<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10
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 APPLIED FOR
(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
================================================================================
<PAGE> 2
ITEM 1. BUSINESS
The information required by this item is contained under the section
"Business" and is identified in the "Index to Financial Statements and
Schedules -- ITT Destinations, Inc. -- Business Segment Information" and
"-- Geographic Information" of the ITT Destinations, Inc. Information Statement
dated July 17, 1997 included herewith as Exhibit 99.1 (the "Information
Statement") and such section and information are incorporated herein by
reference.
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained under the sections
"Summary -- ITT Destinations, Inc. Summary Financial Information," "ITT
Destinations, Inc. Selected Historical Financial and Operating Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the Information Statement and such sections are incorporated
herein by reference.
ITEM 3. PROPERTIES
The information required by this item is contained under the section
"Business" of the Information Statement and such section is incorporated herein
by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained under the section
"Projected Beneficial Ownership" of the Information Statement and such section
is incorporated herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained under the sections
"Management and Executive Compensation -- Board of Directors" and "-- Executive
Officers of the Company" of the Information Statement and such sections are
incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained under the section
"Management and Executive Compensation" of the Information Statement and such
section is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the section
"Management and Executive Compensation -- Certain Relationships and Related
Transactions" of the Information Statement and such sections are incorporated
herein by reference.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained under the section "Legal
Proceedings" of the Information Statement and such section is incorporated
herein by reference.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained under the sections "The
Destinations Distribution -- Listing and Trading of Company Common Stock,"
"Dividend Policy" and "Description of Capital Stock -- Authorized Capital
Stock," "-- Rights Plan" and "Management and Executive Compensation" and
"Projected Beneficial Ownership" of the Information Statement and such sections
are incorporated herein by reference.
<PAGE> 3
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On July 16, 1997, ITT Destinations, Inc. issued 1,000 shares of its common
stock, par value $.01 per share, for $1.00 per share in cash to ITT Corporation.
The issuance of such stock was exempt from registration under Section 4(2) of
the Securities Act of 1933.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained under the section
"Description of Capital Stock" of the Information Statement and such section is
incorporated herein by reference.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained under the section
"Liability and Indemnification of Directors and Officers" of the Information
Statement and such section is incorporated herein by reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is identified in the "ITT
Destinations, Inc. -- Index to Financial Statements and Schedule" of the
Information Statement and such section and information are incorporated herein
by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The information required by this item is identified in the "Index to
Financial Statements and Schedules" on pages F-1 and F-2 of the Proxy Statement
and such information is incorporated herein by reference.
2
<PAGE> 4
(b) Exhibits
The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------
<C> <S>
3.1 Form of Amended and Restated Articles of Incorporation of ITT Destinations, Inc.++
3.2 Form of 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 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 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 Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and ITT
Educational Services, Inc.++
10.2 Form of Intellectual Property License Agreement between ITT Corporation and ITT
Destinations, Inc. and ITT.++
10.3 Form of Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and
ITT Educational Services, Inc.++
10.4 Form of Employee Benefit Services and Liability Agreement between ITT Corporation and
ITT Destinations, Inc.++
10.5 Form of ITT Destinations, Inc. 1997 Restricted Stock Plan for Non-Employee
Directors.++
10.6 Form of Indemnification agreement with members of the Board of Directors.++
10.7 Form of ITT Destinations, Inc. Incentive Stock Plan.++
10.8 Form of ITT Destinations, Inc. Senior Executive Severance Pay Plan.++
10.9 Form of R.V. Araskog employment agreement.++
10.10 Form of Severance Agreement between ITT Destinations, Inc. and certain executives.++
21 List of Subsidiaries of ITT Destinations, Inc.++
99.1 ITT Destinations, Inc. Information Statement dated July 17, 1997*
</TABLE>
- ---------------
* Filed herewith.
++ To be filed by amendment.
3
<PAGE> 5
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: July 17, 1997
4
<PAGE> 6
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
3.1 Form of Amended and Restated Articles of Incorporation of ITT Destinations, Inc.++
3.2 Form of 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 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 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 Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and ITT
Educational Services, Inc.++
10.2 Form of Intellectual Property License Agreement between ITT Corporation and ITT
Destinations, Inc. and ITT.++
10.3 Form of Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and
ITT Educational Services, Inc.++
10.4 Form of Employee Benefit Services and Liability Agreement between ITT Corporation
and ITT Destinations, Inc.++
10.5 Form of ITT Destinations, Inc. 1997 Restricted Stock Plan for Non-Employee
Directors.++
10.6 Form of Indemnification agreement with members of the Board of Directors.++
10.7 Form of ITT Destinations, Inc. Incentive Stock Plan.++
10.8 Form of ITT Destinations, Inc. Senior Executive Severance Pay Plan.++
10.9 Form of R.V. Araskog employment agreement.++
10.10 Form of Severance Agreement between ITT Destinations, Inc. and certain executives.++
21 List of Subsidiaries of ITT Destinations, Inc.++
99.1 ITT Destinations, Inc. Information Statement dated July 17, 1997 *
</TABLE>
- ---------------
* Filed herewith.
++ To be filed by amendment.
<PAGE> 1
EXHIBIT 99.1
SUBJECT TO COMPLETION OR AMENDMENT, DATED JULY 17, 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 also may be referred to
as "we," "our" or "us").
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. ITT's
stockholders will not be required to pay for shares of Company Common Stock
received in the Destinations Distribution. Company Common Stock has been
approved for listing on The New York Stock Exchange, Inc., subject to official
notice of issuance, and "regular way" trading on The New York Stock Exchange,
Inc. will begin on , 1997.
------------------------
NO STOCKHOLDER APPROVAL OF THE DESTINATIONS DISTRIBUTION IS REQUIRED OR SOUGHT.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
STOCKHOLDERS SHOULD NOT SEND ANY ITT STOCK CERTIFICATES TO ITT OR THE COMPANY.
------------------------
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 our information agent, Georgeson & Company Inc., Wall Street
Plaza, New York, New York 10005, telephone number: (800) 223-2064. You 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
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DESTINATIONS DISTRIBUTION............................. 1
SUMMARY............................................................................... 6
THE DESTINATIONS DISTRIBUTION......................................................... 14
General............................................................................... 14
Manner of Effecting the Destinations Distribution..................................... 14
Reasons for Furnishing This Information Statement..................................... 14
Reasons for the Destinations Distribution............................................. 15
Other Transactions.................................................................... 15
Strategic Investment.................................................................. 17
Certain Indebtedness.................................................................. 17
Indebtedness of the Company after the Transactions.................................... 18
Certain Effects of the Destinations Distribution...................................... 18
Federal Income Tax Consequences of the Destinations Distribution...................... 19
Listing and Trading of Company Common Stock........................................... 21
DIVIDEND POLICY....................................................................... 22
CAPITALIZATION........................................................................ 23
ITT DESTINATIONS, INC. SELECTED HISTORICAL FINANCIAL
AND OPERATING DATA.................................................................. 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................... 25
BUSINESS.............................................................................. 33
General............................................................................... 33
Business Developments................................................................. 33
Business Segments..................................................................... 35
Hotel Operations...................................................................... 35
Gaming Operations..................................................................... 39
Gaming Assets Identified for Disposition.............................................. 39
Dispositions.......................................................................... 41
Employees............................................................................. 42
Competition........................................................................... 42
Exposure to Currency Fluctuations..................................................... 43
Intellectual Property................................................................. 43
Governmental Regulation and Related Matters........................................... 43
Other................................................................................. 51
LEGAL PROCEEDINGS..................................................................... 51
OUR RELATIONSHIP WITH ITT AFTER THE DESTINATION DISTRIBUTION.......................... 53
Distribution Agreement................................................................ 53
Tax Allocation Agreement.............................................................. 54
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Intellectual Property Agreement....................................................... 54
Employee Benefits Agreement........................................................... 54
MANAGEMENT AND EXECUTIVE COMPENSATION................................................. 56
Board of Directors.................................................................... 56
Committees of the Board of Directors.................................................. 58
Directors' Retirement Policy.......................................................... 59
Directors' Compensation............................................................... 59
Directors' Benefits................................................................... 59
Restricted Stock Plan for Non-Employee Directors...................................... 60
Certain Relationships and Related Transactions........................................ 60
Executive Officers of the Company..................................................... 61
Compensation of Executive Officers.................................................... 64
Annual Incentive Bonus Plan........................................................... 65
Option Grants of ITT Common Stock to the Company Executives in Last Fiscal Year....... 65
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values..... 66
Severance Agreements.................................................................. 66
Employment Contract................................................................... 67
1997 Stock Plan....................................................................... 67
Pension Plans......................................................................... 68
Compensation Committee Interlocks and Insider Participation........................... 70
PROJECTED BENEFICIAL OWNERSHIP........................................................ 71
DESCRIPTION OF CAPITAL STOCK.......................................................... 73
Authorized Capital Stock.............................................................. 73
Company Common Stock.................................................................. 73
Company Preferred Stock............................................................... 73
Authorized But Unissued Capital Stock................................................. 73
Rights Plan........................................................................... 74
No Preemptive Rights.................................................................. 76
Nevada General Corporation Law........................................................ 76
Provisions of Our Articles of Incorporation and By-laws Affecting a Change in
Control............................................................................. 78
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS............................... 80
WHERE YOU CAN FIND MORE INFORMATION................................................... 81
ITT DESTINATIONS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE........ F-1
</TABLE>
ii
<PAGE> 4
THE INFORMATION CONTAINED IN THIS DOCUMENT IS SUBJECT TO COMPLETION AND
CONTEMPLATES SIMULTANEOUS RECORD, DISTRIBUTION AND MAILING DATES. THEREFORE, THE
DESCRIPTION OF THE DISTRIBUTIONS IS AS OF THE TIME IMMEDIATELY FOLLOWING THE
EFFECTIVE TIME OF THE DISTRIBUTIONS UNLESS THE CONTEXT OTHERWISE REQUIRES.
QUESTIONS AND ANSWERS
ABOUT THE DESTINATIONS DISTRIBUTION
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 that trades under the symbol "IIN" and 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 that trades under the symbol "HIG" and
that operates one of the largest multiline insurance companies in the
United States).
Holders of ITT stock for the five years through 1996 have seen their
investment outperform the Standard & Poor's 500 Index by more than 70%
and increase in aggregate value by approximately $10 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: Prior to the current separation of its businesses, ITT operated in three
principal business areas: hotels and gaming, telephone directories
publishing and post-secondary technical education. ITT conducted its
hotels and gaming business through its subsidiaries, ITT Sheraton
Corporation ("Sheraton"), Ciga S.p.A. ("Ciga") and Caesars World, Inc.
("Caesars"). ITT conducted 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 placed 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 we
intend to change our name to "ITT Corporation." This document, which
describes the Desti-
1
<PAGE> 5
nations Distribution, uses the terms "we," "our" and "us" in reference to
the Company and, although the Company is newly formed, 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 your
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 you 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 you 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
approved by the Board of Directors of ITT (the "Comprehensive Plan"). 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. You 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 $70.00, net to the seller in cash (the "Stock Tender Offer").
The Stock Tender Offer is expected to be consummated several days prior
to the Destinations Distribution to give the depositary for the tender
offer time to prorate and return excess shares.
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. 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, ITT plans to commence a tender offer for all the
publicly held debt securities of ITT Corporation (the "Debt Tender Offer"
and, together with the Equity Tender Offer, the "Tender Offers") and to
repay certain other debt and to replace all this indebtedness with
indebtedness issued by the Company and ITT ISI.
Q5: HOW WILL ITT FINANCE THE TENDER OFFERS?
A: In order to finance the Debt Tender Offer and the repayment of a portion
of certain other indebtedness, ITT plans to use cash received from us in
part as a dividend and in part as consideration for certain assets
contributed to us prior to the Destinations Distribution (the "First
Payment"). In order to finance the Stock Tender Offer and the repayment of
a portion of such other indebtedness, ITT will use a combination of
available cash, securities issued by and borrowings under a new bank
credit facility for ITT ISI and the subsidiaries it will have after the
Distributions and the proceeds of a cash dividend from us (the "Second
Payment"). We will finance the First and the Second Payments with
borrowings under our own new bank credit facility. After the Destinations
Distribution, we will be responsible for approximately $4.2 billion of
outstanding indebtedness and ITT ISI will be responsible for approximately
$1.265 billion of outstanding indebtedness. ITT has received a letter from
The Chase Manhattan Bank and Chase Securities Inc. stating that they are
highly confident that they will be able to arrange credit facilities and
debt securities offerings
2
<PAGE> 6
for the Company and ITT ISI in amounts sufficient to consummate the Tender
Offers and the other elements of the Comprehensive Plan (the "Credit
Facilities").
We and ITT ISI both plan to put in place permanent debt financing
concurrently with or after the Distributions, which will involve the
issuance of debt securities and the use of the proceeds to repay
indebtedness under the Credit Facilities referred to above.
To read more about these other transactions, see pages 16 to 17 and 28 to
30.
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, sold a 39.8% interest in Madison Square
Garden and contracted through "put" and "call" options to sell its
remaining 10.2% interest at guaranteed amounts and, with its partner, Dow
Jones & Company, Inc. ("Dow Jones"), entered into an agreement to sell
television station WBIS+. 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.
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 55 franchise agreements and management contracts
in 15 different countries, totalling more than 15,000 rooms. 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. 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
3
<PAGE> 7
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. ITT is holding The Desert
Inn Resort & Casino ("The Desert Inn") in Las Vegas, Nevada, 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 Board of Directors
of ITT 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.
Q8: WHY IS THIS TRANSACTION STRUCTURED AS A DISTRIBUTION?
A: The Distributions are the most tax-efficient means of separating ITT's
businesses. The Destinations Distribution is intended to be tax-free, for
U.S. Federal income tax purposes, to ITT and its stockholders. 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: ITT stockholders will receive, in what is intended to be a tax-free
distribution for U.S. Federal income tax purposes, one share of Company
Common Stock 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. To review the tax consequences for you in detail, see
pages 18 to 20.
Q10: WHAT DOES AN ITT STOCKHOLDER NEED TO DO NOW?
A: Nothing. Stockholder approval is not required in order to effect the
Destinations Distribution. We are NOT asking you for a proxy. ITT
stockholders should NOT send in their stock certificates. You will
automatically receive your shares of Company Common Stock.
4
<PAGE> 8
Q11: WHAT EFFECT WILL THIS HAVE ON THE OFFER BY HILTON FOR ITT SHARES?
A: ITT's Board of Directors believes that the business justifications for the
Comprehensive Plan are compelling without regard to the unsolidated tender
offer by Hilton for shares of ITT Common Stock and intends to pursue the
plan even if Hilton withdraws its interest in acquiring ITT. However, in
reviewing the Comprehensive Plan, the Board of Directors of ITT took
account of the possibility that the transactions contemplated by the
Comprehensive Plan could adversely affect Hilton's offer. 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 its
offer for shares of ITT Common Stock after completion of the Destinations
Distribution. ITT is unable to predict whether Hilton would commence
efforts to acquire the Company after the Destinations Distribution.
Certain provisions of our Amended and Restated Articles of Incorporation
(our "Articles") and our By-laws (our "By-laws"), our stockholders 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 or delaying or making more difficult an acquisition of control of
the Company in a transaction that is not approved by our Board. In
addition, it is possible that certain terms of the Credit Facilities for
the Company may make more expensive, and may impede, consummation of
Hilton's offer and might deter certain other persons from attempting,
through tender or exchange offers or by other means, to gain control of
the Company, particularly persons who would finance a takeover of the
Company with the Company's own assets and cash flows or who cannot
consummate a tender offer without acquiring a very high percentage of the
Company's voting securities.
Q12: WHO DO I CALL IF I HAVE ADDITIONAL QUESTIONS?
A: If you have additional questions relating to the Destinations
Distribution, you should contact our information agent, Georgeson &
Company Inc., Wall Street Plaza, New York, New York 10005, telephone
number: (800) 223-2064. You may also direct written inquiries to Director
of Investor Relations, ITT Destinations, Inc., 1330 Avenue of the
Americas, New York, New York 10019-5490.
5
<PAGE> 9
THE INFORMATION CONTAINED IN THIS DOCUMENT IS SUBJECT TO COMPLETION AND
CONTEMPLATES SIMULTANEOUS RECORD, DISTRIBUTION AND MAILING DATES. THEREFORE, THE
DESCRIPTION OF THE DISTRIBUTIONS IS AS OF THE TIME IMMEDIATELY FOLLOWING THE
EFFECTIVE TIME OF THE DISTRIBUTIONS UNLESS THE CONTEXT OTHERWISE REQUIRES.
SUMMARY
This summary highlights selected information from this document, and may
not contain all the information that is important to you. To understand the
Destinations Distribution fully, you should read this entire document carefully,
as well as those additional documents referred to in this summary and elsewhere.
See "Where You Can Find More Information" on page 79.
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 that trades under the symbol "IIN" and
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 that trades under the symbol
"HIG" and that operates one of the largest multiline insurance companies in the
United States).
Holders of ITT stock for the five years through 1996 have seen their
investment outperform the Standard & Poor's 500 Index by more than 70% and
increase in aggregate value by approximately $10 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.
Prior to the current separation of its businesses, ITT conducted its hotels
and gaming business through its subsidiaries, Sheraton, Ciga and Caesars,
conducted its telephone directories publishing business through its wholly-owned
subsidiary, ITT World Directories, and conducted its post-secondary technical
education business through its 83.3%-owned subsidiary, ITT Educational.
To carry out the separation of its businesses, ITT placed 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 your 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
you 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 you will receive in the ITT Educational
Distribution.
THE DESTINATIONS DISTRIBUTION (SEE PAGES 13 THROUGH 20)
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. A share of
Company Common Stock automatically includes a right (a "Right") issued under the
Company's Stockholders Rights Plan (the "Rights Plan"). In this document we use
the term "Shares" to mean the Company Common Stock and the Rights together (see
pages 72 to 74 for a description of the Rights Plan).
6
<PAGE> 10
Based on 116,528,691 shares of ITT Common Stock outstanding as of June 30,
1997 and the results of the Stock Tender Offer, approximately 86,528,691 Shares
are being distributed. The Shares being distributed will constitute all of the
outstanding Shares immediately after the Destinations Distribution. Stockholders
will not be required to pay for any Shares or to surrender or exchange shares of
ITT Common Stock to receive the Shares.
After the Distributions, ITT intends to change its name to "ITT Information
Services, Inc." and we intend to change our name to "ITT Corporation." This
document, which describes the Destinations Distribution, uses the terms "we,"
"our" and "us" in reference to the Company and, although the Company is newly
formed, 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 (SEE PAGES 18 TO 20)
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 the Destinations Distribution. Our counsel has delivered an opinion
to us that, for U.S. Federal income tax purposes, ITT will not recognize any
gain or loss with respect to the Destinations Distribution and that the receipt
of Shares by ITT stockholders in the Destinations Distribution will be tax-free.
The opinion is subject to certain factual representations and assumptions. No
ruling has been or will be sought from the Internal Revenue Service concerning
the Federal income tax consequences of the Destinations Distribution.
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 (SEE
PAGES 74 TO 76)
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 of Incorporation 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 (SEE PAGES
71 TO 78)
Certain provisions of our Articles and By-laws may provide the Company's
Board of Directors (our "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 our Board, (ii) the
classification of our 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.
Our 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 our Board more difficult. See "Rights Plan."
DIVIDEND POLICY OF THE COMPANY
(SEE PAGE 20)
After the Destinations Distribution, the Company does not intend to pay
cash dividends on
7
<PAGE> 11
Company Common Stock for the foreseeable
future. Whether we pay cash dividends (and the amount of any such dividends)
will be at the discretion of our Board. We expect that we will be restricted
from paying cash dividends by the terms of our 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 us at such time and our operating results and
financial requirements.
LISTING OF THE COMPANY COMMON STOCK
(SEE PAGE 20)
The Company Common Stock has been approved for listing on The New York
Stock Exchange, Inc. (the "NYSE"), subject to official notice of issuance, under
the symbol "ITT." On the first NYSE trading day following the distribution date
for the Destinations Distribution, "regular way" trading in Company Common Stock
on the NYSE will begin. After the Destinations Distribution, ITT Common Stock
will continue to be listed on the NYSE, but under the symbol " ."
COMPREHENSIVE PLAN (SEE PAGES 14 TO 16)
The Destinations Distribution is an element of the Comprehensive Plan
approved by the Board of Directors of ITT. 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, your 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 30 million shares, or approximately 25.7% of all the outstanding shares, of
ITT Common Stock, at a price of $70.00 per share, net to the seller in cash. The
Stock Tender Offer will be consummated several days prior to the Distributions
to give the depositary for the Stock Tender Offer time to prorate and return
excess shares.
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. 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, ITT plans to commence the Debt
Tender Offer to purchase all the publicly held debt securities of
ITT Corporation and to repay certain other indebtedness.
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, sold a 39.8% interest in Madison Square Garden and
contracted through "put" and "call" options to sell its remaining 10.2% interest
at guaranteed amounts and, with its partner, Dow Jones, entered into an
agreement to sell television station WBIS+. The closing of the sale of ITT's
interest in WBIS+
8
<PAGE> 12
is subject to regulatory approval, and is expected to occur in the fourth
quarter of 1997.
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 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 55 franchise agreements and management contracts in 15 countries,
totalling more than 15,000 rooms. 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. 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. ITT is also holding The
Desert Inn in Las Vegas, Nevada, 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 (SEE PAGE 16)
At the July 15, 1997 meeting, the Board of Directors of ITT approved a
definitive agreement for a substantial minority investment in ITT ISI, which
will hold the telephone directories publishing business following the
Distributions, by an entity affiliated with Clayton, Dubilier & Rice, Inc.
("CD&R"). Following the Distributions, a CD&R affiliate 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 CD&R to buy
common stock of ITT ISI at a 50% premium to CD&R'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. 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. 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 Board of Directors of ITT
approved the purchase by ITT for $254 million of BellSouth Corporation's
minority interest in ITT World Directories, which
9
<PAGE> 13
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 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 (SEE PAGES 16 TO 17 AND 28 TO 30)
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 $1.265 billion of proceeds from securities issued by and
borrowings under new bank credit facilities for ITT ISI and certain of its
subsidiaries and $3.3 billion in cash received from us in connection with the
First and Second Payments. We will finance the First and Second Payments and
certain other expenses with borrowings under our own new bank credit facility.
After the Destinations Distribution, we will be responsible for approximately
$4.2 billion of outstanding indebtedness and ITT ISI will be responsible for
approximately $1.265 billion of outstanding indebtedness. ITT has received a
letter from The Chase Manhattan Bank and Chase Securities Inc. stating that they
are highly confident that they will be able to arrange the Credit Facilities for
the Company and ITT ISI in amounts sufficient to consummate the Tender Offers
and the other elements of the Comprehensive Plan.
We and ITT ISI both plan to put in place permanent debt financing
concurrently with or after the Distributions, which will involve the issuance of
debt securities and the use of the proceeds to repay indebtedness under the
Credit Facilities referred to above.
OUR RELATIONSHIP WITH ITT AFTER THE DESTINATIONS DISTRIBUTION (SEE PAGES 51 TO
53)
Following the Destinations Distribution, we will be an independent public
company and ITT will have no continuing stock ownership interest in us. We will
enter into agreements with ITT governing our relationship after the Destinations
Distribution. We will also have an agreement with ITT for the allocation of tax
and other liabilities and obligations. We will indemnify ITT against
liabilities, litigation and claims arising out of our businesses following the
Destinations Distribution and ITT will indemnify us against liabilities,
litigation and claims arising out of ITT's other businesses following the
Destinations Distribution. We and ITT will have no common officers following the
Destinations Distribution.
Our board of directors will consist of all eleven persons who are currently
directors of ITT. Some 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 us
with the Securities and Exchange Commission (as well as information included in
oral statements or other written statements made or to be made by us) contain
statements which constitute "forward looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. 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 industries,
global, domestic and local economic conditions, additional capital requirements,
new or intensified competition, vola-
10
<PAGE> 14
tility 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, 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 in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
We have no obligation to publicly release any revision to any forward
looking statement contained or incorporated herein to reflect any future events
or occurrences.
11
<PAGE> 15
ITT DESTINATIONS, INC.
SUMMARY FINANCIAL INFORMATION
The following table summarizes certain selected consolidated financial data
which has been derived from our audited consolidated financial statements as of
and for the three years ended December 31, 1996 and our unaudited consolidated
financial statements as of and for the two years ended December 31, 1993 and for
the three months ended March 31, 1997 and 1996 and as of March 31, 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>
THREE MONTHS
ENDED
MARCH 31, 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...................... $1,333 $1,290 $5,718 $5,396 $3,876 $3,184 $3,109
Income (loss) from continuing
operations before accounting
changes(1).................. $ 85 $ 24 $ 183 $ 117 $ 44 $ (38) $ (68)
Earnings (loss) per share from
continuing operations before
accounting changes(1)....... $ .72 $ .20 $ 1.55 $ .98 $ .37 $ (.32) $ (.58)
OPERATING DATA:
Operating income (loss)....... $ 17 $ 87 $ 499 $ 394 $ 139 $ (35) $ (84)
EBITDA(2)..................... $ 85 $ 143 $ 746 $ 617 $ 245 $ 58 $ (19)
Cash from continuing operating
activities.................. $ 28 $ 43 $ 377 $ 400 $ 164 $ 67 $ 10
Number of employees (in
thousands).................. 33 33 33 34 21 14 14
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, --------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $8,711 $8,922 $8,225 $4,873 $3,629 $3,131
Long-term debt, including
allocated debt and capital
leases......................... $2,556 $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 $32 and $0.27, respectively, compared with $17
and $.15 in 1996, respectively. These comparable year-over-year results
represent increases of 88% and 80% 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 $58 pre-tax charge in
connection with the restructuring of the Company's World Headquarters
operations and (iii) a $20 pre-tax charge for costs associated with the
Hilton Offer.
(2) EBITDA 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 (as determined in accordance with generally accepted
accounting principles) or to cash flows from operating activities (as
determined on the Cash Flow Statement in our Financial Statements contained
herein). EBITDA was computed above as earnings before interest, taxes,
depreciation and amortization.
12
<PAGE> 16
ITT DESTINATIONS, INC. SIX MONTHS RESULTS
On July 16, 1997, ITT released its unaudited operating results for the six
months ended June 30, 1997. The following table summarizes such unaudited
results, and has been 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).
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1997 1996
------- -------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
Revenues......................................................... $ 2,815 $ 2,741
Income from continuing operations (1)............................ $ 263 $ 91
Earnings per share from continuing operations (1)................ $ 2.23 $ 0.76
</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 $102 and $0.86,
respectively, compared with $85 and $0.72, respectively, for the first six
months of 1996. These comparable year-over-year results represent increases
of 20% and 19% 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 unsolicited tender offer by Hilton.
13
<PAGE> 17
THE DESTINATIONS DISTRIBUTION
GENERAL
The Board of Directors of ITT 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, you will receive one Share of Company Common Stock
for each share of ITT Common Stock held on the Record Date. You will not be
required to pay for Shares received in the Destinations Distribution, or to
surrender or exchange shares of ITT Common Stock in order to receive Shares. You
will not vote on the Destinations Distribution, and you have no appraisal rights
in connection with the Destinations Distribution.
After the Destinations Distribution, we will be an independent public
company. The number and identity of our 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, we expect to have approximately 56,000
holders of record of Shares and approximately 86,528,691 Shares outstanding,
based on the number of record stockholders and outstanding shares of ITT Common
Stock on the Record Date and 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 we intend to change our name to "ITT Corporation."
MANNER OF EFFECTING THE DESTINATIONS DISTRIBUTION
ITT has delivered all outstanding Shares to The Bank of New York, our
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 to ITT stockholders of record on the Record Date. You will receive one
share of Company Common Stock for each share of ITT Common Stock held on the
Record Date.
Our 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 in the Destinations Distribution,
you must be a stockholder of ITT at the close of business on the Record Date,
which is , 1997.
If you have questions relating to the Destinations Distribution, you should
contact Georgeson & Company Inc., Wall Street Plaza, New York, New York 10005,
telephone number: (800) 223-2064. You may also direct written inquiries to our
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 in the Destinations Distribution solely to provide
information to them concerning 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 our securities or those of ITT. We believe 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 we will not update the information except
in the normal course of our public disclosure practices.
14
<PAGE> 18
REASONS FOR THE DESTINATIONS DISTRIBUTION
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. 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 market understanding and valuations of these businesses. In approving
the Comprehensive Plan, the Board also took account of the tax-free nature of
spin-offs and the Company'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 (as defined herein)) 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.
The ITT Board of Directors' reasons for adopting the Comprehensive Plan are
set forth in more detail in the Solicitation/Recommendation Statement on
Schedule 14D-9 and amendments thereto filed with the Securities and Exchange
Commission (the "Commission") by ITT with respect to Hilton's tender offer for
ITT Common Stock.
OTHER TRANSACTIONS
COMPREHENSIVE PLAN
The Destinations Distribution is an element of the Comprehensive Plan
approved by the Board of Directors of ITT. 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 ITT Educational Common Stock,
which represent 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, your 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 $70.00 per share, net to the seller
in cash. The Stock Tender Offer will expire at 12:00 midnight, New York City
time, on Wednesday, August 13, 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. The
proration period also expires on the expiration date of the Stock Tender Offer.
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.
15
<PAGE> 19
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 receipt of financing on acceptable terms, satisfaction of
all conditions to consummation of the Destinations Distribution (other than in
respect of the Stock Tender Offer) and 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
Distributions on substantially the terms described herein. 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 ITT's Board of
Directors.
The Stock Tender Offer is being made pursuant to an Offer to Purchase dated
as of July 17, 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 (the
"Schedule 13E-4"). The foregoing summary of the Stock Tender Offer is not
intended to be complete and is qualified in its entirety by reference to the
Schedule 13E-4 and the exhibits and amendments thereto.
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. 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, ITT plans to commence the Debt Tender Offer to purchase
all the publicly held debt securities of ITT Corporation and to repay certain
other indebtedness.
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, sold a 39.8% interest in Madison Square Garden and
contracted through "put" and "call" options to sell its remaining 10.2% interest
at guaranteed amounts and, with its partner, Dow Jones, entered into an
agreement to sell television station WBIS+. 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.
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
severence 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 55 franchise agreements and management contracts in 15 different
countries, totalling more than 15,000 rooms. 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
16
<PAGE> 20
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. 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. ITT is also holding The
Desert Inn in Las Vegas, Nevada, 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 the July 15, 1997 meeting, the Board of Directors of ITT approved a
definitive agreement for the Strategic Investment in ITT ISI, which will hold
the telephone directories publishing business following the Distributions, by an
entity affiliated with Clayton, Dubilier & Rice, Inc. ("CD&R"). In the Strategic
Investment, a CD&R affiliate 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 CD&R to buy common stock of ITT ISI at a 50% premium
to CD&R'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. 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. 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 Board of Directors of ITT
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 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 approximately
$1.265 billion of proceeds from securities issued by and borrowings under new
bank credit facilities for ITT ISI and certain of its subsidiaries and $3.3
billion in cash received from us in connection with the First and Second
Payments. We plan to finance the First and Second Payments and certain other
expenses with borrowings under our own bank credit facility. After the
Destinations Distribution, we will be responsible for approximately $4.2 billion
of outstanding indebtedness and ITT ISI will be responsible for approximately
$1.265 billion of outstanding indebtedness. ITT has received a letter from The
Chase Manhattan Bank stating that it is highly confident that it will be able to
arrange the Credit Facilities for the Company and ITT ISI in amounts sufficient
to consummate the Tender Offers and the other elements of the Comprehensive
Plan.
17
<PAGE> 21
ITT currently plans to commence shortly the Debt Tender Offer for all the
publicly held debt securities of ITT Corporation, constituting a total of
approximately $2.0 billion of indebtedness. In conjunction with the Debt Tender
Offer, ITT also plans to repay certain other indebtedness. The terms of the Debt
Tender Offer will be set forth in an Offer to Purchase and a related Letter of
Transmittal which will be mailed to all registered holders of ITT's publicly
held debt securities. The Debt Tender Offer will be conditioned upon, among
other things, receipt of financing on acceptable terms, satisfaction of all
preconditions to consummation of the Destinations Distribution (other than in
respect of the Tender Offers) and ITT being satisfied, in its reasonable
discretion, that there exists no significant impediment, or material likelihood
of a significant impediment, to the timely consummation of the Distributions
substantially on the terms described herein.
INDEBTEDNESS OF THE COMPANY AFTER THE TRANSACTIONS
We and ITT ISI both plan to put in place permanent debt financing
concurrently with or after the Destinations Distribution, which will involve the
issuance of debt securities and the use of the proceeds to repay indebtedness
under the credit facilities referred to above. The Company also plans to use the
proceeds of future sales of assets primarily to reduce indebtedness.
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
stockholders' equity. As of March 31, 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 $5.1
billion of outstanding indebtedness (representing approximately 72% of its total
capitalization).
Our high degree of leverage could have important consequences for
stockholders, including the following: (i) our ability to obtain additional
financing on favorable terms may be impaired in the future; (ii) a substantial
portion of our cash flow from operations will be dedicated to the payment of
principal and interest on our indebtedness, thereby reducing the funds available
for other purposes; (iii) covenants contained in the Credit Facilities or other
financing agreements may restrict our ability to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in other corporate activities; (iv) we may be more leveraged than some of
our competitors, which may place us at a competitive disadvantage; and (v) our
substantial degree of leverage may hinder our ability to adjust rapidly to
changing market conditions and could make us more vulnerable in the event of a
downturn in general economic conditions or in our business.
Our ability to make scheduled payments or to refinance our obligations with
respect to our indebtedness will depend on our financial and operating
performance, which, in turn, is subject to prevailing economic conditions and to
certain financial, business and other factors beyond our control. If our cash
flow and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay planned expansion and capital
expenditures, sell assets, obtain additional equity capital or restructure our
debt. In addition, certain states' laws contain restrictions on the ability of
companies engaged in the gaming business to undertake certain financing
transactions. Such restrictions may prevent us from obtaining necessary capital
in a timely manner. Although our management believes that the Company's cash
flow will be adequate to meet interest and principal payments, they cannot
assure you that the Company's operating results, cash flow and capital resources
will be sufficient for payment of its indebtedness in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CERTAIN EFFECTS OF THE DESTINATIONS DISTRIBUTION
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 Purchase dated January 31,
1997 (the "Hilton Offer
18
<PAGE> 22
to Purchase"). Hilton has stated that, if the Hilton Offer succeeds, it intends
to consummate a merger (the "Proposed Squeeze Out Merger" and, together with the
Hilton Offer, the "Hilton Transaction") 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.
ITT's Board of Directors 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 Board of Directors of ITT took
account of the possibility that the transactions contemplated by the
Comprehensive Plan could adversely affect the Hilton Offer. 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. ITT is unable to predict whether
Hilton would commence efforts to acquire the Company after the Destinations
Distribution. Certain provisions of our Articles and our By-laws, the Rights
Plan and certain provisions of 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 our Board. In addition, it is possible that certain
terms of the Credit Facilities for the Company may make more expensive, and may
impede, consummation of the Hilton Offer and might deter certain other persons
from attempting, through tender or exchange offers or by other means, to gain
control of the Company, particularly persons who would finance a takeover of the
Company with the 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 "Description of Capital Stock -- Rights Plan," "-- Nevada
General Corporation Law" and "-- Provisions of the Articles of Incorporation and
By-laws Affecting a Change in Control."
See "Federal Income Tax Consequences of the Destinations Distribution"
below for a discussion of the Federal income tax consequences of an acquisition
of the Company.
FEDERAL INCOME TAX CONSEQUENCES OF THE DESTINATIONS DISTRIBUTION
We have received an opinion of Cravath, Swaine & Moore, counsel to ITT,
that for Federal income tax purposes:
1. ITT's contribution of assets to us prior to the Destinations
Distribution (the "Contribution") will qualify as a tax-free
"reorganization" under Section 368(a)(1)(D) of the Internal Revenue Code of
1986, as amended (the "Code").
2. The Destinations Distribution will qualify as a tax-free spin-off
under Section 355 of the Code.
3. No gain or loss will be recognized by ITT as a result of the
Contribution or the Destinations Distribution.
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 in the
Destinations Distribution.
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
19
<PAGE> 23
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 received in the
Destinations Distribution will include the holding period of the ITT Common
Stock with respect to which Company Common Stock was distributed, provided
that such ITT Common Stock was held as a capital asset on the Distribution
Date.
This opinion of counsel is based on current law and is subject to certain
assumptions and the accuracy of certain factual representations made by ITT, ITT
Educational and us, 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 "Our Relationship With ITT
after the Destinations Distribution -- Distribution Agreement." We will not seek
a ruling from the Internal Revenue Service ("IRS") with respect to the Federal
income tax consequences of the Destinations Distribution, 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 us in connection with the
Contribution over ITT's adjusted tax basis in such assets.
If the Destinations Distribution were not to qualify under Section 355 of
the Code, then (i) ITT would not recognize any loss realized on the Destinations
Distribution, but would recognize capital gain equal to the excess, if any, of
(x) the fair market value of Company Common Stock on the Distribution Date over
(y) its adjusted tax basis in Company Common Stock and (ii) each holder of ITT
Common Stock who receives shares of Company Common Stock in the Destinations
Distribution would be treated as receiving a taxable distribution in an amount
equal to the fair market value of such shares of Company Common Stock on the
Distribution Date, taxed first as a dividend to the extent of such 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 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 our respective representations made to
Cravath, Swaine & Moore in connection with its opinion.
Under current law, if the IRS were to integrate the Destinations
Distribution and a third party acquisition of the stock of either ITT or the
Company, the Destinations Distribution would result in corporate level gain for
ITT, and the ITT stockholders' receipt of shares of Company 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, proposed legislation recently passed by the House of
Representatives and the Senate (the "Proposed 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 Destinations Distribution, the Company and/or
ITT Educational would recognize taxable gain determined as if ITT had sold its
assets for fair market value immediately after the Destinations Distribution.
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 Proposed Legislation, any acquisition of 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
20
<PAGE> 24
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 and the Proposed Legislation, an acquisition of either
ITT or the Company by Hilton should not adversely affect the tax-free status of
the Destinations Distribution. This opinion is based on an interpretation of tax
laws and the current provisions of pending legislation, rather than on binding
precedent, and accordingly is not free from doubt and may not cover any
additional legislative proposals. None of ITT, ITT Educational or the Company is
obligated to indemnify any holder of ITT Common Stock who receives Shares in the
Destinations Distribution for any tax liabilities.
If the Destinations Distribution occurred and it were not to qualify under
Section 355 of the Code, the resulting tax liability would have a material
adverse effect on the financial position, results of operations and cash flows
of each of ITT and the Company. We estimate that the aggregate shared tax
liability in this regard of ITT, ITT Educational and the Company would be
approximately $1.4 billion, without regard to the effects of any agreements
between the parties. In addition, we estimate that the aggregate tax liability
to ITT's stockholders (after considering an assumed portion of tax-exempt
stockholders) would be approximately $1.4 billion.
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 (a) 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
(b) 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 we 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 us, as applicable, with respect to the
payment of backup withholding. A holder who does not provide ITT or us 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 Destinations Distribution qualifies
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 Shares in connection with the Destinations Distribution.
This discussion of the anticipated Federal income tax consequences of the
Destinations Distribution is for general information only. YOU SHOULD CONSULT
YOUR 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 Common Stock is expected to be approved for listing on the
NYSE, subject to official notice of issuance, 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.
Of course, we 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 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 our businesses
generally, (iii) our dividend policy, (iv) investor perception of our business
and the hotel and gaming industries generally and (v) general economic and
market conditions. In the short term, our stock price may also be impacted by
developments in Hilton's efforts to acquire ITT.
21
<PAGE> 25
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 you receive in the Destinations Distribution will be freely
transferable, unless you may be 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 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 Company Common Stock for the foreseeable future. Whether we
pay cash dividends (and the amount of any such dividends) will be at the
discretion of our Board. We expect that Credit Facilities for the Company and
other debt instruments of the Company will limit our ability to declare and pay
dividends on our stock, as well as our ability to distribute, liquidate,
purchase or acquire our 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 us at such time and our operating results and financial
requirements.
22
<PAGE> 26
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 1997 on a historical basis, which reflects 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), and as adjusted to give effect to the
Tender Offers and expected related borrowings by the Company and the
Distributions. The following data is qualified in its entirety by our financial
statements and other information contained elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, 1997 AFTER
ACTUAL DISTRIBUTIONS(A)
-------------- ----------------
(IN MILLIONS)
<S> <C> <C>
Notes payable and current maturities of long-term debt......... $ 494 $ 494
Allocated debt of ITT(b)....................................... 1,799 --
Other long-term debt(b)........................................ 757 4,656
Minority Interest.............................................. 194 194
Common Stock................................................... 2,899 1
Additional paid in capital..................................... -- 1,874
Cumulative translation adjustment.............................. (79) (79)
Retained earnings.............................................. 321 --
------ ------
Total Capitalization...................................... $6,385 $7,140
====== ======
</TABLE>
- ---------------
(a) Column gives effect to the (i) Distributions by treating ITT World
Directories and ITT Educational (book value of $(817) million and $62
million, respectively) as if, for financial reporting purposes, such
corporations were spun-off from the Company and (ii) the purchase of 30
million shares of ITT Common Stock for $70.00 per share pursuant to the
Stock Tender Offer which will be financed with new indebtedness. See "The
Destinations Distribution -- Other Transactions," "-- Certain Indebtedness"
and "-- Indebtedness of the Company After the Transactions."
(b) ITT has historically incurred indebtedness for its consolidated group
generally at the parent level rather than at the operating company level. In
connection with the Distributions, a portion of the indebtedness incurred by
ITT has been allocated to its hotels and gaming business, which will be held
by the Company. In connection with the Destinations Distribution, this
allocated indebtedness will be replaced by indebtedness incurred by the
Company.
23
<PAGE> 27
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 our audited consolidated financial
statements as of and for the three years ended December 31, 1996, and our
unaudited consolidated financial statements as of and for the two years ended
December 31, 1993 and for the three months ended March 31, 1997 and 1996 and as
of March 31, 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 our Consolidated
Financial Statements and related Notes thereto appearing elsewhere in this
Information Statement.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, 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............................... $1,333 $1,290 $5,718 $5,396 $3,876 $3,184 $3,109
Income (loss) from continuing
operations before accounting
changes(1)........................... $ 85 $ 24 $ 183 $ 117 $ 44 $ (38) $ (68)
Earnings (loss) per share from
continuing operations before
accounting changes(1)................ $ .72 $ .20 $ 1.55 $ .98 $ .37 $ (.32) $ (.58)
OPERATING DATA:
Operating income (loss)................ $ 17 $ 87 $ 499 $ 394 $ 139 $ (35) $ (84)
EBITDA(2).............................. $ 85 $ 143 $ 746 $ 617 $ 245 $ 58 $ (19)
Cash from continuing operating
activities........................... $ 28 $ 43 $ 377 $ 400 $ 164 $ 67 $ 10
Number of Employees (in thousands)..... 33 33 33 34 21 14 14
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $8,711 $8,922 $8,225 $4,873 $3,629 $3,131
Long-term debt, including allocated debt
and capital leases....................... $2,556 $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 $32 and $0.27, respectively, compared with $17
and $.15 in 1996, respectively. These comparable year-over-year results
represent increases of 88% and 80% 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 $58 pre-tax charge in
connection with the restructuring of the Company's World Headquarters
operations and (iii) a $20 pre-tax charge for costs associated with the
Hilton Offer.
(2) EBITDA 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 (as determined in accordance with generally accepted
accounting principles) or to cash flows from operating activities (as
determined on the Cash Flow Statement in our Financial Statements contained
herein). EBITDA was computed above as earnings before interest, taxes,
depreciation and amortization.
24
<PAGE> 28
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.
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").
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1996
Revenues of $1,333 in the 1997 first quarter increased 3% compared with
$1,290 in the corresponding 1996 quarter. Hotels revenues, which increased 8%
due to strong average daily rate gains, were the primary driver of this
improvement. Gaming revenues decreased 10% due primarily to adverse results at
The Desert Inn in Las Vegas, Nevada and The Sheraton Casino in Tunica,
Mississippi, the two gaming properties planned for disposition. Excluding the
results at these two properties, Gaming revenues were approximately unchanged.
Salaries, benefits and other operating costs increased 5% in the quarter to
$1,026 from $978 in the 1996 quarter. This increase primarily reflects the costs
of acquired hotel properties and smaller increases in the cost of services.
Selling, general and administrative expenses increased 31% to $222 in the
1997 quarter compared with $169 in the 1996 quarter. Included in the 1997
quarter is a charge of $58 for severance and other costs to streamline our World
Headquarters operations. Excluding the impact of this restructuring charge,
selling, general and administrative expenses declined 3% compared with the prior
period.
Excluding the restructuring charge and results of the two Gaming properties
held for sale, our earnings before interest, taxes, depreciation and
amortization ("EBITDA") were $166 in the 1997 quarter compared with $139 in the
1996 quarter, a 19% improvement. This improvement reflects significant increases
in average room rates, particularly in owned and leased properties and the
benefits from hotel acquisitions. Depreciation and amortization increased 21%
compared with the prior period due primarily to the impact of various hotel
acquisitions discussed above. Operating income increased 18% when excluding the
impact of the restructuring charge and assets held for sale.
Net interest expense decreased significantly in the 1997 first quarter
compared with the 1996 first quarter. 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) as well as slightly lower overall interest rates.
Miscellaneous expense reflects $20 for costs associated with the Hilton
Offer. We also recorded a pre-tax gain of $183 related to the sale of our
remaining interest in the capital stock of Alcatel Alsthom.
Income tax expense increased in the 1997 quarter on higher pretax earnings
due to improved operations and the sale of our 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).
25
<PAGE> 29
BUSINESS SEGMENTS
Revenues, EBITDA and operating income, excluding the effect of assets held
for sale, for each of our two major business segments were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$1,042 $117 $72 ............Hotels............ $966 $ 90 $56
</TABLE>
Hotels 1997 first quarter generated EBITDA of $117, a 30% increase over
EBITDA of $90 in the 1996 quarter. Owned hotels continued to be the primary
driver of this improved performance, with EBITDA increasing to $83 in the
quarter from $67 a year ago. The EBITDA margin at these properties was 25% for
the quarter compared with 22% in the 1996 quarter. In North America, the average
daily rate at owned hotels increased 11%, to $172, and revenue per available
room ("REVPAR") rose 11%, to $124. Worldwide owned hotels achieved average daily
rate increases of 11%, to $156, while REVPAR increased 9%, to $110. Management
continues to aggressively pursue profitable expansion opportunities while
seeking cost saving initiatives in each of its market segments.
At March 31, 1997, Hotel properties included 67 properties (16%) which were
owned or leased, 144 properties (34%) which were managed under long-term
agreements and 210 properties (50%) which were franchised, totaling over 130,000
rooms worldwide. Five owned hotels were sold to FelCor on June 30, 1997 for
gross proceeds of $200. We will continue to manage each of the properties for a
twenty-year period, subject to a limited change of control provision.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 THREE MONTHS ENDED MARCH 31, 1996
- --------------------------------- ---------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
$263 $ 65 $47 ............Gaming............ $265 $ 71 $53
</TABLE>
Gaming's 1997 first quarter results, excluding assets held for sale,
reflect EBITDA of $65 compared with $71 in the 1996 quarter. This decline is
primarily related to the significant construction activity at Caesars Palace in
Las Vegas, Nevada, which is expected to be completed by year-end. Caesars
Atlantic City in Atlantic City, New Jersey, continued to post impressive results
with a 14% EBITDA increase, despite construction disruptions and a soft local
gaming market.
We currently have 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
At the two Gaming properties planned for disposition, The Desert Inn
experienced a $22 EBITDA loss, due to a negative win percentage in baccarat and
construction disruption, and The Sheraton Casino posted 1997 first quarter
EBITDA of $3 compared with $6 in the 1996 quarter as a result of the continued
effects of increased local competition.
During February and March 1997, we sold our 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 April 10, 1997, we
received the remaining balance of $533 from these sales.
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
26
<PAGE> 30
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, we
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 our 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 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 our
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 we would have incurred if we 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>
27
<PAGE> 31
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, we continued to
expand and enhance our image among world travelers through targeted renovations,
upgrading standards and strategic acquisitions.
During 1996, we 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. We 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 us more than 5,500 rooms
in China and make us one of the largest up-scale international hotel managers
and investors in the Asia Pacific region.
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 $ 168
</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.
We currently have 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."
28
<PAGE> 32
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, we embarked on a
company-wide cost rationalization program aimed at reducing administrative
costs. In June 1995, we announced the closing of the Caesars headquarters in Los
Angeles; in September 1995, we 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, we recorded charges
associated with the consolidation of certain administrative and other functions
in the Gaming segment of $6 pre-tax.
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 us 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 we would have
incurred if we 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.
Income from continuing operations was $117 in 1995, compared with $44 in
1994.
29
<PAGE> 33
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 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.
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 expects to arrange the Credit Facilities to provide borrowings to
Destinations and borrowings and proceeds from debt securities issuances of ITT
ISI and its subsidiaries necessary to consummate the Tender Offers and the
repayment of certain other indebtedness and to provide working capital to each
company following the Distributions. ITT has received a letter from The Chase
Manhattan Bank and Chase Securities Inc. stating that they are highly confident
that they will be able to arrange the Credit Facilities for the Company and ITT
ISI and its subsidiaries in amounts sufficient to consummate the Tender Offers
and other elements of the Comprehensive Plan.
We and ITT ISI both plan to put in place permanent debt financing
concurrently with or after the Destinations Distribution, which will involve the
issuance of debt securities and the use of the proceeds to repay indebtedness
under the Credit Facilities. We also plan to use the proceeds of future sales of
assets primarily to reduce indebtedness.
Cash flows are expected to be sufficient to service our indebtedness,
satisfy tax obligations and fund maintenance capital expenditures and other
liquidity needs. Additional liquidity needs are expected to be funded through
traditional debt or equity financing, asset sales or any combination thereof.
Cash from operating activities, as defined by SFAS No. 95, "Statement of Cash
Flows," was strong in both the first
30
<PAGE> 34
quarter of 1997 and 1996. The SFAS definition of cash from operating activities
differs from EBITDA largely due to the inclusion of interest, income taxes and
changes in working capital.
Upon the consummation of the Distributions and the Tender Offers, the
Company will be more leveraged than ITT was prior to the consummation of the
Distributions and will have indebtedness that is substantial in relation to
stockholders' equity. As of June 30, 1997, on a pro forma basis after giving
effect to the Distributions and the Tender Offers, the Company and its
consolidated subsidiaries would have had an aggregate of $4.2 billion of
outstanding indebtedness (representing approximately 63% of its total
capitalization).
Our high degree of leverage could have important consequences for
stockholders, including the following: (i) our ability to obtain additional
financing on favorable terms may be impaired in the future; (ii) a substantial
portion of our cash flow from operations will be dedicated to the payment of
principal and interest on our indebtedness, thereby reducing the funds available
for other purposes; (iii) covenants contained in the Credit Facilities or other
financing agreements may restrict our ability to dispose of assets, incur
additional indebtedness, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, make investments or
acquisitions, engage in mergers or consolidations, make capital expenditures, or
engage in other corporate activities; (iv) the Company may be more leveraged
than some of our competitors, which may place us at a competitive disadvantage;
and (v) our substantial degree of leverage may hinder our ability to adjust
rapidly to changing market conditions and could make us more vulnerable in the
event of a downturn in general economic conditions or in our business. See "The
Destinations Distribution -- Certain Indebtedness" and "-- Indebtedness of the
Company after the Transactions."
Our ability to make scheduled payments or to refinance our obligations with
respect to our indebtedness will depend on our financial and operating
performance, which, in turn, is subject to prevailing economic conditions and to
certain financial, business and other factors beyond our control. If our cash
flow and capital resources are insufficient to fund our debt service
obligations, we may be forced to reduce or delay planned expansion and capital
expenditures, sell assets, obtain additional equity capital or restructure our
debt. In addition, certain states' laws contain restrictions on the ability of
companies engaged in the gaming business to undertake certain financing
transactions. Such restrictions may prevent us from obtaining necessary capital
in a timely manner. Although our management believes that our cash flow will be
adequate to meet our interest and principal payments, they cannot assure you
that our operating results, cash flow and capital resources will be sufficient
for payment of its indebtedness in the future.
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 Systems
Corporation ("Cablevision") and ITT in Madison Square Garden L.P. ("MSG"). 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 MSG to Cablevision for $650 plus the
assumption of approximately $115 of indebtedness. At such closing, MSG redeemed
a portion of ITT's interest in MSG, such that after such redemption ITT owned an
11.5% limited partnership interest in MSG, for $493.5, and the general partner
of MSG 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 MSG,
which diluted ITT's limited partnership interest in MSG 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 MSG to redeem) half of the Company's
continuing interest in MSG 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
31
<PAGE> 35
$150) on June 17, 1999. On June 17, 2000, Cablevision has the right to purchase
(or cause MSG to redeem) the Company's remaining interest in MSG 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 MSG to redeem) the Company's remaining interest
in MSG 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 MSG
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 MSG will be increased to reflect a capital contribution
to MSG 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 Communications Corporation
("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 MSG and the sale of five hotels to FelCor,
aggregating approximately $1,530, for general corporate purposes, including
repayment of indebtedness.
We have entered into an agreement in principle to form a joint venture with
Planet Hollywood International, Inc. ("Planet Hollywood") to develop, own and
operate "Planet Hollywood" themed hotel/casinos. We expect 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.
On June 27, 1996, we announced a capital expenditure program to upgrade and
expand our 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. We are 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, we have announced that we will
construct 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. We plan 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.
These capital expenditures, and the timing of these capital expenditures, are
dependent upon many factors, including business conditions during the
construction period. Major construction projects, such as the program described
above, entail significant risks, including shortages of skilled labor or
materials, unforeseen environmental, engineering or geological problems, work
stoppages and weather interference, all of which could result in unanticipated
cost increases and delays.
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.
32
<PAGE> 36
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 expects to construct 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 (the "1995 Spin-off Date"), 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, ITT Sheraton Corporation, a
Delaware corporation ("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 Destinations will form ("New
Sheraton"). Following the Destinations Distribution, New Sheraton will be
responsible for the operation of our hotel business.
BUSINESS DEVELOPMENTS
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 has stated that, if the Hilton
Offer succeeds, it intends 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.
33
<PAGE> 37
At a meeting held on February 11, 1997, the Board of Directors of ITT
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 Board of Directors reassessed the Hilton Transaction in light of
developments since February 11, including the Comprehensive Plan, and
unanimously reaffirmed its conclusion that the Hilton Transaction, including the
Hilton Offer, is inadequate and not in the best interests of ITT. Accordingly,
ITT's Board of Directors 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 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 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 pursuit of
transactions that are expected to enhance the profitability, return on assets or
cash flows of that business.
As part of its focus on its core business, ITT sold its interest in Alcatel
Alsthom, sold a 39.8% interest in Madison Square Garden and contracted through
"put" and "call" options to sell its remaining 10.2% interest at guaranteed
amounts and, with its partner, Dow Jones, entered into an agreement to sell
television station WBIS+. 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.
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. 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.
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 55 franchise agreements and
management contracts in 15 different countries, totalling more than 15,000
rooms. 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.
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. 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. ITT is holding The Desert
Inn in Las Vegas, Nevada, 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.
34
<PAGE> 38
BUSINESS SEGMENTS
The Company has two business segments, Hotels and Gaming. 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 included elsewhere in this Information Statement,
for information concerning the Company's business segments.
HOTEL OPERATIONS
Our 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. We also earn 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.
The table below sets forth as a percentage the sources of revenues of our
hotel operations.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995(4)
-------------- ------------- ----------------
<S> <C> <C> <C>
Owned or Leased Hotels.............................. 31% 33% 31%
Managed and Joint Venture Hotels(1)................. 66 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, the number
of properties, available room nights, average daily occupancy rate and average
daily room rate as of March 31, 1997, December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995(3)
-------------- ------------- ----------------
<S> <C> <C> <C>
Number of properties at period end.................. 67 68 68
Available room nights............................... 1,812,767 8,342,463 7,929,098
Average daily occupancy rate(1)..................... 71% 71% 71%
Average daily rate(2)............................... $156 $150 $135
</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) Certain hotel property results for 1995 have been reclassified for an
appropriate comparison with 1996.
35
<PAGE> 39
The hotel properties that we own and lease are, in many cases, subject to
mortgage and lease indebtedness. As of March 31, 1997, the aggregate mortgage
and lease indebtedness of such hotels was approximately $575 million. With
respect to our leased properties, one of our 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 our subsidiaries is responsible for repairs,
maintenance, operating expenses and lease rentals and retains managerial
discretion over operations. Generally, we pay 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, we paid aggregate
rentals, including rentals attributable to the leased properties, of $19 million
and $22 million, respectively, and during the quarters ended March 31, 1997 and
March 31, 1996, we paid aggregate rentals, including rentals attributable to
leased properties, of $5 million and $4 million, respectively.
During 1996, we acquired three hotel properties: The Regent Hotel, Fiji,
The Sheraton Fiji (which was previously managed by us), and The Park Lane Hotel,
London. The aggregate purchase price for these hotels was approximately $135
million. We 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, we also acquired the Sheraton Skyline
Hotel (in London, England) and the Sheraton Cancun (in Cancun, Mexico). These
hotels are expected to further enhance our geographic balance of owned hotels.
On June 30, 1997, we sold to FelCor five Sheraton hotels for $200 million
in cash. As part of that transaction, we retained a 20-year contract to manage
these hotels, subject to a limited change of control provision. See "-- Managed
and Joint Venture Hotels" below. We are also conducting detailed reviews of our
options with regard to our interest in Ciga and certain luxury and other hotels.
Further, we are, and expect 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, we 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 we manage, usually under long-term agreements with the
owner, a number of hotels throughout the world. The following table sets forth
the number of properties, available room nights, average daily occupancy rate
and average daily room rate for the quarter ended March 31, 1997 and the years
ended December 31, 1996 and December 31, 1995 for the hotels managed for third
parties and joint venture hotels in the Sheraton network.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995(3)
-------------- --------------- ----------------
<S> <C> <C> <C>
Number of properties at period end................ 144 135 139
Available room nights............................. 4,251,177 18,401,316 18,419,248
Average daily occupancy rate(1)................... 70% 69% 70%
Average daily rate(2)............................. $135 $130 $122
</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) Certain hotel property results for 1995 have been reclassified for an
appropriate comparison with 1996.
Under our standard management agreement, we operate lodging facilities
under long-term arrangements with property owners. Our responsibilities include
hiring, training and supervising the managers and employees required to operate
these facilities. For additional fees, we provide reservation services. We also
coordinate national advertising and certain marketing and promotional services.
We prepare and implement annual budgets for lodging facilities under our
management and we are responsible for allocating property-owner funds for
periodic maintenance and repair of buildings and furnishings. Our management fee
is generally based on a percentage of the hotel's total revenues, plus, in
certain instances, an incentive fee based on the
36
<PAGE> 40
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 our 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.
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, we
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.
During 1996 and the first quarter of 1997, we 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, we own an equity interest and are, or will be, the manager of the
respective hotel. We expect to continue to invest funds in hotel joint ventures
which include a management contract.
During 1996 and the first six months of 1997, we entered into agreements to
manage 36 additional hotels, six of which were opened as of March 31, 1997. In
each of these transactions, we did not invest in the ownership of the hotel. Of
these 36 hotels, 16 are in Asia, one is in Europe, ten are in the Middle East,
four are in Africa and three are in Latin America.
GLOBAL OPERATIONS
Our hotel operations are conducted worldwide. In North America we own 21
properties. As of March 31, 1997, we had an equity interest of 50% or more in 32
properties in Europe, three properties in the Asia/Pacific region and 11
properties in Latin America.
The source of revenues in geographic terms of our operations (excluding
revenues from gaming operations and revenues based on reservations) is set forth
in the following table for the quarter ended March 31, 1997 and the years ended
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995(3)
-------------- ------------- ----------------
<S> <C> <C> <C>
Revenues
North America(1)............................... 49% 45% 45%
Europe......................................... 17 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%
=== === ===
</TABLE>
37
<PAGE> 41
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995(3)
-------------- ------------- ----------------
<S> <C> <C> <C>
EBITDA(2)
North America(1)............................... 55% 48% 53%
Europe......................................... 8 27 21
Africa/Middle East............................. 3 3 3
Latin America.................................. 15 12 15
Asia/Pacific................................... 22 10 12
Headquarters and Other......................... (3) -- (4)
--- --- ---
Total..................................... 100% 100% 100%
=========== ========== ============
</TABLE>
- ---------------
(1) Includes franchise fees.
(2) EBITDA 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 (as determined in accordance with generally accepted
accounting principles) or to cash flow from operating activities (as
determined on the Consolidated Cash Flow Statements in our Consolidated
Financial Statements). EBITDA was computed as earnings before interest,
taxes, depreciation and amortization.
(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
Our 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 our 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 quarter ended March 31, 1997 and the years ended
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED YEAR ENDED
MARCH 31, 1997 DEC. 31, 1996 DEC. 31, 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Number of properties at period end................... 210 208 214
Available room nights................................ 4,596,373 18,867,329 19,199,826
Average daily occupancy rate(1)...................... 65% 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 us. The Company
approves certain plans for, and the location of, franchised hotels and reviews
their design.
In general, each franchisee pays us 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 we do not
directly participate in the day-to-day management or operation of franchised
hotels, the hotels periodically are inspected to ensure that our 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.
38
<PAGE> 42
In 1995, we began offering some of our 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, we 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 quarter of 1997, we entered into 34 new franchise
license agreements, of which 13 were opened as of March 31, 1997. Of these,
seven will be operated under the Sheraton brand name and 27 will be operated
under the Four Points Hotels brand name. At March 31, 1997, there were 210
franchised hotels in operation under the Sheraton and Four Points Hotels brand
names.
GAMING OPERATIONS
Currently, our 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. We are conducting detailed reviews of our options with regard to
The Desert Inn, which we are in the process of renovating, and The Sheraton
Casino in Tunica, Mississippi.
In June 1996, we announced a capital expenditure program to upgrade and
expand our 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. We have also
announced that we will construct 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 March 31, 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 our 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 fourth quarter 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 is expected to
open in the third quarter of 1997.
For the year ended December 31, 1996 and the quarter ended March 31, 1997,
the average occupancy rate at Caesars Palace of 91% and 89%, respectively,
included occupancy of approximately 42% and 46% of the
39
<PAGE> 43
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 which the casino/hotel stands that
expires in 2004. At March 31, 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 quarter ended March 31, 1997,
the average occupancy rate at Caesars Tahoe of 83% and 81%, respectively,
included occupancy of approximately 30% and 23% 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 March 31, 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 quarter ended March 31, 1997,
the average occupancy rate at Caesars Atlantic City of 96% and 97%,
respectively, included occupancy of approximately 89% and 89% 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.
40
<PAGE> 44
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. 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.
THE DESERT INN. The Desert Inn, which we 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.
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 we expect that this competition will continue.
OTHER GAMING. We also operate 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. We also operate casinos in Australia and Egypt.
We have entered into an agreement in principle to form a joint venture to
develop, own and operate "Planet Hollywood" themed casino/hotels. We expect 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 and The Sheraton Casino for sale. The
Company plans to use the proceeds from the sales of these assets primarily to
reduce indebtedness.
DISPOSITIONS
On February 11, 1997, we sold 3 million shares of the capital stock of
Alcatel Alsthom for approximately $300. On March 27, 1997, we 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.
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.
41
<PAGE> 45
In March 1995, MSG, 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 MSG to Cablevision for $650
million plus the assumption of approximately $115 million of indebtedness. At
such closing, MSG redeemed a portion of ITT's interest in MSG, such that after
such redemption ITT owned an 11.5% limited partnership interest in MSG, for
$493.5 million, and the general partner of MSG 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 MSG, which diluted ITT's limited
partnership interest in MSG 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 MSG to redeem) half of the Company's continuing interest in MSG 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 MSG to redeem) the Company's remaining interest in MSG 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 MSG to redeem) the Company's
remaining interest in MSG 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 MSG 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 MSG
will be increased to reflect a capital contribution to MSG of $38 million due to
the contribution of the aircraft.
EMPLOYEES
As of March 31, 1997 we and our 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 our
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. Our gaming operations face intense competition from
other companies in the gaming industry. Our 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. Our casino facilities in Stateline, Nevada; Atlantic City,
New Jersey; and Tunica, Mississippi also face intense competition for similar
reasons and under similar circumstances. Our hotel/casino and casino operations
are likely to experience increased competition if other states authorize casino
gaming, and this may adversely affect our results.
42
<PAGE> 46
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, we believe that name and reputation are significant competitive
factors.
EXPOSURE TO CURRENCY FLUCTUATIONS
Certain of our subsidiaries conduct operations worldwide. We are,
therefore, exposed to the effects of fluctuations in relative currency values.
Accordingly, our operating results will be impacted by fluctuations in relative
currency values.
In 1996, approximately 44% of our 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
We own and control 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 our 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 our business, we believe that our business, as a
whole, is not materially dependent upon any one intellectual property or related
group of such properties. We are 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 us.
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 Destinations
Distribution, renewable for an additional five years. Similarly, we expect to
enter into an Intellectual Property License Agreement with ITT ISI that provides
for a license to ITT ISI and its subsidiaries and associated companies to
continue to use the "ITT" name, mark and logo in the operation of ITT ISI's
telephone directories publishing business following the Distribution Date. See
"Our Relationship with ITT After the Destinations Distribution -- Distribution
Agreement."
GOVERNMENTAL REGULATION AND RELATED MATTERS
CASINO GAMING -- GENERAL. Our 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 is one of our wholly
owned subsidiaries. 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 one of our wholly owned subsidiaries (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, our 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
43
<PAGE> 47
devices and the recording and reporting of currency transactions, respectively.
Our Nevada casino gaming operations are subject to the Nevada Gaming Control Act
(the "Nevada Act") and 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"). Our New Jersey casino gaming operations are subject to the New
Jersey Casino Control Act (the "New Jersey Act") and 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 our 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. Our Mississippi casino gaming operations are subject
to the Mississippi Gaming Control Act (the "Mississippi Act") and 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"). Our 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"). Our 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 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 our casino gaming operations.
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 our
officers, directors and key employees and those of our subsidiaries who are
actively and directly involved in our gaming activities may be required to be
licensed or found suitable by the
44
<PAGE> 48
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, 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 our voting securities at any time.
Nevada law requires any person who acquires more than 5% of any class of our
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 our 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 our Board of Directors,
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 our 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.
45
<PAGE> 49
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 our 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.
We could be subject to disciplinary action if, without the prior approval of the
Nevada Commission and after we receive 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.
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 Casino 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
46
<PAGE> 50
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 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,
47
<PAGE> 51
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 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 our 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
48
<PAGE> 52
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 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. We believe 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) we have provided in our corporate charter that
our 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) we have 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 CASINO 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
49
<PAGE> 53
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 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 CASINO 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 CASINO GAMING REGULATION. Our 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, we are subject to the gaming
regulations in force in that state. Indiana currently imposes regulations on
gaming similar to and, in our opinion, no more restrictive than the gaming
regulations in force in Nevada and New Jersey.
CASINO GAMING -- RELATED PROVISIONS OF OUR ARTICLES OF INCORPORATION. Our
Articles of Incorporation provide that (i) all of our securities are subject to
redemption by us to the extent necessary to prevent the loss, or to secure the
reinstatement, of any casino gaming license held by us or any of our
subsidiaries in any jurisdiction within or without the United States, (ii) all
our securities are held subject to the condition that if a
50
<PAGE> 54
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 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 we have 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 our planned sale of
WBIS+ to Paxson. In addition, following such sale, we plan 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 us to liability for
environmental problems at those properties, we are not aware of any significant
environmental liabilities associated with the ownership or operation of our
existing hotel and casino properties.
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 ITT's board of
directors "in order to preserve the position of incumbent directors", (ii) to
require ITT's board of directors to redeem the preferred stock purchase rights
and to make inapplicable to the Hilton Offer and 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.
51
<PAGE> 55
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 Board or, alternatively, requiring ITT to
give Hilton the opportunity to supplement the individuals it nominates for ITT's
board of directors 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
of 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 agreement with FelCor and to enjoin ITT from entering into any
other agreement containing change of control provisions and (vi) to enjoin ITT's
Board of Directors 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 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 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.
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
52
<PAGE> 56
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.
OUR RELATIONSHIP WITH ITT AFTER THE DESTINATIONS DISTRIBUTION
Prior to the Destinations Distribution, the Company was a wholly owned
subsidiary of ITT. After the Destinations Distribution, ITT will not have any
ownership interest in the Company, and we will be an independent public company.
We expect to enter into certain agreements with ITT, described below, for
the purpose of giving effect to the Destinations Distribution. These agreements
will govern our relationship after the Destinations Distribution. The expected
terms of the agreements described below have not as of yet been finalized by the
parties. Copies of the forms of such agreements will be filed as exhibits to our
Registration Statement on Form 10 registering the Company Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The following
description summarizes certain of the expected terms of such agreements, but the
following descriptions do not purport to be complete and are qualified in their
entirety by reference to such exhibits.
DISTRIBUTION AGREEMENT
We will enter into a Distribution Agreement with ITT providing for, among
other things, certain corporate transactions to effect the Destinations
Distribution and other arrangements between ITT and the Company after the
Destinations Distribution.
The Distribution Agreement will provide for, among other things, the merger
of Old 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 to the Company and its subsidiaries and
financial responsibility for the liabilities arising out of all of ITT's other
businesses to ITT and its subsidiaries and financial responsibility for certain
other liabilities.
Pursuant to the Distribution Agreement, ITT will agree to seek approval of
its stockholders to change its corporate name from "ITT Corporation" to "ITT
Information Services, Inc." as soon as practicable following the Distribution
Date.
The Distribution Agreement will provide that each of ITT and the Company
will be granted access to certain records and information in the possession of
the other and will require each of ITT and the Company to provide to the other
copies of all documents filed with the Commission pursuant to the periodic and
interim reporting requirements of the Exchange Act. Under the Distribution
Agreement, each of ITT and the Company will agree to provide to the other,
subject to certain conditions, on an "as-needed" basis such services on such
terms as may be agreed upon between the parties.
53
<PAGE> 57
The Distribution Agreement will provide that, in general, except as
otherwise set forth therein or in any related agreement, all costs and expenses
related to the Hilton Offer will be paid by the Company and the other expenses
related to the Comprehensive Plan will be paid by ITT and the Company on a
proportionate basis.
TAX ALLOCATION AGREEMENT
We will enter into a Tax Allocation Agreement with ITT and ITT Educational
effectively providing that we will be responsible for our respective share of
ITT's consolidated tax liability for the tax years that we were included in
ITT's consolidated Federal income tax return. The Tax Allocation Agreement also
provides 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 for an allocation of responsibilities for payments
with respect to certain taxes arising out of the 1995 Spin-Off, including as a
result of certain actions taken or omitted to be taken. In addition, the Tax
Allocation Agreement will provide for an allocation of responsibilities for tax
payments owing in respect of the Destinations Distribution as a result of
certain actions taken or omitted to be taken. None of ITT, ITT Educational or
the Company will be obligated to indemnify any stockholder for any tax
liability.
INTELLECTUAL PROPERTY AGREEMENT
We will enter into an Intellectual Property License Agreement (the "IP
Agreement") with ITT that will provide for a license from the Company to ITT and
its subsidiaries and associated companies to continue to use the "ITT" name,
mark and logo in the operation of ITT's telephone directories publishing
businesses following the Distribution Date, subject to the maintenance of
certain quality standards for their products and services and other conditions
in accordance with the terms of the IP Agreement. We will have a similar Trade
Name and Service Mark License Agreement with ITT Educational 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 following the consummation of the ITT Educational
Distribution.
EMPLOYEE BENEFITS AGREEMENT
GENERAL. We 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
and ITT Educational. As a general matter, the Company, ITT 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) will become employees of the Company. The Benefits Agreement
will provide for the treatment of certain retirement plans, investment and
savings programs, retiree medical and life insurance benefits and stock awards.
In addition, 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 or ITT Educational employees.
RETIREMENT PLANS. Effective on the Distribution Date, 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 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 tax-qualified retirement plans
established by ITT 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 retain assets and liabilities under the non-qualified
Assumed Retirement Plans for current and former employees of ITT and the
Company. As soon as practicable following the Distribution
54
<PAGE> 58
Date, 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 Company
will assume sponsorship of any foreign plan previously maintained by ITT (other
than any stand-alone plan covering only ITT or ITT Educational employees) and
will assume the related assets and liabilities thereunder, subject to any
applicable foreign law.
SAVINGS PLANS. Effective on the Distribution Date, 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 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 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 ITT and ITT Educational
employees) (the "Assumed Medical and Life Plans") and (ii) ITT 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 to the extent ITT is
responsible for such benefits immediately prior to the Distribution Date. It is
expected that ITT 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 secondarily liable for providing
post-retirement medical benefits to ITT employees (and their dependents) who
meet the eligibility requirements for post-retirement medical benefits on the
Distribution Date.
As of the Distribution Date, the Company will assume responsibility for
retiree life benefits for current and former Company employees and former ITT
employees and it is intended that ITT Educational will assume liability for its
current and former employees for whom ITT and ITT Educational, respectively, are
currently responsible for providing such 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's current employees and ITT Educational's former and
current employees may be transferred to newly established VEBAs of ITT and ITT
Educational, respectively.
MISCELLANEOUS BENEFITS. It is expected that the Benefits Agreement will
provide that ITT, 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 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 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.
See "Management and Executive Compensation" for a discussion of
compensation and benefits matters for employees of the Company.
55
<PAGE> 59
MANAGEMENT AND EXECUTIVE COMPENSATION
BOARD OF DIRECTORS
The following table sets forth information as to persons who will serve as
our directors. Our Board of Directors will be comprised of eleven directors,
only two of whom are officers of the Company. Our board of directors 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 our first, second and third annual meetings of
stockholders, and thereafter will serve staggered three-year terms. We expect to
hold our 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 Humphrey Institute of Public Affairs and codirector of the
Institute's Policy Forum. Mr. Weber served in the
56
<PAGE> 60
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 Old 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.
57
<PAGE> 61
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
We will be managed under the direction of our Board of Directors. Our
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 of Directors.
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 our 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-
58
<PAGE> 62
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
Our 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 our 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. Our 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 our 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.
59
<PAGE> 63
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
We expect 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 our 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 our 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 fifth 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 or entering into any
governmental, diplomatic or other service or employment. Except as provided
above, any resignation from board service within the restriction period will
result in forfeiture of the shares. Shares may not be sold, assigned,
transferred, pledged or otherwise disposed of during the restriction period.
Until such risk of forfeiture lapses or the shares are forfeited, a director
will not have the right to vote and to receive dividends on the shares granted
under the 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. Goldman Sachs, Lazard Freres and ITT have entered into an engagement
letter regarding investment banking services to be rendered to ITT in connection
with the Hilton Offer. Mr. Wilson receives a percentage of Lazard Freres'
income, including a percentage of any income earned by Lazard under this
engagement letter.
60
<PAGE> 64
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 Old 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 Old
Sheraton. Prior to that he was Treasurer of
the State of Michigan.
Ann N. Reese, 44
Executive Vice President and
Chief Financial Officer...................... 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.
Richard S. Ward, 56
Executive Vice President,
General Counsel and
Corporate Secretary.......................... 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.
</TABLE>
61
<PAGE> 65
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
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.
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.
</TABLE>
62
<PAGE> 66
<TABLE>
<CAPTION>
NAME, POSITION WITH THE
COMPANY AND AGE BIOGRAPHICAL DATA
- --------------------------------------------- ----------------------------------------------
<S> <C>
Mark Thomas, 40
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.
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>
63
<PAGE> 67
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received by our Chief Executive
and our 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 1995 516,667 398,800 433,646 -- 59,718 1,280,000 44,321
of ITT; President 1994 500,000 385,000 13,408 -- 83,605 -- 17,500
and Chief Executive
Officer of ITT
Sheraton Corporation
Peter G. Boynton(1).... 1996 682,583 15,200 694,276 -- 40,000 -- 11,705
Senior Vice President 1995 578,117 299,776 105,288 -- 59,718 -- 14,500
of ITT; President 1994 -- -- -- -- -- -- --
and Chief Executive
Officer of Caesars
World, Inc.
Ann N. Reese........... 1996 405,000 389,900 47,910 -- 40,000 -- 14,008
Executive Vice 1995 303,571 252,300 45,369 543,750 71,662 113,600 30,018
President and Chief 1994 263,333 210,000 33,738 -- 71,662 -- 10,998
Financial Officer
</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.
(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
64
<PAGE> 68
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 $8,538 paid by ITT.
ANNUAL INCENTIVE BONUS PLAN
Under the ITT Annual Incentive Bonus Plan, the amounts of annual bonus
awards are based upon corporate financial performance for the year compared to
annual performance goals established by the Compensation and Personnel Committee
at the beginning of the year. For 1996, such performance goal for ITT was based
on EBITDA. Under a leveraged performance/payout schedule, the performance factor
generated a standard bonus adjustment factor of 113%. The calculated bonus
amounts for 1996 performance for Messrs. Araskog and Bowman and for Ms. Reese
are shown in the Summary Compensation Table set forth above and were determined
strictly in accordance with the above described formula and standard bonus
adjustment factor. The bonus factor for Mr. Weadock reflects the performance
measurement formula applicable to Old Sheraton; the bonus amount for Mr. Boynton
reflects the performance measurement formula applicable to Caesars. The bonus
amounts paid to Messrs. Araskog, Bowman, Weadock and Boynton and Ms. Reese were
reviewed and approved by the Compensation and Personnel Committee prior to
payment.
OPTION GRANTS OF ITT COMMON STOCK TO THE COMPANY EXECUTIVES IN LAST FISCAL YEAR
The following table sets forth as to the Named Executive Officers
information relating to options granted by ITT from January 1, 1996 through
December 31, 1996.
STOCK OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED RATES
SECURITIES % OF TOTAL OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED EXERCISE OPTION TERM
GRANTED(1) TO EMPLOYEES PRICE(3) EXPIRATION -----------------------
NAME (#) IN 1996(2) ($/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 "Our 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.
65
<PAGE> 69
(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.
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. All
payments under the plan following a change in control are subject to the same
Reduction and Additional Payment mechanism (including the $50,000 minimum
benefit requirement) described below with respect to Mr. Araskog's employment
contract. 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. 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
66
<PAGE> 70
determining such executive's severance and (iii) one year of outplacement
services. All severance payable under each agreement is subject to the same
Reduction and Additional Payment mechanism (including the $50,000 minimum
benefit requirement) 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.
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 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 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 payment 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 of 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 severance payment is
subject to the limitation that, if Sections 280G and 4999 of the Code would
impose on Mr. Araskog any excise tax (an "Excise Tax") in respect of such
severance, then the amount of the severance payment will be reduced to an amount
such that no amount will be subject to such Excise Tax (the "Reduction");
provided, however, that if the price of ITT Common Stock remains for five
consecutive trading days following February 11, 1997 (such threshold price to be
adjusted as of the Distribution Date as necessary to reflect the Destinations
Distribution), at or above 125% of its closing price of $56.75 per share on
February 4, 1997, then the Reduction will not apply, and, in addition, Mr.
Araskog will be entitled to a gross-up payment to fully offset any Excise Tax
imposed, as well as any additional income, employment and excise taxes imposed
on the gross-up payment (an "Additional Payment"), provided that no such
Additional Payment will be made to the extent that Mr. Araskog would not receive
at least a $50,000 net after-tax benefit from the Additional Payment, as
compared to the net amount he would otherwise receive if the Reduction were to
be implemented. The Board selected a share price threshold that must be reached
before the Reduction will be eliminated and the Additional Payment will be
payable that is the same as the share price that must be achieved for the
vesting of performance-based options granted by ITT to senior executives at a
Board meeting held on February 4, 1997. That threshold was determined in
accordance with ITT's usual practice for option grants.
1997 STOCK PLAN
Effective prior to the Destinations Distribution, 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,
67
<PAGE> 71
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.
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 Security Plans (collectively, the "Caesars Pension Plan"). For a
discussion of the impact of the Destinations Distribution on the Retirement
Plan, see "Our 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).
68
<PAGE> 72
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.
69
<PAGE> 73
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.
70
<PAGE> 74
PROJECTED BENEFICIAL OWNERSHIP
All of the outstanding shares of Company Common Stock prior to the
Destinations Distribution were 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)... 4,125,866 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, 1,251,617 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, shares. The
number of shares receivable upon the exercise of options shall be adjusted
following consummation of the Distributions in a manner
71
<PAGE> 75
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.
72
<PAGE> 76
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that we have authority
to issue under our 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 approximately 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 our Board of Directors, each outstanding share of Company Common Stock will
be entitled to such dividends, if any, as may be declared from time to time by
our Board. See "Dividend Policy." Each outstanding share is entitled to one vote
on all matters submitted to a vote of stockholders. Our 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 our 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 our 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 our 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.
73
<PAGE> 77
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 "Where You Can Find More
Information." Each Right, when it becomes exercisable, will entitle the
registered holder to purchase from us 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.
74
<PAGE> 78
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 our assets or
assets representing 50% or more of our 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
our assets or assets representing 50% or more of our 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, our 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 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
75
<PAGE> 79
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, our 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 our 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 us since we are 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. Our 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.
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
76
<PAGE> 80
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, our 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, our
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 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.
77
<PAGE> 81
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 OUR ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING A CHANGE IN
CONTROL
Certain provisions of our Articles and By-laws may provide our 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
our 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 our stockholders. Such provisions may also have the
effect of making it more difficult for third parties to cause the replacement of
the current 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
Our Articles of Incorporation provide that the Board's membership is
divided into three classes as nearly equal in number as possible, each of which
serves for three years 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 our 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. Our
Articles of Incorporation 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 our 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.
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
our Board.
We believe that a classified board of directors will assure continuity and
stability of the Company's management and policies, without diminishing
accountability to stockholders. Our 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. We believe 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 our long-term strategic plan. Our classified
Board will be better
78
<PAGE> 82
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 our 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. We believe 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. We do not expect our 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. We
believe that a classified board of directors is fully accountable to
stockholders. To ensure this accountability, our 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. We believe 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
Our Articles of Incorporation 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 of Incorporation 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
Our 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
received by the Secretary of the Company not later than 60 days in advance of
the anniversary date for the immediately preceding annual meeting (or, in the
case of the Company's first annual meeting of stockholders, not more than 10
days after the first public disclosure of the date of such annual meeting,
whichever is earlier). Similarly, notice of nominations to be brought before a
special meeting must be delivered to the Secretary no later than the close of
business on the seventh day following the day on which notice of the date of any
special meeting of stockholders is given.
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
79
<PAGE> 83
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; and the consent of each nominee to serve as a director if so elected.
We expect to hold our first annual meeting of stockholders in November of
1997. Each stockholder will have until the close of business on the 10th 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
Our Articles of Incorporation 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
Our 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 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. We plan to remove
this provision from our 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
Our Articles of Incorporation 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 our 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, our 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.
Our 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
80
<PAGE> 84
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.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a Registration Statement on Form 10 under
the Exchange Act with respect to the Shares 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. Statements made in this
Information Statement as to the contents of any contract, agreement or other
document referred to herein are summaries only and are not necessarily complete.
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.
We are subject to the informational requirements of the Exchange Act and
under the Exchange Act we will file annual, quarterly and current reports, proxy
statements and other information with the Commission. You 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, you 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.
We intend 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.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
INCORPORATED BY REFERENCE INTO IT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH ANY INFORMATION THAT IS DIFFERENT. YOU 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 OUR
AFFAIRS SINCE THE DATE OF THIS DOCUMENT.
81
<PAGE> 85
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-22
Business Segment Information.......................................................... F-23
Geographical Information -- Total Segments............................................ F-23
Consolidated Income for the three months ended March 31, 1997 and 1996 (Unaudited).... F-24
Consolidated Balance Sheet as of March 31, 1997 (Unaudited) and December 31, 1996..... F-25
Consolidated Cash Flow for the three months ended March 31, 1997 and 1996
(Unaudited)......................................................................... F-26
Notes To Financial Statements (Unaudited)............................................. F-27
Business Segment Information (Unaudited).............................................. F-31
Valuation and Qualifying Accounts..................................................... S-1
</TABLE>
F-1
<PAGE> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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 business 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, and 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.
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 these promotional allowances was
$161,
F-7
<PAGE> 92
$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.
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) computed in accordance
with a tax sharing arrangement. These arrangements generally required that ITT
F-8
<PAGE> 93
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.
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
F-9
<PAGE> 94
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 agreed to contribute to
MSG an ITT-owned aircraft which MSG has used for the Knicks and the Rangers. 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> 95
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> 96
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> 97
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> 98
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
responsibility for approximately $1.0 billion of debt and the Company will have
responsibility for 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> 99
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> 100
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> 101
<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> 102
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.
In connection with the 1995 Spin-off, the Company issued one Series A
Participating Cumulative Preferred Stock Purchase Right (a "Right") for each
share of the Company's common stock outstanding. Additionally, Rights will be
issued in respect of common stock subsequently issued until the Rights
Distribution Date, as defined, and, in certain circumstances, with respect to
common stock issued after the Rights Distribution Date. In the event a person or
group has acquired, or has obtained the right to acquire, beneficial ownership
of more than 15% of the outstanding shares of common stock or certain specified
tender offers occur for more than 15% of the common stock, or in the event the
Company is acquired in a merger or other business combination or certain other
specified events occur, the Right entitles each holder, subject to certain
exceptions, to purchase the number of 1/1,000ths 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, expire on the tenth anniversary of the related rights
agreement and are redeemable by the Company at any time at a price of $.01 per
Right.
F-18
<PAGE> 103
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> 104
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> 105
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 a distribution agreement, a tax sharing agreement (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 will
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 August 1, 1997.
F-21
<PAGE> 106
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 (such merger, 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> 107
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> 108
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> 109
ITT DESTINATIONS, INC.
CONSOLIDATED INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
MARCH 31,
-----------------
1997 1996
------ ------
<S> <C> <C>
Revenues................................................................... $1,333 $1,290
Costs and expenses:
Salaries, benefits and other operating................................... 1,026 978
Selling, general and administrative...................................... 222 169
Depreciation and amortization............................................ 68 56
------ ------
1,316 1,203
------ ------
17 87
Interest expense (net of interest income of $6 and $27).................... (38) (46)
Gain on sale of Alcatel Alsthom shares..................................... 183 --
Miscellaneous expense, net................................................. (20) (2)
------ ------
142 39
Provision for income taxes................................................. (59) (17)
Minority equity............................................................ 2 2
------ ------
Income from continuing operations.......................................... 85 24
Discontinued operations.................................................... (5) (4)
------ ------
Net income................................................................. $ 80 $ 20
====== ======
Earnings per share:
Income from continuing operations........................................ $ .72 $ .20
Loss from discontinued operations........................................ (.04) (.03)
------ ------
Net income............................................................... $ .68 $ .17
====== ======
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> 110
ITT DESTINATIONS, INC.
CONSOLIDATED BALANCE SHEET
(IN MILLIONS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
MARCH 31, ------------
1997
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 205 $ 205
Marketable securities............................................. -- 599
Receivables --
Accounts receivable, net....................................... 382 435
Sale of Alcatel Alsthom shares................................. 533 --
Inventories....................................................... 55 58
Prepaid expenses and other........................................ 124 102
------ ------
Total current assets...................................... 1,299 1,399
Plant, property and equipment, net.................................. 4,437 4,700
Investment in Madison Square Garden................................. 368 533
Other investments................................................... 343 386
Long-term receivables, net.......................................... 168 178
Other assets........................................................ 407 346
Goodwill, net....................................................... 1,297 1,323
Net assets held for sale............................................ 330 --
Net assets of discontinued operations............................... 62 57
------ ------
$ 8,711 $8,922
====== ======
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable.................................................. $ 218 $ 257
Accrued expenses.................................................. 498 451
Notes payable and current maturities of long-term debt............ 494 486
Accrued taxes..................................................... 206 171
------ ------
Total current liabilities................................. 1,416 1,365
Allocated debt of ITT............................................... 1,799 2,095
Other long-term debt................................................ 757 798
Deferred income taxes............................................... 194 186
Other liabilities................................................... 393 378
Net liabilities of discontinued operations.......................... 817 808
Minority interest................................................... 194 218
------ ------
5,570 5,848
------ ------
Stockholders equity:
Common stock: authorized 200,000,000 shares, no par or stated
value, outstanding 116,429,113 and 116,366,176 shares,
respectively................................................... 2,899 2,897
Cumulative translation adjustment................................. (79) (2)
Unrealized loss on securities..................................... -- (62)
Retained earnings................................................. 321 241
------ ------
Total stockholders equity...................................... 3,141 3,074
------ ------
$ 8,711 $8,922
====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-26
<PAGE> 111
ITT DESTINATIONS, INC.
CONSOLIDATED CASH FLOW
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1997 1996
----- -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................................... $ 80 $ 20
Loss from discontinued operations............................................ 5 4
---- ----
Income from continuing operations.......................................... 85 24
Adjustments to income from continuing operations:
Depreciation and amortization.............................................. 68 56
Provision for doubtful receivables......................................... 11 9
Gain on divestments -- pretax.............................................. (201) (8)
Changes in working capital:
Receivables................................................................ (7) 12
Inventories................................................................ -- (5)
Accounts payable........................................................... (47) (33)
Accrued expenses........................................................... 73 (6)
Accrued and deferred taxes................................................... 39 (23)
Other, net................................................................... 7 17
---- ----
Cash from continuing operations.............................................. 28 43
Cash from/(to) discontinued operations....................................... 37 (10)
---- ----
Cash from operating activities............................................. 65 33
---- ----
INVESTING ACTIVITIES
Additions to plant, property and equipment................................... (182) (84)
Proceeds from divestments.................................................... 365 21
Acquisitions................................................................. (31) --
Other, net................................................................... 112 (7)
---- ----
Cash (used for)/from investing activities.................................. 264 (70)
---- ----
FINANCING ACTIVITIES
Short-term debt, net......................................................... (4) 25
Long-term debt issued........................................................ 73 42
Long-term debt repaid........................................................ (396) (58)
Other, net................................................................... 2 39
---- ----
Cash (used for)/from financing activities.................................. (325) 48
---- ----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS............................ (4) --
---- ----
Increase in cash and cash equivalents........................................ -- 11
Cash and cash equivalents -- Beginning of Period............................. 205 141
---- ----
CASH AND CASH EQUIVALENTS -- END OF PERIOD................................... $ 205 $ 152
==== ====
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................................... $ 11 $ 19
==== ====
Income taxes............................................................... $ 13 $ 26
==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-27
<PAGE> 112
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
DISTRIBUTIONS AND BASIS OF PRESENTATION
On July 15, 1997, the Board of Directors of ITT Corporation ("ITT", 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 business 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.
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 March 31, 1997 and
their results of operations and cash flows for the three months ended March 31,
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 $39 and $42 for the
three months ended March 31, 1997 and 1996, respectively. The estimated cost of
such promotional allowances was $30 and $28 for the three months ended March 31,
1997 and 1996, respectively, and has been included in costs and expenses.
F-28
<PAGE> 113
Revenues and costs and expenses of the Gaming operations are comprised of
the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1997 1996
---------------------- ----------------------
COSTS AND COSTS AND
REVENUES EXPENSES REVENUES EXPENSES
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Gaming...................................... $231 $ 152 $262 $ 147
Rooms....................................... 16 6 18 6
Food and beverage........................... 18 17 20 20
Other operations............................ 27 14 24 13
Selling, general and administrative......... -- 50 -- 57
Depreciation and amortization............... -- 21 -- 21
Provision for doubtful accounts............. -- 10 -- 7
---- ---- ---- ----
Total............................. $292 $ 270 $324 $ 271
==== ==== ==== ====
</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
MARCH 31, ------------
1997
-----------
(UNAUDITED)
<S> <C> <C>
Total assets........................................ $ 489 $ 510
Total liabilities................................... (306) (318)
Allocated debt of ITT............................... (1,000) (1,000)
------- -------
Net liabilities of discontinued operations.......... $ (817) $ (808)
======= =======
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $ 42 $ 41
=== ===
Operating income.................................... $ 2 $ 5
Interest expense, net............................... 18 18
Miscellaneous income................................ 1 --
Benefit for income taxes............................ 6 5
--- ---
Loss from discontinued operations................... $ (9) $ (8)
=== ===
</TABLE>
F-29
<PAGE> 114
ITT Educational Services
Balance Sheet Data:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
MARCH 31, ------------
1997
-----------
(UNAUDITED)
<S> <C> <C>
Total assets........................................ $ 130 $134
Total liabilities................................... (68) (77)
---- ----
Net assets of discontinued operations............... $ 62 $ 57
==== ====
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................ $ 65 $ 57
=== ===
Operating income.................................... $ 9 $ 8
Interest income..................................... 1 --
Miscellaneous expense, net.......................... 1 --
Provision for income taxes.......................... 4 3
Minority equity..................................... 1 1
--- ---
Earnings from discontinued operations............... $ 4 $ 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 agreed to contribute to
MSG an ITT-owned aircraft which MSG has used for the Knicks and the Rangers. 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.
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.
F-30
<PAGE> 115
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 August 1, 1997.
Hilton has announced that, if the Hilton Offer succeeds, it will obtain the
entire equity interest in ITT by merging ITT with Hilton or a subsidiary of
Hilton (such merger, 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.
RECLASSIFICATIONS
Certain amounts in the 1996 financial statements have been reclassified to
conform to the current year presentation.
RESTRUCTURING CHARGE
In 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.
SALE OF ALCATEL ALSTHOM SHARES
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.
SUBSEQUENT EVENTS
On April 29, 1997, ITT announced its intention to sell two of its Gaming
Properties: The Desert Inn in Las Vegas, Nevada, 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 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.
F-31
<PAGE> 116
BUSINESS SEGMENT INFORMATION
(IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
REVENUES INCOME
----------------- -------------
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1997 1996 1997 1996
------ ------ ---- ----
<S> <C> <C> <C> <C>
Hotels..................................................... $1,041 $ 966 $ 72 $ 56
Gaming..................................................... 263 265 47 53
------ ------ ---- ----
Ongoing Segments......................................... 1,304 1,231 119 109
Dispositions............................................... 29 59 (23) --
------ ------ ---- ----
Total Segments........................................... 1,333 1,290 96 109
Other...................................................... -- -- (79) (22)
------ ------ ---- ----
1,333 1,290 17 87
Interest expense, net...................................... (38) (46)
Gain on sale of Alcatel Alsthom shares..................... 183 --
Miscellaneous expenses, net................................ (20) (2)
Provision for income taxes................................. (59) (17)
Minority equity............................................ 2 2
---- ----
Income from continuing operations.......................... 85 24
Discontinued operations.................................... (5) (4)
------ ------ ---- ----
$1,333 $1,290 $ 80 $ 20
====== ====== ==== ====
</TABLE>
COMMON STOCK MARKET PRICE AND DIVIDENDS
(IN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
1996
-------------------
HIGH LOW
------ ------
<S> <C> <C>
March 31,................................................ $62.63 $47.38
June 30,................................................. $68.25 $56.88
September 30,............................................ $66.63 $43.00
December 31,............................................. $46.50 $40.88
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------
HIGH LOW
------ ------
<S> <C> <C>
Period commencing December 20, 1995 and ending December
31, 1995............................................... $53.13 $48.25
====== ======
</TABLE>
The above table reflects the range of market prices of ITT common stock
subsequent to the 1995 Spin-off, as reported in the consolidated transaction
reporting system of the New York Stock Exchange, the principal market in which
this security is traded, under the trading symbol "ITT".
During the period from January 1, 1997 through March 24, 1997, the high and
the low reported market prices of ITT common stock were $60.00 and $41.13,
respectively.
The Company has not declared any dividends to date and at present have no
plans to declare or pay any dividends.
There were approximately 56,000 holders of record of ITT Common Stock on
March 24, 1997.
The Company's common stock is listed on the New York Stock Exchange.
F-32
<PAGE> 117
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> 118
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
September , 1997 received a distribution on September , 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 September , 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.
--------------------------------------
Stockholder
