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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
(AMENDMENT NO. 4)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
ITT DESTINATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEVADA 91-1835827
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1330 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-5490
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
212-258-1000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
- --------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SERIES A PARTICIPATING CUMULATIVE PREFERRED NEW YORK STOCK EXCHANGE
STOCK PURCHASE RIGHTS
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(b) Exhibits
The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
3.1 Form of Restated Articles of Incorporation of ITT Destinations, Inc.**
3.2 Form of Amended and Restated By-laws of ITT Destinations, Inc.**
4.1 Specimen Common Share certificate**
4.2 Form of Restated Articles of Incorporation of ITT Destinations, Inc. (filed as
Exhibit 3.1 hereto)**
4.3 Form of Amended and Restated By-laws of ITT Destinations, Inc. (filed as Exhibit 3.2
hereto)**
4.4 Form of Rights Agreement between ITT Destinations, Inc. and The Bank of New York, as
Rights Agent**
4.5 Form of Certificate of the Designations, Voting Powers, Preferences and Relative,
Participating, Optional and Other Special Rights and Qualifications, Limitations or
Restrictions of Series A Participating Cumulative Preferred Stock of ITT
Destinations, Inc. (attached as Exhibit A to the Rights Agreement filed as Exhibit
4.4 hereto)**
4.6 Form of Right Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto)**
10.1 Form of Agreement and Plan of Distribution between ITT Destinations, Inc. and ITT
Corporation**
10.2 Form of Agreement and Plan of Distribution among ITT Destinations, Inc., ITT
Corporation and ITT Educational Services, Inc. (attached as Exhibit D to the
Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.3 Form of Intellectual Property License and Assignment Agreement between ITT
Destinations, Inc., ITT Corporation, ITT World Directories, Inc. and ITT Sheraton
Corporation (attached as Exhibit B-1 to the Agreement and Plan of Distribution filed
as Exhibit 10.1 hereto)**
10.4 Form of Trade Name and Service Mark License Agreement between ITT Sheraton
Corporation, ITT Corporation and ITT World Directories, Inc. (attached as Exhibit B-2
to the Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.5 Form of Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and
ITT Educational Services, Inc. (attached as Exhibit C to the Agreement and Plan of
Distribution filed as Exhibit 10.1 hereto)**
10.6 Form of Employee Benefits Services and Liabilities Agreement among ITT Destinations,
Inc., ITT Corporation and ITT Educational Services, Inc. (attached as Exhibit A to
the Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.7 ITT Destinations, Inc. 1997 Restricted Stock Plan for Non-Employee Directors**
10.8 Form of Indemnification Agreement with members of the Board of Directors**
10.9 ITT Destinations, Inc. Annual Performance-Based Incentive Plan for Executive
Officers**
10.10 ITT Corporation Senior Executive Severance Pay Plan**
10.11 Employment and Consulting Agreement dated as of December 19, 1995 between ITT
Corporation (formerly known as ITT Destinations, Inc.) and Rand V. Araskog**
10.12 Form of Severance Agreement between ITT Destinations, Inc. and certain executives**
10.13 Commitment Letter dated as of August 22, 1997, among Chase Securities Inc., The Chase
Manhattan Bank and ITT Corporation**
10.14 First Amendment to Employment and Consulting Agreement dated as of December 19, 1995
between ITT Corporation (formerly known as ITT Destinations, Inc.) and Rand V.
Araskog**
10.15 Second Amendment to Employment and Consulting Agreement dated as of December 19, 1995
between ITT Corporation (formerly known as ITT Destinations, Inc.) and Rand V.
Araskog**
10.16 1997 ITT Destinations, Inc. Stock Plan*
21 List of Subsidiaries of ITT Destinations, Inc.**
99.1 ITT Destinations, Inc. Information Statement dated September 25, 1997*
</TABLE>
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* Filed herewith.
** Previously filed.
1
<PAGE> 3
PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITT DESTINATIONS, INC.
By: /s/ PATRICK L. DONNELLY
------------------------------------
Name: Patrick L. Donnelly
Title: Vice President
Date: September 24, 1997
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S>
3.1 Form of Restated Articles of Incorporation of ITT Destinations, Inc.**
3.2 Form of Restated By-laws of ITT Destinations, Inc.**
4.1 Specimen Common Share certificate**
4.2 Form of Amended and Restated Articles of Incorporation of ITT Destinations, Inc.
(filed as Exhibit 3.1 hereto)**
4.3 Form of Amended and Restated By-laws of ITT Destinations, Inc. (filed as Exhibit 3.2
hereto)**
4.4 Form of Rights Agreement between ITT Destinations, Inc. and The Bank of New York, as
Rights Agent**
4.5 Form of Certificate of the Designations, Voting Powers, Preferences and Relative,
Participating, Optional and Other Special Rights and Qualifications, Limitations or
Restrictions of Series A Participating Cumulative Preferred Stock of ITT
Destinations, Inc. (attached as Exhibit A to the Rights Agreement filed as Exhibit
4.4 hereto)**
4.6 Form of Right Certificate (attached as Exhibit B to the Rights Agreement filed as
Exhibit 4.4 hereto)**
10.1 Form of Agreement and Plan of Distribution between ITT Destinations, Inc. and ITT
Corporation**
10.2 Form of Agreement and Plan of Distribution among ITT Destinations, Inc., ITT
Corporation and ITT Educational Services, Inc. (attached as Exhibit D to the
Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.3 Form of Intellectual Property License and Assignment Agreement between ITT
Destinations, Inc., ITT Corporation, ITT World Directories, Inc. and ITT Sheraton
Corporation (attached as Exhibit B-1 to the Agreement and Plan of Distribution filed
as Exhibit 10.1 hereto)**
10.4 Form of Trade Name and Service Mark License Agreement between ITT Sheraton
Corporation, ITT Corporation and ITT World Directories, Inc. (attached as Exhibit B-2
to the Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.5 Form of Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and
ITT Educational Services, Inc. (attached as Exhibit C to the Agreement and Plan of
Distribution filed as Exhibit 10.1 hereto)**
10.6 Form of Employee Benefits Services and Liabilities Agreement among ITT Destinations,
Inc., ITT Corporation and ITT Educational Services, Inc. (attached as Exhibit A to
the Agreement and Plan of Distribution filed as Exhibit 10.1 hereto)**
10.7 ITT Destinations, Inc. 1997 Restricted Stock Plan for Non-Employee Directors**
10.8 Form of Indemnification Agreement with members of the Board of Directors**
10.9 ITT Destinations, Inc. Annual Performance-Based Incentive Plan for Executive
Officers**
10.10 ITT Corporation Senior Executive Severance Pay Plan**
10.11 Employment and Consulting Agreement dated as of December 19, 1995 between ITT
Corporation (formerly known as ITT Destinations, Inc.) and Rand V. Araskog**
10.12 Form of Severance Agreement between ITT Destinations, Inc. and certain executives**
10.13 Commitment Letter dated as of August 22, 1997, among Chase Securities Inc., The Chase
Manhattan Bank and ITT Corporation**
10.14 First Amendment to Employment and Consulting Agreement dated as of December 19, 1995
between ITT Corporation (formerly known as ITT Destinations, Inc.) and Rand V.
Araskog**
10.15 Second Amendment to Employment and Consulting Agreement dated as of December 19, 1995
between ITT Corporation (formerly known as ITT Destinations, Inc.) and Rand V.
Araskog**
10.16 1997 ITT Destinations, Inc. Stock Plan*
21 List of Subsidiaries of ITT Destinations, Inc.**
99.1 ITT Destinations, Inc. Information Statement dated September 25, 1997*
</TABLE>
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* Filed herewith.
** Previously filed.
<PAGE> 1
EXHIBIT 10.16
1997 ITT DESTINATIONS, INC. STOCK PLAN
1. Purpose. The purpose of the 1997 ITT Destinations, Inc. Stock
Plan is to motivate and reward superior performance on the part of
employees of ITT Destinations, Inc., a Nevada corporation, and its
subsidiaries ("Destinations") and to thereby attract and retain employees
of superior ability. In addition, the Plan is intended to further
opportunities for stock ownership by such employees in order to increase
their proprietary interest in Destinations and, as a result, their interest
in the success of Destinations. Awards will be made, in the discretion of
the Committee, to Key Employees (including officers and directors who are
also employees) whose responsibilities and decisions directly affect the
performance of any Participating Company and its subsidiaries. Such
incentive awards may consist of stock options, stock appreciation rights
payable in stock or cash, performance shares, restricted stock or any
combination of the foregoing, as the Committee may determine.
2. Definitions. When used herein, the following terms shall have the
following meanings:
"Acceleration Event" means the occurrence of an event defined in
Section 9 of the Plan.
"Act" means the Securities Exchange Act of 1934.
"Award" means an award granted to any Key Employee in accordance with
the provisions of the Plan in the form of Options, Rights, Performance
Shares or Restricted Stock, or any combination of the foregoing.
"Award Agreement" means the written agreement evidencing each Award
granted to a Key Employee under the Plan.
"Beneficiary" means the beneficiary or beneficiaries designated
pursuant to Section 10 to receive the amount, if any, payable under the
Plan upon the death of a Key Employee.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such
sections as they may from time to time be amended or renumbered.)
"Committee" means the Compensation and Personnel Committee of the
Board or such other committee as may be designated by the Board to
administer the Plan.
"Company" means ITT Destinations, Inc., a Nevada corporation, and its
successors and assigns.
"Fair Market Value", unless otherwise indicated in the provisions of
this Plan, means, as of any date, the composite closing price for one share
of Stock on the New York Stock Exchange or, if no sales of Stock have taken
place on such date, the composite closing price on the most recent date on
which selling prices were quoted, the determination to be made in the
discretion of the Committee.
"Incentive Stock Option" means a stock option qualified under Section
422 of the Code.
"Key Employee" means an employee (including any officer or director
who is also an employee) of any Participating Company whose
responsibilities and decisions, in the judgment of the Committee, directly
affect the performance of the Company and its subsidiaries.
"Limited Stock Appreciation Right" means a stock appreciation right
which shall become exercisable automatically upon the occurrence of an
Acceleration Event as described in Section 9 of the Plan.
"Option" means an option awarded under Section 5 of the Plan to
purchase Stock of the Company, which option may be an Incentive Stock
Option or a non-qualified stock option.
<PAGE> 2
"Participating Company" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options
only, "Participating Company" means the Company or any corporation which at
the time such Option is granted qualifies as a "subsidiary" of the Company
under Section 424(f) of the Code.
"Performance Share" means a performance share awarded under Section 6
of the Plan.
"Plan" means the 1997 ITT Destinations, Inc. Stock Plan, as the same
may be amended, administered or interpreted from time to time.
"Plan Year" means the calendar year.
"Retirement" means eligibility to receive immediate retirement
benefits under a Participating Company pension plan.
"Restricted Stock" means Stock awarded under Section 7 of the Plan
subject to such restrictions as the Committee deems appropriate or
desirable.
"Right" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"Stock" means the common stock (par value $.01 per share) of the
Company.
"Total Disability" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee
upon the basis of such evidence, including independent medical reports and
data, as the Committee deems appropriate or necessary.
3. Shares Subject to the Plan. The aggregate number of shares of Stock
which may be awarded under the Plan in any Plan Year shall be limited to two
percent (2%) of the total issued and outstanding shares of Stock (which shall
include Stock held in the Company's treasury) as reported in the Annual Report
on Form 10-K of the Company for the fiscal year ending immediately prior to any
Plan Year; provided that over the term of the Plan the aggregate number of
shares of Stock which may be awarded shall be limited to one and a half percent
(1.5%) of the cumulative total issued and outstanding shares of Stock (which
shall include Stock held in the Company's treasury) as reported each year in the
Annual Report on Form 10-K. Any unused portion of such annual limit with respect
to any Plan Year shall be carried forward and shall be available for Awards in
any succeeding Plan Year.
In addition to the foregoing, in no event shall (i) more than two million
(2,000,000) shares of Stock be cumulatively available for awards of incentive
stock options under the Plan and (ii) more than twenty percent (20%) of the
total number of shares on a cumulative basis be available for restricted stock
and performance share Awards. For any Plan Year, no individual employee may
receive an Award of stock options for more than 200,000 shares; except that each
individual employee may receive in addition to the foregoing limit that number
of stock options equal to the number of substitute stock options required to
replace ITT Corporation stock options surrendered by such employee in connection
with the spin-off by ITT Corporation of the shares of the Company to ITT
Corporation shareholders.
Subject to the above limitations, shares of Stock to be issued under the
Plan may be made available from the authorized but unissued shares, or shares
held by the Company in treasury or from shares purchased in the open market.
For the purpose of computing the total number of shares of Stock available
for Awards under the Plan, there shall be counted against the foregoing
limitations the number of shares of Stock which equal the value of performance
share Awards, in each case determined as of the dates on which such Awards are
granted. If any Awards under the Plan are forfeited, terminated, expire
unexercised, are settled in cash in lieu of Stock or are exchanged for other
Awards, the shares of Stock which were theretofore subject to such Awards shall
again be available for Awards under the Plan to the extent of such forfeiture or
expiration of such Awards. Further, any shares that are exchanged (either
actually or constructively) by optionees as full or partial payment to the
Company of the purchase price of shares being acquired through the exercise of a
stock option granted under the Plan may be available for subsequent Awards.
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4. Grant of Awards and Award Agreement. (a) Subject to the provisions of
the Plan, the Committee shall (i) determine and designate from time to time
those Key Employees or groups of Key Employees to whom Awards are to be granted;
(ii) determine the form or forms of Award to be granted to any Key Employee;
(iii) determine the amount or number of shares of Stock subject to each Award;
and (iv) determine the terms and conditions of each Award.
(b) Each Award granted under the Plan shall be evidenced by a written Award
Agreement. Such agreement shall be subject to and incorporate the express terms
and conditions, if any, required under the Plan or required by the Committee.
5. Stock Options and Rights. (a) With respect to Options and Rights, the
Committee shall (i) authorize the granting of Incentive Stock Options,
non-qualified stock options, or a combination of Incentive Stock Options and
non-qualified stock options; (ii) authorize the granting of Rights which may be
granted in connection with all or part of any Option granted under this Plan,
either concurrently with the grant of the Option or at any time thereafter
during the term of the Option; (iii) determine the number of shares of Stock
subject to each Option or the number of shares of Stock that shall be used to
determine the value of a Right; and (iv) determine the time or times when and
the manner in which each Option or Right shall be exercisable and the duration
of the exercise period.
(b) Any Option issued hereunder which is intended to qualify as an
Incentive Stock Option shall be subject to such limitations or requirements as
may be necessary for the purposes of Section 422 of the Code or any regulations
and rulings thereunder to the extent and in such form as determined by the
Committee in its discretion.
(c) Rights may be granted only to Key Employees who may be considered
directors or officers of the Company for purposes of Section 16 of the Act.
(d) The exercise period for a non-qualified stock option and any related
Right shall not exceed ten years and two days from the date of grant, and the
exercise period for an Incentive Stock Option and any related Right shall not
exceed ten years from the date of grant.
(e) The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value of
one share of Stock on the date the Option is granted.
(f) No part of any Option or Right may be exercised until the Key Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments.
(g) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for tendering Stock as payment upon exercise of an
Option and may impose such limitations and prohibitions on the use of Stock to
exercise an Option as it deems appropriate.
(h) Unless Section 9 shall provide otherwise, Rights granted to a director
or officer shall terminate when such person ceases to be considered a director
or officer of the Company subject to Section 16 of the Act.
(i) In case of termination of employment, the following provisions shall
apply:
(A) If a Key Employee who has been granted an Option shall die before
such Option has expired, his or her Option may be exercised in full by the
person or persons to whom the Key Employee's rights under the Option pass
by will, or if no such person has such right, by his or her executors or
administrators, at any time, or from time to time, within five years after
the date of the Key Employee's death or within such other period, and
subject to such terms and conditions as the Committee may specify, but not
later than the expiration date specified in Section 5(d) above.
(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she
may exercise his or her Options in full at any time, or from
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time to time, within five years after the date of the termination of his or
her employment or within such other period, and subject to such terms and
conditions as the Committee may specify, but not later than the expiration
date specified in Section 5(d) above. Any such Options not fully
exercisable immediately prior to such optionee's Retirement shall become
fully exercisable upon such Retirement unless the Committee, in its sole
discretion, shall otherwise determine.
(C) Except as provided in Section 9, if the Key Employee shall
voluntarily resign before eligibility for Retirement or he or she is
terminated for cause as determined by the Committee, the Options or Rights
shall be canceled coincident with the effective date of the termination of
employment.
(D) If the Key Employee's employment terminates for any other reason,
he or she may exercise his or her Options, to the extent that he or she
shall have been entitled to do so at the date of the termination of his or
her employment, at any time, or from time to time, within three months
after the date of the termination of his or her employment or within such
other period, and subject to such terms and conditions as the Committee may
specify, but not later than the expiration date specified in Section 5(d)
above.
(j) Except as otherwise determined by the Committee, (i) no Option or Right
granted under the plan shall be transferable other than by will or by the laws
of descent and distribution, and (ii) during the lifetime of the optionee, an
Option or Right shall be exercisable only by the Key Employee to whom the Option
or Right is granted (or his estate or designated Beneficiary)."
(k) With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an "incentive stock option" within
the meaning of Section 422 of the Code.
(l) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall be entitled,
subject to such terms and conditions the Committee may specify, to receive
upon exercise thereof 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, as
determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(e), be less than the Fair Market Value of such
specified number of shares of Stock at the time the Right is granted. Upon
exercise of a Right, payment of such excess shall be made as the Committee
shall specify in cash, the issuance or transfer to the Key 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 Committee. The Company will not issue a fractional share of Stock and,
if a fractional share would otherwise be issuable, the Company shall pay
cash equal to the Fair Market Value of the fractional share of Stock at
such time.
(ii) In the event of the exercise of such Right, the Company's
obligation in respect of any related Option or such portion thereof will be
discharged by payment of the Right so exercised.
6. Performance Shares. (a) Subject to the provisions of the Plan, the
Committee shall (i) determine and designate from time to time those Key
Employees or groups of Key Employees to whom Awards of Performance Shares are to
be made, (ii) determine the Performance Period (the "Performance Period") and
Performance Objectives (the "Performance Objectives") applicable to such Awards,
(iii) determine the form of settlement of a Performance Share and (iv) generally
determine the terms and conditions of each such award. 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 that the Committee may limit the aggregate
amount payable upon the settlement of any Award. The maximum award for any
individual employee in any given year shall be 100,000 Performance Shares.
(b) The Committee shall determine a Performance Period of not less than two
nor more than five years. Performance Periods may overlap and Key Employees may
participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
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(c) The Committee shall determine the Performance Objectives of Awards of
Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be based upon one or more
of the following objective criteria, as the Committee deems appropriate:
earnings before interest, time, depreciation and amortization, earnings per
share, return on equity, cash flow or total shareholder return of the Company.
If during the course of a Performance Period there shall occur significant
events which the Committee expects to have a substantial effect on the
applicable Performance Objectives during such period, the Committee may revise
such Performance Objectives.
(d) At the beginning of a Performance Period, the Committee shall determine
for each Key Employee or group of Key Employees the number of Performance Shares
or the percentage of Performance Shares which shall be paid to the Key Employee
or member of the group of Key Employees if the applicable Performance Objectives
are met in whole or in part.
(e) If a Key Employee terminates service with all Participating Companies
during a Performance Period because of death, Total Disability, Retirement, or
under other circumstances where the Committee in its sole discretion finds that
a waiver would be in the best interests of the Company, that Key Employee may,
as determined by the Committee, be entitled to payment in settlement of such
Performance Shares at the end of the Performance Period based upon the extent to
which the Performance Objectives were satisfied at the end of such period and
prorated for the portion of the Performance Period during which the Key Employee
was employed by any Participating Company; provided, however, the Committee may
provide for an earlier payment in settlement of such Performance Shares in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable. If a Key Employee terminates service with all Participating Companies
during a Performance Period for any other reason, then such Key Employee shall
not be entitled to any Award with respect to that Performance Period unless the
Committee shall otherwise determine.
(f) 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 Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
7. Restricted Stock. (a) Restricted Stock shall be subject to a
restriction period (after which restrictions will lapse) which shall mean a
period commencing on the date the Award is granted and ending on such date as
the Committee shall determine (the "Restriction Period"). The Committee may
provide for the lapse of restrictions in installments where deemed appropriate
and it may also require the achievement of predetermined performance objectives
in order for such shares to vest.
(b) Except when the Committee determines otherwise pursuant to Section
7(d), if a Key Employee terminates employment will all Participating Companies
for any reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the Key
Employee and shall be reacquired by the Company.
(c) Except as otherwise provided in this Section 7, no shares of Restricted
Stock received by a Key Employee shall be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of during the Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of
special circumstances, the Committee may, in its sole discretion when it finds
that a waiver would be in the best interests of the Company, elect to waive any
or all remaining restrictions with respect to such Key Employee's Restricted
Stock.
(e) The Committee may require, under such terms and conditions as it deems
appropriate or desirable, that the certificates for Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any Award of Restricted Stock that the Key Employee deliver a stock power
endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from exchanging
any shares of Restricted Stock subject to the restrictions contained herein for
any other shares of Stock that are similarly restricted.
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(g) Subject to Section 7(e) and Section 8, each Key Employee entitled to
receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
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.
8. Certificates for Awards of Stock. (a) The Company shall not be required
to issue or deliver any certificates for shares of Stock prior to (i) the
listing of such shares on any stock exchange on which the Stock may then be
listed and (ii) the completion of any registration or qualification of such
shares under any Federal or state law, or any ruling or regulation of any
government body which the Company shall, in its sole discretion, determine to be
necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other requirements
of the Securities and Exchange Commission, any stock exchange upon which the
Stock is then listed and any applicable Federal or state securities laws, and
the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
(c) Except for the restrictions on Restricted Stock under Section 7, each
Key Employee who receives Stock in settlement of an Award of Stock, shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the shares and receive dividends and other distributions. No Key
Employee awarded an Option, a Right or Performance Share shall have any right as
a shareholder with respect to any shares covered by his or her Option, Right or
Performance Share prior to the date of issuance to him or her of a certificate
or certificates for such shares.
9. Acceleration Events. (a) For the purposes of this Plan, an Acceleration
Event shall occur if
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing that
any person (within the meaning of Section 13(d) of the Act), other than the
Company or a subsidiary of the Company or any employee benefit plan
sponsored by the Company or a subsidiary of the Company, is the beneficial
owner directly or indirectly of 20% or more of the outstanding Stock of the
Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company, shall
purchase shares pursuant to a tender offer or exchange offer to acquire any
Stock of the Company (or securities convertible into Stock) for cash,
securities or any other consideration, if, after consummation of the offer,
the person in question is the beneficial owner (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of fifteen percent or
more of the outstanding Stock of the Company (calculated as provided in
paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire
Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock of
the Company would be converted into cash, securities or other property,
other than a merger of the Company in which holders of Stock of the Company
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger as
immediately before, or (B) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or
substantially all the assets of the Company; or
(iv) there shall have been a change in a majority of the members of
the Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such 12-month
period.
6
<PAGE> 7
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall become
immediately exercisable in full for the aggregate number of shares covered
thereby and all related Rights shall also become exercisable upon the
occurrence of an Acceleration Event described in this Section 9 and shall
continue to be exercisable in full for cash for a period of 60 calendar
days beginning on the date that such Acceleration Event occurs and ending
on the 60th calendar day following that date; provided, however, that no
Option or Right shall be exercisable beyond the expiration date of its
original term.
(ii) Options and Rights shall not terminate and shall continue to be
fully exercisable for a period of seven months following the occurrence of
an Acceleration Event in the case of an employee who is terminated other
than for just cause or who voluntarily terminates his employment because he
in good faith believes that as a result of such Acceleration Event he is
unable effectively to discharge his present duties or the duties of the
position he occupied just prior to the occurrence of such Acceleration
Event. For purposes of this Section 9 only, termination shall be for "just
cause" only if such termination is based on fraud, misappropriation or
embezzlement on the part of the employee which results in a final
conviction of a felony. Under no circumstances, however, shall any Option
or Right be exercised beyond the expiration date of its original term.
(iii) Any Right or portion thereof may be exercised for cash within
the 60-calendar-day period following the occurrence of an Acceleration
Event with settlement, except in the case of a Right related to an
Incentive Stock Option, based on the "Formula Price" which shall be the
highest of (A) the highest composite daily closing price of the Stock
during the period beginning on the 60th calendar day prior to the date on
which the Right is exercised and ending on the date such Right is
exercised, (B) the highest gross price paid for the Stock during the same
period of time, as reported in a report on Schedule 13D filed with the
Securities and Exchange Commission or (C) the highest gross price paid or
to be paid for a share of Stock (whether by way of exchange, conversion,
distribution upon merger, liquidation or otherwise) in any of the
transactions set forth in this Section 9 as constituting an Acceleration
Event.
(iv) Upon the occurrence of an Acceleration Event, Limited Stock
Appreciation Rights shall automatically be granted as to any Option with
respect to which Rights are not then outstanding; provided, however, that
Limited Stock Appreciation Rights shall be provided at the time of grant of
any Incentive Stock Option subject to exercisability upon the occurrence of
an Acceleration Event. Limited Stock Appreciation Rights shall entitle the
holder thereof, upon exercise of such rights and surrender of the related
Option or any portion thereof, to receive, without payment to the Company
(except for applicable withholding taxes), an amount in cash equal to the
excess, if any, of the Formula Price as that term is defined in this
Section 9 over the option price of the Stock as provided in such Option;
provided that in the case of the exercise of any such Limited Stock
Appreciation Right or portion thereof related to an Incentive Stock Option,
the Fair Market Value of the Stock at the time of such exercise shall be
substituted for the Formula Price. Each such Limited Stock Appreciation
Right shall be exercisable only during the period beginning on the first
business day following the occurrence of such Acceleration Event and ending
on the 60th day following such date and only to the same extent the related
Option is exercisable. Upon exercise of a Limited Stock Appreciation Right
and surrender of the related Option, or portion thereof, such Option, to
the extent surrendered, shall not thereafter be exercisable.
(v) The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 7 shall lapse upon the occurrence of an Acceleration
Event and the Company shall issue stock certificates without a restrictive
legend. Key Employees holding Restricted Stock on the date of an
Acceleration Event may tender such Restricted Stock to the Company which
shall pay the Formula Price as that term is defined in this Section 9;
provided, such Restricted Stock must be tendered to the Company within 60
calendar days of the Acceleration Event.
(vi) If an Acceleration Event occurs during the course of a
Performance Period applicable to an Award of Performance Shares pursuant to
Section 6, then the Key Employee shall be deemed to have satisfied the
Performance Objectives and settlement of such Performance Shares shall be
based on the Formula Price, as defined in this Section 9.
7
<PAGE> 8
10. Beneficiary. (a) Each Key Employee shall file with the Company a
written designation of one or more persons as the Beneficiary who shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. A Key Employee may from time to time revoke or change his or her
Beneficiary designation without the consent of any prior Beneficiary by filing a
new designation with the Company. The last such designation received by the
Company shall be controlling; provided, however, that no designation, or change
or revocation thereof, shall be effective unless received by the Company prior
to the Key Employee's death, and in no event shall it be effective as of a date
prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's death, or if no designated Beneficiary survives the Key Employee or
if such designation conflicts with law, the Key Employee's estate shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. If the Committee is in doubt as to the right of any person to receive
such Award, the Company may retain such Award, without liability for any
interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Company therefor.
11. Administration of the Plan. (a) Each member of the Committee shall be
both a member of the Board and a "nonemployee director" within the meaning of
Rule 16b-3 under the Act or successor rule or regulation.
(b) All decisions, determinations or actions of the Committee made or taken
pursuant to grants of authority under the Plan shall be made or taken in the
sole discretion of the Committee and shall be final, conclusive and binding on
all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Key Employees, whether or not such Key
Employees are similarly situated.
(e) The Committee may, in its sole discretion, delegate such of its powers
as it deems appropriate to the chief executive officer or other members of
senior management, except that Awards to executive officers shall be made solely
by the Committee and subject to compliance with Rule 16b-3 of the Act.
(f) If an Acceleration Event has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. Amendment, Extension or Termination. The Board may, at any time, amend
or terminate the Plan and, specifically, may make such modifications to the Plan
as it deems necessary to avoid the application of Section 162(m) of the Code and
the Treasury regulations issued thereunder. However, no amendment shall, without
approval by a majority of the Company's stockholders, (a) alter the group of
persons eligible to participate in the Plan, (b) except as provided in Section
13, increase the maximum number of shares of Stock which are available for
Awards under the Plan, (c) materially increase the benefits accruing to
participants under the Plan or (d) extend the period during which Awards may be
granted beyond September 30, 2004. If an Acceleration Event has occurred, no
amendment or termination shall impair the rights of any person with respect to a
prior Award.
13. Adjustments in Event of Change in Common Stock. In the event of any
reorganization, merger, recapitalization, consolidation, liquidation, stock
dividend, stock split, reclassification, combination of shares, rights offering,
split-up or extraordinary dividend (including a spin-off) or divestiture, or any
other change in the corporate structure or shares, the Committee may make such
adjustment in the Stock subject to Awards,
8
<PAGE> 9
including Stock subject to purchase by an Option, or the terms, conditions or
restrictions on Stock or Awards, including the price payable upon the exercise
of such Option and the number of shares subject to restricted stock awards, as
the Committee deems equitable.
14. Substitute Awards. The Committee shall be authorized to issue stock
options and related rights to those key employees of Participating Companies who
surrender options to acquire stock in ITT Corporation. The Committee may make a
determination as to the exercise price and number of such substitute options it
may issue in order to preserve the economic value of the surrendered ITT
Corporation options and related rights. Shares of Common Stock to be issued upon
the exercise of substitute stock options may be made available from authorized
but unissued shares or from treasury or shares held by Destinations or in shares
purchased in the open market.
The terms and conditions of each substitute stock award, including, without
limitation, the expiration date of the option, the time or times when, and the
manner in which, each substitute option shall be exercisable, the duration of
the exercise period, the method of exercise, settlement and payment, and the
rules in the event of termination, shall be the same as those of the surrendered
ITT Corporation award.
The Committee shall also be authorized to issue substitute grants of
Restricted Stock to replace shares of ITT Corporation restricted stock
surrendered by employees of Participating Companies. Such substitute shares
shall be subject to the same terms and conditions as the surrendered shares of
ITT Corporation restricted stock, including, without limitation, the restriction
period of such ITT Corporation shares.
15. Miscellaneous. (a) Except as provided in Section 9, nothing in this
Plan or any Award granted hereunder shall confer upon any employee any right to
continue in the employ of any Participating Company or interfere in any way with
the right of any Participating Company to terminate his or her employment at any
time. No Award payable under the Plan shall be deemed salary or compensation for
the purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company. All payments to be made hereunder shall be paid from the general
funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
provided in Section 7(e) with respect to Restricted Stock.
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. Effective Date, Term of Plan and Shareholder Approval. The effective
date of the Plan shall be the date as of which the Stock is distributed to
shareholders of ITT Corporation. No Award shall be granted under this Plan after
the Plan's termination date. The Plan's termination date shall be September 30,
2004. The Plan will continue in effect for existing Awards as long as any such
Award is outstanding.
9
<PAGE> 1
EXHIBIT 99.1
SUBJECT TO COMPLETION OR AMENDMENT, DATED SEPTEMBER 25, 1997
INFORMATION STATEMENT
ITT DESTINATIONS, INC.
DISTRIBUTION OF SHARES OF COMMON STOCK
This Information Statement is being furnished in connection with the
distribution (the "Destinations Distribution") by ITT Corporation ("ITT") to
holders of its Common Stock, no par value ("ITT Common Stock"), of all the
outstanding shares of Common Stock, par value $.01 per share ("Company Common
Stock"), of ITT Destinations, Inc. (the "Company"), which will hold ITT's hotels
and gaming business after the Destinations Distribution.
Shares of Company Common Stock are being distributed to holders of ITT
Common Stock of record as of the close of business on , 1997 (the
"Record Date"). Each such holder will receive one share of Company Common Stock
for each share of ITT Common Stock held on the Record Date. The Destinations
Distribution will occur at 12:00 midnight on , 1997. Stockholders of
ITT will not be required to pay for shares of Company Common Stock received in
the Destinations Distribution. The Company has applied to have the Company
Common Stock listed on The New York Stock Exchange, Inc. under the symbol "ITT."
------------------------
NO STOCKHOLDER APPROVAL OF THE DESTINATIONS DISTRIBUTION IS REQUIRED OR SOUGHT.
ITT IS NOT SOLICITING PROXIES AND STOCKHOLDERS ARE REQUESTED NOT TO SEND A PROXY
TO ITT OR THE COMPANY. STOCKHOLDERS SHOULD NOT SEND ANY ITT STOCK CERTIFICATES
TO ITT OR THE COMPANY.
------------------------
SEE "RISK FACTORS" FOR INFORMATION THAT SHOULD BE CONSIDERED IN ADDITION TO THE
OTHER INFORMATION INCLUDED IN THIS INFORMATION STATEMENT.
------------------------
NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION,
THE NEVADA STATE GAMING CONTROL BOARD, THE NEW JERSEY CASINO CONTROL COMMISSION,
THE MISSISSIPPI GAMING COMMISSION OR THE INDIANA GAMING COMMISSION HAS APPROVED
OR DISAPPROVED THESE SECURITIES OR DETERMINED THAT THIS INFORMATION STATEMENT IS
ACCURATE OR COMPLETE. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Stockholders of ITT with inquiries related to the Destinations Distribution
should contact ITT's information agent, Georgeson & Company Inc., Wall Street
Plaza, New York, New York 10005, telephone number: (800) 223-2064. Stockholders
may also direct written inquiries to Director of Investor Relations, ITT
Destinations, Inc., 1330 Avenue of the Americas, New York, New York 10019-5490.
The date of this Information Statement is , 1997.
<PAGE> 2
INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DESTINATIONS DISTRIBUTION AND OTHER MATTERS........... 1
SUMMARY............................................................................... 8
RISK FACTORS.......................................................................... 16
THE DESTINATIONS DISTRIBUTION......................................................... 21
General............................................................................... 21
Manner of Effecting the Destinations Distribution..................................... 21
Reasons for Furnishing This Information Statement..................................... 21
Comprehensive Plan.................................................................... 22
Reasons for the Comprehensive Plan.................................................... 23
Certain Indebtedness.................................................................. 26
Strategic Investment.................................................................. 29
Conditions to the Destinations Distribution........................................... 29
Effect of the Destinations Distribution on the Hilton Offer........................... 30
Recommendation of the Board of Directors of ITT with Respect to the Hilton
Transaction......................................................................... 32
Federal Income Tax Consequences of the Distributions.................................. 34
Listing and Trading of Company Common Stock........................................... 37
DIVIDEND POLICY....................................................................... 38
ITT DESTINATIONS, INC. SELECTED HISTORICAL FINANCIAL AND OPERATING DATA............... 39
ITT DESTINATIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.......... 40
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 1997.................... 40
Unaudited Pro Forma Consolidated Income for the Six Months Ended June 30, 1997........ 41
Unaudited Pro Forma Consolidated Income for the Year Ended December 31, 1996.......... 42
Notes to Unaudited Pro Forma Consolidated Financial Statements........................ 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 44
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996........... 44
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995............... 46
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994............... 48
Liquidity and Capital Resources....................................................... 50
BUSINESS.............................................................................. 53
General............................................................................... 53
Hilton Transaction.................................................................... 53
Continued Refinement and Implementation of Strategic Plan............................. 54
Business Segments..................................................................... 55
Hotel Operations...................................................................... 55
Gaming Operations..................................................................... 64
Gaming Assets Identified for Disposition.............................................. 66
Dispositions.......................................................................... 66
Employees............................................................................. 67
Competition........................................................................... 67
Exposure to Currency Fluctuations..................................................... 68
Intellectual Property................................................................. 68
Governmental Regulation and Related Matters........................................... 69
Other................................................................................. 77
REGULATORY APPROVALS.................................................................. 77
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Nevada Gaming Regulatory Approvals.................................................... 77
New Jersey Gaming Regulatory Approvals................................................ 79
Mississippi Gaming Regulatory Approvals............................................... 80
Ontario, Canada Gaming Regulatory Approvals........................................... 82
Nova Scotia, Canada Gaming Regulatory Approvals....................................... 82
Indiana Gaming Regulatory Approvals................................................... 82
Communications Act of 1934............................................................ 82
LEGAL PROCEEDINGS..................................................................... 82
THE COMPANY'S RELATIONSHIP WITH ITT AFTER THE DESTINATIONS DISTRIBUTION............... 84
Distribution Agreements............................................................... 85
Tax Allocation Agreements............................................................. 85
Intellectual Property Agreements...................................................... 86
Employee Benefits Agreement........................................................... 87
MANAGEMENT AND EXECUTIVE COMPENSATION................................................. 89
Board of Directors.................................................................... 89
Committees of the Board of Directors.................................................. 91
Directors' Retirement Policy.......................................................... 92
Directors' Compensation............................................................... 92
Directors' Benefits................................................................... 92
Restricted Stock Plan for Non-Employee Directors...................................... 93
Certain Relationships and Related Transactions........................................ 93
Executive Officers of the Company..................................................... 94
Compensation of Executive Officers.................................................... 97
Annual Incentive Bonus Plan........................................................... 98
Option Grants of ITT Common Stock to the Company Executives in Last Fiscal Year....... 98
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values..... 99
Severance Agreements.................................................................. 100
Employment Contract................................................................... 100
1997 Stock Plan....................................................................... 101
Pension Plans......................................................................... 101
Compensation Committee Interlocks and Insider Participation........................... 104
PROJECTED BENEFICIAL OWNERSHIP........................................................ 107
DESCRIPTION OF CAPITAL STOCK.......................................................... 107
Authorized Capital Stock.............................................................. 107
Company Common Stock.................................................................. 107
Company Preferred Stock............................................................... 107
Authorized But Unissued Capital Stock................................................. 107
Rights Plan........................................................................... 108
No Preemptive Rights.................................................................. 110
Nevada General Corporation Law........................................................ 110
Provisions of the Company's Articles of Incorporation and By-laws Affecting a Change
in Control.......................................................................... 112
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS............................... 115
AVAILABLE INFORMATION................................................................. 116
ITT DESTINATIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE........ F-1
</TABLE>
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<PAGE> 4
QUESTIONS AND ANSWERS
ABOUT THE DESTINATIONS DISTRIBUTION AND OTHER MATTERS
Q1: WHAT IS THE DESTINATIONS DISTRIBUTION?
A: The Destinations Distribution is part of the plan of ITT Corporation
("ITT") to separate itself into three distinct publicly owned companies
focused on (a) hotels and gaming, (b) telephone directories publishing and
(c) post-secondary technical education.
Q2: ARE THESE TRANSACTIONS SIMILAR TO THE SUCCESSFUL 1995 DIVISION OF THE
BUSINESSES OF ITT?
A: Yes. ITT has substantial experience with the benefits of spin-off
transactions. In 1994, ITT's predecessor spun-off its forestry products
subsidiary to create an independent company. In addition, ITT is the
product of the December 1995 separation of a conglomerate (which was then
known as "ITT Corporation") that controlled the businesses now operated by
ITT as well as ITT Industries, Inc. (a New York Stock Exchange listed
company trading under the symbol "IIN" that manufactures a wide variety of
high technology and industrial products) and The Hartford Financial
Services Group, Inc. (formerly "ITT Hartford Group, Inc.," a New York
Stock Exchange listed company trading under the symbol "HIG" that operates
one of the largest multiline insurance companies in the United States).
Holders of ITT stock (who have retained the common stock of Rayonier
Inc., ITT Industries, Inc., and The Hartford Financial Services Group,
Inc. previously distributed by ITT) for the five years through July 1997
have seen their investment outperform the Standard & Poor's 500 Index by
more than 70% and increase in aggregate value by approximately $15
billion during the same period.
The separation of ITT's three businesses being undertaken now is similar
to the 1995 separation by the former ITT Corporation and represents
another step in the transition of the former ITT conglomerate to a group
of individually accountable, strategically focused organizations.
Q3: WHAT IS THE DIFFERENCE BETWEEN ITT AND THE COMPANY?
A: ITT operates in three principal business areas: hotels and gaming,
telephone directories publishing and post-secondary technical education.
ITT conducts its hotels and gaming business through its subsidiaries, ITT
Sheraton Corporation ("Sheraton"), Ciga S.p.A. ("Ciga") and Caesars World,
Inc. ("Caesars"). ITT conducts its telephone directories publishing
business through its wholly-owned subsidiary, ITT World Directories, Inc.
("ITT World Directories"), and its post-secondary technical education
business through its 83.3%-owned subsidiary, ITT Educational Services,
Inc. ("ITT Educational").
To carry out the separation of its businesses, ITT is placing its hotels
and gaming business in a newly-formed Nevada subsidiary, ITT
Destinations, Inc. (the "Company"). ITT is separating its businesses into
three distinct publicly-owned companies, by distributing to the holders
of ITT's common stock, no par value ("ITT Common Stock"), (i) all the
outstanding shares of common stock, par value $.01 per share ("Company
Common Stock"), of the Company (the "Destinations Distribution") and (ii)
all the shares owned by ITT of the common stock, par value $.01 per share
("ITT Educational Common Stock"), of ITT Educational (the "ITT
Educational Distribution" and, together with the Destinations
Distribution, the "Distributions"). After the Distributions, ITT intends
to change its name to "ITT Information Services, Inc." ("ITT ISI") and
the Company intends to change its name to "ITT Corporation." Although the
Company is newly formed, this document describes the historic activities
of ITT's hotels and gaming business as though they were conducted by the
Company. This document uses the term "ITT ISI" in reference to ITT after
the Distributions, at which time ITT World Directories will be ITT's only
direct subsidiary.
After the Distributions are complete, ITT will still own its subsidiary
that operates its telephone directories publishing business and
1
<PAGE> 5
shares of ITT Common Stock will represent an ownership interest in that
business. Ownership of ITT's hotels and gaming business will be
represented by the shares of Company Common Stock that stockholders will
receive in the Destinations Distribution and ownership of ITT's
post-secondary technical education business will be represented by the
shares of ITT Educational Common Stock that stockholders will receive in
the ITT Educational Distribution.
Q4: WHAT OTHER ACTIONS ARE TAKING PLACE AROUND THE TIME OF THE DESTINATIONS
DISTRIBUTION?
A: The Destinations Distribution is one element of a comprehensive plan (the
"Comprehensive Plan") approved by the Board of Directors of ITT (the "ITT
Board"). The other major elements of the Comprehensive Plan are:
ITT Educational Distribution. In the ITT Educational Distribution, ITT
will separate its post-secondary technical education business from its
telephone directories publishing business in a transaction similar to,
but separate from, this one. In that transaction, ITT will distribute to
its stockholders all the shares that it holds of its subsidiary that
operates its post-secondary technical education business, ITT
Educational. ITT stockholders will receive a separate information
statement describing the ITT Educational Distribution.
Stock Tender Offer. On July 17, 1997, ITT commenced an offer to
repurchase up to 30 million shares of ITT Common Stock, or approximately
25.7% of all its outstanding shares, from the public for a price per
share of $70, net to the seller in cash (the "Stock Tender Offer"). The
Stock Tender Offer is scheduled to expire at 5:00 p.m., New York City
time, on Monday, September 29, 1997.
Allocation of Indebtedness. ITT plans to allocate its indebtedness
between its hotels and gaming business and its telephone directories
publishing business in a manner that is appropriate for the credit
capacity and capitalization requirements of each business. Because the
financial responsibility standards of the U.S. Department of Education
applicable to ITT Educational limit the amount of indebtedness ITT
Educational may incur, no indebtedness will be allocated to ITT
Educational. ITT's preferred means of making this allocation is to
replace ITT's existing indebtedness with indebtedness issued by the
entity that ultimately will be liable for such indebtedness. Accordingly,
on August 11, 1997, ITT commenced an offer to repurchase all the publicly
held debt securities issued by it, aggregating $2 billion in principal
amount (the "Debt Tender Offer" and, together with the Stock Tender
Offer, the "Tender Offers"). The Debt Tender Offer is scheduled to expire
at 5:00 p.m., New York City time, on Monday, September 29, 1997. In
conjunction with the Debt Tender Offer, ITT plans to repay certain other
indebtedness.
Q5: HOW WILL ITT FINANCE THE TENDER OFFERS?
A: ITT plans to finance the Debt Tender Offer and the repayment of a portion
of certain other indebtedness with cash received from the Company as
consideration (along with additional shares of Company Common Stock) for
certain assets transferred to the Company prior to the Destinations
Distribution (the "First Payment") and the proceeds of a cash dividend
from the Company (the "Second Payment"). ITT plans to finance the Stock
Tender Offer and the repayment of a portion of such other indebtedness
with a combination of available cash, borrowings under new bank credit
facilities and debt financing by ITT ISI and the subsidiaries it will have
after the Distributions and the proceeds of a cash dividend from the
Company (the "Third Payment"). The Company will finance the First, Second
and Third Payments with borrowings under a new bank credit facility. After
the Destinations Distribution, the Company will have approximately $4.2
billion of outstanding indebtedness and ITT ISI will have approximately
$1.275 billion of outstanding indebtedness.
The Chase Manhattan Bank ("Chase") and Chase Securities Inc. ("CSI") have
delivered a letter to ITT stating that they are highly confident that
they will be able to arrange credit facilities and debt securities
offerings for the Company and ITT ISI and
2
<PAGE> 6
its subsidiaries in amounts sufficient to consummate the Tender Offers and the
other elements of the Comprehensive Plan. In addition, Chase and CSI have
delivered commitment letters (the "Commitment Letters") to ITT providing for
credit facilities in aggregate principal amounts of (a) $5 billion for
the Company (the "Company Credit Facilities"), (b) $385 million for ITT
Promedia CVA ("Promedia"), a Belgian company and a wholly owned
subsidiary of ITT ISI (the "Promedia Credit Facilities"), and (c) $270
million for ITT Publimedia B.V. ("Publimedia"), a Dutch company and a
wholly owned subsidiary of Promedia (the "Publimedia Credit Facilities").
The significant debt of the Company after the Distributions and the terms
of the Company Credit Facilities could have adverse consequences for the
Company and its stockholders. See "Risk Factors -- Leverage and Debt
Service" and "-- Restrictions Imposed by Financings."
In addition to these credit facilities, Promedia has issued DM 500
million of 9 1/8% Senior Subordinated Notes due 2007 (the "Promedia
Notes") and Publimedia has issued $225 million of 9 3/8% Senior
Subordinated Notes due 2007 (the "Publimedia Notes" and, together with
the Promedia Notes, the "Subsidiary Notes"). The Subsidiary Notes are
unsecured and subordinated and have covenants that are typical for high
yield offerings. ITT also expects to arrange interim bank financing in an
aggregate principal amount of approximately $225 million (the "Interim
Credit Facilities" and, together with the Promedia Credit Facilities and
the Publimedia Credit Facilities, the "ITT ISI Credit Facilities"). ITT
expects that the Interim Credit Facilities will be repaid with the
proceeds of the Strategic Investment (as defined herein). See "The
Destinations Distribution -- Strategic Investment."
To read more about these financings, see "The Destinations
Distribution -- Certain Indebtedness."
Q6: WHAT IS HAPPENING WITH ITT'S STRATEGIC PLAN?
A: The Comprehensive Plan is another step in ITT's refinement of its
strategic plan to focus on hotels and gaming and explore and exploit
opportunities to enhance the value of ITT within that focus. This
initiative already has resulted in the sale of certain of ITT's assets, a
continued focus on cost containment, continued efforts to grow the hotels
and gaming business and the pursuit of transactions that are expected to
enhance the profitability, return on assets or cash flows of that
business.
Sale of Assets. As part of its focus on its core business, ITT sold its
interest in Alcatel Alsthom for $830 million, sold a 39.8% interest in
Madison Square Garden, L.P. ("Madison Square Garden") for $500 million
and contracted through "put" and "call" options to sell its remaining
10.2% interest for at least $150 million and, with its partner, Dow Jones
& Company, Inc. ("Dow Jones"), entered into an agreement to sell
television station WBIS+ for $257.5 million. The closing of the sale of
ITT's interest in WBIS+ is subject to regulatory approval, and is
expected to occur in the fourth quarter of 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Asset Dispositions and
Capital Expenditures."
Cost Containment. The Company plans to continue to focus on cost
containment opportunities in its hotels and gaming business. As part of
this program, ITT implemented a significant restructuring of its World
Headquarters operations (for which it recognized a one-time, pre-tax
charge of $58 million), reducing headcount by 65% and annual expenses by
at least $20 million. These cost savings were achieved even while
providing for affected employees' enhanced severance payments, enhanced
pension payments and placement services. As a more narrowly focused
entity, the Company plans to continue to reduce costs and complete its
evolutionary process by eliminating the vestiges of its former
conglomerate parent. Specifically, the Company plans to focus on reducing
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overhead costs at both its hotels and gaming headquarters as well as
operations. Management of the Company believes that these efforts, which
are currently underway, will result in approximately $10 million to $15
million in additional overhead savings during 1998.
Growth of the Hotels and Gaming Business. Within the parameters of the
strategic plan, ITT is actively pursuing opportunities to grow its hotels
and gaming business. Since January 1, 1997, ITT has acquired three hotels
and signed or acquired 82 franchise agreements and management contracts
in 20 different countries, totalling more than 20,000 rooms, including
contracts to manage four former Ritz Carlton hotels. The Company will
continue to purchase hotels and interests in hotels, add new franchises
and seek out additional management opportunities throughout the world.
Such efforts will depend upon individual market conditions and factors
affecting the hotel industry generally.
Enhanced Profitability, Return on Assets and Cash Flows. ITT believes
transactions involving hotel or gaming properties that enhance the
profitability, return on assets or cash flows of its hotels and gaming
operations further the goal of strengthening ITT's core business. These
transactions may include, among other things, joint ventures to develop,
purchase or operate properties and conversions of owned properties to
managed properties. For example, ITT recently entered into a long-term
strategic alliance with FelCor Suite Hotels, Inc. ("FelCor"), pursuant to
which FelCor acquired five of ITT's hotel properties and ITT retained
long-term contracts to manage such hotels, and an agreement in principle
with Davis Gaming, L.L.C. ("Davis Gaming"), a Delaware limited liability
company owned by Marvin Davis, to form a 50/50 joint venture to own The
Desert Inn Resort and Casino (the "Desert Inn") in Las Vegas, Nevada and
the 34 acre parcel of land adjacent to the Desert Inn, pursuant to which
ITT will receive $250 million in cash and retain a 50% ownership interest
and a long-term contract to manage this property. ITT is holding the
Desert Inn (pending execution of definitive agreements with Davis Gaming
for the joint venture relating to the Desert Inn) and The Sheraton Casino
in Tunica, Mississippi, for sale and is also conducting detailed reviews
of its options with regard to its ownership interest in Ciga and certain
luxury and other hotels, taking into account the best interests of its
stockholders and ITT.
The Company will benefit from the implementation by ITT of, and will
continue to pursue, this strategic plan.
Q7: WHY IS ITT SEPARATING ITS HOTELS AND GAMING BUSINESS FROM ITS TELEPHONE
DIRECTORIES PUBLISHING AND POST-SECONDARY TECHNICAL EDUCATION BUSINESSES?
A: The Comprehensive Plan is intended to enhance the value of the ongoing
investment of stockholders of ITT as well as further the interests of
ITT's employees, creditors, customers, and the economies and communities
in which ITT operates. ITT has operated three distinct businesses with
different characteristics, competitive environments and growth prospects.
Separating ITT's businesses and allowing them to operate independently is
expected to result in, among other things, increased strategic focus, a
flattening of organizational structures, the implementation of
narrowly-tailored incentive compensation plans and enhanced public market
understanding and valuations of these businesses. The ITT Board also took
account of the tax-free nature of spin-offs and ITT's prior positive
experience with such transactions. Additionally, the Comprehensive Plan is
expected to provide significant benefits to other constituents of ITT,
relative both to the proposed acquisition of ITT by Hilton Hotels
Corporation ("Hilton") and ITT's existing structure. See "The Destinations
Distribution -- Reasons for the Comprehensive Plan."
Q8: WHY IS THIS TRANSACTION STRUCTURED AS A DISTRIBUTION?
A: The Distributions are the most tax-efficient means of separating ITT's
businesses. Prior to the Distributions, Cravath, Swaine & Moore, counsel
to ITT, will deliver an opin-
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ion to ITT stating that, for U.S. Federal income tax purposes, the
Distributions will be tax-free to ITT and its stockholders and further
that an acquisition of ITT, ITT Educational or the Company by Hilton after
the Distributions should not adversely affect the tax-free nature of the
Distributions. The opinion is subject to certain factual representations
and assumptions. No ruling has been or will be sought from the Internal
Revenue Service (the "IRS") concerning the U.S. Federal income tax
consequences of the Distributions, and the IRS could take a position
contrary to Cravath, Swaine & Moore's opinion. To read about the Federal
income tax consequences of the Distributions, see "The Destinations
Distribution -- Federal Income Tax Consequences of the Distributions."
ITT as an independent entity can consummate such a tax-free spin-off
immediately; an acquiror (whether by purchase or merger) in a transaction
that is taxable in whole or in part (including the acquisition of ITT
proposed by Hilton) would be unable to undertake a tax-free distribution
of ITT assets for a period of five years. Compared to a taxable sale of
ITT's telephone directories publishing business and post-secondary
technical education business, the Distributions will save ITT in excess of
$500 million in U.S. Federal income taxes. Further, the tax-free nature of
transactions such as the Distributions is under increasing scrutiny in the
Congress. Accordingly, it is possible that in the future legislation will
be passed that might eliminate or restrict the ability of ITT to undertake
the Distributions on a tax-free basis.
Q9: WHAT WILL ITT STOCKHOLDERS RECEIVE IN THE DESTINATIONS DISTRIBUTION?
A: In the Destinations Distribution, ITT stockholders will receive one share
of Company Common Stock and one right (a "Right") issued under the
Company's Stockholders Rights Plan (the "Rights Plan") for each share of
ITT Common Stock that they own. After the Destinations Distribution, ITT
stockholders will still own their ITT shares and the same stockholders
will still own all of ITT's businesses, but as separate investments rather
than a single investment.
After the Distributions, ITT will send a letter to stockholders that will
explain the way to allocate tax basis in the shares distributed to them
and in ITT shares.
Q10: WHAT DOES AN ITT STOCKHOLDER NEED TO DO NOW?
A: Nothing. Stockholder approval is not required under applicable law. The
Company is NOT asking ITT stockholders for a proxy. ITT has decided not to
submit the Destinations Distribution for a vote of ITT stockholders
because under Nevada law such a vote is not required. The 1995 division of
the businesses of ITT's predecessor was submitted for advisory approval of
stockholders as part of a series of stockholder proposals related to the
terms of that transaction that required stockholder approval. In 1995,
certain elements of ITT's predecessor's plan required stockholder
approval, although the distributions themselves did not. The board of
directors of ITT's predecessor reserved the right to proceed with that
transaction even if stockholder approval was not obtained. In the context
of the Destinations Distribution, no other transaction in the
Comprehensive Plan requires stockholder approval, including the
organization of the Company, the Stock Tender Offer, the Debt Tender Offer
or the ITT Educational Distribution.
ITT stockholders should NOT send in their ITT stock certificates. ITT
stockholders will automatically receive their shares of Company Common
Stock.
Q11: WHAT EFFECT WILL THIS HAVE ON THE OFFER BY HILTON FOR ITT SHARES?
A: On January 31, 1997, HLT Corporation ("HLT"), a wholly owned subsidiary of
Hilton, commenced a tender offer (the "Hilton Offer") to purchase
61,145,475 shares, approximately 50.1% of the outstanding shares, of ITT
Common Stock at a purchase price of $55 per share, net to the seller in
cash, upon the terms and subject to the conditions set forth in HLT's
Offer to
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Purchase dated January 31, 1997 (the "Hilton Offer to Purchase"). Hilton
stated that if the Hilton Offer were successful, Hilton intended to
consummate a merger (the "Proposed Squeeze Out Merger" and, together with
the Hilton Offer, the "Hilton Transaction") pursuant to which each share
of ITT Common Stock not tendered and purchased pursuant to the Hilton
Offer (other than shares owned by Hilton and its subsidiaries or held in
ITT's treasury) would be converted into the right to receive a number of
shares of Hilton common stock having a nominal value of $55 per share,
subject to unspecified collar provisions. On August 7, 1997, Hilton
amended the Hilton Offer to increase the offered purchase price to $70 per
share of ITT Common Stock and to indicate that each share not tendered
pursuant to the Hilton Offer would be converted in the Proposed Squeeze
Out Merger into the right to receive a number of shares of Hilton common
stock having a nominal value of $70 per share subject to unspecified
collar provisions. The ITT Board has unanimously determined that the
Hilton Transaction, including the Hilton Offer, as amended, is inadequate
and not in the best interests of ITT.
The ITT Board believes that the business justifications for the
Comprehensive Plan are compelling without regard to the Hilton Offer and
intends to pursue the plan even if Hilton withdraws its interest in
acquiring ITT. However, in reviewing the Comprehensive Plan, the ITT
Board took account of the possibility that the transactions contemplated
by the Comprehensive Plan could adversely affect the Hilton Offer. The
ITT Board also considered appropriate governance mechanisms for the
Company designed to achieve the objectives of fostering management
continuity needed to implement the Company's strategic plan, deterring
abusive takeover tactics and, if necessary, maximizing the Company's
negotiating leverage in the face of a hostile offer and thereby
protecting the interests of the Company's stockholders and other
constituencies. A detailed discussion of the reasons why the ITT Board
approved the Comprehensive Plan as in the best interests of the
stockholders and other constituencies of ITT is set forth under "The
Destinations Distribution -- Reasons For the Comprehensive Plan."
The ITT Board also considered the advice of counsel to ITT that, although
there is no IRS ruling or case law that is dispositive of the issue, in
such counsel's view, the Destinations Distribution should not create a
tax-related impediment to an unsolicited offer by Hilton to acquire the
Company after the Destinations Distribution. The ITT Board recognized
that this advice was based on an interpretation of tax laws and the
provisions of pending legislation as of the time it was expressed, rather
than binding precedent, and accordingly was not free from doubt and was
subject to revision if pending tax legislation changed.
As a result of the Comprehensive Plan, including the Destinations
Distribution, and in light of statements by Hilton that it is interested
in the Company's hotels and gaming business, it is likely that Hilton
will withdraw the Hilton Offer after completion of the Destinations
Distribution. Although ITT is not able to predict Hilton's future
actions, Hilton has stated publicly that if ITT completes the
Destinations Distribution, Hilton will abandon its attempt to acquire ITT
and will not pursue an acquisition of the Company.
If Hilton were to acquire the Company, and all employees who are entitled
to severance payments were terminated, the aggregate amount of all such
severance payments would be approximately $165 million. See "Management
and Executive Compensation -- Severance Agreements."
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and the Company's Amended and Restated
By-laws (the "By-laws"), the Rights Plan and certain provisions of
Chapter 78 of Nevada Revised Statues, the General Corporation Law of the
State of Nevada (the "NGCL"), may have the effect of delaying or making
more difficult an acquisition of control of the Company in a transaction
that is not approved by the Board of Directors of the Company (the
"Board"). See "The Destinations Distribu-
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tion -- Effect of the Destinations Distribution on the Hilton Offer."
Q12: WHOM SHOULD ITT STOCKHOLDERS CALL IF THEY HAVE ADDITIONAL QUESTIONS?
A: Additional questions relating to the Destinations Distribution should be
directed to the Company's information agent, Georgeson & Company Inc.,
Wall Street Plaza, New York, New York 10005, telephone number: (800)
223-2064. Written inquiries may also be directed to Director of Investor
Relations, ITT Destinations, Inc., 1330 Avenue of the Americas, New York,
New York 10019-5490.
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SUMMARY
This summary highlights selected information from this document, and may
not contain all the information that is important to ITT stockholders. To
understand the Destinations Distribution fully, ITT stockholders should read
this entire document carefully, as well as those additional documents referred
to in this summary and elsewhere. See "Additional Information."
THE DISTRIBUTIONS
The Destinations Distribution is part of the plan of ITT to separate itself
into three distinct publicly owned companies focused on (a) hotels and gaming,
(b) telephone directories publishing and (c) post-secondary technical education.
ITT has substantial experience with the benefits of spin-off transactions.
In 1994, ITT's predecessor spun-off its forestry products subsidiary to create
an independent company. In addition, ITT is the product of the December 1995
separation of a conglomerate (which was then known as "ITT Corporation") that
controlled the businesses now operated by ITT as well as ITT Industries, Inc. (a
New York Stock Exchange listed company trading under the symbol "IIN" that
manufactures a wide variety of high technology and industrial products) and The
Hartford Financial Services Group, Inc. (formerly "ITT Hartford Group, Inc.," a
New York Stock Exchange listed company trading under the symbol "HIG" that
operates one of the largest multiline insurance companies in the United States).
Holders of ITT stock (who have retained the common stock of Rayonier Inc.,
ITT Industries, Inc., and The Hartford Financial Services Group, Inc. previously
distributed by ITT) for the five years through July 1997 have seen their
investment outperform the Standard & Poor's 500 Index by more than 70% and
increase in aggregate value by approximately $15 billion during the same period.
The separation of ITT's three businesses being undertaken now is similar to the
1995 separation by the former ITT Corporation and represents another step in the
transition of the former ITT conglomerate to a group of individually
accountable, strategically focused organizations.
ITT conducts its hotels and gaming business through its subsidiaries,
Sheraton, Ciga and Caesars, conducts its telephone directories publishing
business through its wholly-owned subsidiary, ITT World Directories, and
conducts its post-secondary technical education business through its 83.3%-owned
subsidiary, ITT Educational.
To carry out the separation of its businesses, ITT is placing its hotels
and gaming business in a newly-formed Nevada subsidiary, the Company. ITT is
separating its businesses into three distinct publicly-owned companies, by
distributing to the stockholders of ITT (i) all the shares of Company Common
Stock in the Destinations Distribution and (ii) all the shares owned by ITT of
ITT Educational Common Stock in the ITT Educational Distribution.
After the Distributions, ITT's only business will be its telephone
directories publishing business and the shares of ITT Common Stock held by ITT
stockholders will represent an ownership interest in that business. ITT will
continue to own ITT World Directories, which, directly and through operating
subsidiaries, will continue to conduct the telephone directories publishing
business. Ownership of ITT's hotels and gaming business will be represented by
the shares of Company Common Stock that ITT stockholders will receive in the
Destinations Distribution and ownership of ITT's post-secondary technical
education business will be represented by the shares of ITT Educational Common
Stock that ITT stockholders will receive in the ITT Educational Distribution.
THE DESTINATIONS DISTRIBUTION
In the Destinations Distribution, ITT stockholders will receive one share
of Company Common Stock for each share of ITT Common Stock that they own. This
represents a continuing interest in ITT's hotels and gaming business. Each share
of Company Common Stock automatically will include a Right issued under the
Rights Plan (see "Description of Capital Stock -- Rights Plan" for a description
of the Rights Plan).
Based on 116,528,691 shares of ITT Common Stock outstanding as of June 30,
1997 and the number of shares of ITT Common Stock offered for purchase in the
Stock Tender Offer, 86,528,691 shares of Company Common Stock will be
distributed. The shares to be distributed will constitute all of the outstanding
shares of Company Common Stock immediately after the Destinations Distribution.
Stockholders will not be required to pay for any shares of Company Common Stock
or to sur-
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render or exchange shares of ITT Common Stock to receive shares of Company
Common Stock.
After the Distributions, ITT intends to change its name to "ITT Information
Services, Inc." and the Company intends to change its name to "ITT Corporation."
Although the Company is newly formed, this document describes the historic
activities of ITT's hotels and gaming business as though it was conducted by the
Company. This document uses the term "ITT ISI" in reference to ITT after the
Distributions, at which time ITT World Directories will be its only direct
subsidiary.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Destinations Distribution has been structured so that neither ITT nor
its stockholders will recognize any gain or loss for U.S. Federal income tax
purposes in connection with the Destinations Distribution. Prior to the
Distributions, Cravath, Swaine & Moore, counsel to ITT, will deliver an opinion
to ITT stating that, for U.S. Federal income tax purposes, the Distributions
will be tax-free to ITT and to its stockholders and further that an acquisition
of ITT, ITT Educational or the Company by Hilton after the Distributions should
not adversely affect the tax-free nature of the Distributions. The opinion is
subject to certain factual representations and assumptions. No ruling has been
or will be sought from the IRS concerning the U.S. Federal income tax
consequences of the Distributions, and the IRS could take a position contrary to
Cravath, Swaine & Moore's opinion. In the event that the Distributions failed to
qualify as tax-free spinoffs under Section 355 of the Internal Revenue Code of
1986 (the "Code") (or if, as a result of the application of Section 355(e) to
the Distributions, ITT recognized taxable gain with respect to the
Distributions), the Company estimates that the aggregate shared corporate-level
U.S. Federal income tax liability in that regard of ITT ISI, ITT Educational and
the Company would be approximately $1.4 billion. Generally, under the Tax
Allocation Agreement and the Amended and Restated Tax Allocation Agreement (each
as defined herein), the Company will be responsible for the full amount of such
liability, unless such liability arises as a result of certain actions or
omissions of ITT Educational and/or ITT ISI. See "The Company's Relationship
With ITT After the Destinations Distribution--Tax Allocation Agreements." In
addition, if the Distributions failed to qualify as tax-free under Section 355
of the Code, the Company estimates that the aggregate tax liability to ITT's
stockholders (after considering an assumed portion of tax-exempt stockholders)
would be approximately $1.4 billion. None of ITT ISI, ITT Educational or the
Company will be obligated to indemnify ITT's stockholders for any such tax
liability.
ITT as an independent entity can consummate a tax-free spin-off of ITT
assets immediately; an acquiror (whether by purchase or merger) in a transaction
that is taxable in whole or in part (including the acquisition of ITT proposed
by Hilton) would be unable to undertake a tax-free spin-off of ITT assets for a
period of five years. Compared to a taxable sale of the Company's telephone
directories publishing business and post-secondary technical education business,
the Distributions will save ITT in excess of $500 million in U.S. Federal income
taxes. Further, the tax-free nature of transactions such as the Distributions is
under increasing scrutiny in the Congress. Accordingly, it is possible that in
the future legislation will be passed that might eliminate or restrict the
ability of ITT to undertake the Distributions on a tax-free basis.
ACCOUNTING TREATMENT
For the Company's financial reporting purposes, the Destinations
Distribution will be accounted for as if ITT's information services segment,
which consists of ITT's telephone directories publishing and post-secondary
technical education businesses, were being spun off from ITT and discontinued.
EFFECTS OF THE DESTINATIONS DISTRIBUTION ON THE RIGHTS OF ITT STOCKHOLDERS
After the Destinations Distribution, ITT stockholders will be stockholders
of both ITT and the Company. The Company will be governed by Nevada law and the
Company's Articles and By-laws, which differ in certain ways from those of ITT.
ITT will continue to be governed by Nevada law and ITT's Articles of
Incorporation and By-laws.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES, BY-LAWS AND RIGHTS PLAN
Certain provisions of the Articles and By-laws may provide the Board with
more negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of the Company. These provisions include (i)
the availability of capital stock for issuance from time to time at the
discretion of the Board, (ii) the classification of the
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Board into three classes, each of which will serve for a term of three years,
(iii) prohibitions against stockholders calling a special meeting of
stockholders or acting by written consent in lieu of a meeting, (iv)
requirements for advance notice for raising business or making nominations at
stockholders' meetings and (v) the requirement of a supermajority vote to remove
directors with or without cause. These provisions may make difficult an
acquisition of the Company in a transaction not approved by the Board. In
addition, as a result of the classified Board, at least two annual meetings of
stockholders may be required for the Company's stockholders to change a majority
of the members of the Board.
The Company's Rights Plan, which is described elsewhere in this Information
Statement, will also make an acquisition of control of the Company in a
transaction that is not approved by the Board more difficult. See "Description
of Capital Stock -- Rights Plan."
DIVIDEND POLICY OF THE COMPANY
After the Destinations Distribution, the Company does not intend to pay
cash dividends on Company Common Stock for the foreseeable future. Whether the
Company pays cash dividends (and the amount of any such dividends) will be at
the discretion of the Board. The Company expects that it will be restricted from
paying cash dividends by the terms of its new credit agreement and other debt
instruments. Future dividend decisions will be based on, and affected by, a
number of factors, including the terms of any credit facility, indenture or
other agreement binding upon the Company at such time and the Company's
operating results and financial requirements.
ITT has not declared or paid any dividends to date and it is not expected
that ITT ISI will pay any dividends for the foreseeable future. ITT Educational
has not paid any dividends since its initial public offering in December 1994,
and anticipates that it will not pay any cash dividends for the foreseeable
future.
LISTING AND TRADING OF THE COMPANY COMMON STOCK
The Company has applied to have the Company Common Stock listed on The New
York Stock Exchange, Inc. (the "NYSE"), under the symbol "ITT." After the
Destinations Distribution, ITT Common Stock will continue to be listed on the
NYSE, but under the symbol "INF."
There may be a temporary, "when-issued" market for Company Common Stock
shortly before the Destinations Distribution. If there is, stockholders will be
able to sell their right to receive shares of Company Common Stock separately
from shares of ITT Common Stock, subject to completion of the Destinations
Distribution. Such stockholders would have to deliver the shares of Company
Common Stock to the buyer promptly after the Destinations Distribution.
Additionally, there may exist a "when-distributed" market for shares of ITT
Common Stock during this period in which stockholders may sell shares of ITT
Common Stock, but retain the right to receive shares of Company Common Stock in
the Destinations Distribution with respect to such ITT Common Stock.
COMPREHENSIVE PLAN
The Destinations Distribution is an element of the Comprehensive Plan
approved by the ITT Board. The Comprehensive Plan is intended to enhance the
value of the ongoing investment of stockholders as well as to further the
interests of ITT's employees, creditors, customers and the economies and
communities in which ITT operates. The other major elements of the Comprehensive
Plan are:
ITT Educational Distribution. In the ITT Educational Distribution, ITT
will separate its post-secondary technical education business from its telephone
directories publishing business in a transaction similar to, but separate from,
the Destinations Distribution. In that transaction, ITT will distribute to each
of its stockholders approximately 0.25 shares of the common stock, par value
$.01 per share ("ITT Educational Common Stock"), of ITT Educational, the ITT
subsidiary that operates its post-secondary technical education business, for
each share of ITT Common Stock owned by them. Stockholders of ITT will receive a
separate information statement describing the ITT Educational Distribution.
Immediately following the Distributions, ownership of ITT's businesses will
be comprised of (i) shares of Company Common Stock (which will represent
ownership of ITT's hotels and gaming business), (ii) shares of ITT Common Stock
(which will represent ownership of ITT's telephone
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directories publishing business) and (iii) shares of ITT Educational Common
Stock (which will represent ownership of ITT's post-secondary technical
education business).
Stock Tender Offer. On July 17, 1997, ITT commenced the Stock Tender Offer
for up to 30 million shares, or approximately 25.7% of all the outstanding
shares, of ITT Common Stock, at a price of $70 per share, net to the seller in
cash. The Stock Tender Offer is scheduled to expire at 5:00 p.m., New York City
time, on Monday, September 29, 1997.
Allocation of Indebtedness. ITT plans to allocate the indebtedness of ITT
between ITT's hotels and gaming business and telephone directories publishing
business in a manner that is appropriate for the credit capacity and
capitalization requirements of each business. Because the financial
responsibility standards of the U.S. Department of Education applicable to ITT
Educational limit the amount of indebtedness ITT Educational may incur, no
indebtedness will be allocated to ITT Educational. ITT's preferred means of
making this allocation is to replace ITT's existing indebtedness with
indebtedness issued by the entity that ultimately will be liable for such
indebtedness. Accordingly, on August 11, 1997, ITT commenced the Debt Tender
Offer to repurchase all the publicly held debt securities issued by it,
aggregating $2 billion in principal amount. The Debt Tender Offer is scheduled
to expire at 5:00 p.m., New York City time, on Monday, September 29, 1997. In
conjunction with the Debt Tender Offer, ITT plans to repay certain other
indebtedness.
LITIGATION RELATING TO THE COMPREHENSIVE PLAN
On July 16, 1997, ITT filed a complaint in the U.S. District Court for the
District of Nevada seeking, among other relief, a declaratory judgment that
Hilton cannot show that the ITT Board, in approving the Comprehensive Plan,
acted outside its powers or failed to exercise its powers in good faith with a
view to the interests of ITT. ITT also filed a motion with the court seeking a
speedy hearing on its claims.
On August 5, 1997, Hilton filed in the Nevada Federal court answers and
counterclaims to ITT's complaint, claiming, among other things, that the ITT
Board has breached its fiduciary duties and that ITT has made material
misstatements and omissions.
On August 25, 1997, Hilton filed a motion in the Nevada Federal court for
injunctive and preliminary relief seeking, among other things, to enjoin ITT
from proceeding with the Comprehensive Plan. On August 27, 1997, the court set a
hearing date for Hilton's preliminary injunction motion of September 29, 1997.
On September 9, 1997, ITT filed a memorandum in opposition to Hilton's motion.
On September 22, 1997, Hilton filed a reply memorandum in response to ITT's
memorandum in opposition.
CONTINUED REFINEMENT AND IMPLEMENTATION OF STRATEGIC PLAN
The Comprehensive Plan is another step in ITT's refinement of its strategic
plan to focus on hotels and gaming and explore and exploit opportunities to
enhance the value of ITT within that focus. This initiative already has resulted
in the sale of certain of ITT's assets, a continued focus on cost containment,
continued efforts to grow the hotels and gaming business and the pursuit of
transactions that are expected to enhance the profitability, return on assets or
cash flows of that business.
Sale of Assets. As part of its focus on its core business, ITT sold its
interest in Alcatel Alsthom for $830 million, sold a 39.8% interest in Madison
Square Garden for $500 million and contracted through "put" and "call" options
to sell its remaining 10.2% interest for at least $150 million and, with its
partner, Dow Jones, entered into an agreement to sell television station WBIS+
for $257.5 million. The closing of the sale of ITT's interest in WBIS+ is
subject to regulatory approval, and is expected to occur in the fourth quarter
of 1997. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Liquidity and Capital Resources -- Asset Dispositions
and Capital Expenditures."
Cost Containment. The Company plans to continue to focus on cost
containment opportunities in its hotels and gaming business. As part of this
program, ITT implemented a significant restructuring of its World Headquarters
operations (for which it recognized a one-time, pre-tax charge of $58 million),
reducing headcount by 65% and annual expenses by at least $20 million. These
cost savings were achieved even while providing for affected employees' enhanced
severance payments, enhanced pension payments and placement services. As a more
narrowly focused entity, the Company
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plans to continue to reduce costs and complete its evolutionary process by
eliminating the vestiges of its former conglomerate parent. Specifically, the
Company plans to focus on reducing overhead costs at both its hotels and gaming
headquarters as well as operations. Management of the Company believes that
these efforts, which are currently underway, will result in approximately $10
million to $15 million additional in overhead savings during 1998.
Growth of the Hotels and Gaming Business. Within the parameters of the
strategic plan, ITT is actively pursuing opportunities to grow its hotels and
gaming business. Since January 1, 1997, ITT has acquired hotels and signed or
acquired 82 franchise agreements and management contracts in 20 countries,
totalling more than 20,000 rooms, including contracts to manage four former Ritz
Carlton hotels. The Company will continue to purchase hotels and interests in
hotels, add new franchises and seek out additional management opportunities
throughout the world. Such efforts will depend upon individual market conditions
and factors affecting the hotel industry generally.
Enhanced Profitability, Return on Assets and Cash Flows. ITT believes
transactions that enhance the profitability, return on assets or cash flows of
its hotels and gaming operations further the goal of strengthening ITT's core
business. These transactions may include, among other things, joint ventures to
develop, purchase or operate properties and conversions of owned properties to
managed properties. For example, ITT recently entered into a long-term strategic
alliance with FelCor, pursuant to which FelCor acquired five of ITT's hotel
properties and ITT retained long-term contracts to manage such hotels, and an
agreement in principle with Davis Gaming to form a 50/50 joint venture to own
the Desert Inn in Las Vegas, Nevada and the 34 acre parcel of land adjacent to
the Desert Inn, pursuant to which ITT will receive $250 million in cash and
retain a 50% ownership interest and a long-term contract to manage this
property. ITT is also holding the Desert Inn (pending execution of definitive
agreements with Davis Gaming for the joint venture relating to the Desert Inn)
and The Sheraton Casino in Tunica, Mississippi, for sale and is also conducting
detailed reviews of its options with regard to its ownership interest in Ciga
and certain luxury and other hotels, taking into account the best interests of
its stockholders and ITT.
The Company will benefit from the implementation by ITT of, and will
continue to pursue, this strategic plan.
STRATEGIC INVESTMENT
At its July 15, 1997 meeting, the ITT Board approved a definitive
agreement, dated as of July 15, 1997, between ITT and CDRV Acquisition, L.L.C.
("CDRV"), an entity affiliated with Clayton, Dubilier & Rice ("CD&R"), for a
substantial minority investment by CDRV in ITT ISI, which will hold the
telephone directories publishing business following the Distributions. Following
the Distributions, CDRV will purchase approximately 32.9% of the outstanding
common stock of ITT ISI and warrants to purchase shares representing an
additional 13.7% of the outstanding common stock of ITT ISI for aggregate
consideration of $225 million (the "Strategic Investment"). Such warrants will
have a ten year term and permit CDRV to buy common stock of ITT ISI at a 50%
premium to CDRV's initial purchase price. Consummation of the Strategic
Investment is subject to certain conditions including, among other things,
approval of the stockholders of ITT ISI following the Distributions as required
by the rules of the NYSE. Completion of the Strategic Investment (the proceeds
from which are expected to be used primarily to reduce indebtedness of ITT ISI)
is not a condition to the Destinations Distribution and is expected to occur in
the fourth quarter of 1997. Neither CDRV nor CD&R is currently affiliated with
ITT or the Company. Following completion of the Strategic Investment, ITT ISI
will have approximately $1.05 billion in debt, giving ITT ISI an initial
enterprise value, based on the Strategic Investment, of approximately $1.7
billion.
In addition, at the July 15, 1997 meeting, the ITT Board approved the
purchase by ITT for $254 million of BellSouth Corporation's minority interest in
ITT World Directories, which will be the only direct subsidiary of ITT ISI after
the Distributions. The purchase of this interest, which has been consummated,
allows ITT ISI to have 100% of the benefit of the results of operations of ITT
World Directories, allows for a better understanding of ITT ISI by the
investment community, simplifies the corporate and organizational structure of
ITT World Directories and allows for a more effective implementation of the
allocation of ITT's indebtedness. In connection with this transaction, BellSouth
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<PAGE> 16
Corporation received a pro rata portion of a dividend paid by ITT World
Directories, resulting in additional proceeds to BellSouth Corporation of $11
million.
CERTAIN INDEBTEDNESS
ITT plans to finance the Stock Tender Offer, the Debt Tender Offer and the
repayment of certain other indebtedness with a combination of available cash,
approximately $1.275 billion from proceeds of the Subsidiary Notes and
borrowings under the ITT ISI Credit Facilities and $3.3 billion in cash received
from the Company in connection with the First, Second and Third Payments. The
Company will finance the First, Second and Third Payments and certain other
expenses with borrowings under the Company Credit Facilities. After the
Destinations Distribution, the Company will have approximately $4.2 billion of
outstanding indebtedness and ITT ISI and its subsidiaries will have
approximately $1.275 billion of outstanding indebtedness.
Chase and CSI have delivered a letter to ITT stating that they are highly
confident that they will be able to arrange credit facilities and debt
securities offerings for the Company and ITT ISI and its subsidiaries in amounts
sufficient to consummate the Tender Offers and the other elements of the
Comprehensive Plan. In addition, Chase and CSI have delivered the Commitment
Letters to ITT providing for credit facilities in aggregate principal amounts of
(a) $5 billion for the Company, (b) $385 million for Promedia and (c) $270
million for Publimedia. In addition to these credit facilities, Promedia has
issued DM 500 million of the Promedia Notes and Publimedia has issued $225
million of the Publimedia Notes. These Subsidiary Notes are unsecured and
subordinated and have covenants that are typical for high yield offerings. ITT
also expects to arrange the Interim Credit Facilities in an aggregate principal
amount of $225 million. ITT expects that the Interim Credit Facilities will be
repaid with the proceeds of the Strategic Investment. See "The Destinations
Distribution -- Certain Indebtedness" and "-- Strategic Investment."
THE COMPANY'S RELATIONSHIP WITH ITT AFTER THE DESTINATIONS DISTRIBUTION
Following the Destinations Distribution, the Company will be an independent
public company and ITT will have no continuing stock ownership interest in the
Company. The Company will enter into agreements with ITT governing the
relationship between the Company and ITT after the Destinations Distribution.
The Company will also have an agreement with ITT for the allocation of tax and
other liabilities and obligations. The Company will indemnify ITT against
liabilities, litigation and claims arising out of the Company's businesses
following the Destinations Distribution and ITT will indemnify the Company
against liabilities, litigation and claims arising out of ITT's other businesses
following the Destinations Distribution. The Company and ITT will have no common
officers following the Destinations Distribution.
The Board will consist of all eleven persons who are currently directors of
ITT. Three of the current directors of ITT are expected to remain directors of
ITT following the Destinations Distribution.
FORWARD LOOKING STATEMENTS
This Information Statement and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (the "Commission"), as well
as information included in oral statements or other written statements made or
to be made by the Company, contain statements which constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which does not apply to initial public offerings. These statements
appear in a number of places in this document and include, but are not limited
to, all statements relating to plans for future expansion and other business
development activities as well as other capital spending, financing sources and
the effects of regulation (including gaming and tax regulations) and
competition, the terms of the Distributions and all other statements regarding
the intent, plans, belief or expectations of the Company, its directors or its
officers. Stockholders are cautioned that such forward looking statements are
not assurances of future performance or events and involve risks and
uncertainties that could cause actual results and developments to differ
materially from those covered in such forward looking statements. These risks
and uncertainties include, but are not limited to, those relating to leverage
and debt service (including sensitivity to fluctuations in interest rates),
compliance with covenants in loan agreements, conditions in the hotels and
gaming
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<PAGE> 17
industries, global, domestic and local economic conditions, additional capital
requirements, new or intensified competition, volatility of gaming results,
changes in the hotel rate and occupancy environment, efforts of others to
acquire the Company or its assets, development and construction activities (and
completion of such activities in a timely manner), dependence on existing
management and changes in, or changes in the application or enforcement of,
applicable laws or regulations. Consequently, all the forward looking statements
contained in this Information Statement are qualified by the information
contained or incorporated herein, including, but not limited to, the information
contained under this heading and in "Risk Factors," "The Destinations
Distribution," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
The Company has no obligation to publicly release any revision to any
forward looking statement contained or incorporated herein to reflect any future
events or occurrences.
14
<PAGE> 18
ITT DESTINATIONS, INC.
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial data
which has been derived from the Company's audited consolidated financial
statements as of and for the three years ended December 31, 1996 and the
Company's unaudited consolidated financial statements as of and for the two
years ended December 31, 1993 and for the six months ended June 30, 1997 and
1996 and as of June 30, 1997. The summary financial information contained herein
is prepared to reflect the discontinuance of ITT's information services segment,
which includes ITT's telephone directories publishing business (ITT World
Directories) and post-secondary technical education business (ITT Educational).
The information set forth below should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related Notes thereto included in this Information Statement.
The following information is qualified in its entirety by the information and
financial statements appearing elsewhere in this Information Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues................................ $2,815 $2,740 $5,718 $5,396 $3,876 $3,184 $3,109
Income (loss) from continuing operations
before accounting changes(1).......... $ 259 $ 86 $ 183 $ 117 $ 44 $ (38) $ (68)
Earnings (loss) per share from
continuing operations before
accounting changes(1)................. $ 2.19 $ .72 $ 1.55 $ .98 $ .37 $ (.32) $ (.58)
OPERATING DATA:
Hotel operating income (loss)........... $ 181 $ 158 $ 371 $ 197 $ 152 $ 76 $ (30)
Gaming operating income................. 98 117 212 168 -- -- --
Dispositions and other operating income
(loss)(1)............................. (120) (43) (84) 29 (13) (111) (54)
------ ------ ------ ------ ------ ------ ------
Total operating income (loss)........... $ 159 $ 232 $ 499 $ 394 $ 139 $ (35) $ (84)
EBITDA(2):
Hotel Segment......................... 270 230 530 376 239 167 70
Gaming Segment........................ 132 149 277 243 -- -- --
Corporate expenses and overhead....... (39) (46) (75) (93) (110) (115) (118)
------ ------ ------ ------ ------ ------ ------
Total.......................... 363 333 732 526 129 52 (48)
Cash from continuing operating
activities............................ $ 1 $ 108 $ 377 $ 400 $ 164 $ 67 $ 10
Cash from (used for) investing
activities............................ 1,233 (82) (595) (2,686) (1,450) (332) (132)
Cash from (used for) financing
activities............................ (1,102) (41) 250 2,024 610 392 520
Number of employees (in thousands)...... 33 34 33 34 21 14 14
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, --------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $8,160 $8,922 $8,225 $4,873 $3,629 $3,131
Long-term debt, including allocated debt
and capital leases...................... $1,789 $2,893 $2,634 $ 599 $ 169 $ 186
</TABLE>
- ---------------
(1) Excluding several one-time items and the results of certain assets held for
sale, income from continuing operations and earnings per share from
continuing operations for the first six months of 1997 were $99 and $0.83,
respectively, compared with $83 and $.69, respectively, for the first six
months of 1996. These comparable year-over-year results represent increases
of 19% and 20% in income from continuing operations and earnings per share
from continuing operations, respectively. The one-time items reflected in
the 1997 results include (i) a $183 pre-tax gain on the sale of 7.5 million
shares of Alcatel Alsthom, (ii) a $200 pre-tax gain on the sale of the
Company's 39.8% ownership interest in Madison Square Garden, (iii) a $58
pre-tax charge in connection with the restructuring of the Company's World
Headquarters operations and (iv) a $29 pre-tax charge for costs associated
with the Hilton Offer.
(2) EBITDA, as defined in the following sentence, is presented here as an
alternative measure of our 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, gains on asset
sales, assets held for sale, restructuring charges, service fee income and
miscellaneous income (expense), net. Management believes the EBITDA
information presented supplementally is a useful measure of operating
performance because it is industry practice to evaluate hotel and gaming
properties based on operating income before interest, income taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
because it is customarily used by certain investors and analysts together
with net income and cash flow from operations as defined by generally
accepted accounting principles, in evaluating a company's ability to service
its debt. The calculation of EBITDA does not include the commitments of the
Company for capital expenditures and payment of debt. 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 Company. The Company's definition of EBITDA as
presented herein may not be comparable to similarly titled measures of other
companies due to the inclusion or exclusion of certain financial measures.
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<PAGE> 19
RISK FACTORS
The following factors should be considered in addition to other information
included in this Information Statement.
LEVERAGE AND DEBT SERVICE
Upon the consummation of the Distributions and the Tender Offers, the
Company will be more leveraged than ITT was prior to the consummation of such
transactions and will have indebtedness that is substantial in relation to its
stockholders' equity. As of June 30, 1997, on a pro forma basis after giving
effect to the Distributions and the Tender Offers, the Company and its
consolidated subsidiaries would have had an aggregate of approximately $4.2
billion of outstanding indebtedness (representing approximately 68% of its total
capitalization).
The Company's leverage could have important consequences for stockholders,
including the following: (i) the Company's ability to obtain additional
financing on favorable terms may be impaired in the future; (ii) a portion of
the Company's cash flow from operations will be dedicated to the payment of
principal and interest on the Company's indebtedness, thereby reducing the funds
available for other purposes; (iii) covenants contained in the Company Credit
Facilities or other financing agreements may restrict the Company's ability to
dispose of assets, incur additional indebtedness, repay other indebtedness, pay
dividends, create liens on assets, make investments or acquisitions, engage in
certain mergers or consolidations, make capital expenditures, or engage in other
corporate activities; and (iv) the Company may be more leveraged than some of
its competitors, which may affect its ability to adjust rapidly to changing
market conditions and could make the Company more vulnerable in the event of a
downturn in general economic conditions or in the Company's business.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to its indebtedness will depend on the Company's
financial and operating performance, which, in turn, is subject to prevailing
economic conditions and to certain financial, business and other factors beyond
the Company's control. If the Company's cash flow and capital resources are
insufficient to fund its debt service obligations, the Company may be forced to
reduce or delay planned expansion and capital expenditures, sell assets, obtain
additional equity capital or restructure its debt. Although the Company's
management believes that the Company's cash flow will be adequate to meet
interest and principal payments, there can be no assurance that the Company's
operating results, cash flow and capital resources will be sufficient for
payment of its indebtedness in the future. See "The Destinations
Distribution -- Certain Indebtedness" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RESTRICTIONS IMPOSED BY FINANCINGS
The Company intends to enter into the Company Credit Facilities prior to
the consummation of the Destinations Distribution. The Company Credit Facilities
are expected to contain certain financial and other covenants, including
maintenance of certain financial tests and ratios, limitations on capital
expenditures and restrictions on the incurrence of debt or liens, the sale of
assets, the payment of dividends, transactions with affiliates and other
transactions. A failure to comply with the covenants included in the Company
Credit Facilities would generally result in an event of default thereunder,
permitting lenders under the Company Credit Facilities to accelerate the
maturity of and to foreclose upon the collateral securing such indebtedness.
Under such circumstances, there can be no assurance that the Company would have
sufficient assets to satisfy all of its obligations, including its obligations
under the Company Credit Facilities. See "The Destinations Distribution--Certain
Indebtedness."
The obligations of the Company under the Company Credit Facilities are
expected to be secured by a first priority perfected security interest in: (i)
all of the tangible (excluding mortgages on real property) and intangible assets
of the Company and its direct and indirect domestic subsidiaries (excluding
gaming subsidiaries), (ii) all of the capital stock and intercompany obligations
of each of the Company's direct and indirect domestic subsidiaries (excluding
gaming subsidiaries) and (iii) 66% of the capital stock and
16
<PAGE> 20
intercompany obligations of certain of the Company's foreign subsidiaries. See
"The Destinations Distribution--Certain Indebtedness."
COMPETITION
HOTEL OPERATIONS. Competition in the hotel industry is vigorous and is
generally based on quality and consistency of service, attractiveness of
facilities and locations, availability of a global reservation system, price and
other factors. Room revenues, which are determined by occupancy levels and room
rates, have continued to be constrained in certain of the markets in which the
Company's hotels are located as a result of economic factors, overbuilt markets,
price sensitive customers and other factors. The principal competitors of
Sheraton hotels include Marriott, Westin, Hyatt, Four Seasons, Hilton and
various other hotels, motels and inns located in the markets in which Sheraton
hotels compete. Ciga faces similar competitive dynamics in its markets.
GAMING OPERATIONS. The Company's gaming operations face intense
competition from other companies in the gaming industry. The Company's Las Vegas
properties compete primarily with casino/hotels on the Las Vegas "strip," and to
a lesser extent with operations outside of Las Vegas and the state of Nevada.
Although the Las Vegas market has absorbed recent growth, the trend of industry
expansion is expected to continue over the next several years. It is possible
that the expansion of existing casinos and the opening of additional
casino/hotels may further increase competition. The Company's casino facilities
in Stateline, Nevada; Atlantic City, New Jersey; and Tunica, Mississippi also
face intense competition for similar reasons and under similar circumstances.
The Company's hotel/casino and casino operations are likely to experience
increased competition if other states authorize casino gaming, and this may
adversely affect the Company's results. Competition in the gaming industry is
generally based on the quality of the facilities and services and the
entertainment offered at such facilities. In addition, the Company believes that
name and reputation are significant competitive factors. See
"Business -- Competition."
REGULATION
The Company's gaming operations are subject to the casino gaming laws,
regulations and supervisory procedures of Nevada, New Jersey, Indiana,
Mississippi, Ontario and Nova Scotia. Such laws, regulations and supervisory
procedures are extensive and reflect certain public policy considerations as to
(i) the integrity of casino gaming operations and their participants, (ii) the
need for strict governmental and regulatory control of casino gaming operations,
(iii) the creation of economic development, taxes and employment, and (iv) the
maintenance and development of public confidence and trust in casino gaming
regulation and control. Changes to such laws, regulations and supervisory
procedures could have an adverse effect on the Company's casino gaming
operations. See "Business -- Governmental Regulation and Related Matters."
The riverboat under construction by the Company in Harrison County,
Indiana, must comply with U.S. Coast Guard requirements as to boat design,
on-board facilities, equipment, personnel and safety and must hold a Certificate
of Seaworthiness or must be approved by the American Bureau of Shipping for
stabilization and flotation, and may also be subject to local zoning and
building codes. The U.S. Coast Guard requirements establish design standards,
set limits on the operation of the vessel and require individual licensing of
all personnel involved with the operation of the vessel. Loss of the vessel's
Certificate of Seaworthiness or the American Bureau of Shipping approval would
preclude the vessel's use as a floating casino.
As is the case with any owner or operator of real property, the Company is
subject to a variety of Federal, state and local governmental regulations
relating to the use, storage, discharge, emission and disposal of hazardous
materials. Failure to comply with environmental laws with respect to currently
owned properties and to have complied with environmental laws in the past with
properties no longer owned by the Company could result in the imposition of
severe penalties or restrictions on operations by government agencies or courts
of law which could adversely affect operations. While the Company is unaware of
any significant environmental hazard on properties it owns or has owned, in the
event of any discovery of such hazard, severe penalties, including the costs of
remediation, could be sought against the Company.
17
<PAGE> 21
CONSTRUCTION AND DEVELOPMENT RISKS
Construction projects, including the planned Harrison County riverboat
project, entail significant risks, including management's ability to control and
manage such projects effectively, shortages of materials or skilled labor,
unforeseen engineering, environmental or geological problems, work stoppages,
weather interference, difficulties in obtaining governmental permits or other
regulatory approvals and unanticipated cost increases. No assurance can be given
that the budgeted costs of the Company's current and future projects will not be
exceeded or that any such projects will commence operations within contemplated
schedules, if at all. In addition, the scope of the licenses, permits and
authorizations required to construct and open a new facility or expand an
existing facility are extensive, and the failure to obtain, or delay in
obtaining, such licenses, permits and authorizations could prevent or delay the
completion of construction or opening of all or part of such facilities, affect
the design of features of the project or increase completion costs.
Any development of new facilities will require the Company to make a
substantial capital investment and, depending on timing, may require additional
debt or equity financing. There can be no assurance that the cash flow generated
by the operations of the Company or any other new venture will be sufficient to
service any additional debt which may be incurred in connection therewith. There
also can be no assurance that additional financing in respect of such
development efforts can be obtained which is acceptable to the Company. Further,
there can be no assurance that any expansion or development projects will add
proportionately to the Company's results of operations or generate acceptable
returns. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
CERTAIN PROJECTIONS
Officers of the Company have been publicly quoted as saying that the
Company has the ability to add $170 million to its cash flow in 1998. As a
result of its approximately $1.2 billion investment in gaming facilities and as
part of the regular budgeting and monitoring process, the Company regularly
evaluates its capital investments in its existing and new facilities and
estimates the return it expects to receive from such investments. The $170
million cash flow growth anticipated in the near future is expected to come
primarily from three large capital investment projects -- significant expansions
and renovations at Caesars Palace in Las Vegas, Nevada and Caesars Atlantic City
in Atlantic City, New Jersey and a nearly $300 million investment in a new
riverboat complex in Indiana. In the Company's opinion, these statements do not
conflict with, nor are they inconsistent with, the information contained in this
Information Statement. The anticipated cash flow growth is based on the
Company's historical returns and expectations in respect of these projects and
current market conditions, the Company's understanding of the reported results
of similar investments by other companies and the Company's expectations
regarding the timetable for completion of these projects and the obtaining of
regulatory approvals required in respect thereof. As is the case with any
projections, however, the Company cannot make any assurance that such cash flow
growth will be achieved. Actual cash flow growth may be less than that
anticipated and the difference may be material, particularly as a result of the
factors discussed under "Summary -- Forward Looking Statements." In considering
this projection and any other projection of the Company, readers should
carefully review the information set forth under the sections entitled
"Summary -- Forward Looking Statements," "ITT Destinations, Inc. Unaudited Pro
Forma Consolidated Financial Statements," "ITT Destinations, Inc. Selected
Historical Financial and Operating Data," "Business" and the financial
statements of the Company attached hereto and consider such projections in view
of, and as limited by, such information.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCOPORATION AND BY-LAWS
Certain provisions of the Company's Articles and By-laws may provide the
Board with more negotiating leverage by delaying or making more difficult
unsolicited acquisitions or changes of control of the Company and could have the
effect of discouraging third parties from making proposals involving an
unsolicited acquisition or change of control of the Company, although such
proposals, if made, might be considered desirable by a majority of our
stockholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of the management of the
Company without the concurrence of the Board. These provisions include (i) the
availability of capital stock for issuance from time
18
<PAGE> 22
to time at the discretion of the Board (see "Description of Capital
Stock--Authorized But Unissued Capital Stock"), (ii) the classification of the
Board into three classes, each of which serves for a term of three years, (iii)
prohibitions against stockholders calling a special meeting of stockholders or
acting by written consent in lieu of a meeting, (iv) requirements for advance
notice for raising business or making nominations at stockholders' meetings and
(v) the requirement of a super-majority vote to remove directors with or without
cause. See "Description of Capital Stock--Provisions of the Company's Articles
of Incorporation and By-laws Affecting a Change in Control." Certain provisions
of Nevada corporate law may also have an anti-takeover effect. See "Description
of Capital Stock--Nevada General Corporation Law." In addition, the Rights Plan
may render an unsolicitated takeover of the Company more difficult or less
likely to occur or might prevent such a takeover. See "Description of Capital
Stock--Rights Plan." For a discussion of certain approvals required under
applicable gaming laws in the case of certain acquisitions of securities of the
Company, see "Business--Governmental Regulation and Related Matters."
TAX MATTERS
Cravath, Swaine & Moore, counsel to ITT, is of the opinion that, for U.S.
Federal income tax purposes, the Distributions will qualify as tax-free
spin-offs under Section 355 of the Code. As a result, no gain or loss will be
recognized by (and no amount will be includible in the income of) either ITT or
the holders of ITT Common Stock solely as a result of the distribution or
receipt of shares of Company Common Stock and ITT Educational Common Stock in
connection with the Distributions.
Although there is no IRS ruling or case law that is dispositive of the
issues, Cravath, Swaine & Moore is also of the opinion that, under existing U.S.
Federal income tax laws (including recently enacted Section 355(e) of the Code
(the "New Legislation")), an acquisition of ITT, ITT Educational or the Company
by Hilton should not adversely affect the tax-free status of the Distributions.
That opinion is based on an interpretation of tax laws, including the New
Legislation, rather than on binding precedent, and accordingly is not free from
doubt.
If the Distributions occurred and failed to qualify under Section 355 of
the Code as tax-free spin-offs (or if, as a result of the application of the New
Legislation to the Distributions, ITT recognized taxable gain with respect to
the Distributions), the resulting corporate-level U.S. Federal income tax
liability would be material (any such resulting corporate-level tax liability, a
"Distribution Tax"). ITT estimates that the aggregate corporate U.S. Federal
income tax liability that would result under the preceding sentence would be
approximately $1.4 billion.
Under the relevant statutory rules, the Company, ITT ISI and ITT
Educational would each be severally liable for any corporate-level tax that
arises in connection with either the Destinations Distribution or the ITT
Educational Distribution, however, pursuant to the Tax Allocation Agreement and
the Amended and Restated Tax Allocation Agreement, the Company will be liable
for any Distribution Tax unless such Distribution Tax arises as a result of
certain actions or omissions of ITT Educational and/or ITT ISI. See "The
Company's Relationship with ITT after the Destinations Distribution--Tax
Allocation Agreements" for a more detailed discussion of the Tax Allocation
Agreement and the Amended and Restated Tax Allocation Agreement.
In addition, if the Distributions failed to qualify under Section 355 of
the Code as tax-free spin-offs, ITT estimates that the aggregate U.S. Federal
income tax liability of ITT's stockholders (after considering an assumed portion
of tax-exempt stockholders) would be approximately $1.4 billion. None of the
Company, ITT ISI or ITT Educational will be obligated to indemnify ITT's
stockholders for any such tax. See "The Destinations Distribution -- Federal
Income Tax Consequences of the Distributions" for a detailed discussion of the
U.S. Federal income tax consequences of the Distributions.
NO PRIOR PUBLIC TRADING MARKET; VARIATION IN QUARTERLY OPERATING RESULTS
Prior to the Destinations Distribution, there has been no public market for
the Company Common Stock, and there can be no assurance that an active trading
market will develop or, if one does develop, that it will continue. Until
Company Common Stock is fully distributed and an orderly market develops in
Company Common Stock, the price at which such stock trades may fluctuate
significantly and may be higher or lower
19
<PAGE> 23
than the price that would be expected for a fully distributed issue. The price
of Company Common Stock will be determined in the marketplace and may be
influenced by many factors, including (i) the depth and liquidity of the market
for Company Common Stock, (ii) developments affecting the Company's businesses
generally, (iii) the Company's dividend policy, (iv) investor perception of the
Company's business and the hotel and gaming industries generally and (v) general
economic and market conditions. In the short term, the Company's stock price may
also be impacted by developments in Hilton's efforts to acquire ITT.
As a result of the Distributions, the trading price of ITT Common Stock
will be lower immediately following the Distributions as compared to the trading
price of ITT Common Stock immediately prior to the Distributions, although the
receipt of the shares of Company Common Stock and ITT Educational Common Stock
is expected to offset such effect. The aggregate market values of ITT Common
Stock, Company Common Stock and ITT Educational Common Stock after the
Distributions may be less than, equal to or greater than the market value of ITT
Common Stock prior to the Distributions.
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations, and quarterly comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance. In addition, fluctuations in quarterly results could affect the
market price of the Company Common Stock in a manner unrelated to the longer
term operating prospects of the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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THE DESTINATIONS DISTRIBUTION
GENERAL
The ITT Board unanimously has approved the distribution of all of the
outstanding shares of Company Common Stock to all holders of ITT Common Stock.
The Destinations Distribution is being made on , 1997 (the
"Distribution Date") to stockholders of record of ITT at the close of business
on that date (the Distribution Date is also the "Record Date"). In the
Destinations Distribution, stockholders will receive one share of Company Common
Stock for each share of ITT Common Stock held on the Record Date. Stockholders
will not be required to pay for shares of Company Common Stock received in the
Destinations Distribution, or to surrender or exchange shares of ITT Common
Stock in order to receive shares of Company Common Stock. Stockholders will not
vote on the Destinations Distribution, and stockholders have no appraisal rights
in connection with the Destinations Distribution.
After the Destinations Distribution, the Company will be an independent
public company. The number and identity of the Company's stockholders
immediately after the Destinations Distribution will be the same as the number
and identity of the stockholders of ITT at the close of business on the Record
Date. Immediately after the Destinations Distribution, the Company expect to
have approximately 56,000 holders of record of shares of Company Common Stock
and 86,528,691 shares of Company Common Stock outstanding, based on the number
of record stockholders and outstanding shares of ITT Common Stock on June 30,
1997 and the number of shares of ITT Common Stock offered for purchase in the
Stock Tender Offer. The Destinations Distribution will not affect the number of
outstanding shares of ITT Common Stock or your rights as an ITT stockholder.
After the Distributions, ITT intends to change its name to "ITT Information
Services, Inc." and the Company intends to change its name to "ITT Corporation."
See "-- Reasons for the Comprehensive Plan" for a discussion of the
background and the ITT Board's reasons for adapting the Comprehensive Plan,
including the Destinations Distribution.
MANNER OF EFFECTING THE DESTINATIONS DISTRIBUTION
Prior to the Destinations Distribution, ITT delivered all outstanding
shares of Company Common Stock to The Bank of New York, the Company's transfer
agent and, for purposes of the Destinations Distribution, the distribution agent
(the "Distribution Agent"). The Distribution Agent will mail, beginning on or
about the Distribution Date, certificates representing the shares of Company
Common Stock to ITT stockholders of record on the Record Date. Stockholders will
receive one share of Company Common Stock for each share of ITT Common Stock
held on the Record Date.
The Board has adopted a Rights Plan. Certificates evidencing shares of
Company Common Stock issued in the Destinations Distribution also represent an
identical number of Rights issued under the Rights Plan. See "Description of
Capital Stock -- Rights Plan." Unless the context otherwise requires, references
to Company Common Stock include the Rights.
In order to be entitled to receive shares of Company Common Stock in the
Destinations Distribution, a person must be a stockholder of ITT at the close of
business on the Record Date, which is , 1997.
If stockholders of ITT have questions relating to the Destinations
Distribution, they should contact the Company's information agent, Georgeson &
Company Inc., Wall Street Plaza, New York, New York 10005, telephone number:
(800) 223-2064. Stockholders may also direct written inquiries to the Company's
Director of Investor Relations, ITT Destinations, Inc., 1330 Avenue of the
Americas, New York, New York 10019-5490.
REASONS FOR FURNISHING THIS INFORMATION STATEMENT
This Information Statement is being furnished to stockholders of ITT who
will receive shares of Company Common Stock in the Destinations Distribution
solely to provide information to them concerning
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the Destinations Distribution and the shares of Company Common Stock they will
receive in the Destinations Distribution. It is not, and is not to be construed
as, an inducement or encouragement to buy or sell any of the Company's
securities or those of ITT. The Company believes the information contained in
this Information Statement is accurate as of the date set forth on its cover.
Changes may occur after that date, and the Company will not update the
information except in the normal course of its public disclosure practices.
COMPREHENSIVE PLAN
The Destinations Distribution is an element of the Comprehensive Plan
approved by the ITT Board. The other major elements of the Comprehensive Plan
are:
ITT EDUCATIONAL DISTRIBUTION. In the ITT Educational Distribution, ITT
will separate its post-secondary technical education business from its telephone
directories publishing business in a transaction similar to, but separate from,
the Destinations Distribution. In that transaction, ITT will distribute to each
of its stockholders approximately 0.25 of a share of ITT Educational Common
Stock, which represents ownership of the ITT subsidiary that operates its
post-secondary technical education business, for each share of ITT Common Stock
owned by them on the record date for the ITT Educational Distribution.
Stockholders of ITT will receive a separate information statement describing the
ITT Educational Distribution.
Immediately following both Distributions, each ITT stockholder's ownership
of ITT's businesses will be comprised of (i) shares of Company Common Stock
(which will represent ownership of ITT's hotels and gaming business), (ii)
shares of ITT Common Stock (which will represent ownership of ITT's telephone
directories publishing business) and (iii) shares of ITT Educational Common
Stock (which will represent ownership of ITT's post-secondary technical
education business).
STOCK TENDER OFFER. On July 17, 1997, ITT commenced the Stock Tender Offer
for up to 30 million shares, or approximately 25.7% of all the outstanding
shares, of ITT Common Stock, at a price of $70 per share, net to the seller in
cash. The Stock Tender Offer will expire at 5:00 p.m., New York City time, on
Monday, September 29, 1997, unless and until ITT, in its sole discretion, shall
have extended the period of time during which the Stock Tender Offer is open. If
the Stock Tender Offer is oversubscribed, shares of ITT Common Stock tendered
before the expiration date will be subject to proration. ITT expects, although
it is not obligated, to extend the Stock Tender Offer, subject to the other
terms and conditions thereof, until such time as all required approvals for the
Stock Tender Offer and the Destinations Distribution are obtained.
The Stock Tender Offer is not conditioned upon any minimum number of shares
of ITT Common Stock being tendered, but is, however, subject to certain other
conditions, including (i) receipt of financing on acceptable terms, (ii)
satisfaction of all conditions to consummation of the Destinations Distribution
(other than in respect of the Stock Tender Offer), (iii) ITT being satisfied, in
its reasonable discretion, that there exists no significant impediment, or a
material likelihood of a significant impediment, to the timely consummation of
the Destinations Distribution on substantially the terms described herein, (iv)
receipt of regulatory approvals, (v) the absence of threatened, instituted or
pending actions, proceedings or other litigation, (vi) the absence of actions,
statutes, rules, regulations, legislation, interpretations, judgments, orders or
injunctions negatively affecting the Comprehensive Plan, (vii) there not
existing certain material adverse changes, (viii) the absence of certain
takeover proposals or other material transactions and (ix) other customary
conditions. ITT intends to terminate the Stock Tender Offer if Hilton or any
affiliate of Hilton acquires a material number of shares of ITT Common Stock
pursuant to the Hilton Transaction or otherwise or if any of Hilton's nominees
are elected to the ITT Board.
The terms and conditions of the Stock Tender Offer are set forth in more
detail in the Offer to Purchase dated as of July 17, 1997, a Supplement to the
Offer to Purchase dated as of August 27, 1997, and a related Letter of
Transmittal, which are a part of a Tender Offer Statement on Schedule 13E-4
filed with the Commission by ITT.
ALLOCATION OF INDEBTEDNESS. ITT plans to allocate its indebtedness between
its hotels and gaming business and its telephone directories publishing business
in a manner that is appropriate for the credit capacity and capitalization
requirements of each business. Because the financial responsibility standards of
the
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U.S. Department of Education applicable to ITT Educational limit the amount of
indebtedness ITT Educational may incur no indebtedness will be allocated to ITT
Educational. As of June 30, 1997, approximately $1.0 billion of indebtedness was
allocated to ITT ISI and its subsidiaries and approximately $1.098 billion was
allocated to the Company. In July 1997, ITT incurred an additional $254 million
of indebtedness to purchase BellSouth Corporation's minority interest in ITT
World Directories. This additional indebtedness will be allocated to ITT ISI.
The carrying amount of all allocated indebtedness approximated its fair value.
ITT's preferred means of making this allocation is to replace ITT's existing
indebtedness with indebtedness issued by the entity that ultimately will be
liable for such indebtedness. Accordingly, as part of the Comprehensive Plan, on
August 11, 1997, ITT commenced the Debt Tender Offer to repurchase all the
publicly held debt securities issued by it, aggregating $2 billion in principal
amount. The Debt Tender Offer will expire at 5:00 p.m., New York City time, on
Monday, September 29, 1997, unless extended. In conjunction with the Debt Tender
Offer, ITT plans to repay certain other indebtedness.
The Debt Tender Offer is not conditioned upon any minimum amount of debt
securities being tendered but is, however, subject to certain other conditions,
including (i) receipt of financing on acceptable terms, (ii) satisfaction of all
conditions to the Stock Tender Offer, (iii) ITT being satisfied, in its
reasonable discretion, that there exists no significant impediment, or a
material likelihood of a significant impediment, to the timely consummation of
the Destination Distribution on substantially the terms described herein, (iv)
receipt of regulatory approvals, (v) the absence of threatened, instituted or
pending actions, proceedings or other litigation, (vi) the absence of actions,
statutes, rules, regulations, legislation, interpretations, judgments, orders or
injunctions negatively affecting the Comprehensive Plan, (vii) there not
existing certain material adverse changes, (viii) the absence of certain
takeover proposals or other material transactions, (ix) the trustee under the
indentures under which the debt securities were issued not taking certain
adversarial actions and (x) other customary conditions.
The terms and conditions of the Debt Tender Offer are set forth in more
detail in the Offer to Purchase dated as of August 11, 1997 and a related Letter
of Transmittal.
REASONS FOR THE COMPREHENSIVE PLAN
The Destinations Distribution is a part of ITT's Comprehensive Plan. The
Comprehensive Plan is intended to enhance the value of the ongoing investment of
stockholders of ITT as well as to further the interests of ITT's employees,
creditors, customers, and the economies and communities in which ITT operates.
ITT has operated three distinct businesses with different characteristics,
competitive environments and growth prospects. Because ITT's telephone
directories publishing and post-secondary technical education businesses are
distinct from ITT's core hotels and gaming business, during 1996 subsequent to
becoming an independent public company, ITT began to recognize that these
businesses would eventually be separated from ITT's core business, just as ITT's
forest products, insurance and industrial products businesses have previously
become independent publicly traded companies. Separating ITT's businesses and
allowing them to operate independently is expected to result in, among other
things, increased strategic focus and enhanced market understanding and
valuations of these businesses. In approving the Comprehensive Plan, the ITT
Board took account of the tax-free nature of spin-offs and ITT's prior positive
experience with such transactions. ITT as an independent entity can consummate
such a tax-free spin-off; an acquiror (whether by purchase or merger) in a
transaction that is taxable in whole or in part (including the Hilton
Transaction) would be unable to undertake a tax-free spin-off of ITT assets for
a period of five years. Compared to a taxable sale of ITT's telephone
directories publishing business and post-secondary technical education business,
the Distributions will save ITT in excess of $500 million in U.S. Federal income
taxes. Further, the tax-free nature of transactions such as the Distributions is
under increasing scrutiny in the Congress. Accordingly, it is possible that in
the future legislation will be passed that might eliminate or restrict the
ability of ITT to undertake the Distributions on a tax-free basis. Additionally,
the Comprehensive Plan is expected to provide significant benefits to other
constituents of ITT, relative both to the Hilton Transaction and ITT's existing
structure.
ITT'S PRIOR EXPERIENCE. ITT has substantial experience with the benefits
of spin-off transactions. In 1994, ITT's predecessor spun-off its forestry
products subsidiary to create an independent company. In
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addition, ITT itself is the product of the December 1995 separation of a
conglomerate that controlled the businesses now operated by ITT as well as ITT
Industries, Inc. (a New York Stock Exchange listed company trading under the
symbol "IIN" that manufactures a wide variety of high technology and industrial
products) and The Hartford Financial Services Group, Inc. (formerly "ITT
Hartford Group, Inc.," a New York Stock Exchange listed company trading under
the symbol "HIG" that operates one of the largest multiline insurance companies
in the United States). Holders of ITT stock (who have retained the common stock
of Rayonier Inc., ITT Industries, Inc. and The Hartford Financial Services
Group, Inc. previously distributed by ITT) for the five years through July 1997
have seen their investment outperform the Standard & Poor's 500 Index by more
than 70% and increase in aggregate value by approximately $15 billion during
this same period. The separation of ITT's three businesses being undertaken now
is similar to the 1995 separation by the former ITT Corporation and represents
another step in the transition of the former ITT conglomerate to a group of
individually accountable, strategically focused organizations.
SEPARATION OF BUSINESSES. The ITT Board believes that the Comprehensive
Plan will be beneficial to each of ITT's existing businesses because, among
other things, it will separate businesses with distinct financial, investment
and operating characteristics so that each business can adopt strategies and
pursue objectives more appropriate to its specific business plan than is
possible under ITT's present combined structure and without the limitations
caused by competition for resources from the other businesses. Separation will
also allow each company to attain a capital structure that is appropriate for
its competitive environment and financial characteristics, which may involve
increased leverage.
OPTIMIZE FOCUS. Following the Distributions, each business' management
will be in an improved position to control capital funding and acquisition
initiatives and the implementation of business strategies. Management of each
independent company will be able to concentrate its attention and financial
resources wholly on its business, while responding solely to the characteristics
and competitive disciplines of its own industries.
"DELAYERING" OF ORGANIZATIONS. The Comprehensive Plan will allow both ITT
ISI and ITT Educational to eliminate at least one tier of corporate level
administration. Specifically, the Distributions will permit both ITT ISI and ITT
Educational to eliminate the management oversight and reporting functions
currently performed by ITT's world headquarters staff and release such staff
from those responsibilities. In addition, ITT anticipates that following
implementation of the Comprehensive Plan, each of the three companies formed by
the Distributions will continue to search for additional opportunities to
rationalize the organization and administration of their respective businesses.
In that connection, following the Distributions, the individual businesses will
be able to determine which corporate functions they wish to perform internally
and which they wish to obtain from third party service providers, all of which
should contribute to increased efficiency.
NARROWLY-TAILORED COMPENSATION. The Comprehensive Plan will allow each of
the businesses to design incentive plans that relate more directly to its own
business characteristics and performance (currently certain of ITT's incentive
compensation plans, such as stock-based compensation, are necessarily affected
by the performance of ITT as a whole, as compared to the individual businesses
of ITT). Each business will be able to more closely tie compensation incentives
for key employees to the performance of that business. Consequently, each
company and its respective stockholders should benefit from the positive effects
of the closer links between each business' incentive compensation arrangements
for key employees and the performance of its business.
ENHANCED INVESTOR UNDERSTANDING. Investors ultimately should be able to
evaluate better the financial performance of each of ITT's three businesses and
their respective strategies, thereby enhancing the likelihood that each will
achieve an appropriate market valuation. Moreover, as narrowly-focused
companies, each business should fit more readily into traditional industry
groupings, thus attracting the attention of dedicated industry analysts willing
and able to compare each company and its strategies to companies in the same or
similar businesses.
INCREASED PUBLIC FLOAT FOR ITT EDUCATIONAL. Approximately 16.7% of the ITT
Educational Common Stock is currently publicly traded. On completion of the
Comprehensive Plan, 100% of the ITT Educational
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Common Stock of this business will be publicly held. This significant increase
in public float is expected to increase the liquidity of the ITT Educational
Common Stock and thereby raise its market profile in the long term.
TAX-FREE NATURE OF THE DISTRIBUTIONS. Cravath, Swaine & Moore has advised
the ITT Board that, in its opinion, the Distributions will be tax free for U.S.
Federal income tax purposes to ITT and its stockholders. ITT as an independent
entity can consummate such a transaction immediately. An acquiror of ITT
(whether by purchase or merger) in a transaction that is taxable in whole or in
part (including the Hilton Transaction) would be unable to undertake a tax-free
spin-off of ITT assets for a period of five years. In contrast, a taxable sale
of ITT's remaining non-core businesses would result in corporate-level taxation
(which, given ITT's low tax basis in those businesses, would exceed $500
million) and the distribution of the after-tax proceeds of such sale in the form
of a dividend would constitute taxable income to ITT's stockholders.
BENEFITS OF TELEPHONE DIRECTORIES PUBLISHING "STUB." Utilizing ITT's
telephone directories publishing business as the "stub" company (out of which
ITT's hotels and gaming and post-secondary technical education businesses will
be distributed) allows a substantially greater amount of debt in ITT ISI's
overseas subsidiaries, thereby more closely matching liabilities with operating
assets without the incurrence of adverse U.S. tax consequences. The tax laws in
effect at the time the ITT Board approved the Comprehensive Plan permitted ITT
ISI to sell up to 49.9% of the telephone directories publishing business to new
investors, such as CDRV, without jeopardizing the tax-free status of the
Distributions compared to a limit of 20% that applied if that business were
spun-off. The chosen structure may also encourage bondholders to participate in
the Debt Tender Offer, because holders who fail to do so will retain obligations
of ITT ISI, which will be relatively more highly leveraged than the Company.
BENEFITS TO OTHER CONSTITUENTS. The Comprehensive Plan, by creating three
healthy independent public companies, is expected to further the interests of
ITT's employees, creditors, customers and the economies and communities in which
ITT operates. Among the expected benefits that were identified by the ITT Board
are:
- Business Partners. ITT's hotel franchisees and owners of managed hotels
have entered into long-term relationships with ITT based on, among other things,
Sheraton's efforts since 1937 to cultivate the profile of Sheraton as a premier
brand name in the hotel business. This strategy will be unaffected by the
Distributions and will protect existing franchisees and owners of managed hotels
from the potential diminishment of the Sheraton brand name and management
expertise that might occur if Hilton were successful in acquiring ITT and
selling or licensing the Sheraton brand name to a hotel and motel franchisor of
multiple brands. ITT has received communications from existing franchisees
indicating their concerns regarding any proposed transfer of the Sheraton brand
name to a conglomerate franchisor. To that end, an association representing
owners of Sheraton franchisees has informed ITT that approximately 90% of
Sheraton franchisees that responded to its survey believe their business will be
adversely affected if the Hilton Transaction is successful.
- Employees. The displacement to employees of ITT that would be expected to
occur following consummation of a hostile acquisition such as the Hilton
Transaction is expected to be significantly greater than any disruption caused
by the Distributions. In addition, a hostile acquisition can result in
disruption to existing and retired employees through modifications to, or
elimination of, pension and other health and welfare benefits. Also, following
the Distributions, the ability of each company to tailor its incentive
compensation programs to reflect each company's unique competitive environment
should benefit employees and improve morale compared both to the Hilton
Transaction and ITT before the Distributions. Furthermore, certain of ITT's key
operating employees at the hotel and casino property level have indicated their
unwillingness to continue in their positions if the Hilton Transaction occurs.
- Creditors. The Debt Tender Offer is designed to accommodate concerns that
ITT's public bondholders may have and to enhance the ability of the independent
companies to obtain new credit on favorable terms consistent with their credit
characteristics. The ITT Board believes that the Debt Tender Offer, although not
a condition to the completion of the other parts of the Comprehensive Plan, will
be helpful in effectuating the Comprehensive Plan. ITT believes that covenants
in its existing public indebtedness do not limit ITT's ability to carry out the
Distributions. As a practical matter, however, a substantial amount of ITT's
indebtedness will
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need to be allocated to the hotels and gaming business in order for the
telephone directories publishing business to remain viable after the
Distributions. Unlike other structures which could engender acrimonious
relations between ITT and its bondholders and other constituents, the Debt
Tender Offer is designed to minimize market fluctuations in ITT's debt
securities and ITT believes it is consistent with its tradition of equitable
treatment of bondholders. (ITT's predecessor undertook a similar debt repurchase
process prior to the spin-off transactions that created ITT and ITT attributes
the ready access to the debt capital markets it has experienced in part to the
actions of its predecessor.) Although ITT ISI and the Company will be more
highly leveraged as a result of the Comprehensive Plan, pre-existing bondholders
will have an opportunity to sell their securities rather than be forced to
retain lower graded debt. This process, by reemphasizing ITT's commitment to
equitable treatment of bondholders, is expected to facilitate access to the debt
capital markets by the three companies resulting from the Distributions on terms
appropriate for their respective businesses.
- ITT Technical Institute Students. Although the U.S. Department of
Education has informed ITT that the Educational Distribution will constitute a
change of control under its regulations, ITT believes a spin-off of ITT
Educational (as opposed to a sale or other disposition transaction) should not
constitute a "change-of-control" under the regulations of educational
accrediting commissions and many state educational authorities and therefore
does not involve as great a risk of loss of accreditation and access to
financial aid and the potentially devastating consequences to students that a
sale or other disposition transaction could entail. In the event a governmental
authority insists that a spin-off does constitute a "change-of-control," the
distribution to stockholders of the stock of ITT Educational will be coordinated
so as to provide sufficient time to obtain all approvals needed to avoid an
adverse effect on such business and its students. In such a case, the
Destinations Distribution might be completed before the ITT Educational
Distribution.
- Communities. The separation of ITT into three independent companies is
expected to provide significant benefits to the economies and communities in
which ITT operates. In general, maintaining the existing number of independent
competitors in the hotels and gaming business should provide more societal
benefits than will a reduction in the number of competitors. As opposed to
acquisition transactions, which frequently involve the consolidation of
functions at a distant headquarters or otherwise result in job loss at the local
level, spin-off transactions (by creating independent companies with independent
headquarters) can be expected to result in increased opportunities at the local
level. In addition, as independent companies, each of ITT's businesses will
continue their respective strategies. For Destinations, this strategy includes
capital expenditures to construct and acquire new properties and to expand and
upgrade existing properties and transactions that are intended to enhance
profitability, return on assets or cash flows. For ITT Educational, this
strategy involves continuing management's efforts to rationally expand the
number of schools in jurisdictions throughout the United States. For ITT ISI,
this strategy focuses on management's efforts to maintain its strong market
share and develop new products in the jurisdictions in which it has historically
operated as well as to seek acquisitions and develop new businesses in countries
in which emerging and mature economies are expected to yield a high demand for
printed telephone directories and new related products. Finally, each of the
independent companies can be expected to continue ITT's historic commitment to
community service and charitable giving.
CERTAIN INDEBTEDNESS
ITT plans to finance the Stock Tender Offer, the Debt Tender Offer and the
repayment of certain other indebtedness with a combination of approximately
$1.275 billion from proceeds of the Subsidiary Notes and borrowings under the
ITT ISI Credit Facilities and $3.3 billion in cash received from us in
connection with the First, Second and Third Payments. The Company plans to
finance the First, Second and Third Payments and certain other expenses with
borrowings under the Company Credit Facilities. After the Destinations
Distribution, the Company will have approximately $4.2 billion of outstanding
indebtedness and ITT ISI will have approximately $1.275 billion of outstanding
indebtedness. ITT has received a letter from Chase and CSI stating that they are
highly confident that they will be able to arrange credit facilities and debt
securities offerings for the Company and ITT ISI and its subsidiaries in amounts
sufficient to consummate the Tender Offers and the other elements of the
Comprehensive Plan.
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ITT has also received the Commitment Letters whereby CSI has agreed to
structure, arrange and syndicate, and Chase has committed to provide a portion
of (a) the Company Credit Facilities in an aggregate principal amount of $5
billion, (b) the Promedia Credit Facilities in an aggregate principal amount of
$385 million and (c) the Publimedia Credit Facilities in an aggregate principal
amount of $270 million. The terms of definitive agreements for the Company
Credit Facilities, the Promedia Credit Facilities and the Publimedia Credit
Facilities have not yet been finalized. The following is a summary of the
anticipated principal terms of such facilities based upon the Commitment
Letters. This summary is subject to completion of definitive agreements and is
qualified in its entirety by reference to the Commitment Letters, which are
filed as exhibits to the Company's Registration Statement on Form 10, of which
this Information Statement is a part.
The $5 billion Company Credit Facilities will include (a) a $1.5 billion
2- 1/2-year term loan facility and a $2.5 billion 5-year term loan facility,
each to be fully drawn at closing and (b) a $1 billion 5-year revolving credit
facility. Chase has committed to provide up to $500 million of these facilities
and agreed to use commercially reasonable efforts to syndicate the balance.
Loans under the Company Credit Facilities will be prepayable at any time and
will be subject to mandatory prepayment in certain circumstances (i) upon the
incurrence of certain indebtedness, (ii) upon the sale or disposition of certain
assets and (iii) in an amount equal to 50% of the Company's excess cash flow.
The Company Credit Facilities will be guaranteed by each of the Company's direct
and indirect domestic subsidiaries other than gaming subsidiaries. The Company
Credit Facilities will be secured by a perfected first priority security
interest in all of the Company's and its subsidiaries' (other the gaming
subsidiaries) tangible (other than mortgages on real property) and intangible
assets (including, without limitation, the Sheraton reservation system, each of
the Sheraton franchise agreements and intellectual property (including the
Sheraton trademark)) and all the capital stock and intercompany obligations of
each of the Company's direct or indirect domestic subsidiaries (excluding gaming
subsidiaries) and 66% of the capital stock and all the intercompany obligations
of first-tier foreign subsidiaries. In addition, the Company Credit Facilities
will contain (a) customary affirmative covenants, (b) financial covenants that
will require the Company to maintain certain financial ratios and (c) negative
covenants that will limit the ability of the Company and its subsidiaries to
incur indebtedness, liens, pledges and guarantees, to consummate mergers,
consolidations, liquidations, dissolutions and certain sales of assets, to enter
certain leases and sale and leaseback transactions, to make dividends and other
payments in respect of its capital stock, to make capital expenditures,
acquisitions, investments, loans, advances, optional payments and modifications
to certain debt instruments, to engage in transactions with affiliates, to
change its fiscal year or lines of business, and to restrict certain
distributions from subsidiaries. The Company Credit Facilities also will contain
customary representations and warranties and events of default.
The $385 million Promedia Credit Facilities will include (a) a $210 million
6-year term loan facility, a $65 million 7-year term loan facility and a $60
million 8-year term loan facility, each to be fully drawn at closing, and (b) a
$50 million 6-year revolving credit facility. All amounts will be loaned in
their equivalent in Belgian francs. Chase has committed to provide up to $60
million of these facilities and agreed to use commercially reasonable efforts to
syndicate the balance. Loans under the Promedia Credit Facilities will be
prepayable in amounts to be agreed upon and will be subject to mandatory
prepayment in certain circumstances (i) upon the incurrence of certain
indebtedness by ITT ISI and its subsidiaries (excluding those by Publimedia and
its subsidiaries), (ii) upon the sale or disposition of certain assets by ITT
ISI and its subsidiaries (excluding those by Publimedia and its subsidiaries)
and (iii) in an amount equal to 75% of the excess cash flow of Promedia and its
subsidiaries (excluding Publimedia and its subsidiaries). The Promedia Credit
Facilities will be guaranteed by ITT ISI and ITT World Directories. The Promedia
Credit Facilities will be secured by a security interest in certain tangible and
intangible assets of ITT ISI and ITT World Directories and assets of Promedia as
to which it is commercially reasonable to provide security based on the costs
and legal difficulties of obtaining such a security interest in relation to the
value of the security to be afforded thereby. The Promedia Credit Facilities
will contain (a) customary affirmative covenants, (b) financial covenants that
will require Promedia to maintain certain financial ratios and (c) negative
covenants that will limit the ability of Promedia to incur indebtedness, liens,
pledges and guarantees, to consummate mergers, consolidations, liquidations,
dissolutions and certain sales of assets, to enter certain leases and sale and
leaseback transactions, to make dividends and other payments in respect of its
capital
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stock, to make capital expenditures, acquisitions, investments, loans, advances,
optional payments and modifications to certain debt instruments, to amend its
charter or by-laws, to engage in transactions with affiliates, to change its
fiscal year or lines of business, to restrict certain distributions from
subsidiaries and joint ventures, to create new subsidiaries or joint ventures
and to make certain restricted payments. The Promedia Credit Facilities will
contain customary representations and warranties and events of default.
The $270 million Publimedia Credit Facilities will include (a) a $120
million 6-year term loan facility, a $50 million 7-year term loan facility and a
$50 million 8-year term loan facility, each to be fully drawn at closing, and
(b) a $50 million 6-year revolving credit facility. All amounts will be loaned
in their equivalent in Dutch guilders. Chase has committed to provide up to $40
million of these facilities and agreed to use commercially reasonable efforts to
syndicate the balance. Loans under the Publimedia Credit Facilities will be
prepayable at any time and will be subject to mandatory prepayment in certain
circumstances (i) upon the incurrence of certain indebtedness, (ii) upon the
sale or disposition of certain assets and (iii) in an amount equal to 75% of the
excess cash flow of Publimedia and its subsidiaries. The Publimedia Credit
Facilities will be secured by a security interest in 100% of the stock of
Publimedia's direct and indirect subsidiaries. The Publimedia Credit Facilities
will contain (a) customary affirmative covenants, (b) financial covenants that
will require Publimedia to maintain certain financial ratios; and (c) negative
covenants that will limit the ability of Publimedia to incur indebtedness,
liens, pledges and guarantees, to consummate mergers, consolidations,
liquidations, dissolutions, and certain sales of assets, to enter certain leases
and sale and leaseback transactions, to make dividends and other payments in
respect of its capital stock, to make capital expenditures, acquisitions,
investments, loans, advances, optional payments and modifications to certain
debt instruments, to amend its charter or by-laws, to engage in transactions
with affiliates, to change its fiscal year or lines of business, to restrict
certain distributions from subsidiaries and joint ventures, to create new
subsidiaries or joint ventures and to make certain restricted payments. The
Publimedia Credit Facilities will contain customary representations and
warranties and events of default.
The agreements and commitments of Chase and CSI with respect to the Company
Credit Facilities, the Promedia Credit Facilities and the Publimedia Credit
Facilities are subject to certain conditions, including conditions relating to
(a) material adverse conditions or changes in or affecting the business,
operations, property or financial condition or prospects of ITT or the Company,
and their respective subsidiaries, taken as a whole, (b) the satisfaction of
Chase and CSI with the structure and serviceability of the financings of ITT and
its subsidiaries, (c) the disclosure of material and adverse information
affecting ITT or the Company, as the case may be, (d) material adverse
litigation affecting the Comprehensive Plan or such credit facilities; provided
that litigation or other similar proceedings seeking to challenge the
Comprehensive Plan but which have not had the effect of enjoining any of or all
the elements of the Comprehensive Plan shall not prevent the satisfaction of
this condition, (e) material disruptions or material adverse changes in
financial, banking or capital market conditions, (f) competing offerings,
placements or arrangements by or on behalf of ITT, (g) definitive documentation
and (h) certain other customary conditions. The closings under each of the
Company Credit Facilities, Promedia Credit Facilities and Publimedia Credit
Facilities will be conditioned on the closings under the other two credit
facilities.
In addition to the credit facilities described above, Promedia has issued
DM 500 million of the Promedia Notes and Publimedia has issued $225 million of
the Publimedia Notes. These Subsidiary Notes are unsecured and subordinated and
have covenants that are typical for high yield offerings.
ITT also expects to arrange the Interim Credit Facilities in an aggregate
principal amount of $225 million. ITT expects that the Interim Credit Facilities
will be repaid with the proceeds of the Strategic Investment. See "-- Strategic
Investment." It is expected that the obligations of ITT ISI under the Interim
Credit Facilities will be secured by ITT ISI's interest in the capital stock of
ITT World Directories. The Interim Credit Facilities are expected to contain
covenants that, among other things, restrict the ability of ITT ISI and its
subsidiaries (other than Promedia and its subsidiaries) to incur indebtedness,
pay dividends or make distributions, create liens on assets, make investments,
loans or advances, sell assets, engage in mergers or consolidations, or engage
in certain transactions with affiliates and otherwise restrict certain corporate
activities.
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ITT expects to effect the borrowings under the Company Credit Facilities
and the ITT ISI Credit Facilities and the issuance of the Subsidiary Notes at or
around the time the Tender Offers are consummated. There can be no assurance,
however, that ITT will be able to arrange the Company Credit Facilities or the
ITT ISI Credit Facilities or that ITT will be able to arrange alternative
financing in amounts sufficient to consummate the Tender Offers and the other
elements of the Comprehensive Plan. See "Risk Factors -- Leverage and Debt
Service" and "-- Restrictions Imposed by Financings."
STRATEGIC INVESTMENT
At the July 15, 1997 meeting, the ITT Board approved a definitive
agreement, dated as of July 15, 1997, between ITT and CDRV, an entity affiliated
with CD&R, for the Strategic Investment by CDRV in ITT ISI, which will hold the
telephone directories publishing business following the Distributions. In the
Strategic Investment, CDRV will purchase, after the Distributions, approximately
32.9% of the outstanding common stock of ITT ISI and warrants to purchase shares
representing an additional 13.7% of the outstanding common stock of ITT ISI for
aggregate consideration of $225 million. Such warrants will have a ten year term
and permit CDRV to buy common stock of ITT ISI at a 50% premium to CDRV's
initial purchase price. Consummation of the Strategic Investment is subject to
certain conditions including, among other things, approval of the stockholders
of ITT ISI following the Distributions as required by the rules of the NYSE.
Completion of the Strategic Investment (the proceeds from which are expected to
be used primarily to reduce indebtedness of ITT ISI) is not a condition to the
Destinations Distribution and is expected to occur in the fourth quarter of
1997. Neither CDRV nor CD&R is currently affiliated with ITT or the Company.
Following completion of the Strategic Investment, ITT ISI will have
approximately $1.05 billion in debt (see "-- Certain Indebtedness"), giving ITT
ISI an initial enterprise value, based on the Strategic Investment, of
approximately $1.7 billion.
In addition, at the July 15, 1997 meeting, the ITT Board approved the
purchase by ITT for $254 million of BellSouth Corporation's minority interest in
ITT World Directories, which will be the only direct subsidiary of ITT ISI after
the Distributions and will, directly and through operating subsidiaries,
continue to conduct the telephone directories publishing business. The purchase
of this interest, which was consummated on July 15, 1997, allows ITT ISI to have
100% of the benefit of the results of operations of ITT World Directories,
allows for a better understanding of ITT ISI by the investment community,
simplifies the corporate and organizational structure of ITT World Directories
and allows for a more effective implementation of the allocation of ITT's
indebtedness. In connection with this transaction, BellSouth Corporation
received a pro rata portion of a dividend paid by ITT World Directories,
resulting in additional proceeds to BellSouth Corporation of $11 million.
CONDITIONS TO THE DESTINATIONS DISTRIBUTION
ITT's plan to consummate the Destinations Distribution is subject to the
following conditions:
(a) All necessary approvals of any governmental or regulatory bodies having
been obtained, including approval by the gaming authorities of the states of
Nevada, New Jersey and Mississippi, and by the Federal Communications
Commission. ITT has applied for approval of the Destinations Distribution by the
gaming authorities of the states of Nevada, New Jersey and Mississippi and by
the Federal Communications Commission. Approval of the Destinations Distribution
has been granted by the Mississippi gaming authorities. The Federal
Communications Commission granted approval of a pro forma change in control of
the ITT subsidiary that holds an interest in the licensee of WBIS+(TV);
applications are pending before the gaming authorities of Nevada and New Jersey.
See "Regulatory Approvals." There can be no assurance that these approvals will
be obtained or whether they will be obtained in a timely manner.
(b) All necessary consents of third parties having been obtained. ITT is
not aware of any material third party consents that are required in connection
with the Destinations Distribution.
(c) Final action by the ITT Board declaring the Destinations Distribution.
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(d) The satisfaction of all conditions to the Tender Offers (other than the
conditions to the Destinations Distribution). See "-- The Comprehensive
Plan -- Stock Tender Offer" and "-- Allocation of Indebtedness" for a
description of the conditions to the Tender Offers.
(e) The shares of Company Common Stock to be distributed in the
Destinations Distribution having been approved for listing on the NYSE, subject
to official notice of issuance. ITT has applied for the listing of the Company
Common Stock to be distributed in the Destinations Distribution on the NYSE.
(f) The Company's Registration Statement on Form 10 under the Exchange Act
relating to Company Common Stock having become effective under the Exchange Act.
The Company has filed its Registration Statement on Form 10 with the Commission;
the Commission has not yet declared it effective.
(g) There not being in effect any statute, rule, regulation or order of any
court, governmental or regulatory body which prohibits or makes illegal the
transactions contemplated by the Comprehensive Plan. See "Legal Proceedings" for
a description of litigation relating to the Comprehensive Plan.
(h) The receipt by ITT of an opinion of counsel that the Destinations
Distribution will be tax-free to ITT and its stockholders. See "-- Federal
Income Tax Consequences of the Distributions."
The Destinations Distribution is not conditioned upon the completion of the
Strategic Investment or the ITT Educational Distribution. The ITT Board has
retained discretion to abandon, defer or modify the Comprehensive Plan and each
element of the Comprehensive Plan (including the Destinations Distribution) in
light of changed circumstances, and, if the ITT Board does so, the Destinations
Distribution could be abandoned, deferred or modified. The conditions to any
element of the Comprehensive Plan (including the Destinations Distribution) may
be waived by the ITT Board. However, the ITT Board will not waive the
requirement of receipt of an opinion of counsel that the Destinations
Distribution will be tax-free to ITT and its stockholders. Accordingly, the
terms of the Comprehensive Plan (including the Destinations Distribution) remain
subject to modification, and there can be no assurance that the Comprehensive
Plan will occur as described herein.
EFFECT OF THE DESTINATIONS DISTRIBUTION ON THE HILTON OFFER
On January 31, 1997, HLT, a wholly owned subsidiary of Hilton, commenced
the Hilton Offer to purchase 61,145,475 shares, approximately 50.1% of the
outstanding shares, of ITT Common Stock, at a purchase price of $55 per share,
net to the seller in cash, upon the terms and subject to the conditions set
forth in the Hilton Offer to Purchase. Hilton stated that, if the Hilton Offer
were successful, it intended to consummate the Proposed Squeeze Out Merger
pursuant to which all shares of ITT Common Stock not tendered and purchased
pursuant to the Hilton Offer (other than shares of ITT Common Stock owned by
Hilton and its subsidiaries or held in ITT's treasury) would be converted into
the right to receive a number of shares of Hilton common stock having a nominal
value of $55 per share, subject to unspecified collar provisions. On August 7,
1997, Hilton amended the Hilton Offer to increase the offered purchase price to
$70 per share of ITT Common Stock and to indicate that each share not tendered
pursuant to the Hilton Offer would be converted in the Proposed Squeeze Out
Merger into the right to receive a number of shares of Hilton common stock
having a nominal value of $70 per share of ITT Common Stock, subject to
unspecified collar provisions.
On March 21, 1997, Hilton filed with the Commission definitive proxy
materials pursuant to the requirements of Section 14(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations promulgated thereunder (the "Hilton Proxy Statement"). Pursuant to
the Hilton Proxy Statement Hilton is soliciting proxies in support of proposals
for (i) the replacement of the current ITT Board by nominees of Hilton, (ii) the
stockholders of ITT to urge the ITT Board to arrange for the sale of ITT to
Hilton or to any bidder offering a higher price and (iii) each provision of the
Amended and Restated By-laws of ITT adopted on or after July 23, 1996 and prior
to the adoption of such proposal to be repealed.
At a meeting held on February 11, 1997, the ITT Board unanimously
determined that the Hilton Transaction, including the Hilton Offer, is
inadequate and not in the best interests of ITT. At a meeting held
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on July 15, 1997, the ITT Board reassessed the Hilton Transaction in light of
developments since February 11, including the Comprehensive Plan, agreements for
the disposition of certain assets, ongoing cost rationalization at ITT and its
subsidiaries and acquisitions of hotels and management and franchise agreements,
and unanimously reaffirmed its conclusion that the Hilton Transaction, including
the Hilton Offer, is inadequate and not in the best interests of ITT. At a
meeting held on August 14, 1997, the ITT Board reassessed the revised Hilton
Transaction in light of developments since July 15, including the Comprehensive
Plan, and unanimously reaffirmed its conclusion that the Hilton Transaction,
including the Hilton Offer, as amended, is inadequate and not in the best
interests of ITT. Accordingly, the ITT Board continues to recommend unanimously
that the stockholders of ITT reject the Hilton Transaction and not tender their
shares of ITT Common Stock pursuant to the Hilton Offer or take any other action
to facilitate the Hilton Offer. On August 14, 1997, the ITT Board also
reaffirmed its determination that, in light of the prospects of each of ITT's
businesses, the attractiveness of the Distributions and the other elements of
the Comprehensive Plan and certain other factors, ITT's and its stockholders
interests would be best served if ITT (and particularly the core businesses of
ITT) were to remain independent and pursue the Comprehensive Plan. For a
discussion of the recommendation of the ITT Board in this regard, see
"-- Recommendation of the Board of Directors of ITT With Respect to the Hilton
Transaction."
The summary of certain information contained in the Hilton Offer to
Purchase and the Hilton Proxy Statement is not intended to be complete and is
qualified in its entirety by reference to the Hilton Offer to Purchase and the
Hilton Proxy Statement. Hilton has filed with the Commission a Tender Offer
Statement on Schedule 14D-1 and amendments thereto (collectively the "Hilton
Schedule 14D-1"), of which the Hilton Offer to Purchase constitutes a part. The
Hilton Offer to Purchase and the Hilton Schedule 14D-1, including the exhibits
and amendments thereto, and the Hilton Proxy Statement may be examined and
copies may be obtained as described under "Available Information." Any shares of
ITT Common Stock tendered pursuant to the Hilton Offer may be withdrawn by the
tendering stockholders at any time prior to the expiration of the Hilton Offer,
which is presently scheduled for Monday, September 29, 1997.
For a description of certain litigation relating to the Hilton Transaction,
see "Legal Proceedings."
The ITT Board believes that the business justifications for the
Comprehensive Plan are compelling without regard to the Hilton Offer and intends
to pursue the plan even if Hilton withdraws its interest in acquiring ITT.
However, in reviewing the Comprehensive Plan, the ITT Board took account of the
possibility that the transactions contemplated by the Comprehensive Plan could
adversely affect the Hilton Offer. The ITT Board also considered appropriate
governance mechanisms for the Company designed to achieve the objectives of
fostering management continuity needed to implement the Company's strategic
plan, deterring abusive takeover tactics and, if necessary, maximizing the
Company's negotiating leverage in the face of a hostile offer and thereby
protecting the interests of the Company's stockholders and other constituencies.
The ITT Board also considered the advice of counsel to ITT that, although there
is no IRS ruling or case law that is dispositive of the issue, in such counsel's
view, the Destinations Distribution should not create a tax-related impediment
to an unsolicited offer by Hilton to acquire the Company after the Destinations
Distribution. The ITT Board recognized that this advice was based on an
interpretation of tax laws and the provisions of pending legislation as of the
time it was expressed, rather than binding precedent, and accordingly was not
free from doubt and was subject to revision if pending tax legislation changed.
As a result of the Comprehensive Plan, including the Destinations
Distribution, and in light of statements by Hilton that it is interested in the
Company's hotels and gaming business, it is likely that Hilton will withdraw the
Hilton Offer after completion of the Destinations Distribution. Although ITT is
unable to predict Hilton's future actions, Hilton has stated publicly that if
ITT completes the Destinations Distribution, Hilton will abandon its attempts to
acquire ITT and will not pursue an acquisition of the Company.
Company's own assets and cash flows or who cannot consummate a tender offer
without acquiring a very high percentage of the Company's securities. See
"-- Federal Income Tax Consequences of the Distributions," "Description of
Capital Stock -- Rights Plan," "-- Nevada General Corporation Law" and
"-- Provisions of the Company's Articles of Incorporation and By-laws Affecting
a Change in Control."
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RECOMMENDATION OF THE BOARD OF DIRECTORS OF ITT WITH RESPECT TO THE HILTON
TRANSACTION
In the process of reviewing the Comprehensive Plan the ITT Board considered
many factors, including the factors set forth under "Risk Factors." Although the
ITT Board carefully considered, and discussed with its advisors, many of the
factors set forth under "Risk Factors," the ITT Board unanimously approved the
Comprehensive Plan. The ITT Board has also unanimously determined that the
Hilton Transaction, including the Hilton Offer, as amended, is inadequate and
not in the best interests of ITT. The ITT Board has not separately determined
whether there are any positive aspects of the Hilton Transaction.
At a meeting held on August 14, 1997, the ITT Board reassessed the Hilton
Transaction in light of developments since July 15, including the Comprehensive
Plan, and unanimously reaffirmed its conclusion that the Hilton Transaction,
including the Hilton Offer, as amended, is inadequate and not in the best
interests of ITT. Accordingly, the ITT Board continues to recommend unanimously
that the stockholders of ITT reject the Hilton Transaction and not tender their
shares of ITT Common Stock pursuant to the Hilton Offer or take any other action
to facilitate the Hilton Offer. On August 14, 1997, the ITT Board also
reaffirmed its determination that, in light of the prospects of each of ITT's
businesses, the attractiveness of the Distributions and the other elements of
the Comprehensive Plan and certain other factors, ITT's and its stockholders
interests would be best served if ITT (and particularly the core businesses of
ITT) were to remain independent and pursue the Comprehensive Plan.
The ITT Board based its determination on its review and consideration of
the interests of ITT's stockholders and all other factors permitted by
applicable law, including the interests of ITT's employees, suppliers, creditors
and customers; the economy of Nevada and the nation; the interests of the
communities in which ITT operates and of society; and the long and short-term
interests of ITT and its stockholders, including the possibility that these
interests may be best served by the continued independence of ITT. The ITT Board
also reaffirmed its determination that, in light of the prospects of each of
ITT's businesses, the attractiveness of the Distributions and the other elements
of the Comprehensive Plan and other factors described below, ITT's and its
stockholders' interests would be best served if ITT (and particularly the core
business of ITT) were to remain independent and pursue the Comprehensive Plan.
In reaffirming its recommendation that stockholders of ITT should reject
the Hilton Transaction, the ITT Board considered a number of factors, including,
without limitation, the following:
(i) the ITT Board's belief, based on the factors further described
below and other considerations, that the Hilton Transaction, including the
Hilton Offer, does not reflect the inherent value of ITT;
(ii) the ITT Board's familiarity with, and management's review of,
ITT's businesses, financial condition, results of operations, business
strategy and future prospects, including the nature of the markets in which
ITT operates and ITT's position in such markets;
(iii) a presentation by Goldman, Sachs & Co. ("Goldman Sachs") and
Lazard Freres & Co. LLC ("Lazard Freres"), financial advisors to ITT,
concerning ITT, Hilton and the financial aspects of the Hilton Transaction,
and the opinions of Goldman Sachs and Lazard Freres to the effect that, as
of August 14, 1997, the consideration to be received by stockholders of ITT
pursuant to the Hilton Transaction, including the Hilton Offer, is
inadequate; such opinions were expressed after review of many of the
factors referred to herein and various financial criteria used in assessing
an offer, and were based on various assumptions and subject to various
limitations, which were reviewed for the ITT Board as part of the
presentation of Goldman Sachs and Lazard Freres;
(iv) the ITT Board's continued belief that, in light of the prospects
of each of ITT's businesses, the pursuit of the Comprehensive Plan and the
successful implementation by the three companies of their long-term
strategic plans will produce greater value for the stockholders of ITT and
greater benefits for ITT's employees, creditors, customers, and the
economies and communities in which ITT operates than the Hilton
Transaction, including the Hilton Offer; in that regard, the ITT Board
noted that the $70 per share of ITT Common Stock offered by ITT in the
Stock Tender Offer and offered by Hilton in the Hilton Offer are not
comparable as the Stock Tender Offer does not involve a change in control
of ITT;
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(v) the potential negative impact of the involvement of HFS
Incorporated ("HFS") in the Hilton Transaction on the value of ITT's
Sheraton and Four Points hotel businesses, the potential disruption of
hotel management contracts and franchise arrangements of ITT (as evidenced
by communications from existing hotel owners and franchisees opposing any
plan for HFS to assume these contracts and insisting upon contractual
"change-in-control" provisions that would be triggered by the Hilton
Transaction), and the potential for competition, cannibalization and
conflicts between Hilton properties, Ladbroke Group plc properties and
Sheraton and/or Four Points properties following any combination of Hilton
and ITT; in that regard, the ITT Board noted the additional uncertainty as
to HFS's strategy following its announced merger with CUC International and
the continuing absence of information regarding the role of HFS in the
Hilton Transaction;
(vi) the ITT Board's belief that an acquisition of ITT by Hilton could
have an adverse effect on the business and prospects of the combined entity
as a result of Hilton's management's lack of a proven "track record" in
growing a large chain of owned, managed or franchised full service,
international hotels;
(vii) the continuing uncertainty as to the actual value of the
Proposed Squeeze Out Merger to the stockholders of ITT, resulting from,
among other things, the lack of disclosure in the Hilton 14D-1 concerning
the Proposed Squeeze Out Merger, including the manner in which the number
of shares of Hilton common stock to be issued in the Proposed Squeeze Out
Merger would be determined, the failure of Hilton to give sufficient
assurance in the Hilton 14D-1 that the Proposed Squeeze Out Merger will
qualify for tax-free "reorganization" status and the concern of the ITT
Board about possible adverse effects on the value of an investment in
Hilton securities following any combination with ITT;
(viii) the lack of sufficient disclosure in the Hilton 14D-1 regarding
the proposed financing of the Hilton Offer, and the resulting impossibility
of determining if restrictive covenants or other conditions to such
financing would have an unduly negative impact on the ability of Hilton to
maintain and/or expand the proposed combined business and the effect of the
Hilton Transaction on Hilton's capital structure and credit ratings; in
that regard, the ITT Board noted that Hilton has consummated two debt
offerings since the commencement of the Hilton Offer that expressly require
Hilton to pay increased interest rates on such indebtedness in the event
that Hilton's credit ratings fall below specified thresholds as a result of
significant acquisitions;
(ix) the fact that, as a result of uncertainties about the actual
value of the Proposed Squeeze Out Merger and the merits of a longer-term
investment in Hilton, the Hilton Transaction is structured as a two-tiered,
front-end loaded transaction that is intended to coerce stockholders to
tender their shares of ITT Common Stock into the Hilton Offer to avoid
receiving in the Proposed Squeeze Out Merger shares of Hilton common stock
that may or may not have a value of $70 per share;
(x) the ITT Board's concern that Hilton may have had access to and
misused confidential ITT information;
(xi) the ITT Board's concern about press reports of investigations
taking place into possible activities of a key Hilton executive and concern
about senior gaming executives' possible prior activities in several gaming
jurisdictions;
(xii) the ITT Board's belief that there are undue economic
concentration and other gaming law issues relating to a combination of ITT
and Hilton, which create uncertainty as to whether the conditions of the
Hilton Offer will be met; in that regard, the ITT Board noted that the
Hilton Offer is conditioned on the receipt of all material consents,
approvals, orders or authorizations of, or registrations, declarations or
filings with, casino gaming regulatory authorities with jurisdiction in
respect of ITT's active gaming operations required or necessary in
connection with the Hilton Offer and the Proposed Squeeze Out Merger;
(xiii) the disruptive effect the Hilton Offer and the Proposed Squeeze
Out Merger are having on ITT and the potential adverse effect on the
interests of ITT's employees, creditors and customers; the economies of the
State of Nevada and the nation; and the interests of the communities in
which ITT operates and of society;
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(xiv) the commitment of the ITT Board and the management of ITT to
protecting the best interests of the stockholders of ITT and enhancing the
value of ITT;
(xv) the ITT Board's belief that consummation of the Hilton
Transaction would result in a change in control of ITT Educational under
the regulations of the U.S. Department of Education, the state educational
authorities that regulate ITT Educational's business and the accrediting
commissions that accredit each ITT Technical Institute; that an unapproved
change of control of ITT Educational could result in the suspension of
access to certain Federal financial aid funds for ITT Educational and its
students and could result in the loss of accreditation for individual ITT
Technical Institutes; and that any of the foregoing could result in a
material adverse change in the business, financial condition and results of
operations of ITT Educational and thus could materially adversely affect
students at ITT Technical Institutes, ITT Educational's public stockholders
and ITT; in that regard, the ITT Board noted the absence of an express
condition in the Hilton Offer with respect to obtaining required approvals
from educational regulatory authorities and the apparent absence of formal
efforts on the part of Hilton to apply for and obtain such approvals; and
(xvi) the trading performance of ITT Common Stock following the Hilton
Offer.
The foregoing discussion of the information and factors considered and
given weight by the ITT Board covers the material factors considered but is not
intended to be exhaustive. In view of the variety of factors considered in its
evaluation, the ITT Board did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determinations and recommendation. In addition, individual members of the
ITT Board may have given different weights to different factors.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTIONS
Set forth below is a discussion of all material Federal income tax
consequences of the Distributions to stockholders of ITT.
Prior to the Destinations Distribution, ITT will receive an opinion of
Cravath, Swaine & Moore, counsel to ITT, that for Federal income tax purposes:
1. ITT's contribution of certain assets to the Company prior to the
Destinations Distribution (the "Contribution") will qualify as a tax-free
"reorganization" under Section 368(a)(1)(D) of the Code.
2. The Distributions will qualify as tax-free spin-offs under Section
355 of the Code.
3. No gain or loss will be recognized by ITT as a result of the
Contribution or the Distributions.
4. No gain or loss will be recognized by (and no amount will be
included in the income of) the holders of ITT Common Stock solely as a
result of their receipt of shares of Company Common Stock and ITT
Educational Common Stock in the Distributions.
5. The tax basis of the ITT Common Stock and Company Common Stock held
immediately after the Destinations Distribution by any holder will equal
such holder's tax basis in its ITT Common Stock immediately before the
Destinations Distribution, allocated between the ITT Common Stock and the
Company Common Stock in proportion to the relative fair market values of
the ITT Common Stock and Company Common Stock at the time of the
Destinations Distribution; and in the event that the Distributions occur
simultaneously, the tax basis of the ITT Common Stock, ITT Educational
Common Stock and Company Common Stock held immediately after the
Distributions by any holder will equal such holder's tax basis in its ITT
Common Stock immediately before the Distributions, allocated among the ITT
Common Stock, ITT Educational Common Stock and Company Common Stock in
proportion to the relative fair market values of the ITT Common Stock, ITT
Educational Common Stock and Company Common Stock at the time of the
Distributions.
6. The holding period of Company Common Stock and ITT Educational
Common Stock received in the Distributions will include the holding period
of the ITT Common Stock with respect to which
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Company Common Stock and ITT Educational Common Stock was distributed,
provided that such ITT Common Stock was held as a capital asset on the
relevant distribution date.
This opinion of counsel will be based on current law and will be subject to
certain assumptions and the accuracy of certain factual representations made by
ITT, ITT Educational and the Company, which, if incorrect in certain respects,
would jeopardize the conclusions reached by counsel in its opinion. ITT is not
aware of any present facts or circumstances that would cause such assumptions or
representations to be untrue. ITT, ITT Educational and the Company will agree to
certain restrictions on future actions to provide further assurances that the
Distributions will qualify as tax-free spin-offs. See "The Company's
Relationship With ITT after the Destinations Distribution -- Tax Allocation
Agreements." The Company will not seek a ruling from the IRS with respect to the
Federal income tax consequences of the Distributions, and the IRS could take a
position contrary to Cravath, Swaine & Moore's opinion.
If the Contribution were not to qualify as a tax-free reorganization under
Section 368(a)(1)(D) of the Code, ITT would recognize gain equal to the excess
of the fair market value of the assets transferred to the Company in connection
with the Contribution over ITT's adjusted tax basis in such assets.
In general, for the Distributions to qualify as tax-free spin-offs under
Section 355 of the Code, the following six principal conditions must be
satisfied:
1. ITT must distribute the Company Common Stock and ITT Educational Common
Stock to its stockholders with respect to their ITT Common Stock.
2. Immediately before the Distributions, ITT must own Company Common Stock
and ITT Educational Common Stock possessing at least 80% of the total combined
voting power of each of the Company and ITT Educational and 80% of the total
number of all other classes of stock of each of the Company and ITT Educational.
3. ITT must be executing the Distributions for a good and valid business
purpose.
4. ITT must distribute either (a) all the stock and securities that it
owns in both the Company and ITT Educational or (b) an amount of Company Common
Stock and ITT Educational Common Stock constituting control of each of the
Company and ITT Educational (as defined in Section 368(c) of the Code). In the
case of (b), ITT would also have to establish to the satisfaction of the IRS
that ITT's retention of any Company Common Stock or ITT Educational Common Stock
was not in pursuance of a plan having as one of its principal purposes the
avoidance of Federal income tax.
5. The Distributions must not be used principally by ITT as a device for
the distribution of earnings and profits of ITT, ITT Educational and/or the
Company.
6. Immediately after the Distributions, ITT, ITT Educational and the
Company must each be engaged in the active conduct of a trade or business. A
company will be treated as actively engaged in a trade or business if it engages
directly in such trade or business or substantially all its assets consist of
stock of a controlled corporation that is so engaged. An active trade or
business qualifies under Section 355 of the Code only if such trade or business
(a) was actively conducted throughout the five-year period ending on the date of
the distribution (such five-year period, the "Five-Year Period"), (b) was not
acquired within the Five-Year Period in a taxable transaction and (c) was not
conducted by another corporation the control of which was acquired (directly or
indirectly through one or more corporations) during the Five-Year Period in a
taxable transaction.
If the Distributions were not to qualify under Section 355 of the Code,
then (i) ITT would not recognize any loss realized on the Distributions, but
would recognize capital gain equal to the excess, if any, of (x) the fair market
value of Company Common Stock and ITT Educational Common Stock on the relevant
distribution date over (y) its adjusted tax basis in Company Common Stock and
ITT Educational Common Stock and (ii) each holder of ITT Common Stock who
receives shares of Company Common Stock and ITT Educational Common Stock in
connection with the Distributions would be treated as receiving a taxable
distribution in an amount equal to the fair market value of such shares of
Company Common Stock and ITT Educational Common Stock on the relevant
distribution date, taxed first as a dividend to the extent of such
35
<PAGE> 39
holder's pro rata share of ITT's current and accumulated earnings and profits,
and then as a nontaxable return of capital to the extent of such holder's
adjusted tax basis in the ITT Common Stock (with any remaining amount being
taxed as capital gain). ITT, ITT Educational and the Company will each be
severally liable to the IRS for the full amount of the Federal capital gains tax
described in (i) above that is not paid by the other. ITT, ITT Educational and
the Company will indemnify each other for any liabilities resulting from any
breach of their respective representations made to Cravath, Swaine & Moore in
connection with its opinion.
Under current law, if the IRS were to integrate the Distributions and a
third party acquisition of the stock of any of ITT, ITT Educational or the
Company, the Distributions would result in corporate-level gain for ITT, and the
ITT stockholders' receipt of shares of Company Common Stock and ITT Educational
Common Stock would be treated first as a dividend (to the extent of ITT's
current and accumulated earnings and profits) and then as a reduction of each
stockholder's basis in his, her or its shares of ITT Common Stock and then as
capital gain, as discussed above.
Moreover, recently enacted legislation (the "New Legislation") would cause
ITT, but not ITT stockholders, to recognize taxable gain in connection with the
Destinations Distribution (determined as if ITT had sold all the Company Common
Stock for fair market value on the Distribution Date) if 50% or more of the
Company Common Stock were acquired (or deemed to be acquired) and the
Destinations Distribution and such acquisition (or deemed acquisition) were part
of a plan (or were otherwise related). If, instead 50% or more of the ITT Common
Stock were acquired (or deemed to be acquired) as part of a plan (or otherwise
as a related transaction) with the Distributions, under the New Legislation, it
appears that ITT, but not ITT stockholders, would recognize taxable gain in
connection with the Distributions determined as if ITT had sold all the Company
Common Stock and ITT Educational Common Stock for fair market value on the
Distribution Date. For this purpose, the Strategic Investment will be treated as
an acquisition of not less than 32.9% of the ITT Common Stock, and perhaps as
much as 46.6% of the ITT Common Stock. Under the New Legislation, any
acquisition of ITT Educational Common Stock, Company Common Stock or ITT Common
Stock, as the case may be, within the period beginning two years prior to the
Distribution Date and ending two years after the Distribution Date will be
presumed to be part of such a plan (or an otherwise related transaction) unless
the Company or ITT, as the case may be, is able to rebut such presumption.
Although there is no IRS ruling or case law that is dispositive of these
issues, Cravath, Swaine & Moore is of the opinion that, under existing U.S.
Federal income tax laws, including the New Legislation, an acquisition of any of
ITT, ITT Educational or the Company by Hilton should not adversely affect the
tax-free status of the Distributions. This opinion is based on an interpretation
of tax laws, including the New Legislation, rather than on binding precedent,
and accordingly is not free from doubt. None of ITT, ITT Educational or the
Company is obligated to indemnify any holder of ITT Common Stock who receives
Company Common Stock in the Destinations Distribution for any tax liabilities.
If the Distributions occurred and failed to qualify under Section 355 of
the Code as tax-free spin-offs (or if, as a result of the application of the New
Legislation to the Distributions, ITT recognized taxable gain with respect to
the Distributions), the resulting corporate-level U.S. Federal income tax
liability (a "Distribution Tax") would be material. ITT estimates that the
corporate-level U.S. Federal income tax liability that would result under the
preceding sentence would be approximately $1.4 billion. Under the relevant
statutory rules, ITT, the Company and ITT Educational would be severally liable
for any tax that arises in connection with either the Destinations Distribution
or the ITT Educational Distribution.
In connection with the Tax Allocation Agreement, the Company will agree to
be liable for any Distribution Tax unless the actions or omissions (including
actions or omissions taken with respect to the stock or assets) of ITT
Educational and/or ITT materially contribute to the incurrence of such
Distribution Tax. If the actions or omissions (including actions or omissions
taken with respect to the stock or assets) of the Company, ITT and/or ITT
Educational materially contribute to the incurrence of such Distribution Tax,
then the companies so acting or omitting to act will be liable for any such
Distribution Tax, on a pro rata basis if more than one of the companies is so
liable.
In connection with the Amended and Restated Tax Allocation Agreement, the
Company generally will be liable for any Distribution Tax that arises as a
result of the Distributions failing to qualify as tax-free spin-
36
<PAGE> 40
offs under Section 355 of the Code, and 90% of any Distribution Tax that arises
as a result of the application of Section 355(e) of the Code to the
Distributions. Nevertheless, if the actions or omissions (including actions or
omissions taken with respect to the stock or assets) of ITT Educational
materially contribute to the incurrence of any Distribution Tax, ITT Educational
generally will be liable for such Distribution Tax. Further, if ITT, CD&R or
certain other persons named in the agreement with respect to the Strategic
Investment breach any of their covenants or obligations made in connection with
that agreement, ITT generally will be liable for any Distribution Tax arising in
connection with or as a result of such breach. See "The Company's Relationship
with ITT After the Destinations Distribution -- Tax Allocation Agreements" for a
more detailed discussion of both the Tax Allocation Agreement and Amended and
Restated Tax Allocation Agreement.
In addition, if the Distributions failed to qualify under Section 355 of
the Code as tax-free spin-offs, ITT estimates that the aggregate U.S. Federal
income tax liability of ITT's stockholders (after considering an assumed portion
of tax-exempt stockholders) would be approximately $1.4 billion. None of ITT,
ITT Educational or the Company will be obligated to indemnify ITT's stockholders
for any such tax.
Under the backup withholding rules, a holder of ITT Common Stock or Company
Common Stock may be subject to backup withholding at the rate of 31% with
respect to dividends and proceeds of any redemption, unless such holder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact in the manner required by the backup withholding rules or
(ii) provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under these
rules will be credited against a holder's U.S. Federal income tax liability. ITT
or the Company may require holders of ITT Common Stock or Company Common Stock,
respectively, to establish an exemption from backup withholding or to make
arrangements satisfactory to ITT or the Company, as applicable, with respect to
the payment of backup withholding. A holder who does not provide ITT or the
Company with his, her or its correct current taxpayer identification number, or
who does not otherwise establish an exemption from backup withholding, may also
be subject to penalties imposed by the IRS. Assuming the Distributions qualify
as tax-free under Section 355 of the Code, a holder of ITT Common Stock
generally will not be subject to backup withholding with respect to the receipt
of Company Common Stock in connection with the Destinations Distribution.
ITT STOCKHOLDERS SHOULD CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE DESTINATIONS DISTRIBUTION, INCLUDING THE EFFECTS OF FOREIGN,
STATE AND LOCAL TAX LAWS AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS.
LISTING AND TRADING OF COMPANY COMMON STOCK
The Company has applied to have the Company Common Stock listed on the NYSE
under the symbol "ITT." On the first NYSE trading day following the Distribution
Date, "regular way" trading in respect of Company Common Stock will begin. After
the Destinations Distribution, ITT Common Stock will continue to be listed on
the NYSE, but under the symbol "INF."
There may be a temporary, "when-issued" market for Company Common Stock
shortly before the Destinations Distribution. If there is, stockholders will be
able to sell their right to receive shares of Company Common Stock separately
from shares of ITT Common Stock, subject to completion of the Destinations
Distribution. Such stockholders would have to deliver the shares of Company
Common Stock to the buyer promptly after the Destinations Distribution.
Additionally, there may exist a "when-distributed" market for shares of ITT
Common Stock during this period in which stockholders may sell shares of ITT
Common Stock, but retain the right to receive shares of Company Common Stock in
the Destinations Distribution with respect to such ITT Common Stock.
Stockholders are advised to consult their brokers or financial advisors
prior to making any of the foregoing transactions.
The Company cannot predict the specific price at which Company Common Stock
will trade after the Distribution Date. Until Company Common Stock is fully
distributed and an orderly market develops in
37
<PAGE> 41
Company Common Stock, the price at which such stock trades may fluctuate
significantly and may be higher or lower than the price that would be expected
for a fully distributed issue. The price of Company Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for Company Common Stock, (ii)
developments affecting the Company's businesses generally, (iii) the Company's
dividend policy, (iv) investor perception of the Company's business and the
hotel and gaming industries generally and (v) general economic and market
conditions. In the short term, the Company's stock price may also be impacted by
developments in Hilton's efforts to acquire ITT.
As a result of the Distributions, the trading price of ITT Common Stock
will be lower immediately following the Distributions as compared to the trading
price of ITT Common Stock immediately prior to the Distributions, although the
receipt of the shares of Company Common Stock and ITT Educational Common Stock
is expected to offset such effect. The aggregate market values of ITT Common
Stock, Company Common Stock and ITT Educational Common Stock after the
Distributions may be less than, equal to or greater than the market value of ITT
Common Stock prior to the Distributions.
The shares of Company Common Stock ITT stockholders receive in the
Destinations Distribution will be freely transferable, unless a stockholder is
deemed to be an "affiliate" of the Company under the Securities Act of 1933, as
amended (the "Securities Act"). Persons who may be deemed affiliates of the
Company after the Destinations Distribution generally include individuals or
entities that control, are controlled by, or are under common control with the
Company and may include certain of our officers and directors. Persons who are
affiliates of the Company will be permitted to sell their shares of Company
Common Stock only pursuant to an effective registration statement under the
Securities Act or an exemption from the registration requirements of the
Securities Act, such as exemptions afforded by Section 4(2) of the Securities
Act or Rule 144 thereunder.
DIVIDEND POLICY
After the Destinations Distribution, the Company does not intend to pay
cash dividends on shares of Company Common Stock for the foreseeable future.
Whether the Company pays cash dividends (and the amount of any such dividends)
will be at the discretion of the Board. The Company expects that Company Credit
Facilities and other debt instruments of the Company will limit the Company's
ability to declare and pay dividends on its stock, as well as its ability to
distribute, liquidate, purchase or acquire its stock either directly or through
any subsidiary. Future dividend decisions will be based on, and affected by, a
number of factors, including the terms of any credit facility, indenture or
other agreements binding upon the Company at such time and its operating results
and financial requirements.
38
<PAGE> 42
ITT DESTINATIONS, INC.
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table summarizes certain selected consolidated financial data
of the Company which have been derived from its audited consolidated financial
statements as of and for the three years ended December 31, 1996, and its
unaudited consolidated financial statements as of and for the two years ended
December 31, 1993 and for the six months ended June 30, 1997 and 1996 and as of
June 30, 1997. The financial and operating data contained in this Information
Statement reflect the discontinuance of ITT's information services segment,
which includes ITT's telephone directories publishing business (ITT World
Directories) and post-secondary technical education business (ITT Educational).
The following financial and operating data should be read in conjunction with
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................................................... $2,815 $2,740 $5,718 $5,396 $3,876 $3,184 $3,109
Income (loss) from continuing operations before accounting
changes(1)................................................ $ 259 $ 86 $ 183 $ 117 $ 44 $ (38) $ (68)
Earnings (loss) per share from continuing operations before
accounting changes(1)..................................... $ 2.19 $ .72 $ 1.55 $ .98 $ .37 $ (.32) $ (.58)
OPERATING DATA:
Hotel operating income (loss)............................... $ 181 $ 158 $ 371 $ 197 $ 152 $ 76 $ (30)
Gaming operating income..................................... 98 117 212 168 -- -- --
Dispositions and other operating income (loss)(1)........... (120) (43) (84) 29 (13) (111) (54)
------ ------ ------ ------ ------ ------ ------
Total operating income (loss)............................... $ 159 $ 232 $ 499 $ 394 $ 139 $ (35) $ (84)
EBITDA(2):
Hotel Segment............................................. 270 230 530 376 239 167 70
Gaming Segment............................................ 132 149 277 243 -- -- --
Corporate expenses and overhead........................... (39) (46) (75) (93) (110) (115) (118)
------ ------ ------ ------ ------ ------ ------
Total.............................................. 363 333 732 526 129 52 (48)
Cash from continuing operating activities................... $ 1 $ 108 $ 377 $ 400 $ 164 $ 67 $ 10
Cash from/(used for) investing activities................... 1,233 (82) (595) (2,686) (1,450) (332) (132)
Cash from/(used for) financing activities................... (1,102) (41) 250 2,024 610 392 520
Number of employees (in thousands).......................... 33 34 33 34 21 14 14
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................................................... $8,120 $8,922 $8,225 $4,873 $3,629 $3,131
Long-term debt, including allocated debt and capital leases..... $1,789 $2,893 $2,634 $ 599 $ 169 $ 186
</TABLE>
- ---------------
(1) Excluding several one-time items and the results of certain assets held for
sale, 1997 income from continuing operations and earnings per share from
continuing operations were $99 and $0.83, respectively, compared with $83
and $0.69, respectively for the first six months of 1996. These comparable
year-over-year results represent increases of 19% and 20% in income from
continuing operations and earnings per share from continuing operations,
respectively. The one-time items reflected in these results include (i) a
$183 pre-tax gain on the sale of 7.5 million shares of Alcatel Alsthom, (ii)
a $200 pre-tax gain on the sale of the Company's 39.8% ownership interest in
Madison Square Garden, (iii) a $58 pre-tax charge in connection with the
restructuring of the Company's World Headquarters operations and (iv) a $29
pre-tax charge for costs associated with the Hilton Offer.
(2) EBITDA, as defined in the following sentence, is presented here as an
alternative measure of our 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, gains on asset
sales, assets held for sale, restructuring charges, service fee income and
miscellaneous income (expense), net. Management believes the EBITDA
information presented supplementally is a useful measure of operating
performance because it is industry practice to evaluate hotel and gaming
properties based on operating income before interest, income taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
because it is customarily used by certain investors and analysts together
with net income and cash flow from operations as defined by generally
accepted accounting principles, in evaluating a company's ability to service
its debt. The calculation of EBITDA does not include the commitments of the
Company for capital expenditures and payment of debt. 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 Company. The Company's definition of EBITDA as
presented herein may not be comparable to similarly titled measures of other
companies due to the inclusion or exclusion of certain financial measures.
39
<PAGE> 43
ITT DESTINATIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1997 and the Unaudited Pro Forma Consolidated Statements of Income for the six
months ended June 30, 1997 and for the year ended December 31, 1996 are based
upon the assumptions and adjustments set forth in the accompanying Notes to the
Unaudited Pro Forma Consolidated Financial Statements. The following pro forma
financial information should be read in conjunction with the Consolidated
Financial Statements and other financial information set forth in this
Information Statement.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
STOCK DEBT PRO FORMA
JUNE 30, 1997 TENDER SALE OF TENDER AFTER
ACTUAL OFFER DISTRIBUTIONS WBIS+ OFFER DISTRIBUTIONS
-------------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Total current assets............. $ 919 $ 919
Plant, property and equipment.... 4,465 4,465
Investments...................... 434 (105) 329
Goodwill, net.................... 1,290 1,290
Other assets..................... 949 949
Net assets of discontinued
operations..................... 63 (63) --
------- ------ ---- ---- ------ -------
$ 8,120 (63) (105) $ 7,952
======= ==== ==== =======
Notes payable and current
maturities of long-term debt... $ 403 $ 403
Other current liabilities........ 947 947
Allocated debt of ITT............ 1,098 (1,098) --
Other long-term debt............. 691 2,100 (105) 1,098 3,784
Deferred income taxes and other
liabilities.................... 622 622
Net liabilities of discontinued
operations..................... 815 (815) --
Minority interest................ 198 198
Common stock..................... 2,903 (2,902) 1
Additional paid in capital....... -- 802 752 1,554
Cumulative translation
adjustment..................... (77) (77)
Retained earnings................ 520 520
------- ------ ---- ---- ------ -------
$ 8,120 -- (63) (105) -- $ 7,952
======= ====== ==== ==== ====== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Statements.
40
<PAGE> 44
UNAUDITED PRO FORMA CONSOLIDATED INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
SIX MONTHS SALE OF SALE OF
ENDED STOCK DEBT ALCATEL MADISON SALE OTHER PRO FORMA
JUNE 30, 1997 TENDER TENDER ALSTHOM SQUARE OF UNUSUAL AFTER
ACTUAL OFFER OFFER SHARES GARDEN WBIS+ ITEMS DISTRIBUTIONS
------------- ----- ----- ------- ------- ----- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 2,815 $ 2,815
Costs and expenses:
Salaries, benefits and other
operating............................ 2,129 2,129
Selling, general and administrative.... 335 335
Restructuring charge................... 58 (58) --
Depreciation and amortization.......... 134 134
------ ----- ----- ----- ----- ----- ----- ------
2,656 (58) 2,598
------ ----- ----- ----- ----- ----- ----- ------
159 (58) 217
Interest expense, net.................. (76) (86) (7) 15 19 5 (130)
Gain on sale of Alcatel Alsthom
shares............................... 183 (183) --
Gain on sale of investment in Madison
Square Garden........................ 200 (200) --
Miscellaneous income (expense), net.... (18) (4) 5 29 12
Provision for income taxes............. (189) 36 3 71 74 0 (37) (42)
Minority equity........................ --
------ ----- ----- ----- ----- ----- ----- ------
Income from continuing operations...... $ 259 (50) (4) (97) (111) 10 50 $ 57
====== ===== ===== ===== ===== ===== ===== ======
Earnings per share from continuing
operations........................... $ 2.19 $ 0.65
====== ======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Statements.
41
<PAGE> 45
UNAUDITED PRO FORMA CONSOLIDATED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR
ENDED SALE OF SALE OF
DEC. 31, STOCK DEBT ALCATEL MADISON PRO FORMA
1996 TENDER TENDER ALSTHOM SQUARE SALE OF AFTER
ACTUAL OFFER OFFER SHARES GARDEN WBIS+ DISTRIBUTIONS
-------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 5,718 $ 5,718
Costs and expenses:
Salaries, benefits and
other operating...... 4,291 4,291
Selling, general and
administrative....... 681 681
Depreciation and
amortization......... 247 247
------- ------- ------- ------- ------- ------- -------
5,219 5,219
------- ------- ------- ------- ------- ------- -------
499 499
Interest expense, net..... (162) (171) (22) 56 41 5 (253)
Miscellaneous income
(expense), net.......... 3 (7) 6 2
Provision for income
taxes................... (150) 73 9 (24) (15) (5) (110)
Minority equity........... (7) (7)
------- ------- ------- ------- ------- ------- -------
Income from continuing
operations.............. $ 183 (96) (13) 32 19 6 $ 131
======= ======= ======= ======= ======= ======= =======
Earnings per share from
continuing operations... $ 1.55 $ 1.48
======= =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Statements.
42
<PAGE> 46
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Consolidated Financial Statements may not be
indicative of the results that would have occurred if the transactions discussed
above had actually occurred on the dates indicated or which may be obtained in
the future. The Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the historical Consolidated Financial Statements and
accompanying notes to such financial statements of the Company included
elsewhere in this Information Statement. Set forth below is a discussion of the
adjustments that are given effect in the Unaudited Pro Forma Consolidated
Financial Statements.
BALANCE SHEET
The accompanying Unaudited Pro Forma Consolidated Balance Sheet assumes
that the following adjustments occurred as of June 30, 1997.
- Pro forma effect is given to the Distributions by treating ITT World
Directories and ITT Educational (book value of $(815) million and $63
million, respectively) as if, for financial reporting purposes, such
corporations were spun-off from the Company.
- Pro forma effect is given to the purchase of 30 million shares of ITT
Common Stock for $70 per share pursuant to the Stock Tender Offer which
will be financed with new indebtedness. See "The Destinations
Distribution -- Other Transactions" and "-- Certain Indebtedness."
- ITT has historically incurred indebtedness for its consolidated group
generally at the parent level rather than at the operating level. In
connection with the Distributions, a portion of the indebtedness
incurred by ITT has been allocated to its hotels and gaming business. In
connection with the Destinations Distribution, all of ITT's long-term
indebtedness will be replaced, pursuant to the Debt Tender Offer and the
repayment of other indebtedness, by indebtedness of ITT ISI and its
subsidiaries and the Company. Thus, the $1.098 billion of long-term debt
of ITT allocated to the Company and the $2.1 billion of debt incurred by
ITT to fund the Stock Tender Offer will be replaced by an aggregate of
$3.198 billion of debt of the Company. The Unaudited Pro Forma
Consolidated Financial Statements assume that the new indebtedness of
the Company will bear an average annual interest rate of approximately
8.15% based on currently prevailing interest rates. See "The
Destinations Distribution -- Other Transactions" and "-- Certain
Indebtedness."
- Pro forma effect is given to the sale of the Company's interest in WBIS+
at its book value of $1.05 million. On May 12, 1997, ITT, in connection
with Dow Jones & Company, Inc. reached a definitive agreement to sell
WBIS+, Channel 31 in New York City, to Paxson Communications Corporation
("Paxson") for a purchase price of $257.5 million. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Asset Dispositions and
Capital Expenditures."
STATEMENTS OF INCOME
The accompanying Unaudited Pro Forma Consolidated Statements of Income
assume the following adjustments:
- Pro forma effect is given to the Stock Tender Offer, the Debt Tender
Offer, the Distributions and the asset dispositions indicated in the
Unaudited Pro Forma Consolidated Statements of Income as if such
transactions had occurred at the beginning of the respective periods
presented. See "The Destinations Distribution -- Other Transactions,"
"-- Certain Indebtedness" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Asset Dispositions and Capital Expenditures."
- Material non-recurring charges or credits and their related tax effects
are excluded.
- A $58 million pre-tax charge in connection with the restructuring of the
Company's World Headquarters operations and a $29 million pre-tax charge
for costs associated with the Hilton Offer are included in "Other
Unusual Items" for the six months ended June 30, 1997.
43
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
This discussion and analysis of financial condition and results of
operations is prepared to reflect the discontinuance of ITT's information
services segment, which includes ITT's telephone directories publishing business
(ITT World Directories) and post-secondary technical education business (ITT
Educational). This financial reporting treatment is appropriate, even though in
the Destinations Distribution it is ITT that will spin-off the Company's
business, because of the relative significance of the hotels and gaming
operations to ITT. The discussion set forth below discusses the Company's
financial condition and results of operations on a historical basis and does not
give effect to the effects on the Company of the Stock Tender Offer, the Debt
Tender Offer, the sale of ITT's interests in Alcatel Alsthom, WBIS+ and Madison
Square Garden or the incurrence of indebtedness related to the Comprehensive
Plan. Such transactions will have the effect of increasing the Company's
interest expense and reducing the number of outstanding shares of Company Common
Stock used in calculating per share numbers. See "ITT Destinations, Inc.
Unaudited Pro Forma Consolidated Financial Statements." For a discussion of
certain adverse consequences of such increased leverage, see "Risk
Factors -- Leverage and Debt Service" and "-- Restrictions Imposed by
Financings."
ITT was formerly a wholly owned subsidiary of a Delaware corporation known
as ITT Corporation ("Old ITT"). On December 19, 1995, Old ITT (which has been
renamed "ITT Industries, Inc.") distributed to its stockholders all of the
outstanding shares of common stock of ITT and ITT Hartford Group, Inc. (which
has been renamed "The Hartford Financial Services Group, Inc.") (the "1995
Spin-off").
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
Revenues of $2,815 in the 1997 period increased 3% compared with $2,740 in
the corresponding 1996 period. Hotels revenues, which increased 6% due to strong
average daily rate gains, were the primary driver of this improvement. Excluding
the results of the two gaming properties planned for disposition, Gaming
revenues decreased 4% due to the impacts of the continued construction projects
at Caesars Palace and Caesars Atlantic City.
Salaries, benefits and other operating costs increased 3% in the period to
$2,129 from $2,060 in the 1996 period. This increase primarily reflects the
costs of acquired hotel properties.
Selling, general and administrative expenses were essentially unchanged in
1997, as increases in the Hotels segment due to acquired properties were offset
by continuing cost rationalization in the Gaming segment. The 1997 period
reflects a $58 pre-tax charge in connection with the restructuring of the
Company's World Headquarters operations.
Excluding the restructuring charge and results of the two Gaming properties
held for sale, the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $363 in the 1997 period compared with $333 in the
1996 period, a 9% improvement. This improvement reflects significant increases
in average room rates, particularly in owned and leased properties and the
benefits from hotel acquisitions partially offset by the impacts of construction
at Caesars Palace and Caesars Atlantic City. EBITDA is presented here as an
alternative measure of the Company'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). Management believes this discussion of EBITDA
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 Company. Depreciation and amortization increased 19% compared with the
prior period due primarily to the impact of various hotel acquisitions discussed
above. Operating income increased 5% primarily resulting from higher average
room rates.
Net interest expense decreased to $76 in the 1997 period from $83 in the
1996 period. Excluding $6 of interest income on the Cablevision note included in
the second quarter 1996 results, interest expense
44
<PAGE> 48
decreased 15%. This decrease was due principally to the lower average debt
balance attributable to selected asset dispositions (see "-- Liquidity and
Capital Resources" for a more detailed discussion of these asset dispositions).
Miscellaneous expense reflects $29 for costs associated with the Hilton
Offer. The Company also recorded pre-tax gains of $183 and $200 related to the
sales of its remaining interest in the capital stock of Alcatel Alsthom and a
39.8% ownership interest in Madison Square Garden, respectively.
Income tax expense increased in the 1997 quarter on higher pretax earnings
due to improved operations and the sale of the Company's interest in the capital
stock of Alcatel Alsthom. The minority equity benefit includes the net loss
attributable to the minority stockholders of Ciga (this loss was due to the
seasonality of its business).
Income from continuing operations increased to $259 in the 1997 period from
$86 in the 1996 period. Excluding several one-time items and the results of
certain assets held for sale, income from continuing operations for the first
six months of 1997 were $99 compared with $83 for the first six months of 1996.
These comparable year-over-year results represent an increase of 19% from the
1996 results. The one-time items reflected in the 1997 results include (i) $183
pre-tax gain on the sale of 7.5 million shares of Alcatel Alsthom, (ii) a $200
pre-tax gain on the sale of the Company's 39.8% ownership interest in Madison
Square Garden, (iii) a $58 pre-tax charge in connection with the restructuring
of the Company's World Headquarters operations and (iv) a $29 pre-tax charge for
costs associated with the Hilton Offer.
BUSINESS SEGMENTS
Revenues, EBITDA and operating income, excluding the effects of assets held
for sale and minority equity, for each of the Company's two major business
segments were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$2,220 $270 $ 181 ............Hotels............ $2,086 $230 $ 158
</TABLE>
Hotels generated EBITDA of $270 in the 1997 six month period, a 17%
increase over $230 in the 1996 period. Owned and leased hotels continued to be
the primary driver of this improved performance, with EBITDA increasing to $200
in the period from $177 a year ago. The EBITDA margin at these properties was
27% for the period, compared with 26% in the 1996 period. In North America, the
average daily rate at owned hotels increased 10%, to $171, and REVPAR rose 10%,
to $125.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$514 $132 $98 ............Gaming............ $ 534 $149 $ 117
</TABLE>
Gaming's 1997 six month results, reflect EBITDA of $132 compared with $149
in the 1996 period. This decline is primarily related to the significant
construction activity at Caesars Palace and at Caesars Atlantic City, which is
expected to be completed by year-end.
The Company currently has ongoing expansion projects at Caesars Palace and
Caesars Atlantic City. These projects are expected to have a negative impact on
performance until they are completed. These negative impacts are expected to
primarily result from the noise, appearance and physical condition of the
properties caused by the construction and, to a lesser extent, a slight
reduction in the number of available rooms during certain project phases. A
discussion of the Company's program to upgrade and expand its existing gaming
operations appears under "-- Liquidity and Capital Resources."
DISPOSITIONS
At the two Gaming properties planned for disposition, the Desert Inn
experienced a $17 EBITDA loss in the six months ended June 30, 1997 compared
with an operating loss of $2 and EBITDA of $1 in the 1996
45
<PAGE> 49
period, respectively. The 1997 losses were due to a negative win percentage in
baccarat in the first quarter and ongoing construction disruption. The Sheraton
Casino posted operating income and EBITDA of $3 and $6 for the six months ended
June 30, 1997, respectively, compared with $7 and $11 in the 1996 period as a
result of the continued effects of increased local competition.
During February and March 1997, ITT sold its remaining interest in the
capital stock of Alcatel Alsthom. Total proceeds from these sales were
approximately $830, resulting in a pre-tax gain of $183. On May 12, 1997, ITT
and Dow Jones reached a definitive agreement to sell WBIS+, Channel 31 in New
York City, to Paxson for a purchase price of $257.5. The closing of the sale of
ITT's interest in WBIS+ is subject to regulatory approval, and is expected to
occur in the fourth quarter of 1997. On June 17, 1997, ITT sold 39.8% of its
interest in Madison Square Garden. Total proceeds from this sale were
approximately $500, resulting in a pre-tax gain of $200. On August 1, 1997,
Sheraton entered into an agreement in principle with Davis Gaming to form a
50/50 joint venture to own the Desert Inn and the 34 acre parcel of land
adjacent to the Desert Inn. This transaction, which is subject to the execution
of definitive agreements, due diligence and certain other customary closing
conditions, is expected to be completed by November 1, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Revenues of $5,718 in 1996 increased 6% compared with $5,396 in 1995. This
growth was fueled by the Hotels segment, which realized an 11% increase in
average room rates in its owned and leased properties as well as the benefit
from hotel acquisitions which were made in late 1995 and during 1996. Gaming
revenues rose 4% in 1996 due to the inclusion of a full year of Caesars results
versus eleven months in 1995. Excluding this benefit, Gaming revenues decreased
2% due to construction disruption at The Desert Inn, which impacted casino
operations for almost the entire year, and increased competition in the Tunica,
Mississippi market, where The Sheraton Casino results were substantially below
the previous year. During this period, management continued to aggressively
pursue revenue growth as well as cost saving opportunities in each of its market
segments through a variety of strategies including the cross promotion of its
hotel and gaming assets and continued domestic and international expansion.
Salaries, benefits and other operating costs increased 4% in 1996 to $4,291
from $4,117 representing the costs of the acquired properties and smaller
increases in the cost of services. Overall, salaries, benefits and other
operating costs represented 75% of revenues in 1996, down from 76% in 1995. This
decrease reflects management's ongoing cost containment programs as well as the
increases in average room rates noted above outpacing increases in costs.
Selling, general and administrative expenses increased 3% to $681 in 1996
compared with $662 in 1995. Included in the 1995 period is a charge of $51 for
severance and other costs associated with restructuring the headquarters of the
Hotels business segment and a charge of $6 associated with the consolidation of
certain administrative and other functions in the Gaming business segment. The
1995 results also include a benefit of $96 representing the reimbursement of
overhead expenses related to world headquarters management and supervision of
the entities which comprised Old ITT prior to the 1995 Spin-off ("service fee
income"). Excluding the impact of these items, selling, general and
administrative expenses declined approximately 3% in 1996, reflecting
management's continuing commitment to cost containment.
Excluding the prior year restructuring charges and service fee income, the
Company generated EBITDA of $746 in 1996 compared with $579 in 1995, a 29%
improvement. This improvement reflects the significant average room rate
increases, the benefits from acquisitions in the Hotels business segment and
other operational improvements. This overall increase was mitigated by
significant adverse conditions at two of the Company's gaming properties, The
Desert Inn and The Sheraton Casino. Depreciation and amortization increased 11%
in 1996 compared with 1995 due to the impact of various acquisitions. Excluding
the prior year restructuring charges and service fee income, operating income
rose 40% in 1996 to $499 compared with $356 in 1995.
Interest expense (before interest income of $68 in 1996 and $49 in 1995)
decreased to $230 from $268 in 1995. During 1995, Old ITT allocated certain
indebtedness between the Company and ITT Industries in anticipation of the 1995
Spin-off. As a result of such allocation, the interest expense reflected in 1995
is not
46
<PAGE> 50
necessarily indicative of the interest expense which would have been incurred if
we had been an independent entity during such period.
Income tax expense increased in 1996 due to higher pretax earnings and a
higher effective tax rate, which was caused by a difference in the mix of the
Company's worldwide earnings. In addition, during 1995 Old ITT allocated certain
tax attributes between the companies in anticipation of the 1995 Spin-off. Such
allocation reflects results that are not necessarily indicative of the income
tax expense that the Company would have incurred if it had been an independent
entity during such period.
The minority equity represents the net income attributable to the minority
stockholders of Ciga and increased due to higher earnings.
Net income from continuing operations of $183 in 1996 improved 56% compared
with $117 in 1995; the results of the factors discussed above.
BUSINESS SEGMENTS
Revenues, EBITDA and operating income, excluding the effects of the 1995
restructuring charges ($51 in Hotels and $6 in Gaming), for each of our two
major business segments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 1996 YEAR ENDED 1995
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$4,433 $530 $ 371 ............Hotels............ $4,164 $376 $ 248
</TABLE>
Hotels 1996 results reflect average room rate increases of 11% at owned and
leased properties throughout the world. The average rate gains at these
properties contributed to a 10% increase in REVPAR to $106 in 1996 from $96 in
1995, and was the primary contributor to a 14% revenue increase at owned and
leased properties. Improvements in the owned and leased properties have a
greater impact on the Hotels segment results than do improvements in managed
properties, where the majority of the improvements are realized by the owners of
those properties. Despite strong average rate gains, managed property revenues
increased by only 3% in 1996 due to the termination of several hotel management
contracts.
Owned and leased properties, which generate 75% of the Hotel segment
EBITDA, reflect a 37% EBITDA improvement. Excluding the effects of acquisitions,
EBITDA from owned and leased properties improved 27%, as evidenced by a 42%
improvement in New York (consisting of the St. Regis, the Sheraton New York, the
Sheraton Manhattan and the Sheraton Russell properties), an 82% improvement in
San Diego, California, a 58% improvement in Miami, Florida, and a 63%
improvement in Rome (three properties). The primary contributors to the improved
results at these properties were increased average room rates and cost
containment. Acquisitions, which consist of properties purchased and
constructed, contributed $32 of EBITDA in 1996 and include properties in London,
Paris, Warsaw (Poland), Cancun (Mexico) and the Fiji Islands. EBITDA from
franchised properties increased 7% on a 6% average room rate increase. Hotels'
41% EBITDA improvement and 50% operating income growth in 1996 compared with
1995 reinforce management's philosophy of maximizing operating results by
attaining an optimal combination of rate and occupancy while enhancing the level
of service and value to our customers. During this period, the Company continued
to expand and enhance its image among world travelers through targeted
renovations, upgrading standards and strategic acquisitions.
During 1996, the Company signed agreements to manage seven new hotels to be
opened in China. Included in the seven hotels is the Beijing International Club,
which will open in 1997 and will include a 286-room hotel, an office building
with more than 75,000 square feet of space for lease, a sports and recreation
complex, 112 upscale apartments and a private membership club. The Company will
own a 31% interest in this property. The remaining six hotels will be located in
the cities of Suzhou, Guangzhou, Dongguan, Shenyang, Wuxi and Haikou and are
scheduled for opening in the next two years. These seven hotels, combined with
the five hotels currently managed in China, will give the Company more than
5,500 rooms in China and make the Company one of the largest up-scale
international hotel managers and investors in the Asia Pacific region.
47
<PAGE> 51
At December 31, 1996, Hotel properties included 68 properties (17%) which
were owned or leased, 135 properties (33%) which were managed under long-term
agreements and 208 properties (50%) which were franchised, totaling over 128,000
rooms worldwide.
<TABLE>
<CAPTION>
YEAR ENDED 1996 YEAR ENDED 1995
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$1,066 $277 $ 212 ............Gaming............ $ 944 $243 $ 174
</TABLE>
Gaming's 1996 results include strong performances at Caesars Atlantic City
in Atlantic City, New Jersey, Caesars Palace in Las Vegas, Nevada, and Caesars
Tahoe in Stateline, Nevada. At Caesars Atlantic City, record revenues, EBITDA
and operating income were the result of improved table and slot results despite
higher marketing costs. Caesars Palace recorded improved revenues and flat
EBITDA and operating income despite a third quarter decline in its premium play
business and the negative effects that construction had on the operations.
Caesars Tahoe improved its results through successful cost containment programs
while maintaining gaming volume. All three of these properties also benefited
from strong increases in average room rates and high occupancy levels.
The Company currently has ongoing expansion projects at Caesars Palace and
Caesars Atlantic City. These projects are expected to have a negative impact on
performance until they are completed. These negative impacts are expected to
primarily result from the noise, appearance and physical condition of the
properties caused by the construction and, to a lesser extent, a slight
reduction in the number of available rooms during certain project phases. A
discussion of our program to upgrade and expand our existing gaming operations
appears under "-- Liquidity and Capital Resources."
DISPOSITIONS
Results at the two gaming properties held for sale were negatively impacted
by construction disruption at the Desert Inn and excess market capacity at The
Sheraton Casino. The Desert Inn opened its newly renovated casino on December
26, 1996, however, construction disruption prior to this opening severely
limited casino operations during the year. Increased competition in the Tunica
market, which is expected to continue throughout 1997, contributed to results
substantially below 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Revenues of $5,396 in 1995 increased 39% compared with $3,876 in 1994,
reflecting the eleven month contribution of the Caesars acquisition as well as
the full year contribution of Ciga and other significant hotel acquisitions
completed during the latter half of 1994. Caesars revenues totaled $910 from the
date of acquisition while Ciga and other hotel acquisitions contributed $586 in
1995 compared with $271 in 1994 from the dates of acquisition of these
properties. Excluding the Caesars and hotel acquisitions discussed above,
revenues increased 8% in 1995 primarily due to higher average room rates in
owned and leased properties in North America and the inclusion of a full year's
results of The Sheraton Casino.
Salaries, benefits and other operating costs increased 26% in 1995 to
$4,117 from $3,277, representing the costs of the acquired properties and
smaller increases in the cost of services. Overall, salaries, benefits and other
operating costs represented 76% of revenues in 1995, down from 85% in the
comparable 1994 period, as higher average room rates and occupancy outpaced the
increase in costs.
Selling, general and administrative expenses increased 87% to $662 in 1995
compared with $354 in 1994, due primarily to the costs associated with the
Caesars, Ciga and the other hotel acquisitions. In 1995, the Company embarked on
a company-wide cost rationalization program aimed at reducing administrative
costs. In June 1995, the Company announced the closing of the Caesars
headquarters in Los Angeles; in September 1995, the Company provided for
severance and other costs associated with the downsizing of the headquarters
operations of the Hotels business segment totaling $51 pretax; and in December
1995, the Company recorded charges associated with the consolidation of certain
administrative and other functions in the Gaming segment of $6 pre-tax.
48
<PAGE> 52
Selling, general and administrative expenses have been reduced by service
fee income of $96 and $88 in 1995 and 1994, respectively, representing amounts
received for overhead expenses related to world headquarters management and
supervision of the entities comprising Old ITT prior to the 1995 Spin-off,
including advice and assistance provided by the Company in connection with cash
management, legal, accounting, tax and insurance services. The net cost of these
services to us is not necessarily indicative of the costs that the Company would
have incurred if it had been operated as an independent entity during such
period.
Operating income rose to $394 in 1995 compared with $139 in 1994,
reflecting the impact of the acquisitions discussed above, as well as the impact
of one-time charges related to the planned disposals of certain non-core assets
and restructuring charges referred to above. Excluding the acquisitions and
restructuring charges, operating income increased 58% primarily due to higher
average room rates, particularly in owned properties in North America.
Depreciation and amortization increased 110% compared with 1994 due primarily to
the acquisitions discussed above.
Interest expense (before interest income of $49 in 1995 and $14 in 1994)
increased to $268 from $69 in 1994. This increase is primarily the result of the
Caesars and hotel acquisitions discussed above as well as the March 1995
acquisition of Madison Square Garden Corporation.
Income tax expense rose during 1995 due to higher pretax earnings which was
partially offset by a decrease in the effective rate in 1995 compared with 1994.
Net income from continuing operations increased to $117 in 1995, compared
with $44 in 1994, the result of the factors discussed above.
BUSINESS SEGMENTS
Revenues, EBITDA and operating income, excluding the effects of the 1995
restructuring charges ($51 in Hotels and $6 in Gaming), for each of the
Company's two major business segments were as follows:
<TABLE>
<CAPTION>
YEAR ENDED 1995 YEAR ENDED 1994
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$4,164 $376 $ 248 ..............Hotels.............. $3,700 $239 $ 152
</TABLE>
The 1995 results reflect the full-year benefit of the Ciga and other
significant hotel acquisitions made during 1994. The average room rate at our
owned and leased properties increased 10% and was the primary contributor to a
10% increase in REVPAR to $96. EBITDA from owned and leased properties more than
doubled in 1995. Excluding the effects of 1994 acquisitions, EBITDA from owned
and leased properties improved 51%, with strong improvements throughout North
America. The primary contributors to the improved results were the increase in
average room rates and the benefits of cost containment programs. These
increases reflected management's focus on attaining the optimal combination of
rate and occupancy while enhancing the level of service and value to our
customers. EBITDA from managed properties increased 24% due to the addition of
several new management agreements. At December 31, 1995, Hotel properties
included 68 properties (17%) which were owned or leased, 134 properties (32%)
which were managed under long-term agreements and 214 properties (51%) which
were franchised, totaling over 129,000 rooms worldwide.
<TABLE>
<CAPTION>
YEAR ENDED 1995 YEAR ENDED 1994
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$ 944 $243 $ 168 .............Gaming............. $ -- $ -- $ --
</TABLE>
The January 1995 acquisition of the most internationally recognized brand
name in gaming, Caesars, positioned us to be a competitive force in the gaming
industry. The Gaming segment has key properties in both major U.S.
jurisdictions, Las Vegas, Nevada and Atlantic City, New Jersey as well as other
properties, both domestic and international.
49
<PAGE> 53
DISPOSITIONS
EBITDA at The Sheraton Casino increased $24 to $29 from $5 in 1994 due to
the inclusion of a full year of operating results from this property which
opened in August 1994. Results at the Desert Inn during this period were flat
due primarily to lower than anticipated hold percentages.
LIQUIDITY AND CAPITAL RESOURCES
ITT plans to finance the Stock Tender Offer, the Debt Tender Offer and the
repayment of certain other indebtedness with a combination of available cash,
the proceeds from borrowings under the Promedia Credit Facilities and the
Publimedia Credit Facilities, and the issuance of the Subsidiary Notes by
Promedia and Publimedia and $3.3 billion in cash received from the Company in
connection with the First, Second and Third Payments. The Company will finance
the First, Second and Third Payments and certain other expenses with borrowings
under the Company Credit Facilities. After the Destinations Distribution, the
Company will be responsible for approximately $4.2 billion of outstanding
indebtedness. See "The Destinations Distribution -- Certain Indebtedness."
Cash flows are expected to be sufficient to service the Company's
indebtedness, satisfy tax obligations and fund maintenance capital expenditures
and other liquidity needs. Cash from continuing operations was $1 in the six
months ended June 30, 1997, compared with $108 in the corresponding prior year
period. This decrease was attributable to the taxes on the Company's gains on
the sales of its interest in Madison Square Garden and its 7.5 million shares of
Alcatel Alsthom. In accordance with SFAS No. 95, "Statement of Cash Flows,"
these taxes remain as a use of cash when computing cash flow from operating
activities while proceeds from divestments are a component of cash flows from
investing activities. Excluding these taxes, cash flow from continuing
operations would have been $162 in the 1997 six month period. Cash from
continuing operations was $377 in the 1996 full year compared with $400 in the
corresponding 1995 period. This decrease was attributable to working capital
increases which more than offset the increase in operating income. Cash from
continuing operations increased significantly in the 1995 full year to $400
compared with $164 in 1994 primarily due to the Caesars acquisition, selected
hotel acquisitions as well as working capital decreases.
Cash from investing activities grew to $1,233 in the 1997 six months
compared with a use of funds of $82 in the corresponding 1996 period. This
increase reflects the gross proceeds from the Company's sales of certain assets
discussed above as well as proceeds from a payment by Cablevision Systems
Corporation ("Cablevision") to equalize its interest in Madison Square Garden.
This increase was offset somewhat by the Company's continuing construction
activity related to its gaming expansion projects as more fully discussed below.
Cash used for investing activities was $595 in the 1996 full year compared with
$2,606 in the 1995 period. Acquisitions, net of acquired cash, decreased to $364
in 1996 from $2,309 in 1995. Reflected in 1996 acquisitions is the purchase of
WBIS+, as well as certain hotel acquisitions. The 1995 acquisitions reflect the
Caesars and Madison Square Garden transactions and certain hotel purchases. Cash
used for plant, property and equipment continued to grow in 1996 due primarily
to construction activity in the Gaming segment. The 1994 acquisitions reflect
several hotel purchases, notably the hotels owned by Ciga, the Phoenician,
Sheraton on the Park and others.
Cash used for financing activities increased to $1,102 in the 1997 six
months compared with $41 as the Company used proceeds from asset sales to retire
indebtedness. The Company generated cash from financing activities in the 1996,
1995, and 1994 full years primarily from debt issuances. The 1995 and 1994
financing activities also reflect funds (paid to) received from ITT Industries,
Inc., prior to the 1995 Spin-off. Additional liquidity needs are expected to be
funded through traditional debt or equity financing, asset sales or any
combination thereof.
The Company has entered into several forward exchange contracts with major
financial institutions to hedge exchange rate exposure on the Company's foreign
currency denominated assets. The Company is an end-user and does not utilize
these hedging contracts for speculative purposes. The Company has strict
policies regarding the financial stability and credit standing of its major
counterparties. The aggregate contractual amount of these hedging contracts at
June 30, 1997 was approximately $150 which approximated
50
<PAGE> 54
fair value. These hedging contracts mature at various periods through 1998. The
Company's hedging activities and the exposure under all its hedging contracts is
immaterial to the Company.
ASSET DISPOSITIONS AND CAPITAL EXPENDITURES
On February 11, 1997, ITT sold three million shares of the capital stock of
Alcatel Alsthom for approximately $300. On March 27, 1997, ITT sold its
remaining interest in the capital stock of Alcatel Alsthom for proceeds of
approximately $530. Proceeds from these sales were used for general corporate
purposes, including debt reduction.
On February 18, 1997, ITT received $169 as payment of the remaining amount
necessary to equalize the partnership interests of Cablevision and ITT in
Madison Square Garden. On June 17, 1997, ITT closed the first transfer under its
agreement, dated as of April 15, 1997, with Cablevision and certain of its
affiliates (the "MSG Agreement"), to sell its 50% interest in Madison Square
Garden to Cablevision for $650 plus the assumption of approximately $115 of
indebtedness. At such closing, Madison Square Garden redeemed a portion of ITT's
interest in Madison Square Garden, such that after such redemption ITT owned an
11.5% limited partnership interest in Madison Square Garden, for $493.5, and the
general partner of Madison Square Garden redeemed all of the shares of \its
capital stock owned by ITT for $6.5. In addition, at such closing, Cablevision
caused SportsChannel Associates, a New York general partnership, to be
contributed as a capital contribution to Madison Square Garden, which diluted
ITT's limited partnership interest in Madison Square Garden to 10.2%. This
continuing limited partnership interest and ITT's rights under the MSG Agreement
will be retained by the Company. The Company has a "put" option to require
Cablevision to purchase (or cause Madison Square Garden to redeem) half of the
Company's continuing interest in Madison Square Garden for $75 on June 17, 1998
and the Company's other half of this continuing interest for an additional $75
(or if the first "put" option is not exercised on June 17, 1998, the Company's
entire continuing interest for $150) on June 17, 1999. On June 17, 2000,
Cablevision has the right to purchase (or cause Madison Square Garden to redeem)
the Company's remaining interest in Madison Square Garden at a price determined
by an investment banking firm to be fair market value, subject to a floor price
equal to the proportionate "put" price. In addition, Cablevision has the right
to purchase (or cause Madison Square Garden to redeem) the Company's remaining
interest in Madison Square Garden upon a "change of control" (as defined in the
MSG Agreement) of the Company, at a price equal to the proportionate put price,
payable, at Cablevision's election, in cash or debt securities of Cablevision.
The Company also has the right to cause to be contributed as a capital
contribution to Madison Square Garden an aircraft owned by the Company at a
value of $38. If the Company causes such contribution to occur, each of the
"put" prices will be increased by $19 (or if the first "put" option is not
exercised, $38) and the floor price in respect of Cablevision's third-year call
right and the price payable upon the exercise of Cablevision's change of control
call right will be correspondingly increased. In the event Cablevision does not
exercise its third-year call right, the Company's percentage interest in Madison
Square Garden will be increased to reflect a capital contribution to Madison
Square Garden of $38 due to the contribution of the aircraft.
On May 12, 1997, ITT and Dow Jones reached a definitive agreement to sell
WBIS+, Channel 31 in New York City, to Paxson for a purchase price of $257.5.
The closing of the sale of ITT's interest in WBIS+ is subject to regulatory
approval, and is expected to occur in the fourth quarter of 1997. Paxson
currently provides the station's programming under a time brokerage agreement
until the transaction closes. ITT's rights under the agreements with Paxson will
be retained by the Company.
On June 30, 1997, we sold to FelCor five Sheraton hotels for $200 in cash
and retained a 20-year contract to manage these hotels, subject to a limited
change of control provision.
ITT used the proceeds of the dispositions of shares of Alcatel Alsthom, the
initial transfer of its interest in Madison Square Garden and the sale of five
hotels to FelCor, aggregating approximately $1.53 billion, for general corporate
purposes, including repayment of indebtedness.
The Company has entered into an agreement in principle dated as of June 28,
1996, to form a joint venture with Planet Hollywood International, Inc. ("Planet
Hollywood") to develop, own and operate "Planet Hollywood" themed hotel/casinos.
The Company expects that the joint venture will initially develop a Planet
51
<PAGE> 55
Hollywood Hotel and Casino in Las Vegas, Nevada, and later in Atlantic City, New
Jersey, as market conditions warrant. Although the Company and Planet Hollywood
have entered into an agreement in principle, the Company and Planet Hollywood
have not completed the negotiation of definitive documentation. No specific
terms for this joint venture have been agreed upon.
On June 27, 1996, the Company announced a capital expenditure program to
upgrade and expand its existing gaming operations. Approximately $495 is
expected to be invested in Caesars Palace and approximately $280 is expected to
be invested at Caesars Atlantic City. The Company is also in the process of
renovating the Desert Inn. This renovation commenced in 1995 and is expected to
be completed in the third quarter of 1997 with a total cost of approximately
$175. In addition to the expansion of existing gaming operations, the Company
has begun construction of a riverboat casino and a hotel in Harrison County,
Indiana, at a cost of approximately $270. Construction on certain of these
projects has commenced. Total capital expenditures related to these projects is
estimated to be $840 and $270 in 1997 and 1998, respectively. The Company plans
to finance this capital expenditure program from a combination of cash generated
from operations, net proceeds received from the issuance of securities and the
sale of non-strategic assets. Construction projects, including the Harrison
County riverboat project, entail significant risks, including management's
ability to control and manage such projects effectively, shortages of materials
or skilled labor, unforeseen engineering, environmental or geological problems,
work stoppages, weather interference, difficulties in obtaining governmental
permits or other regulatory approvals and unanticipated cost increases. No
assurance can be given that the budgeted costs of the Company's current and
future projects will not be exceeded or that any such projects will commence
operations within contemplated schedules, if at all. In addition, the scope of
the licenses, permits and authorizations required to construct and open a new
facility or expand an existing facility are extensive, and the failure to
obtain, or delay in obtaining, such licenses, permits and authorizations could
prevent or delay the completion of construction or opening of all or part of
such facilities, affect the design of features of the project or increase
completion costs.
Capital expenditures totaled $182 in the first quarter of 1997, 25% and 75%
at the Hotels and Gaming segments, respectively, compared with $84 in the first
quarter of 1996, with 62% and 38% attributable to the Hotels and Gaming
segments, respectively.
52
<PAGE> 56
BUSINESS
GENERAL
The Company is engaged in the hotels and gaming business directly and
through its subsidiaries Ciga and Caesars. Through the Sheraton, The Luxury
Collection, Ciga, Four Points Hotels and Caesars brand names, the Company is
represented in most major markets of the world. In 1996, the Company hosted over
50 million customer nights at its hotel properties in 62 countries. Gaming
operations are marketed under either the Caesars or Sheraton brand names and
service marks and are currently represented in Las Vegas (Nevada), Atlantic City
(New Jersey), Halifax (Nova Scotia), Sydney (Nova Scotia), Lake Tahoe (Nevada),
Tunica County (Mississippi), Lima (Peru), Cairo (Egypt), Windsor (Ontario) and
Townsville (Australia).
Sheraton is a worldwide hospitality network of over 420 owned, leased,
managed and franchised properties, including hotels, resorts, casinos and inns.
Sheraton's origins date back to 1937 with the acquisition of its first hotel in
Springfield, Massachusetts. Following rapid expansion, in the 1940s Sheraton
became the first hotel company to be listed on the NYSE. Sheraton was acquired
by Old ITT in 1968 and developed into the leading hotel company it is today.
Caesars is one of the world's leading companies in gaming. Caesars'
flagship property is Caesars Palace in Las Vegas, Nevada. Caesars also owns and
operates Caesars Atlantic City in Atlantic City, New Jersey, and Caesars Tahoe
in Stateline, Nevada. In addition, Caesars owns one-half of a management company
that operates Casino Windsor, which was opened in May 1994 in Windsor, Ontario.
Caesars Palace, Las Vegas' first themed resort and casino, opened to much
fanfare on August 6, 1966. Since that time, Caesars has worked almost constantly
to upgrade its facilities and develop new properties. Caesars is committed to
establishing its facilities as the best in the industry. Caesars was acquired by
Old ITT in January 1995. In June 1996, the Company announced a capital
expenditure program designed to increase and enhance Caesars' future growth. As
part of that program, Caesars Palace and Caesars Atlantic City are being
expanded and enhanced. The Company also is constructing the largest riverboat in
the United States. This riverboat will be located in Harrison County, Indiana,
on the Ohio River, across from Louisville, Kentucky.
Prior to the Destinations Distribution, the Company was a wholly owned
subsidiary of ITT. The Company was incorporated in Nevada on July 15, 1997, for
the purpose of effecting the Destinations Distribution. Prior to December 19,
1995, ITT was a wholly owned subsidiary of Old ITT (which has been renamed "ITT
Industries, Inc."). In the 1995 Spin-off, Old ITT distributed to its
stockholders of record at the close of business on December 19, 1995 all of the
outstanding shares of ITT Common Stock and the common stock of ITT Hartford
Group, Inc. (which has been renamed "The Hartford Financial Services Group,
Inc."). Holders of common stock of Old ITT received one share of ITT Common
Stock for every share of Old ITT common stock held. In connection with the 1995
Spin-off, ITT, which was then named "ITT Destinations, Inc.," changed its name
to "ITT Corporation." References to ITT prior to December 20, 1995 are
references to Old ITT, the former parent corporation of ITT. Neither ITT nor the
Company is affiliated with ITT Industries, Inc. or The Hartford Financial
Services Group, Inc. Prior to the Destinations Distribution, and in order to
facilitate the Destinations Distribution, Sheraton will be merged with and into
the Company. In connection with the merger of the Company and Sheraton, all of
the officers and directors of Sheraton will become officers and directors of ITT
Sheraton Corporation, a Delaware corporation that the Company will form ("New
Sheraton"). Following the Destinations Distribution, New Sheraton will be
responsible for the operation of the Company's hotel business.
HILTON TRANSACTION
On January 31, 1997, HLT, a wholly owned subsidiary of Hilton, commenced
the Hilton Offer to purchase 61,145,475 shares, approximately 50.1% of the
outstanding shares, of ITT Common Stock, at a purchase price of $55 per share,
net to the seller in cash, upon the terms and subject to the conditions set
forth in the Hilton Offer to Purchase. Hilton stated that, if the Hilton Offer
were successful, it intended to consummate the Proposed Squeeze Out Merger
pursuant to which all shares of ITT Common Stock not tendered and purchased
pursuant to the Hilton Offer (other than shares of ITT Common Stock owned by
Hilton and its subsidiaries or held in ITT's treasury) would be converted into
the right to receive a number of shares of Hilton common stock having a nominal
value of $55 per share, subject to unspecified collar provisions. On August 7,
1997, Hilton amended the Hilton Offer to increase the offered purchase price to
$70
53
<PAGE> 57
per share of ITT Common Stock and to indicate that each share not tendered
pursuant to the Hilton Offer would be converted in the Proposed Squeeze Out
Merger into the right to receive the number of shares of Hilton common stock
having a nominal value of $70 per share of ITT Common Stock, subject to
unspecified collar provisions.
At a meeting held on February 11, 1997, the ITT Board unanimously
determined that the Hilton Transaction, including the Hilton Offer, is
inadequate and not in the best interests of ITT. At a meeting held on July 15,
1997, the ITT Board reassessed the Hilton Transaction in light of developments
since February 11, including the Comprehensive Plan, agreements for the
disposition of certain assets, ongoing cost, rationalization at ITT and its
subsidiaries and acquisitions of hotels and management and franchise agreements,
and unanimously reaffirmed its conclusion that the Hilton Transaction, including
the Hilton Offer, is inadequate and not in the best interests of ITT. At a
meeting held on August 14, 1997, the ITT Board reassessed the revised Hilton
Transaction in light of developments since July 15, including the Comprehensive
Plan, and unanimously reaffirmed its conclusion that the Hilton Transaction,
including the Hilton Offer, as amended, is inadequate and not in the best
interests of ITT. Accordingly, the ITT Board continues to recommend unanimously
that the stockholders of ITT reject the Hilton Transaction and not tender their
shares of ITT Common Stock pursuant to the Hilton Offer or take any other action
to facilitate the Hilton Offer. The ITT Board also reaffirmed its determination
that, in light of the prospects of each of ITT's businesses, the attractiveness
of the Distributions and the other elements of the Comprehensive Plan and
certain other factors, ITT's and its stockholders interests would be best served
if ITT (and particularly the core businesses of ITT) were to remain independent
and pursue the Comprehensive Plan. See "The Destinations Distribution -- Reasons
for the Comprehensive Plan" and "-- Recommendation of the Board of Directors of
ITT With Respect to the Hilton Transaction."
CONTINUED REFINEMENT AND IMPLEMENTATION OF STRATEGIC PLAN
During 1997, ITT has refined its strategic plan to focus on hotels and
gaming and explored and exploited opportunities to enhance the value of ITT
within that focus. This initiative has resulted in the sale of certain of ITT's
assets, a continued focus on cost containment, continued efforts to grow the
hotels and gaming business and the pursuit of transactions that are expected to
enhance the profitability, return on assets or cash flows of that business.
SALE OF ASSETS. As part of its focus on its core business, ITT sold its
interest in Alcatel Alsthom for $830 million, sold a 39.8% interest in Madison
Square Garden for $500 million and contracted through "put" and "call" options
to sell its remaining 10.2% interest for at least $150 million and, with its
partner, Dow Jones, entered into an agreement to sell television station WBIS+
for $257.5 million. The closing of the sale of ITT's interest in WBIS+ is
subject to regulatory approval, and is expected to occur in the fourth quarter
of 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Asset Dispositions
and Capital Expenditures."
COST CONTAINMENT. The Company plans to continue to focus on cost
containment opportunities in its hotels and gaming business. As part of this
program, ITT implemented a significant restructuring of its World Headquarters
operations (for which it recognized a one-time, pre-tax charge of $58 million),
reducing headcount by 65% and annual expenses by at least $20 million. These
cost savings were achieved even while providing for affected employees' enhanced
severance payments, enhanced pension payments and placement services. As a more
narrowly focused entity, the Company plans to continue to reduce costs and
complete its evolutionary process by eliminating the vestiges of its former
conglomerate parent. Specifically, the Company plans to focus on reducing
overhead costs at both its hotels and gaming headquarters as well as operations.
Management of the Company believes that these efforts, which are currently
underway, will result in approximately $10 million to $15 million in additional
overhead savings during 1998.
GROWTH OF THE HOTELS AND GAMING BUSINESS. Within the parameters of the
strategic plan, ITT is actively pursuing opportunities to grow its hotels and
gaming business. Since January 1, 1997, ITT has acquired three hotels and signed
or acquired 82 franchise agreements and management contracts in 20 different
countries, totalling more than 20,000 rooms, including contracts to manage four
former Ritz Carlton hotels. The
54
<PAGE> 58
Company will continue to purchase hotels and interests in hotels, add new
franchises and seek out additional management opportunities throughout the
world. Such efforts will depend upon individual market conditions and factors
affecting the hotel industry generally.
ENHANCED PROFITABILITY, RETURN ON ASSETS AND CASH FLOWS. ITT believes
transactions involving hotel or gaming properties that enhance the
profitability, return on assets or cash flows of its hotels and gaming
operations further the goal of strengthening ITT's core business. These
transactions may include, among other things, joint ventures to develop,
purchase or operate properties and conversions of owned properties to managed
properties. For example, ITT recently entered into a long-term strategic
alliance with FelCor, pursuant to which FelCor acquired five of ITT's hotel
properties and ITT retained long-term contracts to manage such hotels, and an
agreement in principle with Davis Gaming to form a 50/50 joint venture to own
the Desert Inn in Las Vegas, Nevada, and the 34 acre parcel of land adjacent to
the Desert Inn, pursuant to which ITT will receive $250 million in cash and
retain a 50% ownership interest and a long-term contract to manage this
property. ITT is also holding the Desert Inn (pending execution of definitive
agreements with Davis Gaming for the joint venture relating to the Desert Inn)
and The Sheraton Casino in Tunica, Mississippi, for sale and is also conducting
detailed reviews of its options with regard to its ownership interest in Ciga
and certain luxury and other hotels, taking into account the best interests of
its stockholders and ITT. ITT's (and the Company's) reasons for determining to
dispose of, or consider its options with respect to, such assets relate to the
performance of such assets and the business environment in which the Company
operates.
The Company will benefit from the implementation by ITT of, and will
continue to pursue, this strategic plan.
BUSINESS SEGMENTS
The Company has two business segments, Hotels and Gaming. For information
concerning the Company's business segments, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Business Segment information included in the notes to the Company's
financial statements captioned "Distribution and Basis of Presentation,"
"Accounting Policies," "Restructuring," "Discontinued Operations," "Business
Segment Information," "Basis of Presentation," "Gaming Operations" and "Net
Assets Held for Sale," included elsewhere in this Information Statement.
HOTEL OPERATIONS
The Company's revenues from hotel operations are derived worldwide from
owned, leased and managed hotels and the Company's 70.3% ownership interest in
Ciga, a group substantially comprised of luxury hotels in Europe. The Company
also earns franchise fees by licensing the "Sheraton" and "Four Points Hotels"
brands to owners of independent hotels. Revenues in the hotel business
(excluding franchised hotels) are essentially a function of number of rooms,
average daily rate charged for rooms and number of rooms occupied.
The gaming operations in hotels in the Sheraton network and the gaming
operations of Caesars are discussed below under "Gaming Operations." The tables
contained in this section do not include information relating to hotel/casinos
owned by us or Caesars.
55
<PAGE> 59
The table below sets forth as a percentage the sources of revenues of our
hotel operations.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996 DEC. 31, 1995(4)
-------------- ------------- ----------------
<S> <C> <C> <C>
Owned or Leased Hotels.............................. 33% 33% 31%
Managed and Joint Venture Hotels(1)................. 64 64 66
Franchised Hotels(2)................................ 1 1 1
Other(3)............................................ 2 2 2
--- --- ---
100% 100% 100%
</TABLE>
- ---------------
(1) Includes 100% of the revenues of managed and joint venture hotels.
(2) Includes franchise fees, not revenues of franchised hotels.
(3) Other revenues primarily include revenues from reservation services and
Sheraton Club International fees.
(4) Beginning January 1, 1996, results of Caesars' Pocono resorts were included
in Hotel operations. The 1995 results assume that the acquisition of
Caesars' Pocono resorts was completed on January 1, 1995 and have been
restated for an appropriate comparison with 1996. In addition, certain other
hotel property results for 1995 have been reclassified for an appropriate
comparison with 1996.
OWNED AND LEASED HOTELS
The following table illustrates, for owned and leased properties classified
by geographic region and hotel type, the average number of years since purchase
or major renovation, total revenues (in millions), average daily occupancy rate,
average daily room rate, average revenue per available room, total number of
rooms and the total number of properties. The amounts shown in the table reflect
the U.S. dollar equivalent of all local currencies; in some cases, currency
fluctuations may have an adverse effect on the comparison of any region or
individual property for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DEC. 31, 1996 DEC. 31, 1995(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NORTH AMERICA - LUXURY:
Average number of years since purchase
or major renovation................... 9 8 8 7
Total revenues.......................... $113.3 $101.6 $193.3 $174.8
Average daily occupancy rate (1)........ 81% 81% 75% 72%
Average daily rate (2).................. $350 $321 $309 $280
REVPAR (3).............................. $278 $259 $231 $201
Number of rooms at period end........... 1,152 1,091 1,145 1,091
Number of properties at period end...... 3 3 3 3
NORTH AMERICA - UPSCALE:
Average number of years since purchase
or major renovation................... 4 4 4 5
Total revenues.......................... $261.4 $249.1 $520.7 $434.2
Average daily occupancy rate (1)........ 73% 73% 72% 73%
Average daily rate (2).................. $148 $133 $137 $120
REVPAR (3).............................. $107 $98 $99 $87
Number of rooms at period end........... 9,773 10,183 9,797 9,419
Number of properties at period end...... 18 19 18 16
</TABLE>
56
<PAGE> 60
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DEC. 31, 1996 DEC. 31, 1995(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NORTH AMERICA - TOTAL:
Average number of years since purchase
or major renovation................... 5 5 5 5
Total revenues.......................... $374.7 $350.7 $714.0 $609.0
Average daily occupancy rate (1)........ 74% 74% 72% 73%
Average daily rate (2).................. $171 $153 $155 $136
REVPAR (3).............................. $125 $114 $112 $99
Number of rooms at period end........... 10,925 11,274 10,942 10,510
Number of properties at period end...... 21 22 21 19
EUROPE / CIGA - LUXURY:
Average number of years since purchase
or major renovation................... 3 2 2 1
Total revenues.......................... $112.4 $121.1 $263.3 $251.9
Average daily occupancy rate (1)........ 68% 69% 66% 65%
Average daily rate (2).................. $218 $205 $225 $203
REVPAR (3).............................. $147 $141 $149 $131
Number of rooms at period end........... 3,380 3,476 3,188 3,290
Number of properties at period end...... 18 18 17 17
EUROPE / CIGA - UPSCALE:
Average number of years since purchase
or major renovation................... 5 4 4 3
Total revenues.......................... $131.8 $90.4 $218.5 $156.0
Average daily occupancy rate (1)........ 73% 72% 72% 73%
Average daily rate (2).................. $120 $119 $129 $123
REVPAR (3).............................. $87 $85 $93 $90
Number of rooms at period end........... 4,534 3,556 4,434 4,113
Number of properties at period end...... 15 15 15 21
EUROPE / CIGA - TOTAL:
Average number of years since purchase
or major renovation................... 4 3 3 2
Total revenues.......................... $244.2 $211.5 $481.8 $407.9
Average daily occupancy rate (1)........ 71% 70% 69% 69%
Average daily rate (2).................. $160 $160 $171 $160
REVPAR (3).............................. $113 $112 $119 $110
Number of rooms at period end........... 7,914 7,032 7,622 7,403
Number of properties at period end...... 33 33 32 38
AFRICA / MIDDLE EAST - UPSCALE AND
TOTAL:
Average number of years since purchase
or major renovation................... N/A(5) 16 16 15
Total revenues.......................... $1.3 $2.5 $1.2
Average daily occupancy rate (1)........ 77% 67% 58%
Average daily rate (2).................. $11 $11 $11
REVPAR (3).............................. $9 $7 $7
Number of rooms at period end........... 164 164 164
Number of properties at period end...... 2 2 2
</TABLE>
57
<PAGE> 61
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DEC. 31, 1996 DEC. 31, 1995(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
LATIN AMERICA - LUXURY:
Average number of years since purchase
or major renovation................... 6 6 6 9
Total revenues.......................... $16.7 $11.3 $25.9 $22.2
Average daily occupancy rate (1)........ 63% 69% 63% 72%
Average daily rate (2).................. $258 $241 $238 $196
REVPAR (3).............................. $158 $165 $150 $141
Number of rooms at period end........... 425 244 425 244
Number of properties at period end...... 2 1 2 1
LATIN AMERICA - UPSCALE:
Average number of years since purchase
or major renovation................... 11 14 14 13
Total revenues.......................... $88.8 $83.2 $172.3 $152.8
Average daily occupancy rate (1)........ 73% 77% 69% 69%
Average daily rate (2).................. $107 $100 $98 $96
REVPAR (3).............................. $77 $77 $67 $66
Number of rooms at period end........... 4,247 4,015 4,008 44,034
Number of properties at period end...... 9 8 8 8
LATIN AMERICA - TOTAL:
Average number of years since purchase
or major renovation................... 10 13 13 12
Total revenues.......................... $105.5 $94.5 $198.2 $175.0
Average daily occupancy rate (1)........ 72% 77% 68% 69%
Average daily rate (2).................. $119 $108 $106 $103
REVPAR (3).............................. $85 $83 $73 $71
Number of rooms at period end........... 4,672 4,259 4,433 4,278
Number of properties at period end...... 11 9 10 9
ASIA PACIFIC - LUXURY:
Average number of years since purchase
or major renovation................... 2 1 1 1
Total revenues.......................... $24.5 $22.2 $14.5 $33.8
Average daily occupancy rate (1)........ 82% 81% 84% 74%
Average daily rate (2).................. $172 $158 $173 $130
REVPAR (3).............................. $140 $128 $145 $97
Number of rooms at period end........... 559 559 559 --
Number of properties at period end...... 1 1 1 --
ASIA PACIFIC - UPSCALE:
Average number of years since purchase
or major renovation................... 2 2 1
Total revenues.......................... $14.9 N/A(5) $16.1 $17.2
Average daily occupancy rate (1)........ 68% 76% 76%
Average daily rate (2).................. $146 $142 $104
REVPAR (3).............................. $94 $108 $79
Number of rooms at period end........... 553 567 391
Number of properties at period end 2 2 --
</TABLE>
58
<PAGE> 62
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DEC. 31, 1996 DEC. 31, 1995(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
ASIA PACIFIC - TOTAL:
Average number of years since purchase
or major renovation................... 1 1 1 0
Total revenues.......................... $39.4 $22.2 $30.6 $51.0
Average daily occupancy rate (1)........ 75% 81% 79% 75%
Average daily rate (2).................. $160 $158 $154 $119
REVPAR (3).............................. $117 $128 $122 $89
Number of rooms at period end........... 1,112 559 1,126 391
Number of properties at period end...... 3 1 3 --
</TABLE>
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
(3) Revenue per available room ("REVPAR") was computed as room revenue divided
by rooms available for sale.
(4) Certain hotel property results for 1995 have been reclassified for an
appropriate comparison with 1996.
(5) There were no properties in this geographic region for the period presented.
The hotel properties that the Company owns and leases are, in many cases,
subject to mortgage and lease indebtedness. As of June 30, 1997, the aggregate
mortgage and lease indebtedness of such hotels was approximately $521 million.
With respect to the Company's leased properties, one of the Company's
subsidiaries generally leases the land upon which the hotel has been built and
the hotel building. At the end of the lease, the buildings and other leasehold
improvements revert to the landlord. Usually, one of the Company's subsidiaries
is responsible for repairs, maintenance, operating expenses and lease rentals
and retains managerial discretion over operations. Generally, the Company pays a
percentage rental based on total revenues (as defined) or gross operating profit
(as defined) for the facility, but sometimes with a minimum fixed annual rent or
a preferential rent. During the years ended December 31, 1996 and December 31,
1995, the Company paid aggregate rentals, including rentals attributable to the
leased properties, of $19 million and $22 million, respectively, and during the
six months ended June 30, 1997 and June 30, 1996, the Company paid aggregate
rentals, including rentals attributable to leased properties, of $10 million and
$8 million, respectively.
During 1996, the Company acquired three hotel properties: The Regent Hotel,
Fiji, The Sheraton Fiji (which was previously managed by the Company), and The
Park Lane Hotel, London. The aggregate purchase price for these hotels was
approximately $135 million. The Company also purchased the 50% interest in
Sheraton on the Park (in Sydney, Australia) not previously owned for $40 million
and opened two newly-constructed hotels, the Sheraton Paris Airport Hotel (in
Roissy, France) and the Sheraton Warsaw (in Warsaw, Poland). Late in 1995, the
Company also acquired the Sheraton Skyline Hotel (in London, England) and the
Sheraton Cancun (in Cancun, Mexico). These hotels are expected to further
enhance the Company's geographic balance of owned hotels.
On June 30, 1997, the Company sold to FelCor five Sheraton hotels for $200
million in cash. As part of that transaction, the Company retained a 20-year
contract to manage these hotels, subject to a limited change of control
provision. See "-- Managed and Joint Venture Hotels" below. The Company is also
conducting detailed reviews of its options with regard to its interest in Ciga
and certain luxury and other hotels. Further, the Company is, and expects to
continue to be, in the business of purchasing and selling hotels and interests
in hotels throughout the world. From time to time, depending upon individual
market conditions and factors affecting the hotel industry generally, the
Company may in the ordinary course of business buy or sell hotels individually
or as part of a larger group.
MANAGED AND JOINT VENTURE HOTELS
Through subsidiaries the Company manages, usually under long-term
agreements with the owner, a number of hotels throughout the world. The
following table illustrates, for managed and joint venture properties,
classified
59
<PAGE> 63
by geographic region, total revenues (in millions), average daily occupancy
rate, average daily rate, average revenue per available room, total number of
rooms and the total number of properties. The amounts shown in the table reflect
the U.S. dollar equivalent of all local currencies; in some cases, currency
fluctuations may have an adverse effect on the comparison of any region or
individual property for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996 DEC. 31, 1996 DEC. 31, 1995(4)
------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C>
NORTH AMERICA:
Total revenues.......................... $654.7 $603.1 $1,231.0 $1,182.6
Average daily occupancy rate (1)........ 76% 75% 72% 74%
Average daily rate (2).................. $152 $142 $139 $126
REVPAR (3).............................. $113 $106 $101 $93
Number of rooms at period end........... 21,724 21,786 22,091 21,790
Number of properties at period end...... 36 37 37 38
EUROPE / CIGA:
Total revenues.......................... $205.3 $205.2 $444.9 $385.0
Average daily occupancy rate (1)........ 68% 69% 69% 70%
Average daily rate (2).................. $133 $139 $140 $134
REVPAR (3).............................. $90 $94 $97 $93
Number of rooms at period end........... 7,984 7,816 7,339 7,534
Number of properties at period end...... 29 27 26 27
AFRICA / MIDDLE EAST:
Total revenues.......................... $190.9 $178.6 $382.8 $354.5
Average daily occupancy rate (1)........ 65% 62% 61% 59%
Average daily rate (2).................. $91 $93 $91 $87
REVPAR (3).............................. $58 $57 $55 $51
Number of rooms at period end........... 9,550 8,865 9,244 8,923
Number of properties at period end...... 36 32 34 33
LATIN AMERICA:
Total revenues.......................... $16.8 $11.7 $21.0 $38.9
Average daily occupancy rate (1)........ 60% 75% 59% 67%
Average daily rate (2).................. $87 $67 $66 $78
REVPAR (3).............................. $51 $49 $39 $52
Number of rooms at period end........... 1,279 890 1,084 890
Number of properties at period end...... 5 3 4 3
ASIA PACIFIC:
Total revenues.......................... $349.4 $351.0 $790.9 $737.8
Average daily occupancy rate (1)........ 69% 71% 68% 73%
Average daily rate (2).................. $134 $137 $138 $134
REVPAR (3).............................. $91 $96 $93 $97
Number of rooms at period end........... 11,786 11,552 11,790 10,630
Number of properties at period end...... 36 33 34 33
</TABLE>
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
(3) Revenue per available room ("REVPAR") was computed as room revenue divided
by rooms available for sale.
(4) Certain hotel property results for 1995 have been reclassified for an
appropriate comparison with 1996.
60
<PAGE> 64
Under the Company's standard management agreement, it operates lodging
facilities under long-term arrangements with property owners. The Company's
responsibilities include hiring, training and supervising the managers and
employees required to operate these facilities. For additional fees, the Company
provides reservation services. The Company also coordinates national advertising
and certain marketing and promotional services. The Company prepares and
implements annual budgets for lodging facilities under its management and the
Company is responsible for allocating property-owner funds for periodic
maintenance and repair of buildings and furnishings. The Company's management
fee is generally based on a percentage of the hotel's total revenues, plus, in
certain instances, an incentive fee based on the hotel's operating performance.
Since the Hilton Offer was commenced, owners of hotels negotiating or
renegotiating management agreements have increasingly requested the right to
terminate the management agreement upon a hostile change of control of the
Company. Accordingly, some of the Company's management agreements entered into
since the commencement of the Hilton Offer and, to a lesser extent, prior to the
commencement of the Hilton Offer contain a provision granting the owner the
option to terminate the agreement upon the occurrence of a change of control.
ITT and its subsidiaries are parties to 37 new hotel management and franchise
agreements that contain provisions permitting the other party to terminate such
agreement upon a change of control resulting from an unsolicited acquisition
proposal that was not approved by the ITT Board. ITT estimates that it will
generate aggregate EBITDA of approximately $30 million in 1998 under these 37
agreements.
On May 19, 1997, ITT and FelCor announced the creation of a long-term
strategic alliance. As part of this strategic alliance, the Company expects to
provide its expertise in the hotel business by making available the "Sheraton"
hotel brand through long-term management agreements. Similarly, FelCor expects
that it will provide its hotel expertise and hotel asset management skills by
making available substantially all the capital necessary to acquire certain
existing Sheraton brand hotels and hotels that may be converted to Sheraton
brand hotels. As the first step in this strategic alliance, on June 30, 1997,
the Company sold to FelCor five Sheraton hotels for $200 million in cash. As
part of that transaction, the Company has retained a 20-year contract to manage
these hotels, subject to a limited change of control provision. This transaction
will remove the properties involved and their associated indebtedness from the
Company's balance sheet while allowing the Company to earn fee income from
managing the properties. Both parties will benefit from the continued operation
of the properties under the Sheraton brand name. The management agreement for
each hotel purchased by FelCor is terminable by FelCor upon the occurrence of a
"change of control." Under each management agreement, "change of control" is
defined as, at the relevant time, (i) any event resulting in any "person" or
"group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act)
becoming the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of more than 35% of the total voting
power of all classes of capital stock of the ultimate parent, at the relevant
time, of Sheraton then outstanding and entitled to vote generally in elections
of directors ("voting stock") and such beneficial ownership was acquired within
a period of two years following a tender offer by such person (or any of its
affiliates) for shares of voting stock of such parent of Sheraton or a
solicitation of proxies with respect to voting stock of such parent of Sheraton
by such person, if, in either case, such tender offer or solicitation of proxies
was not approved by a majority of the Board of Directors of such parent of
Sheraton in office at the time such tender offer or proxy solicitation was
commenced, or (ii) a majority of the Board of Directors of the ultimate parent,
at the relevant time, of Sheraton being constituted of individuals who were
elected pursuant to a solicitation of proxies with respect to voting stock of
such parent of Sheraton, if such solicitation of proxies was not approved by a
majority of the Board of Directors of such parent of Sheraton in office at the
time such solicitation of proxies was commenced.
During 1996 and the first six months of 1997, the Company invested
approximately $51 million and $14 million, respectively, in hotel joint
ventures. This amount included investments in the Beijing International Club in
Beijing, China, The Sheraton Suites Santa Fe near Mexico City, Mexico, and the
Hotel Imperial, which is currently under construction in Kuala Lumpur, Malaysia.
In each of these projects, the Company owns an equity interest and is, or will
be, the manager of the respective hotel. The Company expects to continue to
invest funds in hotel joint ventures which include a management contract.
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During 1996 and the first six months of 1997, the Company entered into
agreements to manage 45 additional hotels, seven of which were opened as of June
30, 1997. In each of these transactions, the Company did not invest in the
ownership of the hotel. Of these 45 hotels, 22 are in Asia, 11 are in Europe,
six are in Africa/Middle East and two are in Latin America.
GLOBAL OPERATIONS
The Company's hotel operations are conducted worldwide. As of June 30,
1997, the Company had an equity interest of 50% or more in 21 properties in
North America, 33 properties in Europe, 3 properties in the Asia/Pacific region
and 11 properties in Latin America.
The source of revenues in geographic terms of the Company's operations
(excluding revenues from gaming operations and revenues based on reservations)
is set forth in the following table for the six months ended June 30, 1997 and
the years ended December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996 DEC. 31, 1995(3)
-------------- ------------- ----------------
<S> <C> <C> <C>
Revenues
North America(1)............................... 47% 45% 45%
Europe......................................... 19 21 21
Africa/Middle East............................. 8 9 8
Latin America.................................. 6 5 5
Asia/Pacific................................... 18 18 19
Headquarters and Other......................... 2 2 2
--- --- ---
Total..................................... 100% 100% 100%
=== === ===
EBITDA(2)
North America(1)............................... 53% 48% 53%
Europe......................................... 21 27 21
Africa/Middle East............................. 3 3 3
Latin America.................................. 13 12 15
Asia/Pacific................................... 13 10 12
Headquarters and Other......................... (3) -- (4)
--- --- ---
Total..................................... 100% 100% 100%
=== === ===
</TABLE>
- ---------------
(1) Includes franchise fees.
(2) EBITDA, as defined in the following sentence, is presented here as an
alternative measure of our 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, gains on asset
sales and miscellaneous expense, net. Management believes the EBITDA
information presented supplementally is a useful measure of operating
performance because it is industry practice to evaluate hotel and gaming
properties based on operating income before interest, income taxes,
depreciation and amortization, which is generally equivalent to EBITDA, and
because it is customarily used by certain investors and analysts together
with net income and cash flow from operations as defined by generally
accepted accounting principles, in evaluating a company's ability to service
its debt. The calculation of EBITDA does not include the commitments of the
Company for capital expenditures and payment of debt. 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 Company. The Company's
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definition of EBITDA as presented herein may not be comparable to similarly
titled measures of other companies due to the inclusion or exclusion of
certain financial measures.
(3) Beginning January 1, 1996, results of Caesars' Pocono resorts were included
in Hotel operations. The 1995 results assume that the acquisition of
Caesars' Pocono resorts was completed on January 1, 1995 and have been
restated for an appropriate comparison with 1996. In addition, certain other
hotel property results for 1995 have been reclassified for an appropriate
comparison with 1996.
FRANCHISE BUSINESS
The Company's franchised properties are located primarily in North America.
Of the Company's over 200 franchised hotels and inns, 22 are located outside of
North America. For the Company's franchise business (which includes properties
operated under the "Four Points Hotels" name), the following table illustrates
the number of properties, available room nights, average daily occupancy rate
and average daily room rate for the six months ended June 30, 1997 and the years
ended December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996 DEC. 31, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Number of properties at period end.................... 214 208 214
Available room nights................................. 9,347,609 18,867,329 19,199,826
Average daily occupancy rate(1)....................... 69% 67% 67%
Average daily rate(2)................................. $87 $81 $77
</TABLE>
- ---------------
(1) Occupied rooms in the period divided by rooms available for sale in the same
period.
(2) Room revenues for the period divided by rooms occupied for the same period.
Franchised hotels are permitted to operate under the "Sheraton" trade name
and to use the stylized "S" and wreath service mark. Franchised hotels are
generally smaller than the hotels owned, leased or managed by the Company. The
Company approves certain plans for, and the location of, franchised hotels and
reviews their design.
In general, each franchisee pays the Company an initial minimum fee, plus
an additional fee for every room over 100. There is a continuing monthly license
fee based on a percentage of the facility's room revenues. Although the Company
does not directly participate in the day-to-day management or operation of
franchised hotels, the hotels periodically are inspected to ensure that the
Company's standards are maintained. Since the Hilton Offer was commenced,
certain owners of hotels have requested the right to terminate the franchise
agreement upon a change of control of the Company. Accordingly, some new or
renewed franchise agreements entered into since the commencement of the Hilton
Offer contain a provision granting the owner the option to terminate the
agreement upon the occurrence of a change of control. ITT and its subsidiaries
are parties to 37 new hotel management and franchise agreements that contain
provisions permitting the other party to terminate such agreement upon a change
of control resulting from an unsolicited acquisition proposal that was not
approved by the ITT Board. ITT estimates that it will generate aggregate EBITDA
of approximately $30 million in 1998 under these 37 agreements.
In 1995, the Company began offering some of its franchised hotel owners the
opportunity to convert inns which are franchised under the "Sheraton" name to
the "Four Points Hotels" name, a new mid-priced hotel brand. As of March 31,
1997, the Company had 46 franchised properties operating under the Four Points
Hotels brand name. Of these properties, 33 were properties converted from
Sheraton franchises and 13 properties were converted from competing brands. The
Company expects that each Four Points Hotel will be operated and marketed by its
owners with a view toward providing hospitality services to the
business-oriented traveler.
During 1996 and the first six months of 1997, the Company entered into 49
new franchise license agreements, of which 26 were opened as of June 30, 1997.
Of these, six will be operated under the Sheraton
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brand name and 20 will be operated under the Four Points Hotels brand name. At
June 30, 1997, there were 214 franchised hotels in operation under the Sheraton
and Four Points Hotels brand names.
GAMING OPERATIONS
Currently, the Company's gaming operations are conducted at Caesars Palace
in Las Vegas, Nevada; Caesars Atlantic City in Atlantic City, New Jersey;
Caesars Tahoe in Stateline, Nevada; The Desert Inn in Las Vegas, Nevada; The
Sheraton Casino in Tunica, Mississippi; and various other hotel/casino
operations outside the United States. The Company is holding the Desert Inn
(pending execution of definitive agreements with Davis Gaming for the joint
venture relating to the Desert Inn described below) and The Sheraton Casino in
Tunica for sale. Although the U.S. Department of Education has informed ITT that
the Educational Distribution will constitute a change of control under its
regulations.
In June 1996, the Company announced a capital expenditure program to
upgrade and expand its existing gaming operations. As part of this program,
approximately $495 million is expected to be invested in Caesars Palace and
approximately $280 million is expected to be invested at Caesars Atlantic City.
The Company has also begun construction of a riverboat casino and a hotel in
Harrison County, Indiana. A description of each of these initiatives appears
below.
CAESARS WORLD
Caesars operates three destination gaming resorts: Caesars Palace in Las
Vegas, Nevada; Caesars Tahoe in Stateline, Nevada; and Caesars Atlantic City in
Atlantic City, New Jersey. Caesars also owns one-half of a management company
that operates Casino Windsor, a casino opened on May 17, 1994, in Windsor,
Canada, which is owned by the Government of the Province of Ontario. A Caesars
subsidiary operates small casinos on two cruise ships in conjunction with the
operator of the ships. Caesars' subsidiaries also own and operate four
non-gaming resorts in the Pocono Mountains of Pennsylvania.
CAESARS PALACE. Caesars Palace, which opened in 1966 as the first themed
casino on the "strip" in Las Vegas, Nevada, is a casino/hotel complex located on
approximately 80 acres. At June 30, 1997, Caesars Palace had approximately 1,400
hotel rooms and suites in service, 10 restaurants, a 1,126-seat showroom, a
convention complex with approximately 100,000 square feet of meeting and banquet
space, numerous bars and lounges, The Forum Shops (a retail shopping arcade),
health spas, and an "Omnimax" theater. Currently, its casino is approximately
118,000 square feet, and it offers wagering limits that are among the highest in
Nevada. In June 1996, Caesars unveiled "Caesars Magical Empire," which combines
a dining experience with a unique "magical" entertainment program and theme.
As part of the capital expenditure program announced for the Company's
gaming operations, Caesars plans to invest approximately $495 million at Caesars
Palace over two years. The project is intended to create a more attractive,
exciting gaming environment, while satisfying substantial unmet room demand. The
project will result in the addition of approximately 1,130 guestrooms, which
will increase the total number of rooms at Caesars Palace to approximately
2,600. Construction of the new room tower at Caesars Palace has begun and is
expected to be completed during the fall of 1997. Enhancements to the casino are
expected to include the addition of gaming space for slot machines and table
games. Other improvements are expected to include the development of the second
phase of The Forum Shops with 250,000 square feet of retail space, the addition
of 235,000 square feet of meeting and convention facilities and construction of
a new health club and spa. The second phase of The Forum Shops opened on August
29, 1997.
For the year ended December 31, 1996 and the six months ended June 30,
1997, the average occupancy rate at Caesars Palace was 91% for both periods and
included occupancy of approximately 42% and 40%, respectively, of the available
rooms and suites by guests receiving complimentary rooms. The average occupancy
rate at Caesars Palace was 88% and 91% for the years ended December 31, 1995 and
1994, including occupancy of 42% and 43% of the available rooms and suites by
guests receiving complimentary rooms.
CAESARS TAHOE. Caesars Tahoe casino/hotel opened in 1979 and is located in
Stateline, Nevada, adjacent to Lake Tahoe. At that time, Caesars entered into a
long-term lease of the 24-acre property upon
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which the casino/hotel stands that expires in 2004. At June 30, 1997, Caesars
Tahoe had 440 hotel rooms and suites in service, five restaurants, a 1,500-seat
showroom, 16,000 square feet of convention space, a Roman-themed nightclub, a
40,000-square foot casino including a race and sports book, bars, shops, four
outdoor tennis courts and an indoor health spa containing a swimming pool and a
racquetball court.
For the year ended December 31, 1996 and the six months ended June 30,
1997, the average occupancy rate at Caesars Tahoe was 83% for both periods and
included occupancy of approximately 30% for both periods of the available rooms
and suites by guests receiving complimentary rooms. The average occupancy rate
at Caesars Tahoe was 86% and 89% for the years ended December 31, 1995 and 1994,
including occupancy of 29% and 32% of the available rooms and suites by guests
receiving complimentary rooms.
Capital projects at Caesars Tahoe include the renovation of a buffet
restaurant and the upgrading and improvement of gaming equipment.
CAESARS ATLANTIC CITY. Caesars Atlantic City is a casino/hotel on the
Boardwalk in Atlantic City, New Jersey. At June 30, 1997, it had approximately
550 rooms in service, a 78,000-square foot casino, including table games and
slots and approximately 6,000 square feet of gaming space for keno, poker and
race simulcasting. It also had 12 restaurants and bars, 10,000 square feet of
meeting and banquet space, an 1,100-seat showroom, a shopping arcade, a
Roman-themed transportation center which accommodates 2,500 cars and 11 buses, a
health club and two tennis courts. The property upon which Caesars Atlantic City
stands consists of approximately 8.1 acres, including contiguous parcels
totaling approximately 5.4 acres bounded on three sides by Missouri, Arkansas
and Pacific Avenues, with an entire block of Boardwalk frontage.
Planned improvements at Caesars Atlantic City are expected to cost
approximately $280 million over two years. These improvements will bring the
total number of guestrooms to approximately 1,125 and will increase casino space
by approximately 30,000 square feet. As part of this project, Caesars Atlantic
City will construct a new entrance and central four-story atrium, a grand
multi-function ballroom and expanded dining facilities. The design incorporates
an elaborate Roman theme with Corinthian columns, large statues and extensive
fountains. These improvements are expected to enable Caesars Atlantic City to
increase its convention business and to satisfy substantial unmet room demand.
The exterior renovations are designed to further enhance Caesars' visibility on
the center of the Boardwalk to attract more "walk-in" patrons.
In August 1996, Caesars acquired the Ocean One retail mall from The
Equitable Life Assurance Society for approximately $20 million. The Ocean One
mall is constructed on a pier which extends out 900 feet over the Atlantic Ocean
and is located directly in front of the Boardwalk entrance to Caesars Atlantic
City. Ocean One contains approximately 400,000 square feet of restaurant and
retail space on three floors. Under current applicable local and state laws,
Ocean One may not be used for gaming or lodging activities. In the event gaming
and lodging is permitted by local and state laws on Ocean One, Caesars intends
to evaluate the use of the property as a hotel and casino.
For the year ended December 31, 1996 and the six months ended June 30,
1997, the average occupancy rate at Caesars Atlantic City of 96% and 94%,
respectively, included occupancy of approximately 89% for both periods of the
available rooms and suites by guests receiving complimentary rooms. The average
occupancy rate at Caesars Atlantic City was 94% and 93% for the years ended
December 31, 1995 and 1994, including occupancy of 84% and 77% of the available
rooms and suites by guests receiving complimentary rooms.
CASINO WINDSOR. Caesars owns a one-half interest in Windsor Casino Limited
("Windsor"). Windsor is the operator of Casino Windsor, a 50,000 square foot
interim casino in Windsor, Ontario, which is owned by the Ontario provincial
government. Caesars anticipates that the interim casino will be replaced by a
permanent facility in early 1998, which is expected to include a hotel of
approximately 400 rooms, a 75,000 square foot casino and entertainment and
meeting facilities.
HARRISON COUNTY RIVERBOAT DEVELOPMENT. In May 1996, Caesars was granted a
certificate of suitability by the Indiana Gaming Commission to construct and
operate what is expected to be the largest riverboat casino in the United
States. The 80,000 square foot facility will be located on the Ohio River and is
expected to dock in Indiana, across the river from Louisville, Kentucky.
Construction of the riverboat has begun. The riverboat must comply with certain
U.S. Coast Guard and American Bureau of Shipping requirements. See
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"Business -- Government Regulation and Related Matters." Construction of the
temporary land-based facility is subject to receipt of various consents, permits
and approvals. Caesars expects to take delivery of the riverboat in February
1998 and, subject to the receipt of the consents, permits and approvals for the
temporary land-based facility, commence gaming operations on such riverboat in
March 1998. Construction of the permanent land-based facilities at the site will
commence shortly after gaming operations begin and are expected to be completed
within approximately 12 months. However, there can be no assurance that the
necessary consents, permits and approvals for the operation of the riverboat or
the construction of land-based facilities will be obtained, or will be obtained
on a timely basis, or that construction will be completed as planned.
THE DESERT INN. The Desert Inn, which the Company purchased in November
1993, is a casino/hotel complex located on approximately 200 acres on the
"strip" in Las Vegas, Nevada. The Desert Inn is currently undergoing extensive
renovations, the total cost of which is expected to be approximately $175
million. Upon completion of the current renovations, the Desert Inn is expected
to have 715 hotel rooms and suites, five restaurants, a 636-seat showroom, a
convention complex with approximately 24,500 square feet of meeting and banquet
space, numerous bars and lounges, a shopping arcade, three swimming pools,
tennis facilities, an 18 hole championship golf course, a spa and other
facilities. Its casino is approximately 25,000 square feet. On August 1, 1997,
Sheraton and Davis Gaming entered into an agreement in principle to form a 50/50
joint venture to own the Desert Inn and the 34 acre parcel of land adjacent to
the Desert Inn, pursuant to which the Company will receive $250 million in cash
and retain a 50% ownership interest in and a long-term contract to manage this
property. The Company is holding the Desert Inn for sale (pending execution of
definitive agreements with Davis Gaming).
THE SHERATON CASINO. The Sheraton Casino opened in Tunica, Mississippi in
August 1994. The Sheraton Casino has three restaurants, three bars and lounges
and other facilities. Its casino has approximately 31,000 square feet of gaming
space. Casino games include mini-baccarat, blackjack, craps, roulette, slot
machines, Caribbean stud poker, big "6" and "Let it Ride." The performance of
The Sheraton Casino has been adversely affected by increased competition in the
Tunica market and the Company expects that this competition will continue.
OTHER GAMING. The Company also operates casinos in Lima, Peru, at the
Sheraton Lima Hotel & Casino, which has 438 rooms and suites; in Halifax, Nova
Scotia, at the Sheraton Halifax Hotel & Casino, which has 351 rooms and suites;
and in Sydney, Cape Breton, Nova Scotia, at the Sheraton Casino Sydney, which is
a stand-alone casino. The Company also operates casinos in Australia and Egypt.
The Company has entered into an agreement in principle to form a joint
venture to develop, own and operate "Planet Hollywood" themed casino/hotels. The
Company expects that the joint venture will initially develop a Planet Hollywood
Hotel and Casino in Las Vegas, Nevada and later in Atlantic City, New Jersey, as
market conditions warrant. Although the Company and Planet Hollywood have
entered into an agreement in principle, the Company and Planet Hollywood have
not completed the negotiation of definitive documentation.
Caesars is actively exploring various gaming opportunities in the United
States and internationally.
GAMING ASSETS IDENTIFIED FOR DISPOSITION
The Company is holding the Desert Inn (pending execution of definitive
agreements with Davis Gaming for the joint venture related to the Desert Inn)
and The Sheraton Casino for sale. The Company plans to use the proceeds from the
sales of these assets and from the joint venture with Davis Gaming (if
consummated) primarily to reduce indebtedness.
DISPOSITIONS
On February 11, 1997, ITT sold 3 million shares of the capital stock of
Alcatel Alsthom for approximately $300. On March 27, 1997, ITT sold our
remaining interest in the capital stock of Alcatel Alsthom for proceeds of
approximately $530. Proceeds from these sales were used for general corporate
purposes, including debt reduction.
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In July 1996, in partnership with Dow Jones, ITT purchased television
station WNYC-TV from New York City. The purchase price of $207 million was split
evenly by the two companies and the partnership is managed on a 50/50 basis. On
May 12, 1997, ITT and Dow Jones reached a definitive agreement to sell WBIS+ to
Paxson for a purchase price of $257.5 million. The closing of the sale of ITT's
interest in WBIS+ is subject to regulatory approval and is expected to occur in
the fourth quarter of 1997. Paxson currently provides the station's programming
under a time brokerage agreement until the transaction closes. ITT's rights
under the agreements with Paxson will be retained by the Company.
In March 1995, Madison Square Garden, a limited partnership between
subsidiaries of ITT and Cablevision, acquired the business of Madison Square
Garden Corporation for approximately $1 billion. On June 17, 1997, ITT closed
the first transfer under the MSG Agreement to sell its 50% interest in Madison
Square Garden to Cablevision for $650 million plus the assumption of
approximately $115 million of indebtedness. At such closing, Madison Square
Garden redeemed a portion of ITT's interest in Madison Square Garden, such that
after such redemption ITT owned an 11.5% limited partnership interest in Madison
Square Garden, for $493.5 million, and the general partner of Madison Square
Garden redeemed all of the shares of its capital stock owned by ITT for $6.5
million. In addition, at such closing, Cablevision caused SportsChannel
Associates, a New York general partnership, to be contributed as a capital
contribution to Madison Square Garden, which diluted ITT's limited partnership
interest in Madison Square Garden to 10.2%. This continuing limited partnership
interest and ITT's rights under the MSG Agreement will be retained by the
Company. The Company has a "put" option to require Cablevision to purchase (or
cause Madison Square Garden to redeem) half of the Company's continuing interest
in Madison Square Garden for $75 million on June 17, 1998 and the Company's
other half of this continuing interest for an additional $75 million (or if the
first "put" option is not exercised on June 17, 1998, the Company's entire
continuing interest for $150 million) on June 17, 1999. On June 17, 2000,
Cablevision has the right to purchase (or cause Madison Square Garden to redeem)
the Company's remaining interest in Madison Square Garden at a price determined
by an investment banking firm to be fair market value, subject to a floor price
equal to the proportionate "put" price. In addition, Cablevision has the right
to purchase (or cause Madison Square Garden to redeem) the Company's remaining
interest in Madison Square Garden upon a "change of control" (as defined in the
MSG Agreement) of the Company at a price equal to the proportionate "put" price,
payable, at Cablevision's election, in cash or debt securities of Cablevision.
The Company has the right to cause to be contributed as a capital contribution
to Madison Square Garden an aircraft owned by the Company at a value of $38
million. If the Company causes such contribution to occur, each of the "put"
prices will be increased by $19 million (or if the first "put" option is not
exercised, $38 million) and the floor price in respect of Cablevision's
third-year call right and the price payable upon the exercise of Cablevision's
change of control call right will be correspondingly increased. In the event
Cablevision does not exercise its third-year call right, the Company's
percentage interest in Madison Square Garden will be increased to reflect a
capital contribution to Madison Square Garden of $38 million due to the
contribution of the aircraft.
EMPLOYEES
As of June 30, 1997 the Company and its subsidiaries employed on a
full-time basis approximately 33,000 people. Of this number, 60% are employed in
the United States. Approximately 38% of the U.S. employees are represented by
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
COMPETITION
HOTEL OPERATIONS. Competition in the hotel industry is vigorous and is
generally based on quality and consistency of service, attractiveness of
facilities and locations, availability of a global reservation system, price and
other factors. Room revenues, which are determined by occupancy levels and room
rates, have continued to be constrained in certain of the markets in which the
Company's hotels are located as a result of economic factors, overbuilt markets,
price sensitive customers and other factors. The principal competitors of
Sheraton hotels include Marriott, Westin, Hyatt, Four Seasons, Hilton and
various other hotels, motels and inns located in the markets in which Sheraton
hotels compete. Ciga faces similar competitive dynamics in its markets.
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GAMING OPERATIONS. The Company's gaming operations face intense
competition from other companies in the gaming industry. The Company's Las Vegas
properties compete primarily with casino/hotels on the Las Vegas "strip", and to
a lesser extent with operations outside of Las Vegas and the state of Nevada.
Although the Las Vegas market has absorbed recent growth, the trend of industry
expansion is expected to continue over the next several years. It is possible
that the expansion of existing casinos and the opening of additional
casino/hotels may further increase competition. The Company's casino facilities
in Stateline, Nevada; Atlantic City, New Jersey; and Tunica, Mississippi also
face intense competition for similar reasons and under similar circumstances.
The Company's hotel/casino and casino operations are likely to experience
increased competition if other states authorize casino gaming, and this may
adversely affect the Company's results.
Competition in the gaming industry is generally based on the quality of the
facilities and services and the entertainment offered at such facilities. In
addition, the Company believes that name and reputation are significant
competitive factors.
EXPOSURE TO CURRENCY FLUCTUATIONS
Certain of the Company's subsidiaries conduct operations worldwide. The
Company, therefore, is exposed to the effects of fluctuations in relative
currency values. Accordingly, the Company's operating results will be impacted
by fluctuations in relative currency values. The Company has entered into
several forward exchange contracts with major financial institutions to hedge
exchange rate exposure on the Company's foreign currency denominated assets. The
Company is an end-user and does not utilize these hedging contracts for
speculative purposes. The Company has strict policies regarding the financial
stability and credit standing of its major counterparties. The aggregate
contractual amount of these hedging contracts at June 30, 1997 was approximately
$150 which approximated fair value. These hedging contracts mature at various
periods through 1998. The Company's hedging activities and the exposure under
all its hedging contracts is immaterial to the Company.
In 1996, approximately 44% of the Company's consolidated revenues were made
outside the United States, of which Europe constituted 16%, the Asia-Pacific
region constituted 14%, the Africa and Middle East region constituted 7% and
other geographic regions constituted the balance.
INTELLECTUAL PROPERTY
The Company owns and controls a number of trademarks, trade names, service
marks, copyrights, patents, trade secrets, confidential information, and other
intellectual property rights which are used in the operation of its businesses.
These intellectual property rights include such recognizable trademarks and
trade names as ITT, Sheraton, Caesars and Caesars Palace. However, while these
trademarks, trade names and other intellectual property rights in the aggregate
are of material importance to the Company's business, the Company believes that
its business, as a whole, is not materially dependent upon any one intellectual
property or related group of such properties. The Company is licensed to use
certain trademarks, software, patents, technology and other intellectual
property rights owned and controlled by others and, similarly, other companies
are licensed to use certain trademarks, software, patents, technology and other
intellectual property rights owned and controlled by the Company.
ITT Educational currently has rights under a Trade Name and Service Mark
License Agreement to continue to use the "ITT" name, mark and logo in the
operation of its business for five years following the ITT Educational
Distribution, renewable for an additional five years thereafter. Similarly, the
Company expects to enter into an Intellectual Property License and Assignment
Agreement with ITT ISI that provides for ITT ISI to continue to use the "ITT"
name in its corporate name and trade name and a Trade Name and Service Mark
License Agreement with ITT World Directories that provides for a license to ITT
World Directories and its subsidiaries to continue to use the "ITT" name, mark
and logo, in each case, in the operation of ITT ISI's telephone directories
publishing business following the Distribution Date. ITT will agree to seek
approval of its stockholders to change its corporate name from "ITT Corporation"
to "ITT Information Services, Inc." at the first annual meeting of ITT
stockholders following the Distribution Date. See "The Company's Relationship
with ITT After the Destinations Distribution -- Distribution Agreement" and
"-- Intellectual Property Agreements."
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GOVERNMENTAL REGULATION AND RELATED MATTERS
CASINO GAMING -- GENERAL. The Company's casino gaming operations in Las
Vegas, Nevada and Stateline, Nevada are conducted by Desert Palace, Inc.
("DPI"), which is a wholly owned subsidiary of Caesars Palace Corporation
("CPC"). CPC is a wholly owned subsidiary of Caesars (Caesars, CPC and DPI are
collectively referred to as the "Caesars Nevada Companies"). Caesars' casino
gaming operations in Atlantic City, New Jersey are conducted by Boardwalk
Regency Corporation ("BRC"), which is a wholly owned subsidiary of Caesars New
Jersey Inc. ("CNJ"). CNJ is a wholly owned subsidiary of Caesars (as required by
the context, Caesars, CNJ and BRC are collectively referred to as the "Caesars
New Jersey Companies"). In addition, DPI owns all of the issued and outstanding
capital stock of Tele/Info, Inc., which is a Nevada licensed disseminator of
horse race simulcasts for the purpose of receiving and disseminating live
telecasts of horse racing information.
The Desert Inn complex is owned and operated by Desert Inn Corporation
("SDI"), which is a wholly owned subsidiary of Sheraton Gaming Corporation
("SGC"). SGC is a wholly owned subsidiary of the Company (SGC and SDI are
collectively referred to as the "Desert Inn Companies"). The Sheraton Casino in
Tunica, Mississippi, is owned and operated by Sheraton Tunica Corporation
("STC"), which is a wholly owned subsidiary of SDI.
CASINO GAMING REGULATION -- GENERAL. The ownership and/or operation of
casino gaming facilities in the United States are subject to extensive Federal,
state and local regulations. On the Federal level, in addition to all other
relevant Federal regulation, the Company's casino gaming operations are
specifically subject to the compliance with the Gambling Devices Act of 1962, as
amended, and the Bank Secrecy Act, as amended; these govern the ownership,
possession, manufacture, distribution and transportation in interstate commerce
of gaming devices and the recording and reporting of currency transactions,
respectively. The Company's Nevada casino gaming operations are subject to the
Nevada Gaming Control Act (the "Nevada Act"), the regulations promulgated under
the Nevada Act (the "Nevada Regulations") and various local ordinances and
regulations (such ordinances and regulations, together with the Nevada Act and
the Nevada Regulations, the "Nevada Gaming Law"). The Company's Nevada gaming
operations are subject to the licensing and regulatory control of the Nevada
Gaming Commission (the "Nevada Commission") and the Nevada State Gaming Control
Board (the "Nevada Control Board"), as well as various local, county and state
regulatory agencies (collectively referred to as the "Nevada Gaming
Authorities"). The Company's New Jersey casino gaming operations are subject to
the New Jersey Casino Control Act (the "New Jersey Act") and the regulations
promulgated under the New Jersey Act (the "New Jersey Regulations" and, together
with the New Jersey Act, the "New Jersey Gaming Law"). The Company is subject to
the licensing and regulatory control of the New Jersey Casino Control Commission
(the "New Jersey Commission") and the New Jersey Department of Law & Public
Safety, Division of Gaming Enforcement (the "New Jersey DGE"), as well as
various local, county and state regulatory agencies (collectively referred to as
the "New Jersey Gaming Authorities"). Due to the development of the Company's
riverboat on the Ohio River in Harrison County, Indiana, the Company's casino
gaming operations in Indiana are subject to the Indiana Gaming Control Act and
the licensing and regulatory control of the Indiana Gaming Commission, as well
as various local, county and state regulatory agencies. The Company's
Mississippi casino gaming operations are subject to the Mississippi Gaming
Control Act (the "Mississippi Act"), the regulations promulgated under the
Mississippi Act (the "Mississippi Regulations") and various local ordinances and
regulations (such ordinances and regulations, together with the Mississippi Act
and the Mississippi Regulations, the "Mississippi Gaming Law"). The Company's
Mississippi casino gaming operations are subject to the licensing and regulatory
control of the Mississippi Gaming Commission (the "Mississippi Commission"), as
well as various local, county and state regulatory agencies (collectively
referred to as the "Mississippi Gaming Authorities"). The Company's Ontario
casino gaming operations are subject to the Ontario Gaming Control Act (the
"Ontario Act") and the licensing and regulatory control of the Ontario Gaming
Control Commission (the "Ontario Commission"), as well as various local,
provincial and federal regulatory agencies (collectively referred to as the
"Ontario Gaming Authorities"). The Company's Nova Scotia casino gaming
operations are subject to the Nova Scotia Gaming Control Act (the "Nova Scotia
Act") and the licensing and regulatory control of the Nova Scotia
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Gaming Control Commission (the "Nova Scotia Commission"), as well as various
local, provincial and federal regulatory agencies (collectively referred to as
the "Nova Scotia Gaming Authorities").
The casino gaming laws, regulations and supervisory procedures of Nevada,
New Jersey, Indiana, Mississippi, Ontario and Nova Scotia are extensive and
reflect certain public policy considerations as to (i) the integrity of casino
gaming operations and their participants, (ii) the need for strict governmental
and regulatory control of casino gaming operations, (iii) the creation of
economic development, taxes and employment, and (iv) the maintenance and
development of public confidence and trust in casino gaming regulation and
control. Changes to such laws, regulations and supervisory procedures could have
an adverse effect on the Company's casino gaming operations.
In connection with the Destinations Distribution, the Company is seeking
certain approvals from the Nevada Gaming Authorities, the New Jersey Gaming
Authorities and the Mississippi Gaming Authorities. See "Regulatory Approvals."
NEVADA GAMING REGULATION. In general, Nevada's gaming laws, regulations
and supervisory procedures seek to (i) prevent unsavory or unsuitable persons
from having any direct or indirect involvement with gaming at any time or in any
capacity, (ii) establish and maintain responsible accounting practices and
procedures, (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record-keeping,
and making periodic reports to the applicable casino gaming authority, (iv)
prevent cheating and fraudulent practices, and (v) provide a source of state and
local revenues through taxation and licensing fees.
SDI, as the operator of the Desert Inn, and DPI, as the operator of Caesars
Palace and Caesars Tahoe, are required to be licensed by the Nevada Gaming
Authorities. The casino gaming licenses are not transferable and must be renewed
periodically by the payment of casino gaming license fees and taxes. The Nevada
Commission requires that (i) SGC be registered as an intermediary company of SDI
and (ii) CPC be registered as an intermediary company of DPI; the Nevada
Commission also requires that the Company and Caesars be registered as publicly
traded corporations. No person may become a stockholder of, or receive any
percentage of profits from, SDI or DPI without first obtaining certain required
licenses and approvals from the Nevada Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, a corporation which is
involved in gaming activities. Officers, directors and key employees of each of
SDI and DPI must be individually licensed by, and changes in corporate positions
must be reported to, the Nevada Gaming Authorities; the Nevada Gaming
Authorities may disapprove a change in corporate position. Certain of the
Company's officers, directors and key employees and those of the Company's
subsidiaries who are actively and directly involved in the Company's gaming
activities may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation.
If the Nevada Gaming Authorities find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
the Company, the Desert Inn Companies or the Caesars Nevada Companies, the
companies involved would be required to sever all relationships with such
person. In addition, the Nevada Gaming Authorities may require a registered
company or licensee to terminate the employment of any person who refuses to
file appropriate disclosures.
The Company, the Desert Inn Companies and the Caesars Nevada Companies are
required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all loans, leases, sales of securities and similar
financing transactions by either SDI or DPI must be reported to or approved by
the Nevada Commission. Nevada law prohibits a corporation registered by the
Nevada Commission from making a public offering of its securities without the
prior approval of the Nevada Commission if any part of the proceeds of the
offering of the securities themselves are to be used either to (i) finance the
construction,
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acquisition or operation of gaming facilities in Nevada, or (ii) retire or
extend obligations incurred for one or more such purposes.
If it is determined that Nevada gaming laws were violated by SDI or DPI,
the gaming license each holds could be limited, conditioned, suspended or
revoked. In addition, at the discretion of the Nevada Commission, the Company,
the Desert Inn Companies and the persons involved could be subject to
substantial fines for each separate violation of the Nevada gaming laws by The
Desert Inn. Similarly, and also at the discretion of the Nevada Commission, the
Company, the Caesars Nevada Companies and the persons involved could be subject
to substantial fines for each separate violation of the Nevada gaming laws by
either Caesars Palace or Caesars Tahoe. Further, a supervisor could be appointed
by the Nevada Commission to operate either SDI's or DPI's gaming property and,
under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of SDI's or DPI's gaming
property) could be forfeited to the State of Nevada. Any suspension or
revocation of either SDI's or DPI's license would have a materially adverse
effect on SDI or DPI, as the case may be.
The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of the Company's voting securities at any
time. Nevada law requires any person who acquires more than 5% of any class of
the Company's voting securities to report the acquisition to the Nevada
Commission and such person may be investigated and found suitable or not
suitable. Any person who becomes a beneficial owner of more than 10% of any
class of the Company's voting securities must apply for a finding of suitability
by the Nevada Commission within 30 days after the Nevada Control Board Chairman
mails a written notice requiring such filing, and must pay the costs and fees
incurred by the Nevada Control Board in connection with the investigation. Under
certain circumstances, an "institutional investor" who acquires more than 10%
but not more than 15% of our voting securities may apply to the Nevada
Commission for a waiver of such finding of suitability requirements if such
institutional investor holds the voting securities for investment purposes only.
An institutional investor will not be deemed to hold voting securities for
investment purposes unless the voting securities were acquired and are held in
the ordinary course of business by such institutional investor and not for the
purpose of causing, directly or indirectly, the election of a majority of the
members of the Board, any change in our corporate charter, by-laws, management,
policies or operations or any of our casino gaming operations, or any other
action which the Nevada Commission finds to be inconsistent with holding the
Company's voting securities for investment purposes only. Activities which are
not deemed to be inconsistent with holding voting securities for investment
purposes only include (i) voting on all matters voted on by stockholders, (ii)
making financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations, and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent. If
the stockholder who must be found suitable is a corporation, partnership or
trust, it must submit detailed business and financial information, including a
list of beneficial holders of its ownership interests.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
by the Chairman of the Nevada Control Board may be found unsuitable. Any person
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of the Company's debt or equity voting securities beyond such period or periods
of time as may be prescribed by the Nevada Commission may be guilty of a gross
misdemeanor. The Company could be subject to disciplinary action if, without the
prior approval of the Nevada Commission and after the Company receives notice
that a person is unsuitable to be an equity or debt security holder or to have
any other relationship with the Company, the Desert Inn Companies or the Caesars
Nevada Companies, any of such entities either (i) pays to the unsuitable person
any dividend, interest or any distribution whatsoever, (ii) recognizes any
voting right by such unsuitable person in connection with such securities, (iii)
pays the unsuitable person remuneration in any form, (iv) makes any payment to
the unsuitable person by way of principal, redemption, conversion, exchange,
liquidation or similar transaction, or (v) fails to pursue all lawful efforts to
require such unsuitable person to relinquish his securities including, if
necessary, the immediate purchase of such securities for cash at fair market
value.
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Regulations of the Nevada Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements, or any form of
takeover without the prior approval of the Nevada Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Nevada Commission as to a variety of stringent standards prior to assuming
control of such corporation. The failure of a person to obtain such approval
prior to assuming control over the registered publicly traded corporation may
constitute grounds for finding such person unsuitable.
Regulations of the Nevada Commission also prohibit certain repurchases of
securities by registered publicly traded corporations without the prior approval
of the Nevada Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over
market price from certain holders of more than 3% of the outstanding securities
of the registered publicly traded corporation. The regulations of the Nevada
Commission also require prior approval for a "plan of recapitalization."
Generally, a plan of recapitalization is a plan proposed by the management of a
registered publicly traded corporation that contains recommended action in
response to a proposed corporate acquisition opposed by management of the
corporation if such acquisition itself would require the prior approval of the
Nevada Commission.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming operation outside
the State of Nevada is required to deposit with the Nevada Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Control Board of the Licensees'
participation in such foreign gaming; the revolving fund is subject to increase
or decrease in the discretion of the Nevada Commission. Once such revolving fund
is established, the Licensees may engage in gaming activities outside the State
of Nevada without seeking the approval of the Nevada Commission provided (i)
such activities are lawful in the jurisdiction where they are to be conducted
and (ii) the Licensees comply with certain reporting requirements imposed by the
Nevada Act. Licensees are subject to disciplinary action by the Nevada
Commission if they (i) knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation, (ii) fail to conduct the foreign
gaming operation in accordance with the standards of honesty and integrity
required of Nevada gaming operations, (iii) engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees,
or (iv) employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the grounds of personal unsuitability.
NEW JERSEY GAMING REGULATION. The New Jersey gaming laws and regulations
primarily concern (a) the financial stability and character of casino operators,
their employees, their security holders and others financially interested in
casino operations, and (b) the operating methods and the financial and
accounting procedures used in connection with casino operations. The New Jersey
gaming laws and regulations include detailed provisions concerning, among other
things, (i) the type, manner and number of applications and licenses required to
conduct casino gaming and ancillary activities, (ii) the licensing, regulation
and curricula of gaming schools, (iii) the establishment of minimum standards of
accounting and internal control, including the issuance and enforceability of
casino credit, (iv) the manufacture, sale, distribution and possession of gaming
equipment, (v) the rules of the games, (vi) the exclusion of undesirable
persons, (vii) the use, regulation and reporting of junket activities, (viii)
the possession, sale and distribution of alcoholic beverages, (ix) the
regulation and licensing of suppliers to licensed casino operators, (x) the
conduct of entertainment within licensed casino facilities, (xi) equal
employment opportunity for employees of licensed casino operators, contractors
for casino facilities and other entities, (xii) the payment of gross revenue
taxes and similar fees and expenses, (xiii) the conduct of casino simulcasting
and (xiv) the imposition and discharge of casino reinvestment development
obligations. A number of these regulations require practices which are different
from those in many casinos elsewhere and some of them result in casino operating
costs greater than those in comparable facilities elsewhere. As a prerequisite
to being licensed, a New Jersey casino/hotel facility must meet certain
facilities requirements concerning, among other things, the size and number of
guest rooms.
In order to operate Caesars Atlantic City, BRC must be licensed by the New
Jersey Commission, which has broad discretion with regard to the issuance,
renewal, revocation or suspension of licenses. A New Jersey
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casino license is not transferable and must be renewed at designated periods of
up to four years. Renewal is not automatic and involves an extensive review by
the New Jersey DGE, a report by the New Jersey DGE to the New Jersey Commission,
an independent review by the New Jersey Commission, and the affirmative vote of
at least four of the five sitting Commissioners of the New Jersey Commission
sitting in a scheduled open public meeting. BRC's license to operate Caesars
Atlantic City was renewed on November 30, 1996 and expires on November 30, 2000.
Except for certain banking and lending institutions exempted under the New
Jersey Act, all financial backers, investors, mortgagees, debt holders,
landlords under leases relating to our New Jersey casino/hotel facilities, all
lenders to BRC, all officers and directors of BRC and all employees who work at
Caesars Atlantic City have to be qualified, licensed, approved or registered by
or with the New Jersey Commission. In addition, all contracts and leases entered
into by BRC are subject to approval by the New Jersey Commission.
As a prerequisite to BRC holding a license, the Company, Caesars and CNJ
have to be approved by the New Jersey Commission due to their corporate
relationship to BRC. Thus, any holder of our debt or equity securities or those
of Caesars or CNJ must be found qualified; the qualification requirement may be
waived based on an express finding by the New Jersey Commission, with the
consent of the Director of the New Jersey DGE, that the security holder either
(a)(i) is not significantly involved in the activities of BRC, (ii) does not
have the ability to control the Company, Caesars, CNJ or BRC, and (iii) does not
have the ability to elect one or more members of the respective boards of
directors of the Company, Caesars, CNJ or BRC, or (b) is an "institutional
investor." The New Jersey Act presumes that any non-"institutional investor"
security holder who owns or beneficially holds 5% or more of our equity
securities has the ability to control the Company, Caesars, CNJ or BRC, unless
such presumption is rebutted by clear and convincing evidence.
The New Jersey Act and regulations define an "institutional investor" as
(i) any retirement fund administered by a public agency for the exclusive
benefit of Federal, state or local public employees, (ii) an investment company
registered under the Investment Company Act of 1940, (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency, (iv) a closed and investment trust, (v) a chartered
or licensed life insurance company or property and casualty insurance company,
(vi) banking or other licensed or chartered lending institutions, (vii) an
investment advisor registered under the Investment Advisors Act of 1940, or
(viii) such other persons as the New Jersey Commission may determine for reasons
consistent with the policies of the New Jersey Act. In the absence of a prima
facie showing by the Director of the DGE that there is any cause to believe that
such institutional investor may be found unqualified, upon application and for
good cause shown, an institutional investor holding either (a) less than 10% of
our equity securities or (b) debt securities constituting less than 20% of our
outstanding debt and less than 50% of the issue involved may be granted a waiver
of qualification as to such holdings if (i) such securities are those of a
publicly traded corporation, (ii) the institutional investor's holdings of such
securities were purchased for investment purposes only, and (iii) upon request
by the New Jersey Commission, the institutional investor files with the New
Jersey Commission a certified statement to the effect that the institutional
investor has no intention of influencing or affecting the affairs of the
Company, Caesars, CNJ or BRC; notwithstanding the foregoing, the institutional
investor is permitted to vote on matters put to the vote of the outstanding
security holders of the Company.
If an institutional investor who has been granted a waiver subsequently
determines to influence or affect the affairs of the Company, the institutional
investor must provide to the New Jersey Commission not less than 30 days prior
notice of such intent and the institutional investor must file with the New
Jersey Commission an application for qualification before taking any action that
may influence or affect our affairs; notwithstanding the foregoing, the
institutional investor is permitted to vote on matters put to the vote of our
outstanding security holders. If an institutional investor changes its
investment intent, or if the New Jersey Commission finds reasonable cause to
believe that the institutional investor may be found unqualified, no action
other than divestiture shall be taken by such institutional investor with
respect to its security holdings until there has been compliance with the
interim casino authorization provisions of the New Jersey Act, including the
execution of a trust agreement. The Company, Caesars, CNJ and BRC are required
to immediately notify the New Jersey Commission and the New Jersey DGE of any
information about, or action of, an institutional investor holding its equity or
debt securities where such information or action may impact
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on the eligibility of such institutional investor for a waiver. If the New
Jersey Commission finds an institutional investor unqualified or if the New
Jersey Commission finds that, by reason of the extent or nature of its holdings,
an institutional investor is in the position to exercise a substantial impact on
the controlling interests of BRC so that qualification of the institutional
investor is necessary to protect the public interest, the New Jersey Act vests
in the New Jersey Commission the power to take all necessary action to protect
the public interest, including the power to require that the institutional
investor submit to qualification and become qualified under the New Jersey Act.
An equity or debt security holder -- including institutional
investors -- who is required to be found qualified by the New Jersey Commission
must submit an application for qualification within 30 days after being ordered
to do so or divest all security holdings within 120 days after the New Jersey
Commission determines such qualification is required. The application for
qualification must include a trust agreement by which the security holder places
its interest in the Company's securities in trust with a trustee qualified by
the New Jersey Commission. If the security holder is ultimately found qualified,
the trust agreement is terminated. If the security holder is not found qualified
or withdraws its application for qualification prior to a determination on
qualification being made, the trustee will be empowered with all rights of
ownership pertaining to such security holder's securities, including all voting
rights and the power to sell the securities; in any event, the unqualified
security holder will not be entitled to receive in exchange for its securities
an amount in excess of the lower of (i) the actual cost the security holder
incurred in acquiring the securities or (ii) the value of such securities,
calculated as if the investment had been made on the date the trust became
operative. If the security holder is not found qualified, it is unlawful for the
security holder to (i) receive any dividends or interest on such securities,
(ii) exercise, directly or through any trustee or nominee, any right conferred
by such securities, or (iii) receive any remuneration in any form from the
Company, Caesars, CNJ or BRC or its holding or intermediary companies for
services rendered or otherwise.
Each officer, director, lender and certain other persons of the Company,
Caesars and CNJ must be found qualified unless the New Jersey Commission, with
the consent of the Director of the New Jersey DGE, finds that such officer,
director, lender or other person of the Company, Caesars or CNJ is not
significantly involved in the affairs of BRC and is thus waived from
qualification. New Jersey law requires that an officer or director of the
Company, Caesars or CNJ must apply for temporary qualification at least 30 days
before assuming any duties; such temporary qualification, if granted by the New
Jersey Commission, will be valid for a period not to exceed the earlier of (i)
nine consecutive calendar months or (ii) the effective date of BRC's next casino
license renewal.
The New Jersey Act requires that each of the Company, Caesars, CNJ and BRC
and its holding and intermediary companies maintain financial stability and
capability. For purposes of these requirements, the New Jersey Commission has
adopted regulations defining "financial stability" and has set forth certain
standards for determining compliance with the financial stability regulations.
Under the regulations of the New Jersey Commission, "financial stability" has
been defined as (i) the ability to assure the financial integrity of casino
operations by the maintenance of a casino bankroll or equivalent provisions
adequate to pay winning wagers to casino patrons when due, (ii) the ability to
meet ongoing operating expenses which are essential to the maintenance of
continuous and stable casino operations, (iii) the ability to pay, as and when
due, all local, state and federal taxes and any and all fees imposed by the New
Jersey Act, (iv) the ability to make necessary capital and maintenance
expenditures in a timely manner which are adequate to insure maintenance of a
superior first class facility of exceptional quality as required by the New
Jersey Act, and (v) the ability to pay, exchange, refinance or extend debts,
including long-term and short-term principal and interest and capital lease
obligations, which will mature or otherwise come due and payable during either
the license term or within 12 months after the end of the license term or to
otherwise manage such debts and any default with respect to the debts. The New
Jersey Commission regulations provide that the financial stability standards
concerning casino bankroll, operating expenses and capital and maintenance
expenditures are met if the following is shown by clear and convincing evidence:
(i) casino bankroll -- the maintenance, on a daily basis, of a casino bankroll
at least equal to the average daily casino bankroll, calculated on a monthly
basis, for the corresponding month in a previous year, (ii) operating
expenses -- the demonstration of the ability to achieve positive gross operating
profit measured on an annual basis, and (iii) capital and maintenance
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expenditures -- the demonstration that its capital and maintenance expenditures
over the five-year period, which includes the previous 36 calendar months and
the upcoming license period, average at least 5% of net revenue per annum. The
Company believes that, at current operating levels, BRC will have no difficulty
in complying with these requirements.
The New Jersey Commission has the authority to restrict or prohibit the
transfer of cash or the assumption of liabilities by BRC if such action will
adversely impact the financial stability of BRC and the prior approval of the
New Jersey Commission is required to incur indebtedness and guarantees of
affiliated indebtedness by BRC involving amounts greater than $25 million.
If it were determined that New Jersey gaming laws were violated by BRC, BRC
could be subject to fines or its casino license could be limited, conditioned,
suspended or revoked. In addition, if a security holder of the Company, Caesars,
CNJ or BRC is found disqualified but does not dispose of the securities, the New
Jersey Commission is authorized to take any necessary action to protect the
public interest, including the suspension or revocation of the casino license.
The New Jersey Commission, however, will not take any action against the
Company, Caesars, CNJ or BRC in connection with a disqualified holder if the New
Jersey Commission finds that (i) the Company has provided in the Articles that
the Company's securities are held subject to the condition that, if a holder
thereof is found to be disqualified by the New Jersey Commission pursuant to the
provisions of the New Jersey Act, such holder shall dispose of his interest in
the Company, (ii) the Company has made a good faith effort, including the
prosecution of all legal remedies, to comply with any order of the New Jersey
Commission requiring the divestiture of the security interest held by the
disqualified holder, and (iii) such disqualified holder does not have the
ability to control the Company, Caesars, CNJ or BRC or to elect one or more
members of the boards of directors of the Company, Caesars, CNJ or BRC. If BRC's
license is revoked, not renewed or suspended for a period in excess of 120 days,
the New Jersey Commission is empowered to appoint a conservator to operate, and
to dispose of, BRC's casino/hotel facilities. If a conservator operates the
casino/hotel facilities, payments to stockholders would be limited to a "fair
return" on their investment, with any excess going to the State of New Jersey.
If a conservator is appointed, the conservator's charges and expenses become a
lien against the property which is paramount to all prior and subsequent liens.
MISSISSIPPI GAMING REGULATION. Gaming in Mississippi can be legally
conducted only on vessels of a certain minimum size either in navigable waters
or counties bordering the Mississippi River or in the waters of the State of
Mississippi which lie adjacent to the coastline of the three counties bordering
the Gulf of Mexico. STC possesses a license for the ownership and operation of
The Sheraton Casino in Tunica County, Mississippi issued by the Mississippi
Commission pursuant to the Mississippi Act.
The Mississippi Act does not restrict the amount or percentage of space on
a vessel that may be utilized for casino gaming; the Mississippi Act also does
not limit the number of licenses that the Mississippi Commission can grant for a
particular area.
The Company and STC are required to submit detailed financial, operating
and other reports to the Mississippi Commission. Substantially all loans,
leases, sales of securities and similar financing transactions entered into by
the Company or by STC must be reported to or approved by the Mississippi
Commission. The Company and STC are also required periodically to submit
detailed financial and operating reports to the Mississippi Commission and
furnish any other information which the Mississippi Commission may require.
Each of the directors, officers and certain key employees of the Company
and STC who are actively and directly engaged in the administration or
supervision of casino gaming in Mississippi, or who have any other significant
involvement with the activities of STC, must be found suitable therefor and may
be required to be licensed by the Mississippi Commission. A finding of
suitability is comparable to licensing, and both require the submission of
detailed personal financial information followed by a thorough investigation. An
application for licensing may be denied for any cause deemed reasonable by the
Mississippi Commission. Changes in licensed positions must be reported to the
Mississippi Commission. In addition to its authority to deny an application for
a license, the Mississippi Commission has the authority to disapprove a change
in corporate position. If the Mississippi Commission finds a director, officer
or key employee of the Company or STC unsuitable for licensing or unsuitable to
continue having a relationship with the Company or STC, such entity
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is required to suspend, dismiss and sever all relationships with such person.
The Company and STC have similar obligations with regard to any person who fails
or refuses to file appropriate applications. Each gaming employee must obtain a
work permit; the Mississippi Commission may refuse to issue a work permit to a
gaming employee (i) if the employee has committed larceny, embezzlement or any
other crime of moral turpitude or knowingly violated the Mississippi Act or the
regulations of the Mississippi Commission, or (ii) for any other reasonable
cause.
Mississippi gaming licenses are not transferable and must be renewed
periodically. The Mississippi Commission is empowered to deny, limit, condition,
revoke and/or suspend any license, finding of suitability or registration, and
to fine any person as it deems reasonable and in the public interest, subject to
the due process considerations of notice and an opportunity for a hearing. The
Mississippi Commission may fine any licensee or other person which is subject to
the Mississippi Act up to $100,000 for each violation of the Mississippi Act
which is the subject of an initial complaint and up to $250,000 for each
violation of the Mississippi Act which is the subject of any subsequent
complaint. The Mississippi Act provides for judicial review of certain decisions
of the Mississippi Commission; however, the filing for such judicial review does
not automatically stay the action taken by the Mississippi Commission pending
the court's review.
License fees and taxes, computed in various ways depending on the type of
casino gaming involved, are payable to the State of Mississippi and to the
counties and cities in which gaming operations are located. Generally, these
fees and taxes are based on a percentage of the gross gaming revenues received
by the casino operation, the number of slot machines operated by such casino, or
the number of table games operated by such casino. Moreover, several local
governments have been authorized to impose either additional gross fees on
adjusted gross gaming revenues or, alternatively, per person boarding fees and
annual license fees based on the number of gaming devices aboard the vessel.
License fees paid to the State of Mississippi are allowed as a credit against
Mississippi state income taxes.
In all other material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada and New Jersey.
ONTARIO GAMING REGULATION. Windsor is required to comply with licensing
requirements similar to Nevada and New Jersey and is also subject to operational
regulation by the Province of Ontario.
NOVA SCOTIA GAMING REGULATION. The Company's subsidiary that owns and
operates the casino in the City of Halifax, Nova Scotia, and operates the casino
in the City of Sydney, Nova Scotia, is required to comply with licensing
requirements similar to the Province of Ontario and is also subject to
operational regulation by the Province of Nova Scotia.
INDIANA GAMING REGULATION. As a result of Caesars' riverboat casino
development in Harrison County, Indiana, the Company is subject to the gaming
regulations in force in that state. Indiana currently imposes regulations on
gaming similar to and, in its opinion, no more restrictive than the gaming
regulations in force in Nevada and New Jersey.
The riverboat also must comply with U.S. Coast Guard requirements as to
boat design, on-board facilities, equipment, personnel and safety and must hold
a Certificate of Seaworthiness or must be approved by the American Bureau of
Shipping for stabilization and flotation, and may also be subject to local
zoning and building codes. The U.S. Coast Guard requirements establish design
standards, set limits on the operation of the vessel and require individual
licensing of all personnel involved with the operation of the vessel. Loss of
the vessel's Certificate of Seaworthiness or the American Bureau of Shipping
approval would preclude its use as a floating casino.
CASINO GAMING -- RELATED PROVISIONS OF OUR ARTICLES OF INCORPORATION. The
Company's Articles provide that (i) all of the Company's securities are subject
to redemption by the Company to the extent necessary to prevent the loss, or to
secure the reinstatement, of any casino gaming license held by the Company or
any of the Company's subsidiaries in any jurisdiction within or without the
United States, (ii) all of the Company's securities are held subject to the
condition that if a holder thereof is found by a gaming authority in any such
jurisdiction to be disqualified or unsuitable pursuant to any gaming law, such
holder will be required to dispose of all such securities, and (iii) it is
unlawful for any such disqualified person to (a) receive payments of
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interest or dividends on any such securities, (b) exercise, directly or
indirectly, any rights conferred by any such securities or (c) receive any
remuneration in any form, for services rendered or otherwise, from the
subsidiary that holds the gaming license in such jurisdiction.
RESTRICTIONS ON ALIEN OWNERSHIP. The Communications Act of 1934, as
amended (the "Communications Act"), restricts the ownership of Company Common
Stock by "aliens". The Communications Act generally defines "aliens" to include
persons who are not citizens of the United States, entities organized under laws
other than those of the United States, foreign governments, entities controlled
directly or indirectly by foreign nationals, and the representatives of foreign
persons or foreign-controlled entities.
Because the Company has shared control of a broadcast licensee, the
limitations in Section 310(b)(4) of the Communications Act govern the
permissible degree of alien ownership and control of Company Common Stock. Under
Section 310(b)(4), no more than 25 percent of the ownership nor more than 25
percent of the voting rights of a broadcast licensee may be held directly or
indirectly by aliens. In assessing compliance with the 25 percent ceiling, the
Federal Communications Commission (the "FCC") will consider direct and indirect
alien interests using a multiplier, so that, for example, minority alien
interests in U.S.-controlled corporations will count proportionally against the
25 percent ceiling. Alien voting interests are not treated proportionally,
however, in any corporation that is alien controlled. The alien interest in any
partnership with an alien partner also is not treated proportionally unless the
alien partner is a limited partner that is insulated from material involvement
in the business of the partnership within the meaning of the FCC's rules and
policies.
The By-laws provide that the amount of Company Common Stock owned of record
or voted by aliens within the meaning of the FCC's rules and policies will not
exceed 25 percent of the total outstanding stock of the Company. The
restrictions on alien ownership under the Communications Act will no longer
apply to Company Common Stock following the consummation of the planned sale of
WBIS+ to Paxson. In addition, following such sale, the Company plans to amend
the By-laws to remove the limitations on the ownership and voting of Company
Common Stock by aliens.
OTHER
In addition, a number of the Company's businesses are subject to other
governmental regulation by law or through contractual arrangements. For example,
Sheraton hotels in the United States are liquor retailers where permitted,
licensed in each state in which they do such business and in certain states are
subject to statutes that prohibit the Company or the hotel owner from being both
a wholesaler and retailer of alcoholic beverages. Although the ownership and
operation of hotel and casino properties could expose the Company to liability
for environmental problems at those properties, the Company is not aware of any
significant environmental liabilities associated with the ownership or operation
of its existing hotel and casino properties.
REGULATORY APPROVALS
Except as described in this section, ITT is not aware of any license or
regulatory permit that appears to be material to its business that might be
adversely affected by the Comprehensive Plan or of any approval or other action
by any government or governmental, administrative or regulatory authority or
agency, domestic or foreign, that would be required for the Comprehensive Plan.
Should any such approval or other action be required, ITT currently contemplates
that it will seek such approval or other action. There can be no assurance that
any such approval or other action, if needed, would be obtained without
substantial conditions or that the failure to obtain any such approval or other
action might not result in adverse consequences to ITT's business. See
"Business -- Governmental Regulation and Related Matters."
NEVADA GAMING REGULATORY APPROVALS
STOCK TENDER OFFER. ITT believes that the Stock Tender Offer, in and of
itself, does not require the prior approval of the Nevada Gaming Authorities.
However, if the Stock Tender Offer involved the aggregate payment of cash to
voting security holders in excess of 50% of the aggregate current market value
of the securities, the Nevada Gaming Authorities may determine that the
Comprehensive Plan, of which the Stock
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Tender Offer is a part, constitutes a "plan of recapitalization" under the
Nevada regulations, in which case ITT and the Company would be required to
obtain the prior approval of the Nevada Commission prior to consummating the
Stock Tender Offer and the Destinations Distribution.
DEBT TENDER OFFER. ITT believes that the Debt Tender Offer, in and of
itself, does not require the prior approval of the Nevada Gaming Authorities.
However, since it is contemplated that the Debt Tender Offer will be financed in
part by the Company Credit Facilities, the interaction of the Debt Tender Offer
and the Company Credit Facilities may require the prior approval of the Nevada
Gaming Authorities.
DESTINATIONS DISTRIBUTION. Because the Destinations Distribution involves
the pro rata distribution of all the shares of Company Common Stock to
stockholders of ITT, the Company is seeking certain approvals, including the
following approvals from the Nevada Commission: (i) registration of the Company,
on an interim basis, as an intermediary/holding company for the Desert Inn,
Caesars Palace in Las Vegas and Caesars Tahoe in Stateline (the "Nevada
Licensees"); (ii) registration of the Company as a publicly traded corporation;
(iii) approval of the listing of the Company Common Stock on the NYSE; (iv)
approval for continuous or delayed public offering by the Company or any
affiliated company wholly owned by it which is or would thereby become a
publicly traded corporation; and (v) such other approvals as may become
necessary or desirable in connection with the Destinations Distribution and the
other components of the Comprehensive Plan.
In addition, the Nevada Gaming Authorities may require controlling
stockholders, officers, directors and other persons associated with the Company
having a material relationship or material involvement with the Nevada Licensees
to be investigated and licensed as part of the approval process for the
Destinations Distribution. The Nevada Gaming Authorities may deny an applicant
for licensing or a finding of suitability for any cause that they deem
reasonable. A finding of suitability is comparable to licensing and both require
the submission of detailed personal and financial information followed by a
thorough investigation. If the Nevada Gaming Authorities find an officer,
director or key employee unsuitable for licensing or unsuitable to continue
having a relationship with the Company and the Nevada Licensees, the companies
involved would be required to sever all relationships with such person. Inasmuch
as all the relevant officers, directors and other persons associated with the
Company have already been subject to review by the Nevada Gaming Authorities,
ITT believes that the investigation and licensing of such individuals will not
present a substantial regulatory obstacle.
In connection with obtaining the necessary approvals for the Destinations
Distribution from the Nevada Gaming Authorities, ITT is seeking approval from
the Nevada Commission for its de-registration.
As noted above under "-- Stock Tender Offer," the interaction of the
various transactions contemplated by the Comprehensive Plan may be sufficient to
characterize the Comprehensive Plan as a plan of recapitalization under the
Nevada Gaming Law, and, in turn, require ITT to seek additional approvals from
the Nevada Gaming Authorities. In addition, to the extent that the financing
utilized in the Comprehensive Plan involves agreements to (i) grant possessory
security interests in the equity securities issued by the Nevada Licensees or
any affiliated holding company, (ii) restrict the transfer of equity securities
issued by any Nevada Licensee or any affiliated holding company or (iii) not
encumber equity securities issued by any Nevada Licensee or any affiliated
holding company, ITT and the Company will be required to obtain the prior
approval of the Nevada Gaming Authorities.
On July 16 and 21, 1997, ITT and the Company filed the relevant
applications for approval with the Nevada Gaming Authorities in conjunction with
the Comprehensive Plan. ITT and the Company will promptly file any additional
applications or notices, if necessary, with the Nevada Gaming Authorities. On
September 17, 1997, the Nevada Control Board unanimously recommended to the
Nevada Commission that all approvals necessary for consummation of the
Comprehensive Plan be granted. Such approvals are subject to the condition that
the Federal District Court for the District of Nevada has not enjoined
consummation of the Comprehensive Plan. The Nevada Commission is scheduled to
consider the Company's applications relating to the Comprehensive Plan at a
hearing on September 25, 1997. There can be no assurances, however, as to when
the Nevada Commission will take final action. Further, any such approvals, if
granted, do not
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constitute a finding, recommendation or approval by the Nevada Control Board or
the Nevada Commission as to the accuracy or adequacy of the Destinations
Distribution or the merits of the Comprehensive Plan.
NEW JERSEY GAMING REGULATORY APPROVALS
STOCK TENDER OFFER. ITT believes that the Stock Tender Offer, in and of
itself, does not require the prior approval of the New Jersey Gaming
Authorities.
DEBT TENDER OFFER. ITT believes that the Debt Tender Offer, in and of
itself, does not require the prior approval of the New Jersey Gaming
Authorities. However, it is contemplated that the Debt Tender Offer will be
financed in whole or in part by the Company Credit Facilities, which will
require the prior approval of the New Jersey Gaming Authorities.
DESTINATIONS DISTRIBUTION. New Jersey Gaming Law requires prior approval
from the New Jersey Commission before securities of a casino licensee or one of
its holding companies that is not publicly traded can be transferred. In
addition, any person acquiring the securities of a casino licensee or privately
held holding company must become qualified by the New Jersey Commission or
dispose of such securities. However, the New Jersey Act provides that the New
Jersey Commission has the discretion to permit an entity to acquire and own
securities of such licensee on an interim basis ("interim authorization") until
that entity is plenarily qualified by the New Jersey Commission; during the
period of interim authorization, the securities of such licensee must be held in
a trust pursuant to the provisions of the New Jersey Act.
Because the Destinations Distribution involves the pro rata distribution of
all the shares of Company Common Stock to stockholders of ITT, the Company is
seeking the following approvals, determinations and/or waivers from the New
Jersey Commission: (i) approval of the transfer of the common stock of Caesars,
including Caesars' interest in CNJ and BRC, to the Company as part of a
corporate restructuring of ITT's gaming business, (ii) the determination that
the interim authorization requirements -- including the establishment of a
trust -- are inapplicable to such transfers, (iii) the determination that, after
the Destinations Distribution, BRC and its holding and intermediary companies
will possess the financial stability, integrity and responsibility required by
the New Jersey Act, (iv) the determination that the Articles satisfy the
requirements of the New Jersey Act, (v) the waiver of qualification of
stockholders of the Company, (vi) the determination that the relevant officers
and directors of ITT's New Jersey operations are qualified under the New Jersey
Act, (vii) the qualification of the Company as a holding and intermediary
company of ITT's New Jersey operations and (viii) the waiver of qualification of
officers of the Company and ITT's New Jersey operations who are not
significantly involved in the affairs of BRC.
In addition, the New Jersey Gaming Authorities will require that the
Company Credit Facilities -- which will be used to finance in part the Debt
Tender Offer and the Stock Tender Offer -- be approved and that each financial
source of ITT's New Jersey operations or holding companies and each holder of
debt securities of ITT's New Jersey operations or holding companies be
qualified. Banking and other licensed lending institutions are exempt from the
qualification requirements of the New Jersey Act. Because the Company Credit
Facilities will be used to finance in whole or in part the Debt Tender Offer and
the Stock Tender Offer, the Company will seek the following approvals from the
New Jersey Commission: (i) a determination that the lenders under the Company
Credit Facilities are exempt from the qualification requirements because all
such lenders are banking or other licensed lending institutions; (ii) approval
of the material debt transaction, if such transaction involves the pledge of the
assets of ITT's New Jersey operations; and (iii) a waiver of the qualification
of the holders of any debt securities of the Company or its subsidiaries.
The qualification requirements of any debt or equity security holder of the
Company may be waived based on an express finding by the New Jersey Commission,
with the consent of the Director of the New Jersey DGE, that the security holder
either (a)(i) is not significantly involved in the activities of BRC, (ii) does
not have the ability to control BRC or any of its holding or intermediary
companies and (iii) does not have the ability to elect one or more members of
the respective boards of directors of the Company, BRC or its holding or
intermediary companies or (b) is an "institutional investor," as such term is
defined in New Jersey Gaming Law. For purposes of clause (a) , the New Jersey
Act presumes that any non- "institutional investor" security holder who owns or
beneficially hold 5% or more of the equity securities of the Company has
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the ability to control the Company, BRC and its holding or intermediary
companies, unless such presumption is rebutted by clear and convincing evidence.
The New Jersey Act requires that each of the Company, BRC and its holding
and intermediary companies maintain financial stability and capability. For
purposes of these requirements, the New Jersey Commission has adopted
regulations defining "financial stability" as the same applies to licensed
casino operations and has set forth certain standards for determining compliance
with the financial stability regulations. Under the New Jersey Regulations,
"financial stability" has been defined as (i) the ability to assure the
financial integrity of casino operations by the maintenance of a casino bankroll
or equivalent provisions adequate to pay winning wagers to casino patrons when
due, (ii) the ability to meet ongoing operating expenses which are essential to
the maintenance of continuous and stable casino operations, (iii) the ability to
pay, as and when due, all local, state and Federal taxes and any and all fees
imposed by the New Jersey Act, (iv) the ability to make necessary capital and
maintenance expenditures in a timely manner which are adequate to insure
maintenance of a superior first-class facility of exceptional quality as
required by the New Jersey Act and (v) the ability to pay, exchange, refinance
or extend debts, including long-term and short-term principal and interest and
capital lease obligations, which will mature or otherwise come due and payable
during either the license term or within 12 months after the end of the license
term or to otherwise manage such debts and any default with respect to the
debts. The New Jersey Regulations provide that the financial stability standards
concerning casino bankroll, operating expenses and capital and maintenance
expenditures are met if the following is shown by clear and convincing evidence:
(i) casino bankroll -- the maintenance, on a daily basis, of a casino bankroll
at least equal to the average daily casino bankroll, calculated on a monthly
basis, for the corresponding month of the previous year, (ii) operating
expenses -- the demonstration of the ability to achieve positive gross operating
profit measured on an annual basis; and (iii) capital and maintenance
expenditures -- the demonstration that its capital and maintenance expenditures
for the five-year period, which includes the previous 36 calendar months and the
upcoming license period, average at least five percent of net revenue per annum.
ITT believes that, at current operating levels, BRC will be in compliance with
these requirements.
The New Jersey Commission has the authority to restrict or prohibit the
transfer of cash or the assumption of liabilities by BRC if such action will
adversely impact the financial stability of BRC and the prior approval of the
New Jersey Commission is required to incur indebtedness and guarantees of
affiliated indebtedness by BRC involving amounts greater than $25 million.
The interaction of the various transactions contemplated by the
Comprehensive Plan may trigger the need to seek additional approvals from the
New Jersey Gaming Authorities. In addition, to the extent that the financing
utilized in the Comprehensive Plan involves agreements to (i) restrict the
transfer of equity securities issued by BRC or its holding or intermediary
companies or (ii) not encumber equity securities issued by BRC or its holding or
intermediary companies, ITT and the Company will be required to obtain the prior
approval of the New Jersey Gaming Authorities.
On July 16, 1997, ITT and the Company filed the relevant applications for
approval with the New Jersey Gaming Authorities in conjunction with the
Comprehensive Plan. ITT and the Company will promptly file any additional
applications or notices, if necessary, with the New Jersey Gaming Authorities.
On September 18, 1997, the New Jersey Commission held a hearing with respect to
the Company's applications relating to the Comprehensive Plan. A decision
relating to these applications is expected on or prior to September 26, 1997.
There can be no assurances, however, as to when the New Jersey Commission will
take final action. Further, any such approvals, if granted, do not constitute a
finding, recommendation or approval by the New Jersey Commission as to the
accuracy or adequacy of the Destinations Distribution or the merits of the
Comprehensive Plan.
MISSISSIPPI GAMING REGULATORY APPROVALS
In all material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada.
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STOCK TENDER OFFER. The Company believes that the Stock Tender Offer, in
and of itself, does not require the prior approval of the Mississippi
Commission. However, if the Stock Tender Offer involves the aggregate payment of
cash to voting security holders in excess of 50% of the aggregate current market
value of the securities, the Mississippi Commission may determine that the
Comprehensive Plan, of which the Stock Tender Offer is a part, constitutes a
"plan of recapitalization" under the Mississippi Regulations, in which case ITT
and the Company would be required to obtain the approval of the Mississippi
Commission before consummating the Stock Tender Offer and the Destinations
Distribution. In addition, because the Stock Tender Offer involves the purchase
of ITT's own equity securities, the Mississippi Commission may determine that
the Stock Tender Offer constitutes an "exceptional repurchase of securities"
under the Mississippi Regulations, in which case ITT and the Company would be
required to obtain the approval of the Mississippi Commission before
consummating the Stock Tender Offer.
DEBT TENDER OFFER. ITT believes that the Debt Tender Offer, in and of
itself, does not require the prior approval of the Mississippi Commission.
However, since the Debt Tender Offer will be financed in whole or in part by the
Company Credit Facilities, the interaction of the Debt Tender Offer and the
Company Credit Facilities may require the prior approval of the Mississippi
Commission.
DESTINATIONS DISTRIBUTION. Because the Destinations Distribution involves
the pro rata distribution of all the shares of Company Common Stock to
stockholders of ITT, the Company is seeking the following approvals from the
Mississippi Commission: (i) approval of the merger of the Company with and into
Sheraton, with the Company as the surviving company; (ii) approval of the
Company as the sole stockholder of Sheraton Tunica; (iii) registration of the
Company on an interim basis, as an intermediary/holding company for Sheraton
Tunica, (iv) registration of the Company as a publicly traded corporation; (v)
approval of the listing of the Company Common Stock on the NYSE; (vi) approval
of the granting of possessory security interests and/or the execution of other
agreements which may impose transfer restrictions; and (vii) approval for
continuous or delayed public offering by the Company or any affiliated company
wholly owned by it which is or would thereby become a publicly traded
corporation.
In addition, the Mississippi Commission may require controlling
stockholders, officers, directors and other persons associated with the Company
having a material relationship or material involvement with Sheraton Tunica to
be investigated and licensed as part of the approval process for the
Destinations Distribution. The Mississippi Commission may deny an application
for licensing or a finding of suitability for any cause that it deems
reasonable. A finding of suitability is comparable to licensing and both require
the submission of detailed personal and financial information followed by a
thorough investigation. If the Mississippi Commission finds an officer, director
or key employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company and Sheraton Tunica, the companies involved would
be required to sever all relationships with such person. Inasmuch as all the
relevant officers, directors and other persons associated with the Company have
already been subject to review by the Mississippi Commission, ITT believes that
the investigation and licensing of such individuals will not present a
substantial regulatory obstacle.
The interaction of the various transactions contemplated by the
Comprehensive Plan may be sufficient to characterize the Comprehensive Plan as a
plan of recapitalization, and, in turn, require ITT to seek additional approvals
from the Mississippi Commission. Similarly, the terms and/or conditions of the
Stock Tender Offer may be sufficient to characterize the Stock Tender Offer as
an exceptional repurchase of equity securities and, in turn, require ITT to seek
additional approvals from the Mississippi Commission. In addition, to the extent
that the financing proposed by the Comprehensive Plan involves agreements to (i)
restrict the transfer of equity securities issued by Sheraton Tunica or any
affiliated holding company or (ii) not encumber equity securities issued by
Sheraton Tunica or any affiliated holding company, ITT and the Company will be
required to obtain the prior approval of the Mississippi Commission.
On July 18, 23 and 25, 1997, ITT and the Company filed the relevant
applications for approval with the Mississippi Commission in conjunction with
the Comprehensive Plan. On September 15, 1997, the Mississippi Commission
unanimously approved the Company's applications relating to the Comprehensive
Plan.
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Such approvals do not constitute a finding, recommendation or approval by the
Mississippi Commission as to the accuracy or adequacy of the Destinations
Distribution or the merits of the Comprehensive Plan.
ONTARIO, CANADA GAMING REGULATORY APPROVALS
None of the Debt Tender Offer, the Stock Tender Offer or the Destinations
Distribution requires the approval of the Ontario Gaming Authorities. However,
in keeping with ITT's policy of disclosure with its gaming regulatory agencies,
appropriate disclosures concerning the Debt Tender Offer, the Stock Tender Offer
and the Destinations Distribution will be made to the Ontario Gaming Authorities
and full, complete and accurate response will be provided to the Ontario Gaming
Authorities to all inquiries concerning the Comprehensive Plan.
NOVA SCOTIA, CANADA GAMING REGULATORY APPROVALS
None of the Debt Tender Offer, the Stock Tender Offer or the Destinations
Distribution requires the approval of the Nova Scotia Gaming Authorities.
However, in keeping with ITT's policy of disclosure with its gaming regulatory
agencies, appropriate disclosures concerning the Debt Tender Offer, the Stock
Tender Offer and the Destinations Distribution will be made to the Nova Scotia
Gaming Authorities and full, complete and accurate responses will be provided to
the Nova Scotia Gaming Authorities to all inquiries concerning the Comprehensive
Plan.
INDIANA GAMING REGULATORY APPROVALS
None of the Debt Tender Offer, the Stock Tender Offer or the Destinations
Distribution requires the approval of the Indiana Gaming Authorities. However,
in keeping with ITT's policy of disclosure with its gaming regulatory agencies,
appropriate disclosures concerning the Debt Tender Offer, the Stock Tender Offer
and the Destinations Distribution will be made to the Indiana Gaming Authorities
and full, complete and accurate responses will be provided to the Indiana Gaming
Authorities to all inquiries concerning the Comprehensive Plan.
COMMUNICATIONS ACT OF 1934
ITT holds a fifty percent interest in ITT-Dow Jones Television, the general
partnership that is the licensee of WBIS+(TV), New York, New York, through ITT's
wholly owned subsidiary ITT Broadcasting Corp. The transfer of the stock of ITT
Broadcasting Corp. to the Company in preparation for the Destinations
Distribution and the distribution of the shares of the Company to ITT's
stockholders in the Destinations Distribution will require the prior approval of
the FCC for a pro forma change in control of ITT Broadcasting Corp. The FCC is
not required to provide 30 days prior public notice of and the opportunity for
filing petitions to deny, such an application, as it would be in the case of an
application requesting consent for a change in ultimate control. The FCC will
consider informal objections filed against such an application. The FCC
typically grants applications for consent to pro forma transfers of control
within a few weeks after filing, although the filing of informal objections may
delay the FCC's action on an application until the FCC considers the objections.
On July 25, 1997, ITT filed an application for the FCC's consent to the pro
forma change in control of ITT Broadcasting Corp. On August 28, 1997, the
Federal Communications Commission granted approval of the pro forma change in
control of ITT Broadcasting Corp.
LEGAL PROCEEDINGS
On January 27, 1997, a complaint (the "Hilton Complaint") captioned Hilton
Hotels Corporation and HLT Corporation v. ITT Corporation was filed against ITT
in the U.S. District Court for the District of Nevada. The Hilton Complaint asks
the court, among other things: (i) to enjoin ITT from amending its by-laws "in
any way that would impede the effective exercise of the stockholder franchise in
connection with the 1997 annual meeting" of ITT stockholders, from materially
delaying the annual meeting, and from increasing the size of the ITT Board "in
order to preserve the position of incumbent directors", (ii) to require the ITT
Board to redeem ITT's the preferred stock purchase rights and to make
inapplicable to the Hilton Offer and
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the Proposed Squeeze Out Merger the Nevada Control Share Acquisition Statute and
the Nevada Business Combination Statute and (iii) to declare that ITT does not
have standing to institute an action under the Federal anti-trust laws to block
or impede the Hilton Offer or the Proposed Squeeze Out Merger and that, in any
event, the consummation of the Hilton Offer and the Proposed Squeeze Out Merger
would not violate such laws.
On January 27, 1997, Hilton and HLT filed a motion for a preliminary
injunction (the "Hilton Preliminary Injunction Motion") seeking to enjoin ITT
(i) from increasing the size of the ITT Board or, alternatively, requiring ITT
to give Hilton the opportunity to supplement the individuals it nominates for
the ITT Board and (ii) from amending ITT's by-laws "to impede in any way the
effective exercise of the stockholder franchise in connection with electing
directors" at its 1997 annual meeting. Following a hearing on the preliminary
injunction on March 5, 1997, the court issued an order denying the Hilton
Preliminary Injunction Motion.
On January 29, 1997, Hilton and HLT filed a motion for a temporary
restraining order and preliminary injunction enjoining ITT from prosecuting any
action against Hilton or HLT arising out of the Hilton Offer in any jurisdiction
other than the U.S. District Court for the District of Nevada. On January 29,
1997, the U.S. District Court for the District of Nevada issued an order denying
Hilton and HLT's motion.
On February 12, 1997, ITT filed an answer and counterclaims to the Hilton
Complaint denying all material allegations of the Hilton Complaint. The
counterclaims seek injunctive relief prohibiting Hilton from proceeding with the
Hilton Offer which is tainted by Hilton's misappropriation and misuse of ITT's
confidential information and other relief to prevent Hilton from benefitting
from access to ITT's confidential information. These counterclaims also seek
injunctive relief, in the event the Hilton Offer is not enjoined, requiring
Hilton to correct material inadequacies in the Hilton Schedule 14D-1 by
disclosing and filing the information required under the Federal securities
laws.
On February 13, 1997, ITT filed a motion for an injunction (the "Counsel
Motion") requiring Hilton to discharge Latham & Watkins as its counsel. The
Counsel Motion sought (i) an order requiring Hilton to dismiss Latham & Watkins
as its counsel in connection with the Hilton Offer or, in the alternative, (ii)
a preliminary injunction enjoining Hilton from seeking Latham & Watkins' counsel
until the court can review the merits of the Counsel Motion. On March 12, 1997,
the court issued an order denying the Counsel Motion.
On February 26, 1997, Hilton filed a motion (the "Hilton Annual Meeting
Motion") for a preliminary injunction seeking to require ITT to hold its annual
meeting of stockholders in May 1997. On March 13, 1997, ITT filed a memorandum
in opposition to Hilton's motion. On March 25, 1997, Hilton filed a reply
memorandum in response to ITT's memorandum in opposition. On April 21, 1997, the
court issued on order denying the Hilton Annual Meeting Motion. Hilton appealed
the court's denial of the Hilton Annual Meeting Motion to the United States
Court of Appeals for the Ninth Circuit. On June 19, 1997, the Court of Appeals
issued an order affirming the district court's denial of the Hilton Annual
Meeting Motion.
On June 12, 1997, Hilton filed a first amended and supplemental complaint
(the "First Amended and Supplemental Hilton Complaint") in the U.S. District
Court for the District of Nevada. In addition to the relief sought in the Hilton
Complaint, the First Amended and Supplemental Hilton Complaint asks the court,
among other things, (i) to enjoin ITT from further delaying its annual meeting,
(ii) to require ITT to conduct an auction of ITT, (iii) to enjoin ITT from
selling any of its assets without conducting an auction in which Hilton may
participate and without stockholder approval, (iv) to require ITT to rescind its
transaction with FelCor, (v) to invalidate the change of control provisions in
ITT's management agreements with FelCor and to enjoin ITT from entering into any
other agreement containing change of control provisions and (vi) to enjoin the
ITT Board from taking actions aimed at entrenching themselves in office.
On July 2, 1997, ITT filed a motion to dismiss certain counts included in
the First Amended and Supplemental Hilton Complaint or, in the alternative, for
partial summary judgment in the U.S. District Court for the District of Nevada.
On September 10, 1997, the court denied in part and granted in part ITT's
motion.
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On July 16, 1997, ITT filed a complaint in the U.S. District Court for the
District of Nevada seeking, among other relief, a declaratory judgment that
Hilton cannot show that, in approving the Comprehensive Plan, the ITT Board
acted outside its powers or failed to exercise its powers in good faith with a
view to the interests of the Company. ITT also filed a motion with the court
seeking a speedy hearing on its claims.
On August 5, 1997, Hilton filed in the Nevada Federal court answers and
counterclaims to ITT's complaint, claiming, among other things, that the ITT
Board has breached its fiduciary duties and that ITT has made material
misstatements and omissions.
On August 25, 1997, Hilton filed a motion in the Nevada Federal court for
injunctive and preliminary relief seeking, among other things, to enjoin ITT
from proceeding with the Comprehensive Plan. On August 27, 1997, the court set a
hearing date for Hilton's preliminary injunction motion of September 29, 1997.
On September 9, 1997, ITT filed a memorandum in opposition to Hilton's motion.
On September 22, 1997, Hilton filed a reply memorandum in response to ITT's
memorandum in opposition.
Following the Hilton Offer, a total of eight purported class action suits
were filed on behalf of individual plaintiffs against ITT and its board of
directors in various state courts in Nevada. These complaints were captioned
Cohen v. ITT Corp. N.V., et al.; Kostick v. Araskog, et al.; Bernstein, et al.
v. ITT Corp. N.V., et al.; Feuerstein, et al. v. ITT Corp. N.V., et al.; Marks,
et al. v. Araskog, et al.; Huntley v. ITT Corporation, et al.; Steiner v.
Araskog, et al.; and Cohen v. Araskog, et al. Five purported class action suits
were also filed on behalf of individual plaintiffs against ITT and its board of
directors in the Nevada Federal court. The complaints were captioned Collins v.
Anderson, et al.; Taub, et al. v. Araskog, et al.; Kanarek v. Araskog, et al.;
Halebian v. Araskog, et al.; and Cohen, et al. v. Araskog, et al. In addition,
four purported class action suits were filed on behalf of individual plaintiffs
against ITT and its board of directors in the Supreme Court of the State of New
York. The complaints were captioned Siegel v. Araskog, et al.; Waltzman v.
Anderson., et al.; Hack v. ITT Corp., et al.; and Rand, et al. v. ITT
Corporation, et al. The complaints allege, among other things, that the
defendants have breached their fiduciary duties to ITT's stockholders by failing
to maximize stockholder value. The complaints seek, among other things, to
compel the defendants to carry out their fiduciary duties and to cooperate with
any person having a bona fide interest in proposing a transaction with ITT which
would maximize stockholder value. On March 10, 1997, the Nevada Federal court
consolidated the five purported class action suits filed in that court. There
have been no other material developments in any of the foregoing actions.
In addition to the suits described above, there are various lawsuits
pending against the Company and its subsidiaries, some of which involve claims
for substantial amounts. However, the ultimate liability with respect to these
lawsuits is not considered material in relation to the consolidated financial
condition of the Company and its subsidiaries.
THE COMPANY'S RELATIONSHIP WITH ITT AFTER THE DESTINATIONS DISTRIBUTION
Prior to the Destinations Distribution, the Company will be a wholly owned
subsidiary of ITT. After the Destinations Distribution, ITT ISI will not have
any ownership interest in the Company, and the Company will be an independent
public company.
The Company expects to enter into certain agreements with ITT and ITT
Educational, described below, for the purpose of giving effect to the
Distributions. These agreements will govern the Company's relationships with ITT
ISI and ITT Educational after the Distributions and provide for the allocation
of tax and certain other liabilities arising from periods prior to the
Distributions. The summaries below reflect the terms of such agreements as they
have been finalized for execution in connection with the Distributions. ITT
expects that these agreements may be amended in certain respects in connection
with the Strategic Investment. Accordingly, no assurance can be made that the
descriptions below will reflect the agreements between the parties as so amended
or that there will not be other agreements covering other matters. Copies of the
forms of such agreements will be filed as exhibits to the Company's Registration
Statement on Form 10 registering the Company Common Stock under the Exchange
Act, of which this Information Statement forms a part. The following
descriptions do not purport to be complete and are qualified in their entirety
by reference to such exhibits.
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DISTRIBUTION AGREEMENTS
The Company will enter into a distribution agreement with ITT (the
"Destinations Distribution Agreement") providing for, among other things,
certain transactions to effect the Destinations Distribution and other
arrangements between ITT ISI and the Company after the Destinations
Distribution.
The Destinations Distribution Agreement will provide for, among other
things, the merger of Sheraton with and into the Company and the transfer by ITT
to the Company of certain miscellaneous subsidiaries and assets of ITT and the
assumption of liabilities and cross-indemnities designed to allocate generally,
effective as of the Distribution Date, financial responsibility for the
liabilities (other than for taxes and certain employee benefits) arising out of
or in connection with the hotels and gaming businesses and ITT's current and
former businesses other than the telephone directories publishing business and
the post-secondary technical education business to the Company. The Destinations
Distribution Agreement also will provide that the Company will indemnify ITT ISI
for certain liabilities, including, among others, liabilities relating to the
transactions contemplated by the Comprehensive Plan, the Hilton Offer and
certain other businesses formerly conducted by ITT. Liabilities (other than
certain employee benefit and tax liabilities, the treatment of which are
discussed below) under the distribution agreement relating to the 1995 Spin-off,
will be assumed by Destinations under the Destinations Distribution Agreement.
The Destinations Distribution Agreement will provide that each of ITT ISI
and the Company will be granted access to certain records and information in the
possession of the other.
ITT and the Company also will enter into a distribution agreement with ITT
Educational (the "ITT Educational Distribution Agreement") providing for, among
other things, certain transactions to effect the ITT Educational Distribution
and other arrangements between the parties. The ITT Educational Distribution
Agreement will provide for, among other things, the assumption of liabilities
and cross-indemnities designed to allocate generally, effective as of the
distribution date for the ITT Educational Distribution, financial
responsibilities for the liabilities (other than taxes and certain employee
benefits) arising out of or in connection with the post-secondary technical
education business to ITT Educational. The Company will be a party to the ITT
Educational Distribution for purposes of indemnification by ITT Educational for
certain liabilities arising out of its business and certain insurance
administration and other matters.
TAX ALLOCATION AGREEMENTS
The Company will enter into a Tax Allocation Agreement with ITT and ITT
Educational (the "Tax Allocation Agreement") effectively providing that the
Company will be responsible for its respective share of ITT's consolidated tax
liability for the tax years that the Company was included in ITT's consolidated
Federal income tax return. The Tax Allocation Agreement will also provide for
sharing, where appropriate, of state, local and foreign taxes attributable to
periods prior to the Distribution Date. The Tax Allocation Agreement will also
provide that the Company will be liable for any Distribution Tax and certain
taxes arising out of the 1995 Spin-off (each such tax a "1995 Spin-off Tax")
unless the actions or omissions (including, in the case of any Distribution Tax,
actions or omissions taken with respect to the stock or assets) of ITT
Educational and/or ITT materially contribute to the incurrence of such
Distribution Tax and/or 1995 Spin-off Tax.
If the actions or omissions (including, in the case of any Distribution
Tax, actions or omissions taken with respect to the stock or assets) of the
Company, ITT and/or ITT Educational materially contribute to the incurrence of
such Distribution Tax and/or 1995 Spin-off Tax, then the companies so acting or
omitting to act will be liable for any such Distribution Tax and/or Spin-off
Tax, on a pro rata basis if more than one of the companies is so liable. ITT
estimates that if the Distributions failed to qualify as tax-free under Section
355 of the Code (or, if as a result of the application of Section 355(e) of the
Code to the Distributions, ITT recognized taxable gain with respect to the
Distributions), the amount of the resulting Distribution Tax would be
approximately $1.4 billion. In addition, ITT estimates that the Company's
liability in respect of a 1995 Spin-off Tax could be as much as $1.75 billion if
the actions or omissions of ITT, ITT Educational and/or the Company materially
contribute to a final determination that the 1995 Spin-off was taxable or $583
million if the 1995 Spin-off is determined to be taxable notwithstanding that
none of the parties to the 1995 Spin-off takes or omits to take any action that
materially contributes to a final determination that such spin-off was
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taxable, and as little as $0, for example, if the actions or omissions of one or
both of the other parties to the 1995 Spin-off materially contributes to a final
determination that the 1995 Spin-off was taxable. None of ITT ISI, ITT
Educational or the Company will be obligated to indemnify any stockholder for
any tax liability.
Upon the consummation of the Strategic Investment, an Amended and Restated
Tax Allocation Agreement (the "Amended and Restated Tax Allocation Agreement")
will become effective and supersede the Tax Allocation Agreement. The Amended
and Restated Tax Allocation Agreement will provide that the Company will be
responsible for its respective share of ITT's consolidated tax liability for the
tax years that the Company was included in ITT's consolidated Federal income tax
return and that the Company will be responsible for any deficiency with respect
to ITT's respective share of ITT's consolidated tax liability for the tax years
that precede the Distributions. The Amended and Restated Tax Allocation
Agreement will also provide that ITT ISI, ITT Educational and the Company will
each be responsible for their state, local and foreign taxes attributable to
periods prior to the Distributions; provided, however, that the Company
generally will be responsible for any deficiencies with respect to taxes payable
by ITT that are attributable to periods before the consummation of the Strategic
Investment unless ITT, CDRV or certain other parties named in the agreement
between ITT and CDRV for the Strategic Investment breach any of their covenants
or obligations made in connection with that agreement.
The Amended and Restated Tax Allocation Agreement will also provide that
the Company will generally be liable for any Distribution Tax that arises as a
result of the Distributions failing to qualify as tax-free spin-offs under
Section 355 of the Code, and 90% of any Distribution Tax that arises as a result
of the application of Section 355(e) of the Code to the Distributions. The
Amended and Restated Tax Allocation Agreement will also provide that,
notwithstanding the preceding sentence, if the actions or omissions (including
actions or omissions taken with respect to the stock or assets) of ITT
Educational materially contribute to the incurrence of any Distribution Tax, ITT
Educational generally will be liable for such Distribution Tax. Further, if ITT
ISI, CDRV or certain other persons named in the agreement between ITT and CDRV
for the Strategic Investment breach certain of their covenants or obligations
made in connection with that agreement and any Distribution Tax arises in
connection with or as a result of such breach, ITT ISI generally will be liable
for such Distribution Tax. None of ITT ISI, ITT Educational or the Company will
be obligated to indemnify any stockholder for any tax liability.
The Amended and Restated Tax Allocation Agreement will also provide that
the Company will be liable for any 1995 Spin-off Tax in the same manner as
provided in the Tax Allocation Agreement; provided, however, that in general,
ITT ISI will only be liable for a 1995 Spin-off Tax if ITT ISI, CDRV or certain
other persons named in the agreement between ITT and CDRV for the Strategic
Investment breach any of their covenants or obligations made in connection with
that agreement and a Spin-off Tax arises in connection with or as a result of
such breach.
INTELLECTUAL PROPERTY AGREEMENTS
The Company will enter into an Intellectual Property License and Assignment
Agreement with ITT that will provide for a license to ITT ISI and its
subsidiaries and associated companies to continue to use the "ITT" name in its
corporate name and trade name and a Trade Name and Service Mark License
Agreement with ITT World Directories that will provide for a license to ITT
World Directories and its subsidiaries to continue to use the "ITT" name, mark
and logo, in each case, in the operation of the telephone directories publishing
businesses following the Distribution Date and subject to the maintenance of
certain quality standards for their products and services and other condition in
accordance with the terms thereof. The Company and ITT Educational currently are
parties to a similar Trade Name and Service Mark License Agreement that provides
for a license to ITT Educational and its subsidiaries and associated companies
to continue to use the "ITT" name, mark and logo in the operation of ITT
Educational's business for five years following the consummation of the ITT
Educational Distribution, renewable for an additional five years thereafter.
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EMPLOYEE BENEFITS AGREEMENT
GENERAL. The Company will enter into an Employee Benefits Services and
Liabilities Agreement (the "Benefits Agreement") with ITT and ITT Educational
providing for the allocation of retirement, welfare and other employee benefit
and executive compensation plans, programs, policies and arrangements among the
Company, ITT ISI (or a subsidiary of ITT ISI) and ITT Educational. As a general
matter, the Company, ITT ISI (or a subsidiary of ITT ISI) and ITT Educational
will each (i) continue to employ their respective employees and (ii) assume the
liabilities existing on the Distribution Date for their respective employees and
former employees. For this purpose, as of the Distribution Date, all ITT
headquarters staff employees (except for certain designated employees who will
remain with ITT ISI (or a subsidiary of ITT ISI)) will become employees of the
Company. The Benefits Agreement will provide for the treatment of certain
retirement plans, investment and savings programs, medical and life insurance
benefits, retiree medical and life insurance benefits and stock awards. In
addition, it is expected that the Benefits Agreement will provide that, as of
the Distribution Date, the Company will assume sponsorship of each compensation
and benefit plan presently maintained by ITT or its subsidiaries, other than
plans exclusively for the benefit of ITT ISI or ITT Educational employees.
RETIREMENT PLANS. Except for stand-alone plans maintained exclusively for
ITT ISI or ITT Educational (or their respective subsidiaries) employees,
effective on the Distribution Date, it is expected that the Company will assume
sponsorship of ITT's tax-qualified and non-qualified defined benefit pension
plans ("Assumed Retirement Plans") and the related trusts established
thereunder. Effective as of the Distribution Date, ITT ISI and ITT Educational
may establish new qualified and non-qualified defined benefit plans. The Company
will either transfer the assets and liabilities attributable to current
employees of ITT and/or ITT Educational to new retirement plans established by
ITT ISI (or a subsidiary of ITT ISI) and/or ITT Educational for their respective
employees or the Company will retain such assets and liabilities under the tax-
qualified Assumed Retirement Plans for benefits accrued prior to the
Distribution Date for such employees.
The Company may also retain assets and liabilities under the non-qualified
Assumed Retirement Plans for current and former employees of ITT ISI and the
Company or, alternatively, the Company may transfer the assets and liabilities
for current and former employees of ITT Educational to one or more newly
established non-qualified plans and related grantor trusts.
Effective on the Distribution Date, to the extent practicable, the
respective rights and obligations of the Company, ITT ISI and ITT Educational
with respect to any foreign plan previously maintained by ITT will be treated in
a manner consistent with the general principles described above.
SAVINGS PLANS. Effective on the Distribution Date, it is expected that the
Company will assume sponsorship of the ITT Corporation 401(k) Retirement Savings
Plan and the ITT Corporation Excess Savings Plan (the "Assumed Savings Plans")
and the related trusts established thereunder. Effective as of the Distribution
Date, ITT ISI (or a subsidiary of ITT ISI) and ITT Educational may establish new
tax-qualified and non-qualified savings plans. The Company will either transfer
the assets and liabilities attributable to the current ITT ISI and ITT
Educational employees under the Assumed Savings Plans to their respective newly
created plans and trusts or the Company will retain such assets and liabilities
under the Assumed Savings Plans for benefits accrued prior to the Distribution
Date for such employees.
MEDICAL AND LIFE PLANS. Effective on the Distribution Date, it is expected
that (i) the Company will assume the medical and life insurance plans sponsored
by ITT (other than any stand-alone arrangements for employees of ITT ISI (or a
subsidiary of ITT ISI) and ITT Educational) (the "Assumed Medical and Life
Plans") and (ii) ITT ISI (or a subsidiary of ITT ISI) and ITT Educational will
adopt medical and life insurance plans for their respective employees. Effective
as of the Distribution Date, it is expected that the Company will assume
responsibility for retiree medical benefits for current and former Company
employees and former employees of ITT ISI or ITT Educational unless such
liability was allocated to a party other than ITT under the Employee Benefits
and Services Liability Agreement dated as of November 1, 1995, between ITT, ITT
Industries, Inc. and The Hartford Financial Services Group, Inc. (the "1995
Benefits Agreement"). It is expected that ITT ISI will retain and ITT
Educational will assume liabilities for their respective employees who retire
after the Distribution Date. Under certain specified circumstances, the Company
may be
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secondarily liable for providing post-retirement medical benefits to ITT ISI
employees (and their dependents) who meet the eligibility requirements for
post-retirement medical benefits on the Distribution Date.
It is expected that the Benefits Agreement will provide that, as of the
Distribution Date, the Company will assume responsibility for retiree life
benefits for current and former Company employees and former ITT ISI employees
and it is intended that ITT Educational will assume liability for its current
and former employees for whom ITT and ITT Educational are currently providing
benefits. Subject to applicable law, an allocable share of assets held in the
voluntary employees' beneficiary association ("VEBA"), which was established by
ITT prior to the Distribution Date and assumed by the Company as of the
Distribution Date, attributable to retiree life benefits of ITT ISI's current
employees and ITT Educational's former and current employees may be transferred
to newly established VEBAs of ITT ISI and ITT Educational, respectively, or to
an insurance company.
MISCELLANEOUS BENEFITS. It is expected that the Benefits Agreement will
provide that ITT ISI, the Company and ITT Educational each will retain the
obligation to make any payments to their respective employees in respect of the
ITT Annual Incentive Bonus Plan and the ITT Corporation Annual Performance-Based
Incentive Plan for Executive Officers with respect to the 1997 calendar year. It
is expected that the Company will also assume certain director and executive
compensation liabilities of ITT (and any assets associated therewith), including
a deferred compensation plan, certain executive death benefit and life insurance
arrangements and a frozen non-employee directors' pension plan. It is expected
that the Company, ITT ISI and ITT Educational each will be liable for any
outstanding options and restricted stock held by their respective employees. It
is expected that the outstanding options and restricted stock held by ITT
employees will also be adjusted in a manner designed to preserve the economic
benefit of such options and restricted stock. It is expected that the Company,
ITT ISI and ITT Educational will each be responsible pursuant to the Benefits
Agreement for providing severance pay and benefits to their respective employees
owing immediately prior to the Distribution Date.
Following the Destinations Distribution, ITT ISI and the Company will have
three common directors (Rand V. Araskog, Edward C. Meyer and Margita E. White)
and no common officers. Non-employee directors of ITT ISI will receive an annual
retainer of $25,000, payable in restricted stock of ITT ISI, and $750 for each
meeting of the Board of Directors or a committee of the Board of Directors of
ITT ISI attended by such director. Non-employee directors of the Company will
receive an annual retainer of $48,000, payable in restricted Company Common
Stock, and $1,000 for each meeting of the Board or a committee of the Board
attended by such director. See "Management and Executive
Compensation -- Directors Compensation."
See "Management and Executive Compensation" for a discussion of
compensation and benefits matters for employees of the Company.
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MANAGEMENT AND EXECUTIVE COMPENSATION
BOARD OF DIRECTORS
The following table sets forth information as to persons who will serve as
the Company's directors. The Board will be comprised of eleven directors, only
two of whom are officers of the Company. The Board is divided into three classes
consisting of four directors in each of the first two classes and three
directors in the third class. The directors in classes I, II and III will come
up for re-election at the Company's first, second and third annual meetings of
stockholders, and thereafter will serve staggered three-year terms. The Company
expects to hold its first annual meeting of stockholders at which the directors
in Class I would come up for re-election after the Distribution Date in November
1997. The following table contains information concerning directors as of the
date hereof.
<TABLE>
<CAPTION>
NAME CLASS OF DIRECTORS
- ----------------------------------------------------------------------------- ------------------
<S> <C>
Bette B. Anderson............................................................ I
Robert A. Burnett............................................................ I
Edward C. Meyer.............................................................. I
Vin Weber.................................................................... I
Robert A. Bowman............................................................. II
Paul G. Kirk, Jr............................................................. II
Benjamin F. Payton........................................................... II
Kendrick R. Wilson III....................................................... II
Rand V. Araskog.............................................................. III
Nolan D. Archibald........................................................... III
Margita E. White............................................................. III
</TABLE>
------------------------
Mrs. Anderson, age 68, is Vice Chairman of Kelly, Anderson, Pethick &
Associates, Inc. Mrs. Anderson has served as a director of ITT since December
1995 (Director of Old ITT 1981-1995). Mrs. Anderson joined Kelly, Anderson,
Pethick & Associates, Inc., a Washington-based management firm, in 1990, was
elected president in 1991 and was elected Vice Chairman in 1995. She had
previously been executive vice president of that firm. Mrs. Anderson was
formerly a partner in the public affairs company of Anderson, Benjamin, Read &
Haney. She was Undersecretary of the United States Treasury from 1977 to 1981.
Mrs. Anderson was affiliated for 27 years with the Citizens and Southern
National Bank of Savannah, having served as a vice president until she assumed
the Treasury post. Mrs. Anderson is a director of ITT Educational, The Hartford
Financial Services Group, Inc., American Banknote Corp., United Payors & United
Providers Inc., the Miller Foundation and the University of Virginia.
Mr. Burnett, age 70, is Chairman and CEO (Retired) of Meredith Corporation.
Mr. Burnett has served as a director of ITT since December 1995 (Director of Old
ITT 1985-1995). Mr. Burnett served as chairman of Meredith Corporation from 1988
until his retirement in 1992 and as president and chief executive officer from
1977 to 1989. Mr. Burnett is a director of The Hartford Financial Services
Group, Inc., ITT Industries, Inc., Meredith Corporation, Whirlpool Corporation
and MidAmerican Energy Corp.
General Meyer, age 68, is Chairman of Mitretek Systems. General Meyer has
served as a director of ITT since December 1995 (Director of Old ITT 1986-1995).
General Meyer 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 ITT Industries, Inc. He is a managing partner of Cilluffo
Associates Limited Partnership, which owns approximately 20% of GRC
International.
Mr. Weber, age 44, is a partner at Clark & Weinstock, Inc., a
Washington-based public relations firm. Mr. Weber has served as a director of
ITT since February 1996. He is vice chairman and co-founder of Empower America,
a public interest group. He is also a senior fellow at the University of
Minnesota's
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Humphrey Institute of Public Affairs and codirector of the Institute's Policy
Forum. Mr. Weber served in the United States House of Representatives from 1980
to 1992, representing Minnesota's 2nd district. He is a director of Department
56, Inc., ITT Educational, Mark Centers Trust, Inc., OneLink Communications,
Inc. (formerly MarketLink, Inc.) and TCF Financial Corporation.
------------------------
Mr. Bowman, age 42, is President and Chief Operating Officer of the
Company. Prior to the Destinations Distribution, Mr. Bowman served as President
and Chief Operating Officer of ITT. Mr. Bowman has served as a director of ITT
since December 1995. Mr. Bowman became President and Chief Operating Officer of
ITT in December 1995. Prior thereto, he served with Old ITT as Executive Vice
President and Chief Financial Officer since September 1992. From April 1991 to
September 1992, Mr. Bowman served as Executive Vice President and Chief
Financial Officer of Sheraton. Mr. Bowman was Treasurer of the State of Michigan
from 1983 until December 1990. Mr. Bowman is a director of ITT Educational and a
trustee of The Rockefeller Foundation.
Mr. Kirk, age 59, is of Counsel to Sullivan & Worcester. Mr. Kirk has
served as a director of ITT since December 1995 (director of Old ITT 1989-1995).
Mr. Kirk became a partner in the law firm of Sullivan & Worcester in 1977. He
served as Chairman of the Democratic National Committee from 1985 to 1989 and as
Treasurer from 1983 to 1985. Following his resignation in 1989 as Chairman of
the Democratic National Committee, he returned to Sullivan & Worcester as a
partner in general corporate practice at the firm's Boston and Washington
offices. Mr. Kirk is a director of Kirk-Sheppard & Co., Inc., of which he also
is Chairman and Treasurer. He is a director of the Bradley Real Estate
Corporation, Hartford Financial Services Group, Inc. and Rayonier Inc.
Dr. Payton, age 64, is President of Tuskegee University. Dr. Payton has
served as a director of ITT since December 1995 (director of Old ITT 1987-1995).
Dr. Payton has been President of Tuskegee University in Alabama since 1981.
Previously he had served as President of Benedict College and as Program
Officer, education and public policy, of the Ford Foundation. Dr. Payton is a
director of Amsouth Bancorporation, the Liberty Corporation, Praxair
Corporation, SONAT Inc., Morrisons, Inc., Ruby Tuesday, Inc., the Southern
Regional Council and the Alabama Shakespeare Festival.
Mr. Wilson, age 50, is Managing Director of Lazard Freres & Co. LLC. Mr.
Wilson has served as a director of ITT since February 1996. Mr. Wilson joined
Lazard Freres & Co. LLC in 1989 after serving as founder and President of
Ranieri Wilson & Co., a merchant banking firm. Prior thereto, he was Senior
Executive Vice President and a director of E.F. Hutton & Co. and Managing
Director in the financial institutions group of Salomon Brothers Inc. Mr. Wilson
is a director of American Buildings Company, Inc., American Marine Holdings,
Inc., Bank United and Meigher Communications, Inc. He is also a trustee of
BlackRock Asset Investors.
------------------------
Mr. Araskog, age 65, is Chairman and Chief Executive of the Company. Prior
to the Destinations Distribution, Mr. Araskog served as Chairman and Chief
Executive of ITT. Mr. Araskog has served as a director of ITT since December
1995 (director of Old ITT 1977-1995). Mr. Araskog became Chairman and Chief
Executive of ITT in December 1995. In December 1996, Mr. Araskog became Chairman
of Old Sheraton and Caesars. Prior thereto, since 1966, he served with Old ITT,
including as Chief Executive from 1979, Chairman from 1980 and President from
1991. Mr. Araskog is a director of Alcatel Alsthom of France. Mr. Araskog is
also a director of Dow Jones, ITT Educational, The Hartford Financial Services
Group, Inc., ITT Industries, Inc., Rayonier Inc. and Shell Oil Company.
Mr. Archibald, age 53, is Chairman, President and Chief Executive Officer
of The Black & Decker Corporation. Mr. Archibald has served as a director of ITT
since December 1995 (director of Old ITT 1991-1995 and 1986-1988). Mr. Archibald
joined Black & Decker in 1985 as President and Chief Operating Officer and since
that time has been elected Chief Executive Officer and Chairman. Prior to
joining Black & Decker, he was Senior Vice President and President of the
Consumer and Commercial Products Group of the Beatrice Companies, Inc. and held
various executive and marketing positions with the Beatrice Companies, Inc.
during the period 1977 to 1985. Mr. Archibald is also a director of Brunswick
Corporation.
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Mrs. White, age 60, is President of the Association for Maximum Service
Television, Inc. Mrs. White has served as a director of ITT since December 1995
(Director of Old ITT 1980-1995). Mrs. White 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 ITT Educational, The
Growth Fund of Washington, Leitch Technology Corp., Washington Mutual Investors
Fund and a trustee of Mitretek Systems.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company will be managed under the direction of the Board. The By-laws
also provide for an Audit Committee, a Capital Committee, a Compensation and
Personnel Committee, a Corporate Governance and Legal Affairs Committee, an
Executive and Policy Committee, a Gaming Audit Committee, a Nominating Committee
and a Public Affairs Committee of the Board.
AUDIT COMMITTEE
The Audit Committee will recommend the selection of independent auditors
for the Company, confirm the scope of audits to be performed by such auditors,
review audit results and internal accounting and control procedures and policies
and review the fees paid to the Company's independent auditors. The Audit
Committee will review and recommend approval of our audited financial statements
and the annual reports to stockholders. It will also review the expense accounts
of senior executives.
CAPITAL COMMITTEE
The Capital Committee will be responsible for maximizing the effective use
of the assets of the Company and its subsidiaries and reviewing capital
expenditures and appropriations.
COMPENSATION AND PERSONNEL COMMITTEE
The Compensation and Personnel Committee, which will be comprised entirely
of non-employee directors, will oversee the compensation and benefits of
employees, evaluate management performance and establish executive compensation.
In the performance of its functions, the Compensation and Personnel Committee
will have access to independent compensation counsel.
CORPORATE GOVERNANCE AND LEGAL AFFAIRS COMMITTEE
The Corporate Governance and Legal Affairs Committee will review and
consider major claims and litigation and legal, regulatory and related
governmental policy matters affecting the Company and its subsidiaries. The
Committee will review and approve management policies and programs relating to
compliance with legal and regulatory requirements, business ethics and
environmental matters.
EXECUTIVE AND POLICY COMMITTEE
The Executive and Policy Committee will exercise the powers of the Board in
the management of the business and affairs of the Company in the intervals
between meetings of the Board. The Committee will review the long-range
corporate strategies formulated by senior management and the non-employee
directors will meet in executive session to review the overall performance of
the chief executive, particularly with respect to the Company's long-range
strategies.
GAMING AUDIT COMMITTEE
The Gaming Audit Committee will review audit results and internal
accounting, control and surveillance procedures and policies employed in
connection with our casino gaming activities. Pursuant to the require-
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<PAGE> 95
ments of certain gaming laws, the employees primarily responsible for internal
accounting and internal surveillance at the Company's casinos will report
directly to the Gaming Audit Committee.
NOMINATING COMMITTEE
The Nominating Committee will make recommendations concerning the
organization, size and composition of the Board and its committees, propose
nominees for election to the Board and its committees and consider the
qualifications, compensation and retirement of directors.
The Nominating Committee will consider recommendations for director
nominees that are submitted by stockholders in writing to the Secretary of the
Company. The By-laws contain provisions relating to nominations for director at
a stockholders meeting.
PUBLIC AFFAIRS COMMITTEE
The Public Affairs Committee will review and define the Company's social
responsibilities, including issues of significance to the Company and its
stockholders and employees.
DIRECTORS' RETIREMENT POLICY
The Board is expected to adopt 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 Company or of any of its
subsidiaries (other than an employee who has served as the Company's chief
executive) may be nominated for election or reelection as a director after
reaching age 65, unless the Board has specifically waived these age
requirements.
DIRECTORS' COMPENSATION
Members of the Board who are employees of the Company or its subsidiaries
will not be compensated for service on the Board or any committee of the Board.
Non-employee directors will receive a fee of $1,000 for each meeting of the
Board attended and for each meeting of a committee attended. Members of the
Board, except for Mr. Araskog and Mr. Bowman, will receive an annual retainer
fee of $48,000 payable solely in restricted shares of Company Common Stock. See
"-- Restricted Stock Plan for Non-Employee Directors." Directors will be
reimbursed for travel expenses incurred on behalf of the Company.
DIRECTORS' BENEFITS
Certain directors of the Company who were non-employee directors of ITT
have been offered participation in a group life insurance program and the ITT
Group Accident Program for Officers and Directors. The Board has adopted
substantially identical plans and programs (the "Destinations Directors Group
Life Plan" and the "Destinations Group Accident Program for Officers and
Directors", respectively).
The Destinations Directors Group Life Plan will provide $100,000 of
non-contributory group life insurance to participating non-employee directors
during their service on the Board. Non-employee directors will be covered under
the Destinations Group Accident program for Officers and Directors, which will
be a non-contributory group accidental death and dismemberment program that will
provide each director $750,000 of coverage during his or her service on the
Board. Additional benefits will be permitted to be purchased.
The Company has assumed an unfunded retirement plan to provide benefits
accrued as of December 19, 1995, for its non-employee directors who were
directors of Old ITT on December 18, 1995. No future benefits are accruing under
the plan. The benefits are payable upon retirement from the Board at or after
age 65 after completing at least five years of service on the Board, including
service on the Board of Directors of Old ITT. Under the plan, directors may
indicate a preference, subject to certain conditions, to receive any accrued
benefit in the form of a single (discounted) lump-sum payment immediately
payable upon such director's retirement.
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<PAGE> 96
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
The Company expects to put in place a restricted stock plan for
non-employee directors (the "1997 Non-Employee Directors Plan"). The 1997
Non-Employee Directors Plan is designed to further the Company's objectives of
attracting and retaining individuals of ability as directors and providing the
directors with a closer identity with the interests of the Company's
stockholders.
Under the 1997 Non-Employee Directors Plan, directors of the Company who
are not employees of the Company or any of its subsidiaries will automatically
participate in the 1997 Non-Employee Directors Plan. There are presently nine
directors of the Company who are eligible to participate in the 1997
Non-Employee Directors Plan.
The 1997 Non-Employee Directors Plan will be administered by the
Compensation and Personnel Committee of the Board. The Committee will have the
responsibility of interpreting the 1997 Non-Employee Directors Plan and
establishing the rules appropriate for the administration of the 1997
Non-Employee Directors Plan.
Grants of restricted stock will be made automatically on the date of each
annual meeting of stockholders to each non-employee director elected at the
meeting or continuing in office following the meeting. The amount of the award
shall equal (and be in lieu of) the annual retainer in effect for the calendar
year within which the award date falls, divided by the fair market value of
Company Common Stock. "Annual retainer" is defined as the amount payable to a
director for service on the Board during the calendar year and does not include
meeting attendance fees. The annual retainer is presently set at $48,000. "Fair
market value" is defined as the average of the high and low sales price per
share of Company Common Stock on the date of the applicable annual meeting, as
reported on the NYSE Composite Tape. A total of 120,000 shares are reserved for
issuance under the 1997 Non-Employee Directors Plan. The shares to be issued may
be treasury shares or newly issued shares of Company Common Stock. The shares of
Company Common Stock that are granted under the 1997 Non-Employee Directors Plan
will be held in escrow by the Company and will be subject to a restriction
period (after which restrictions will lapse) that shall mean a period commencing
on the grant date and ending on the earliest of (i) the third anniversary of the
grant date, (ii) upon retirement at age 72, (iii) upon a "change of control" (as
defined) of the Company, (iv) death, (v) the onset of disability or (vi)
resignation in certain cases of ill health, relocation, entering into any
governmental, diplomatic or other service or employment or any circumstances
which, in the opinion of outside counsel, could reasonably be expected to result
in a conflict with law or Company policy or (vii) failure to be reelected after
standing for reelection. 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 1997 Non-Employee Directors Plan.
The Board may amend, suspend or discontinue the 1997 Non-Employee Directors
Plan at any time except that the Board may not, without stockholder approval,
take any action that would cause the 1997 Non-Employee Directors Plan to no
longer comply with Rule 16b-3 under the Exchange Act. No amendment, suspension
or discontinuance of the 1997 Non-Employee Directors Plan may impair a
director's right under a restricted stock award previously granted without his
consent.
The 1997 Non-Employee Directors Plan will terminate on December 31, 2007,
provided that grants of Restricted Stock made prior to the termination of the
Plan may vest following such termination in accordance with their terms.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 for which Lazard Freres was paid customary fees.
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<PAGE> 97
Goldman Sachs, Lazard Freres and ITT have entered into an engagement
letter, dated as of February 10, 1997, regarding investment banking services to
be rendered to ITT in connection with the Hilton Offer. Pursuant to the
engagement letter with Lazard Freres and Goldman Sachs, ITT has agreed to pay
each of Lazard Freres and Goldman Sachs for their services 50% of (a) an initial
fee equal to $1 million and (b) an additional advisory fee equal to $19 million,
payable upon the later of September 30, 1997 and the date two business days
before the scheduled date of the next annual meeting of stockholders of ITT (the
"Payment Date"); provided, however, that if the Payment Date is later than
September 30, 1997, ITT will pay one-half of the advisory fee on September 30,
1997 and the balance of the fee on the Payment Date. Notwithstanding the
foregoing, and except as otherwise specified in the engagement letter, the
advisory fee will be payable immediately upon a termination of the engagement
letter by ITT or if a Change of Control (as defined in the engagement letter) of
ITT has occurred or is imminent. Goldman Sachs and Lazard Freres have been
assisting and advising ITT in connection with the Hilton Offer and the
Comprehensive Plan from time to time through the date hereof. Mr. Wilson
receives a percentage of Lazard Freres' income, including a percentage of any
income earned by Lazard Freres under this engagement letter. The Company will
assume the obligations of ITT under this engagement letter.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information as to the Company's executive
officers. After the Distribution Date, all executive officers will have resigned
from any positions then held with ITT.
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
Rand V. Araskog, 65
Chairman and Chief Executive................. Mr. Araskog has been Chairman and Chief
Executive and a director of ITT since December
1995. In December 1996, he was also elected
Chairman of Sheraton and Caesars. Prior to his
election as Chairman and Chief Executive of
ITT, he was Chairman, President and Chief
Executive of Old ITT.
Robert A. Bowman, 42
President and Chief Operating Officer........ Mr. Bowman has been President and Chief
Operating Officer and a director of ITT since
December 1995. From September 1992 to December
1995, he was Executive Vice President and
Chief Financial Officer of Old ITT. From April
1991 to September 1992, he was Executive Vice
President and Chief Financial Officer of
Sheraton. Prior to that he was Treasurer of
the State of Michigan.
Ann N. Reese, 44 Executive Vice President,
Chief Financial Officer and Corporate
Secretary.................................... Ms. Reese has been Executive Vice President
and Chief Financial Officer of ITT since
December 1995. From September 1992 to December
1995 she was Senior Vice President and
Treasurer of Old ITT and prior to that time
she was Vice President and Assistant Treasurer
of Old ITT.
</TABLE>
94
<PAGE> 98
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
Richard S. Ward, 57
Executive Vice President and
General Counsel.............................. Mr. Ward has been Executive Vice President,
General Counsel and Corporate Secretary of ITT
since December 1995. From May 1994 to December
1995, he was Executive Vice President and
General Counsel of Old ITT. From September
1992 to May 1994 he was Senior Vice President
and General Counsel of Old ITT and prior to
that time he was Vice President and Associate
General Counsel of Old ITT.
Peter G. Boynton, 54
Senior Vice President of the Company and
President and Chief Executive Officer
of Caesars................................... Mr. Boynton has been a Senior Vice President
of ITT and the President and Chief Executive
Officer of Caesars since December 1995. From
July 1995 to December 1995 he was a Senior
Vice President of Old ITT and from February
1995 to December 1995 he was also President
and Chief Operating Officer of Caesars. From
1982 to February 1995 he was President and
Chief Operating Officer of Caesars Atlantic
City Hotel/Casino.
Juan Cappello, 58
Senior Vice President and the Director of
Corporate Relations.......................... Mr. Cappello has been a Senior Vice President
and the Director of Corporate Relations of ITT
since December 1995. He was also a Senior Vice
President and the Director of Corporate
Relations of Old ITT, a position he held since
December 1984.
Jon F. Danski, 44
Senior Vice President and Controller......... Mr. Danski has been a Senior Vice President
and Controller of ITT since December 1995.
From October 1993 to December 1995 he was
Senior Vice President and Controller of Old
ITT and prior to that he was Vice President
and General Auditor of RJR Nabisco.
Nicholas J. Glakas, 52
Senior Vice President........................ Mr. Glakas has been a Senior Vice President of
ITT since December 1995. From October 1995 to
December 1995 he was Senior Vice President of
Old ITT. From September 1992 to October 1995
he was Vice President, Associate General
Counsel & Director of Government Affairs of
Old ITT and prior to that time he was Director
of Government Affairs of Old ITT.
</TABLE>
95
<PAGE> 99
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
Ralph W. Pausig, 62
Senior Vice President and Director of Human
Resources.................................... Mr. Pausig has been a Senior Vice President
and Director of Human Resources of ITT since
December 1995. He was also a Senior Vice
President and Director of Human Resources of
Old ITT, a position he held since March 1987.
Mark Thomas, 41
Senior Vice President and Director of
Corporate Development........................ Mr. Thomas has been a Senior Vice President
and Director of Corporate Development of ITT
since June 1997. From October 1995 to June
1997 he was Vice President and Director of
Corporate Development of ITT. From June 1994
to October 1995 he was Senior Vice President
and Director of Corporate Development for
Sheraton. From April 1994 to June 1994 he was
Senior Vice President and General Counsel of
Hilton Gaming Corporation, a subsidiary of
Hilton. From April 1993 to April 1994 he was
Vice President and General Counsel of Sheraton
Gaming Corporation. From May 1980 to April
1993 he held various positions in the Law
Department of Holiday Corporation and its
successor corporation, The Promus Companies
Incorporated, the parent company of Holiday
Inns, Hampton Inns, Embassy Suites, Homewood
Suites and Harrahs.
Elizabeth A. Tuttle, 41
Senior Vice President and Treasurer.......... Ms. Tuttle has been a Senior Vice President
and Treasurer of ITT since December 1995. From
February 1995 to December 1995 she was Vice
President and Assistant Treasurer of Old ITT.
From October 1993 to February 1995 she was
Assistant Treasurer & Director of Capital
Markets of Old ITT. From July 1992 to October
1993 she was Assistant Treasurer & Manager of
Financial Planning and Operations of Old ITT
and prior to that time she was Manager of
Financial Planning and Operations of Old ITT.
</TABLE>
96
<PAGE> 100
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
Daniel P. Weadock, 57
Senior Vice President of the Company and
President and Chief Executive Officer of New
Sheraton..................................... Mr. Weadock has been a Senior Vice President
of ITT and the President and Chief Executive
Officer of Sheraton since December 1995. In
connection with the Distributions, Mr. Weadock
will be appointed President and Chief
Executive Officer of New Sheraton, a newly
formed subsidiary which will be responsible
for the Company's hotel operations. From July
1995 to December 1995, he was a Senior Vice
President of Old ITT. From November 1993 to
December 1995 he was also the President and
Chief Operating Officer of Sheraton. Prior to
that time he was Chairman, President and Chief
Executive Officer of ITT Communications and
Information Services, Inc.
</TABLE>
The Company expects that Mr. Ward will replace Ms. Reese as Corporate
Secretary following completion of Mr. Ward's licensing by the Nevada Gaming
Authorities.
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received by the Company's Chief
Executive and the Company's four other most highly compensated executive
officers (the "Named Executive Officers") for services rendered to ITT and Old
ITT for the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------------------
ANNUAL COMPENSATION PAYOUTS
------------------------------------------- AWARDS ---------
OTHER --------------------------- LONG- TERM ALL
NAME AND PRINCIPAL ANNUAL RESTRICTED SECURITIES INCENTIVE OTHER
POSITION COMPEN- STOCK UNDERLYING PLAN COMPEN-
AS OF DECEMBER 31, 1996 YEAR SALARY($) BONUS($) SATION(2)($) AWARDS($) OPTIONS(3)(#) PAYOUTS SATION(4)($)
- ----------------------- ---- --------- --------- ------------ --------- ------------- --------- ------------
<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
Daniel P. Weadock...... 1996 537,500 757,300 55,287 -- 40,000 -- 18,281
Senior Vice President
of 1995 516,667 398,800 433,646 -- 59,718 1,280,000 44,321
ITT; President and
Chief 1994 500,000 385,000 13,408 -- 83,605 -- 17,500
Executive Officer of
ITT Sheraton
Corporation
Peter G. Boynton(1).... 1996 682,583 15,200 694,276 -- 40,000 -- 11,705
Senior Vice President
of 1995 578,117 299,776 105,288 -- 59,718 -- 14,500
ITT; 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 1995 303,571 252,300 45,369 543,750 71,662 113,600 30,018
and Chief Financial
Officer 1994 263,333 210,000 33,738 -- 71,662 -- 10,998
</TABLE>
- ---------------
(1) Mr. Boynton became an executive officer of ITT following the January 1995
acquisition of Caesars. As a result, the 1994 compensation paid to Mr.
Boynton by Caesars has not been included.
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<PAGE> 101
(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
amount shown for Mr. Weadock in 1995 includes $426,597 in relocation
allowance, (d) the amounts shown for Mr. Boynton include $513,463 and
$41,074 in 1996 and 1995, respectively, in relocation allowances and (e) 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.
(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 1995 Spin-off.
(4) The amounts shown in this column are contributions by ITT under the ITT
401(k) Retirement Savings Plan and, in the case of Messers. 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 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
retirement contribution equal to one percent (1%) of an employee's salary.
In the case of Mr. Araskog, the amounts also include $353,113 and $354,156
paid in 1996 and 1995, respectively, by ITT for premiums on a split-dollar
life insurance policy maintained jointly for Mr. and Mrs. Araskog. The
Company 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 or
the Company and continue to sustain the policy until the year 2035, which
is expected to occur at the end of the year 2008.
In the case of Mr. Boynton, the amount shown for 1996 includes a life
insurance premium of $8,538 paid by ITT.
ANNUAL INCENTIVE BONUS PLAN
Under the ITT Annual Incentive Bonus Plan, the amounts of annual bonus
awards are based upon corporate financial performance for the year compared to
annual performance goals established by the Compensation and Personnel Committee
at the beginning of the year. For 1996, such performance goal for ITT was based
on EBITDA. Under a leveraged performance/payout schedule, the performance factor
generated a standard bonus adjustment factor of 113%. The calculated bonus
amounts for 1996 performance for Messrs. Araskog and Bowman and for Ms. Reese
are shown in the Summary Compensation Table set forth above and were determined
strictly in accordance with the above described formula and standard bonus
adjustment factor. The bonus factor for Mr. Weadock reflects the performance
measurement formula applicable to Old Sheraton; the bonus amount for Mr. Boynton
reflects the performance measurement formula applicable to Caesars. The bonus
amounts paid to Messrs. Araskog, Bowman, Weadock and Boynton and Ms. Reese were
reviewed and approved by the Compensation and Personnel Committee prior to
payment.
OPTION GRANTS OF ITT COMMON STOCK TO THE COMPANY EXECUTIVES IN LAST FISCAL YEAR
The following table sets forth as to the Named Executive Officers
information relating to options granted by ITT from January 1, 1996 through
December 31, 1996.
98
<PAGE> 102
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED EXERCISE OPTION TERM
GRANTED(1) TO EMPLOYEES PRICE(3) EXPIRATION -----------------------
NAME (#) IN 1996(2) ($/SHARE) DATE 5%($) 10%($)
- ------------------------- ---------- ------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog(4)....... 150,000 8.6 55.88 2/8/06 5,271,000 13,359,000
Robert A. Bowman(4)...... 100,000 5.7 55.88 2/8/06 3,514,000 8,906,000
Daniel P. Weadock(4)..... 40,000 2.3 55.88 2/8/06 1,405,600 3,562,400
Peter G. Boynton(4)...... 40,000 2.3 55.88 2/8/06 1,405,600 3,562,400
Ann N. Reese(4).......... 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.
It is expected that such options will be converted into options to purchase
Company Common Stock in a manner designed to preserve the economic benefits
of the existing options to officers of the Company. See "The Company's
Relationship With ITT After the Destinations Distribution -- Employee
Benefits Agreement."
(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 days, the
options will be fully exercisable. Notwithstanding the above, the options
will be fully exercisable after February 6, 2005, but not later than
February 8, 2006.
(4) Securities underlying options granted in the first six months of 1997, and
their associated exercise prices, for such individuals are as follows: Mr.
Araskog, 162,500 options, $56.75; Mr. Bowman, 108,300 options, $56.75; Mr.
Weadock, 43,300 options, $56.75; Mr. Boynton, 43,300 options, $56.75; and
Ms. Reese, 43,300 options, $56.75.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth as to the Named Executive Officers
information regarding options to purchase ITT Common Stock exercised during 1996
and the value of in-the-money outstanding options to purchase ITT Common Stock
at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS HELD AT
ACQUIRED VALUE FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
ON EXERCISE REALIZED --------------------------- ---------------------------
(#) ($) 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............... -- -- 322,186 40,000 -- --
Daniel P. Weadock.............. -- -- 59,718 40,000 3,569,868 --
Ann N. Reese................... -- -- 236,544 40,000 1,797,819 --
</TABLE>
- ---------------
(1) Based on the New York Stock Exchange consolidated trading closing price of
ITT Common Stock on December 31, 1996 of $43.375.
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<PAGE> 103
SEVERANCE AGREEMENTS
The Company will assume the ITT Corporation Senior Executive Pay Plan, a
severance pay plan which applies to senior executives of the Company who are
U.S. citizens or who are employed in the U.S., including all executive officers
of the Company other than Mr. Araskog and the executive officers and other
employees who are covered by the Severance Agreements described below. Under the
plan, if a participant's employment is involuntarily terminated by the Company,
other than for cause or as a result of other occurrences specified in the plan,
or such executive terminates employment for good reason within two years
following a Change in Control of the Company (as defined), the participant is
entitled to receive severance consisting of (i) a lump-sum payment equal to the
sum of (A) two times the executive's annual base salary in effect immediately
prior to the executive's termination of employment and (B) for certain
designated employees, including the executive officers covered by the plan, two
times the highest bonus paid or awarded to the executive under the Company'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 two years and (iii) one year of outplacement services. The plan
includes pre- and post-Change in Control offset provisions for other
compensation from the Company and requirements on the part of executives with
respect to noncompetition and compliance with the Company's Code of Corporate
Conduct. All severance payable under the plan is subject to the same Gross-up
Payment mechanism described below with respect to Mr. Araskog's employment
contract. As of June 30, 1997, none of the Named Executive Officers participated
in this plan.
The Company has offered severance agreements (previously entered into or
offered by ITT) to eight executives of the Company, including seven executive
officers. Each agreement provides that, if the executive is involuntarily
terminated other than for cause or such executive terminates for good reason
within two years following a Change in Control, the executive will receive
severance consisting of (i) a lump-sum payment equal to the sum of (A) two or
three times the executive's annual base salary in effect immediately prior to
the executive's termination of employment and (B) two or three times the highest
bonus paid or awarded to the executive under the Company'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 a number of years equal to the number by which such executive's
annual base salary is multiplied for purposes of determining such executive's
severance and (iii) one year of outplacement services. All severance payable
under each agreement is subject to the same Gross-up Payment mechanism described
below with respect to Mr. Araskog's employment contract. The executive officers
who have been offered the severance agreements by the Company are Robert A.
Bowman, Peter G. Boynton, Ann N. Reese, Richard S. Ward, Daniel P. Weadock, Jon
F. Danski and Elizabeth A. Tuttle.
The aggregate amount of all severance payments the Company would make under
the ITT Corporation Senior Executive Pay Plan and all severance agreements with
employees, assuming all participants therein and parties thereto were terminated
after an applicable Change in Control of the Company, would be approximately
$165 million. Certain of the provisions for severance payments were in effect
prior to the Hilton Offer. Following the Hilton Offer on February 11, 1997 and
August 14, 1997, the ITT Board approved severance agreements and other
provisions designed to enhance severance arrangements for employees.
EMPLOYMENT CONTRACT
The Company will assume an employment contract previously entered into by
ITT with Mr. Araskog which provides for, among other things: (i) a base salary
of $2,000,000 per year, entitlement to receive bonus and additional incentive
compensation each year as may be awarded in the discretion of the Compensation
and Personnel Committee of the Board, participation in the Company's benefit
plans (other than pre-retirement and post-retirement life insurance benefits),
contractual disability and death benefits, his employment as chairman and chief
executive of the Company until October 31, 2000 (when he will have reached age
69); (ii) his service as a consultant to his successor as chief executive of the
Company from November 1, 2000 through October 31, 2003 for a fee of not less
than $400,000 per year, (iii) his nomination as a director of the Company at
each annual meeting of the Company's stockholders at which he comes up for
reelection, commencing with the annual meeting for 2001 and including the annual
meeting to be held in 2003 and, upon election, payment to him of the usual
director's fees for service in such capacity; (iv) the provision of office
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space and certain staff and transportation assistance in connection with his
service as a director and consultant subsequent to October 31, 2000; (v) certain
payments in the event that, after completion of services through October 31,
2000 in accordance with the terms of the contract, Mr. Araskog at any time prior
to October 31, 2003 is not nominated as a director of the Company, which
payments would be in the form of a discounted lump sum payment equal to the then
present value of the balance remaining of the consulting fees and the director's
fees referred to above; and (vi) covenants by Mr. Araskog against competition
with any business actively conducted by the Company or any of its subsidiaries
and for compliance with the Company's Code of Corporate Conduct.
The contract also provides that, if Mr. Araskog is involuntarily terminated
other than for cause or he terminates for good reason within two years following
a Change in Control, he shall receive severance consisting of a lump-sum payment
equal to the remaining payments owed to him during the respective employment and
consulting terms set forth in the employment contract. The contract provides
that if any payment made under it to Mr. Araskog would be subject to the excise
tax imposed by Section 4999 of the Code (the "Excise Tax"), then Mr. Araskog
shall be entitled to receive from the Company an additional payment (the
"Gross-up Payment") in an amount such that the net amount of such payment and
Gross-Up Payment retained by Mr. Araskog, after the calculation and deduction of
all Excise Taxes (including any interest or penalties imposed with respect to
such taxes) on such payment and all Federal, state and local income tax,
employment tax and Excise Tax (including any interest or penalties imposed with
respect to such taxes) on the Gross-Up Payment, shall be equal to such payment.
1997 STOCK PLAN
Effective as of the Distribution Date, the Company is expected to adopt an
incentive stock plan (the "1997 Stock Plan"), under which the Company may grant
to its employees awards in the form of stock options, stock appreciation rights,
restricted stock and performance shares, as well as substitute stock options,
stock appreciation rights and restricted stock awards. The 1997 Stock Plan will
be administered by the Compensation and Personnel Committee, and is designed to
enable the Company to attract and retain key employees and to directly link
their incentives to the performance of Company Common Stock. The 1997 Stock Plan
will be substantially similar to the current 1995 ITT Corporation Incentive
Stock Plan.
ANNUAL PERFORMANCE-BASED INCENTIVE PLAN
As of the Distribution Date, the Company is expected to adopt a bonus plan
pursuant to which annual bonus awards are payable based upon the attainment of
performance goals established by the Compensation and Personnel Committee at the
beginning of the year. Performance goals shall be based upon one or more of the
following business criteria for the Company as a whole or any of its
subsidiaries, operating divisions or other operating units: earnings before
interest, taxes, depreciation and amortization, pre-tax operating income,
earnings per share, return on equity, return on invested capital or assets, cost
reductions and savings, return on sales or productivity improvements.
PENSION PLANS
GENERAL
The Company will assume the ITT Salaried Retirement Plan (the "Retirement
Plan") for its salaried employees. The Retirement Plan was previously amended by
Old ITT to recognize service prior to December 19, 1995 with companies
affiliated with Old ITT for eligibility, vesting and benefit accrual purposes
and further provides for an offset of any benefit payable from any ITT
retirement plan covering the same period of service. Service with ITT on or
after December 19, 1995 and prior to the Destinations Distribution will also be
recognized under the Retirement Plan. Messrs. Araskog, Bowman and Weadock and
Ms. Reese participate in the Retirement Plan.
Prior to the Destinations Distribution, executives of Caesars did not
participate in the retirement plans maintained by ITT and, immediately following
the Destinations Distribution, they will not participate in the retirement plans
maintained by the Company. Accordingly, Mr. Boynton is covered by the Caesars
Executive
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Security Plans (collectively, the "Caesars Pension Plan"). For a discussion of
the impact of the Destinations Distribution on the Retirement Plan, see "The
Company's Relationship with ITT After the Destinations Distribution -- Employee
Benefits Agreement."
RETIREMENT PLAN
The Retirement Plan covers all eligible salaried employees of the Company
and certain of its subsidiaries, including senior executive officers and other
Company 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.
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation which may be recognized under a tax-qualified retirement
plan. The Company has assumed non-qualified unfunded retirement plans which were
sponsored by ITT prior to the Destinations Distribution (the "Excess Pension
Plans") for payment of those benefits at retirement that cannot be paid from the
qualified retirement plan. The practical effect of the Excess Pension Plans is
to continue calculation of retirement benefits to all employees on a uniform
basis. Benefits under the Excess Pension Plans will generally be paid directly
by the Company. The Company has assumed sponsorship of an excess plan trust
under which excess benefits under the Excess Pension Plans for certain officers
of ITT has been 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 Excess
Pension Plans).
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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 Plan at retirement at age 65 that
are paid for by the Company, subject to the offsets described above.
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 $ 28,750 $ 32,500 $ 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 2,537,000
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 amounts shown under "Salary" and "Bonus" opposite the names of the
individuals in the Summary Compensation Table under "Compensation of Executive
Officers" above comprise the compensation which is used for purposes of
determining "average final compensation" under the plan. The amounts shown
reflect compensation paid by ITT and Old ITT to such named individuals and years
of service rendered by the named individuals to ITT and Old ITT, in each case,
prior to the Destinations Distribution. The years of service of each of the
individuals for eligibility and benefit purposes as of June 30, 1997 are as
follows: Rand V. Araskog, 30.59 years; Robert A. Bowman, 6.23 years; Daniel P.
Weadock, 35.96 years; and Ann N. Reese, 9.66 years.
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 approval of
the Compensation and Personnel Committee 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 and are subject to a
maximum of 30 years. 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.
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<PAGE> 107
CAESARS PENSION PLAN TABLE
<TABLE>
<CAPTION>
FIVE YEAR YEARS OF SERVICE
AVERAGE -----------------------------------------------
SALARY 15 20 25 30
- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 125,000 $ 43,750 $ 56,250 $ 68,750 $ 81,250
150,000 52,500 67,500 82,500 97,500
175,000 61,200 78,750 96,250 113,750
200,000 70,000 90,000 110,000 130,000
225,000 78,750 101,250 123,750 146,250
250,000 87,500 112,500 137,500 162,500
300,000 105,000 135,000 165,000 195,000
400,000 140,000 180,000 220,000 260,000
500,000 175,000 225,000 275,000 325,000
600,000 210,000 270,000 330,000 390,000
800,000 280,000 360,000 440,000 520,000
1,000,000 350,000 450,000 550,000 650,000
1,200,000 420,000 540,000 660,000 780,000
</TABLE>
The remuneration covered by the Caesars Pension Plan is the average of the
participant's highest five years of salary earned during the applicable
employee's last ten years of employment with Caesars. The amount shown under
"Salary" opposite the name of Mr. Boynton in the Summary Compensation Table
under "Compensation of Executive Officers" above will be used for determining
"average annual salary" under the plan. As of June 30, 1997, Mr. Boynton had
21.17 years of credited service under the Caesars Pension Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are not expected to be any compensation committee interlocks. The
members of the Company's Nominating Committee are Bette B. Anderson, Nolan D.
Archibald, Edward C. Meyer and Benjamin F. Payton and the members of the
Company's Compensation and Personnel Committee are Bette B. Anderson, Nolan D.
Archibald, Robert A. Burnett, Paul G. Kirk, Jr., Edward C. Meyer and Margita E.
White.
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PROJECTED BENEFICIAL OWNERSHIP
All of the outstanding shares of Company Common Stock prior to the
Destinations Distribution are held beneficially and of record by ITT. The
following table sets forth the expected beneficial ownership of Company Common
Stock after giving effect to the Destinations Distribution by (i) each person or
entity known by the Company to own more than five percent of the outstanding ITT
Common Stock, (ii) each person who will be a director of the Company at the time
of the Destinations Distribution, (iii) each of the Named Executive Officers of
the Company and (iv) all persons who will be a director or executive officer of
the Company at the time of the Destinations Distribution, as a group. The
information is based on the number of shares of ITT Common Stock owned by such
persons or entities as of June 30, 1997, and reflects the distribution of one
share of Company Common Stock for each share of ITT Common Stock and further
assumes that none of such persons or entities tenders any of its shares of ITT
Common Stock in the Stock Tender Offer (although percentage interests have not
correspondingly been adjusted). Unless otherwise indicated in the footnotes
below, each person or entity is expected to have sole voting and investment
power with respect to the shares set forth opposite such person's or entity's
name. Also shown in the table are shares of Company Common Stock which may be
acquired within 60 days through the exercise of options.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS
- ------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Bette B. Anderson...................................... 2,811 shares(2) *
Rand V. Araskog........................................ 1,748,398 shares 1.5%
Nolan D. Archibald..................................... 1,811 shares *
Robert A. Bowman....................................... 549,046 shares *
Robert A. Burnett...................................... 2,981 shares *
Paul G. Kirk, Jr....................................... 1,821 shares *
Edward C. Meyer........................................ 3,311 shares *
Benjamin F. Payton..................................... 1,303 shares *
Vin Weber.............................................. 844 shares *
Margita E. White....................................... 2,811 shares *
Kendrick R. Wilson III................................. 3,744 shares *
Daniel P. Weadock...................................... 396,061 shares *
Peter G. Boynton....................................... 60,855 shares *
Ann N. Reese........................................... 251,068 shares *
All directors and executive officers as a group (21)... 4,122,208 shares 3.7%
Bankers Trust New York Corporation..................... 7,728,083 shares(3) 8.9%
280 Park Avenue
New York, New York 10017
FMR Corp............................................... 13,166,423 shares(4) 11.32%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
- ---------------
* Less than one percent.
(1) All shares are owned directly except as hereinafter otherwise indicated.
Pursuant to regulations of the Commission, shares of ITT Common Stock (i)
receivable by directors and executive officers upon exercise of employee
stock options exercisable within 60 days after June 30, 1997, and (ii)
allocated to the accounts of certain directors and executive officers under
the ITT 401(k) Retirement Savings Plan at June 30, 1997, are deemed to be
beneficially owned by such directors and executive officers at that date. Of
the number of shares shown above the following represent shares that may be
acquired upon exercise of employee stock options for the accounts of: Mr.
Araskog, 1,196,617 shares; Mr. Bowman, 521,653 shares; Mr. Weadock, 322,186
shares; Mr. Boynton, 59,718 shares; Ms. Reese, 236,544 shares; and all
present directors and executive officers as a group, 3,330,352 shares. The
number of shares receivable upon the exercise of options shall be adjusted
following consummation of the Distributions in a manner
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<PAGE> 109
designed to preserve the economic benefits of such options. 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. Bowman, 2,455 shares; Mr. Weadock, 52,796 shares; Mr. Boynton,
137 shares; Ms. Reese 1,348 shares; and all present directors and executive
officers as a group, 113,404 shares.
(2) An additional 83 shares of ITT Common Stock are owned by Mrs. Anderson's
husband. Mrs. Anderson disclaims beneficial ownership in such shares.
(3) 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) and BT Securities Corporation, and its
indirectly wholly owned subsidiary Bankers Trust International PLC,
beneficially owned 7,728,083 shares of ITT Common Stock. Of these shares,
Bankers Trust Company is deemed to have (i) sole power to vote or to direct
the vote with respect to 7,725,383 shares of ITT Common Stock, (ii) shared
power to vote or to direct the vote with respect to 2,700 shares of ITT
Common Stock, (iii) sole power to dispose or to direct the disposition of
1,990,982 shares of ITT Common Stock and (iv) shared power to dispose or to
direct the disposition of 16,505 shares of ITT Common Stock.
(4) A February 14, 1997 Schedule 13G provided to ITT reflects that FMR Corp.
("FMR") beneficially owned 13,166,423 shares of ITT Common Stock. Of such
reported shares, Fidelity Management & 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 reported sole power to
dispose of the 12,437,559 shares of ITT Common Stock owned by the Fidelity
Funds. Neither FMR nor Edward C. Johnson 3d, Chairman of FMR, 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 Exchange Act, is the beneficial owner of 725,464
shares of ITT Common Stock or 0.62% of the ITT Common Stock outstanding as a
result of its serving as investment manager of institutional accounts.
Edward C. Johnson 3d and FMR, through its control of FMTC, reported 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 ITT 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 3d
owned 12.0% and Abigail Johnson owned 24.5% of the aggregate outstanding
voting stock of FMR. Mr. Johnson 3d is Chairman of FMR and Abigail P.
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 ITT
Common Stock reported includes 3,400 shares owned directly by Edward C.
Johnson 3d or in trusts for the benefit of Edward C. Johnson 3d or an Edward
C. Johnson 3d family member for which Edward C. Johnson 3d serves as
trustee. Edward C. Johnson 3d reported sole voting and dispositive power
over 400 shares and shared voting and dispositive power over 3,000 shares.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that the Company has
authority to issue under the Articles is 250,000,000 shares of which 200,000,000
shares represent shares of Company Common Stock and 50,000,000 shares represent
shares of preferred stock, par value $.01 per share (the "Company Preferred
Stock"). Based on 116,528,681 shares of ITT Common Stock outstanding as of June
30, 1997, the distribution of one share of Company Common Stock for each share
of ITT Common Stock and the assumed repurchase in the Stock Tender Offer of 30
million shares, it is expected that 86,528,681 shares of Company Common Stock
will be distributed to holders of ITT Common Stock on the Distribution Date.
COMPANY COMMON STOCK
Subject to any preferential rights of any Company Preferred Stock created
by the Board, each outstanding share of Company Common Stock will be entitled to
such dividends, if any, as may be declared from time to time by the Board. See
"Dividend Policy." Each outstanding share is entitled to one vote on all matters
submitted to a vote of stockholders. The Articles do not provide for cumulative
voting rights; therefore, the holders of a majority of the shares voting for the
election of the Board can elect all the directors up for election, if they so
choose. In the event of liquidation, dissolution or winding up of the Company,
holders of Company Common Stock are entitled to receive on a pro rata basis any
assets remaining after provision for payment of creditors and after payment of
any liquidation preferences to holders of Company Preferred Stock.
COMPANY PREFERRED STOCK
The authorized Company Preferred Stock is available for issuance from time
to time at the discretion of the Board without stockholder approval. The Board
has the authority to prescribe for each series of Company Preferred Stock it
establishes the number of shares in that series, the number of votes (if any) to
which such shares in that series are entitled, the consideration for such shares
in that series and the designations, powers, preferences and relative
participating, optional or other special rights, and such qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Company Preferred Stock, the issuance of Company Preferred Stock
could have the effect of delaying or preventing a change in control of the
Company, making removal of the Company's present management more difficult or
resulting in restrictions upon the payment of dividends and other distributions
to the holders of Company Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Nevada law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the Company Common Stock remained listed on the NYSE, require
stockholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of Company Common
Stock. These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital or to facilitate
corporate acquisitions.
One of the effects of the existence of unissued and unreserved Company
Common Stock and Company Preferred Stock may be to enable the Board to issue
shares to persons friendly to current management, which issuance could render
more difficult or discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby protect
the continuity of the Company's management and possibly deprive the stockholders
of opportunities to sell their shares of Company Common Stock at prices higher
than prevailing market prices. Such additional shares also could be used to
dilute the stock ownership of persons seeking to obtain control of the Company
pursuant to the operation of the Rights Plan, which is discussed below.
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<PAGE> 111
RIGHTS PLAN
RIGHTS
Each share of Company Common Stock issued in the Destinations Distribution
will be accompanied by one right (the "Rights"), and additional Rights will be
issued with respect to Company Common Stock issued thereafter until the Rights
Distribution Date (as defined below), and, in certain circumstances, with
respect to Company Common Stock issued after the Rights Distribution Date. The
description and terms of the Rights are set forth in the Rights Plan (the
"Rights Plan") between the Company and The Bank of New York, as rights agent
(the "Rights Agent"). The terms of the Rights Plan are identical in all material
respects to the terms of the existing ITT Rights Plan. A copy of the Rights Plan
has been filed as an exhibit to the Registration Statement of the Company in
respect of the registration of the Company Common Stock under the Exchange Act,
of which this Information Statement is a part. See "Additional Information."
Each Right, when it becomes exercisable, will entitle the registered holder to
purchase from the Company one one-thousandth (1/1000th) of a share of Company
Preferred Stock (the "Company Preferred Shares") at a price specified in the
Rights Plan (expected to be substantially above the price at which Company
Common Stock is expected to trade after the Destinations Distribution) (the
"Purchase Price"), subject to adjustment in certain circumstances. The Rights
will not be exercisable until the Rights Distribution Date and will expire on
the tenth annual anniversary of the Rights Plan (the "Expiration Date"), unless
earlier redeemed by the Company as described below. Until a Right is exercised,
the holder thereof, as such, will have no rights as a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends with respect to the Rights or the Preferred Shares relating thereto.
Unless the context otherwise requires, references herein to the Company Common
Stock include the related Rights.
RIGHTS DISTRIBUTION DATE
Under the Rights Plan, the Rights Distribution Date is the earlier of (i)
such time as the Company learns that a person or group (including any affiliate
or associate of such person or group) has acquired, or has obtained the right to
acquire, beneficial ownership of more than 15% of the outstanding shares of
Company Common Stock (such person or group being an "Acquiring Person"), unless
provisions preventing accidental triggering of the distribution of the Rights
apply, and (ii) the close of business on such date, if any, as may be designated
by the Board following the commencement of, or first public disclosure of an
intent to commence, a tender or exchange offer for more than 15% of the
outstanding shares of Company Common Stock. A person or group (or any affiliate
or associate of such person or group), however, that inadvertently acquires more
than 15% of the outstanding shares of Company Common Stock will not be deemed to
be an Acquiring Person provided that such person or group reduces the percentage
of beneficial ownership to less than 15% of the outstanding shares of Company
Common Stock by the close of business on the fifth business day after notice
from the Company that such person's or group's ownership interest exceeds 15% of
the outstanding shares of Company Common Stock. Such person or group will be
deemed to be an Acquiring Person at the end of such five business day period
absent such reduction.
EVIDENCE OF RIGHTS
Until the Rights Distribution Date, the Rights will be evidenced by the
certificates for Company Common Stock registered in the names of the holders
thereof (which certificates for Company Common Stock shall also be deemed to be
Rights Certificates, as defined below) rather than separate Rights Certificates.
Therefore, on and after the Distribution Date and until the Rights Distribution
Date, the Rights will be transferred with and only with the Company Common Stock
and each transfer of Company Common Stock also will transfer the associated
Rights. As soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of Company Common Stock as of the close of business on the
Rights Distribution Date (and to each initial record holder of certain Company
Common Stock originally issued after the Rights Distribution Date), and such
separate Rights Certificates alone will thereafter evidence the Rights.
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<PAGE> 112
ADJUSTMENTS
The number of Company Preferred Shares or other securities issuable upon
exercise of the Rights, the Purchase Price, the Redemption Price (as defined
below) and the number of Rights associated with each share of Company Common
Stock are all subject to adjustment from time to time in the event of any change
in Company Common Stock or the Company Preferred Shares, whether by reason of
stock dividends, stock splits, recapitalizations, mergers, consolidations,
combinations or exchanges of securities, split-ups, split-offs, spin-offs,
liquidations, other similar changes in capitalization or any distribution or
issuance of cash, assets, evidences of indebtedness or subscription rights,
options or warrants to holders of Company Common Stock or Company Preferred
Shares.
The Company may, but is not required to, issue fractions of Rights or
distribute Rights Certificates that evidence fractional Rights. In lieu of such
fractional Rights, the Company may make a cash payment based on the market price
of such Rights. In addition, the Company may, but is not required to, issue
fractions of shares upon the exercise of the Rights or distribute certificates
that evidence fractional Company Preferred Shares. In lieu of fractional Company
Preferred Shares, the Company may utilize a depository arrangement as provided
by the terms of the Company Preferred Shares and, in the case of fractions other
than one one-thousandth (1/1000th) of a Company Preferred Share or integral
multiples thereof, may make a cash payment based on the market price of such
shares.
TRIGGERING EVENT AND EFFECT OF TRIGGERING EVENT
At such time as there is an Acquiring Person, the Rights will entitle each
holder (other than such Acquiring Person) of a Right to purchase, for the
Purchase Price, that number of one one-thousandths (1/1000ths) of a Company
Preferred Share equivalent to the number of shares of Company Common Stock that
at the time of such event would have a market value of twice the Purchase Price.
In the event the Company is acquired in a merger or other business
combination by an Acquiring Person or an affiliate or associate of an Acquiring
Person that is a publicly traded corporation or 50% or more of the Company's
assets or assets representing 50% or more of the Company's revenues or cash flow
are sold, leased, exchanged or otherwise transferred (in one or more
transactions) to an Acquiring Person or an affiliate or associate of an
Acquiring Person that is a publicly traded corporation, each Right will entitle
its holder (subject to the next paragraph) to purchase, for the Purchase Price,
that number of common shares of such corporation that at the time of the
transaction would have a market value of twice the Purchase Price. In the event
the Company is acquired in a merger or other business combination by an
Acquiring Person or an affiliate or associate of an Acquiring Person that is not
a publicly traded entity or 50% or more of the Company's assets or assets
representing 50% or more of the Company's revenues or cash flow are sold,
leased, exchanged or otherwise transferred (in one or more transactions) to an
Acquiring Person or an affiliate or associate of an Acquiring Person that is not
a publicly traded entity, each Right will entitle its holder (subject to the
next paragraph) to purchase, for the Purchase Price, at such holder's option,
(i) that number of shares of the surviving corporation in the transaction with
such entity (which surviving corporation could be the Company) that at the time
of the transaction would have a book value of twice the Purchase Price, (ii)
that number of shares of such entity that at the time of the transaction would
have a book value of twice the Purchase Price or (iii) if such entity has an
affiliate that has publicly traded common shares, that number of common shares
of such affiliate that at the time of the transaction would have market value of
twice the Purchase Price.
Any Rights that are at any time beneficially owned by an Acquiring Person
(or any affiliate or associate of an Acquiring Person) will be null and void and
nontransferable and any holder of any such Right (including any purported
transferee or subsequent holder) will be unable to exercise or transfer any such
Right.
REDEMPTION
At any time prior to the earlier of (i) such time as a person or group
becomes an Acquiring Person and (ii) the Expiration Date, the Board may redeem
the Rights in whole, but not in part, at a price (in cash or Company Common
Stock or other securities of the Company deemed by the Board to be at least
equivalent in
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value) of $.01 per Right (which amount shall be subject to adjustment as
provided in the Rights Plan) (the "Redemption Price"). Immediately upon the
action of the Board ordering the redemption of the Rights, and without any
further action and without any notice, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price. Within 10 business days after the action of the Board ordering
the redemption of the Rights, the Company will give notice of such redemption to
the holders of the then outstanding Rights by mail. Each such notice of
redemption will state the method by which payment of the Redemption Price will
be made.
In addition, at any time after there is an Acquiring Person, the Board may
elect to exchange each Right (other than Rights that have become null and void
and nontransferable as described above) for consideration per Right consisting
of one-half of the securities that would be issuable at such time upon exercise
of one Right pursuant to the terms of the Rights Plan.
AMENDMENT
At any time prior to the Rights Distribution Date, the Company may, without
the approval of any holder of any Rights, supplement or amend any provision of
the Rights Plan (including, without limitation, the date on which the Rights
Distribution Date shall occur, the definition of Acquiring Person, the time
during which the Rights may be redeemed or the terms of the Company Preferred
Shares), except that no supplement or amendment shall be made that reduces the
Redemption Price (other than pursuant to certain adjustments therein) or
provides for an earlier Expiration Date. From and after the Rights Distribution
Date and subject to applicable law, the Company may amend the Rights Plan
without the approval of any holders of Rights Certificates (i) to cure any
ambiguity or to correct or supplement any provision contained in the Rights Plan
that may be defective or inconsistent with any other provision of the Rights
Plan or (ii) to make any other provisions that the Company may deem necessary or
desirable and that shall not adversely affect the interests of the holders of
Rights Certificates (other than an Acquiring Person or an affiliate or associate
of an Acquiring Person). Any supplement or amendment adopted during any period
after any person or group has become an Acquiring Person but prior to the Rights
Distribution Date shall be null and void unless such supplement or amendment
could have been adopted under the prior sentence from and after the Rights
Distribution Date.
CERTAIN EFFECTS OF THE RIGHTS PLAN
The Rights Plan is designed to protect the Company's stockholders and other
constituencies in the event of unsolicited offers to acquire the Company and
other coercive takeover tactics which, in the opinion of the Board, could impair
its ability to represent stockholder interests. The provisions of the Rights
Plan may render an unsolicited takeover of the Company more difficult or less
likely to occur or might prevent such a takeover, even though such takeover may
offer the Company's stockholders the opportunity to sell their stock at a price
above the prevailing market rate and may be favored by a majority of the
stockholders of the Company.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of the Company authorized at the time of
the Destinations Distribution will have any preemptive right to subscribe to any
securities of the Company of any kind or class.
NEVADA GENERAL CORPORATION LAW
The terms of Chapter 78 of the NGCL apply to the Company since it is a
Nevada corporation. Under certain circumstances, the following selected
provisions of the NGCL may delay or make more difficult acquisitions or changes
of control of the Company. The Articles and By-laws do not exclude the Company
from such provisions of the NGCL. Such provisions also may have the effect of
preventing changes in the management of the Company. It is possible that such
provisions could make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.
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CONTROL SHARE ACQUISITIONS
Pursuant to Sections 78.378 to 78.3793 of the NGCL, an "acquiring person"
who acquires a "controlling interest" in an "issuing corporation" may not
exercise voting rights on any "control shares" unless such voting rights are
conferred by a majority vote of the disinterested stockholders of the issuing
corporation at a special meeting of such stockholders held upon the request and
at the expense of the acquiring person. In the event that the control shares are
accorded full voting rights and the acquiring person acquires control shares
with a majority or more of all the voting power, any stockholder, other than the
acquiring person, who does not vote in favor of authorizing voting rights for
the control shares is entitled to demand payment for the fair value of his or
her shares, and the corporation must comply with the demand. For purposes of the
above provisions, "acquiring person" means (subject to certain exceptions) any
person who, individually or in association with others, acquires or offers to
acquire, directly or indirectly, a controlling interest in an issuing
corporation. "Controlling interest" means the ownership of outstanding voting
shares of an issuing corporation sufficient to enable the acquiring person,
individually or in association with others, directly or indirectly, to exercise
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, and/or (iii) a majority or more of the voting power of the
issuing corporation in the election of directors. Voting rights must be
conferred by a majority of the disinterested stockholders as each threshold is
reached and/or exceeded. "Control shares" means those outstanding voting shares
of an issuing corporation that an acquiring person acquires or offers to acquire
in an acquisition or within 90 days immediately preceding the date when the
acquiring person became an acquiring person. "Issuing corporation" means a
corporation which is organized in Nevada, has 200 or more stockholders (at least
100 of whom are stockholders of record and residents of Nevada) and does
business in Nevada directly or through an affiliated corporation. The above
provisions do not apply if the articles of incorporation or by-laws of the
corporation in effect on the 10th day following the acquisition of a controlling
interest by an acquiring person provide that said provisions do not apply. As
noted above, the Articles of Incorporation and By-laws do not exclude the
Company from the restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS
Sections 78.411 to 78.444 of the NGCL restrict the ability of a "resident
domestic corporation" to engage in any combination with an "interested
stockholder" for three years after the interested stockholder's date of
acquiring the shares that cause such stockholder to become an interested
stockholder, unless the combination or the purchase of shares by the interested
stockholder on the interested stockholder's date of acquiring the shares that
cause such stockholder to become an interested stockholder is approved by the
board of directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested stockholder may effect a
combination after the three-year period only if such stockholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria. For purposes of the above provisions, "resident domestic
corporation" means a Nevada public corporation that has 200 or more
stockholders. "Interested stockholder" means any person, other than the resident
domestic corporation or its subsidiaries, who is (a) the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the outstanding
voting shares of the resident domestic corporation or (b) an affiliate or
associate of the resident domestic corporation and, at any time within three
years immediately before the date in question, was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the resident domestic corporation. The above provisions do
not apply to corporations that so elect in a charter amendment approved by a
majority of the disinterested shares. Such a charter amendment, however, would
not become effective for 18 months after its passage and would apply only to
stock acquisitions occurring after its effective date. As noted above, the
Articles of Incorporation do not exclude the Company from the restrictions
imposed by such provisions.
RIGHTS AND OPTIONS
Section 78.200 of the NGCL provides that a corporation may create and
issue, whether in connection with the issue and sale of any shares of stock or
other securities of the corporation, rights or options for the purchase of
shares of stock of any class of the corporation, to be evidenced by such
instrument as is approved
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by the board of directors. The terms upon which, the time or times, which may be
limited or unlimited in duration, at or within which, and the price at which,
any such shares may be purchased from the corporation upon the exercise of any
such right or option must be fixed and stated in the articles of incorporation
or in a resolution adopted by the board of directors providing for the creation
and issuance of such rights or options, and, in every case, set forth or
incorporated by reference in the instrument evidencing the rights or options.
DIRECTORS' DUTIES
Section 78.138 of the NGCL allows directors and officers, in exercising
their respective powers with a view to the interests of the corporation, to
consider the interests of the corporation's employees, suppliers, creditors and
customers, the economy of the state and the nation, the interests of the
community and of society and the long and short-term interests of the
corporation and its stockholders, including the possibility that these interests
may be best served by the continued independence of the corporation. Directors
may resist a change or potential change in control if the directors, by a
majority vote of a quorum, determine that the change or potential change is
opposed to or not in the best interest of the corporation upon consideration of
the interests set forth above or if the board has reasonable grounds to believe
that, within a reasonable time, the debt created as a result of the change in
control would cause the assets of the corporation or any successor to be less
than the liabilities or would render the corporation or any successor insolvent
or would lead to bankruptcy proceedings.
PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING A
CHANGE IN CONTROL
Certain provisions of the Articles and By-laws may provide the Board with
more negotiating leverage by delaying or making more difficult unsolicited
acquisitions or changes of control of the Company. It is believed that such
provisions will enable the Company to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by the Board to be in the best interests of the Company and
its stockholders. Such provisions could have the effect of discouraging third
parties from making proposals involving an unsolicited acquisition or change of
control of the Company, although such proposals, if made, might be considered
desirable by a majority of the Company's stockholders. Such provisions may also
have the effect of making it more difficult for third parties to cause the
replacement of the management of the Company without the concurrence of the
Board. These provisions include (i) the availability of capital stock for
issuance from time to time at the discretion of the Board (see "-- Authorized
But Unissued Capital Stock"), (ii) the classification of the Board into three
classes, each of which serves for a term of three years, (iii) prohibitions
against stockholders calling a special meeting of stockholders or acting by
written consent in lieu of a meeting, (iv) requirements for advance notice for
raising business or making nominations at stockholders' meetings and (v) the
requirement of a super-majority vote to remove directors with or without cause.
In addition, the By-laws currently contain a restriction on ownership of the
Company's shares by "aliens" (to the United States). See
"Business -- Governmental Regulation and Related Matters -- Restrictions on
Alien Ownership."
CLASSIFIED BOARD; REMOVAL OF DIRECTORS
The Articles provide that the Board's membership is divided into three
classes as nearly equal in number as possible, each of which serves until the
third succeeding annual meeting with one class being elected at each annual
meeting of stockholders. As a result, at least two annual meetings of
stockholders may be required for the Company's stockholders to change a majority
of the members of our Board. In addition, directors may be removed, with or
without cause, only by the affirmative vote of the holders of at least 80% of
the voting power of all shares of voting stock of the Company, voting together
as single class. The Articles contain a provision requiring the affirmative vote
of the holders of at least 80% of the voting power of all shares of voting stock
of the Company, voting together as a single class, to alter, amend, repeal or
adopt provisions inconsistent with the classified board provision of the
Articles, and the provision requiring an 80% vote to remove directors. The
By-laws prohibit increases in the size of the Board that have the effect of
delaying the ability of stockholders to change a majority of the directors for
more than two annual meetings.
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The classified board provision and the requirement of an 80% supermajority
vote to remove directors may make it more difficult to change the composition of
the Board.
The Company believes that a classified board of directors will assure
continuity and stability of the Company's management and policies, without
diminishing accountability to stockholders. The Company's classified Board will
ensure that a majority of directors at any given time will have experience in
the business, competitive affairs and regulatory environment of the Company's
business. The Company believes that an experienced board is best situated to
enhance the value of the Company's business. A classified board and the
continuity it fosters will be important in developing, refining and executing
the Company's long-term strategic plan. The Company's classified Board will be
better positioned to make fundamental decisions that are in the best interests
of the Company. A classified board will also prevent an abrupt change in the
composition of the Board and will therefore eliminate delays inherent in the
familiarization by the new Board with the Company and its business and will
moderate changes in corporate policies, decisions and strategies that may not be
in the best interests of the Company and its stockholders and other appropriate
constituencies. At the same time, stockholders have the power to propose and
elect their own nominees for the class of directors to be elected at each annual
meeting, and in that manner change the Board's composition. By reducing the
threat of an abrupt change in the composition of the entire board,
classification of directors will give the Board sufficient time to review any
takeover proposal, study appropriate alternatives and achieve the best results
for all stockholders and other appropriate constituencies. The Company believes
that a classified board will enhance the Company's ability to resist an abusive
takeover attempt or to negotiate a fair price and appropriate protections for
other constituencies. The Company does not expect the classified Board
necessarily to discourage takeover offers or ultimately prevent a hostile
acquisition at a fair price and with appropriate protections for other corporate
constituents. The Company believes that a classified board of directors is fully
accountable to stockholders. To ensure this accountability, the By-laws prohibit
increases in the size of the Board that have the effect of delaying the ability
of stockholders to change a majority of the directors for more than two annual
meetings. The classified board provision also will not prevent persons from
making unsolicited proposals to acquire the Company. The Company believes that a
classified board of directors thus remains accountable to stockholders.
Moreover, directors are bound by fiduciary duty to serve stockholders' interests
throughout their term of office.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Articles and By-laws provide that stockholder action can be taken only
at an annual or special meeting and cannot be taken by written consent in lieu
of a meeting. The Articles and By-laws also provide that special meetings of the
stockholders can be called only by the Chairman of the Board or by a vote of the
majority of the entire Board. Furthermore, the By-laws provide that only such
business as is specified in the notice of any such special meeting of the
stockholders may come before such meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the Board, or by a stockholder who has given
to the Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make the determination of whether business
has been properly brought before such meeting. Only persons who are nominated
by, or at the direction of, the Board, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
directors of the Company.
To be timely, notice of business to be brought before an annual meeting or
nominations of candidates for election as directors at an annual meeting must be
personally delivered or sent by United States mail, postage prepaid, to the
Secretary of the Company not less than 90 nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting; provided, however,
that in the event the date of the annual
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meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the stockholder must be so delivered or received not
earlier than the 120th day prior to such annual meeting and not later than the
close of business on the later of the 90th day prior to such annual meeting or
the tenth day following the day on which public announcement of the scheduled
date of such meeting is first made. Similarly, notice of nominations to be
brought before a special meeting must be received by the Secretary not earlier
than the 90th day prior to such special meeting and not later than the close of
business on the 60th day prior to such special meeting or the tenth day
following the date on which notice of such meeting is first given to
stockholders.
The notice of business to be brought before an annual meeting by a
stockholder must set forth, as to each matter the stockholder proposes to bring
before the annual meeting, a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting and, in the event that such business includes a proposal to amend either
the Articles or the By-laws, the text of the proposed amendment; the name and
address, as they appear on the Company's books, of the stockholder proposing
such business; a representation that the stockholder is a holder of record of
stock of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to propose such business; any material
interest of the stockholder in such business; and if the stockholder intends to
solicit proxies in support of such stockholder's proposal, a representation to
that effect.
The notice of any nomination for election as a director must set forth the
name and address of the stockholder who intends to make the nomination and of
the person or persons to be nominated; a representation that the stockholder is
a holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in the proxy statement filed pursuant to the proxy rules of the
Commission had each nominee been nominated, or intended to be nominated, by the
Board; the consent of each nominee to serve as a director if so elected; and, if
the stockholder intends to solicit proxies in support of such stockholder's
nominee(s) without such stockholder having made the foregoing representation, a
representation to that effect.
The Company expects to hold its first annual meeting of stockholders in
November 1997. Each stockholder will have until the close of business on the
tenth day following the day on which the first public disclosure of the date of
such first annual meeting is made to give notice to the Company, in proper form,
of such stockholder's intention to bring any matter before such first annual
meeting.
RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS
The Articles provide that (i) all securities of the Company are subject to
redemption by the Company to the extent necessary to prevent the loss or to
secure the reinstatement of any casino gaming license held by the Company or any
of its subsidiaries in any jurisdiction within or without the United States,
(ii) all securities of the Company are held subject to the condition that if a
holder thereof is found by a gaming authority in any such jurisdiction to be
disqualified or unsuitable pursuant to any gaming laws, such holder will be
required to dispose of all securities of the Company held by such holder and
(iii) it will be unlawful for any such disqualified person to (a) receive
payments of interest or dividends on any securities of the Company, (b)
exercise, directly or indirectly, any rights conferred by any securities of the
Company or (c) receive any remuneration in any form, for services rendered or
otherwise, from the subsidiary that holds the gaming license in such
jurisdiction.
RESTRICTIONS ON ALIEN OWNERSHIP
The By-laws contain a restriction on ownership of shares of the Company by
"aliens" (to the United States), that is substantially identical to a similar
provision contained in the ITT By-laws. Such provision has been included in the
By-laws as a result of the requirements of certain United States statutes that
are
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applicable to the Company because of its ownership with Dow Jones of television
station WBIS+. This provision of the By-laws limits stock ownership by "aliens"
(as used herein, the term "alien" includes the following and their
representatives: individuals who are not nationals of the United States,
partnerships unless a majority of the partners are such nationals and share in a
majority of those profits, foreign governments, entities created under the laws
of foreign governments and entities controlled directly or indirectly by one or
more of such individuals, partnerships, governments or entities). The By-laws
provide that under no circumstances shall the amount of stock of the Company
owned of record by aliens exceed 25% of the total outstanding. The Company plans
to remove this provision from the By-laws following consummation of our planned
sale of WBIS+ to Paxson. See "Business -- Governmental Regulation and Related
Matters -- Restrictions on Alien Ownership."
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Articles waive the personal liability of a director or officer for
damages for breach of fiduciary duty except for (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law or (ii) the
payment of distributions in violation of Section 78.300 of the NGCL, which
concerns the unlawful payment of distributions to stockholders.
While the Articles provide directors and officers with protection from
awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, the Articles will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
a director's or officer's breach of his or her duty of care.
The By-laws provide for indemnification of the directors and officers of
the Company to the fullest extent permitted by applicable state law, as then in
effect. The indemnification rights conferred by the By-laws are not exclusive of
any other right to which a person seeking indemnification may otherwise be
entitled. The Company will also provide liability insurance for the directors
and officers for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers and will enter into an
indemnification agreement with each of its directors. Under its form of
indemnification agreement, the Company agrees to indemnify its directors 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 Company does not maintain the aforementioned insurance or comparable
coverage, to the full extent provided in the applicable policies as in effect on
the date of such agreement (the Company'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. The Commission has taken the
position that the provisions discussed in this section do not eliminate the
monetary liability of directors or officers under the Federal securities laws.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
10 under the Exchange Act with respect to the shares of Company Common Stock
being issued in the Destinations Distribution (the "Registration Statement").
This Information Statement does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, to which reference is
hereby made. With respect to each such contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto filed by the Company with the
Commission may be inspected at the public reference facilities of the Commission
listed below.
The Company is subject to the informational requirements of the Exchange
Act and under the Exchange Act the Company will file annual, quarterly and
current reports, proxy statements and other information with the Commission.
Stockholders may read and copy these reports, proxy statements and other
information at the public reference facilities maintained by the Commission at
its offices at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Regional Offices of the Commission at Seven World Trade Center, Suite 1300,
New York, New York 10048 and in the Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of these reports, proxy
statements and other information may be obtained through the World Wide Web
(http://www.sec.gov). The Commission maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. In addition,
stockholders may read reports, proxy statements and other information concerning
the Company at the offices of The New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
The Company intends to furnish holders of Company Common Stock with annual
reports containing consolidated financial statements (beginning with the year
ending December 31, 1997) audited by independent accountants.
STOCKHOLDERS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT
OR INCORPORATED BY REFERENCE INTO IT. THE COMPANY HAS NOT AUTHORIZED ANYONE TO
PROVIDE STOCKHOLDERS WITH ANY INFORMATION THAT IS DIFFERENT. STOCKHOLDERS SHOULD
NOT ASSUME THAT THE DELIVERY OF THIS DOCUMENT OR THE DISTRIBUTION OF COMPANY
COMMON STOCK IMPLIES THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH
IN THIS DOCUMENT OR IN THE COMPANY'S AFFAIRS SINCE THE DATE OF THIS DOCUMENT.
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ITT DESTINATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Income for the three years ended December 31, 1996....................... F-3
Consolidated Balance Sheet as of December 31, 1996 and 1995........................... F-4
Consolidated Cash Flow for the three years ended December 31, 1996.................... F-5
Consolidated Stockholders Equity for the three years ended December 31, 1996.......... F-6
Notes to Financial Statements......................................................... F-7
Quarterly Results for 1996 and 1995 (Unaudited)....................................... F-23
Business Segment Information.......................................................... F-24
Geographical Information -- Total Segments............................................ F-24
Consolidated Income for the six months ended June 30, 1997 and 1996 (Unaudited)....... F-25
Consolidated Balance Sheet as of June 30, 1997 (Unaudited) and December 31, 1996...... F-26
Consolidated Cash Flow for the six months ended June 30, 1997 and 1996 (Unaudited).... F-27
Notes To Financial Statements (Unaudited)............................................. F-28
Business Segment Information (Unaudited).............................................. F-32
Valuation and Qualifying Accounts..................................................... S-1
</TABLE>
F-1
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT CORPORATION:
We have audited the accompanying consolidated balance sheet of ITT
Destinations, Inc. (a Nevada corporation and a wholly-owned subsidiary of ITT
Corporation) 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 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
Destinations, Inc. 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
F-2
<PAGE> 122
ITT DESTINATIONS, INC.
CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues....................................................... $5,718 $5,396 $3,876
Costs and expenses:
Salaries, benefits and other operating....................... 4,291 4,117 3,277
Selling, general and administrative (net of service fee
income of $--, $96 and $88)............................... 681 662 354
Depreciation and amortization................................ 247 223 106
------ ------ ------
5,219 5,002 3,737
------ ------ ------
499 394 139
Interest expense (net of interest income of $68, $49, and
$14)......................................................... (162) (219) (55)
Miscellaneous income (expense), net............................ 3 5 (17)
------ ------ ------
340 180 67
Provision for income taxes..................................... (150) (64) (27)
Minority equity................................................ (7) 1 4
------ ------ ------
Income from continuing operations.............................. 183 117 44
Discontinued operations........................................ 66 30 30
------ ------ ------
Net income..................................................... $ 249 $ 147 $ 74
====== ====== ======
Earnings per share (Pro forma for 1994 -- see Notes to
Financial Statements):
Income from continuing operations............................ $ 1.55 $ .98 $ .37
Income from discontinued operations.......................... .56 .26 .26
------ ------ ------
Net income................................................... $ 2.11 $ 1.24 $ .63
====== ====== ======
Weighted average common and common equivalent shares (Pro forma
for 1994 -- see Notes to Financial Statements)............... 118 118 117
------ ------ ------
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-3
<PAGE> 123
ITT DESTINATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 205 $ 141
Marketable securities.................................................... 599 --
Receivables, net......................................................... 435 484
Inventories.............................................................. 58 45
Prepaid expenses and other............................................... 102 82
------ ------
Total current assets............................................. 1,399 752
Plant, property and equipment, net......................................... 4,700 3,929
Investment in Madison Square Garden........................................ 533 607
Other investments.......................................................... 386 1,149
Long-term receivables, net................................................. 178 141
Other assets............................................................... 346 309
Goodwill, net.............................................................. 1,323 1,294
Net assets of discontinued operations...................................... 57 44
------ ------
$8,922 $8,225
====== ======
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable......................................................... $ 257 $ 244
Accrued expenses......................................................... 451 565
Notes payable and current maturities of long-term debt................... 486 282
Accrued taxes............................................................ 171 140
------ ------
Total current liabilities........................................ 1,365 1,231
Allocated debt of ITT...................................................... 2,095 2,131
Other long-term debt....................................................... 798 503
Deferred income taxes...................................................... 186 101
Other liabilities.......................................................... 378 302
Net liabilities of discontinued operations................................. 808 809
Minority interest.......................................................... 218 212
------ ------
5,848 5,289
------ ------
Stockholders equity:
Common stock: authorized 200,000,000 shares, no par or stated value,
outstanding 116,366,176 and 117,196,370 shares, respectively.......... 2,897 2,944
Cumulative translation adjustment........................................ (2) --
Unrealized loss on securities............................................ (62) --
Retained earnings........................................................ 241 (8)
------ ------
Total stockholders equity........................................ 3,074 2,936
------ ------
$8,922 $8,225
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-4
<PAGE> 124
ITT DESTINATIONS, INC.
CONSOLIDATED CASH FLOW
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
----- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 249 $ 147 $ 74
Discontinued operations......................................... (66) (30) (30)
----- ------- -------
Income from continuing operations............................. 183 117 44
Adjustments to income from continuing operations:
Depreciation and amortization................................. 247 223 106
Provision for doubtful receivables............................ 39 50 39
Minority equity in net income................................. 7 (1) (4)
Equity income, net of dividends received...................... 8 21 16
(Gain) loss on divestments -- pretax.......................... (36) 2 --
Changes in working capital:
Receivables................................................... (102) (151) (51)
Inventories................................................... (11) -- (3)
Accounts payable.............................................. (33) 46 (6)
Accrued expenses.............................................. 6 50 26
Accrued and deferred taxes...................................... 41 53 35
Other, net...................................................... 28 (10) (38)
----- ------- -------
Cash from continuing operations................................. 377 400 164
Cash from discontinued operations............................... 31 150 26
----- ------- -------
Cash from operating activities................................ 408 550 190
----- ------- -------
INVESTING ACTIVITIES
Additions to plant, property and equipment...................... (563) (416) (229)
Proceeds from divestments....................................... 282 10 18
Acquisitions, net of acquired cash.............................. (364) (2,309) (1,249)
Other, net...................................................... 50 109 10
----- ------- -------
Cash used for investing activities............................ (595) (2,606) (1,450)
----- ------- -------
FINANCING ACTIVITIES
Short-term debt, net............................................ 77 (4) 11
Long-term debt issued........................................... 454 3,132 260
Long-term debt repaid........................................... (303) (121) (124)
Changes in investments and advances from ITT Industries......... -- (929) 457
Other, net...................................................... 22 (54) 6
----- ------- -------
Cash from financing activities................................ 250 2,024 610
----- ------- -------
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS............... 1 (2) (1)
----- ------- -------
Increase/(decrease) in cash and cash equivalents................ 64 (34) (651)
Cash and cash equivalents -- Beginning of Year.................. 141 175 826
----- ------- -------
CASH AND CASH EQUIVALENTS -- END OF YEAR........................ $ 205 $ 141 $ 175
===== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................... $ 171 $ 238 $ 42
===== ======= =======
Income taxes.................................................. $ 85 $ 23 $ 67
===== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-5
<PAGE> 125
ITT DESTINATIONS, INC.
CONSOLIDATED STOCKHOLDERS EQUITY
(IN MILLIONS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
CURRENCY RETAINED
INVESTMENTS AND COMMON STOCK TRANSLATION EARNINGS
ADVANCES FROM -------------------- AND OTHER (ACCUMULATED
ITT INDUSTRIES, INC.(1) SHARES AMOUNT ADJUSTMENT DEFICIT)
----------------------- ----------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance -- January 1, 1994.............. $ 2,765 -- $ -- $ -- $ --
Net income.............................. 74 -- -- -- --
Transfers from ITT Industries, net...... 549 -- -- -- --
Translation of financial statements..... (35) -- -- -- --
------- ----------- ------ ---- ----
Balance -- December 31, 1994............ 3,353 -- -- -- --
Net income.............................. 155 -- -- -- --
Transfers to ITT Industries, net........ (539) -- -- -- --
Translation of financial statements..... (25) -- -- -- --
Issuance of common stock in connection
with the spin-off..................... (2,944) 117,196,370 2,944 -- --
------- ----------- ------ ---- ----
Balance -- December 19, 1995............ -- 117,196,370 2,944 -- --
Net loss................................ -- -- -- -- (8)
------- ----------- ------ ---- ----
Balance -- December 31, 1995............ -- 117,196,370 2,944 -- (8)
Net income.............................. -- -- -- -- 249
Stock option transactions............... -- 293,332 10 -- --
Common stock repurchases................ -- (1,123,526) (57) -- --
Translation of financial statements..... -- -- -- (2) --
Unrealized loss on securities........... -- -- -- (62) --
------- ----------- ------ ---- ----
Balance -- December 31, 1996............ $ -- 116,366,176 $2,897 $(64) $241
======= =========== ====== ==== ====
</TABLE>
- ---------------
(1) Investments and Advances from ITT Industries Inc., represents the means by
which ITT was funded by ITT Industries Inc. prior to the 1995 Spin-off and
consisted of both equity and interest bearing advances. As of December 19,
1995, ITT was recapitalized through issuances of its own debt and equity
securities.
The accompanying notes to financial statements are an integral part of the above
statement.
F-6
<PAGE> 126
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
DISTRIBUTION AND BASIS OF PRESENTATION
On July 15, 1997, the Board of Directors of ITT Corporation ("ITT," which
is expected to be renamed ITT Information Services, Inc.) approved a plan to
distribute to the holders of ITT's common stock all the outstanding shares of
common stock of ITT Destinations, Inc. (which is expected to be renamed ITT
Corporation and is herein referred to as the "Company"), a newly formed company
that will hold the hotels and gaming businesses of ITT (the "Destinations
Distribution"), and all the shares representing its approximately 83% interest
in ITT Educational Services, Inc., its publicly traded post-secondary technical
education business (the "ITT Educational Distribution" and, together with the
Destinations Distribution, the "Distributions"). Upon completion of the
Distributions, holders of ITT's common stock will receive the common stock of
the Company and ITT Educational. For accounting purposes, because of the
relative significance of the hotel and gaming operations, the businesses
comprising the information services segment of ITT (ITT World Directories and
ITT Educational) have been presented as discontinued operations. The net
liabilities of discontinued operations includes an allocation of ITT's
indebtedness which will occur prior to the Distributions.
The Company is one of the world's largest hotel and gaming companies. Its
principal lines of business are hotels and gaming. The hotels segment is
comprised of a worldwide hospitality network of over 420 full-service hotels
serving three markets: luxury, upscale and mid-price. The Company's hotel
operations are represented on every continent and in nearly every major world
market. The Company's gaming operations are located in several key domestic
jurisdictions. The Company also operates various hotel/casino ventures outside
the United States.
These financial statements represent the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. ITT's historical basis in the assets and liabilities of the
Company has been carried over and all majority-owned subsidiaries have been
consolidated. All material intercompany transactions and balances have been
eliminated.
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: Generally, revenues are recognized when the services
have been rendered. The following is a description of the composition of
revenues of the Company's business segments:
Hotels Operations: At December 31, 1996, the Company operated 135 hotels
under long-term management agreements. These agreements effectively convey to
the Company the right to use the hotel properties in exchange for payments to
the property owners which are based primarily on the hotels' profitability.
Accordingly, the Company includes the operating results of hotel properties
under long-term management agreements in its consolidated financial statements.
Revenues related to these hotel properties were $2.8 billion, $2.8 billion and
$2.7 billion for 1996, 1995 and 1994, respectively. Amounts provided for
payments to the property owners for the use of the hotel properties were $.6
billion, $.5 billion and $.5 billion for 1996, 1995 and 1994, respectively, and
other hotel operating costs were $2.1 billion, $2.2 billion and $2.1 billion for
1996, 1995 and 1994, respectively.
Gaming Operations: Casino revenues represent the net win from gaming wins
and losses. Revenues exclude the retail value of rooms, food, beverage,
entertainment and other promotional allowances provided on
F-7
<PAGE> 127
a complimentary basis to customers. The estimated retail value of these
promotional allowances was $161, $144 and $17 for the years ended December 31,
1996, 1995 and 1994, respectively. The estimated cost of such promotional
allowances was $111, $99 and $11 for the years ended December 31, 1996, 1995 and
1994, respectively, and has been included in Costs and Expenses in the
accompanying statement of Consolidated Income.
Revenues and Costs and Expenses of the Gaming operations are comprised of
the following for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
COSTS AND COSTS AND COSTS AND
REVENUES EXPENSES REVENUES EXPENSES REVENUES EXPENSES
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Gaming.................................. $1,032 $ 592 $1,004 $ 516 $139 $ 62
Rooms................................... 70 25 70 25 20 9
Food and beverage....................... 79 71 70 80 12 17
Other operations........................ 104 57 88 99 5 10
Selling, general and administrative..... -- 215 -- 172 -- 37
Depreciation and amortization........... -- 80 -- 88 -- 10
Provision for doubtful accounts......... -- 34 -- 50 -- 22
------ ------ ------ ------ ---- ----
Total......................... $1,285 $ 1,074 $1,232 $ 1,030 $176 $ 167
====== ====== ====== ====== ==== ====
</TABLE>
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.
Inventories: Inventories, comprised principally of hotel and gaming
supplies, are generally valued at the lower of cost (first-in, first-out) or
market and potential losses from obsolete and slow-moving inventories are
provided for in the current period.
Plant, Property and Equipment: Plant, property and equipment, including
capitalized interest of $13 in 1996 applicable to major project expenditures,
are recorded at cost. The Company normally claims the maximum depreciation
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 and equipment -- 2 to 10
years, and Other -- 5 to 40 years. Gains or losses on the sale or retirement of
assets are included in income. The Company continually reviews plant, property
and equipment 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.
Derivative Financial Instruments: The Company uses derivative financial
instruments from time to time, including foreign currency forward contracts
and/or swaps, as a means of hedging exposure to foreign currency and/or interest
rate risks. Forward exchange contracts and foreign currency swaps are accounted
for in accordance with SFAS No. 52 "Foreign Currency Translation." The Company
is an end-user and does not utilize these instruments for speculative purposes.
The Company has strict policies regarding the financial stability and credit
standing of its major counterparties. Changes in the spot rate of derivative
instruments designated as hedges of foreign currency denominated assets have
been classified in the same manner as the classification of the changes in the
underlying assets.
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.
Income Tax: Prior to the 1995 Spin-off (see "Transactions with ITT
Industries"), ITT and its subsidiaries were included in the consolidated U.S.
Federal tax return of ITT Industries and remitted to (received from) ITT
Industries an income tax provision (benefit) computed in accordance with a tax
sharing arrangement. Prior to the Distributions, the Company and ITT Educational
were included in the consolidated U.S. Federal tax return of ITT and remitted to
(received from) ITT an income tax provision (benefit)
F-8
<PAGE> 128
computed in accordance with a tax sharing arrangement. These arrangements
generally required that ITT determine its tax provision (benefit) as if it were
filing a separate U.S. Federal income tax return. However, the arrangements
allowed ITT to record benefits of certain tax attributes, primarily foreign tax
credits, utilizable on the ITT Industries consolidated tax return, which may not
have been available on a separate company basis.
Subsidiary Stock Issuance: The Company recognizes gains (losses) on sales
of subsidiary stock. For the year ended December 31, 1994, Miscellaneous income
(expense), net includes a pretax gain of $10 from the sale of 16.7% of the
common stock of ITT Educational.
Goodwill: The excess of cost over the fair value of net assets acquired is
amortized on a straight-line basis over 40 years. Accumulated amortization was
$72, $33 and $2 at December 31, 1996, 1995 and 1994, respectively. 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 through the 1995 Spin-off Date (as
defined below) were computed based upon the number of ITT Industries common
shares which were outstanding on the 1995 Spin-off date. Earnings per share from
the 1995 Spin-off Date through December 31, 1996 were determined based upon the
weighted average of common and common equivalent shares outstanding during the
period.
Reclassifications: Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.
TRANSACTIONS WITH ITT INDUSTRIES
On December 19, 1995 (the "1995 Spin-off Date"), the former ITT Corporation
(which has been renamed ITT Industries, Inc. -- "ITT Industries"), distributed
to its stockholders of record at the close of business on such date all of the
outstanding shares of common stock of ITT, then a wholly owned subsidiary of ITT
Industries (the "1995 Spin-off"). In such spin-off, holders of common stock of
ITT Industries received one share of ITT common stock for every one share of ITT
Industries common stock held. In connection with the 1995 Spin-off, ITT, which
was then named "ITT Destinations, Inc.," changed its name to ITT Corporation.
Prior to the 1995 Spin-off the Company included many of the corporate
functions of ITT Industries and provided ITT Industries and other affiliates
certain centralized systems for legal, accounting, tax, treasury and insurance
services. The Company received fees for such services which ranged between 0.5%
and 1% of net sales of the affiliate and totaled $96 and $88 in 1995 and 1994,
respectively. Service fee income has been recorded in Costs and expenses in the
accompanying statement of Consolidated Income.
Interest expense was charged to the Company on the portion of its
Investments and Advances from ITT Industries, Inc. which was deemed debt.
Interest expense was charged at 8% and totaled $161 and $19 in 1995 and 1994,
respectively.
The Company was one of several affiliates participating in the ITT Salaried
Retirement Plan as well as health care and life insurance programs for salaried
employees and retirees sponsored by ITT Industries through the time of the 1995
Spin-off (see "Employee Benefit Plans").
ACQUISITIONS
ITT completed various hotel acquisitions during 1996. These acquisitions
were accounted for using the purchase method of accounting. The aggregate
purchase price of $371, including assumed liabilities of $176, was approximately
equal to the fair value of the assets acquired. The results of operations of
these acquisitions have been included in Consolidated Income from their
respective dates of acquisition. ITT also made minority investments in certain
hotel properties during 1996 in the aggregate amount of $65. The pro forma
effects of these transactions on revenues, net income and earnings per share
were not material.
F-9
<PAGE> 129
On July 1, 1996, ITT Dow Jones Television, a general partnership in which
each ITT and Dow Jones & Company, Inc. ("Dow Jones") owns a 50% interest,
launched a new television station, WBIS+, which operates the broadcasting
license of the former WNYC-TV. The partnership purchased the broadcasting
license from New York City for $207. This purchase was funded equally by the
partners. ITT's investment in this partnership is reported using the equity
method of accounting. The Company's share of WBIS+'s results of operations are
included in Consolidated Income from the date of acquisition.
On May 12, 1997, the partnership agreed to sell the Federal Communications
Commission license of WBIS+ to Paxson Communications Corporation for a purchase
price of approximately $258. This agreement is subject to the approval of the
Federal Communications Commission, which is expected to be received in 1997.
This transaction is expected to be completed by the end of 1997.
On January 30, 1995, ITT completed a cash tender offer for the outstanding
shares of Caesars World, Inc. ("Caesars") for approximately $1.76 billion
(including expenses directly attributable to the acquisition of approximately
$10). The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets based on their estimated fair values.
The purchase price, including assumed liabilities of $450, exceeded the fair
value of assets acquired by approximately $1.1 billion. Caesars results of
operations are included in Consolidated Income from the date of acquisition.
On March 10, 1995, ITT, in a joint venture with Rainbow Programming
Holdings, Inc., a subsidiary of Cablevision Systems Corporation ("Cablevision"),
completed the acquisition of the businesses comprising Madison Square Garden
("MSG") for approximately $1 billion. The acquisition was funded by equity
contributions from the venture partners of approximately $720 and the remainder
was financed through bank debt. The Company's share of the results of MSG are
included in Consolidated Income from the date of acquisition.
On February 18, 1997, the Company received $169 as payment of the remaining
amount necessary to equalize the partnership interests of Cablevision and ITT in
MSG. On April 15, 1997, ITT entered into a Partnership Interest Transfer
Agreement among ITT, ITT Eden Corporation, ITT MSG Inc., Cablevision, Rainbow
Media Holdings Inc., Rainbow Garden Corp., Garden L.P. Holding Corp., MSG Eden
Corporation and MSG (the "Partnership Interest Transfer Agreement"). Pursuant to
the Partnership Interest Transfer Agreement, Cablevision paid ITT $500 in cash
on June 17, 1997. ITT also has a "put" option to require Cablevision or MSG to
purchase half of ITT's continuing interest in MSG for $75 on June 17, 1998 and
the other half of this continuing interest for an additional $75 on June 17,
1999 (or, if the first option is not exercised the entire continuing interest
for $150). In addition, pursuant to an Aircraft Contribution Agreement dated as
of April 15, 1997, among Garden L.P. Holding Corp., MSG Eden Corporation, ITT
MSG, Inc., ITT Flight Operations, Inc. and MSG, ITT has the right to cause to be
contributed to MSG an ITT-owned aircraft which MSG has used for the Knicks and
the Rangers. If the Company causes such contribution to occur, in consideration
of the aircraft contribution, Cablevision has agreed to add an additional $19 to
the exercise price of each of ITT's "put" options. The Partnership Interest
Transfer Agreement also includes a "call" option requiring ITT to sell its
remaining stake in MSG on the third anniversary of the closing at fair market
value, but not below a minimum price based on the "put" prices.
The following unaudited pro forma summary presents information as if the
Caesars and MSG acquisitions had occurred at the beginning of the respective
periods:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1995 1994
------ ------
<S> <C> <C>
Revenues................................................... $5,478 $5,050
Net income (loss) from continuing operations............... $ 102 $ (22)
====== ======
Earnings (loss) per share from continuing operations....... $ .86 $ (.19)
====== ======
</TABLE>
The pro forma information is not necessarily indicative of the results that
would have occurred had the acquisitions taken place at the beginning of the
respective periods.
F-10
<PAGE> 130
MARKETABLE SECURITIES
Marketable securities consist of the Company's investment in Alcatel
Alsthom. Accordingly, this investment has been classified as "available for
sale" in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and carried at fair value with the change from cost
basis reported in stockholders equity. The cost basis of this investment at
December 31, 1996 was $661. Dividend income from Alcatel Alsthom was $12 and $29
in 1996 and 1995, respectively. During February and March 1997, ITT sold its
remaining interest in the capital stock of Alcatel Alsthom. Total proceeds from
these sales were approximately $830, resulting in a pretax gain of $183.
RECEIVABLES
Current receivables of $435 and $484 at December 31, 1996 and 1995,
including current maturities of notes receivable, are reported net of allowances
for doubtful accounts of $121 and $81.
Long-term receivables of $178 and $141 at December 31, 1996 and 1995, are
net of allowances for doubtful accounts of $50 and $98, exclude current
maturities of $15 and $21, respectively, and approximate fair 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...................................... $1,337 $1,176
Buildings and improvements................................. 2,671 2,297
Machinery, furniture, fixtures and equipment............... 969 676
Construction work in process............................... 293 249
Other...................................................... 120 80
------ ------
5,390 4,478
Less: Accumulated depreciation and amortization............ (690) (549)
------ ------
$4,700 $3,929
====== ======
</TABLE>
OTHER INVESTMENTS
Other investments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
---- ------
<S> <C> <C>
Equity in WBIS+............................................. $109 $ --
Equity in and advances to other 20-50% owned companies...... 261 261
Alcatel Alsthom at cost..................................... -- 834
Other investments at cost................................... 16 54
-----
-
------
$386 $1,149
====== ======
</TABLE>
Equity in earnings of unconsolidated subsidiaries accounted for on the
equity basis were $8, $1, and $-- in 1996, 1995 and 1994, respectively.
RESTRUCTURING
The Company recorded a $51 pretax charge in the Hotels business segment
during the 1995 third quarter to restructure and rationalize its world
headquarters operations and provide for the planned disposal of non-core assets.
Of the total pretax charge, approximately $17 represented severance and other
related
F-11
<PAGE> 131
employee termination costs. The balance of the restructuring charge ($34 pretax)
related primarily to asset write-offs, lease commitments, 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.
INCOME TAX
Income tax data from continuing operations is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pretax income
U.S......................................................... $244 $114 $ 4
Foreign..................................................... 96 66 63
---- ---- ----
$340 $180 $ 67
==== ==== ====
Provision (benefit) for income tax*
Current:
U.S. Federal................................................ $ 73 $ (2) $ 49
State and local............................................. 11 11 5
Foreign..................................................... 29 21 16
---- ---- ----
113 30 70
---- ---- ----
Deferred:
U.S. Federal................................................ 22 32 (55)
Foreign and other........................................... 15 2 12
---- ---- ----
37 34 (43)
---- ---- ----
$150 $ 64 $ 27
==== ==== ====
</TABLE>
- ---------------
* The provision (benefit) for income tax was computed in accordance with tax
sharing arrangements among the Company, ITT Industries and ITT that generally
require that such provision (benefit) be computed as if the Company were a
stand-alone entity. The primary exception to the stand-alone computation
between ITT Industries and ITT relates to the utilization of foreign tax
credits. The arrangements allow for the realization of such credits since they
were utilized by ITT Industries in the respective consolidated tax returns. On
a pro forma basis, the Company's tax provision, on a stand alone basis, would
have been $146, $71 and $33 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 $268 since these amounts are permanently
reinvested.
Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. Deferred tax assets
(liabilities) include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995
------------------- -------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL & OTHER FEDERAL & OTHER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Plant, property and equipment................... $(177) $ (74) $(184) $ (12)
Allowances for doubtful accounts................ 50 -- 45 --
Employee benefits............................... 32 -- 30 --
Other........................................... (5) (12) 26 (6)
----- ---- ----- ----
$(100) $ (86) $ (83) $ (18)
===== ==== ===== ====
</TABLE>
F-12
<PAGE> 132
A reconciliation of the tax provision at the U.S. statutory rate to the
provision for income tax as reported is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate........................... $119 $63 $23
Tax on repatriation of foreign earnings........................ 1 (18) --
Non-deductible goodwill........................................ 10 9 --
Foreign tax rate differential.................................. 6 (2) (1)
U.S. state and local income taxes.............................. 8 8 3
Other.......................................................... 6 4 2
---- --- ---
Provision for income tax....................................... $150 $64 $27
==== === ===
</TABLE>
DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
<S> <C> <C>
Bank loans and other short-term............................ $ 467 $ 269
Long-term.................................................. 817 516
Allocated debt of ITT...................................... 2,095 2,131
------ ------
$3,379 $2,916
====== ======
</TABLE>
The weighted average interest rate for bank loans and other short-term
borrowings was 8.0% at December 31, 1996 and 9.6% at December 31, 1995 and their
fair values approximated carrying value. This average is composed of interest
rates on non-U.S. dollar denominated indebtedness. The estimated fair value of
long-term debt at December 31, 1996 and 1995 was $2,863 and $2,696,
respectively, and was determined based on quoted market prices and/or discounted
cash flows using the Company's incremental borrowing rates for similar
arrangements.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
DESCRIPTION 1996 1995
-------------------------------------------------------------- ---- ----
<S> <C> <C>
8.875% senior subordinated notes due 2002..................... $150 $150
5.9%-10.1% domestic mortgage loans due 1998-2001.............. 152 151
4.75%-14.26% foreign loans due 1997-2009...................... 514 204
Other......................................................... 1 11
---- ----
Total......................................................... 817 516
Less current maturities....................................... (19) (13)
---- ----
$798 $503
==== ====
</TABLE>
The aggregate maturities of long-term debt are $19 in 1997, $51 in 1998,
$-- in 1999, $17 in 2000, $255 in 2001, and $475 thereafter. Assets pledged to
secure indebtedness (including mortgage loans) amounted to $535 as of December
31, 1996.
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. ITT maintains lines of credit under which bank
loans and other short-term debt are drawn. On November 4, 1996, ITT renewed its
two major revolving credit facilities ("Revolvers") with syndicate banks
totaling $3.0 billion (five-year facility of $2.0 billion; 364-day facility of
$1.0 billion). In addition, smaller credit lines are maintained by ITT's foreign
subsidiaries. ITT had approximately $1.8 billion of available borrowing capacity
under the Revolvers as of December 31, 1996. As of December 31, 1996 and
F-13
<PAGE> 133
1995, $1,102 and $1,329 of commercial paper has been classified as long-term
since it is anticipated that the Company will enter into similar credit
arrangements upon consummation of the Distributions.
Prior to the Distributions, ITT intends to realign its existing
indebtedness. As part of the debt realignment, ITT will commence a tender offer
for all publicly held debt securities issued by ITT and repay certain other
debt. This tender offer will be financed by a combination of new lines of credit
of the Company and ITT. Upon completion of the debt realignment, ITT will have
approximately $1.0 billion of debt and the Company will have the remaining debt.
Consequently, interest expense was allocated at a rate equivalent to the
weighted average interest rate attributable to the allocated corporate debt,
which was 7.5% for 1996, 1995 and 1994. Total pre-tax interest allocated to ITT
was $75, $71 and $67 in 1996, 1995 and 1994, respectively.
ITT corporate debt, including allocated indebtedness, 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 classified in net liabilities of
discontinued operations................................. (1,000) (941)
------ ------
$ 2,095 $2,131
====== ======
</TABLE>
DISCONTINUED OPERATIONS
As more fully discussed in "Distributions and Basis of Presentation", the
assets and liabilities of ITT World Directories and ITT Educational are included
in Net Liabilities of Discontinued Operations and Net Assets of Discontinued
Operations, respectively. Summary financial information of the discontinued
operations is as follows:
ITT World Directories
Balance Sheet Data:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -----
<S> <C> <C>
Total assets.............................................. $ 510 $ 519
Total liabilities......................................... (318) (387)
Allocated debt of ITT..................................... (1,000) (941)
------- -----
Net liabilities of discontinued operations................ $ (808) $(809)
======= =====
</TABLE>
F-14
<PAGE> 134
Income Statement Data:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................. $647 $654 $646
==== ==== ====
Operating income...................................... $208 $160 $141
Interest expense, net................................. 72 77 76
Miscellaneous expense, net............................ 1 -- --
Income tax expense.................................... 50 42 26
Minority equity....................................... 31 20 16
---- ---- ----
Earnings from discontinued operations................. $ 54 $ 21 $ 23
==== ==== ====
</TABLE>
ITT Educational Services
Balance Sheet Data:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- ----
<S> <C> <C>
Total assets.................................................. $134 $113
Total liabilities............................................. (77) (69)
---- ----
Net assets of discontinued operations......................... $ 57 $ 44
==== ====
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues.............................................. $232 $202 $187
=== === ===
Operating income...................................... $ 21 $ 14 $ 12
Interest income....................................... 4 5 --
Miscellaneous expense, net............................ 1 -- --
Income tax expense.................................... 10 8 5
Minority equity....................................... 2 2 --
--- --- ---
Earnings from discontinued operations................. $ 12 $ 9 $ 7
=== === ===
</TABLE>
EMPLOYEE BENEFIT PLANS
Pension Plans. The Company and its subsidiaries sponsor numerous pension
plans. The plans are funded with trustees, except in some countries outside the
U.S. where funding is not required. The plans' assets are comprised of a broad
range of domestic and foreign equity securities, fixed income investments and
real estate. Prior to the 1995 Spin-off, certain employees of the Company
participated in the ITT Salaried Retirement Plan sponsored by ITT Industries.
Subsequent to the 1995 Spin-off, those employees became participants of the
Company plans.
F-15
<PAGE> 135
Total pension expenses were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Defined Benefit Plans
Service cost................................................ $ 22 $ 15 $ 9
Interest cost............................................... 22 14 12
Return on assets............................................ (28) (29) (1)
Net amortization and deferral............................... 15 16 (9)
---- ---- ----
Net periodic pension cost................................... 31 16 11
Defined contribution savings plans............................ 10 5 5
Other......................................................... 10 4 3
---- ---- ----
Total pension expense......................................... $ 51 $ 25 $ 19
==== ==== ====
</TABLE>
U.S. pension expenses included in the net periodic pension costs in the
table above were $22, $9 and $9 for 1996, 1995 and 1994, respectively.
The following table sets forth the funded status of the Company's pension
plans, amounts recognized in the Company's Consolidated Balance Sheet at
December 31, 1996 and 1995, and the principal weighted average assumptions
inherent in their determination:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------
DOMESTIC FOREIGN
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation....... $ 138 $ 45 $ 39 $ 29
Accumulated benefit
obligation................... $ 154 $ 49 $ 39 $ 29
====== ====== ====== ======
Projected benefit obligation...... $ 188 $ 63 $ 42 $ 31
Plan assets at fair value......... 184 -- 45 --
------ ------ ------ ------
Projected benefit obligation
(in excess of) less than plan
assets.......................... (4) (63) 3 (31)
Unrecognized net (gain)/loss...... (6) 4 2 --
Unrecognized net obligation....... 17 8 -- 2
------ ------ ------ ------
Pension asset (liability)
recognized in the consolidated
balance sheet................... $ 7 $ (51) $ 5 $ (29)
====== ====== ====== ======
Discount rate..................... 7.50% 7.50% 7.44% 7.44%
Rate of return on invested
capital......................... 9.75% 9.75% 8.09% 8.09%
Salary increase assumption........ 4.50% 4.50% 5.43% 5.43%
</TABLE>
F-16
<PAGE> 136
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------
DOMESTIC FOREIGN
--------------------------- ---------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation....... $ 121 $ 45 $ -- $ 28
Accumulated benefit
obligation................... $ 137 $ 48 $ -- $ 28
===== ===== ===== =====
Projected benefit obligation...... $ 190 $ 57 $ 1 $ 30
Plan assets at fair value......... 167 1 1 --
----- ----- ----- -----
Projected benefit obligation in
excess of plan assets........... (23) (56) -- (30)
Unrecognized net loss............. 33 16 -- --
Unrecognized net obligation....... -- 8 -- 3
----- ----- ----- -----
Pension asset (liability)
recognized in the consolidated
balance sheet................... $ 10 $ (32) $ -- $ (27)
===== ===== ===== =====
Discount rate..................... 7.50% 7.50% 7.08% 7.08%
Rate of return on invested
capital......................... 9.75% 9.75% 7.51% 7.51%
Salary increase assumption........ 6.00% 6.00% 5.42% 5.42%
</TABLE>
Retirement Savings Plan. The Company maintains a qualified retirement
savings plan under Section 401(k) of the Internal Revenue Code. This plan allows
eligible employees to contribute from 2% to 16% of their pretax pay subject to
certain limits, as defined. The Company contributes an amount equal to 1% of an
eligible employee's pay to the plan regardless of each employee's individual
contribution decision. Employees are 100% vested in this contribution at all
times. In addition, the Company matches 50% of eligible employees contributions
to the plan up to a maximum of 5% of pretax pay. This matching contribution is
20% vested each year and fully vested after five years of employment with the
Company. Both the retirement and matching contributions made by the Company are
invested in the Company common stock. Contribution expense related to this plan
was $10 in 1996. Prior to the 1995 Spin-off, the Company participated in ITT
Industries' Investment and Savings Plans. The contribution expenses related to
these plans which were charged to the Company were $9 in 1995 and $4 in 1994.
Postretirement Health and Life. The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. Postretirement health care and life insurance benefits
expenses were comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
--- --- ---
<S> <C> <C> <C>
Service cost..................................................... $ 1 $ 1 $ 1
Interest cost.................................................... 2 2 1
Return on assets................................................. (2) (2) --
Net amortization and deferral.................................... (1) -- (1)
--- --- ---
Net periodic expense............................................. $-- $ 1 $ 1
=== === ===
</TABLE>
F-17
<PAGE> 137
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Company's
Consolidated Balance Sheet at December 31, 1996 and 1995 and the principal
weighted average assumptions inherent in their determination:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation................. $ 23 $ 26
Plan assets at fair value..................................... 14 10
---- ----
Accumulated postretirement benefit obligation in excess of
plan assets................................................. (9) (16)
Unrecognized net gain......................................... (8) (2)
Unrecognized past service liability........................... (4) (4)
---- ----
Liability recognized in the consolidated balance sheet........ $(21) $(22)
==== ====
Discount rate................................................. 7.50% 7.50%
Rate of return on invested assets............................. 9.75% 9.75%
Ultimate health care trend rate............................... 5.00% 6.00%
==== ====
</TABLE>
The assumed rate of future increases in the per capita cost of health care
(the "health care trend rate") was 8.3% for 1996, decreasing ratably to 5.0% in
the year 2001 and remaining at that level thereafter. Increasing the table of
health care trend rates by 1% per year would have the effect of increasing the
accumulated postretirement benefit obligation by $1 and the annual expense by
$--. To the extent that the actual experience differs from the inherent
assumptions, the effect will be amortized over the average future service of the
covered active employees.
LEASES AND RENTALS
As of December 31, 1996, minimum rental commitments under operating leases
were $36, $33, $31, $28 and $27 for 1997, 1998, 1999, 2000, and 2001,
respectively. For the remaining years, such commitments amounted to $188,
aggregating total minimum lease payments of $343.
Rental expenses for operating leases were $47, $50 and $48 in 1996, 1995
and 1994, respectively.
CAPITAL STOCK
The Company is authorized to issue 50 million shares of preferred stock,
none of which was outstanding at December 31, 1996.
The Company expects to issue one Series A Participating Cumulative
Preferred Stock Purchase Right (a "Right") for each share of the Company's
common stock issued in the Destinations Distribution. 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 the
Company is acquired in a merger or other business combination or certain other
specified events occur, the Right will entitle each holder, subject to certain
exceptions, to purchase the number of 1/1,000ths of a share of Series A
Participating Cumulative Preferred Stock of the Company equivalent to the number
of shares of the Company 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, will expire on the tenth anniversary of the related
rights agreement and will be redeemable by the Company at any time at a price of
$.01 per Right.
F-18
<PAGE> 138
STOCK INCENTIVE PLANS
Concurrent with the 1995 Spin-off, ITT adopted the 1995 ITT Corporation
Incentive Stock Plan (the "1995 Plan") for key employees. The 1995 Plan provides
for the granting of nonqualified or incentive stock options, stock appreciation
rights payable in stock or cash, performance shares, restricted stock or any
combination of the foregoing. Awards may be made under the 1995 Plan through the
year 2005.
In connection with the 1995 Spin-off, ITT granted substitute stock options
to acquire 6,276,596 of ITT's common shares, all of which were outstanding at
December 31, 1995. These substitute options replaced 2,627,591 options which
were outstanding prior to the 1995 Spin-off, and maintain the same economic
value, vesting, expiration dates and other restrictions, terms and conditions
which existed under the ITT Industries stock incentive plans.
The 1995 Plan limits awards to employees to no more than 1.5% of the issued
and outstanding shares (including treasury shares) on the last day of each year
plus any unused portions of such limit carried over from prior years.
Additionally, no more than 5,000,000 shares may be available for incentive stock
options and no more than 20% of the total may be available for awards of
restricted stock or performance shares under the 1995 Plan. No more than 10% of
the annual limit may be granted to any one person. The exercise price of each
stock option granted is equal to the closing price of ITT's common stock on the
date of grant. Generally, stock options have a maximum term of ten years and
vest ratably over a three year period from the date of grant. Options granted to
senior officers of ITT vest after nine years from the grant date or upon
attaining certain defined market price levels of ITT's common stock, whichever
occurs first.
The following table summarizes ITT's stock option activity as of and for
the year ended December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE
OPTIONS PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding at the Spin-off Date and at December 31,
1995................................................. 6,276,596 $37.24
Granted................................................ 1,741,546 $55.80
Exercised.............................................. (288,107) $33.84
Forfeited.............................................. (116,256) $49.66
---------
Outstanding at December 31, 1996....................... 7,613,779 $41.43
=========
Exercisable at December 31, 1996....................... 5,035,111 $36.31
=========
</TABLE>
The following table summarizes information about ITT's outstanding stock
options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96* CONTRACTUAL LIFE PRICE/SHARE 12/31/96 PRICE/SHARE
- --------------- ------------ ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$18.00 - $25.04 609,456 4.5 years.... $20.03 609,456 $20.03
$27.81 - $40.14 3,180,439 7.3 years.... $35.17 2,972,005 $35.14
$41.97 - $62.13 3,823,884 8.7 years.... $50.04 1,453,650 $45.54
--------- ---------
7,613,779 5,035,111
========= =========
</TABLE>
- ---------------
* Included in the number of shares outstanding at December 31, 1996, are 696,000
non exercisable options, granted on February 6, 1996 at an exercise price of
$55.88, that will become exercisable in whole or in part upon achievement of
specified market prices for ITT's common stock or fully exercisable after the
passage of nine years from the date of grant, whichever occurs first.
F-19
<PAGE> 139
ITT applies APB Opinion 25 "Accounting for Stock Issued to Employees" and
related interpretations in accounting for the 1995 Plan. Accordingly, no
compensation cost has been recognized for grants of stock options from the 1995
Plan. Had compensation cost for those grants been determined based on the fair
value at the grant dates consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation", ITT's net income and earnings per share would have
been reduced by $20 ($0.18 per share) and $6 ($0.05 per share) in 1996 and 1995,
respectively. During the initial phase-in period, the effects of applying SFAS
No. 123 for pro forma disclosures are not likely to be representative of the
effects on reported net income for future years because options vest over
several years and additional awards generally are made each year. In addition,
pro forma compensation expense may vary due to the impact of accelerated vesting
of certain employee stock options. The fair value of each option grant used in
the above pro forma amounts is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
zero for all years; expected volatility of 33 percent for all years; risk free
interest rates of 5.3 percent and 6.4 percent; and an expected life of 4 years
for all options. The weighted-average fair value of each option granted during
1996 was $19.12.
In addition to the 1995 Plan, ITT maintains a restricted stock plan for
non-employee directors called the 1996 Restricted Stock Plan for Non-Employee
Directors (the "1996 Restricted Stock Plan"). ITT has reserved 120,000 common
shares for grants under the 1996 Restricted Stock Plan. Under this plan, grants
of restricted shares are made automatically on the date of each Annual Meeting
of Stockholders to each non-employee director elected at the meeting, or
continuing in office following the meeting. The amount of each award is equal to
(and in lieu of) the annual retainer in effect for the calendar year within
which the award date falls, divided by the fair market value of ITT's common
stock. Grants of approximately 7,000 restricted shares, resulting in $1 of
expense, were made under this plan in 1996, all of which were outstanding on
December 31, 1996. These shares are expected to vest on various dates from June
1999 through May 2001.
ITT converted 127,401 substitute restricted common shares from the ITT
Industries employee stock incentive plans on the date of the 1995 Spin-off, all
of which were outstanding at December 31, 1995. During 1996, 7,964 of these
restricted shares vested. The remaining 119,437 restricted shares, which were
outstanding at December 31, 1996, are expected to vest on various dates from
April 1997 through January 2001. Amortization expense recorded during 1996 was
$1 related to these employee restricted stock awards.
Upon the occurrence of an acceleration event, as defined, all outstanding
stock options will become immediately exercisable for 60 days beginning on the
date of the event. Additionally, limited stock appreciation rights ("Rights")
will be automatically granted for each outstanding option and become exercisable
for 60 days beginning with the day after the acceleration event. Such Rights
allow option holders to receive, when exercised, cash payments equal to the
spread between a formula market price and the applicable option price, less
withholding taxes.
As of the date of the Distributions, the number and exercise price of all
stock options and restricted common shares outstanding will be adjusted to
recognize the effect of the Distribution. This adjustment will increase the
number of stock options and restricted common shares and reduce the exercise
price of these shares to reflect the value of the common stock of the Company
and ITT Educational which will be distributed to ITT's stockholders.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into three forward exchange contracts with major
financial institutions to hedge exchange rate exposure on the Company's foreign
currency denominated assets. The contractual amounts of these hedges at December
31, 1996 and 1995, were $300 and $250, respectively. The contracts mature in
1997. Under these contracts, $250 represents hedges of dollars against French
francs while $50 represents a hedge of U.K. pounds against Belgian francs. The
total unrealized losses on these contracts at December 31, 1996 and 1995 were
$25 and $36, respectively, and approximate the fair value of these contracts.
The fair value of forward exchange contracts is the estimated amount the Company
would pay to terminate the contracts at the reporting date.
F-20
<PAGE> 140
From time to time the Company uses derivatives to manage its exposure to
interest rate fluctuations on its variable rate debt in U.S. dollars and other
currencies. The Company currently has three interest rate swaps in place with an
aggregate notional amount of $95 in which the Company pays fixed rates and
receives variable rates. The estimated unrealized loss on these interest rate
swaps was $8 at December 31, 1996. The unrealized loss represents the amount the
Company would pay to terminate the swap agreements based on current interest
rates.
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.
COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in various legal matters,
some of which include claims for substantial sums. Reserves have been
established when the outcome is probable and can be reasonably estimated. While
the ultimate results of claims and 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.
The Company has guaranteed certain loans and commitments of various
ventures to which it is a party. These commitments, which in the aggregate were
approximately $130 at December 31, 1996, are not expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
For purposes of governing certain of the ongoing relationships between the
Company and ITT Industries after the 1995 Spin-off, the Company and ITT
Industries have entered into various agreements including a Distribution
Agreement, Employee Benefits Services and Liability Agreement, Tax Allocation
Agreement and Intellectual Property Transfer and License Agreements. The Company
may be liable to or due reimbursement from ITT Industries relating to the
resolution of certain matters under these agreements.
In order to assist in the orderly transition of ITT, the Company and ITT
Educational into separate, publicly held companies, the Company intends to
modify, amend or enter into certain contractual agreements with ITT and ITT
Educational, including distribution agreements, tax allocation agreements (see
"Income Tax"), an employee benefits agreement and other ancillary agreements.
These agreements will provide, among other things, that: (i) the Company 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 ITT, the Company and ITT Educational; (iii) ITT
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 ITT; and (iv) the Company may provide
certain transition services to ITT World Directories and ITT Educational for a
limited period of time following the Distributions. The Company may be liable to
or due reimbursement from ITT and/or ITT Educational relating to the resolution
of certain matters under these agreements.
SUBSEQUENT EVENTS
On January 31, 1997, Hilton Hotels Corporation ("Hilton") commenced a
tender offer for approximately 50.1% of the outstanding shares of ITT's common
stock (the "Hilton Tender Offer") at $55 per share, net to the seller in cash
and without interest upon the terms and subject to the conditions set forth in
the Offer to Purchase dated January 31, 1997 and the related Letter of
Transmittal. The Hilton Tender Offer has been extended to September 29, 1997.
F-21
<PAGE> 141
Hilton has announced that, if the Hilton Tender Offer succeeds, it will
obtain the entire equity interest in ITT by merging ITT with Hilton or a
subsidiary of Hilton (the "Squeeze Out Merger" and, together with the Hilton
Tender Offer, the "Hilton Transaction") in a transaction pursuant to which all
shares not tendered and purchased pursuant to the Hilton Tender Offer (other
than shares owned by Hilton and its subsidiaries or held in ITT's treasury)
would be converted into the right to receive a number of shares of Hilton common
stock, par value $2.50 per share, having a nominal value of $55 per share,
subject to unspecified collar provisions. The Hilton Transaction is more fully
described in the Tender Offer Statement on Schedule 14D-1 filed by Hilton with
the Securities and Exchange Commission.
During the 1997 first quarter, ITT recorded a $58 pretax charge to
restructure and rationalize its World Headquarters operations. Of the total
pretax charge, $28 represents severance and other related employee termination
costs associated with the elimination of nearly 115 positions. It is expected
that the majority of the severance costs will be paid by the end of 1997. The
balance of the restructuring charge ($30 pretax) relates to charges for reduced
facilities utilization.
F-22
<PAGE> 142
QUARTERLY RESULTS FOR 1996 AND 1995
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C>
1996
Revenues...................................... $1,290 $ 1,450 $1,430 $ 1,548 $5,718
Costs and Expenses............................ $1,203 $ 1,305 $1,309 $ 1,402 $5,219
Income from continuing operations............. $ 24 $ 62 $ 49 $ 48 $ 183
Income (loss) from discontinued operations.... $ (4) $ 34 $ 18 $ 18 $ 66
------ ------ ------ ------ ------
Net income.................................... $ 20 $ 96 $ 67 $ 66 $ 249
====== ====== ====== ====== ======
Earnings Per Share Income from continuing
operations.................................. $ .20 $ .52 $ .42 $ .41 $ 1.55
Income (loss) from discontinued
operations............................... $( .03) $ .29 $ .15 $ .16 $ .56
------ ------ ------ ------ ------
Net income.................................. $ .17 $ .81 $ .57 $ .57 $ 2.11
====== ====== ====== ====== ======
1995
Revenues...................................... $1,169 $ 1,371 $1,420 $ 1,436 $5,396
Costs and Expenses............................ $1,112 $ 1,261 $1,323 $ 1,306 $5,002
Income from continuing operations............. $ 14 $ 18 $ 50 $ 35 $ 117
Income (loss) from discontinued operations.... $ (7) $ 28 $ -- $ 9 $ 30
------ ------ ------ ------ ------
Net income.................................... $ 7 $ 46 $ 50 $ 44 $ 147
====== ====== ====== ====== ======
Earnings Per Share (Pro Forma through
September 30)
Income from continuing operations........... $ .12 $ .15 $ .42 $ .30 $ .98
Income (loss) from discontinued
operations............................... $ (.06) $ .24 $ -- $ .07 $ .26
------ ------ ------ ------ ------
Net income.................................. $ .06 $ .39 $ .42 $ .37 $ 1.24
====== ====== ====== ====== ======
</TABLE>
F-23
<PAGE> 143
BUSINESS SEGMENT INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
REVENUES INCOME
------------------------ ---------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Hotels.......................................... $4,433 $4,164 $3,700 $ 371 $ 197 $ 152
Gaming.......................................... 1,066 944 -- 212 168 --
------ ------ ------ ----- ----- -----
Ongoing Segments.............................. 5,499 5,108 3,700 583 365 152
Dispositions.................................... 219 288 176 (1) 34 9
------ ------ ------ ----- ----- -----
Total Segments................................ 5,718 5,396 3,876 582 399 161
Other........................................... (83) (5) (22)
----- ----- -----
499 394 139
Interest expense, net........................... (162) (219) (55)
Miscellaneous income (expense), net............. 3 5 (17)
Provision for income taxes...................... (150) (64) (27)
Minority equity................................. (7) 1 4
----- ----- -----
Income from continuing operations............... 183 117 44
Discontinued operations......................... 66 30 30
------ ------ ------ ----- ----- -----
$5,718 $5,396 $3,876 $ 249 $ 147 $ 74
====== ====== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
GROSS PLANT
IDENTIFIABLE ASSETS ADDITIONS DEPRECIATION
------------------------ ------------------ ------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels........................... $4,543 $3,774 $3,484 $267 $278 $123 $125 $106 $ 70
Gaming........................... 2,481 2,269 -- 206 100 -- 31 44 --
Dispositions..................... 412 372 345 51 35 102 13 11 6
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Segments................... 7,436 6,415 3,829 524 413 225 169 161 76
Other............................ 1,486 1,810 806 39 3 4 7 8 8
------ ------ ------ ---- ---- ---- ---- ---- ----
$8,922 $8,225 $4,635 $563 $416 $229 $176 $169 $ 84
====== ====== ====== ==== ==== ==== ==== ==== ====
</TABLE>
Hotels: Operates a worldwide network of hotels and resorts under the
Sheraton name, including the hotels and resorts in the ITT Sheraton Luxury
Collection.
Gaming: Includes the casino operations of ITT Sheraton Gaming Corporation
and effective January 31, 1995, includes the newly acquired operations of
Caesars. Caesars owns and operates three hotel/casinos in Las Vegas and
Stateline, Nevada, and in Atlantic City, New Jersey. In conjunction with another
entity, Caesars manages a casino owned by the Ontario government in Windsor,
Canada.
"Dispositions" include the operating results of certain gaming operations
which are held for sale in Las Vegas, Nevada and Tunica, Mississippi.
"Income" consists of gross profit on revenues less operating expenses
incurred. "Other" includes non-operating income and corporate expenses.
Intercompany revenues, which are priced on an arm's-length basis, are not
material.
GEOGRAPHICAL INFORMATION -- TOTAL SEGMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
REVENUES OPERATING INCOME IDENTIFIABLE ASSETS
------------------------ ------------------ ------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.......................... $3,209 $3,038 $1,841 $358 $240 $ 67 $4,596 $4,281 $2,151
Western Europe............... 890 827 625 91 48 5 1,920 1,544 1,041
Canada and Other............. 1,619 1,531 1,410 133 111 89 920 590 637
------ ------ ------ ---- ---- ---- ------ ------ ------
Total Segments............... $5,718 $5,396 $3,876 $582 $399 $161 $7,436 $6,415 $3,829
====== ====== ====== ==== ==== ==== ====== ====== ======
</TABLE>
F-24
<PAGE> 144
ITT DESTINATIONS, INC.
CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
JUNE 30,
-----------------
1997 1996
------ ------
<S> <C> <C>
Revenues................................................................... $2,815 $2,740
Costs and expenses:
Salaries, benefits and other operating................................... 2,129 2,060
Selling, general and administrative...................................... 335 334
Restructuring charge..................................................... 58 --
Depreciation and amortization............................................ 134 114
------ ------
2,656 2,508
------ ------
159 232
Interest expense, net...................................................... (76) (83)
Gain on sale of Alcatel Alsthom shares..................................... 183 --
Gain on sale of investment in Madison Square Garden........................ 200 --
Miscellaneous income (expense), net........................................ (18) 9
------ ------
448 158
Provision for income taxes................................................. (189) (70)
Minority equity............................................................ -- (2)
------ ------
Income from continuing operations.......................................... 259 86
Discontinued operations.................................................... 20 30
------ ------
Net income................................................................. $ 279 $ 116
====== ======
Earnings per share:
Income from continuing operations........................................ $ 2.19 $ .72
Income from discontinued operations...................................... .18 .25
------ ------
Net income............................................................... $ 2.37 $ .97
====== ======
Weighted average common and common equivalent shares....................... 118 119
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-25
<PAGE> 145
ITT DESTINATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 312 $ 205
Marketable securities............................................. -- 599
Accounts receivable, net.......................................... 403 435
Inventories....................................................... 56 58
Prepaid expenses and other........................................ 148 102
------ ------
Total current assets...................................... 919 1,399
Plant, property and equipment, net.................................. 4,465 4,700
Investment in Madison Square Garden................................. 85 533
Other investments................................................... 349 386
Long-term receivables, net.......................................... 210 178
Other assets........................................................ 400 346
Goodwill, net....................................................... 1,290 1,323
Net assets held for sale............................................ 339 --
Net assets of discontinued operations............................... 63 57
------ ------
$ 8,120 $8,922
====== ======
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable.................................................. $ 262 $ 257
Accrued expenses.................................................. 484 451
Notes payable and current maturities of long-term debt............ 403 486
Accrued taxes..................................................... 201 171
------ ------
Total current liabilities................................. 1,350 1,365
Allocated debt of ITT............................................... 1,098 2,095
Other long-term debt................................................ 691 798
Deferred income taxes............................................... 184 186
Other liabilities................................................... 438 378
Net liabilities of discontinued operations.......................... 815 808
Minority interest................................................... 198 218
------ ------
4,774 5,848
------ ------
Stockholders equity:
Common stock: authorized 200,000,000 shares, no par or stated
value, outstanding 116,528,691 and 116,366,176 shares,
respectively................................................... 2,903 2,897
Cumulative translation adjustment................................. (77) (2)
Unrealized loss on securities..................................... -- (62)
Retained earnings................................................. 520 241
------ ------
Total stockholders equity...................................... 3,346 3,074
------ ------
$ 8,120 $8,922
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-26
<PAGE> 146
ITT DESTINATIONS, INC.
CONSOLIDATED CASH FLOW
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX
MONTHS ENDED
JUNE 30,
-----------------
1997 1996
------- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................ $ 279 $ 116
Discontinued operations................................................... (20) (30)
---- ----
Income from continuing operations....................................... 259 86
Adjustments to income from continuing operations:
Depreciation and amortization........................................... 134 114
Provision for doubtful receivables...................................... 19 17
Gain on divestments -- pretax........................................... (411) (20)
Changes in working capital:
Receivables............................................................. (17) (17)
Inventories............................................................. (2) (7)
Accounts payable........................................................ (22) (37)
Accrued expenses........................................................ 41 (36)
Accrued and deferred taxes................................................ 25 1
Other, net................................................................ (25) 7
---- ----
Cash from continuing operations........................................... 1 108
Cash (to)/from discontinued operations.................................... (23) 24
---- ----
Cash (used for)/from operating activities............................... (22) 132
---- ----
INVESTING ACTIVITIES
Additions to plant, property and equipment................................ (470) (233)
Proceeds from divestments................................................. 1,597 219
Collection of Cablevision note receivable................................. 169 --
Acquisitions.............................................................. (29) (75)
Other, net................................................................ (34) 7
---- ----
Cash from/(used for) investing activities............................... 1,233 (82)
---- ----
FINANCING ACTIVITIES
Short-term debt, net...................................................... (8) 30
Long-term debt issued..................................................... 98 139
Long-term debt repaid..................................................... (1,197) (260)
Other, net................................................................ 5 50
---- ----
Cash used for financing activities...................................... (1,102) (41)
---- ----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS......................... (2) 1
---- ----
Increase in cash and cash equivalents..................................... 107 10
Cash and cash equivalents -- Beginning of Period.......................... 205 141
---- ----
CASH AND CASH EQUIVALENTS -- END OF PERIOD................................ $ 312 $ 151
==== ====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................................ $ 72 $ 74
==== ====
Income taxes............................................................ $ 152 $ 53
==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-27
<PAGE> 147
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
COMPREHENSIVE PLAN
At a July 15, 1997 meeting of the Board of Directors of ITT Corporation
("ITT"), the Board approved a comprehensive plan (the "Comprehensive Plan")
designed to enhance the value of the ongoing investment of stockholders as well
as further the interests of ITT's employees, creditors, customers and the
economies and communities in which ITT operates. The major elements of the
Comprehensive Plan are:
(i) A tender offer to repurchase up to 30 million shares (or
approximately 25.7% of all the outstanding shares) of ITT's common stock
from the public for a price per share of $70, net to the seller in cash
(the "Stock Tender Offer"). ITT commenced the Stock Tender Offer on July
17, 1997 and the Stock Tender Offer is currently scheduled to expire at
5:00 p.m., New York City time, on Tuesday, September 9, 1997, unless
extended;
(ii) the pro rata distribution to stockholders of ITT of all the
shares of common stock of ITT Destinations, Inc. (the "Company"), a new
subsidiary that was formed to hold ITT's hotels and gaming business (the
"Destinations Distribution");
(iii) the pro rata distribution to stockholders of ITT of all the
shares of common stock owned by ITT of ITT Educational Services, Inc. ("ITT
Educational"), the subsidiary that operates ITT's post-secondary technical
education business (the "ITT Educational Distribution" and, together with
the Destinations Distribution, the "Distributions"); and
(iv) the allocation of ITT's indebtedness between its hotels and
gaming business and telephone directories publishing business in a manner
that is appropriate for the credit capacity and capitalization requirements
of each business. In order to effect this allocation, ITT commenced a
tender offer (the "Debt Tender Offer") for all of its outstanding public
debt on August 11, 1997. The Debt Tender Offer is currently scheduled to
expire at 5:00 p.m., New York City time, on Tuesday, September 9, 1997,
unless extended.
Consummation of the Comprehensive Plan is subject to receipt of certain
regulatory and other approvals. Following the Distributions, ITT's only direct
subsidiary will be ITT World Directories, Inc. ("ITT World Directories"), the
subsidiary that operates ITT's telephone directories publishing business and it
is expected that ITT will change its name to "ITT Information Services, Inc."
BASIS OF PRESENTATION
The Company is one of the world's largest hotel and gaming companies. The
Company's principal lines of business are hotels and gaming. The hotels segment
is comprised of a worldwide hospitality network of over 420 full-service hotels
serving three markets: luxury, upscale and mid-price. ITT's hotel operations are
represented on every continent and in nearly every major world market. The
Company's gaming operations are located in several key domestic jurisdictions.
The Company also operates various hotel/casino ventures outside the United
States.
These financial statements represent the financial position, results of
operations and cash flows of the Company as if it were a separate entity for all
periods presented. ITT's historical basis in the assets and liabilities of the
Company has been carried over and all majority-owned subsidiaries have been
consolidated. All material intercompany transactions and balances have been
eliminated.
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 and it subsidiaries at
F-28
<PAGE> 148
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 performance.
GAMING OPERATIONS
Casino revenues represent the net win from gaming wins and losses. Revenues
exclude the retail value of rooms, food, beverage, entertainment and other
promotional allowances provided on a complimentary basis to customers. The
estimated retail value of such promotional allowances was $75 and $83 for the
six months ended June 30, 1997 and 1996, respectively. The estimated cost of
such promotional allowances was $59 and $56 for the six months ended June 30,
1997 and 1996, respectively, and has been included in costs and expenses.
Revenues and costs and expenses of the Gaming operations are comprised of
the following:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Revenues
Gaming...................................................................... $473 $526
Rooms....................................................................... 33 36
Food and beverage........................................................... 36 39
Other operations............................................................ 53 54
---- ----
Total............................................................... $595 $655
==== ====
Cost and Expenses
Gaming...................................................................... $296 $302
Rooms....................................................................... 12 13
Food and beverage........................................................... 34 35
Other operations............................................................ 28 25
Selling, general and administrative......................................... 91 105
Depreciation and amortization............................................... 41 39
Provision for doubtful accounts............................................. 14 14
---- ----
Total............................................................... $516 $533
==== ====
</TABLE>
DISCONTINUED OPERATIONS
As more fully discussed in "Distributions and Basis of Presentation," the
assets and liabilities of ITT World Directories and ITT Educational are included
in Net Liabilities of Discontinued Operations and Net Assets of Discontinued
Operations, respectively. Summary financial information of the discontinued
operations is as follows:
ITT World Directories
Balance Sheet Data:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Total assets........................................ $ 459 $ 510
Total liabilities................................... (274) (318)
Allocated debt of ITT............................... (1,000) (1,000)
------- -------
Net liabilities of discontinued operations.......... $ (815) $ (808)
======= =======
</TABLE>
F-29
<PAGE> 149
Income Statement Data:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $ 276 $291
=== ===
Operating income.................................... $ 83 $103
Interest expense, net............................... 36 37
Provision for income taxes.......................... 19 26
Minority equity..................................... 13 14
--- ---
Income from discontinued operations................. $ 15 $ 26
=== ===
</TABLE>
ITT Educational Services
Balance Sheet Data:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Total assets........................................ $ 138 $134
Total liabilities................................... (75) (77)
---- ----
Net assets of discontinued operations............... $ 62 $ 57
==== ====
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $ 124 $109
=== ===
Operating income.................................... $ 10 $ 7
Interest income..................................... 2 2
Miscellaneous expense, net.......................... -- 1
Provision for income taxes.......................... 5 4
Minority equity..................................... 2 --
--- ---
Earnings from discontinued operations............... $ 5 $ 4
=== ===
</TABLE>
INVESTMENT IN MADISON SQUARE GARDEN
On February 18, 1997, the Company received $169 as payment of the remaining
amount necessary to equalize the partnership interests of Cablevision and ITT in
MSG. On April 15, 1997, ITT entered into a Partnership Interest Transfer
Agreement among ITT, ITT Eden Corporation, ITT MSG Inc., Cablevision, Rainbow
Media Holdings Inc., Rainbow Garden Corp., Garden L.P. Holding Corp., MSG Eden
Corporation and MSG (the "Partnership Interest Transfer Agreement"). Pursuant to
the Partnership Interest Transfer Agreement, Cablevision paid ITT $500 in cash
on June 17, 1997. ITT also has a "put" option to require Cablevision or MSG to
purchase half of ITT's continuing interest in MSG for $75 on June 17, 1998 and
the other half of this continuing interest for an additional $75 on June 17,
1999 (or, if the first option is not exercised the entire continuing interest
for $150). In addition, pursuant to an Aircraft Contribution Agreement dated as
of April 15, 1997, among Garden L.P. Holding Corp., MSG Eden Corporation, ITT
MSG, Inc., ITT Flight Operations, Inc. and MSG, ITT has the right to cause to be
contributed to MSG an ITT-owned aircraft which MSG has used for the Knicks and
the Rangers. If the Compnay causes such Contribution to occur, in consideration
of the aircraft contribution, Cablevision has agreed to add an additional $19 to
the exercise price of each of ITT's "put" options. The Partnership Interest
Transfer Agreement also
F-30
<PAGE> 150
includes a "call" option requiring ITT to sell its remaining stake in MSG on the
third anniversary of the closing at fair market value, but not below a minimum
price based on the "put" prices.
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 (loss) 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.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform to the current year presentation.
NET ASSETS HELD FOR SALE
On April 29, 1997, ITT announced its intention to sell two of its Gaming
properties: The Desert Inn Resort & Casino in Las Vegas, Nevada (the "Desert
Inn"), and The Sheraton Casino in Tunica, Mississippi. For financial reporting
purposes, the assets and liabilities attributable to these two properties have
been classified in the Consolidated Balance Sheet as "Net assets held for sale."
On August 1, 1997, ITT Sheraton Corporation entered into an agreement in
principle with Davis Gaming, L.L.C. ("Davis Gaming"), a Delaware limited
liability company owned by Marvin Davis, to form two 50/50 joint ventures to own
the Desert Inn and the 34 acre parcel of land adjacent to the Desert Inn. The
Desert Inn and the 34 acre parcel of land are currently owned by a subsidiary of
ITT. Under the terms of the agreement in principle, ITT will receive $250 in
cash, including a $150 cash payment from Davis Gaming and $100 from the proceeds
of new debt issued by the Desert Inn joint venture. ITT, through its Caesars
World, Inc. subsidiary, will manage the Desert Inn for a period of ten-years
with an option to extend the management contract for an additional ten-year
period. Over the next two years, the joint venture partners will consider the
feasibility of developing a new hotel and casino on the 34 acre parcel. Should
the decision be made to proceed, ITT will also manage the new property. At the
insistence of Davis Gaming, the transaction documentation will include certain
"change of control" provisions.
This transaction, which is subject to the execution of definitive
agreements, due diligence and certain other customary closing conditions, is
expected to be completed by November 1, 1997. ITT's rights under the transaction
will be retained by the Company after the completion of the Destinations
Distribution.
SALE OF WBIS+
On May 12, 1997, ITT Dow Jones Television, a general partnership in which
each of ITT and Dow Jones & Company Inc. ("Dow Jones") owns a 50% interest,
agreed to sell the Federal Communications Commission license of WBIS+ Channel 31
in New York City, to Paxson Communications Corporation for a purchase price of
approximately $258. This agreement is subject to the approval of the Federal
Communications Commission, which is expected to be received in 1997. This
transaction is expected to be completed by the end of 1997.
THE HILTON OFFER
On January 31, 1997, Hilton Hotels Corporation ("Hilton") commenced a
tender offer for approximately 50.1% of the outstanding shares of ITT's common
stock (the "Hilton Tender Offer") at $55 per share, net to the seller in cash
and without interest upon the terms and subject to the conditions set forth in
the Offer to Purchase dated January 31, 1997 and the related Letter of
Transmittal. The Hilton Tender Offer has been extended to September 29, 1997.
F-31
<PAGE> 151
Hilton has announced that, if the Hilton Tender Offer succeeds, it will
obtain the entire equity interest in ITT by merging ITT with Hilton or a
subsidiary of Hilton (the "Squeeze Out Merger" and, together with the Hilton
Tender Offer, the "Hilton Transaction") in a transaction pursuant to which all
shares not tendered and purchased pursuant to the Hilton Tender Offer (other
than shares owned by Hilton and its subsidiaries or held in ITT's treasury)
would be converted into the right to receive a number of shares of Hilton common
stock, par value $2.50 per share, having a nominal value of $55 per share,
subject to unspecified collar provisions. On August 7, 1997, Hilton amended the
Hilton Tender Offer to increase the offered purchase price to $70 per share of
ITT common stock and to indicate that each share not tendered pursuant to the
Hilton Tender Offer would be converted in the Squeeze Out Merger into the right
to receive a number of shares of Hilton common stock having a nominal value of
$70 per share of ITT common stock, subject to unspecified collar conditions. The
Hilton Transaction is more fully described in the Tender Offer Statement on
Schedule 14D-1 filed by Hilton with the Securities and Exchange Commission.
BUSINESS SEGMENT INFORMATION
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
REVENUES INCOME
----------------- -------------
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1997 1996 1997 1996
------ ------ ---- ----
<S> <C> <C> <C> <C>
Hotels..................................................... $2,220 $2,086 $181 $158
Gaming..................................................... 514 533 98 117
------ ------ ---- ----
Ongoing Segments......................................... 2,734 2,619 279 275
Dispositions............................................... 81 121 (20) 6
------ ------ ---- ----
Total Segments........................................... 2,815 2,740 259 281
Restructuring charge..................................... (58) --
Other...................................................... -- -- (42) (49)
------ ------ ---- ----
2,815 2,740 159 232
Interest expense, net...................................... (76) (83)
Gain on sale of Alcatel Alsthom shares..................... 183 --
Gain on sale of investment in Madison Square Garden........ ...... 200 --
Miscellaneous expenses, net................................ (18) 9
Provision for income taxes................................. (189) (70)
Minority equity............................................ -- (2)
---- ----
Income from continuing operations.......................... 259 86
Discontinued operations.................................... 20 30
------ ------ ---- ----
$2,815 $2,740 $279 $116
====== ====== ==== ====
</TABLE>
F-32
<PAGE> 152
SCHEDULE II
ITT DESTINATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN MILLIONS)
<TABLE>
<CAPTION>
ADDITIONS (DEDUCTIONS)
-------------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATIONS 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.................... $81 $ 39 $-- $ 1 $ 121
Notes Receivable -- Allowance for
doubtful accounts.................... $98 $ -- $-- $ (48) $ 50
YEAR ENDED DECEMBER 31, 1995
Trade Receivables -- Allowance for
doubtful accounts.................... $26 $ 50 $-- $ 5 $ 81
Notes Receivable -- Allowance for
doubtful accounts.................... $78 $ -- $-- $ 20 $ 98
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for
doubtful accounts.................... $13 $ 33 $-- $ (20) $ 26
Notes Receivable -- Allowance for
doubtful accounts.................... $76 $ 6 $-- $ (4) $ 78
</TABLE>
S-1
<PAGE> 153
STATEMENT OF STOCKHOLDERS RECEIVING
A DISTRIBUTION OF STOCK OF
ITT DESTINATIONS, INC.
FILED PURSUANT TO TREASURY REGULATION SEC.1.355-5(B)
1. The undersigned stockholder owning shares of ITT Corporation as of
, 1997 received a distribution on , 1997 of
stock in a controlled corporation (ITT Destinations, Inc.) to which
Section 355 of the Internal Revenue Code applies.
2. The names and addresses of the corporations involved are:
(a) ITT Corporation
1330 Avenue of the Americas
New York, New York 10019-5490
(b) ITT Destinations, Inc.
1330 Avenue of the Americas
New York, New York 10019-5490
3. No stock or securities in ITT Corporation were surrendered by the
undersigned.
4. ________ common shares of ITT Destinations, Inc. were received.
5. By letter dated , 1997, Cravath, Swaine & Moore, special
counsel to ITT Corporation, advised ITT Corporation that the
distribution of shares of ITT Destinations, Inc. was a nontaxable
Section 355 corporate separation.
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Stockholder
