1
million below the $37 million interest expense for the corresponding period in
1996 due to lower notes payable levels in 1997.
Income taxes of $19 million, at an effective tax rate of 40.4%, for the
first six months of 1997 were $7 million below the $26 million, at an effective
tax rate of 39.4%, for the corresponding period in 1996.
Net income of $15 million in the first six months of 1997 decreased by $11
million from the corresponding period in 1996, for the same reasons as the
reduction in operating income.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues of $647 million in 1996 decreased by 1% from $654
million in 1995. In local currency terms, however, revenues increased by 6%, as
a 2% decrease in revenues in Europe was exceeded by an increase of 233% in South
Africa, which was due primarily to the inclusion of a full year's South African
results in 1996 as compared to only two months in 1995. The revenue decrease was
principally due to continuing competition in Belgium from the national telephone
company's directory operations, BDS, and to a lesser extent the discontinuance
of ITT-Thomas Publishing Europe in 1995. Although the number of advertisers
increased by approximately 10% in Belgium, there was erosion in both prices and
the average customer advertising program reducing revenues by 8%. Revenues in
Portugal decreased by 2% in local currency due mainly to a reduction in the
number of advertisers. Revenues in The Netherlands increased by
A-10
<PAGE> 54
6% in local currency as the number of advertisers increased, notwithstanding
increased competition in the market.
Fees to National Telephone Companies. Fees to national telephone companies
of $137 million in 1996 increased by $13 million from $124 million in 1995. As a
percentage of revenues, these fees increased from 19% in 1995, to 21.2% in 1996.
In local currency fees to national telephone companies increased by 20%. The
increase is largely due to the inclusion of a full year for South Africa which,
as a sales company, does not incur printing and publishing costs, but pays a fee
to the national telephone company exceeding 60% of revenues.
In Puerto Rico, there was an overall reduction in the fees paid to the
national telephone company in 1996 of $7 million.
Operating Costs. Operating costs decreased by $23 million from $218
million in 1995 to $195 million in 1996. As a percentage of revenues, operating
costs decreased from 33.3% in 1995 to 30.1% in 1996. Overall, operating costs
decreased by 4% in local currency terms largely due to the discontinuance of
ITT -- Thomas Publishing Europe in 1995. Total costs in Belgium were 3% above
the prior year's costs, while costs in Portugal and The Netherlands were level
with 1995, and South Africa and Ireland combined showed cost declines. In the
other units, there was a general reduction in costs which offset increased paper
costs.
Marketing, General and Administrative. Marketing, general and
administrative expenses of $91 million in 1996 decreased by $44 million from
$135 million in 1995. As a percentage of revenues, marketing, general and
administrative expenses decreased from 20.6% in 1995 to 14.1% in 1996. In local
currency, marketing, general and administrative expenses decreased by
approximately 30% in 1996. Included in the 1995 results was a charge of $9
million for severance and other costs associated with restructuring the
Corporation's headquarters operations. Also, the costs associated with
discontinuing ITT -- Thomas Publishing Europe, which were approximately $18
million, were included in 1995. Excluding the impact of the restructuring charge
and the costs associated with discontinuing ITT -- Thomas Publishing Europe,
marketing, general and administrative expenses decreased by $17 million or
approximately 16% (equivalent to a reduction in local currency terms of
approximately 9%) in 1996 primarily due to significant reductions in its
expenses relating to various competition issues in Belgium. Portugal maintained
expenses at the 1995 level while The Netherlands had a reduction of 9%,
principally in administrative expenses.
Operating Income. Operating income increased by $48 million in 1996 to
$208 million from $160 million in 1995. Excluding the restructuring charge in
1995 and the ITT -- Thomas Publishing Europe operations, operating income
increased by $21 million or 11% in 1996 from the previous year. This increase in
operating income in 1996 as compared to 1995 resulted from the revenue and cost
factors discussed above; principally the reduction in operating costs.
Interest expenses decreased from $77 million in 1995 to $72 million in
1996, largely due to the timing of borrowings during the periods.
Income taxes increased to $50 million in 1996 from $42 million in 1995. The
effective tax rate in 1996 was 37% as compared to 50.6% in 1995. This difference
in effective tax rates between the periods was mainly due to foreign taxes
including the effects of dividend and remittance taxes.
Net income after taxes increased from $21 million to $54 million because of
the increase in pre-tax income of $52 million and the lower effective tax rate.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues of $654 million in 1995 increased from $646 million in
1994. In local currency, revenues decreased by 9% during this time period. This
decrease was primarily due to the 33% reduction of Belgian revenues (in local
currency) as a result of the Corporation's decision to compete with the
directory operations of the national telephone company (BDS). In Portugal,
revenues decreased 3% in local currency as a result of the loss of some
advertisers, but in The Netherlands, revenues increased 3% in local currency as
increased competition and the Corporation's marketing efforts increased the
total directory advertising market. ITT -- Thomas Publishing Europe generated
revenues of $5 million in 1995, and had no revenues in 1994.
A-11
<PAGE> 55
Fees to National Telephone Companies. Fees paid by the Corporation to
national telephone companies in 1995 decreased approximately $100 million from
$224 million in 1994 to $124 million in 1995. As a percentage of revenues, fees
paid by the Corporation to national telephone companies decreased from 34.7% in
1994 to 19% in 1995. The most important factor for this decrease was the
Corporation's decision to become an independent directory operator in Belgium
and compete against the national telephone company.
Operating Costs. Operating costs in 1995 increased by $43 million from
$175 million in 1994, to $218 million in 1995. As a percentage of revenues,
operating costs increased to 33.3% in 1995 from 27.1% in 1994. In local
currency, operating costs increased by 9%. Paper and printing costs increased
from $60 million in 1994 to $68 million in 1995. The increase in operating costs
from 1994 to 1995 on a local currency basis resulted substantially from the
increase in paper and printing costs and the operating costs of ITT -- Thomas
Publishing Europe.
Marketing, General and Administrative. Marketing, general and
administrative expenses of $135 million in 1995 increased by $44 million from
$91 million in 1994, including a $9 million charge for severance and other costs
associated with restructuring the Corporation's headquarters, and $18 million
for discontinuing ITT -- Thomas Publishing Europe. As a percentage of revenues,
marketing, general and administrative expenses increased to 20.6% in 1995 from
14.1% in 1994. In local currency, marketing, general and administrative expenses
increased approximately 35% in 1995. Excluding the impact of the restructuring
charge and ITT -- Thomas Publishing Europe, marketing, general and
administrative expenses increased by 8% in local currency terms, primarily as a
result of the new competitive environment in Belgium.
Operating Income. Operating income increased by $19 million or 13.5% as
the reduction in fees paid to the national telephone company in Belgium
significantly exceeded all of the incremental costs and expenses associated with
competing against the national telephone company and the non-recurring expenses
described above.
Interest expense of $77 million in 1995 was comparable to the interest
expense of $76 million in 1994.
Income taxes of $42 million in 1995 were significantly higher than the
income taxes of $26 million in 1994. This resulted from a combination of an $18
million increase in pre-tax income and a higher effective tax rate of 50.6% in
1995, as compared with 40% in 1994.
Net income of $21 million in 1995 decreased by $2 million from $23 million
in 1994, principally as a result of the increased effective tax rate in 1995, as
compared to 1994.
LIQUIDITY AND CAPITAL RESOURCES
Historical Cash Flows from Operating Activities. Net cash provided by
operations was $16 million in the six months ended June 30, 1997, as compared to
$21 million in the corresponding prior year period. Net cash from operating
activities decreased from $85 million in the year 1995 to $58 million in 1996.
This decrease resulted primarily from an increase in working capital,
principally represented by a reduction in payables and accrued expenses.
Historical Cash Flows from Investing Activities. Net cash used for
investing activities, which were comprised solely of additions to plant,
property and equipment and investments in subsidiaries, was $5 million, $25
million and $7 million for 1996, 1995 and 1994, respectively. The acquisition of
a 60% interest in the South African operation in 1995 required a $19 million
initial cash investment.
Historical Cash Flows from Financing Activities. Net cash used for
financing activities was $69 million, $37 million and $2 million for 1996, 1995
and 1994, respectively. These amounts relate principally to changes in
short-term debt and intercompany transactions (from a net increase of borrowing
of $98 million in 1995 to a net repayment of $54 million in 1996).
Credit Facilities and Notes. In connection with the Comprehensive Plan and
related transactions, the Corporation's Belgian subsidiary will borrow $335
million under a credit facility, and will issue $320 million of notes for total
indebtedness of $655 million. In addition, the Corporation's Dutch subsidiary
will borrow
A-12
<PAGE> 56
$220 million under a credit facility, and will issue $175 million of notes for
total indebtedness of $395 million. The Corporation also will borrow $225
million under the Senior Facility.
On a pro forma basis, after giving effect to the Comprehensive Plan and
related transactions as though they occurred on June 30, 1997, the Corporation
would have had, on a consolidated basis, approximately $1,275 million of
indebtedness and, after giving effect to the Strategic Investment, $1,050
million of indebtedness. On a pro forma basis, after giving effect to the
Comprehensive Plan and related transactions as though they occurred on January
1, 1996, the Corporation's estimated net interest expense would have been
approximately $106 million and $53 million (and, after giving effect to the
Strategic Investment, approximately $77 million and $38 million) for 1996 and
the six months ended June 30, 1997, respectively, excluding any related
financing fees.
Capital Expenditures. The Corporation's operations are not capital
intensive. Capital expenditures were $4 million and $3 million in the six months
ended June 30, 1997 and 1996, respectively, and $6 million, $7 million and $6
million in 1996, 1995 and 1994, respectively.
Liquidity. As noted above, the Corporation arranged borrowings and debt
securities issuances necessary to consummate the Tender Offers and the repayment
of certain other indebtedness and to provide working capital to each company
following the Distributions. Cash flows are expected to be sufficient to service
the Corporation's indebtedness, satisfy tax obligations and fund maintenance
capital expenditures and other liquidity needs. Additional liquidity needs are
expected to be funded through traditional debt or equity financing, asset sales
or any combination thereof.
Upon the consummation of the Distributions and the Tender Offers, the
Corporation will be more leveraged than ITT was prior to the consummation of the
Distributions and will have indebtedness that is substantial in relation to
stockholders' equity. As of June 30, 1997, on a pro forma basis after giving
effect to the Distributions and the Tender Offers, the Corporation and its
consolidated subsidiaries would have had an aggregate of $1,275 million of
outstanding indebtedness and, after giving effect to the Strategic Investment,
an aggregate of $1,050 million of outstanding indebtedness.
The Corporation's high degree of leverage could have important consequence
for stockholders, including the following: (i) its ability to obtain additional
financing on favorable terms may be impaired in the future; (ii) a substantial
portion of its cash flow from operations will be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the funds available
for other purposes; (iii) covenants contained in the Senior Facility or other
financing agreements may restrict the Corporation's ability to dispose of
assets, incur additional indebtedness, repay other indebtedness or amend other
debt instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in other corporate activities; (iv) the Corporation may be more leveraged
than some of its competitors, which may place the Corporation at a competitive
disadvantage; and (v) the Corporation's substantial degree of leverage may
hinder its ability to adjust rapidly to changing market conditions and could
make it more vulnerable in the event of a downturn in general economic
conditions or in its business.
The Corporation's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on its financial and
operating performance, which, in turn is subject to prevailing economic
conditions and to certain financial, business and other factors beyond its
control. If the Corporation's cash flow and capital resources are insufficient
to fund its debt service obligations, the Corporation may be forced to reduce or
delay planned expansion and capital expenditures, sell assets, obtain additional
equity capital or restructure its debt. Although the Corporation's management
believes that its cash flow will be adequate to meet its interest and principal
payments, there can be no assurance that its operating results, cash flow and
capital resources will be sufficient for payment of its indebtedness in the
future.
A-13
<PAGE> 57
ITT CORPORATION AND SUBSIDIARIES
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................................. A-15
Consolidated Income for the three years ended December 31, 1996...................... A-16
Consolidated Balance Sheet as of December 31, 1996 and 1995.......................... A-17
Consolidated Cash Flow for the three years ended December 31, 1996................... A-18
Consolidated Stockholders Equity (Deficit) for the three years ended December 31,
1996............................................................................... A-19
Notes to Financial Statements........................................................ A-20
Geographical Information -- Total Segments........................................... A-28
Quarterly Financial Data for 1996 and 1995 (Unaudited)............................... A-28
Schedule of Valuation and Qualifying Accounts........................................ A-29
</TABLE>
A-14
<PAGE> 58
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT CORPORATION:
We have audited the accompanying consolidated balance sheet of ITT
Corporation (a Nevada corporation, which is expected to be renamed ITT
Information Services, Inc.) and subsidiaries, as defined in the notes, as of
December 31, 1996 and 1995, and the related consolidated statements of income,
cash flow and stockholders equity (deficit) for each of the three years in the
period ended December 31, 1996, as described in the accompanying Index to
Financial Statements and Schedule. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ITT
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements and Schedule is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
July 15, 1997
A-15
<PAGE> 59
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................................. $647 $654 $646
Costs and expenses:
Salaries, benefits and other operating.............................. 332 342 399
Marketing, general and administrative............................... 91 135 91
Depreciation and amortization....................................... 16 17 15
---- ---- ----
439 494 505
---- ---- ----
208 160 141
Interest expense...................................................... (72) (77) (76)
Miscellaneous expense, net............................................ (1) -- --
---- ---- ----
135 83 65
Provision for income taxes............................................ (50) (42) (26)
Minority equity....................................................... (31) (20) (16)
---- ---- ----
Net income............................................................ $ 54 $ 21 $ 23
==== ==== ====
Earnings per share.................................................... $.46 $.18 $.20
==== ==== ====
Weighted average common and common equivalent shares.................. 118 118 117
==== ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-16
<PAGE> 60
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 13 $ 30
Receivables, net......................................................... 358 341
Directories in progress.................................................. 44 41
Prepaid expenses and other............................................... 5 8
----- -----
Total current assets............................................. 420 420
Plant, property and equipment, net......................................... 27 31
Goodwill, net.............................................................. 34 37
Long-term receivables, net................................................. 8 9
Other assets............................................................... 21 22
----- -----
$ 510 $ 519
===== =====
LIABILITIES AND STOCKHOLDERS DEFICIT
Current liabilities:
Accounts payable......................................................... $ 43 $ 57
Accrued expenses......................................................... 93 122
Notes payable............................................................ 46 104
Accrued taxes............................................................ 57 47
----- -----
Total current liabilities........................................ 239 330
Deferred income taxes...................................................... 10 11
Long-term debt............................................................. 1,000 941
Other liabilities.......................................................... 8 7
Minority interest.......................................................... 61 39
----- -----
1,318 1,328
----- -----
STOCKHOLDERS DEFICIT....................................................... (808) (809)
----- -----
$ 510 $ 519
===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-17
<PAGE> 61
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................... $ 54 $ 21 $ 23
Adjustments to net income:
Depreciation and amortization...................................... 16 17 12
Provision for doubtful receivables................................. 14 18 14
Minority equity in net income...................................... 31 20 16
Changes in working capital:
Receivables........................................................ (8) (3) (10)
Directories in progress............................................ (7) (4) --
Accounts payable................................................... (11) 13 (4)
Accrued expenses................................................... (26) 26 (29)
Accrued and deferred taxes........................................... 4 (9) (13)
Other, net........................................................... (9) (14) 1
---- ----- ----
Cash from operating activities..................................... 58 85 10
---- ----- ----
INVESTING ACTIVITIES
Additions to plant, property and equipment........................... (6) (7) (6)
Acquisition, net of acquired cash.................................... -- (19) --
Other, net........................................................... 1 1 (1)
---- ----- ----
Cash used for investing activities................................. (5) (25) (7)
---- ----- ----
FINANCING ACTIVITIES
Short-term debt, net................................................. (54) 98 2
Transfers (to)/from Destinations..................................... (12) (134) 3
Other, net........................................................... (3) (1) (7)
---- ----- ----
Cash used for financing activities................................. (69) (37) (2)
---- ----- ----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS.................... (1) 2 --
---- ----- ----
(Decrease)/increase in cash and cash equivalents..................... (17) 25 1
Cash and Cash Equivalents -- Beginning of Year....................... 30 5 4
---- ----- ----
CASH AND CASH EQUIVALENTS -- END OF YEAR............................. $ 13 $ 30 $ 5
==== ===== ====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................... $ 81 $ 76 $ 77
==== ===== ====
Income taxes....................................................... $ 69 $ 26 $ 37
==== ===== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-18
<PAGE> 62
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS EQUITY (DEFICIT)
(IN MILLIONS)
<TABLE>
<S> <C>
Balance -- January 1, 1994......................................................... $ 170
Net income......................................................................... 23
Translation of financial statements................................................ (15)
Transfers from Destinations, net................................................... 21
-------
Balance -- December 31, 1994....................................................... 199
Net income......................................................................... 21
Translation of financial statements................................................ (6)
Transfers to Destinations, net..................................................... (1,023)
-------
Balance -- December 31, 1995....................................................... (809)
Net income......................................................................... 54
Translation of financial statements................................................ (15)
Transfers to Destinations, net..................................................... (38)
-------
Balance -- December 31, 1996....................................................... $ (808)
=======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-19
<PAGE> 63
ITT CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
DISTRIBUTIONS AND BASIS OF PRESENTATION
On July 15, 1997, the Board of Directors of ITT Corporation ("ITT")
approved a plan to distribute (the "Distributions") to the holders of ITT's
common stock all the outstanding shares of common stock of ITT Destinations,
Inc. ("Destinations"), a newly formed company that will hold the hotels and
gaming businesses of ITT, and all the shares representing its approximately 83%
interest in ITT Educational Services, Inc. ("ITT Educational"), its
publicly-traded postsecondary technical education business. After the
Distributions, the shares of ITT (which is expected to be renamed ITT
Information Services, Inc. and is herein referred to as the "Company") will
represent its interest in its telephone directories publishing businesses.
The Company publishes telephone directories -- alphabetical and
classified -- and also publishes specialized directories. The Company's
principal source of revenue is advertisements published in its directories. Its
principal publications are in Belgium, The Netherlands, Portugal, the Republic
of Ireland, the Republic of South Africa, Puerto Rico and the United States
Virgin Islands. The Company publishes directories in these jurisdictions either
pursuant to a contract with the national telecommunications provider or as a
proprietary directory in such jurisdiction.
The accompanying consolidated financial statements, which include the
accounts of the Company and its wholly and majority owned directory publishing
subsidiaries, present the financial position, results of operations and cash
flows of the Company in a manner that accounts for the Distributions as if the
Company was spun-off by Destinations. Consequently, the accompanying financial
statements present the historical basis in the operations of the Company, after
adjustment for certain indebtedness not allocated to Destinations. All material
intercompany transactions and balances have been eliminated. Investments in
affiliated companies, owned more than 20%, but not in excess of 50%, are
recorded on the equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING POLICIES
Revenue Recognition
Revenues are recognized as directories are published and are comprised of
the total value of advertising contracts sold by the Company. Costs and expenses
include remuneration and franchise fees paid to telephone authorities in
jurisdictions where the Company operates as a publisher of directories or
operates as an agent.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Directories in Progress
Directories in progress include direct and indirect costs applicable to
unpublished directories. Such costs include the costs of soliciting advertising,
compiling and printing the directories. Where the Company is the publisher of
these directories, income and the related costs are recognized concurrently with
the distribution of the telephone directories. Revenues on multibook contracts,
however, are recognized at the time of publication of the first book; costs for
future books are accrued at that time. Where the Company operates as an agent of
A-20
<PAGE> 64
the telephone authorities, income and related costs are recognized concurrently
with performance of contractual responsibilities.
Plant, Property and Equipment
Plant, property and equipment are recorded at cost. The Company normally
claims the maximum deduction allowable for tax purposes. In general, for
financial reporting purposes, depreciation is provided on a straight-line basis
over the useful economic lives of the assets involved as follows: Buildings and
improvements -- primarily 15 to 40 years, Machinery, furniture and
equipment -- 2 to 10 years, and Other -- 5 to 10 years. Gains or losses on the
sale or retirement of assets are included in income.
Deferred Charges and Other Non-Current Assets
Costs in connection with computer systems development have been deferred
and are being amortized over three years. At December 31, 1996 and 1995, $9 and
$9, respectively, of these costs were deferred net of accumulated amortization
of $5 and $5, respectively. Amortization expense charged to income was $4, $5
and $4 in 1996, 1995 and 1994, respectively.
Income Taxes
Prior to the Distributions, the Company and its U.S. subsidiaries were
included in the consolidated U.S. Federal tax return of ITT and/or ITT
Industries as applicable and remitted to (received from) ITT and/or ITT
Industries an income tax provision (benefit) computed in accordance with a tax
sharing arrangement. This arrangement generally required that the Company
determine its tax provision (benefit) as if it were filing a separate U.S.
Federal income tax return. During 1996, 1995 and 1994, ITT allocated interest
expense along with the corresponding tax benefit to the Company.
Foreign Currency
Balance sheet accounts are translated at the exchange rates in effect at
each year end and income and expense accounts are translated at the average
rates of exchange prevailing during the year. The national currencies of foreign
operations are generally the functional currencies. Gains and (losses) from
foreign currency transactions are reported currently in costs and expenses and
were insignificant for all periods presented.
Goodwill
The difference between the purchase price and the value ascribed to net
tangible assets of operations acquired has been recorded as goodwill. The
Company does not amortize goodwill relating to companies acquired prior to
November 1, 1970. Unamortized balances were $4 and $4 respectively, as of
December 31, 1996 and 1995.
Goodwill recorded after November 1, 1970 is amortized on a straight-line
basis over varying periods not exceeding forty years. This goodwill is
attributable to directory franchises which management believes to have
indefinite lives based on the expectation of continuing operations either
through the renewal of the franchise contracts or independently. At December 31,
1996 and 1995 goodwill of $34 and $37, respectively, is presented net of
accumulated amortization of $9 and $6, respectively. Amortization expense
charged to income was $4 in 1996, $1 in 1995, and $-- in 1994.
The Company continually reviews goodwill to assess recoverability from
future operations using undiscounted cash flows. Impairments would be recognized
in operating results if a permanent diminution in value is deemed to have
occurred.
Earnings Per Share
Earnings per share were computed based upon the number of ITT common and
common equivalent shares which were outstanding during the applicable periods
presented.
A-21
<PAGE> 65
ACQUISITION
On October 31, 1995, the Company acquired a 60% interest in Maister
Directories (1981) (Pty) Ltd. and an additional 10% interest in Maister
Management Company (Pty) Ltd. (collectively "Maister") of the Republic of South
Africa (bringing its ownership to 60%). Accordingly, the accompanying
consolidated financial statements include the results of Maister from October
31, 1995. The costs of these acquisitions of $38 were allocated to the
proportionate share of the assets acquired and liabilities assumed with the
excess of $25 allocated to goodwill.
The following unaudited pro forma information presents the results of
operations assuming the Maister acquisition occurred at the beginning of the
respective periods:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------
1995 1994
---- ----
<S> <C> <C>
Revenues...................................................... $704 $717
Net income.................................................... $ 24 $ 29
Earnings per share............................................ $.20 $.24
==== ====
</TABLE>
The pro forma information is not necessarily indicative of the results that
would have occurred had the acquisition taken place at the beginning of the
respective periods.
RECEIVABLES
Current receivables are net of allowance for doubtful accounts of $19 and
$24 at December 31, 1996 and 1995, respectively. Included in current receivables
are interest bearing advances to Destinations subsidiaries of $98 and $54 at
December 31, 1996 and 1995, respectively, which are expected to be settled prior
to the Distributions. Such advances bear interest at current market rates. The
fair value of receivables at December 31, 1996 approximates their book value.
PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Land and improvements......................................... $ -- $ 2
Buildings and improvements.................................... 14 14
Machinery, furniture and equipment............................ 51 57
Other......................................................... 17 15
---- ----
82 88
Less: Accumulated depreciation and amortization............... (55) (57)
---- ----
$ 27 $ 31
==== ====
</TABLE>
FORMATION OF JOINT VENTURE
On January 1, 1997, the Company consummated the merger of ITT
Portugal -- Sociedade Gestora de Participacoes Socias, Lda., ITT Paginas
Amarelas, S.A. and ITT Pecas Automoveis Lda. and Portugal Telecom, S.A.
contributed capital to the merged entity. Under the new ownership structure, the
Company owns 50% of the outstanding shares of common stock and the other 50% is
owned by Portugal Telecom, S.A.. All preferred shares are held by the Company.
The preferred shares give right to a preferred dividend of 50% of the
distributable profit of the year with a guaranteed minimum payment, as defined.
The Company receives 75% of the merged entity's net income through a combination
of its common and preferred stock ownership. The merged company has been named
Paginas Amarelas, S.A.
A-22
<PAGE> 66
RESTRUCTURING
The Company recorded a $28 pretax charge in the 1995 third quarter to
restructure and rationalize headquarter operations and provide for the planned
disposal of non-core assets.
Of the total pretax charge, approximately $11 represents severance and
other related employee termination costs. The balance of the restructuring
charge ($17 pretax) related primarily to asset write-offs, lease commitments and
termination penalties and reserve actions in connection with the disposal of
non-core assets and reduced facilities utilization. As of December 31, 1996,
substantially all of these restructuring costs had been paid.
GENERAL AND ADMINISTRATIVE EXPENSES
Included in selling, general and administrative expenses is $2, $2, and $3
in 1996, 1995 and 1994, respectively, which represents the Company's share of
costs incurred by ITT for legal, financial, communication and other
administrative services. In the opinion of management, ITT's methods for
allocating costs are reasonable. However, the net cost of these services to ITT
are not necessarily indicative of the costs that would have been incurred if the
Company had been operated as an unaffiliated entity. It is not practical to
estimate such costs on a stand-alone basis.
DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Bank loans and other short-term............................ $ 46 $ 104
Allocated debt of ITT...................................... 1,000 941
------ ------
$1,046 $1,045
====== ======
</TABLE>
ITT's historical practice has been to incur indebtedness for its
consolidated group at the parent company level or at a limited number of
subsidiaries, rather than at the operating company level, and to centrally
manage various cash functions. Consequently, a portion of the corporate debt of
ITT along with the corresponding interest expense has been allocated to the
Company. Interest expense was allocated at a rate equivalent to the overall
weighted average interest rate of ITT, which was 7.5% for 1996, 1995 and 1994.
Total pre-tax interest allocated to the Company was $75, $71 and $67 in 1996,
1995 and 1994, respectively.
Long-term corporate debt, including indebtedness allocated to Destinations,
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
DESCRIPTION 1996 1995
--------------------------------------------------------- ------- -------
<S> <C> <C>
Commercial paper
(5.75% and 5.94% weighted average rate in 1996 and
1995, respectively)................................. $ 1,102 $ 1,329
6.25% notes due 2000..................................... 698 698
6.75% notes due 2003..................................... 250 --
6.75% notes due 2005..................................... 449 449
7.375% debentures due 2015............................... 448 448
7.75% debentures due 2025................................ 148 148
------- -------
Total.................................................... 3,095 3,072
Less: indebtedness allocated to Destinations............. (2,095) (2,131)
------- -------
$ 1,000 $ 941
======= =======
</TABLE>
Prior to the Distributions, ITT intends to realign its existing
indebtedness. As part of the debt realignment, ITT will commence tender offers
for all publicly held debt securities issued by ITT and repay
A-23
<PAGE> 67
certain other debt. These tender offers will be financed by a combination of new
lines of credit of Destinations and the Company. Upon completion of the debt
realignment, the Company will have responsibility for approximately $1.0 billion
of debt, subject to certain adjustments, and Destinations will have
responsibility for the remaining indebtedness of ITT. The fair value of
indebtedness approximates its book value.
INCOME TAX
Income tax data is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pretax income (loss)
U.S......................................................... $(54) $(69) $(39)
Foreign..................................................... 189 152 104
---- ---- ----
$135 $ 83 $ 65
==== ==== ====
Provision (benefit) for income tax*
Current:
U.S. Federal................................................ $(24) $(31) $(17)
Foreign..................................................... 69 77 58
---- ---- ----
45 46 41
---- ---- ----
Deferred:
U.S. Federal................................................ 1 1 1
Foreign and other........................................... 4 (5) (16)
---- ---- ----
5 (4) (15)
---- ---- ----
$ 50 $ 42 $ 26
==== ==== ====
</TABLE>
- ---------------
* The provision (benefit) for income taxes was computed in accordance with tax
sharing arrangements among the Company, ITT Industries, Inc. and ITT that
generally requires that such provision (benefit) be computed as if the Company
were a stand-alone entity. The primary exception to the stand-alone
computation relates to the benefits arising from the allocation of interest
expense to the Company. On a pro forma basis, the Company's tax provision,
assuming the benefits of interest allocation had been limited to the Company's
ability to deduct them on its separate U.S. Federal tax return, would have
been $73, $72 and $42 for the years ended December 31, 1996, 1995 and 1994,
respectively.
No provision was made for U.S. taxes payable on undistributed foreign
earnings amounting to approximately $125 since these amounts are permanently
reinvested.
Deferred income taxes represent the tax effect of differences between the
book and tax basis of assets and liabilities. Deferred tax (assets) liabilities
include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Plant, property and equipment................................. $ 2 $ 2
Basis differentials........................................... 18 17
Other......................................................... (10) (8)
---- ---
$ 10 $11
==== ===
</TABLE>
A-24
<PAGE> 68
A reconciliation of the tax provision at the U.S. statutory rate to the
provision for income taxes as reported is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate............................ $ 47 $ 29 $ 23
Tax on repatriation of foreign earnings......................... 4 3 3
Non-deductible goodwill......................................... 1 -- --
Foreign tax rate differential................................... 3 13 --
Other........................................................... (5) (3) --
--- --- ---
Provision for income taxes...................................... $ 50 $ 42 $ 26
=== === ===
</TABLE>
CAPITAL STOCK
ITT is authorized to issue 50 million shares of preferred stock, none of
which was outstanding at December 31, 1996.
In connection with its distribution from ITT Industries, ITT issued one
Series A Participating Cumulative Preferred Stock Purchase Right (a "Right") for
each share of ITT common stock outstanding. Additionally, Rights will be issued
in respect of common stock subsequently issued until the Rights Distribution
Date, as defined, and, in certain circumstances, with respect to common stock
issued after the Rights Distribution Date. In the event a person or group has
acquired, or has obtained the right to acquire, beneficial ownership of more
than 15% of the outstanding shares of common stock or certain specified tender
offers occur for more than 15% of the common stock, or in the event ITT is
acquired in a merger or other business combination or certain other specified
events occur, the Right entitles each holder, subject to certain exceptions, to
purchase the number of 1/1000ths of a share of Series A Participating Cumulative
Preferred Stock of ITT equivalent to the number of shares of ITT common stock or
common stock of the surviving corporation or other specified entity, as
applicable, which have a market value of twice the specified Purchase Price at
the relevant date. The Rights, which do not have voting rights, expire on the
tenth anniversary of the related rights agreement and are redeemable by ITT at
any time at a price of $.01 per Right.
EMPLOYEE BENEFITS
Certain employees of the Company, Destinations and ITT Educational
participate in ITT's stock incentive plans. The ITT incentive stock plan
provides for the granting of ITT common stock options and other stock awards at
a price not greater than market value at the date of grant. Outstanding options
on ITT common stock held by the Company, Destinations and ITT Educational
employees will be converted into new options of the Company, Destinations and
ITT Educational, as applicable, so as to preserve the aggregate economic value
of the options held prior to the Distribution.
Certain employees of the Company participate in ITT's Salaried Retirement
Plan and ITT 401(k) Retirement Savings Plan. Subsequent to the Distribution, the
Company intends to establish similar employee benefit plans. The Company
sponsors defined benefit pension plans covering a significant percentage of its
employees. The plans' assets are comprised of a broad range of domestic and
foreign equity securities, fixed income investments and real estate.
The components of net periodic pension cost are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................... $ 5 $ 4 $ 4
Interest cost................................................... 5 5 4
Return on assets................................................ (6) (6) --
Net amortization and deferral................................... 1 1 (4)
--- --- ---
Net periodic expense....................................... $ 5 $ 4 $ 4
=== === ===
</TABLE>
A-25
<PAGE> 69
The following table sets forth the funded status of the Company's pension
plans, amounts recognized in the Company's Balance Sheet at December 31, 1996
and 1995, and the principal weighted average assumptions inherent in their
determination:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1996 1995
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation --
Vested benefit obligation................... $ 5 $ 61 $ 4 $ 56
Accumulated benefit obligation.............. $ 5 $ 64 $ 4 $ 60
=== ==== === ===
Projected benefit obligation.................. $ 7 $ 79 $ 4 $ 78
Plan assets at fair value..................... 2 101 -- 81
--- ---- --- ---
Projected benefit obligation (in excess of)
less than plan assets....................... (5) 22 (4) 3
Unrecognized net gain......................... -- (23) -- (5)
Unrecognized net obligation................... -- 4 -- 4
--- ---- --- ---
Pension asset (liability) recognized in the
consolidated balance sheet.................. $ (5) $ 3 $ (4) $ 2
=== ==== === ===
Discount rate................................. 7.50% 6.82% 7.50% 7.08%
Rate of return on invested assets............. 9.75% 7.53% 9.75% 7.51%
Salary increase assumption.................... 4.50% 5.08% 6.00% 5.42%
</TABLE>
For substantially all foreign plans, the total of assets and recorded
liabilities exceed accumulated benefits.
COMMITMENTS AND CONTINGENCIES
The following presents the Company's obligations for future minimum rental
payments under long-term operating lease contracts which have an initial or
remaining term in excess of one year:
<TABLE>
<S> <C>
1997................................................... $ 9
1998................................................... 6
1999................................................... 3
2000................................................... 2
2001................................................... 1
Thereafter............................................. 8
---
$29
===
</TABLE>
Rental expense related to operating leases amounted to $11, $11 and $13 in
1996, 1995 and 1994, respectively.
The Company has entered into contracts with various foreign telephone
companies to publish telephone directories for varying periods through 2000. As
of December 31, 1996, the Company is required to make guaranteed aggregate
minimum payments of $162 through 2000. Directory publishing contracts are
renegotiable at the time of their expiration. The 1996 revenues of contracts
renewable in future years is summarized below:
<TABLE>
<CAPTION>
YEAR OF
RENEWAL
-------------
1999 2000
---- ----
<S> <C> <C>
Revenues...................................... $60 $111
</TABLE>
The Company and its subsidiaries are involved in various legal matters.
Reserves have been established when the outcome is probable and can be
reasonably estimated. While the ultimate results of claims and
A-26
<PAGE> 70
litigation cannot be determined, the Company does not expect that the resolution
of all legal matters will have a material adverse effect on its consolidated
results of operations, financial position or cash flow.
In order to assist in the orderly transition of Destinations and ITT
Educational into separate, publicly held companies, the Company intends to
modify, amend or enter into certain contractual agreements with Destinations and
ITT Educational, including a tax sharing agreement (see "Income Taxes"), an
employee benefits agreement, an insurance agreement, an administrative services
agreement and other ancillary agreements. These agreements will provide, among
other things that: (i) Destinations will become the sole sponsor of the ITT
Retirement Plan for Salaried Employees, the ITT Investment Savings Plan, and
various ITT welfare benefit plans; (ii) an allocation of responsibilities for
tax payments owing in respect of the Distributions will be made among the
Company, Destinations and ITT Educational; (iii) Destinations and ITT
Educational will retain specific insurance policies relating to their businesses
and will continue to have rights and obligations under certain parent-company
level insurance policies of the Company and (iv) Destinations will provide
certain transition services to the Company for a limited period of time
following the Distributions. The Company may be liable to or due reimbursement
from Destinations relating to the resolution of certain matters under these
agreements.
NEW ACCOUNTING PRONOUNCEMENT
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share," which is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS No. 128 requires replacement of primary and
fully diluted earnings per share with basic and diluted earnings per share. The
impact of SFAS No. 128 to the Company's current presentation is immaterial for
all periods presented.
BUSINESS SEGMENT INFORMATION
The Company is primarily engaged in the business of publishing telephone
directories. It does not operate in any other industry segment.
SUBSEQUENT EVENT
On July 15, 1997, the Company entered into a definitive agreement with an
investor to purchase approximately 32.9% of the outstanding Common Stock of the
Company and warrants to purchase shares representing an additional 13.7% of the
outstanding Common Stock of the Company for aggregate consideration of $225. The
warrants will have a ten year term and permit the investor to buy Common Stock
of the Company at a 50% premium to the investor's initial purchase price.
Consummation of this transaction is subject to certain conditions including,
among other things, approval of the Company's stockholders following the
Distributions.
In addition, on July 15, 1997, the Company purchased for $254 the 20%
minority interest in ITT World Directories, Inc., which will be the only direct
subsidiary of the Company after the Distributions, bringing its ownership of ITT
World Directories, Inc. to 100%.
A-27
<PAGE> 71
GEOGRAPHICAL INFORMATION
<TABLE>
<CAPTION>
REVENUES
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Western Europe................................................ $512 $558 $578
Africa........................................................ 73 26 --
United States................................................. 62 70 68
---- ---- ----
Total Segments................................................ $647 $654 $646
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Western Europe................................................ $181 $146 $121
Africa........................................................ 11 6 2
United States................................................. 9 (5) 6
Other -- Asia................................................. 7 13 12
---- ---- ----
Total Segments................................................ $208 $160 $141
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Western Europe................................................ $335 $348 $297
Africa........................................................ 85 111 --
United States................................................. 84 54 88
Other -- Asia................................................. 6 6 6
---- ---- ----
Total Segments................................................ $510 $519 $391
==== ==== ====
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- ----
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
1996
Revenues........................................ $ 41 $ 250 $ 170 $ 186 $647
Costs and expenses.............................. $ 36 $ 153 $ 116 $ 134 $439
Net income (loss)............................... $ (8) $ 34 $ 12 $ 16 $ 54
Earnings (loss) per share....................... $(.07) $ .28 $ .10 $ .14 $.46
===== ==== ===== ==== ====
1995
Revenues........................................ $ 41 $ 257 $ 148 $ 208 $654
Costs and expenses.............................. $ 37 $ 167 $ 124 $ 166 $494
Net income (loss)............................... $ (10) $ 29 $ (5) $ 7 $ 21
Earnings (loss) per share....................... $(.09) $ .24 $ (.04) $ .06 $.18
===== ==== ===== ==== ====
</TABLE>
A-28
<PAGE> 72
SCHEDULE II
ITT CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS (DEDUCTIONS)
--------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATION RECOVERIES BALANCE
DESCRIPTION JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
- ------------------------------------------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Trade Receivables -- Allowance for doubtful
accounts................................. $24 $ 14 $(1) $ (18) $19
YEAR ENDED DECEMBER 31, 1995
Trade Receivables -- Allowance for doubtful
accounts................................. $26 $ 18 $ 1 $ (21) $24
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for doubtful
accounts................................. $23 $ 14 $ 2 $ (13) $26
</TABLE>
A-29
<PAGE> 73
ITT CORPORATION AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Income for the six months ended June 30, 1997 and 1996 (Unaudited)...... A-31
Consolidated Balance Sheet as of June 30, 1997 (Unaudited) and December 31, 1996..... A-32
Consolidated Cash Flow for the six months ended June 30, 1997 and 1996 (Unaudited)... A-33
Notes to Financial Statements (Unaudited)............................................ A-34
</TABLE>
A-30
<PAGE> 74
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
----- -----
<S> <C> <C>
Revenues................................................................. $ 276 $ 291
Costs and expenses:
Salaries, benefits and other operating................................. 143 138
Marketing, general and administrative.................................. 42 42
Depreciation and amortization.......................................... 8 8
------ ------
193 188
------ ------
83 103
Interest expense......................................................... (36) (37)
------ ------
47 66
Provision for income taxes............................................... (19) (26)
Minority equity.......................................................... (13) (14)
------ ------
Net income............................................................... $ 15 $ 26
====== ======
Earnings per share....................................................... $0.13 $0.21
====== ======
Weighted average common equivalent shares................................ 118 119
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-31
<PAGE> 75
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 24 $ 13
Receivables, net.................................................. 302 358
Directories in progress........................................... 37 44
Prepaid expenses and other........................................ 11 5
------ ------
Total current assets...................................... 374 420
Plant, property and equipment, net.................................. 25 27
Goodwill, net....................................................... 34 34
Long-term receivables, net.......................................... 5 8
Other assets........................................................ 21 21
------ ------
$ 459 $ 510
====== ======
LIABILITIES AND STOCKHOLDERS DEFICIT
Current liabilities:
Accounts payable.................................................. $ 25 $ 43
Accrued expenses.................................................. 87 93
Notes payable..................................................... 27 46
Accrued taxes..................................................... 58 57
------ ------
Total current liabilities................................. 197 239
Deferred income taxes............................................... 9 10
Long-term debt...................................................... 1,000 1,000
Other liabilities................................................... 8 8
Minority interest................................................... 60 61
------ ------
1,274 1,318
------ ------
STOCKHOLDERS DEFICIT................................................ (815) (808)
------ ------
$ 459 $ 510
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
A-32
<PAGE> 76
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................................. $ 15 $ 26
Adjustments to net income:
Depreciation and amortization......................................... 8 7
Provision for doubtful receivables.................................... 6 6
Minority equity in net income......................................... 13 14
Changes in working capital:
Receivables........................................................... (6) (1)
Directories in progress............................................... 3 --
Accounts payable...................................................... (21) (29)
Accrued expenses...................................................... 2 (8)
Accrued and deferred taxes.............................................. 3 17
Other, net.............................................................. (7) (11)
---- ----
Cash from operating activities........................................ 16 21
---- ----
INVESTING ACTIVITIES
Additions to plant, property and equipment.............................. (4) (3)
Other, net.............................................................. -- (1)
---- ----
Cash used for investing activities.................................... (4) (4)
---- ----
FINANCING ACTIVITIES
Short-term debt, net.................................................... (14) 8
Transfers from/(to) Destinations........................................ 26 (21)
Other, net.............................................................. (12) 1
---- ----
Cash used for financing activities.................................... -- (12)
---- ----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS....................... (1) (2)
---- ----
Increase in cash and cash equivalents................................... 11 3
Cash and Cash Equivalents -- Beginning of Period........................ 13 30
---- ----
CASH AND CASH EQUIVALENTS -- END OF PERIOD.............................. $ 24 $ 33
==== ====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................................. $ 41 $ 41
==== ====
Income taxes.......................................................... $ 36 $ 30
==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
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<PAGE> 77
ITT CORPORATION
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
DISTRIBUTIONS AND BASIS OF PRESENTATION
On July 15, 1997, the Board of Directors of ITT Corporation ("ITT")
approved a plan to distribute (the "Distributions") to the holders of ITT's
common stock all the outstanding shares of common stock of ITT Destinations,
Inc. ("Destinations"), a newly formed company that will hold the hotels and
gaming businesses of ITT, and all the shares representing its approximately 83%
interest in ITT Educational Services, Inc. ("ITT Educational"), its
publicly-traded postsecondary technical education business. After the
Distributions, the shares of ITT (which is expected to be renamed ITT
Information Services, Inc. and is herein referred to as the "Company") will
represent its interest in its telephone directories publishing businesses.
The Company publishes telephone directories -- alphabetical and
classified -- and also publishes specialized directories. The Company's
principal source of revenue in connection with its operations is advertisements
published in its directories. Its principal publications are in Belgium, The
Netherlands, Portugal, the Republic of South Africa, the Republic of Ireland,
Puerto Rico and the United States Virgin Islands. The Company publishes in these
jurisdictions either pursuant to a contract with the national telecommunications
provider or as a proprietary directory in such jurisdiction.
Prior to the Distributions, ITT intends to realign its existing
indebtedness. As part of the debt realignment, certain debt of Destinations will
be offered in exchange for certain issues of ITT debt. ITT will commence tender
offers for all publicly held debt securities issued by ITT and repay certain
other debt. These tender offers will be financed by a combination of new lines
of credit of Destinations and the Company. Upon completion of the debt
realignment, the Company will have responsibility for approximately $1.0 billion
of debt, subject to certain adjustments and Destinations will have
responsibility for the remaining indebtedness of ITT.
The accompanying consolidated financial statements, which include the
accounts of the Company and its wholly and majority owned directory publishing
subsidiaries, present the financial position, results of operations and cash
flows of the Company in a manner that accounts for the Distributions as if the
Company was spun-off by Destinations. Consequently, the accompanying financial
statements present the historical basis in the operations of the Company, after
adjustment for certain indebtedness not allocated to Destinations. All material
intercompany transactions and balances have been eliminated. Investments in
affiliated companies, owned more than 20%, but not in excess of 50%, are
recorded on the equity method.
INTERIM PERIOD FINANCIAL STATEMENTS
The unaudited consolidated financial statements reflect all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position of the Company at June 30, 1997 and their results of
operations and cash flows for the six months ended June 30, 1997 and 1996.
Interim results are not necessarily indicative of full year performances.
EARNINGS PER SHARE
Earnings per share were computed based upon the number of ITT common and
common equivalent shares which were outstanding on June 30, 1997.
SUBSEQUENT EVENT
On July 15, 1997, the Company entered into a definitive agreement with an
investor to purchase approximately 32.9% of the outstanding Common Stock of the
Company and warrants to purchase Shares representing an additional 13.7% of the
outstanding Common Stock of the Company for aggregate consideration of $225. The
warrants will have a ten year term and permit the investor to buy Common Stock
of the Company at a 50% premium to the investor's initial purchase price.
Consummation of this transaction is subject to certain conditions including,
among other things, approval of the Company's stockholders following the
Distributions.
In addition, on July 15, 1997, the Company purchased for $254 the 20%
minority interest in ITT World Directories, Inc., which will be the only direct
subsidiary of the Company after the Distributions, bringing its ownership of ITT
World Directories, Inc. to 100%.
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<PAGE> 78
APPENDIX B
INVESTMENT AGREEMENT
BETWEEN ITT CORPORATION
AND CDRV ACQUISITION, L.L.C.
DATED AS OF JULY 15, 1997
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INVESTMENT AGREEMENT, dated as of July 15, 1997, between CDRV Acquisition,
L.L.C., a Delaware limited liability company ("Purchaser") and ITT Corporation,
a Nevada corporation (the "Company").
WHEREAS the Board of Directors of the Company has approved a transaction
pursuant to which (a) all the assets of the Company, other than the Directories
Assets (as defined in Schedule 1) and the shares of common stock (the "ESI
Shares") of ITT Educational Services, Inc. ("ESI"), will be contributed by the
Company to a wholly owned Subsidiary (as defined in Section 12.01) of the
Company organized under the laws of the State of Nevada ("Newco") and all the
liabilities of the Company, other than the Directories Liabilities (as defined
in Schedule 1), will be assumed by Newco and certain other transactions will be
consummated and (b) the Company will distribute all the issued and outstanding
shares of Common Stock, no par value, of Newco ("Newco Common Stock"), to the
holders of record of shares of Common Stock, no par value, of the Company
("Common Stock"), other than shares held in the treasury of the Company, on a
share-for-share basis (the "Newco Distribution" and, together with the ESI
Distribution (as defined below), the "Distributions").
WHEREAS the Board of the Directors of the Company has approved a
transaction pursuant to which and subject to the terms of which, the Company
will distribute the ESI Shares to the holders of record of Common Stock on a pro
rata basis (the "ESI Distribution").
WHEREAS, in connection with the Distributions, the Company expects to (a)
execute and deliver (i) a distribution agreement to effect the Newco
Distribution (the "Newco Distribution Agreement"), (ii) a distribution agreement
to effect the ESI Distribution (the "ESI Distribution Agreement" and, together
with the Newco Distribution Agreement, the "Distribution Agreements"), (iii) a
tax allocation agreement (the "Tax Allocation Agreement"), (iv) an employee
benefits services and liability agreement (the "Employee Benefits Services and
Liability Agreement"), (v) an intellectual property agreement (the "Newco
Intellectual Property Agreement") and (vi) an intellectual property agreement
(the "ESI Intellectual Property Agreement" and, together with the Newco
Intellectual Property Agreement, the "Intellectual Property Agreements"), (b)
cause Newco to execute and deliver the Tax Allocation Agreement, the Employee
Benefits Services and Liability Agreement and the Newco Intellectual Property
Agreement and (c) cause ESI to execute and deliver the Tax Allocation Agreement,
the Employee Benefits Services and Liability Agreement and the ESI Intellectual
Property Agreement.
WHEREAS, prior to the Distributions and pursuant to the terms of the
Distribution Agreements, the Company, ESI and Newco will consummate the
transactions contemplated by the Newco Distribution Agreement and the ESI
Distribution Agreement and those other transactions specified to occur in the
Distribution Agreements prior to the Distributions. For the purposes of this
Agreement, (i) the "Pre-Distribution Transactions" means the contribution of
certain assets, the assumption of certain liabilities and other transfers
contemplated by Article II of the respective Distribution Agreements and
described on Schedule 1 and (ii) the "Retained Business" means the Directories
Business (as defined in Schedule 1).
WHEREAS the Company expects to (a) execute and deliver the Newco
Distribution Agreement, (b) cause Newco to execute and deliver the Newco
Distribution Agreement and (c) after the satisfaction or waiver of all of the
conditions to the Company's obligation to consummate the Newco Distribution set
forth in the Newco Distribution Agreement, and pursuant to the terms of the
Newco Distribution Agreement, effect the Newco Distribution.
WHEREAS the Company expects to (a) execute and deliver the ESI Distribution
Agreement, (b) cause ESI to execute and deliver the ESI Distribution Agreement
and (c) after the satisfaction or waiver of all of the conditions to the
Company's obligation to consummate the ESI Distribution set forth in the ESI
Distribution Agreement, and pursuant to the terms of the ESI Distribution
Agreement, effect the ESI Distribution.
WHEREAS, following the Pre-Distribution Transactions and the Distributions,
Purchaser wishes to purchase from the Company, and the Company wishes to sell to
Purchaser, shares of Common Stock representing 32.9% of the outstanding shares
of Common Stock as of the Closing Date (giving effect to the
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<PAGE> 80
issuance of such shares and assuming for such purposes that all Rollover Options
in existence on the Closing Date have been exercised calculated on the treasury
stock method), and warrants (the "Warrants") entitling the holder thereof to
purchase 0.78 shares of Common Stock for each share so purchased on the terms
and subject to the conditions set forth in Exhibit 1 hereto, and the Company and
Purchaser wish to enter into a registration rights agreement (the "Registration
Rights Agreement"), the principal terms of which are attached hereto as Exhibit
2.
WHEREAS Purchaser and the Company are entering into this Agreement to
provide for such purchase and sale and to establish various rights and
obligations in connection therewith.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein set forth, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES AND WARRANTS
SECTION 1.01. Purchase and Sale of Shares and Warrants. Upon the terms
and subject to the conditions set forth herein, the Company agrees to sell to
Purchaser and Purchaser agrees to purchase from the Company shares of previously
unissued Common Stock (including the associated Rights) representing 32.9% of
the outstanding shares of Common Stock as of the Closing Date (giving effect to
the issuance of such shares and assuming for such purposes that all Rollover
Options in existence on the Closing Date have been exercised calculated on the
treasury stock method) and Warrants to purchase 0.78 shares of Common Stock for
each share so purchased for an aggregate purchase price of $225 million (the
"Purchase Price"). The shares of Common Stock being purchased pursuant hereto
are referred to herein as the "Shares"; and unless the context otherwise
requires, the term "Shares" as used herein includes the associated Series A
Participating Cumulative Preferred Stock Purchase Rights (the "Rights") issuable
in respect of such shares of Common Stock pursuant to the Rights Agreement dated
as of November 1, 1995, between the Company and The Bank of New York, as Rights
Agent (the "Rights Agreement").
SECTION 1.02. Time and Place of the Closing. The closing (the "Closing")
shall take place at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825
8th Avenue, New York, New York, 10019, at 10:00 A.M., New York time, on the
third Business Day following the first date on which the conditions to Closing
set forth in Article IX have first been satisfied or waived. The Company shall
give Purchaser ten Business Days prior written notice of the date the Closing is
scheduled to occur. The "Closing Date" shall be the date the Closing occurs.
SECTION 1.03. Transactions at the Closing. At the Closing, subject to the
terms and conditions of this Agreement, the Company shall issue and sell to
Purchaser and Purchaser shall purchase the Shares and the Warrants. At the
Closing, the Company shall deliver to Purchaser a certificate representing the
Shares and a certificate representing the Warrants, in each case registered in
the name of Purchaser against payment of the Purchase Price with respect thereto
by wire transfer of immediately available funds to an account or accounts
previously designated by the Company.
ARTICLE II
COVENANTS
SECTION 2.01. Covenants of the Company.
(a) Financial Statements and Other Reports. The Company covenants that it
will deliver to Purchaser so long as Purchaser's Percentage Interest exceeds
10%:
(i) as soon as practicable and in any event within 45 days after the
end of each quarterly period (other than the last quarterly period) in each
fiscal year, a consolidated statement of income and a consolidated
statement of cash flow of the Company and its Subsidiaries for the period
from the beginning of the then current fiscal year to the end of such
quarterly period, and a consolidated balance
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<PAGE> 81
sheet of the Company and its Subsidiaries as of the end of such quarterly
period, setting forth in each case in comparative form figures for the
corresponding period or date in the preceding fiscal year, all in
reasonable detail and certified by the principal financial officer of the
Company as presenting fairly, in accordance with United States generally
accepted accounting principles ("GAAP") applied (except as specifically set
forth therein) on a basis consistent with such prior fiscal period, the
information contained therein, subject to changes resulting from year-end
closing and audit adjustments; provided, however, that delivery pursuant to
clause (iii) below of a copy of the Quarterly Report on Form 10-Q of the
Company for such quarterly period filed with the Securities and Exchange
Commission (the "SEC") shall be deemed to satisfy the requirements of this
clause (i);
(ii) as soon as practicable and in any event within 90 days after the
end of each fiscal year, a consolidated statement of income, a consolidated
statement of cash flow and a consolidated statement of stockholders equity
of the Company and its Subsidiaries for such year, and a consolidated
balance sheet of the Company and its Subsidiaries as of the end of such
year, setting forth in each case in comparative form the corresponding
figures from the preceding fiscal year, all in reasonable detail and
examined and reported on by independent public accountants of recognized
national standing selected by the Company, which report shall state that
such consolidated financial statements present fairly the financial
position of the Company and its Subsidiaries as at the dates indicated and
the results of their operations and changes in their financial position for
the periods indicated in conformity with GAAP applied on a basis consistent
with prior years (except as otherwise specified in such report) and that
the audit by such accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards; provided, however, that delivery pursuant to clause
(iii) below of a copy of the Annual Report on Form 10-K of the Company for
such fiscal year filed with the SEC shall be deemed to satisfy the
requirements of this clause (ii);
(iii) promptly upon transmission thereof, copies of all such financial
statements, proxy statements, notices and reports as it shall send to its
stockholders and copies of all such registration statements (without
exhibits), other than registration statements relating to employee benefit
or dividend reinvestment plans, and all such regular and periodic reports
as it shall file with the SEC; and
(iv) promptly upon receipt thereof, copies of all reports submitted to
the Company by independent public accountants in connection with each
annual, interim or special audit of the books of the Company or any
Subsidiary made by such accountants, including the comment letter submitted
by such accountants to management in connection with their annual audit;
and
(v) with reasonable promptness, such other financial data of the
Company and its Subsidiaries as Purchaser may reasonably request.
(b) Inspection of Property. The Company covenants that so long as
Purchaser's Percentage Interest exceeds 20%, it will permit representatives of
Purchaser to visit and inspect, at Purchaser's expense, any of the properties of
the Company and its Subsidiaries, to examine the corporate books and make copies
or extracts therefrom and to discuss the affairs, finances and accounts of the
Company and its Subsidiaries with the officers and employees of the Company and
its Subsidiaries and independent public accountants (and by this provision the
Company authorizes such accountants to discuss with such representatives the
affairs, finances and accounts of the Company and its Subsidiaries), all at such
reasonable times and as often as Purchaser may reasonably request; provided,
however, that the foregoing shall be subject to compliance with reasonable
safety requirements and shall not require the Company or any of its Subsidiaries
to permit any inspection which in the reasonable judgment of the Company would
violate any statute or regulation with respect to confidentiality or security.
Purchaser agrees not (i) to use for any purpose detrimental to the Company or
(ii) to disclose to any Person any information or data obtained by it pursuant
to this Section 2.01(b) or Section 2.01(a)(iv) until, in the case of the
foregoing clause (ii) only, such information or data otherwise becomes publicly
available or except pursuant to a valid subpoena, judicial process or its
equivalent or in connection with a claim against the Company; provided that
Purchaser shall have used its reasonable best efforts to give the Company
advance notice of such subpoena or judicial process so that the Company may seek
an appropriate protective order. Purchaser acknowledges that information
obtained pursuant to the rights
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<PAGE> 82
granted hereby may constitute material non-public information and agrees that it
will comply with all applicable laws relating to the purchase or sale of
securities while in possession of such information.
SECTION 2.02 Covenants of Purchaser Related Parties. (a) For the period
beginning on the date hereof and ending on the date that is two years after the
later of the date of the ESI Distribution and the date of the Newco Distribution
(the "Relevant Period"), none of Purchaser, Clayton, Dubilier & Rice Fund V
Limited Partnership (the "Fund"), Clayton, Dubilier & Rice, Inc. ("CD&R"), CD&R
Associates V Limited Partnership and CD&R Investment Associates, Inc., any
professional employee of CD&R, the Company or the Retained Subsidiaries
(collectively, the "Purchaser Related Parties") shall take any action that might
cause, or shall omit to take any action reasonably available to it, if such
omission might cause, the Company to cease being actively engaged in the conduct
of the Directories Business within the meaning of Section 355(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulation
Section 1.355-3(b).
(b) None of the Purchaser Related Parties shall take any action that would
reasonably be expected to cause, or shall omit to take any action reasonably
available to it if such omission would reasonably be expected to cause, the
Company to breach any of the covenants, or cause to be untrue any of the
representations or statements that the Company makes in connection with the Tax
Allocation Agreement or to the Company's outside tax counsel in connection with
such firm's rendering an opinion to the Company as to certain tax aspects of the
Contribution and Distributions in a representation letter, provided that such
representations and covenants are substantially the same as would be required by
the Internal Revenue Service in connection with the issuance of a private letter
ruling with respect to the Contribution and Distributions.
(c) None of the Purchaser Related Parties shall take any action (including
but not limited to a breach of any covenant or obligation set forth in this
Section 2.02, Section 5.03, Article VI or Article VII of this Agreement) that
would reasonably be expected to materially contribute to a Final Determination
that the Contribution, the ESI Distribution and/or the Newco Distribution
results in the recognition of gain to any of the Company, ESI, and Newco by
virtue of the Contribution, the ESI Distribution and/or the Newco Distribution
failing to qualify under Section 355 of the Code by reason of Section 355(e) (as
ultimately enacted) or otherwise.
(d) If any of the Purchaser Related Parties takes any action during the
Relevant Period that, if such action had been taken on the date of any of the
Contribution, the ESI Distribution or the Newco Distribution, would have been
inconsistent with any of the representations made in the representation letters
described in Section 2.02(b) of this Agreement, and such action or omission
materially contributes to a Final Determination that the Contribution, the ESI
Distribution and/or the Newco Distribution, as the case may be, results in the
recognition of gain to any of the Company, ESI and Newco by virtue of the
Contribution, the ESI Distribution and/or the Newco Distribution failing to
qualify under Section 355 of the Code by reason of Section 355(e) (as ultimately
enacted) or otherwise (a Person which takes or omits any such action, a
"Breaching Person"), such Breaching Person shall be treated for purposes of this
Agreement as having actually violated any such representation or covenant.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.01. Representations and Warranties of the Company. As used in
this Agreement, (i) any reference to the Company and its Subsidiaries means the
Company and each of its Subsidiaries, (ii) any reference to the "Retained
Company" and its Subsidiaries or the "Retained Companies" means the Company
(solely with respect to the Retained Business) and those of its Subsidiaries
included in the Retained Business, (iii) any reference to the "Retained
Subsidiaries" means the Subsidiaries of the Company included in the Retained
Business, (iv) any reference to Newco and its Subsidiaries or the "Newco
Companies" means Newco immediately after the Newco Distribution Time (as defined
in Schedule 1) and those entities that immediately after the Newco Distribution
Time will be Subsidiaries of Newco and (v) any reference to ESI and its
Subsidiaries means ESI immediately after the ESI Distribution Time (as defined
in Schedule 1) and
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<PAGE> 83
those entities that immediately after the ESI Distribution Time will be
Subsidiaries of ESI. As used in this Agreement, any reference to any state of
facts, event, change or effect having a "Material Adverse Effect" on or with
respect to an entity (or group of entities taken as a whole) means such state of
facts, event, change or effect has had, or would reasonably be expected to have,
a material adverse effect on the business, properties, results of operations or
financial condition of such entity (or, if with respect thereto, of such group
of entities taken as a whole), or on the ability of such entity (or group of
entities) to consummate the transactions contemplated hereby, including the
Pre-Distribution Transactions and the Distributions, or to perform its
obligations under this Agreement, the Warrant, the Registration Rights
Agreement, the Distribution Agreements, the Tax Allocation Agreement, the tax
representation letters to be delivered in connection with the Distributions, the
Employee Benefits Services and Liability Agreement, the Intellectual Property
Agreements and such other agreements as are entered into to effect the
Pre-Distribution Transactions (collectively, the "Reorganization Agreements") to
which it is or will be a party.
The Company hereby represents and warrants to Purchaser as follows:
(a) Corporate Organization. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
State of Nevada. Each Retained Subsidiary is duly organized and validly
existing and, if applicable, is in good standing, under the laws of the
jurisdiction of its incorporation or organization. Each of the Retained
Companies is duly qualified or licensed and, if applicable, is in good
standing as a foreign corporation, in each jurisdiction in which the
properties owned, leased or operated, or the business conducted, by it
require such qualification or licensing, except for any such failure so to
qualify or be in good standing which, individually or in the aggregate,
would not have a Material Adverse Effect on the Retained Companies, taken
as a whole. Each of the Retained Companies has the requisite power and
authority to carry on its businesses as they are now being or will be
(immediately after the Distributions) conducted. The Company has heretofore
made available to Purchaser complete and correct copies of the Restated
Articles of Incorporation of the Company (the "Company Charter") and the
Amended and Restated By-laws of the Company (the "Company By-laws") and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each of the Retained Subsidiaries, each as amended to date
and currently in full force and effect.
(b) Corporate Authority. Each of the Company, ESI and Newco has (or
will have at the time of such act) the requisite corporate power and
authority to execute, deliver and perform each Reorganization Agreement to
which it is or will be a party and to consummate the transactions
contemplated thereby (other than, with respect to the issuance and sale by
the Company of the Shares and Warrants, the approval of such issuance and
sale by the affirmative vote of the holders of a majority of the voting
power of the Common Stock (the "Company Stockholder Approval") and, with
respect to the Distributions, formal declaration of the Distributions by
the Company's Board of Directors). The execution, delivery and performance
of each Reorganization Agreement by the Company and the consummation by the
Company of the Pre-Distribution Transactions, the Newco Merger (as defined
in the Newco Distribution Agreement), the Distributions and the issuance
and sale by the Company of the Shares and Warrants and of the other
transactions contemplated thereby have been duly authorized (or will have
been duly authorized at the time of such act) by the Company's Board of
Directors, and no other corporate proceedings on the part of the Company
are necessary to authorize any Reorganization Agreement or for the Company
to consummate the transactions so contemplated (other than, with respect to
the issuance and sale by the Company of the Shares and Warrants, the
Company Stockholder Approval and, with respect to the Distributions, formal
declaration of the Distributions by the Company's Board of Directors). The
execution, delivery and performance by Newco of each Reorganization
Agreement to which it will be a party and the consummation by it of the
transactions contemplated thereby will be duly authorized by Newco's Board
of Directors and its stockholder, if required, and no other corporate
proceedings on the part of Newco will be necessary to authorize any
Reorganization Agreement to which it will be a party or for it to
consummate the transactions so contemplated. The execution, delivery and
performance by ESI of each Reorganization Agreement to which it will be a
party and the consummation by it of the transactions contemplated thereby
will be duly authorized by ESI's Board of Directors and its stockholders,
if required, and no other corporate proceedings on the part of ESI will be
necessary to
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authorize any Reorganization Agreement to which it will be a party or for
it to consummate the transactions so contemplated. Each Reorganization
Agreement to which the Company, ESI or Newco is or will be a party is, or
when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof,
assuming (in the case of this Agreement and the Registration Rights
Agreement) that each Reorganization Agreement to which Purchaser is a party
is a valid and binding agreement of Purchaser.
(c) No Violations; Consents and Approvals. (i) None of the execution,
delivery or performance by the Company, ESI or Newco of each Reorganization
Agreement to which any of them is or will be a party or the consummation by
the Company, ESI or Newco of the transactions contemplated thereby (A) will
result in a violation or breach of the Company Charter or the Company
By-laws, the articles of incorporation or by-laws of ESI, the articles of
incorporation or by-laws of Newco or the organizational documents of any of
the Retained Subsidiaries or (B) will result in a violation or breach of
(or give rise to any right of termination, revocation, cancelation or
acceleration under or increased payments under), or constitute a default
(with or without due notice or lapse of time or both) under, or result in
the creation of any lien, charge, encumbrance or security interest of any
kind (a "Lien") upon any of the properties or assets of the Retained
Companies under, (1) subject to the governmental filings and other matters
referred to in clause (ii) below, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, contract, agreement,
obligation, instrument, offer, commitment, understanding or other
arrangement (each a "Contract") or of any license, waiver, exemption,
order, franchise, permit or concession (each a "Permit") to which any of
the Retained Companies is a party or by which any of their properties or
assets may be bound, or (2) subject to the governmental filings and other
matters referred to in clause (ii) below, any judgment, order, decree,
statute, law, regulation or rule applicable to the Retained Companies,
except, in the case of clause (B), for violations, breaches, defaults,
rights of cancelation, termination, revocation or acceleration or Liens
that would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(ii) Except for consents, approvals, orders, authorizations,
registrations, declarations or filings as may be required under, and other
applicable requirements of, the Securities Act of 1933 (the "Securities
Act"), the Securities Exchange Act of 1934 (the "Exchange Act") and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), filings under state securities or "blue sky" laws, filings referred
to in Schedule 3.01(c)(ii), and the filing of articles of merger relating
to the Newco Merger (collectively, the "Regulatory Filings"), no consent,
approval, order or authorization of, or registration, declaration or filing
with, any government or any court, administrative agency or commission or
other governmental authority or agency, Federal, state or local or foreign
(a "Governmental Entity"), is required with respect to the Company, ESI,
Newco or any of their respective Subsidiaries, in connection with the
execution, delivery or performance by the Company, ESI, or Newco of each
Reorganization Agreement to which any of them is or will be a party or the
consummation by the Company, ESI and Newco of the transactions contemplated
thereby (except where the failure to obtain such consents, approvals,
orders or authorizations, or to make such registrations, declarations,
filings or agreements would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole.
(iii) Except as set forth on Schedule 3.01(c)(iii), none of the
Company, ESI or Newco provide any support, assets, properties, rights,
goods, services or benefits to the Retained Companies that will be
terminated or modified adversely as a result of the execution, delivery or
performance by the Company, ESI or Newco of this Agreement, in the case of
the Company, or each Reorganization Agreement to which any of them is or
will be a party or the consummation by the Company, ESI or Newco, as the
case may be, of the transactions contemplated hereby or thereby.
(d) Capital Stock. As of the date hereof, the authorized capital
stock of the Company consists of (i) 200,000,000 shares of Common Stock, of
which an aggregate of 116,528,691 shares of Common Stock were issued and
outstanding as of the close of business on June 30, 1997, and (ii)
50,000,000 shares of preferred stock, without par value ("Preferred Stock")
of which none are issued and outstanding; as of June 30, 1997, 200,000
shares of Preferred Stock, all denominated as Series A
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Participating Cumulative Preferred Stock (subject to increase and
adjustment as set forth in the Rights Agreement and the Certificate of
Designation attached as an exhibit thereto) were reserved for issuance in
connection with the Rights. As of the close of business on June 30, 1997,
there were outstanding under the Company's 1995 Corporation Incentive Stock
Plan, the 1996 ITT Restricted Stock Plan for Non-Employee Directors and in
respect of 1995 substitute options (collectively, the "Company Stock
Plans") options to acquire an aggregate of 9,301,939 shares of Common Stock
(subject to adjustment on the terms set forth therein). As of the close of
business on June 30, 1997, the Company had no shares of Common Stock
reserved for issuance, other than 9,346,262 shares of Common Stock reserved
for issuance upon exercise of outstanding stock options issued pursuant to
the Company Stock Plans. As of the close of business on June 30, 1997,
there were outstanding under the Company Stock Plans 154,030 shares of
restricted stock. As of the close of business on June 30, 1997, the company
had no shares of Common Stock reserved for issuance of restricted stock,
other than 266,865 shares of Common Stock reserved for issuance of
restricted stock pursuant to the Company Stock Plans. All of the
outstanding shares of Common Stock have been duly authorized and validly
issued, and are fully paid and nonassessable. Except as set forth on
Schedule 3.01(d), there are no preemptive or similar rights on the part of
any holders of any class of securities of the Company or of any of the
Retained Subsidiaries. Except as set forth above, the Company has
outstanding no bonds, debentures, notes or other obligations or securities
(other than the Common Stock) the holders of which have the right to vote
(or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any
matter. Except as set forth above, as of the date of this Agreement, there
are no securities convertible into or exchangeable for, or options,
warrants, calls, subscriptions, rights, contracts, commitments,
arrangements or understandings of any kind to which the Company or any of
its Subsidiaries is a party or by which any of them is bound obligating the
Company or any of its Subsidiaries contingently or otherwise to issue,
deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of the Company or of any
of the Retained Subsidiaries. Except (w) pursuant to an agreement dated as
of July 15, 1997 between the Company and BellSouth Corporation (a copy of
which has been made available to Purchaser), (x) to the extent that Article
Ninth of the Company Charter or any comparable provision of the articles of
incorporation of any Subsidiary of the Company required under any Gaming
Law (as defined below) could be construed as a Contract, (y) with respect
to the withholding of exercise price or withholding taxes under any stock
option plan or (z) pursuant to any Share Repurchase (as defined below),
there are no outstanding Contracts of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of the Company or of any of the Retained Subsidiaries. As
used herein, the term "Gaming Laws" means any Federal, state, local or
foreign statute, ordinance, rule, regulation, policy, permit, consent,
approval, license, judgment, order, decree, injunction or other
authorization governing or relating to the current or contemplated casino
and gaming activities and operations of the Company or any of its
Subsidiaries, as applicable, and (2) the term "Share Repurchase" means a
tender offer, exchange offer, open market purchase, private repurchase or
other similar arrangement providing for the repurchase by the Company of
approximately 25% of the outstanding shares of Common Stock.
(e) Subsidiaries. Schedule 3.01(e) contains a complete and correct
description of the shares of stock or other equity interests that are
authorized, or issued and outstanding, of each of the Retained Companies
(other than the Company). Except for Subsidiaries which will not be
Subsidiaries of the Company after the Distributions, the Company has no
equity interests in any Person other than the Retained Companies. Each of
the outstanding shares of capital stock of each of the Retained
Subsidiaries has been duly authorized and validly issued, and is fully paid
and nonassessable. Except as set forth on Schedule 3.01(e), all the
outstanding shares of capital stock of each Retained Subsidiary are owned,
either directly or indirectly, by the Company free and clear of all Liens.
(f) SEC Filings. (i) The Company has timely filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the SEC under the Securities Act and the Exchange Act since June 30,
1996 (the "Company SEC Documents"). As of its filing date, each Company SEC
Document filed, as amended or supplemented, if applicable, (A) complied in
all material respects with the applicable requirements of the Securities
Act or the Exchange Act, as applicable, and the rules and
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regulations thereunder and (B) did not, at the time it was filed, contain
any untrue statement of a material fact regarding the Retained Business or
omit to state any material fact regarding the Retained Business required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(ii) The proxy statement (as amended or supplemented and including
documents incorporated by reference therein, the "Proxy Statement")
relating to the meeting of stockholders to approve the transactions
contemplated hereby (the "Company Meeting") will not, at the date mailed to
the Company's stockholders and at the date of the Company Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rules and
regulations thereunder, except that no representation is made by the
Company with respect to statements made therein based on information
supplied in writing by Purchaser or any of its Affiliates for inclusion in
the Proxy Statement.
(g) Retained Business Financial Statements. (i) Attached hereto as
Annex A(i) are a consolidated balance sheet as of December 31, 1996 (the
"Balance Sheet") and a consolidated balance sheet as of December 31, 1995
and consolidated income statements, consolidated cash flow statements and
consolidated statements of stockholders equity for the years ended December
31, 1994, 1995 and 1996, in each case for the Retained Business (such
financial statements, including the notes thereto, the "Retained Business
Financial Statements"), together with the report of the Company's
independent accountants thereon. Each of the Balance Sheet and the balance
sheet as of December 31, 1995 (including any related notes and schedules)
fairly presents in all material respects the consolidated financial
position of the Retained Business as of their respective dates, and each of
the consolidated income statements, consolidated cash flow statements and
consolidated statements of stockholders equity included in the Retained
Business Financial Statements (including any related notes and schedules)
fairly presents in all material respects the income, cash flows and
stockholders equity, as the case may be, of the Retained Business for the
periods set forth therein, in each case in accordance with GAAP applied on
a consistent basis throughout the periods presented therein except as
indicated in the notes thereto. The Retained Business Financial Statements
may not necessarily be indicative of the financial position, results of
operations or cash flows that would have existed if the Retained Business
had operated as a stand-alone company.
(ii) Attached hereto as Annex A(ii) are the unaudited consolidated
balance sheet for the Retained Business as of March 31, 1997 and the
unaudited consolidated statement of income of the Retained Business for the
three months then ended (such financial statements, including the notes
thereto, the "Unaudited Retained Business Financial Statements"). The
Unaudited Retained Business Financial Statements have been prepared in all
material respects in accordance with GAAP consistently applied and on that
basis fairly present the consolidated financial condition and results of
operations of the Retained Business as of the date thereof and for the
period indicated, except that the Unaudited Retained Business Financial
Statements omit the statement of cash flows and footnote disclosures
required by GAAP and are subject to normal, recurring year-end closing and
audit adjustments.
(iii) The balance sheets included in the Retained Business Financial
Statements do not include any material assets or liabilities not intended
to constitute a part of the Retained Business after giving effect to the
transactions contemplated by the Reorganization Agreements. The statements
of income, statements of stockholders equity and statements of cash flows
included in the Retained Business Financial Statements do not reflect the
operations of any entity or business not intended to constitute a part of
the Retained Business after giving effect to all such transactions. The
statements of income included in the Retained Business Financial Statements
reflect all of the material costs and expenses incurred in connection with
the Retained Business, including those incurred in generating the revenues
reflected in the Retained Business Financial Statements, in each case, for
the periods covered thereby, that would be required to be so reflected
under GAAP in consolidated financial statements of the Retained Business
prepared on a pro forma basis after giving effect to all such transactions.
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(h) [Intentionally omitted]
(i) Undisclosed Liabilities. Except (i) for the items listed in
Schedule 3.01(i) hereto, (ii) as and to the extent disclosed or reserved
against on the Balance Sheet and (iii) as incurred after the date of the
Balance Sheet in the ordinary course of the Retained Business consistent
with prior practice and not prohibited by this Agreement, the Retained
Companies do not have any liabilities or obligations of any nature, whether
known or unknown, absolute, accrued, contingent or otherwise and whether
due or to become due, that, individually or in the aggregate, have had or
would have a Material Adverse Effect on the Retained Companies, taken as a
whole.
( j) Absence of Certain Events and Changes. Except as disclosed in
the Company SEC Documents filed with the SEC and publicly available prior
to the date hereof, including the Solicitation/Recommendation Statement on
Schedule 14D-9 originally filed by the Company on February 12, 1997, and
any amendments filed with respect thereto prior to the date hereof (the
"Filed Company SEC Documents") or as otherwise contemplated or permitted by
this Agreement or the Reorganization Agreements, and except for any items
referred to in Schedule 3.01(j), since March 31, 1997, the Company and its
Subsidiaries have conducted the Retained Business in the ordinary course
consistent with past practice and there has not been any event, change or
development which, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole, other than
events, changes or developments relating to the economy in general.
(k) Compliance with Applicable Laws. Except as disclosed in the Filed
Company SEC Documents, each of the Retained Companies is in compliance with
all statutes, laws, regulations, rules, judgments, orders and decrees of
all Governmental Entities applicable to it that relate to the Retained
Business, and neither the Company nor any of the Retained Companies has
received any notice alleging noncompliance except with reference to all the
foregoing where the failure to be in compliance would not, individually or
in the aggregate, have a Material Adverse Effect on the Retained Companies,
taken as a whole. This Section 3.01(k) does not relate to employee benefits
matters (for which Section 3.01(p) is applicable), environmental matters
(for which Section 3.01(q) is applicable) or tax matters (for which Section
3.01(o) is applicable). Each of the Retained Companies has all Permits that
are required in order to permit it to carry on its business as it is
presently conducted, except where the failure to have such Permits or
rights would not, individually or in the aggregate, have a Material Adverse
Effect on the Retained Companies, taken as a whole. All such Permits are in
full force and effect and the Retained Companies are in compliance with the
terms of such Permits, except where the failure to be in full force and
effect or in compliance would not, individually or in the aggregate, have a
Material Adverse Effect on the Retained Companies, taken as a whole.
(l) Title to Assets. (i) Except as set forth in Schedule 3.01(l)(i),
each of the Retained Companies owns and has good and valid title to, or a
valid leasehold interest in, or otherwise has sufficient and legally
enforceable rights to use, all of the properties and assets (real, personal
or mixed, tangible or intangible), used by the Retained Business or held
for use by the Retained Business in connection with, the conduct of, or
otherwise material to, the Retained Business (the "Assets"), including
Assets reflected on the Balance Sheet or acquired since the date thereof,
except for Assets disposed of in the ordinary course of business consistent
with past practice and in accordance with this Agreement and except for
such defects in title which, individually or in the aggregate, would not
have a Material Adverse Effect on the Retained Companies, taken as a whole,
in each case free and clear of any Liens except for Permitted Liens (as
defined in clause (iii) below). This Section 3.01(l) does not relate to
intellectual property (for which Section 3.01(t) is applicable). A list of
all owned and leased real property relating to the Retained Business is set
forth on Schedule 3.01(l) and such owned and leased real property
constitutes all the fee and leasehold interests held by the Retained
Companies, except for any such fee or leasehold interests acquired or
disposed of in the ordinary course of business consistent with past
practice after the date hereof and in accordance with this Agreement, and
constitutes all the fee and leasehold interests used by the Retained
Business or held for use by the Retained Business in connection with, the
conduct of, or otherwise material to the Retained Business.
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(ii) Except as referred to in Schedule 3.01(l)(ii), each Retained
Company has (A) good and insurable title to its owned real properties and
(B) valid and subsisting leasehold interests in its leased real properties,
in each case, free and clear of any Liens, except for (1) Permitted Liens,
(2) easements, covenants, rights-of-way, other matters of record and other
matters subject to which the leases of the Retained Companies' real
properties are granted and (3) such state of facts as an accurate survey
would show.
(iii) "Permitted Liens" shall mean those Liens (A) securing debt that
is reflected on the Balance Sheet or the notes thereto or securing debt
incurred as part of the Proposed Financings, (B) referred to in Schedule
3.01(l), (C) for Taxes not yet due or payable or being contested in good
faith, (D) that constitute mechanics', carriers', workmens' or like liens,
liens arising under original purchase price conditional sales contracts and
equipment leases with third parties entered into in the ordinary course,
(E) Liens incurred or deposits made in the ordinary course of business
consistent with past practice in connection with workers' compensation,
unemployment insurance and social security, retirement and other
legislation and in the case of Liens described in clauses (B), (C), (D) or
(E) that, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole.
(m) Litigation. Other than actions brought by or on behalf of Hilton
Hotels Corporation ("Hilton") or derivative actions related to Hilton's
proposed acquisition of the Company, and except as disclosed in the Filed
Company SEC Documents or referred to in Schedule 3.01(m), as of the date
hereof there are no civil, criminal or administrative actions, suits or
proceedings pending or, to the knowledge of the Company, threatened,
against any of the Retained Companies that, individually or in the
aggregate, are likely to have a Material Adverse Effect on the Retained
Companies, taken as a whole. Except as disclosed in the Company SEC
Documents, there are no outstanding judgments, orders, decrees, or
injunctions of any Governmental Entity against any of the Retained
Companies that, insofar as can reasonably be foreseen, individually or in
the aggregate, in the future would have a Material Adverse Effect on the
Retained Companies, taken as a whole.
(n) Contracts. (i) Schedule 3.01(n) contains a complete and correct
list, as of the date hereof, of all Contracts that are of the types listed
in clauses (A) through (G) below to which any of the Retained Companies is
a party (the "Material Contracts"):
(A) leases and subleases and other Contracts concerning or relating
to the real property, each with an annual base rental of more than
$150,000 and a remaining term of more than three years;
(B) employment, consulting, severance, and other material Contracts
relating to or for the benefit of the most senior executive of the
Retained Business in each country in which the Retained Companies
operate and any such Contracts requiring annual base payments in excess
of $200,000 relating to or for the benefit of current, future or former
employees, officers, directors, sales representatives, distributors,
dealers, agents, independent contractors or consultants, and material
sales agency or distributorship agreements or arrangements for the sale
of any of the products or services of any of the Retained Companies;
(C) Contracts relating to the borrowing of money or obtaining of or
extension of credit (other than in the ordinary course of business),
including letters of credit, guarantees and material security
agreements;
(D) material licenses and other material Contracts providing in
whole or in part for the use of, or limiting the use of, any
Intellectual Property;
(E) joint venture, partnership and similar Contracts involving a
sharing of profits or expenses;
(F) Contracts prohibiting or materially restricting the ability of
any Retained Company to conduct its business, to engage in any business
or operate in any geographical area or to compete with any Person;
(G) Contracts that are material to the business, operations,
results of operations, condition (financial or otherwise), assets or
properties of any of the Retained Companies.
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(ii) All Material Contracts are legal, valid, binding, in full force
and effect and enforceable against each party thereto, except to the extent
that any failure to be enforceable, individually and in the aggregate,
would not reasonably be expected to have or result in a Material Adverse
Effect. Except as set forth in Schedule 3.01(n), there does not exist under
any Material Contract any violation, breach or event of default, or event
or condition that, after notice or lapse of time or both, would constitute
a violation, breach or event of default thereunder, on the part of any of
the Retained Companies or, to the knowledge of the Company, any other
Person, other than such violations, breaches or events of default as would
not, individually or in the aggregate, have a Material Adverse Effect on
the Retained Companies, taken as a whole. Except as set forth in Schedule
3.01(n), the enforceability of all Material Contracts will not be affected
in any manner by the execution, delivery or performance of this Agreement,
and no Material Contract contains any change in control or other terms or
conditions that will become applicable or inapplicable as a result of the
consummation of the transactions contemplated by this Agreement and the
other Reorganization Agreements.
(o) Taxes. (i) Except as set forth on Schedule 3.01(o), (A) all Tax
Returns required to be filed by or on behalf of each of the Company and the
Retained Subsidiaries have been filed except to the extent that a failure
to file, individually or in the aggregate, would not have a material
adverse effect on the Retained Companies, taken as a whole; (B) all such
Tax Returns filed are complete and accurate in all respects, other than any
incompleteness or any inaccuracy that would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies taken
as a whole, and all Taxes shown to be due on such Tax Returns have been
paid; (C) none of the Company and the Retained Subsidiaries is currently
the beneficiary of any extension of time within which to file any Tax
Return; (D) no written claim (other than a claim that has been finally
settled) has been made by a taxing authority that any of the Retained
Companies is subject to an obligation to file Tax Returns or to pay or
collect Taxes imposed by any jurisdiction in which such Retained Company
does not file Tax Returns or pay or collect Taxes; (E) there is no
deficiency with respect to any Taxes which would, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies; and
(F) all material assessments for Taxes due with respect to completed and
settled examinations or concluded litigation have been paid. As used in
this Agreement, "Taxes" shall include all Federal, state, local and foreign
income, franchise, property, sales, excise and other taxes, tariffs or
governmental charges of any nature whatsoever, including interest and
penalties, and additions thereto; and "Tax Returns" shall mean all Federal,
state, local and foreign tax returns, declarations, statements, reports,
schedules, forms and information returns relating to Taxes.
(ii) Except as set forth in Schedule 3.01(o), (A) there are no liens
for Taxes (other than for current Taxes not yet due and payable) on the
assets of the Retained Companies; and (B) each of the Retained Companies
has duly and timely withheld all Taxes required to be withheld in
connection with its business and assets, and such withheld Taxes have been
either duly and timely paid to the proper governmental authorities or
properly set aside in accounts for such purpose, except to the extent that
any failure to do so would not have a Material Adverse Effect on the
Retained Companies, taken as a whole.
(iii) Except as set forth in Section 3.01(o) of the disclosure
Schedule, (A) none of the Company or the Retained Subsidiaries is a party
to or bound by or has any obligation under any Tax allocation, sharing,
indemnification or similar agreement or arrangement; and (B) none of the
Company or the Retained Subsidiaries is or has been at any time since 1990
a member of any group of companies filing a consolidated, combined or
unitary income tax return.
(iv) Except as set forth in Section 3.01(o) of the Disclosure
Schedule, (A) all taxable periods of each of the Company and the Retained
Subsidiaries ending before 1994 are closed or no longer subject to audit;
(B) none of the Company and the Retained Subsidiaries is currently under
audit by any taxing authority; and (C) no waiver of the statute of
limitations is in effect with respect to any taxable year of the Company or
any of the Retained Subsidiaries.
(p) Employee Benefit Plans. With respect to each employee benefit
plan which is sponsored or maintained by any of the Retained Companies
(each an "Employee Benefit Plan"): (i) if the Employee
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Benefit Plan is intended to comply with, or qualify under, any foreign or
domestic tax law or regulation, it has received approval (to the extent
such approval is required under applicable law) from the appropriate
governmental authority or agency to the effect that such Employee Benefit
Plan is so qualified (excluding any Employee Benefit Plan with respect to
which any applicable remedial amendment period has not yet expired) and no
event has occurred or condition is known to exist that would reasonably be
expected to adversely affect such tax qualified status; (ii) except as set
forth on Schedule 3.01(p) if the Employee Benefit Plan is a defined benefit
plan or other plan subject to funding requirements, the present value of
the benefit obligations accrued under such Employee Benefit Plan does not
exceed the fair market value of the assets of such Employee Benefit Plan as
of the date hereof, determined on an accumulated benefit obligation basis
by an amount which individually or in the aggregate would have a Material
Adverse Effect on any of the Retained Companies; (iii) to the extent that
contributions are required to be made to any Employee Benefit Plan, such
contributions have been made in a timely manner; (iv) to the Company's
knowledge, there are no claims (other than claims for benefits in the
normal course), actions or lawsuits asserted, instituted or threatened with
respect to any Employee Benefit Plan, which, if adversely determined could,
individually or in the aggregate, have a Material Adverse Effect on any of
the Retained Companies; (v) except as otherwise set forth in Schedule
3.01(p), if the Employee Benefit Plan is maintained by the Retained
Companies, there is no material unfunded liability with respect to retiree
or further employee benefits, including but not limited to, retiree medical
and life insurance benefits, and severance payments (vi) to the Company's
knowledge, there are no claims, actions, or lawsuits asserted, instituted
or threatened by any current employees, former employees or retirees
against the Retained Companies, which, if adversely determined could,
individually or in the aggregate, have a Material Adverse Effect on any of
the Retained Companies; and (vii) each Employee Benefit Plan has been
maintained and administered in compliance in all material respects with its
terms and all applicable laws of the jurisdiction to which such plan is
subject.
Except as disclosed in the Filed Company SEC Documents or as set forth
in Schedule 3.01(p), neither the execution and delivery of this Investment
Agreement or the Distribution Agreements nor the consummation of the
transactions contemplated hereby or thereby will (i) result in any payment
to be made by Purchaser or the Retained Companies (including without
limitation, severance, termination or other similar payment) becoming due
to any employee under any Employee Benefit Plan or otherwise or (ii)
increase any benefits otherwise payable under any Employee Benefit Plan.
(q) Environmental Matters. Except as disclosed in the Filed Company
SEC Documents and except for such matters that, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, (i) the Retained Companies are in compliance
with all applicable Environmental Laws (as defined below), (ii) the
Retained Companies have all Permits required under Environmental Laws for
the operation of the Retained Business as presently conducted
("Environmental Permits") and (iii) to the Company's knowledge, as of the
date hereof none of the Retained Companies has received any written notices
from any Governmental Entity that remain outstanding and assert that any of
the Retained Companies may be in violation of, or liable under, any
Environmental Law.
For purposes of this Agreement, "Environmental Law" means any Federal,
state, local or foreign law, statute, regulation or decree relating to (x)
the protection of the environment or (y) the use, storage, treatment,
generation, transportation, processing, handling, release or disposal of
Hazardous Substances, in each case as in effect on the date hereof.
"Hazardous Substance" means any waste, substance, material, pollutant or
contaminant presently listed, defined, designated or classified as
hazardous, toxic or radioactive, or otherwise regulated, under any
Environmental Law.
(r) Rights Agreement; Charter and By-laws; Nevada Law. The Company
has taken or will take all action reasonably necessary to ensure that (i)
neither (x) the execution of this Agreement and the other Reorganization
Agreements nor (y) consummation of the transactions contemplated hereby or
thereby will result in the occurrence of a Distribution Date (as defined in
the Rights Agreement) or enable or require the Rights (as defined in the
Rights Agreement) to be exercised, (ii) neither the Purchaser nor any of
its Affiliates is an Acquiring Person (as defined in the Rights Agreement),
(iii) the transactions
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contemplated hereby do not violate the Company Charter or Company By-laws,
and (iv) Sections 78.378 to 78.3793 or any other provision of the Nevada
General Corporate Law (the "NGCL") do not limit the ability of Purchaser to
exercise voting rights with respect to the Shares, Warrants, shares
issuable upon exercise of Warrants and any other Equity Securities acquired
by Purchaser not in violation of this Agreement and the limitations of
Sections 78.411 to 78.444 or any other provision of the NGCL will not apply
as a result of the transactions contemplated in this Agreement.
(s) Status of Shares. Assuming the Company Stockholder Approval has
been obtained, the Shares being issued at the Closing will have been duly
authorized by all necessary corporate action on the part of the Company,
and such Shares will have been validly issued and, assuming payment
therefor has been made, will be validly issued, fully paid and
nonassessable, and the issuance of such Shares will not be subject to
preemptive rights of any other Stockholder of the Company. Assuming the
Company Stockholder Approval has been obtained, the Warrant Shares will
have been duly authorized by all necessary corporate action on the part of
the Company, and such shares of Common Stock have been validly reserved for
issuance, and, assuming payment therefor has been made, will be upon
issuance upon exercise of the Warrants will be validly issued and
outstanding, fully paid and nonassessable.
(t) Intellectual Property. Schedule 3.01(t) sets forth a list of all
Intellectual Property that is owned by any of the Retained Companies (the
"Owned Intellectual Property") and is material to the Company. The Owned
Intellectual Property constitutes all of the Intellectual Property used or
held for use in connection with, necessary for the conduct of, or otherwise
material to its business, except for Intellectual Property subject to the
written or oral licenses, agreements or arrangements set forth in Schedule
3.01(t) pursuant to which (i) the use of Intellectual Property by any
Retained Company is permitted by any Person or (ii) the use by any Person
of Intellectual Property is permitted by any Retained Company (together
with any licenses, agreements and arrangements that are not material, the
"Intellectual Property Licenses" and, together with the Owned Intellectual
Property, the "Company Intellectual Property"). The Owned Intellectual
Property is owned free from any Liens (other than Permitted Liens). Except
as set forth in Schedule 3.01(t), all Intellectual Property Licenses are in
full force and effect in accordance with their terms, and are free and
clear of any Liens (other than Permitted Liens). The Company has delivered
to Purchaser complete and correct copies of all material written
Intellectual Property Licenses (including amendments, supplements, waivers
and other modifications). Except as set forth in Schedule 3.01(t), all
royalties, license fees, charges and other amounts payable by, on behalf
of, to or for the account of any of the Retained Companies in respect of
any Intellectual Property are reflected in the Retained Business Financial
Statements. Except as set forth in Schedule 3.01(t), immediately after the
Closing, the Retained Companies will own or have the right to use all the
Company Intellectual Property, in each case free from Liens (except for
Permitted Liens incurred in the ordinary course of business) and on the
same terms and conditions as in effect prior to the Closing, except with
respect to the license to use the ITT name and the ITT mark. Except as set
forth in Schedule 3.01(t), the conduct of the Retained Business does not
infringe or conflict with the rights of any third party in respect of any
Intellectual Property. Except as set forth in Schedule 3.01(t), to the
knowledge of the Company, none of the Company Intellectual Property is
being infringed by any third party. Except as set forth in Schedule
3.01(t), there is no claim or demand of any Person pertaining to, or any
proceeding which is pending or, to the knowledge of the Company,
threatened, that challenges the rights of any of the Retained Companies in
respect of any Company Intellectual Property, or that claims that any
default exists under any Intellectual Property License. Except as set forth
in Schedule 3.01(t), none of the Company Intellectual Property is subject
to any outstanding order, ruling, decree, judgment or stipulation by or
with any court, tribunal, arbitrator, or other Governmental Entity adverse
to the Company. Except as set forth in Schedule 3.01(t), the Owned
Intellectual Property has been duly registered with, filed in or issued by,
as the case may be, the appropriate filing offices, domestic or foreign, to
the extent necessary or desirable to ensure usual and customary protection
for intellectual property in the relevant jurisdiction under any applicable
law, and the same remain in full force and effect. The Retained Companies
have taken all necessary actions to ensure usual and customary protection
for intellectual property in the relevant jurisdiction of the Company
Intellectual Property (including maintaining the secrecy of all
confidential Intellectual Property) under any applicable law.
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(u) Guarantees. Except as set forth on Schedule 3.01(u), none of the
obligations or liabilities of the Retained Business is guaranteed by or
subject to a contingent obligation of any other Person. Except as set forth
in Schedule 3.01(u), neither the Company nor any of its Subsidiaries (other
than the Retained Subsidiaries) has guaranteed or become subject to a
contingent obligation (except as may arise as a matter of law or as
contemplated by this Agreement or the Reorganization Agreements) in respect
of the obligations of any of the Retained Companies.
(v) Brokers or Finders. No agent, broker, investment banker or other
firm or Person, including any of the foregoing that is an Affiliate of the
Company is or will be entitled to any broker's or finder's fee or any other
commission or similar fee following the Closing Date from the Company in
connection with any of the transactions contemplated by this Agreement.
(w) Disclosure. To the knowledge of the Company, no representation or
warranty by the Company contained in this Agreement or in any certificate
to be furnished by or on behalf of the Company pursuant hereto, taken as a
whole, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading with respect to the Retained Business
or the transactions contemplated by this Agreement. The Company does not
know of any fact (other than matters of a general economic or political
nature that do not affect the business of the Retained Companies uniquely)
that could reasonably be expected to have or result in a Material Adverse
Effect on the Retained Companies, taken as a whole.
SECTION 3.02. Representations and Warranties of Purchaser. Purchaser
represents and warrants as of the date hereof as follows:
(a) Organization. Purchaser is a limited liability company duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization, with all requisite power and authority to
own, lease and operate its properties and to conduct its business as now
being conducted.
(b) Authority. Purchaser has the requisite limited liability company
power and authority to execute, deliver and perform each Reorganization
Agreement to which it is a party and to consummate the transactions
contemplated hereby. All necessary action required to have been taken by or
on behalf of Purchaser by applicable law, its limited liability company
agreement or otherwise to authorize the approval, execution, delivery and
performance by Purchaser of this Agreement and the consummation by it of
the transactions contemplated hereby have been duly authorized, and no
other proceedings on its part are or will be necessary to authorize this
Agreement or for it to consummate the transactions so contemplated. This
Agreement is a valid and binding agreement of Purchaser, enforceable
against Purchaser in accordance with the terms hereof, assuming that this
Agreement is a valid and binding agreement of the Company.
(c) Conflicting Agreements and Other Matters. Neither the execution
and delivery of this Agreement nor the performance by Purchaser of its
obligations hereunder will conflict with, result in a breach of the terms,
conditions or provisions of, constitute a default under, result in the
creation of any mortgage, security interest, encumbrance, lien or charge of
any kind upon any of the properties or assets of Purchaser pursuant to, or
require any consent, approval or other action by or any notice to or filing
with any court or administrative or governmental body pursuant to, the
organizational documents or agreements of Purchaser or any agreement,
instrument, order, judgment, decree, statute, law, rule or regulation by
which Purchaser is bound, except for filings after the Closing under
Section 13(d) of the Exchange Act and filings under the HSR Act.
(d) Acquisition for Investment; Sufficiency and Source of
Funds. Purchaser is acquiring the Shares and Warrants being purchased by
it for its own account for the purpose of investment and not with a view to
or for sale in connection with any distribution thereof, and Purchaser has
no present intention or plan to effect any distribution of shares of Common
Stock, Warrants or Warrant Shares; provided that the disposition of such
Purchaser's property shall at all times be and remain within its control
and subject to the provisions of this Agreement and the Registration Rights
Agreement. Purchaser has delivered to the
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Company a complete and correct copy of a commitment letter from the Fund
for $225 million of common equity financing. The Fund constitutes a
"venture capital operating company" within the meaning of Section
2510.3-101(d) of the regulations promulgated under ERISA and the
transactions contemplated by this Agreement shall not adversely affect such
status.
(e) Ownership of Securities. At the date hereof Purchaser does not
Beneficially Own, directly or, to the knowledge of Purchaser, indirectly
(or have any option or other right to acquire), any securities of the
Company other than the Shares and Warrants being purchased by it hereunder.
(f) Brokers or Finders. No agent, broker, investment banker or other
firm or Person, including any of the foregoing that is an Affiliate of
Purchaser, is or will be entitled to any broker's or finder's fee or any
other commission or similar fee from Purchaser in connection with any of
the transactions contemplated by this Agreement.
(g) Future Acquisitions. Purchaser has no present plan or intention
to acquire, directly or indirectly, 50% or more of the Total Voting Power
or 50% or more of the total Fair Market Value of all shares of outstanding
capital stock of the Company.
ARTICLE IV
CORPORATE GOVERNANCE
SECTION 4.01. Composition of the Board of Directors. Subject to this
Article IV, the fundamental policies and strategic direction of the Company
shall be determined by its Board of Directors as provided in this Article IV.
The composition of the Board of Directors and manner of selecting members
thereof shall be as follows:
(a) At and after the Closing, the Board of Directors shall be
comprised of 11 Directors consisting of six designees of the Company (no
more than one of whom may be an employee of the Retained Company and its
Subsidiaries) (the "Non-Investor Directors") and five designees of
Purchaser (no more than three of whom may be employees of Purchaser or CD&R
(the "Investor Directors").
(b) Immediately following the Closing on the Closing Date, the Company
shall elect to its Board of Directors the five individuals notified prior
to the Closing by Purchaser to the Company (unless any such individual is
unable or unwilling to serve, in which event the Company shall elect a
substitute individual designated by Purchaser prior to the Closing), each
of whom is designated as an Investor Director by Purchaser.
(c) Except as otherwise provided herein, at all times from and after
the Closing, the Directors shall be nominated as follows (it being
understood that such nomination shall include any nomination of any
incumbent Director for reelection to the Board of Directors):
(i) Purchaser's designees on the corporate governance committee of
the Board of Directors (the "Corporate Governance Committee") shall
nominate a number of Investor Directors as follows:
(1) so long as Purchaser's Percentage Interest equals or exceeds
35%, Purchaser's designees have the right to nominate 5 directors;
(2) if Purchaser's Percentage Interest is less than 35% but
equals or exceeds 25%, then Purchaser's designees have the right to
nominate 4 directors;
(3) if Purchaser's Percentage Interest is less than 25% but
equals or exceeds 10%, then Purchaser's designees have the right to
nominate 3 directors;
(4) if Purchaser's Percentage Interest is less than 10% but
equals or exceeds 5%, then Purchaser's designees have the right to
nominate 2 directors; and
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(ii) the Company's designees on the Corporate Governance Committee
shall nominate the remaining Directors, each of whom shall be a
"Non-Investor" Director.
(d) The entire Board of Directors (excluding any director who is an
employee of the Company or its Affiliates or of Purchaser or CD&R) shall
approve or disapprove the individuals nominated by the respective designees
on the Corporate Governance Committee.
(e) Purchaser's designee on the Corporate Governance Committee (or if
none remain in office, the remaining Investor Directors) shall have the
right to designate any replacement for an Investor Director upon the death,
resignation, retirement, disqualification or removal from office of such
Director. The Company's designees on the Corporate Governance Committee
shall have the right to designate any replacement for a Non-Investor
Director upon the death, resignation, retirement, disqualification or
removal from office of such Director. The entire Board of Directors
(excluding any director who is an employee of the Company or its Affiliates
or Purchaser or CD&R) shall approve or disapprove the individuals so
nominated.
(f) Without limiting the generality of Section 4.01(c), in the event
that at any time after the Closing the number of Investor Directors on the
Board of Directors differs from the number that Purchaser has the right
(and wishes) to designate pursuant to this Section 4.01, (i) if the number
of Investor Directors exceeds such number, Purchaser shall promptly take
all appropriate action to cause to resign that number of Investor Directors
as is required to make the remaining number of such Investor Directors
conform to this Section 4.01 or (ii) if the number of Investor Directors
otherwise is less than such number, the Company shall take all necessary
action to create sufficient vacancies on the Board of Directors of the
Company to permit Purchaser to designate the full number of Investor
Directors which it is entitled (and wishes) to designate pursuant to this
30 Section 4.01 (such action to include expanding the size of the Board of
Directors (provided that the size of the Board of Directors shall not be
other than 11 members at any time), seeking the resignation or removal of
Directors or, at the request of Purchaser, calling a special meeting of the
stockholders of the Company for the purpose of removing Directors to create
such vacancies to the extent permitted by applicable law). Upon the
creation of any vacancy pursuant to the preceding sentence Purchaser's
designees on the Corporate Governance Committee shall designate the person
to fill such vacancy in accordance with this Section 4.01 and the Board of
Directors shall elect such person so designated.
(g) Notwithstanding anything herein to the contrary, no individual who
is an officer, director, partner or principal stockholder of any competitor
of the Company or any of its Subsidiaries shall serve as a Director without
the unanimous consent of the Corporate Governance Committee.
(h) Notwithstanding anything herein to the contrary, Non-Investor
Directors shall at all times constitute a majority of the members of the
Board of Directors.
SECTION 4.02. Solicitation and Voting of Shares. (a) The Company shall
use its best efforts to solicit from the stockholders of the Company eligible to
vote for the election of Directors proxies in favor of the nominees selected in
accordance with Section 4.01.
(b) In any election of Directors or any meeting of the stockholders of
the Company called expressly for the removal of Directors, so long as the
Board of Directors includes (and will include after any such removal) the
number of Investor Directors contemplated by Section 4.01, Purchaser shall
be present for purposes of establishing a quorum and shall vote all its
shares of Voting Stock (i) in favor of any nominees for Director selected
in accordance with Section 4.01, (ii) in favor of removal of any Director
as contemplated by Section 4.01(f) and (iii) otherwise against the removal
of any Director designated in accordance with Section 4.01. In any other
matter submitted to a vote of the stockholders of the Company, Purchaser
may vote any or all of its shares in its sole discretion.
(c) Purchaser agrees that it will take all action as a stockholder of
the Company or as is otherwise reasonably within its control, as necessary
to effect the provisions of this Agreement.
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SECTION 4.03. Supermajority Voting Provisions. Neither the Company nor
the Board of Directors shall cause or permit to happen any of the following
events without the affirmative vote of two thirds of the Board of Directors:
(a) any issuance of Equity Securities other than issuances pursuant to
employee stock option or incentive compensation plans of Equity Securities
in an amount not to exceed 5% of the Common Stock outstanding immediately
following the Closing on a fully diluted basis (assuming exercise of the
Warrant and the Rollover Options);
(b) (i) any merger, consolidation or other business combination
involving the Company or any decision whether to approve a tender offer
involving the Company's Equity Securities, (ii) any sale, lease, transfer
or other disposition in one transaction or a series of transactions of all
or substantially all the assets of the Company, (iii) any major
recapitalization or similar transaction or series of transactions involving
the Company or (iv) any dissolution or complete or partial liquidation of
the Company; provided, however, that the foregoing shall not prevent the
Company from undertaking any transaction in the ordinary course of
business; or
(c) any amendment or modification of the Company Charter or the
Company By-laws that is inconsistent with the provisions of this Agreement
and the rights afforded to Purchaser hereunder.
SECTION 4.04. Committees. The Board of Directors shall have the following
committees: an Executive Committee, a Corporate Governance Committee, an Audit
Committee and a Compensation Committee. Subject to any law or stock exchange
rule prohibiting committee membership by Affiliates of the Company, (i) each of
the Executive Committee, the Audit Committee and the Compensation Committee
shall have four members, of whom, in each case, two members shall be Investor
Directors and two shall be Non-Investor Directors and (ii) the Chairperson of
each of the Executive Committee and the Compensation Committee shall be an
Investor Director and the Chairperson of the Audit Committee shall be a
Non-Investor Director. If the members of any of the Executive Committee, the
Audit Committee or the Compensation Committee become deadlocked over any action
or decision, such action or decision shall be decided by the full Board of
Directors. The Corporate Governance Committee shall have five members, of whom
three shall be Non-Investor Directors and two shall be Investor Directors, and
the Chairperson shall be a Non-Investor Director.
SECTION 4.05. Enforcement of this Agreement. A majority of the
Non-Investor Directors shall have full and complete authority on behalf of the
Company to enforce the terms of this Agreement.
SECTION 4.06. Certificate of Incorporation and By-laws. In connection
with the Company Meeting, the Company shall propose that the stockholders of the
Company approve such amendments to the Company Charter as are set forth in
Exhibit 3 (the "Proposed Charter Amendments"), and the Board of Directors of the
Company shall recommend that the stockholders of the Company approve the
Proposed Charter Amendments. The Company and Purchaser shall take or cause to be
taken all lawful action necessary to ensure at all times as of and following the
Closing Date that the Company Charter and Company By-laws are not inconsistent
with the provisions of this Agreement or the transactions contemplated hereby.
SECTION 4.07. Termination of Article IV. This Article IV shall terminate
and be of no further force or effect on the earlier to occur of (a) the fifth
anniversary of the Closing and (b) the date on which the percentage of the Total
Voting Power represented by the aggregate voting power of all Voting Securities
then owned by Purchaser (other than any Voting Securities acquired in violation
of this Agreement) is greater than 50%.
ARTICLE V
EQUITY PURCHASES FROM THE COMPANY
SECTION 5.01. Subscription Rights. So long as Purchaser has the right to
designate any Investor Directors pursuant to Section 4.01, if the Board of
Directors shall authorize the issuance of New Securities for cash (other than
any New Securities issued (i) to officers, employees or directors of the Company
or any of its
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Subsidiaries pursuant to any employee stock offering, plan or arrangement
currently in effect or approved by a majority of the Investor Directors, (ii) in
connection with any acquisition transaction, (iii) in any public offering
registered under the Securities Act or in any financing transaction in which
sales or resales are effected through Rule 144A or Regulation S under the
Securities Act or any successor or comparable provisions thereto and (iv) to
Purchaser or its Affiliates (other than the Company and its Subsidiaries)),
then, prior to each such issuance of New Securities, the Company shall offer to
Purchaser a Pro Rata Share of such New Securities. Any offer of New Securities
made to Purchaser under this Section 5.01 shall be made by notice in writing
(the "Subscription Notice") at least 10 Business Days prior to the date on which
the meeting of the Board of Directors is held to authorize the issuance of such
New Securities. The Subscription Notice shall set forth (i) the number of New
Securities proposed to be issued to Persons other than Purchaser and the terms
of such New Securities, (ii) the consideration (or manner of determining the
consideration), if any, for which such New Securities are proposed to be issued
and the terms of payment, (iii) the number of New Securities offered to
Purchaser in compliance with the provisions of this Section 5.01 and (iv) the
proposed date of issuance of such New Securities. Not later than 20 Business
Days after its receipt of a Subscription Notice, Purchaser shall notify the
Company in writing whether it elects to purchase all or any portion of the New
Securities offered to Purchaser pursuant to the Subscription Notice. If
Purchaser shall elect to purchase any such New Securities, the New Securities
which it shall have elected to purchase shall be issued and sold to Purchaser by
the Company at the same time and on the same terms and conditions as the New
Securities are issued and sold to third parties. If, for any reason, the
issuance of New Securities to third parties is not consummated, Purchaser's
right to its Pro Rata Share of such issuance shall lapse, subject to Purchaser's
ongoing subscription right with respect to issuances of New Securities at later
dates or times.
SECTION 5.02. Issuance and Delivery of New Securities and Voting
Stock. The Company represents and covenants to Purchaser that (i) upon
issuance, all the shares of New Securities sold to Purchaser pursuant to this
Article V shall be duly authorized, validly issued, fully paid and nonassessable
and will be approved (if outstanding securities of the Company of the same type
are at the time already approved) for listing on the New York Stock Exchange or
for quotation or listing on the principal trading market for the securities of
the Company at the time of issuance, (ii) upon delivery of such shares, they
shall be free and clear of all claims, Liens, encumbrances, security interests
and charges of any nature and shall not be subject to any preemptive right of
any stockholder of the Company and (iii) in connection with any such issuance,
the Company shall take such actions as are specified in Section 3.01(r) with
respect to such shares. If at the time of issuance of any shares of Common Stock
pursuant to this Article V, the Company shall not have redeemed the Rights, then
each share of Common Stock issued pursuant hereto shall have attached to it
Rights or new rights with terms substantially the same as, and at least as
favorable to Purchaser as, are provided under the Rights. Each share issued or
delivered by the Company hereunder shall bear the legend set forth in Section
13.11.
SECTION 5.03. Limitation on Repurchase of Shares. During the Relevant
Period the Company shall not purchase any outstanding Common Stock. During the
three-year period beginning on the day after the Relevant Period, the Company
shall not purchase any outstanding Common Stock unless the Company delivers to
the Tax Administrator an opinion of nationally recognized tax counsel, which
opinion is reasonably satisfactory in form and substance to the Tax
Administrator, to the effect that such purchase will not cause the ESI
Distribution and/or the Newco Distribution to result in the recognition of gain
to the Company, ESI or Newco by virtue of the ESI Distribution and/or Newco
Distribution failing to qualify under Section 355 of the Code by reason of
Section 355(e) (as ultimately enacted) or otherwise.
ARTICLE VI
LIMITATIONS ON PURCHASES OF ADDITIONAL EQUITY SECURITIES
SECTION 6.01. Purchases of Equity Securities.
(a) Except as expressly permitted by Section 6.01(c) or 6.01(d), during the
five-year period beginning on the date of this Agreement, none of the Purchaser
Related Parties (other than the Company) shall (i) acquire any Securities
(including by exercise of the Warrants) or otherwise increase, or take any
action that would reasonably be expected to cause, or shall omit to take any
action reasonably available to it, if such
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omission would reasonably be expected to cause, Purchaser's Percentage Interest
to be increased or (ii) solicit the acquisition of Securities, warrants, options
or conversion rights with respect to Securities, provided that the provision by
the Fund to its limited partners of customary reports and information, and
customary communications with such limited partners on behalf of the Fund, with
respect to the Fund's investment in the Company, that in either case do not
recommend any such acquisition, shall not be treated as a solicitation by
Purchaser or its Affiliates within the meaning of this clause (ii), if any such
action, omission or solicitation would reasonably be expected to result in the
ESI Distribution and/or Newco Distribution resulting in the recognition of gain
to any of the Company, ESI and Newco by virtue of the ESI Distribution and/or
Newco Distribution failing to qualify under Section 355 of the Code by reason of
Section 355(e) (as ultimately enacted) or otherwise.
(b) Except as expressly permitted by Section 6.01(c) or 6.01(d), during the
five-year period beginning on the date of this Agreement, none of the Purchaser
Related Parties shall exercise any warrants (including the Warrants), options or
conversion rights with respect to Securities to the extent that such exercise
might result in the ESI Distribution and/or Newco Distribution resulting in the
recognition of gain to any of the Company, ESI and Newco by virtue of the ESI
Distribution and/or Newco Distribution failing to qualify under Section 355 of
the Code by reason of Section 355(e) (as ultimately enacted) or otherwise.
(c) From and after the second anniversary of the later of the Newco
Distribution Time and the ESI Distribution Time, Purchaser may, directly or
indirectly, purchase or otherwise acquire Equity Securities or options to
acquire (through purchase, exchange, conversion or otherwise) any Equity
Securities pursuant to a Buyout Transaction, provided that a majority of the
Non-Investor Directors shall have approved such transaction; it being understood
that Purchaser has no present intention to purchase or acquire any additional
Equity Securities as permitted under this Section 6.01(b) and provided further,
however that prior to any such Buyout Transaction, Purchaser delivers to the
Company and the Tax Administrator an opinion of nationally recognized tax
counsel, which opinion is reasonably satisfactory in form and substance to both
the Company and the Tax Administrator, to the effect that such Buyout
Transaction will not cause the ESI Distribution and/or Newco Distribution to
result in the recognition of gain to the Company, ESI or Newco by virtue of the
ESI Distribution and/or Newco Distribution failing to qualify under Section 355
of the Code by reason of Section 355(e) (as ultimately enacted) or otherwise.
(d) Nothing herein shall prevent Purchaser from purchasing the Securities
pursuant to the terms of this Agreement (including through exercise of the
Warrant pursuant to its terms), and none of the Purchaser Related Parties shall
be treated as having breached any covenant in this Agreement solely as a result
of such purchase (or exercise), except to the extent that (i) such purchase (or
exercise) would result in the breach of a covenant set forth in this Agreement
and (ii) such breach would result on account of a change in law (or issuance of
administrative guidance) occurring after the date hereof, assuming for this
purpose that Section 355(e) of the Code in its proposed form as of the date
hereof (H.R. 2014, as approved by the Senate on June 27, 1997 and by the House
of Representatives on June 26, 1997) is current law.
(e) This Article VI shall terminate and be of no further force or effect on
the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
SECTION 6.02. Additional Limitations. Other than in connection with a
Buyout Transaction (provided, however, that in the case of a Buyout Transaction
initiated by Purchaser, such Buyout Transaction is permitted under Section
6.01(b)) or as specifically approved by a majority of the Non-Investor
Directors, Purchaser shall not, and shall not permit its Affiliates to:
(i) contrary to the Board of Directors, make, or in any way
participate, directly or indirectly, in any "solicitation" of "proxies" to
vote (as such terms are used in the proxy rules of the SEC) or seek to
advise, encourage or influence any person or entity with respect to the
voting of any shares of capital stock of the Company, initiate, propose or
otherwise solicit stockholders of the Company for the approval of one or
more stockholder proposals or induce or attempt to induce any other
individual, firm, corporation, partnership or other entity to initiate any
stockholder proposal;
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(ii) deposit any Voting Securities into a voting trust or subject any
Voting Securities to any arrangement or agreement with respect to the
voting of such securities or form, join a partnership, limited partnership,
syndicate or other group, or otherwise act in concert with any other
Person, for the purpose of acquiring, holding, voting or disposing of
Voting Securities, or otherwise become a "person" within the meaning of
Section 13(d)(3) of the Exchange Act;
(iii) seek to control the Board of Directors of the Company; provided,
however, that actions taken by representatives of such Purchaser solely by
exercise of such Purchaser's right to vote Voting Securities held by such
Purchaser in accordance with the provisions of this Agreement shall not
violate this provision; or
(iv) make a public request to the Company (or its directors, officers,
stockholders, employees or agents) to amend or waive any provisions of this
Agreement including, without limitation, any public request to permit
Purchaser or any other Person to take any action in respect of the matters
referred to in this Section 6.02.
ARTICLE VII
TRANSFER OF COMMON STOCK
SECTION 7.01. Transfer of Common Stock.
(a) Other than as specifically approved by a majority of the Non-Investor
Directors prior to the fifth anniversary of the Closing, Purchaser will not,
directly or indirectly, sell, transfer or otherwise dispose of any shares of
Common Stock except (i) pursuant to a registered underwritten public offering
intended to achieve a broad distribution in accordance with the Registration
Rights Agreement, (ii) in accordance with the volume and manner-of-sale
limitations of Rule 144 promulgated under the Securities Act (regardless of
whether such limitations are applicable), (iii) in a transaction exempt from the
registration requirements of the Securities Act to any Person or group (within
the meaning of Section 13(d)(3) of the Exchange Act) of Persons, if, prior to
and after giving effect to such sale, such Person or group of Persons (A) does
not or would not to Purchaser's knowledge after due inquiry, Beneficially Own
(provided that for purposes of this Section 7.01(a) a Person shall be deemed to
Beneficially Own all shares that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time) 3% or
more of the then outstanding shares of Common Stock or (B) is an investment
company registered under the Investment Company Act of 1940, as amended, or (iv)
in connection with a Buyout Transaction. Purported transfers of shares of Common
Stock that are not in compliance with this Article VII shall be of no force or
effect.
(b) This Article VII shall terminate and be of no further force or effect
on the earlier to occur of (i) the fifth anniversary of the Closing and (ii) the
date on which the percentage of the Total Voting Power represented by the
aggregate voting power of all Voting Securities then owned by Purchaser (other
than any Voting Securities acquired in violation of this Agreement) is greater
than 50%.
ARTICLE VIII
COVENANTS AND ADDITIONAL AGREEMENTS
SECTION 8.01. Covenants of the Company. During the period from the date
of this Agreement and continuing until the Closing, the Company agrees as to
itself and the Retained Subsidiaries that, except as set forth in Schedule 8.01,
or to the extent that Purchaser otherwise consents in writing:
(a) Ordinary Course. The Retained Business will be conducted in the
ordinary course in substantially the same manner as presently conducted and
the Company will use commercially reasonable efforts to keep available the
services of the current officers and key employees engaged primarily in the
Retained Business and to preserve the relationships with key customers,
suppliers and others having business dealings with the Retained Business,
except as contemplated or permitted by the Distribution Agreements or as
set forth in Schedule 8.01.
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(b) No Acquisitions. The Company will not, nor will it permit any of
the Retained Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets
of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or
otherwise acquire or agree to acquire any assets (other than inventory) in
any such case, that would be material to the Retained Business.
(c) No Dispositions. The Company will not, nor will it permit any of
the Retained Subsidiaries to, sell, lease, license, encumber or otherwise
dispose of, or agree to sell, lease, license, encumber or otherwise dispose
of, any of the Assets of the Retained Business other than in the ordinary
course of business or pursuant to existing contractual obligations for the
sale or other disposition of obsolete equipment.
(d) Other Transactions. The Company will not, nor will it permit any
of the Retained Subsidiaries to, do any of the following:
(i) Amend its Certificate of Incorporation Articles of Association,
By-laws or other organizational documents;
(ii) declare or pay any non-cash dividend or make any non-cash
distribution with respect to the Assets;
(iii) redeem or otherwise acquire any shares of its capital stock
or issue any capital stock or any option, warrant or right relating
thereto;
(iv) incur any liabilities, obligations or indebtedness for
borrowed money or guarantee any such liabilities, obligations or
indebtedness, other than in the ordinary course of business consistent
with past practice;
(v) permit, allow or suffer any of the Directories Assets to be
subject to any Lien other than Permitted Liens;
(vi) cancel any material indebtedness (individually or in the
aggregate) relating to the Retained Business or waive any claims or
rights of substantial value relating to the Retained Business;
(vii) pay, loan or advance any amount to, or sell transfer or lease
any of its assets relating to the Retained Business, or enter into any
agreement or arrangement relating to the Retained Business with Newco or
ESI or any of their respective Affiliates other than intercompany
transactions in the ordinary course of business consistent with past
practice of the Company and its Affiliates;
(viii) make any change in any method of accounting or accounting
practice or policy, except as may be required by GAAP;
(ix) modify, amend, terminate or permit the lapse of any material
lease of real property used in connection with the Retained Business
(except modifications or amendments associated with renewals of leases
in the ordinary course of business consistent with past practice of the
Retained Companies with respect to which Purchaser shall have the right
to participate and to approve);
(x) enter into any Contract concerning telephone directories
publishing, Contract for subscriber data or other material Contract with
a telephone company;
(xi) enter into any agreement or take any action in violation of
the terms of this Agreement or any of the Reorganization Agreements;
(xii) settle any material tax audit, make or change any material
tax election with respect to any of the Retained Subsidiaries (other
than in connection with the Pre-Distribution Restructuring) without the
consent of Purchaser (which consent shall not unreasonably withheld or
delayed); or
(xiii) agree, whether in writing or otherwise, to do any of the
foregoing.
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(e) Employee Benefits. Except as set forth in Schedule 8.01(e) or
except in the ordinary course of business and as consistent with past
practice (which shall include normal periodic performance reviews and
related benefit increases) or pursuant to the existing terms of any
collective bargaining agreement, the Company will not, nor will it permit
any of the Retained Subsidiaries to (i) increase in any manner the
compensation of any of the officers or other employees of the Retained
Companies; (ii) pay or agree to pay any pension, retirement allowance or
other employee benefit not required by any existing plan, agreement or
arrangement to any such officer or employee, whether past or present; (iii)
enter into, or negotiate, any collective bargaining agreement with respect
to employees of the Retained Companies except as required by law, in which
case the Company or such Retained Subsidiary shall first notify Purchaser;
or (iv) commit itself to any additional pension, profit-sharing, bonus,
incentive, deferred compensation, stock purchase, stock option, equity
purchase (or other equity based plan), stock appreciation right, group
insurance, severance pay, retirement or other employee benefit plan,
policy, program, understanding, agreement or arrangement, or to any
employment agreement or consulting agreement (arising out of prior
employment), regardless of the applicable funding arrangements, with or for
the benefit of any officer or employee of the Retained Companies, or amend
any of such plan or any of such agreements in existence on the date hereof
in any manner which would have a Material Adverse Effect on any of the
Retained Companies, it being understood that the Retained Companies may
establish new employee benefit plans as necessary to replace any plans
assumed by Newco pursuant to the Newco Distribution.
Purchaser agrees that it shall not seek, nor be entitled to receive,
relief from the Company or Newco for any breach of the covenants set forth
in Section 8.01(d) after the Closing Date other than any breach of the
covenants set forth in Sections 8.01(d)(ii), (iv), (vii), (x), (xi) and,
with respect to the foregoing, (xiii).
SECTION 8.02. Directories Transaction Proposal. (a) Subject to Section
8.02(d), the Company shall not, nor shall it permit any of its Subsidiaries to,
nor shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative of, the Company
or any of its subsidiaries to, (i) solicit or initiate, or encourage the
submission of, any Directories Transaction Proposal (as defined below) or (ii)
participate in any discussions or negotiations regarding, or furnish to any
Person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Directories Transaction Proposal; provided, however,
that prior to the Company Meeting, in response to an unsolicited written bona
fide Directories Transaction Proposal that in the good faith opinion of the
Board of Directors of the Company could reasonably be expected to result in a
Superior Directories Proposal (as defined below), the Company may, subject to
compliance with Section 8.02(c), (A) furnish information with respect to the
Company to such Person making such proposal pursuant to a customary
confidentiality agreement with such Person and (B) participate in negotiations
regarding such Directories Transaction Proposal. For purposes of this Agreement,
"Directories Transaction Proposal" means any inquiry, proposal or offer
conditional upon the occurrence of the Distributions (each, a "proposal") from
any person relating to any purchase or other acquisition from the Company of a
substantial amount of assets of the Retained Companies or purchase or other
acquisition of any equity interest in the Retained Companies, or any tender
offer or exchange offer, that if consummated would result in any person
beneficially owning 5% or more of the Total Voting Power following the
Distributions other than the transactions contemplated by this Agreement,
provided that an Alternative Company Proposal shall not constitute a Directories
Transaction Proposal. Immediately after the execution and delivery of this
Agreement, the Company will, and will cause its Subsidiaries and affiliates, and
their respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents to, cease and terminate any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any possible Directories Transaction Proposal and shall notify each party
that it, or any officer, director, investment advisor, financial advisor,
attorney or other representative retained by it, has had discussions with during
the 30 days prior to the date of this Agreement that the Board of Directors of
the Company no longer seeks the making of any Directories Transaction Proposal.
The Company represents to Purchaser that as of the date hereof the Company is
not currently engaged in discussions with any parties regarding an Alternative
Company Proposal.
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(b) Except as set forth in this Section 8.02(b) or as permitted by Section
8.02(d), neither the Board of Directors of the Company nor any committee thereof
shall (A) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Purchaser, the approval or recommendation by such Board of Directors
or any such committee of this Agreement or the transactions contemplated hereby,
(B) approve or recommend, or propose to approve or recommend, any Directories
Transaction Proposal (C) cause or permit the Company or any of its Subsidiaries
to enter into any agreement with respect to any Directories Transaction Proposal
or (D) terminate this Agreement in response to a Directories Transaction
Proposal. Notwithstanding the foregoing, if prior to the Company Meeting the
Company has received a Directories Transaction Proposal that the Board considers
in good faith is a Superior Directories Proposal, then the Board of Directors of
the Company may (subject to the terms of this sentence and compliance with the
following sentence) (i) withdraw or modify its recommendation of this Agreement,
or the transactions contemplated hereby, (ii) approve or recommend such Superior
Directories Proposal, (iii) cause the Company to enter into an agreement with
respect to a Superior Directories Proposal and (iv) terminate this Agreement, in
each case (as contemplated by Section 8.02(c)) no earlier than 5 Business Days
following Purchaser's receipt of a written notice from the Company advising
Purchaser that the Board of Directors of the Company has received a Superior
Directories Proposal, specifying the material terms and conditions of such
Superior Directories Proposal and identifying the person making such Superior
Directories Proposal; provided, however, that neither the Company nor its Board
of Directors shall take any of the actions specified in such clauses (i), (ii)
or (iii) unless the Company shall have furnished Purchaser with written notice
(a "Section 8.02(b) Notice") on a date prior to the date any such actions are
proposed to be taken specifying such actions to be taken. In addition, if the
Company or the Board of Directors of the Company proposes to take any of the
actions permitted by the preceding sentence with respect to any Directories
Transaction Proposal, then the Company shall, prior to the taking of any such
action, pay, or cause to be paid, to Purchaser's Expenses and the Termination
Fee (each as defined in Section 12.09). The term "Superior Directories Proposal"
shall mean any bona fide written Directories Transaction Proposal that has the
following characteristics: (1) it is a proposal conditional upon the occurrence
of the Distributions to acquire, directly or indirectly, following the
Distributions for consideration consisting of cash and/or readily marketable
securities, (x) shares of Common Stock representing at least 20% of the Total
Voting Power following the Distributions, or (y) a substantial amount of the
assets of the Retained Subsidiaries and (2) the terms of such proposal in the
good faith judgment of the Board of Directors of the Company provide
consideration to the Company or the Company's stockholders that is superior to
the consideration provided pursuant to this Agreement (after taking into account
any modifications to this Agreement proposed by Purchaser in writing).
(c) The Company shall immediately advise Purchaser orally and in writing of
(i) any request for information which may relate to a Directories Transaction
Proposal, (ii) any Directories Transaction Proposal, (iii) any inquiry with
respect to or that could lead to any Directories Transaction Proposal or (iv)
any action taken in accordance with Section 8.02(a)(A) or (B), and in each case
the material terms and conditions of such request, Directories Transaction
Proposal, inquiry or action and the identity of the Person making any such
request, alternative transaction proposal or inquiry or with respect to which
such action is taken. The Company will keep Purchaser fully and timely informed
of the status and details (including amendments or proposed amendments) of any
such request, Directories Transaction Proposal, inquiry or action and any
restrictions relating thereto. Notwithstanding the foregoing, if after receiving
a Superior Directories Proposal, the Board of Directors of the Company
determines in good faith that an auction of all or any portion of the assets of
or equity interest in the Retained Business would be in the best interest of the
stockholders of the Company, the Board of Directors of the Company may, having
established and promulgated reasonable procedures to govern the conduct thereof,
conduct such an auction and the foregoing information delivery obligations and
the obligation to deliver a Section 8.02(b) Notice shall not apply.
(d) Notwithstanding any provision of this Agreement to the contrary, if the
Board of Directors of the Company determines in good faith, based on
consultation with outside legal counsel, that it is necessary to do so in order
to comply with its fiduciary duties to the Company under applicable law, the
Company or any of its representatives may, at any time, solicit, initiate or
encourage proposals with respect to a merger, acquisition, consolidation or
similar transaction involving, or any purchase of, all or substantially all of
the assets or more than 50% of the Voting Securities or any other transaction or
series of transactions the consummation of which
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would preclude consummation of either or both of the Distributions (an
"Alternative Company Proposal"), and the Company may, at any time, enter into
any written agreement relating to an Alternative Company Proposal, provided that
for the avoidance of doubt, a Directories Transaction Proposal shall not
constitute "substantially all" of the assets of the Company. Notwithstanding any
provision of this Agreement to the contrary, in the event that the Board of
Directors of the Company determines in good faith that it is in the best
interest of the Company to pursue an Alternative Company Proposal, the Board of
Directors of the Company may (x) withdraw or modify its approval or
recommendation of this Agreement in favor of an Alternative Company Proposal,
(y) approve or recommend an Alternative Company Proposal or (z) terminate this
Agreement in order to pursue an Alternative Company Proposal.
(e) Nothing contained in this Section 8.02 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
stockholders of the Company if, in the good faith opinion of the Board of
Directors of the Company, after consultation with outside legal counsel, failure
to so disclose would be inconsistent with its duties under applicable law.
SECTION 8.03. Modification of Reorganization Documents; Abandonment of
Distributions. Notwithstanding anything to the contrary in this Agreement, the
Company may in its sole discretion modify each of the Reorganization Agreements
relating to the Distributions and, if the Board of Directors of the Company
determines in good faith that it is in the best interest of the Company to do
so, abandon the Distributions.
SECTION 8.04. Reorganization Documents and Schedules. The Company shall
use reasonable best efforts to cause (i) each of the Reorganization Agreements
to be entered into by or among the Company, Newco or ESI, as the case may be, in
connection with the Distributions and (ii) each of the Schedules called for in
this Agreement (and during such period may unilaterally amend this Agreement to
add additional Schedules) to be delivered to Purchaser and its counsel by 7:00
p.m., New York City time, prior to August 22, 1997 (the "Delivery Cut-off
Time"). Purchaser shall review such Reorganization Documents and Schedules in
good faith. Prior to the applicable Review Cut-off Time (as defined) the Company
shall make available to Purchaser and its counsel at their request all
documentation related to any item set forth on any Schedule. Purchaser shall
complete its review of the Reorganization Documents and the Schedules and notify
the Company that such review is complete by 7:00 p.m., New York City time, on
September 12, 1997 (the "Review Cut-off Time"); provided, however, that if any
Reorganization Document or Schedule is delivered after the Delivery Cut-off
Time, the Review Cut-off Time for all Reorganization Documents and Schedules
shall be extended by the number of days elapsed (which, in any case, shall not
be less than one) between the date of the Delivery Cut-off Time and the date of
receipt by Purchaser and its counsel of such Reorganization Document or
Schedule; and provided further, however, that if Purchaser objects to (i) any
term of the Reorganization Agreements as being inconsistent with Purchaser's
good faith understanding of the transactions contemplated by this Agreement or
(ii) any change or addition to the Schedules made after the date hereof,
Purchaser may terminate this Agreement upon written notice to the Company
without further liability on the part of Purchaser or the Company other than
pursuant to Sections 10.02 and 13.09.
SECTION 8.05. Company Stockholder Approval; Proxy Statement. (a) The
Company shall call a meeting of its stockholders (the "Company Meeting") for the
purpose, among others, of voting upon the issuance of the Shares and the
Warrants (and, in each case, the associated Rights) to Purchaser (the
"Issuance") and the Charter Amendment Proposals (collectively, the "Company
Meeting Proposals").
(b) The Company will prepare and file with the SEC the Proxy Statement with
respect to the Company Meeting and will use its reasonable best efforts to
respond to any comments of the SEC or its staff and to cause the Proxy Statement
to be cleared by the SEC. The Company will notify Purchaser of the receipt of
any comments from the SEC or its staff and of any request by the SEC or its
staff for amendments or supplements to the Proxy Statement or for additional
information and will supply Purchaser and its counsel with copies of all
correspondence between the Company or any of its representatives, on the one
hand, and the SEC or its staff, on the other hand, with respect to the Proxy
Statement. The Company shall give Purchaser and its counsel the opportunity to
review the Proxy Statement prior to its being filed with the SEC and shall give
Purchaser and its counsel the opportunity to review all amendments and
supplements to the Proxy Statement
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and all responses to requests for additional information and replies to comments
prior to their being filed with, or sent to, the SEC. Each of the Company and
Purchaser agrees to use its reasonable best efforts, after consultation with the
other party hereto, to respond promptly to all such comments of and requests by
the SEC. After the Proxy Statement has been cleared by the SEC, the Company
shall mail the Proxy Statement to the stockholders of the Company. If at any
time prior to the Company Meeting there shall occur any event that should be set
forth in an amendment or supplement to the Proxy Statement, the Company will
prepare and mail to its stockholders such an amendment or supplement.
(c) Subject to the fiduciary duties of the Board of Directors as advised by
counsel, the Company shall use its best efforts to obtain the necessary
approvals by its stockholders of the Company Meeting Proposals.
SECTION 8.06. Debt Repayment. Prior to the Distributions, the Company
shall repay all of its currently outstanding indebtedness on a consolidated
basis or enter into arrangements satisfactory to Purchaser as will result in the
economic equivalent to the Company of having no outstanding indebtedness on the
Closing Date other than as referred to in Schedule 9.03(l).
SECTION 8.07. Retained Companies Financing. In connection with the
financings proposed to be undertaken by the Company and the Retained Company as
part of the transactions contemplated by the Reorganization Agreements (the
"Proposed Financings"), the Company shall (i) permit Purchaser and its counsel
to participate in any discussions or negotiations between the Company and any of
its representatives, on the one hand, and its prospective lenders and their
counsel, on the other, and to comment on draft commitment letters (the
"Commitment Letters") and loan and other documentation in respect of any such
Proposed Financings and (ii) provide Purchaser and its counsel copies of all
correspondence between the Company and its lenders relating thereto. If, prior
to the execution of any Commitment Letters in final form and based on its review
of such Commitment Letters, Purchaser determines in the good faith exercise of
its reasonable judgment not to proceed with the transactions contemplated by
this Agreement, Purchaser may terminate this Agreement upon written notice to
the Company.
SECTION 8.08. Employee Benefits. The Company, through its Board of
Directors, shall take any actions that are necessary or desirable with respect
to the 1995 ITT Corporation Incentive Stock Plan, to give effect to the
transactions contemplated under this Agreement or the Reorganization Agreements
to maintain the economic value of the optionees benefits under such plan.
SECTION 8.09. Access and Information. So long as this Agreement remains
in effect, the Company will (and will cause each of the Retained Companies, and
each of their respective accountants, counsel, consultants, officers, directors,
employees, agents and representatives ("Representatives") of or to any of the
Retained Companies, to) give Purchaser and its Representatives, full access
during reasonable business hours to all of their respective properties, assets,
books, contracts, commitments, reports and records relating to the Retained
Companies, and furnish to them all such documents, records and information with
respect to the properties, assets and business of the Retained Companies and
copies of any work papers relating thereto as Purchaser shall from time to time
reasonably request. The Company will keep Purchaser generally informed as to the
affairs of the Retained Business.
SECTION 8.10. Further Actions. (a) Subject to Section 8.03, the Company
shall, and shall cause each of the Retained Companies to, use all reasonable
efforts to take or cause to be taken all actions, and to do or cause to be done
all other things, necessary, proper or advisable in order for each of the
Retained Companies to fulfill and perform its obligations in respect of this
Agreement and the Reorganization Agreements to which it is a party, or otherwise
to consummate and make effective the transactions contemplated hereby and
thereby.
(b) The Company shall (and shall cause each of the Retained Companies to),
as promptly as practicable, (i) make, or cause to be made, all filings and
submissions (including but not limited to under the HSR Act and foreign
antitrust filings) required under any law applicable to any of the Retained
Companies, and give such reasonable undertakings as may be required in
connection therewith, and (ii) use all reasonable efforts to obtain or make, or
cause to be obtained or made, all Permits necessary to be obtained or made by
any of the Retained Companies, in each case in connection with this Agreement or
the Reorganization
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Agreements, the sale and transfer of the Shares pursuant hereto, or the
consummation of the other transactions contemplated hereby or thereby.
(c) The Company shall, and shall cause each of the Retained Companies to,
coordinate and cooperate with Purchaser in exchanging such information and
supplying such reasonable assistance as may be reasonably requested by Purchaser
in connection with the filings and other actions contemplated by this Agreement.
(d) At all times prior to the Closing Date, the Company shall promptly
notify Purchaser in writing of any fact, condition, event or occurrence that
could reasonably be expected to result in the failure of any of the conditions
contained in Article IX to be satisfied, promptly upon becoming aware of the
same.
SECTION 8.11. Further Assurances. Following the Closing Date, the Company
shall, and shall cause each of the Retained Companies to, from time to time,
execute and deliver such additional instruments, documents, conveyances or
assurances and take such other actions as shall be necessary, or otherwise
reasonably be requested by Purchaser, to confirm and assure the rights and
obligations provided for in this Agreement and the Reorganization Agreements and
render effective the consummation of the transactions contemplated hereby and
thereby, or otherwise to carry out the intent and purposes of this Agreement.
ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.01. Conditions to Each Party's Obligation. The obligation of
the Company and Purchaser to consummate the transactions contemplated to occur
at the Closing shall be subject to the satisfaction prior to the Closing of each
of the following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) HSR and Other Approvals. Any applicable waiting period under the
HSR Act relating to the transactions contemplated hereby shall have expired
or been terminated, and all other material authorizations, consents, orders
or approvals of, or regulations, declarations or filings with, or
expirations of applicable waiting periods imposed by, any Governmental
Entity (including, without limitation, any foreign antitrust filing)
necessary for the consummation of the transactions contemplated hereby,
shall have been obtained or filed or shall have occurred.
(b) No Litigation, Injunctions, or Restraints. No statute, rule,
regulation, executive order, decree, temporary restraining order,
preliminary or permanent injunction or other order enacted, entered,
promulgated, enforced or issued by any Governmental Entity or other legal
restraint or prohibition preventing the consummation of the transactions
contemplated by this Agreement or any of the Reorganization Agreements
shall be in effect.
(c) Stockholders Vote. The Company Stockholder Approval shall have
been obtained.
(d) NYSE Listing. The Shares shall have been approved for listing on
the New York Stock Exchange, subject only to official notice of issuance.
(e) Consummation of Distributions. The distribution of the businesses
of ESI and Newco and their respective Subsidiaries shall have occurred.
(f) Tax Allocation Agreement. The Tax Allocation Agreement shall
contain the following provisions:
(i) an indemnity from Newco in favor of the Company and the
Retained Subsidiaries that covers (A) Taxes arising from the
Distributions, other than Taxes for which the Company is responsible
pursuant to a provision substantially similar to Section 9.01(f)(ii) of
this Agreement; (B) Taxes arising from the Pre-Distribution Transactions
attributable to periods prior to the Closing, including as a result of
the transfer of stock of a Subsidiary of the Company and the liquidation
of a Subsidiary of the Company; and (C) pre-closing Taxes of the Company
and the Retained Subsidiaries; provided, that the Company shall agree to
timely file all notices required to be filed in
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respect of gain recognition agreements entered into under Section 367 of
the Code for pre-Closing taxable years;
(ii) an indemnity from the Company in favor of Newco with respect
to any Taxes that arise from, in connection with, or relating to (A) any
breach of any covenant made by Purchaser Related Parties in connection
with this Agreement, including but not limited to the covenants
contained in Section 2.02 of this Agreement; or (B) any breach of
Purchaser's obligations under Section 5.03, Article VI or Article VII of
this Agreement;
(iii) Notwithstanding Sections 9.01(f)(i) and 9.01(f)(ii) above,
the Tax Allocation Agreement shall provide that if any liability for
Taxes arises as a result of the ESI Distribution and/or the Newco
Distribution failing to qualify under Section 355 of the Code, by reason
of Section 355(e) (as ultimately enacted), and such liability for Taxes
does not result from (A) a breach by any of the Purchaser Related
Parties of any of their covenants or obligations under Section 2.02,
Article VI or Article VII of this Agreement or (B) any action by Newco,
then any such liability for Taxes shall be shared 10% by the Company and
90% by Newco; and
(iv) The Tax Allocation Agreement shall contain customary
provisions providing for control and participation rights with respect
to any administrative and judicial proceedings with respect to Taxes,
including the right of the Person primarily responsible for the relevant
indemnification obligation thereunder to control any such proceeding,
and in the case of an indemnification obligation described in Section
9.01(f)(iii), the right of the Company to participate in such
proceeding. Notwithstanding anything to the contrary in the preceding
sentence, Company shall not be entitled to assume control of any
administrative or judicial proceeding with respect to Taxes unless
Company shall have theretofore acknowledged in writing the breach by the
relevant Purchaser Related Party of the covenants under this Agreement
that resulted in the claim or assertion giving rise to such proceeding.
SECTION 9.02. Conditions to the Obligation of the Company. The obligation
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction or waiver thereof prior to the
Closing of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Purchaser that are qualified as to materiality shall be true
and correct, and those that are not so qualified shall be true and correct
in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the
extent such representations and warranties expressly relate to an earlier
date (in which case such representations and warranties that are qualified
as to materiality shall be true and correct, and those that are not so
qualified shall be true and correct in all material respects, on and as of
such earlier date) and the Company shall have received a certificate signed
by an authorized officer of Purchaser to such effect.
(b) Opinion of Purchaser's Counsel. The Company shall have received
an opinion dated as of the Closing of Debevoise & Plimpton, counsel to
Purchaser, in form and substance satisfactory to the Company.
(c) Registration Rights Agreement. Purchaser shall have executed and
delivered the Registration Rights Agreement.
SECTION 9.03. Conditions to the Obligation of Purchaser. The obligation
of Purchaser to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction or waiver thereof prior to the Closing of
each of the following conditions:
(a) Representations and Warranties. Except as set forth in Schedule
8.01, the representations and warranties of the Company set forth in this
Agreement that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all
material respects, as of the date of this Agreement and as of the time of
the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such
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representations and warranties that are qualified as to materiality shall
be true and correct, and those that are not so qualified shall be true and
correct in all material respects, on and as of such earlier date), and
Purchaser shall have received a certificate signed by an authorized officer
of the Company to such effect.
(b) Reorganization Agreements. Each Reorganization Agreement to which
the Company is a party shall have been executed without modification from
the forms as in existence at the Review Cut-off Time or such earlier date
as Purchaser completed its review of such agreement.
(c) Performance of Obligations of the Company. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under
this Agreement, and Purchaser shall have received a certificate signed by
an authorized officer of the Company to such effect.
(d) Opinion of the Company's Counsel. Purchaser shall have received
opinions dated as of the Closing of the general counsel of the Company, and
Cravath, Swaine & Moore, counsel to the Company, satisfactory in form and
substance to Purchaser.
(e) Registration Rights Agreements. Purchaser shall have executed and
delivered the Registration Rights Agreement.
(f) Debt Repayment. The Company shall have repaid all of its
indebtedness outstanding on the date of this Agreement or have entered into
other arrangements satisfactory to Purchaser in respect of such
indebtedness.
(g) Financings. The Company shall have entered into definitive
documentation for new bank and public debt financing and such definitive
documentation shall reflect substantially the terms and conditions of the
Commitment Letters or if no such Commitment Letters shall have been entered
into prior to executing such definitive documentation, then such definitive
documentation shall be satisfactory in form and substance to Purchaser.
(h) Consulting Agreement. The Company or a Significant Subsidiary of
the Company shall have entered into a consulting agreement with CD&R
providing for an annual fee of $500,000 in connection with consulting and
advisory services.
(i) Other Parties. (A) No Person or "group" (as defined in the
Exchange Act), other than Purchaser, shall have acquired beneficial
ownership of more than 15% of the outstanding shares of Voting Stock, and
(B) no Person (other than Purchaser or one or more of its Affiliates) shall
have entered into an agreement in principle or definitive agreement with
the Company with respect to a tender or exchange offer for any shares of
Common Stock or a merger, consolidation or other business combination with
or involving the Company.
(j) Transaction Fee. The Company shall have authorized payment to
CD&R of the Transaction Fee and the Transaction Fee shall have been paid.
(k) Assumption By Newco. Newco shall have assumed the obligations of
the Company under Article XI of this Agreement as contemplated by Section
11.01(b).
(l) New Debt. The Company's debt capital structure shall be as set
forth in Schedule 9.03(l), which shall reflect total indebtedness not to
exceed $1.056 billion on a pro forma basis prepared as though the Closing
occurred on September 30, 1997.
(m) Corporate Proceedings. All corporate proceedings of the Company
in connection with the transactions contemplated by this Agreement and the
Reorganization Agreements, and all documents and instruments incident
thereto, shall be satisfactory in form and substance to Purchaser and its
counsel, and Purchaser and its counsel shall have received all such
documents and instruments, or copies thereof, certified or requested, as
may be reasonably requested.
(n) Certain Indemnities. The indemnity with respect to liabilities
arising from the 1995 spinoffs, the transactions contemplated by the
Reorganization Agreements, including, without limitation, the debt
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repayments contemplated by Section 8.06, the financings contemplated by
9.03(g) and the use of the proceeds thereof and claims by Hilton
Corporation and contingent obligations to BellSouth Corporation (including
claims in respect of payment of additional consideration or other
contingent liabilities to BellSouth) to be provided to the Company by Newco
in the Newco Distribution Agreement shall be satisfactory to Purchaser.
(o) By-Law Amendments. The Company By-laws shall have been amended to
the extent necessary to assure that the acquisition of the Shares, the
Warrants, the shares issuable upon exercise of the Warrants and, to the
extent permitted by applicable law, any other Equity Securities acquired by
Purchaser not in violation of this Agreement do not limit the ability of
Purchaser to exercise voting rights with respect thereto.
(p) Litigation. Except as disclosed in the Filed Company SEC
Documents, there shall be no civil, criminal or administrative actions,
suits or proceedings pending or, to the knowledge of the Company,
threatened, against any of the Retained Companies that, individually or in
the aggregate, would reasonably be expected to have a Material Adverse
Effect on the Retained Companies, taken as a whole.
(q) Material Adverse Effect. No event, change or development shall
exist or have occurred since March 31, 1997 which has had or is reasonably
likely to have a Material Adverse Effect on the Retained Companies, taken
as a whole.
ARTICLE X
TERMINATION
SECTION 10.01. Termination. This Agreement may be terminated at any time
prior to the Closing, whether before or after the Company Stockholder Approval
has been obtained:
(a) by mutual written consent of Purchaser and the Company;
(b) by Purchaser or the Company at any time after January 15, 1998;
(c) by the Company if any of the conditions set forth in Section 9.01
or 9.02 shall become impossible to fulfill (other than as a result of any
breach by the Company of the terms of this Agreement) and shall not have
been waived in accordance with the terms of this Agreement;
(d) by Purchaser if (i) the Board of Directors of the Company or any
committee thereof withdraws or modifies (or publicly announces its
intention to do so) in a manner adverse to Purchaser (as determined by
Purchaser in its reasonable judgment) its approval or recommendation of
this Agreement or the transactions contemplated hereby or approves or
recommends a Directories Transaction Proposal or resolves to do any of the
foregoing or (ii) the Company shall have entered into an agreement with
respect to a Directories Transaction Proposal or resolved to take such
action;
(e) by Purchaser, if the Board of Directors of the Company publicly
announces its determination not to effect the Distributions or enters into
an agreement with respect to an Alternative Company Proposal;
(f) by Purchaser, if any of the conditions set forth in Section 9.01
or 9.03 shall become impossible to fulfill (other than as a result of any
breach by Purchaser of the terms of this Agreement) and shall not have been
waived in accordance with the terms of this Agreement;
(g) by Purchaser if the Company fails to perform in any material
respect any of its material obligations hereunder or breaches in any
material respect any material provision hereof, and the Company has failed
to perform such obligation or cure such breach, within 10 days of its
receipt of written notice thereof from Purchaser, and such failure to
perform shall not have been waived in accordance with the terms of this
Agreement;
(h) by the Company if Purchaser fails to perform in any material
respect any of its material obligations hereunder or breaches in any
material respect any material provision hereof, and Purchaser
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has failed to perform such obligation or cure such breach, within 10 days
of its receipt of written notice thereof from the Company, and such failure
to perform shall not have been waived in accordance with the terms of this
Agreement;
(i) by Purchaser or the Company if the Company Stockholder Approval
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote held at a duly held meeting of stockholders or at
any adjournment thereof;
(j) by the Company if (i) the Company enters into a definitive
agreement in accordance with Section 8.02(b)(iii) and (ii) the Company
simultaneously with terminating pays Purchaser's Expenses and the
Termination Fee (each as set forth in Section 13.09) in cash and otherwise
complies with the provisions of Section 8.02;
(k) by the Company if (i) the Board of Directors of the Company
determines not to effect the Distributions and (ii) the Company
simultaneously with terminating pays Purchaser Purchaser's Expenses and the
Termination Fee (each as set forth in Section 13.09) in cash; or
(l) by Purchaser if the Company shall make any material amendment to
any Reorganization Agreement after the Review Cut-Off Time without
Purchaser's consent which, in its good faith judgment, is materially
adverse to the proposed investment of Purchaser hereunder.
SECTION 10.02. Effect of Termination. In the event of termination of this
Agreement by either the Company or Purchaser as provided in Section 10.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Purchaser or the Company, other than the provisions
of this Section 10.02 and Section 13.09 and except to the extent that such
termination results from the wilful and material breach by a party of any of its
representations, warranties, covenants or agreements set forth in this
Agreement.
ARTICLE XI
INDEMNIFICATION
SECTION 11.01 Indemnification of Purchaser.
(a) By the Company. The Company covenants and agrees to defend, indemnify
and hold harmless each of Purchaser, its Affiliates (other than the Company and
any Retained Companies), and their respective officers, directors, partners,
employees, agents, advisers and representatives including, without limitation,
the Fund and CD&R (collectively, the "Purchaser Indemnitees") from and against,
and pay or reimburse the Purchaser Indemnitees for, the amount of any judgment
or settlement obtained by a claimant against any Purchaser Indemnitee, including
interest and penalties with respect thereto plus out-of-pocket expenses and
reasonable attorneys' and accountants' fees and expenses incurred in the
investigation or defense of any of the same or in asserting, preserving or
enforcing any of their respective rights hereunder (collectively, "Losses"),
resulting from or based on (or allegedly resulting from or based on):
(i) any actions brought by any third parties (including any
shareholders of the Company in connection with any derivative actions)
resulting from or based on (or allegedly resulting from or based on) any of
the transactions (including any financings, restructurings and the
Pre-Distribution Transactions) contemplated by this Agreement or any of the
other Reorganization Agreements, provided that the indemnity provided in
this clause (i) shall not include (A) actions brought by any limited
partner of the Fund against Purchaser or any of its Affiliates relating to
the transactions contemplated by this Agreement, (B) Losses resulting from
or based on the acts or omissions of a Purchaser Indemnitee following the
Closing, (C) claims resulting from or based on a breach by Purchaser of its
obligations under this Agreement, (D) any contract, agreement, obligation,
commitment, understanding or other arrangement between the claimant and any
Purchaser Indemnitee, (E) any intentional tort by a Purchaser Indemnitee or
(F) to the extent relating to any fee, compensation or other payment to be
paid to any Purchaser Indemnitee;
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(ii) any actions brought by BellSouth Corporation or any shareholder
of BellSouth Corporation or any other third party resulting from or arising
out of the purchase by the Company of the shares of ITT World Directories,
Inc. from BellSouth Corporation pursuant to the Stock Purchase Agreement,
dated as of July 15, 1997, between BellSouth Corporation and the Company;
and
(iii) any actions brought by or on behalf of Hilton Hotels Corporation
or other actions by third parties (including any shareholder of the Company
in connection with any derivative action) related to Hilton's proposed
acquisition of the Company.
The Losses described in clauses (i), (ii) and (iii) of this Section 11.01(a) are
herein referred to as "Purchaser Indemnifiable Losses". The Company shall
reimburse the Purchaser Indemnitees for any legal or other expenses incurred by
such Purchaser Indemnitees in connection with investigating or defending any
such Purchaser Indemnifiable Losses as such expenses are incurred.
(b) By Newco. From and after the Newco Distribution Time, Newco shall in a
writing reasonably satisfactory to Purchaser assume and agree to pay, perform
and fully discharge all obligations of the Company under this Article XI and
shall agree in a writing reasonably satisfactory to Purchaser to indemnify and
hold harmless Purchaser from and against all losses (including reasonable
attorneys' and accountants' fees and expenses, resulting from or based on any
breach by the Company of the covenants set forth in clauses (ii), (iv), (vii),
(x), (xi) and, with respect to the foregoing, (xiii) of Section 8.01(d).
SECTION 11.02 Indemnification Procedures. Promptly after receipt by a
Purchaser Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Purchaser Indemnitee shall, if a claim in respect
thereof is to be made against the Company or Newco, as the case may be (the
"Indemnifying Person"), notify the Indemnifying Person in writing of the
commencement or the written assertion thereof. Failure by a Purchaser Indemnitee
to so notify the Indemnifying Person shall relieve the Indemnifying Person from
the obligation to indemnify such Purchaser Indemnitee only to the extent that
the Indemnifying Person suffers actual and material prejudice as a result of
such failure but in no event shall such failure to notify the Indemnifying
Person (i) constitute prejudice suffered by the Indemnifying Person if it has
otherwise received notice of the actions giving rise to such obligation to
indemnify or (ii) relieve it from any liability or obligation that it may
otherwise have to such Purchaser Indemnitee. In case any such action or claim
shall be brought or asserted against any Purchaser Indemnitee and it shall
notify the Indemnifying Person of the commencement or assertion thereof, the
Indemnifying Person shall be entitled to participate therein but the defense of
such action or claim shall be conducted by counsel to the Purchaser Indemnitee,
provided, however, that the Indemnifying Person shall not, in connection with
any one such action or proceeding or separate but substantially similar actions
or proceedings arising out of the same general allegations, be liable for the
fees and expenses of more than one separate firm of attorneys at any time for
all Purchaser Indemnitees, except to the extent that local counsel, in addition
to regular counsel, is required in order to effectively defend against such
action or proceeding and provided further that a Purchaser Indemnitee shall not
enter into any settlement of any such claim without the prior consent of the
Company or, following the Newco Distribution Time, Newco, such consent not to be
unreasonably withheld.
ARTICLE XII
DEFINITIONS
SECTION 12.01. Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
"Affiliate" shall have the meaning set forth in Rule 12b-2 under the
Exchange Act (as in effect on the date of this Agreement).
"Beneficially Own" with respect to any securities shall mean having
"beneficial ownership" of such securities (as determined pursuant to Rule
13d-3 under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing.
"Business Day" means any day on which banking institutions are open in
the City of New York.
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"Buyout Transaction" means a tender offer, merger, sale of all or
substantially all the Company's assets or any similar transaction that
offers each holder of Voting Securities (other than, if applicable, the
Person proposing such transaction) the opportunity to dispose of Voting
Securities Beneficially Owned by each such holder for the same
consideration or otherwise contemplates the acquisition of Voting
Securities Beneficially Owned by each such holder for the same
consideration.
"Closing" means the date the Shares and Warrants are accepted for
payment.
"Code" shall mean the Internal Revenue Code of 1986.
"Directories Business" means the publishing of telephone (alphabetical
and classified) and specialized directories.
"Employee Benefit Plans" shall mean all defined contribution, defined
benefit, welfare benefit, bonus, incentive compensation, stock option,
stock purchase, stock appreciation right, stock bonus, incentive, deferred
compensation, insurance, medical, dental, vision, life, death benefit,
fringe benefit or other employee benefit plans, programs, policies or
arrangements, including without limitation, any employment, consulting,
offer, secondment, severance or other termination agreement and any
collective bargaining agreements, maintained by the Company and its
subsidiaries other than any such plan, program, policy or arrangement
assumed by Newco pursuant to the Newco Distribution.
"Equity Security" means (i) any Common Stock or other Voting
Securities, (ii) any securities of the Company convertible into or
exchangeable for Common Stock or other Voting Securities or (iii) any
options, rights or warrants (or any similar securities) issued by the
Company to acquire Common Stock or other Voting Securities.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Final Determination" means the final resolution of liability for any
Tax for any taxable period, including any related interest or penalties, by
or as a result of: (i) a final and unappealable decision, judgment, decree
or other order of a court of competent jurisdiction; (ii) a closing
agreement or accepted offer in compromise under Section 7121 or 7122 of the
Code, or comparable agreement under the laws of other jurisdictions, which
resolves the entire tax liability for any tax period; (iii) any allowance
of a refund or credit in respect of an overpayment of Tax, but only after
the expiration of all periods during which such refund may be recovered
(including by way of offset) by the applicable taxing jurisdiction; or (iv)
any other final disposition, including by reason of the expiration of the
applicable statute of limitations.
"Intellectual Property": trademarks, trade names, trade dress, service
marks, copyrights, domain names, and similar rights (including
registrations and applications to register or renew the registration of any
of the foregoing), patents and patent applications, trade secrets, ideas,
inventions, improvements, practices, processes, formulas, designs,
know-how, confidential business or technical information, computer
software, firmware, data and documentation, licenses of or agreements
relating to any of the foregoing, rights of privacy and publicity, moral
rights, and any other similar intellectual property rights and tangible
embodiments of any of the foregoing (in any medium including electronic
media).
"knowledge of the Company" or any like expression means to the
knowledge of the persons listed on Schedule 12.01 after due inquiry.
"New Security" means any Equity Security issued by the Company after
the Closing; provided that "New Security" shall not include (i) any
securities issuable upon conversion of any convertible Equity Security,
(ii) any securities issuable upon exercise of any option, warrant or other
similar Equity Security or (iii) any securities issuable in connection with
any stock split, stock dividend or recapitalization of the Company where
such securities are issued to all stockholders of the Company on a
proportionate basis.
"Other Holders" means the holders of the Other Shares.
"Other Shares" means Voting Securities not Beneficially Owned by
Purchaser or its Affiliates.
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"Person" shall mean any individual, partnership, joint venture,
corporation, limited liability company, trust, unincorporated organization,
government or department or agency of a government.
"Pro Rata Share" means the fraction of an entire issuance of New
Securities, the numerator of which shall be the number of shares of Common
Stock owned by Purchaser or receivable upon exercise of the Warrant and its
Affiliates (other than the Company and its Subsidiaries) immediately prior
to such issuance of such New Securities and the denominator of which shall
be the aggregate number of shares of Common Stock outstanding immediately
prior to such issuance of such New Securities and receivable upon exercise
of the Warrant.
"Purchaser's Percentage Interest" means the greater of (i) the
percentage of Total Voting Power, determined on the basis of the number of
Voting Securities actually outstanding, that is controlled directly or
indirectly by Purchaser or any Subsidiary or Affiliate of Purchaser (other
than the Company and its Subsidiaries), including by beneficial ownership
and (ii) the percentage of the total Fair Market Value of all classes of
outstanding capital stock of the Company that is owned directly or
indirectly by Purchaser or any Subsidiary or Affiliate of Purchaser (other
than the Company and its Subsidiaries), including beneficial ownership. For
purposes of determining Purchaser's Percentage Interest, (a) any options,
rights, warrants (including the Warrants) and similar securities that
entitle the holder thereof to acquire shares of any class of capital stock
of the Company, whether voting or non-voting, shall be treated as
exercised; (b) any debt security that is convertible into shares of any
class of capital stock of the Company, whether voting or non-voting, shall
be treated as converted; and (c) any equity security that is convertible
into shares of any class of capital stock of the Company, whether voting or
non-voting, shall be treated as converted, but only to the extent that such
conversion would result in Purchaser's Percentage Interest being greater
than such interest would be if such conversion had not been deemed to
occur.
"Rollover Options" means options held by employees, former employees,
directors or former directors of the Company to purchase Common Stock in
existence immediately following the later to occur of the Distributions.
"Security" shall mean at any time Equity Securities and any shares of
any class of capital stock of the Company.
"Significant Subsidiary" means the entities operating the Retained
Business in Belgium, the Netherlands and Portugal.
"Subsidiary" shall mean, as to any Person, any corporation at least a
majority of the shares of stock of which having general voting power under
ordinary circumstances to elect a majority of the Board of Directors of
such corporation (irrespective of whether or not at the time stock of any
other class or classes shall have or might have voting power by reason of
the happening of any contingency) is, at the time as of which the
determination is being made, owned by such Person, or one or more of its
Subsidiaries or by such Person and one or more of its Subsidiaries;
provided, however, that in the case of the Retained Business, the term
Subsidiary shall include the interests of the Retained Business in Japan
and South Africa.
"Tax Administrator" shall have the meaning assigned to such term in
the Tax Allocation Agreement.
"13D Group" shall mean any group of Persons acquiring, holding, voting
or disposing of Voting Securities which would be required under Section
13(d) of the Exchange Act and the rules and regulations thereunder (as in
effect, and based on legal interpretations thereof existing, on the date
hereof) to file a statement on Schedule 13D with the SEC as a "person"
within the meaning of Section 13(d)(3) of the Exchange Act if such group
beneficially owned Voting Securities representing more than 5% of any class
of Voting Securities then outstanding.
"Total Voting Power" at any time shall mean the total combined voting
power in the general election of directors of all the Voting Securities
then outstanding.
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"Transaction Fee" means an amount equal to $12 million.
"Voting Securities" shall mean at any time shares of any class of
capital stock of the Company which are then entitled to vote generally in
the election of directors.
"Warrant Shares" shall mean the shares of Common Stock issuable upon
exercise of the Warrants.
ARTICLE XIII
MISCELLANEOUS
SECTION 13.01. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such which may be hereafter declared invalid, void or
unenforceable.
SECTION 13.02. Specific Enforcement. Purchaser, on the one hand, and the
Company, on the other, acknowledge and agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state thereof having jurisdiction, this being in addition to any
other remedy to which they may be entitled at law or equity.
SECTION 13.03. Entire Agreement. This Agreement (including the documents
set forth in the Exhibits and Schedules hereto) contains the entire
understanding of the parties with respect to the transactions contemplated
hereby.
SECTION 13.04. Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more of the counterparts have been signed
by each party and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
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SECTION 13.05. Notices. All notices, consents, requests, instructions,
approvals and other communications provided for herein and all legal process in
regard hereto shall be validly given, made or served, if in writing and
delivered personally, by telecopy (except for legal process) or sent by
registered mail, postage prepaid, if to:
The Company: ITT Corporation
1330 Avenue of the Americas
New York, NY 10019
Attention of: Ann N. Reese
Telecopy No.: (212) 489-3596
Purchaser: CDRV Acquisition, L.L.C.
c/o Clayton, Dubilier & Rice, Inc.
375 Park Avenue, 18th Floor
New York, NY 10152
Attention of: Brian D. Finn
Telecopy No.: (212) 407-5252
with copy a to:
Debevoise & Plimpton
875 Third Avenue
New York, NY 10022
Attention of: Paul S. Bird
Telecopy No.: (212) 909-6836
or to such other address or telex number as any party may, from time to time,
designate in a written notice given in a like manner.
SECTION 13.06. Amendments. This Agreement may be amended as to Purchaser
and their successors and assigns (determined as provided in Section 13.08), and
the Company may take any action herein prohibited, or omit to perform any act
required to be performed by it, if the Company shall obtain the written consent
of Purchaser. This Agreement may not be waived, changed, modified, or discharged
orally, but only by an agreement in writing signed by the party or parties
against whom enforcement of any waiver, change, modification or discharge is
sought or by parties with the right to consent to such waiver, change,
modification or discharge on behalf of such party.
SECTION 13.07. Cooperation. Purchaser and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement, including, without limitation, making all required filings under the
HSR Act, if any; provided, however, that the foregoing shall not limit the
ability of the Company to modify the Restructuring Agreements or to abandon the
Distributions pursuant to Section 8.03. Purchaser agrees that it will not take
any action the effect of which could reasonably be expected to result in the
Distributions being characterized as taxable events.
SECTION 13.08. Successors and Assigns. All covenants and agreements
contained herein shall bind and inure to the benefit of the parties hereto and
their respective successors and assigns; provided, however, that Purchaser may
not assign any of its rights under this Agreement.
SECTION 13.09. Expenses and Remedies.
(a) Whether or not the Closing takes place, all costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be borne by the party incurring such expense, except as set forth in the next
eight paragraphs.
(b) Notwithstanding Section 13.09(a), if Purchaser terminates this
Agreement pursuant to Section 10.01(d), (e) or (l) the Company shall reimburse
Purchaser for the reasonable out-of-pocket expenses
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(including reasonable fees and expenses of legal counsel) incurred by Purchaser
in connection with this Agreement or the matters contemplated hereby up to a
maximum of $4 million (such expenses, subject the foregoing maximum,
"Purchaser's Expenses") and shall pay Purchaser a termination fee of $25 million
(the "Termination Fee").
(c) Notwithstanding Section 13.09(a), if the Closing does not occur solely
as a result of the failure to satisfy the condition set forth in Section
9.03(b), the Company shall pay Purchaser Purchaser's Expenses.
(d) Notwithstanding Section 13.09(a), if (i) the Closing does not occur
prior to January 15, 1998 (other than as a result of any breach by Purchaser of
the terms of this Agreement), (ii) a Directories Transaction Proposal was made
prior to January 15, 1998 and (iii) during the period ending 12 months after
termination the Company consummates, becomes a party to or enters into an
agreement relating to or publicly announces, a sale of Equity Securities
representing in excess of 20% of the Total Voting Power, then promptly after the
Company consummates such transaction, the Company shall pay Purchaser
Purchaser's Expenses and the Termination Fee.
(e) Notwithstanding Section 13.09(a), if the Company terminates this
Agreement pursuant to Section 10.01(j) or (k), the Company shall pay Purchaser
Purchaser's Expenses and the Termination Fee.
(f) Notwithstanding Section 13.09(a), if Purchaser or the Company
terminates this Agreement pursuant to Section 10.01(i), and during the period
ending 12 months after termination the Company enters into an agreement with
respect to an Alternative Company Proposal or Directories Transaction Proposal,
the Company shall pay Purchaser Purchaser's Expenses and the Termination Fee;
provided, however, that if the Company enters into an agreement with respect to
an Alternative Company Proposal with Hilton Hotels Corporation, the termination
fee payable shall be $15 million.
(g) Notwithstanding Section 13.09(a), if the Closing has not occurred prior
to January 15, 1998 because of a material breach by the Company of any
representation, warranty or covenant of the Company under this Agreement, the
Company shall pay Purchaser's Expenses and a Termination Fee equal to $15
million.
(h) Notwithstanding Section 13.09(a), if Purchaser terminates this
Agreement pursuant to clause (i) to the proviso of the last sentence of Sections
8.04 or Section 8.07, the Company shall pay Purchaser's Expenses and the
Termination Fee.
(i) Notwithstanding Section 13.09(a), upon the occurrence of the Closing,
the Company shall pay Purchaser's Expenses.
SECTION 13.10. Non-Survival of Representations and Warranties. None of
the representations and warranties contained herein or made in writing by any
party in connection herewith shall survive the Closing.
SECTION 13.11. Transfer of Shares and Warrants. Purchaser understands and
agrees that neither any shares of Common Stock or any Warrants or the Warrant
Shares have been or will be registered under the Securities Act or the
securities laws of any state and that they may be sold or otherwise disposed of
only in one or more transactions registered under the Securities Act and, where
applicable, such laws or as to which an exemption from the registration
requirements of the Securities Act and, where applicable, such laws is
available. Purchaser acknowledges that except as provided in the Registration
Rights Agreement Purchaser has no right to require the Company to register
shares of Common Stock, the Warrants or the Warrant Shares. Purchaser
understands and agrees that each certificate representing shares of Common
Stock, Warrants or Warrant Shares (other than, with respect to the first legend,
shares of Common Stock, Warrants or Warrant Shares that are no longer subject to
the provisions of Article VII and other than, with respect to the second legend,
shares of Common Stock, Warrants or Warrant Shares which have been transferred
in a transaction registered under the Securities Act or exempt from the
registration requirements of the Securities Act pursuant to Rule 144 thereunder
or any similar rule or regulation) shall bear the following legends:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT ON FILE AT THE OFFICES OF THE CORPORATION."
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"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY
STATE AND MAY NOT BE SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS
OF SUCH ACT OR SUCH LAWS."
and Purchaser agrees to transfer shares of Common Stock, Warrants and Warrant
Shares only in accordance with the provisions of such legends.
SECTION 13.12. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York.
SECTION 13.13. Publicity. The Company and Purchaser will consult and
cooperate with each other to the extent reasonably practicable prior to issuing
any press releases or otherwise making public statements with respect to the
transactions contemplated by this Agreement; provided, however, that the initial
press release relating to this Agreement will be issued separately by the
Company.
SECTION 13.14. No Third Party Beneficiaries.
(a) Nothing contained in this Agreement is intended to confer upon any
person or entity other than the parties hereto and their respective successors
and permitted assigns, any benefit, right or remedies under or by reason of this
Agreement; provided, however, that the parties hereto hereby acknowledge and
agree that ESI and Newco are each third party beneficiaries of Sections 2.02,
5.03, 6.01, Article IX and Section 13.14(b) of this Agreement and that the
Purchaser Indemnitees (other than Purchaser) are third party beneficiaries of
Article XI of this Agreement.
(b) Purchaser shall cooperate with the Company and Newco in connection with
any tax audits or administrative or judicial proceedings with respect to the
application of Section 355(e) (as ultimately enacted), including in rebutting
any presumption arising under Section 355(e) of the Code.
SECTION 13.15. Consent to Jurisdiction. Each of the Company and Purchaser
irrevocably submits to the exclusive jurisdiction of the United States District
Court for the Southern District of New York for the purposes of any suit, action
or other proceeding arising out of this Agreement or any transaction
contemplated hereby (and, to the extent permitted under applicable rules of
procedure, agrees not to commence any action, suit or proceeding relating hereto
except in such court). Each of the Company and Purchaser further agrees that
service of any process, summons, notice or document hand delivered or sent by
registered mail to such party's respective address set forth in Section 12.05
will be effective service of process for any action, suit or proceeding in New
York with respect to any matters to which it has submitted to jurisdiction as
set forth in the immediately preceding sentence. Each of the Company and
Purchaser irrevocably and unconditionally waives any objection to the laying of
venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in the United States District Court for the
Southern District of New York, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in such court that any
such action, suit or proceeding brought in such court has been brought in an
inconvenient forum.
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IN WITNESS WHEREOF, Purchaser and the Company have caused this Agreement to
be duly executed, all as of the day and year first above written.
ITT CORPORATION,
by: /s/ Ann N. Reese
Name: Anne N. Reese
Title: Executive Vice President and
Chief
Financial Officer
CDRV ACQUISITION, L.L.C.,
by: /s/ Brian D. Finn
Name: Brian D. Finn
Title: Executive Vice President
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EXHIBIT 1
TO INVESTMENT AGREEMENT
TERMS OF WARRANTS
EXERCISE PRICE: 150% of the per share price paid by Purchaser for
the Common Stock
EXPIRATION DATE: 10 years from date of issuance.
VESTING: 20% per year for 5 years; in the event of a Change
of Control, the Warrants will receive consideration
equal to its fair market value after giving effect
to the Change of Control as determined in good
faith by the Board of Directors of the Company. The
Warrants are only exercisable during the first 5
years into a number of shares of Common Stock not
greater than 49.9% of the actual number of shares
of Common Stock outstanding, less the sum of (i)
the number of all shares of Common Stock owned by
Purchaser immediately prior to exercise and (ii)
all shares of Common Stock previously owned and
disposed of by Purchaser.
SHARES SUBJECT TO WARRANT: 0.78 times the number of shares of Common Stock
purchased by Purchaser at Closing.
TRANSFERABILITY: Transferable to the same extent as Common Stock
purchased pursuant to the Investment Agreement.
CASHLESS EXERCISE: Permitted.
ANTIDILUTION PROTECTION: Customary so as to preserve percentage interest in
the Company represented by the Warrant.
REGISTRATION RIGHTS: Same as for Common Stock.
LISTING OF WARRANTS: Upon request of Purchaser.
LISTING OF SHARES ISSUABLE
UPON EXERCISE OF WARRANTS: Prior to Closing.
SPECIAL COVENANTS: The Company will not be permitted to repurchase
Common Stock if as a result thereof the
exercisability of the Warrant will be limited.
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EXHIBIT 2
TO INVESTMENT AGREEMENT
TERMS OF REGISTRATION RIGHTS AGREEMENT
REGISTRABLE SECURITIES: Common Stock issued under Investment Agreement,
Warrants, and other Common Stock purchased by
Purchaser in compliance with the Investment
Agreement.
DEMAND REGISTRATIONS: Four.
PIGGYBACK REGISTRATIONS: Unlimited.
REGISTRATION FEES AND
EXPENSES: Payable by the Company, including counsel for
selling stockholder.
SELECTION OF UNDERWRITERS: Purchaser selects underwriters for Demand
Registrations subject to Company's consent which
shall not be unreasonably withheld. Company selects
underwriters for Piggyback Registrations subject to
Purchaser's consent which shall not be unreasonably
withheld.
PRIORITY IN EXERCISE OF
REGISTRATION OF RIGHTS: In the event of cutbacks, securities to be
registered for the account of the Purchaser shall
have priority over other securities to be
registered in connection with Demand Registrations
and over other securities to be registered for the
account other selling stockholders in Piggyback
Registrations
INDEMNIFICATION: Customary
REGISTRATION PROCEDURES: Customary including, without limitation, provision
of opinions of counsel and comfort letter.
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APPENDIX C
PROPOSED AMENDMENTS TO THE RESTATED ARTICLES OF INCORPORATION
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PROPOSED AMENDMENTS TO
THE RESTATED ARTICLES OF INCORPORATION
1. Article FIRST of the Restated Articles of Incorporation is amended in
its entirety to read as follows:
ARTICLE FIRST
The name of the corporation is ITT Information Services, Inc. (the
"Corporation").
2. Article NINTH is deleted in its entirety.
3. Articles TENTH, ELEVENTH and TWELFTH are redesignated Articles NINTH,
TENTH and ELEVENTH, respectively.
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APPENDIX D
ITT INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE PLAN
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ITT INFORMATION SERVICES, INC.
1997 LONG-TERM INCENTIVE PLAN
EFFECTIVE , 1997
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ITT INFORMATION SERVICES, INC.
1997 LONG-TERM INCENTIVE PLAN
EFFECTIVE , 1997
ITT CORPORATION, a Nevada corporation (the "Corporation"), sets forth
herein the terms of the ITT Information Services, Inc. 1997 Long-Term Incentive
Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation, after the
distribution of shares of ITT Destinations, Inc. and ITT Educational Services,
Inc. (the "Distributions"), by providing eligible employees of the Corporation
and its subsidiaries an opportunity to acquire or increase their proprietary
interest in the Corporation, which thereby will create a stronger incentive to
expend maximum effort for the growth and success of the Corporation and its
subsidiaries. Awards to employees under the Plan ("Awards") may consist of
nonqualified stock options ("NQSOs"), "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended from
time to time (the "Code"), or the corresponding provision of any subsequently
enacted tax statute ("ISOs"; together with NQSOs, "Options"), stock appreciation
rights ("SARs") payable in stock or in cash, shares based on achievement of
performance objectives ("Performance Shares"), grants of stock subject to
restrictions ("Restricted Stock"), or any combination of the foregoing.
2. ADMINISTRATION
2.1 ADMINISTRATOR
The administrator of the Plan (the "Administrator") will be the
Compensation and Personnel Committee (the "Committee") of the Board of Directors
of the Corporation (the "Board"), unless the Board designates another committee
of the Board to serve as the Administrator. The Board may also act under the
Plan as though it were the Compensation and Personnel Committee.
2.2 ACTION BY ADMINISTRATOR
The Administrator shall have such powers and authorities related to the
administration of the Plan as are consistent with the Certificate of
Incorporation and Bylaws of the Corporation and applicable law. The
Administrator shall have the full power and authority to take all actions and to
make all determinations required or permitted under the Plan and any Award
granted hereunder. The Administrator shall have the full power and authority to
take all other actions and determination not inconsistent with the specific
terms and provisions of the Plan that the Administrator deems to be necessary or
appropriate to the administration of the Plan. The Administrator's powers shall
include, but not be limited to, the power to amend, waive, or extend any
provision or limitation of any Award. All such actions and determinations shall
be by the affirmative vote of a majority of the members of the Administrator
present at a meeting or by unanimous consent of the Administrator executed in
writing in accordance with the Certificate of Incorporation and Bylaws of the
Corporation and applicable law. The interpretation and construction by the
Administrator of any provision of the Plan or any Award granted hereunder shall
be final and conclusive. The Administrator may delegate its functions to
officers or employees of the Corporation; provided, however, that it may not
delegate the granting of Awards with respect to Section 16 Officers (as defined
below).
The Administrator may also grant Awards in substitution for options or
other incentive compensation held by individuals who become employees of the
Corporation or of an eligible subsidiary as a result of the Corporation's
acquiring the individual's employer. If necessary to conform the Awards to the
awards for which they are substitutes, the Administrator may grant substitute
Awards under terms and conditions that vary from those the Plan otherwise
requires.
2.3 NO LIABILITY
No member of the Board or of the Administrator shall be liable for any
action or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan.
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2.4 APPLICABILITY OF RULE 16B-3
Those provisions of the Plan that make express reference to Rule 16b-3
shall apply only to persons ("Section 16 Officers") who are required to file
reports under Section 16(a) of the Securities Exchange Act of 1934, as amended.
2.5 AWARD AGREEMENTS
Awards granted to employees pursuant to the Plan will ordinarily be
evidenced by written notices or agreements in such form or forms as the
Administrator shall from time to time determine. The Administrator may amend
Award notices or agreements from time to time. Award agreements may, without
limitation, contain such provisions as the Administrator may deem appropriate
regarding exercisability upon death, retirement, disability, or termination of
employment of the Recipient (as defined below) and/or acceleration of vesting or
exercisability upon a change of control of the Corporation and need not contain
uniform provisions. The Administrator may condition the grant of any Award upon
such terms and conditions, including the Recipient's agreement to provisions
restricting his ability to use confidential information or to compete with the
Corporation and its affiliates, as the Administrator shall specify at the time
of grant.
2.6 WITHHOLDING
The Recipient must satisfy all applicable federal, state, local, and
foreign income and employment tax withholding requirements before the
Corporation will deliver stock certificates or make payments with respect to
Awards. The Corporation may satisfy the withholding obligations through
additional withholding on salary or wages. If the Corporation does not or cannot
withhold from other compensation, the Recipient must pay the Corporation the
full amounts required by withholding or make other arrangements for the payment
of such withholding as are satisfactory to the Administrator. Unless otherwise
expressly permitted by the Administrator, payment of withholding obligations is
due at the same time as is payment of the exercise price or when the Recipient
gives notice of exercise. If the Administrator so determines, the optionee may
instead satisfy the withholding obligations by directing the Corporation to
retain cash or shares from an Award, by tendering previously owned shares, or by
attesting to his ownership of shares (with the distribution of net shares).
3. STOCK AVAILABLE FOR AWARDS
The stock that may be issued pursuant to Awards shall be shares of common
stock of the Corporation (the "Stock"), which shares may be treasury shares or
authorized but unissued shares. Subject to adjustment as provided in Section 14,
the number of shares of Stock that may be issued under the Plan shall not exceed
in the aggregate shares of Stock, and the maximum number of shares of
Stock available for awards of restricted stock and performance shares shall not
exceed in the aggregate shares. The maximum number of shares of Stock
that may be issued pursuant to Awards granted under the Plan to any person in
any one year is shares, and in the aggregate is , subject in
each case to adjustment as provided in Section 14. If any Award expires,
terminates, or is terminated for any reason prior to exercise in full, the
shares of Stock that were subject to the unexercised portion of such Award shall
be available immediately for future grants of Awards under the Plan.
Effective upon stockholder approval of the Plan, no additional awards will
be granted under the 1995 ITT Corporation Incentive Stock Plan (the "Predecessor
Plan").
4. ELIGIBILITY
Awards may be granted under the Plan to any employee of the Corporation or
any Subsidiary (including any such employee who is a director of the Corporation
or any Subsidiary) as the Administrator shall determine and designate from time
to time prior to expiration or termination of the Plan. (Individuals who have
been granted Awards are referred to as "Recipients.") An individual may hold
more than one Award, subject to such restrictions as are provided herein.
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5. EFFECTIVE DATE AND TERM
5.1 EFFECTIVE DATE
The Plan shall become effective as of the date of the Distributions (the
"Effective Date"), subject to approval of the stockholders within 12 months
before or after the Board's approval of the Plan.
5.2 TERM
The Plan shall terminate ten years after the Effective Date unless
previously terminated under Section 13.
6. EMPLOYEE STOCK OPTIONS
6.1 GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Administrator may, at
any time and from time to time prior to the termination of the Plan, grant to
such eligible employees as the Administrator may determine, Options to purchase
such number of shares of Stock on such terms and conditions as the Administrator
may determine, including any terms or conditions that may be necessary to
qualify such Options as Incentive Stock Options under Code Section 422. The date
on which the Administrator approves the grant of an Option shall be considered
the date on which such Option is granted. Neither the employee nor any person
entitled to exercise any rights hereunder shall have any of the rights of a
stockholder with respect to the shares of Stock subject to an Option until
certificates for such shares have been issued upon the exercise of the Option.
6.2 LIMITATION ON INCENTIVE STOCK OPTIONS
An Option granted to an employee shall constitute an Incentive Stock Option
only to the extent that the aggregate fair market value (determined at the time
the Option is granted) of the Stock with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year (under the Plan and all other plans of the Corporation and its parent and
subsidiary corporations, within the meaning of the Code Section 422(d)), does
not exceed $100,000. This limitation shall be applied by taking Options into
account in the order in which such Options were granted.
6.3 OPTION PRICE
The Administrator shall determine the purchase price of each share of Stock
subject to an Option issued under Section 6. The option price shall be not less
than the Fair Market Value of the Stock, as of the Date of Grant, covered by the
Option; provided, however, that if an employee would otherwise be ineligible to
receive an Incentive Stock Option by reason of the provisions of Code Sections
422(b)(6) and 424(d) (relating to more-than-10%-stock-owners), the option price
of an Option that is intended to be an Incentive Stock Option shall be not less
than 110% of the Fair Market Value of a share of Stock covered by the Option at
the time such Option is granted.
Fair Market Value of Stock for purposes of this Plan shall mean, in the
event that the Stock is listed on an established national or regional stock
exchange, is admitted to quotation on the National Association of Security
Dealers Automated Quotation System, or is publicly traded on an established
securities market, the closing price of the Stock on such exchange or system or
in such market (the highest such closing price if there is more than one such
exchange or market on the date the Option is granted) or, if there is no such
closing price, then the mean between the highest bid and lowest asked price or
between the high and low prices on such date, or, if no sale of stock has been
made on such day, on the preceding day on which any such sale shall have been
made, or, if the Stock is not then publicly traded, as determined by the Board
or the Administrator.
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6.4 TERM
Each Option granted to an employee under the Plan shall terminate and all
rights to purchase Stock thereunder shall cease upon the expiration of ten years
from the date such Option is granted, or on such prior date as may be fixed by
the Administrator and stated in the option agreement relating to such Option;
provided, however, that if the employee would otherwise be ineligible to receive
an Incentive Stock Option by reason of the provisions of Code Sections 422(b)(6)
and 424(d)(relating to more-than-10%-stock-owners), an Option granted to such
employee that is intended to be an Incentive Stock Option shall in no event be
exercisable after the expiration of five years from the date it is granted.
6.5 EXERCISE BY OPTIONEE
Only the individual receiving an Option (or, in the event of the Optionee's
legal incapacity or incompetency, the individual's guardian or legal
representative, and in the case of the individual's death, the individual's
estate) may exercise the Option.
6.6 OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable in whole or in part
at any time and from time to time over a period commencing on or after the date
of grant of the Option and ending upon expiration or termination of the Option,
as the Administrator shall determine and set forth in the option agreement.
Unless the Administrator shall otherwise determine and specify in the Award
agreement, an Option granted hereunder shall become exercisable in three
approximately equal installments on each of the first three anniversaries of the
Date of Grant. Without limiting the foregoing, the Administrator, subject to the
terms and conditions of the Plan, may in its sole discretion provide that the
Option granted to an employee may not be exercised in whole or in part for any
period or periods of time during which such Option is outstanding as the
Administrator shall determine and set forth in the option agreement. Any such
limitation on the exercise of an Option may be rescinded, modified or waived by
the Administrator, in its sole discretion, at any time and from time to time
after the date of grant of such Option.
6.7 METHOD OF EXERCISE
An Option that is exercisable by an employee hereunder may be exercised by
delivery to the Corporation on any business day, at its principal office
addressed to the attention of the Corporate Secretary, a written notice of
exercise. Such notice shall specify the number of shares for which the Option is
being exercised and shall be accompanied by payment in full of the option price
of the shares for which the Option is being exercised. Payment in full of the
Option price need not accompany the written notice of exercise provided the
notice directs that the stock certificates for the shares issued upon the
exercise be delivered to a licensed broker acceptable to the Corporation as the
agent for the individual exercising the option and at the time the stock
certificates are delivered to the broker, the broker will tender to the
Corporation cash or cash equivalents acceptable to the Corporation equal to the
exercise price.
Payment of the option price for the shares of Stock purchased pursuant to
the exercise of an Option by an employee shall be made, as determined by the
Administrator and set forth in the option agreement, as follows:
(a) in cash or by certified check payable to the order of the
Corporation;
(b) through the tender to the Corporation of shares of Stock, which
must have been held by the individual exercising the option for at least
six months at the time of surrender and which shall be valued, for purposes
of determining the extent to which the option price has been paid, at their
Fair Market Value on the date of exercise; or
(c) by a combination of the foregoing methods or any other method that
the Administrator may allow.
Notwithstanding the preceding, the Administrator may, in its discretion,
impose and set forth in the option agreement such limitations or prohibitions on
the methods of exercise as the Administrator deems
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appropriate. Promptly after the exercise of an Option and the payment in full of
the option price of the shares of Stock covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Stock certificate
or certificates evidencing such individual's ownership of such shares. A
separate Stock certificate or certificates shall be issued for any shares
purchased pursuant to the exercise of an Option that is an Incentive Stock
Option, which certificate or certificates shall not include any shares that were
purchased pursuant to the exercise of an Option that is not an Incentive Stock
Option. An individual holding or exercising an Option shall have none of the
rights of a stockholder until the shares of Stock covered thereby are fully paid
and issued to such individual and, except as provided in Section 14, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date of such issuance.
7. STOCK APPRECIATION RIGHTS
7.1 AWARDS OF SARS
Subject to the terms and conditions of the Plan, the Administrator may, at
any time and from time to time prior to the termination of the Plan, grant to
such eligible employees as the Administrator may determine, SARs with respect to
such number of shares of Stock on such terms and conditions as the Administrator
may determine. Neither the employee nor any person entitled to exercise any
rights hereunder shall have any of the rights of a stockholder with respect to
the shares of Stock subject to an SAR, unless and until certificates for such
shares have been issued upon the exercise of the SAR.
7.2 EXERCISE AND SETTLEMENT OF SARS
Upon exercise of an SAR, the employee shall be entitled, subject to such
terms and conditions as the Administrator may specify, to receive all or a
portion of the excess of (A) the Fair Market Value of a specified number of
shares of Stock at the time of exercise over (B) a specified amount which shall
not be less than the Fair Market Value of such specified number of shares of
Stock at the time the SAR is granted. Upon exercise of an SAR, payment of such
excess shall be made as the Administrator shall specify in cash, the issuance or
transfer to the employee of whole shares of Stock with a Fair Market Value at
such time equal to any excess, or a combination of cash and shares of Stock with
a combined Fair Market Value at such time equal to any such excess, all as
determined by the Administrator.
8. PERFORMANCE SHARES
8.1 AWARDS OF PERFORMANCE SHARES
Subject to the terms and conditions of the Plan, the Administrator may, at
any time and from time to time prior to the termination of the Plan, grant to
such eligible employees as the Administrator may determine, awards of Stock
conditioned on achievement of performance objectives ("Performance Shares")
based on objective criteria established by the Administrator for the Corporation
as a whole or a Subsidiary or other business unit, whether on an absolute or
comparative basis ("Performance Objectives"), during a period determined by the
Administrator ("Performance Period"). Notwithstanding anything else contained in
the Plan to the contrary, unless the Administrator otherwise determines at the
time of grant, any award of Performance Shares to a Section 16 Officer shall
become vested, if at all, upon the determination by the Administrator that
Performance Objectives established by the Administrator have been attained, in
whole or in part. Such Performance Objectives shall be determined solely by
reference to the performance of (i) the Corporation, (ii) a subsidiary, (iii) an
affiliate, (iv) a division or unit of any of the foregoing or based on
comparative performance of any of the foregoing relative to other companies: (A)
total return to stockholders; (B) return on equity; (C) operating revenues; (D)
earnings per share; (E) earnings before income taxes; (F) improvements in debt
to equity ratio; and (G) changes in the value of the Corporation's Common Stock
(each such category referred to as a "Performance Award"). The maximum number of
Performance Shares that may be subject to an Award in any month period
shall not exceed shares, as such number may be adjusted pursuant to
Section 14.1. At any date, each Performance Share shall have a value equal to
the Fair Market Value of a share of Stock at such date; provided, however, that
the Administrator may limit the aggregate amount payable upon the settlement of
any Award. Performance Periods may overlap and employees may participate
simultaneously with respect to Performance Shares for which different
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Performance Periods or Performance Objectives are prescribed. Performance
Objectives may vary from employee to employee and between groups of employees.
If during the course of a Performance Period there shall occur significant
events which the Administrator expects to have a substantial effect on the
applicable Performance Objectives during such Period, the Administrator may
revise such Performance Objectives.
8.2 SETTLEMENT OF PERFORMANCE SHARE AWARDS
Each Award of a Performance Share shall be paid in whole shares of Stock,
or cash, or a combination of Stock and cash either as a lump sum payment or in
annual installments, all as the Administrator shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period; provided, however, that the Administrator may require that a Recipient
remain in the employ of the Corporation or a subsidiary until the expiration of
the Performance Period or the date settlement is made to be eligible to receive
any payment or distribution in respect of a Performance Share Award.
8.3 INTERPRETATION
Notwithstanding anything else contained in the Plan to the contrary, to the
extent necessary to qualify any Performance Share Award as "other
performance-based compensation" for purposes of Section 162(m)(4)(C) of the
Code, the Administrator shall not be entitled to exercise any discretion
otherwise authorized under the Plan with respect to such Performance Share Award
if the ability to exercise such discretion (as opposed to the exercise of such
discretion) would cause such award to fail to qualify as other
"performance-based compensation."
9. RESTRICTED STOCK
9.1 AWARDS OF RESTRICTED STOCK
Subject to the terms and conditions of the Plan, the Administrator may, at
any time and from time to time prior to the termination of the Plan, grant to
such eligible employees as the Administrator may determine, awards of Stock
("Restricted Stock") subject to a restriction period (after which restrictions
will lapse) beginning on the date of the Award and ending on such date as the
Administrator shall determine. The Administrator may provide for the lapse of
restrictions in installments where deemed appropriate and it may also require
the achievement of predetermined performance objectives in order for such shares
to vest.
9.2 TERMS OF RESTRICTED STOCK AWARDS
Subject to this Section 9.2 and the other terms and conditions of this
Plan, each employee awarded Restricted Stock under this Plan shall be issued a
certificate for such shares of Stock. Such certificate shall be registered in
the name of the employee and shall bear an appropriate legend reciting the
terms, conditions and restrictions, if any, applicable to such Award and shall
be subject to appropriate stop-transfer orders. The Administrator may require,
under such terms and conditions as it deems appropriate or desirable, that the
certificates for Stock delivered under this Plan be held in custody by a bank or
other institution, or that the Corporation itself may hold such shares in
custody until the Restriction Period expires or until the restrictions thereon
otherwise lapse, and may require as a condition of any Award of Restricted Stock
that the employee deliver a stock power endorsed in blank relating to the
Restricted Stock.
9.3 FORFEITURE
Unless otherwise determined by the Administrator, if an employee terminates
employment with the Corporation or its Subsidiaries for any reason before the
expiration of the Restriction Period, all shares of Restricted Stock still
subject to restriction shall be forfeited by the employee and shall be
reacquired by the Corporation.
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10. TRANSFERABILITY OF AWARDS
No Award shall be assignable or transferable by the Recipient to whom it is
granted, other than by will or the laws of descent and distribution.
11. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock pursuant to
Options shall constitute general funds of the Corporation.
12. REQUIREMENTS OF LAW
12.1 GENERAL
The Corporation shall not be required to sell or issue any shares of Stock
under any Award if the sale or issuance of such shares would constitute a
violation by the individual exercising the Award or by the Corporation of any
provision of any law or regulation of any governmental authority, including,
without limitation, any foreign, federal, or state securities laws or
regulations. If at any time the Corporation shall determine, in its discretion,
that the listing, registration or qualification of any shares subject to the
Award upon any securities exchange or under any foreign, state, or federal law,
or the consent of any government regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of shares, the
Award may not be exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Corporation, and any delay
caused thereby shall in no way affect the date of termination of the Award.
Specifically in connection with the Securities Act of 1933, as amended (the
"Securities Act"), upon exercise of any Award, unless a registration statement
under the Securities Act is in effect with respect to the shares of Stock
covered by such Award, the Corporation shall not be required to sell or issue
such shares unless the Corporation has received evidence satisfactory to the
Corporation that the Recipient may acquire such shares pursuant to an exemption
from registration under the Securities Act. Any determination in this connection
by the Administrator shall be final and conclusive. The Corporation may, but
shall in no event be obligated to, register any securities covered hereby
pursuant to the Securities Act. The Corporation shall not be obligated to take
any affirmative action in order to cause the exercise of an Award or the
issuance of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Award shall not be exercisable unless and until the shares
of Stock covered by such Award are registered or are subject to an available
exemption from registration, the exercise of such Award (under circumstances in
which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.
12.2 RULE 16B-3
The Plan is intended to qualify for the exemption provided by Rule 16b-3
under the Exchange Act. To the extent any provision of the Plan or action by the
Administrator does not comply with the requirements of Rule 16b-3, it shall be
deemed inoperative, to the extent permitted by law and deemed advisable by the
Administrator, and shall not affect the validity of the Plan. If Rule 16b-3 is
revised or replaced, the Board may exercise discretion to modify the Plan in any
respect necessary to satisfy the requirements of the revised exemption or its
replacement.
13. AMENDMENT AND TERMINATION
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Awards have not been
granted; provided, however, that no amendment by the Board with respect to ISOs
shall be made without stockholder approval when required to comply with Section
422 of the Code. The Corporation also may retain the right in an Award agreement
to cause a forfeiture of the shares or gain realized by a Recipient on account
of the Recipient taking actions in "competition with the Corporation," as
defined in the applicable Award agreement. Furthermore, the Corporation may, in
the Award agreement, retain the right to annul the grant of an Award if the
holder of such grant was an employee of the
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Corporation or a Subsidiary and is terminated "for cause," as described in the
applicable Award agreement. Except as permitted under Section 12, no amendment,
suspension or termination of the Plan or Award agreement shall, without the
consent of the Optionee, alter or impair rights or obligations under any Award
previously granted under the Plan.
14. EFFECT OF CHANGES IN CAPITALIZATION
14.1 CHANGES IN STOCK
If the number of outstanding shares of Stock is increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of any recapitalization,
reclassification, stock split-up, combination of shares, exchange of shares,
stock dividend or other distribution payable in capital stock, or other increase
or decrease in such shares effected without receipt of consideration by the
Corporation, occurring after the Effective Date of the Plan, the Administrator
shall make an appropriate adjustment in the number and kind of shares for which
Awards are outstanding and to the exercise price of any Option, so that the
rights of the Recipient immediately following such event shall neither be
enlarged nor diminished from those in effect immediately prior to such event.
Unless the Administrator determines another method would be appropriate, any
such adjustment in outstanding Awards shall not change the aggregate Award Price
payable with respect to shares subject to the unexercised portion of the Award
outstanding but shall include a corresponding proportionate adjustment in the
Award Price per share.
14.2 REORGANIZATION WITH CORPORATION SURVIVING
Subject to Section 14.3, if the Corporation is the surviving corporation in
any reorganization, merger or consolidation of the Corporation with one or more
other entities, any Award previously granted pursuant to the Plan shall pertain
to and apply to the securities to which a holder of the number of shares of
Stock subject to such Award would have been entitled immediately following such
reorganization, merger or consolidation, with a corresponding proportionate
adjustment of the Award price per share so that the aggregate option price
thereafter shall be the same as the aggregate option price of the shares
remaining subject to the Option immediately prior to such reorganization, merger
or consolidation.
14.3 OTHER REORGANIZATIONS; SALE OF ASSETS OR STOCK
Upon the dissolution or liquidation of the Corporation, or upon a merger,
consolidation or reorganization of the Corporation with one or more other
corporations in which the Corporation is not the surviving corporation, or upon
a sale of substantially all of the assets of the Corporation to another
corporation, or upon any transaction (including, without limitation, a merger or
reorganization in which the Corporation is the surviving corporation) approved
by the Board that results in any person or entity (other than persons who are
holders of stock of the Corporation at the time the Plan is approved by the
Stockholders and other than an affiliate of the Corporation as defined in Rule
144(a)(1) under the Securities Act) owning 80 percent or more of the combined
voting power of all classes of stock of the Corporation, the Plan and all Awards
outstanding hereunder shall terminate, except to the extent provision is made in
connection with such transaction for the continuation of the Plan and/or the
assumption of the Awards theretofore granted, or for the substitution for such
Awards of new awards covering the stock of a successor corporation, or a parent
or subsidiary thereof, with appropriate adjustments as to the number and kinds
of shares and exercise prices, in which event the Plan and Awards theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, each Recipient shall have the right
(subject to the general limitations on exercise set forth in the option
agreement relating to such Option), immediately prior to the occurrence of such
termination and during such period occurring prior to such termination as the
Administrator in its sole discretion shall designate, to exercise such Option in
whole or in part, whether or not such Option was otherwise exercisable at the
time such termination occurs, but subject to any additional limitations that the
Administrator may, in its sole discretion, include in any award agreement. The
Administrator shall send written notice of an event that will result in such a
termination to all Recipients not later than the time at which the Corporation
gives notice thereof to its stockholders.
D-10
<PAGE> 131
14.4 ADJUSTMENTS
Adjustments under this Section 14 relating to stock or securities of the
Corporation shall be made by the Administrator, whose determination in that
respect shall be final and conclusive. No fractional shares of Stock or units of
other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.
14.5 NO LIMITATIONS ON CORPORATION
The grant of an Award or pursuant to the Plan shall not affect or limit in
any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
15. DISCLAIMER OF RIGHTS
No provision in the Plan or any agreement entered into pursuant to the Plan
shall be construed to confer upon any individual the right to remain in the
service of the Corporation or any Subsidiary, or to interfere in any way with
the right and authority of the Corporation or any Subsidiary either to increase
or decrease the compensation of any individual at any time, or to terminate any
employment or other relationship between any individual and the Corporation or
any Subsidiary. The obligation of the Corporation to pay any benefits pursuant
to the Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed
herein. The Plan shall in no way be interpreted to require the Corporation to
transfer any amounts to a third party trustee or otherwise hold any amounts in
trust or escrow for payment to any participant or beneficiary under the terms of
the Plan.
16. NONEXCLUSIVITY
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan.
17. INDEMNIFICATION
To the extent permitted by applicable law, the Administrator shall be
indemnified and held harmless by the Corporation against and from any and all
loss, cost, liability or expense that may be imposed upon or reasonably incurred
by the Administrator in connection with or resulting from any claim, action,
suit or proceeding to which the Administrator may be a party or in which the
Administrator may be involved by reason of any action taken or failure to act
under the Plan, and against and from any and all amounts paid by the
Administrator (with the Corporation's written approval) in the settlement
thereof, or paid by the Administrator in satisfaction of a judgment in any such
action, suit or proceeding except a judgment in favor of the Corporation;
subject, however, to the conditions that upon the institution of any claim,
action, suit or proceeding against the Administrator, the Administrator shall
give the Corporation an opportunity in writing, at its own expense, to handle
and defend the same before the Administrator undertakes to handle and defend it
on the Administrator's own behalf. The foregoing right of indemnification shall
not be exclusive of any other right to which such persons may be entitled as a
matter of law or otherwise, or any power the Corporation may have to indemnify
the Administrator or hold the Administrator harmless.
The Administrator and each officer and employee of the Corporation shall be
fully justified in reasonably relying or acting upon any information furnished
in connection with the administration of the Plan by the Corporation or any
employee of the Corporation. In no event shall any persons who are or were
members of the Administrator, or an officer or employee of the Corporation, be
liable for any determination made or other action taken or any omission to act
in reliance upon any such information, or for any action (including furnishing
of information) taken or any failure to act, if in good faith.
D-11
<PAGE> 132
DETACH PROXY CARD HERE
================================================================================
ITT CORPORATION
PROXY CARD
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON NOVEMBER ,
1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This undersigned hereby constitutes and appoints and ,
and each of them, true and lawful agents and proxies of the
undersigned, with full power of substitution, to represent the
undersigned and to vote all shares of stock which the undersigned is
entitled to vote at the Annual Meeting of stockholders of ITT
Corporation (the "Corporation") to be held on November, 1997, and at
any and all adjournments and postponements thereof, on all matters
before such meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE. HOWEVER,
IF NO VOTE IS SPECIFIED ON A PROXY CARD THAT IS RETURNED, THIS PROXY
WILL BE VOTED "FOR" THE ELECTION AS DIRECTORS OF THE NOMINEES LISTED
ON THE REVERSE SIDE, "FOR" THE APPROVAL OF THE PROPOSED ISSUANCE IN
CONNECTION WITH THE STRATEGIC INVESTMENT IN THE CORPORATION BY CDRV
ACQUISITION, L.L.C., "FOR" THE APPROVAL OF THE PROPOSED BY-LAW
AMENDMENT, "FOR" THE APPROVAL OF A CHANGE OF THE CORPORATION'S NAME TO
"ITT INFORMATION SERVICES, INC." AND CERTAIN OTHER AMENDMENTS TO THE
CORPORATION'S RESTATED ARTICLES OF INCORPORATION, "FOR" THE APPROVAL
OF THE ITT INFORMATION SERVICES, INC. 1997 LONG-TERM INCENTIVE PLAN,
AND "FOR" THE RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP
AS THE CORPORATION'S INDEPENDENT PUBLIC ACCOUNTANTS FOR 1997, ALL OF
WHICH MATTERS ARE MORE FULLY DESCRIBED IN THE ANNUAL MEETING PROXY
STATEMENT OF WHICH THE UNDERSIGNED STOCKHOLDER ACKNOWLEDGES RECEIPT.
THIS PROXY GRANTS DISCRETIONARY AUTHORITY (1) TO VOTE FOR A
SUBSTITUTE NOMINEE OF THE BOARD IF ANY NOMINEE FOR DIRECTOR LISTED ON
THE REVERSE SIDE IS UNABLE TO SERVE, OR FOR GOOD CAUSE WILL NOT SERVE,
AS A DIRECTOR (UNLESS AUTHORITY TO VOTE FOR ALL NOMINEES OR FOR THE
PARTICULAR NOMINEE WHO HAS CEASED TO BE A CANDIDATE IS WITHHELD) AND
(2) TO VOTE ON OTHER MATTERS THAT MAY COME BEFORE THE MEETING IN
ACCORDANCE WITH THE BEST JUDGMENT OF THE NAMED PROXIES; PROVIDED,
HOWEVER, THAT YOU MAY WITHHOLD FROM THE NAMED PROXIES AUTHORITY TO
VOTE TO ADJOURN THE ANNUAL MEETING.
PLEASE VOTE, SIGN AND DATE THIS PROXY ON THE OTHER SIDE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE.
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF ITT
CORPORATION.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS INDICATED,
THIS PROXY WILL BE VOTED "FOR" PROPOSALS 1, 2, 3, 4 5, AND 6.
<PAGE> 133
[Reverse of Proxy Card]
[ITT Logo]
Chairman and
Chief Executive Officer
Dear Stockholder:
The 1997 Annual Meeting of ITT Corporation will be held at 10:30 a.m. on
, November , 1997 in the of , ,
. Stockholders of record at the close of business on , 1997
will be entitled to vote at the meeting and any adjournment thereof.
Stockholders of record who plan to attend the Annual Meeting in person may
request an admission card by marking the box below. Stockholders who hold their
shares beneficially through bank or brokerage accounts should bring with them
proof of their ownership if they wish to attend the meeting.
Whether or not you plan to attend the meeting, you can assure that your
shares are represented by promptly completing, signing, dating and returning the
proxy card below.
Sincerely yours,
Chairman and Chief Executive Officer
DETACH PROXY CARD HERE
================================================================================
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3,
4, 5, AND 6.
1. Election of Directors:
[ ] FOR [ ] WITHHELD [ ] FOR ALL
EXCEPT
Rand V. Araskog, Gerald C. Crotty, Arthur Hartman, Edward C. Meyer,
H. Patrick Swygert, and Margita E. White.
If you do not wish your shares voted "FOR" a particular nominee or
nominees, mark the "For All Except" box and strike a line through
the nominee's name(s). Your shares will be voted for the remaining
nominee(s).
2. Approval of the Proposed Issuance in connection with the Strategic
Investment in the Corporation by CDRV Acquisition, L.L.C.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval of the Proposed By-Law Amendment.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Approval of Corporate Name Change to "ITT Information Services,
Inc." and the Other Amendments to the Restated Articles of
Incorporation
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. Approval of the ITT Information Services, Inc. 1997 Long-Term
Incentive Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. Ratification of Appointment of Arthur Andersen LLP as the
Corporation's Independent Public Accountants
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Authority to vote to adjourn the Annual
Meeting [ ] GRANTED [
] WITHHELD
Mark this box to request an admission card for the meeting [ ]
Please sign this proxy exactly as your name appears hereon. Joint
owners should each sign personally. Trustees and other fiduciaries
should indicate the capacity in which they sign, and where more than
one name appears, a majority should sign. If a corporation, the
signature should be that of an authorized officer who should state his
or her title.
Please mark, sign, date and return the proxy promptly using the
enclosed envelope.
Signature:
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Date:
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Signature:
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Date:
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Title:
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