<PAGE> 1
Filed pursuant to Rule 424(b)(2)
Registration Nos. 33-37894 and 33-45756
THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AND IS SUBJECT TO COMPLETION OR
AMENDMENT. THIS PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUPPLEMENT (Subject to Completion, Issued November 8, 1995)
(To Prospectus dated April 20, 1992)
$250,000,000
ITT Corporation
Subject to the satisfaction of certain
conditions, to be reincorporated as
ITT Industries, Inc.
% DEBENTURES DUE NOVEMBER , 2025
------------------------
Interest payable May and November
------------------------
FOLLOWING THE DISTRIBUTION (AS DEFINED HEREIN), WHICH IS EXPECTED TO OCCUR PRIOR
TO DECEMBER 31, 1995, SUBJECT TO THE SATISFACTION OF CERTAIN CONDITIONS, ITT
CORPORATION, A DELAWARE CORPORATION, WILL BE REINCORPORATED AS ITT INDUSTRIES,
INC., AN INDIANA CORPORATION. THE DEBENTURES WILL BE THE OBLIGATION OF ITT
INDUSTRIES, INC. FOLLOWING THE DISTRIBUTION. THE DEBENTURES WILL BE
REDEEMABLE IN WHOLE OR IN PART, AT THE OPTION OF ITT INDUSTRIES, INC. AT
ANY TIME, AT A REDEMPTION PRICE EQUAL TO THE GREATER OF (I) 100% OF
THEIR PRINCIPAL AMOUNT AND (II) THE SUM OF THE PRESENT VALUES OF THE
REMAINING SCHEDULED PAYMENTS OF PRINCIPAL AND INTEREST THEREON
DISCOUNTED TO THE DATE OF REDEMPTION ON A SEMIANNUAL BASIS (ASSUMING
A 360-DAY YEAR CONSISTING OF TWELVE 30-DAY MONTHS) AT THE TREASURY
YIELD (AS DEFINED HEREIN) PLUS 20 BASIS POINTS, PLUS IN EACH CASE
ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE DEBENTURES WILL
BE REPRESENTED BY A GLOBAL SECURITY REGISTERED IN THE NAME OF
THE DEPOSITORY TRUST COMPANY ("DEPOSITARY") OR ITS NOMINEE.
BENEFICIAL INTERESTS IN THE GLOBAL SECURITY WILL BE SHOWN ON,
AND TRANSFERS THEREOF WILL BE EFFECTED THROUGH, RECORDS
MAINTAINED BY THE DEPOSITARY OR ITS PARTICIPANTS. EXCEPT AS
DESCRIBED HEREIN, DEBENTURES IN DEFINITIVE FORM WILL NOT BE
ISSUED. SEE "DESCRIPTION OF DEBENTURES".
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE % AND ACCRUED INTEREST
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
------------- ------------- -------------
<S> <C> <C> <C>
Per Debenture.......................... % % %
Total.................................. $ $ $
</TABLE>
- ---------------
(1) Plus accrued interest from November , 1995.
(2) ITT Corporation has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(3) Before deducting expenses payable by ITT Corporation estimated at
$310,000.
------------------------
The Debentures are offered, subject to prior sale, when, as and if accepted
by the several Underwriters and subject to approval of certain legal matters by
Cravath, Swaine & Moore, counsel for the Underwriters. It is expected that
delivery of the Debentures will be made on or about November , 1995 through
the book-entry facilities of the Depositary against payment therefor in
immediately available funds.
------------------------
LAZARD FRERES & CO. LLC LEHMAN BROTHERS MORGAN STANLEY & CO.
Incorporated
November , 1995
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEBENTURES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
NO PERSON IS AUTHORIZED BY ITT CORPORATION OR BY THE UNDERWRITERS OR ANY
DEALER TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED. NEITHER
THIS PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
SECURITIES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS OR ANY
SALE MADE HEREUNDER DOES NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE ON WHICH SUCH
INFORMATION IS GIVEN.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.............................................................. S-3
Summary Financial and Operating Data....................................................... S-5
Use of Proceeds............................................................................ S-6
Ratio of Earnings to Fixed Charges......................................................... S-6
Forecasted Capitalization.................................................................. S-7
ITT Industries Unaudited Pro Forma Consolidated Financial Statements....................... S-9
ITT Industries Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................................ S-12
Business of ITT Industries................................................................. S-21
The Distribution........................................................................... S-30
The Reincorporation of ITT................................................................. S-31
Relationship Between ITT Industries, ITT Destinations and ITT Hartford After the
Distribution............................................................................. S-32
Description of the Debentures.............................................................. S-34
Underwriting............................................................................... S-37
Incorporation of Certain Documents by Reference............................................ S-37
Legal Opinions............................................................................. S-38
Experts.................................................................................... S-38
Index to Financial Statements and Schedules................................................ F-1
PROSPECTUS
Incorporation of Certain Documents by Reference............................................ 2
Available Information...................................................................... 2
ITT........................................................................................ 2
Use of Proceeds............................................................................ 3
Ratio of Earnings to Fixed Charges......................................................... 3
Description of Debt Securities............................................................. 3
Description of Warrants.................................................................... 8
Plan of Distribution....................................................................... 9
Legal Opinions............................................................................. 10
Experts.................................................................................... 10
</TABLE>
S-2
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
This Summary is qualified in its entirety by the more detailed information
included elsewhere in this Prospectus Supplement and the accompanying
Prospectus.
ITT
ITT Corporation is a Delaware corporation which, until December 31, 1983,
was known as International Telephone and Telegraph Corporation. It is the
successor (since 1968) to a Maryland corporation incorporated in 1920. Unless
the context otherwise indicates, references herein to ITT Corporation ("ITT")
include its subsidiaries.
ITT is a diversified enterprise engaged directly and through its
subsidiaries in three major business areas: Insurance, Industries and
Hospitality, Entertainment and Information Services. For financial statement
purposes, ITT's Insurance, Hospitality, Entertainment and Information Services
businesses are treated as discontinued operations. As more fully described
below, after the Distribution (as hereafter defined) the Debentures will
represent the obligations of ITT Industries, Inc., an Indiana corporation ("ITT
Industries"), as successor by merger to ITT. See "THE DISTRIBUTION" below. ITT
has approximately 110,000 employees.
ITT's principal executive offices are presently located at 1330 Avenue of
the Americas, New York, NY 10019-5490 and, following the Distribution, the
principal executive offices of ITT Industries will be located at 4 West Red Oak
Lane, White Plains, NY 10604.
THE DISTRIBUTION
At a special meeting of shareholders of ITT held on September 21, 1995, the
shareholders approved a group of separate but related proposals to divide ITT
into its three separate areas: (i) Insurance, (ii) Industries and (iii)
Hospitality, Entertainment and Information Services.
These proposals provide for the proposed distribution (the "Distribution")
to ITT's shareholders of all the shares of common stock of ITT Destinations,
Inc. ("ITT Destinations"), which is a wholly owned subsidiary of ITT, and all
the shares of common stock of ITT Hartford Group, Inc. ("ITT Hartford"), which
is also a wholly owned subsidiary of ITT. In the Distribution, holders of ITT
Common Stock will receive one share of ITT Destinations Common Stock and one
share of ITT Hartford Common Stock for every one share of ITT Common Stock held.
The Distribution will separate ITT into three publicly owned companies. In
addition, as part of the Distribution, ITT will change its name to ITT
Industries, Inc. ("ITT Industries") and ITT Destinations will change its name to
ITT Corporation. In connection with the Distribution, ITT (which is now a
Delaware corporation) also will reincorporate in Indiana. After the
Distribution, ITT Industries will continue to conduct the automotive, defense
and electronics, and fluid technology businesses of ITT. ITT Destinations,
renamed ITT Corporation, will continue to conduct the Hospitality, Entertainment
and Information Services businesses of ITT. ITT Hartford will continue to
conduct the insurance businesses of ITT.
The Distribution is subject to various conditions, including (i) receipt of
a favorable ruling from the Internal Revenue Service as to certain federal
income tax consequences of the Distribution and (ii) all necessary consents of
any governmental or regulatory bodies having been obtained. A complete
description of the conditions precedent to the Distribution is contained in the
Proxy Statement for the Special Meeting of ITT Corporation Stockholders on
September 21, 1995 (the "Proxy"), which is incorporated herein by reference. ITT
currently expects the Distribution to occur prior to December 31, 1995; however,
there can be no assurance that the Distribution will occur prior to that date or
at all.
For information concerning the contemplated offering by ITT Destinations of
debt securities to be guaranteed by ITT until the completion of the
Distribution, see "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS".
ITT INDUSTRIES
After the Distribution, ITT Industries will be engaged, directly and
through its subsidiaries, in the design and manufacture of a wide range of high
technology products, focused on the three principal business
S-3
<PAGE> 4
segments of automotive, defense and electronics, and fluid technology. ITT
Industries is a substantial worldwide enterprise with 1994 sales of $7.8
billion, of which approximately half is produced or sold outside the United
States, and which would rank ITT Industries among the top 200 companies in the
"Fortune 500". With approximately 58,000 employees based in over 40 countries,
ITT Industries' companies sell products in over 100 countries under a variety of
highly regarded brand names coupled with the ITT trademark. Each of its three
principal business units is recognized internationally as a leader in its chosen
field and competes based on the skills of its people in technical leadership,
customer relations and manufacturing proficiency.
ITT Automotive is one of the largest independent suppliers of automotive
systems and components to vehicle manufacturers worldwide with 1994 sales of
$4.8 billion. Through operations located in Europe, North and South America and
joint ventures and licensees in Asia, ITT Automotive designs, engineers and
manufactures a broad range of automotive systems and components under two major
worldwide product groupings. The Brake and Chassis Systems group, with annual
sales approaching $3 billion, represents the world's largest array of expertise
in braking and chassis system capabilities, including anti-lock brake ("ABS")
and traction control systems ("TCS"), chassis systems, foundation brake
components, fluid handling products and Koni shock absorbers. In 1994, ITT
Automotive maintained its position as a leading global supplier of four-wheel
ABS and TCS, sales of which exceeded $1 billion for the second consecutive year.
The Body and Electrical Systems group, with sales approaching $2 billion
annually, produces automotive products, such as door and window assemblies,
wiper module assemblies, seat systems, air management systems, switches and
fractional horsepower DC motors. During 1994, ITT Automotive substantially
increased its previously established position as a leading producer of electric
motors and wiper systems, through the acquisition from General Motors of its
motors and actuators business unit, now renamed ITT Automotive Electrical
Systems, Inc.
ITT Defense & Electronics companies, with 1994 sales of $1.5 billion,
develop, manufacture and support high technology electronic systems and
components for defense and commercial markets on a worldwide basis with
operations in North America, Europe and Asia. Defense market products include
tactical communications equipment, electronic warfare systems, night vision
devices, radar, space payloads and operations and management services.
Commercial products include interconnect products such as connectors, switches
and cable assemblies and night vision devices. ITT Defense & Electronics enjoys
a leadership position in certain products that are expected to be critical to
the armed forces in the 21st century, particularly products that facilitate
communications in the forward area battlefield, night vision devices that enable
soldiers to conduct night combat operations and electronic systems that protect
allied forces from enemy radar controlled missiles. In addition, through its
international field engineering business, ITT Defense & Electronics is well
positioned to gain from trends to commercialize and outsource military support
operations. In the interconnect products market, ITT Cannon maintains a position
as one of the world's top ten connector companies based on revenue and is a
leading supplier to the military/aerospace and industrial sectors.
ITT Fluid Technology, with 1994 sales of $1.1 billion, is a worldwide
leader in the design, development, production and sale of products, systems and
services used to move, handle, transfer, control and contain fluids of all
kinds. Operating in more than 100 countries, ITT Fluid Technology is a leading
supplier of pumps, valves, heat exchangers, mixers, instruments and controls for
the management of fluids. Its major unit is ITT Flygt, which is headquartered in
Sweden and is a pioneer in submersible technology and the world leader in
submersible pumping and mixing products. Other units hold market leadership
positions in a number of product/market segments under long-established, strong
brand names such as AC Pump, Barton, Bell & Gossett, Cam-tite and Dia-Flo
valves, McDonnell & Miller, Jabsco, Marlow and others. In 1994, ITT acquired
Richter Chemie-Technik GmbH, a leading German producer of specialized pumps and
valves to handle the flow of high temperature corrosive liquid and gaseous
media.
In connection with the Distribution, D. Travis Engen, who is currently
Executive Vice President of ITT, will become Chairman, President and Chief
Executive Officer of ITT Industries, and certain persons who are currently
directors of ITT will serve as directors of ITT Industries. ITT management
expects that in addition to Mr. Engen, most of the other executive officers of
ITT Industries will be drawn from the current management of ITT or subsidiaries
of ITT.
S-4
<PAGE> 5
ITT INDUSTRIES
SUMMARY FINANCIAL AND OPERATING DATA
The following table summarizes certain selected consolidated financial data
of ITT Industries which has been derived from the Consolidated Financial
Statements of ITT Industries for the five years ended December 31, 1994, and the
nine months ended September 30, 1995 and 1994. The Distribution has been
recorded as a discontinuance of the businesses of ITT Destinations and ITT
Hartford in the consolidated financial statements of ITT Industries (currently
ITT Corporation) contained herein. The information set forth below should be
read in conjunction with the information set forth under "ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS", "ITT INDUSTRIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and ITT Industries' Consolidated Financial Statements and the Notes
thereto included in this Prospectus Supplement and in the Proxy, which is
incorporated herein by reference. The following information is qualified in its
entirety by the information and financial statements appearing elsewhere in this
Prospectus Supplement and in the Proxy, which is incorporated by reference
herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- ------- ------- ------- ------- -------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales..................... $ 6,633 $ 5,590 $ 7,758 $ 6,621 $ 6,845 $ 6,430 $ 6,972
Income from Continuing
Operations.................. $ 37(1) $ 118 $ 202 $ 135 $ 655(2) $ 231 $ 521
BALANCE SHEET DATA:
Total Assets.................. $ 13,577 $ 11,668 $11,035 $12,981 $12,560 $13,283 $12,810
Long-Term Debt, including
Capital Leases.............. $ 801 $ 1,987 $ 1,712 $ 1,994 $ 2,272 $ 2,323 $ 2,357
Debt excluding Discontinued
Operations.................. $ 2,275 $ 2,721 $ 2,640 $ 2,971 $ 2,792 $ 2,717 $ 2,657
Stockholders Equity(3)........ $ 8,061 $ 6,898 $ 6,835 $ 7,650 $ 7,247 $ 9,173 $ 8,546
OPERATING DATA:
Operating Income.............. $ 337 $ 262 $ 418 $ 229 $ 19 $ 158 $ 305
EBITDA(4)..................... $ 659 $ 547 $ 791 $ 552 $ 334 $ 453 $ 564
Cash from Continuing Operating
Activities(5)............... $ 216 $ 253 $ 637 $ 628 $ 633 $ 702 $ 455
</TABLE>
- ---------------
(1) Includes charge of $111 million after tax for provisions for the planned
disposal of ITT Semiconductors and of ITT Community Development Corporation.
(2) Includes $622 million after tax gain from the sale of the equity interest in
Alcatel N.V.
(3) Excluding unrealized loss on debt and equity securities per SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
(4) EBITDA is presented here as an alternative measure of the ability of ITT
Industries 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 Consolidated Cash Flow Statements in ITT Industries'
Consolidated Financial Statements contained herein).
(5) Amounts are as determined on the Consolidated Cash Flow Statements in ITT
Industries' Consolidated Financial Statements contained herein.
S-5
<PAGE> 6
USE OF PROCEEDS
The net proceeds from the sale of the Debentures will be applied to the
repayment of short-term debt, currently having a weighted-average interest rate
of approximately 5.85% and a weighted-average maturity of approximately eight
days. Such short-term debt was incurred primarily to repurchase in July 1995
$3.4 billion aggregate principal amount of public debt securities. See "ITT
INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES".
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------------------
1995 1994 1993 1992 1991 1990
- ----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
1.57(1) 3.40 2.05 5.27 1.99 5.31
</TABLE>
- ---------------
(1) Includes after-tax provisions of $111 million for the expected losses on the
disposals of ITT Semiconductors and ITT Community Development Corporation.
Excluding these provisions, the ratio was 2.66.
The ratios of earnings to fixed charges for ITT and set forth above reflect
the businesses of ITT Destinations and ITT Hartford as discontinued operations
for all periods presented. These computations include the continuing operations
of ITT and its subsidiaries, and 50% or less equity companies. For the purpose
of these ratios, "earnings" is determined by adding "fixed charges" (excluding
interest capitalized), income taxes, minority common stockholders equity in net
income and amortization of interest capitalized to income from continuing
operations after eliminating equity in undistributed earnings of companies in
which at least 20% but less than 50% equity is owned. For this purpose, "fixed
charges" consists of (1) interest on all indebtedness and amortization of debt
discount and expense, (2) interest capitalized and (3) an interest factor
attributable to rentals.
S-6
<PAGE> 7
FORECASTED CAPITALIZATION
The following table sets forth the consolidated capitalization of ITT
Industries as of September 30, 1995 on a historical basis, forecasted as to
December 31, 1995 (the approximate date of the Distribution), and as adjusted to
give effect to the Distribution and the transactions contemplated thereby,
including the allocation of indebtedness discussed under "THE
DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The significant
assumptions used to calculate the forecasted capitalization are described below.
The following data is qualified in its entirety by the financial statements of
ITT Industries and other information contained elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
(1)
SEPTEMBER 30, FORECASTED PRO FORMA
1995 AT DECEMBER 31, AFTER
ACTUAL 1995 DISTRIBUTION
-------------- --------------- -------------
($ IN MILLIONS)
<S> <C> <C> <C>
Cash and Cash Equivalents.............................. $ 183 $ 111 $ 111
======= ====== ======
Debt................................................... 2,275 1,561 1,561
Stockholders Equity --
Common Stock...................................... 116 119 119
Capital Surplus................................... 685 832 705
Cumulative Translation Adjustment................. (36) (36) (36)
Unrealized Loss on Securities, Net of Tax (2)..... (111) (111) --
Retained Earnings................................. 7,296 7,506 --
------- ------ ------
Total Equity................................. 7,950 8,310 788
------- ------ ------
Total Capitalization......................... $10,225 $9,871 $2,349
======= ====== ======
</TABLE>
- ---------------
(1) Column gives effect to the distribution of ITT Hartford Common Stock and ITT
Destinations Common Stock (book values of $4.4 billion and $3.1 billion,
respectively) and the allocation of amounts of indebtedness contemplated by
"THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS".
(2) The unrealized loss on securities, net of tax, relates solely to the
investment portfolios of ITT Hartford, which will not be part of ITT
Industries following the Distribution.
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The foregoing financial forecast of the capitalization of ITT Industries is
based on ITT management's forecasts and assumptions concerning events and
circumstances which are expected to occur subsequent to the latest historical
balance sheet date but prior to and including December 31, 1995 (the approximate
date of the Distribution), including future results of operations and other
events. For purposes of this forecasted capitalization, net income in the last
three months of 1995 is assumed to approximate the same level as the comparable
1994 period. Assumptions with respect to events that will occur between
September 30, 1995 and December 31, 1995, include the following:
- - The sale of certain non-strategic assets resulting in debt reduction of
approximately $175 million, for which negotiations are in progress.
- - The exercise of 2.1 million stock options at an average exercise price of $70
per share resulting in a reduction of debt and an increase to equity of
approximately $150 million.
- - Receipt of a dividend from ITT Hartford of approximately $370 million.
- - A reduction in deployed working capital of $175 million and the utilization of
those funds to repay existing short-term borrowings.
- - The use of $72 million in cash balances at various subsidiaries of ITT
Industries to repay existing short-term borrowings, primarily in Germany.
- - Net capital expenditures totaling $190 million in the last three months of
1995 ($175 million of net capital expenditures was incurred in the comparable
1994 period). In addition, a $100 million contribution to ITT Destinations is
anticipated.
S-7
<PAGE> 8
In ITT management's judgment, the listed assumptions and forecasts reflect
those material events or transactions expected to occur prior to the
Distribution. There have been no changes in accounting principles anticipated in
this capitalization forecast nor are any such changes currently contemplated.
LIMITATIONS ON PROJECTIONS AND FORECASTS
The assumptions and estimates underlying the projected and forecasted data
and information in this Prospectus Supplement are inherently uncertain and,
although considered reasonable by management of ITT, are subject to significant
business, economic and competitive uncertainties, many of which are beyond the
control of ITT and its subsidiaries. Accordingly, there can be no assurance that
the projected and forecasted financial results will be realized. In fact, actual
results in the future usually will differ from the forecasted financial results
and the differences may be material. Neither ITT nor any of its subsidiaries
intends after the date of this Prospectus Supplement to update any forecasted or
projected financial data or information contained in this Prospectus Supplement
and the absence of such an update should not be construed as any indication
regarding the views or beliefs of management of ITT (or of ITT Industries after
the Distribution) concerning the forecasted or projected data or information
contained in this Prospectus Supplement.
S-8
<PAGE> 9
ITT INDUSTRIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet of ITT
Industries as of September 30, 1995, gives effect to the Distribution (see "THE
DISTRIBUTION -- SHARES TO BE DISTRIBUTED"). The Unaudited Pro Forma Consolidated
Income Statements of ITT Industries for the year ended December 31, 1994 and the
nine months ended September 30, 1995, present the results of operations of ITT
Industries as if the Distribution and the conversion of the issued and
outstanding shares of preferred stock to common shares and the termination of
the ESOP had been completed at the beginning of each period.
The Unaudited Pro Forma Consolidated Financial Statements are based on the
historical financial statements of ITT Industries and the assumptions and
adjustments set forth in the accompanying Notes to ITT Industries Unaudited Pro
Forma Consolidated Financial Statements.
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1995
($ IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets............................................. $ 2,624 $ -- $2,624
Net assets of discontinued operations...................... 7,657 (7,657) --
Other assets............................................... 3,296 102 3,398
------- ------- ------
Total assets..................................... $13,577 $(7,555) $6,022
======= ======= ======
Current liabilities........................................ $ 3,261 $ -- $3,261
Other liabilities.......................................... 2,366 -- 2,366
Stockholders equity --
Common stock.......................................... 116 -- 116
Paid-in capital....................................... 685 (370) 315
Cumulative translation adjustments.................... (36) -- (36)
Unrealized gain (loss) on securities.................. (111) 111 --
Retained earnings..................................... 7,296 (7,296) --
------- ------- ------
Total equity..................................... 7,950 (7,555) 395
------- ------- ------
Total liabilities and equity..................... $13,577 $(7,555) $6,022
======= ======= ======
</TABLE>
See accompanying Notes to ITT Industries Unaudited Pro Forma Financial
Statements
S-9
<PAGE> 10
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1994
($ IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................................. $7,758 $ -- $7,758
Cost of sales.............................................. 6,607 -- 6,607
Selling, general, administrative and other operating
expenses................................................. 733 -- 733
Interest expense, net...................................... 48 -- 48
Miscellaneous expense, net................................. 21 -- 21
------ ----- ------
349 -- 349
Income tax expense......................................... (147) -- (147)
------ ----- ------
Income from continuing operations.......................... 202 -- 202
Discontinued operations, net of tax........................ 831 (706) 125
Cumulative effect of accounting changes.................... (11) 5 (6)
------ ----- ------
Net income................................................. $1,022 $(701) $ 321
====== ===== ======
</TABLE>
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 30, 1995
($ IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................................. $6,633 $ -- $6,633
Cost of sales.............................................. 5,730 -- 5,730
Selling, general, administrative and other operating
expenses................................................. 566 -- 566
Interest expense, net...................................... 92 -- 92
Miscellaneous expense, net................................. 163 -- 163
------ ----- ------
82 -- 82
Income tax expense......................................... (45) -- (45)
------ ----- ------
Income from continuing operations.......................... 37 -- 37
Discontinued operations:
Results of operations, net of tax..................... 533 (485) 48
Gain on disposition, net of tax....................... 403 -- 403
Extraordinary item -- Early extinguishment of debt, net of
tax benefit of $165...................................... (307) -- (307)
------ ----- ------
Net income................................................. $ 666 $(485) $ 181
====== ===== ======
</TABLE>
See accompanying Notes to ITT Industries Unaudited Pro Forma Financial
Statements
S-10
<PAGE> 11
ITT INDUSTRIES NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
In addition to the historical results of ITT Industries for the respective
periods presented, the Unaudited Pro Forma Consolidated Financial Statements
reflect the following:
- The distribution of ITT Destinations Common Stock and ITT Hartford
Common Stock to the shareholders of ITT Industries. The distribution is
accounted for as a dividend with a corresponding reduction of net assets
of discontinued operations and retained earnings representing the equity
of ITT Destinations and ITT Hartford. In addition, there is a reduction
in the Unrealized Loss on Securities, Net representing the account
balance pertaining to ITT Hartford.
- The elimination of the income, including cumulative effects of
accounting changes, of ITT Destinations and ITT Hartford.
LIMITATIONS ON PRO FORMA FINANCIAL INFORMATION
The pro forma financial information contained in this Prospectus Supplement
does not purport to be indicative of the results of operations that would
actually have been reported had the transactions underlying the pro forma
adjustments actually been consummated on such dates or of the results of
operations that may be reported by ITT Industries in the future. Pro forma
information in respect of ITT Industries assumes that the Distribution and the
other referenced events were completed at the beginning of the relevant
reporting period.
The Unaudited Pro Forma Consolidated Financial Statements should be read in
conjunction with, and are qualified by, information set forth under "ITT
INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and ITT Industries' Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus Supplement.
S-11
<PAGE> 12
ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of
operations is prepared to reflect the discontinuance of the businesses of ITT
Destinations and ITT Hartford and refers to ITT Industries, although the
corporation was named ITT Corporation during the periods covered.
BACKGROUND AND BUSINESS CONDITIONS
After the Distribution, ITT Industries will be engaged, directly and
through its subsidiaries, in the design and manufacture of a wide range of high
technology products, focused on the three principal business segments of
automotive, defense and electronics, and fluid technology. ITT Industries is a
substantial worldwide enterprise with 1994 sales of $7.8 billion, of which
approximately half is produced or sold outside the United States, and which
would rank ITT Industries among the top 200 of companies in the "Fortune 500".
With approximately 58,000 employees based in over 40 countries, ITT Industries
companies sell products in over 100 countries under a variety of highly regarded
brand names coupled with the ITT trademark. Each of its three principal business
units is recognized internationally as a leader in its chosen field and competes
based on the skills of its people in technical leadership, customer relations
and manufacturing proficiency. Following the Distribution, ITT Industries will
continue to pursue opportunities for growth, with a particular focus on
strengthening its position in areas of existing product leadership and expanding
international sales.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1994
Net income from continuing operations of $37 million declined 69% compared
with the $118 million reported in the 1994 period. The decline was caused by
after-tax provisions of $111 million for the expected losses on the disposals of
ITT Semiconductors and ITT Community Development Corporation. Excluding these
provisions, ITT Industries would have reported net income from continuing
operations of $148 million, a 25% improvement largely due to the contribution of
Electrical Systems Inc. ("ESI"), the former General Motors' motors and actuators
business acquired in March 1994. Excluding ESI, net income still exceeded the
1994 level by 9% due to higher volumes in a number of product lines and the
favorable impact of continuing cost reduction programs. Income from discontinued
operations totaled $936 million (including $403 million reflecting the gain on
the sale of ITT Financial) and $610 million for the first nine months of 1995
and 1994, respectively, and represents the results of ITT Hartford, ITT
Destinations, ITT Financial and, in 1994, Rayonier. ITT Industries recorded an
extraordinary loss of $307 million after tax on the early extinguishment of debt
for premium costs related to the successful completion of a debt tender offer.
Net income was $666 million, compared with $717 million in the 1994 period.
Net sales totaling $6.6 billion rose 19% with improvements at Automotive,
Defense & Electronics and Fluid Technology. Excluding the ESI contribution, net
sales improved 14%. Gross margin was approximately 14% in the 1995 period and
15% in the 1994 period due to higher material costs, while selling, general and
administrative expenses decreased to 7.6% of sales from 8.3% in the 1994 period
due to a continuing focus on cost reduction and efficiency programs. Service
charges from affiliated companies represent fees for advice and assistance
related to certain centralized general and administrative functions. Such
services represent advice and assistance in connection with cash management,
legal, accounting, tax and insurance services and charges totaled $63 million
and $53 million in the 1995 and 1994 nine months, respectively. The fees for
these services, which are based upon a general relations agreement, approximate
1% of sales. See "Plan of Distribution" Note to Consolidated Financial
Statements herein. Other operating (income) expenses, which includes gains and
losses from foreign exchange transactions and other charges, totaled ($2)
million in the 1995 period, compared with $40 million in the 1994 period which
includes the operating losses of certain non-core businesses which were disposed
of. Operating margins (excluding service charges from affiliated companies) rose
to 6.0% in the current nine months, up from 5.6% in the nine months of 1994, a
result of the factors discussed above.
S-12
<PAGE> 13
Interest expense increased to $124 million compared with $85 million in
1994 reflecting higher borrowings in connection with the acquisition of ESI and
the funding of capital needs of both continuing and discontinued operations.
Interest income in the 1994 period benefited from interest income totaling $32
million on a note receivable from the sale of Alcatel N.V. in 1992.
Miscellaneous Expense includes the aforementioned provisions for the expected
losses on the disposal of ITT Semiconductors and ITT Community Development
Corporation. The effective income tax rate approximated 55% and 46% in the 1995
and 1994 periods. Both periods were impacted by the sale of certain assets for
which no tax benefit was realized. Excluding these sales, the 1995 and 1994
effective tax rates approximated 42% and 43%, respectively. Income tax expense
decreased by $55 million, to $45 million in the 1995 period, due to lower pretax
earnings.
Business Segments -- Sales and operating income before service charges from
affiliated companies for each of ITT Industries' three major continuing business
segments were as follows for the first nine months of 1995 and 1994 ($ in
millions):
<TABLE>
<CAPTION>
SALES OPERATING INCOME
- ----------------------- -------------------
NINE MONTHS NINE MONTHS
- ----------------------- -------------------
1995 1994 1995 1994
- ------ ------ ---- ----
<S> <C> <C> <C> <C>
$4,283 $3,427 ........... Automotive ........... $276 $226
</TABLE>
Automotive's 1995 nine months results benefited significantly from the ESI
acquisition and from higher volumes and the continued impact of cost reduction
programs. These benefits were partly offset by continued pricing pressure from
original equipment manufacturers and higher material and labor costs.
<TABLE>
<CAPTION>
SALES OPERATING INCOME
- ----------------------- -------------------
NINE MONTHS NINE MONTHS
- ----------------------- -------------------
1995 1994 1995 1994
- ------ ------ ---- ----
<S> <C> <C> <C> <C>
$1,157 $1,120 ....... Defense & Electronics ....... $68 $59
</TABLE>
At Defense & Electronics, 1995 nine month operating income rose on slightly
higher revenues due to improved margins at several units and a $3 million gain
on the termination of a leasehold interest. Order backlog was $2.1 billion and
$2.2 billion at September 30, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
SALES OPERATING INCOME
- ------------------- -------------------
NINE MONTHS NINE MONTHS
- ------------------- -------------------
1995 1994 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$910 $791 .......... Fluid Technology .......... $75 $63
</TABLE>
At Fluid Technology, 1995 nine month sales and operating income increased
at all units, most significantly at Flygt, primarily due to higher volumes and
favorable foreign exchange.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Net income was $1.022 billion compared with $913 million in 1993, including
income from Discontinued Operations totaling $831 million and $828 million,
respectively.
Reported net income was adversely impacted by the net effect of three
accounting changes, the cumulative effect of which totaled $11 million after tax
as of January 1, 1994. ITT Industries adopted Statement of Financial Accounting
Standards ("SFAS") No. 115 and related pronouncements which required adjustments
to the fair value of mortgage-backed interest-only securities held by its
discontinued businesses through the statement of income. The cumulative effect
of this accounting change was a $36 million after tax charge. In an unrelated
change, the basis for discounting certain workers' compensation liabilities in
the Insurance business was changed from an insurance guideline-based method to
an estimated risk-free rate of return to reflect more appropriately current
market conditions. The cumulative effect of this accounting change was a benefit
of $42 million after tax. Finally, ITT Industries changed the accounting for
certain marketing and start-up costs at the discontinued ITT Educational. Such
costs, which had been previously deferred and amortized, are now expensed as
incurred. The cumulative effect of this accounting change was an after tax
charge of $17 million. The 1993 net income was adversely impacted by an
extraordinary loss of $50 million after tax resulting from the retirement of
fixed rate debt.
S-13
<PAGE> 14
Net income from continuing operations of $202 million rose by $67 million
(50%) from the 1993 level of $135 million. Over 46% of the net income growth was
contributed by ESI, which was acquired in March 1994. Net income in 1994
included a $15 million after tax loss from the divestment of ITT Instruments, a
non-strategic business within the Defense & Electronics business segment. Net
income in 1993 included an after tax gain of $10 million for the divestment of
ITT Components Distribution, also within the Defense & Electronics segment.
Higher volumes at Automotive and Fluid Technology combined with the favorable
impact of ongoing cost reduction programs in all businesses contributed to the
favorable net income comparison.
Net sales in 1994 rose to a record $7.8 billion, an increase of 17% from
$6.6 billion in 1993. Without ESI, net sales from existing businesses rose 6.6%,
principally from higher Automotive volumes.
Gross margins remained steady at approximately 15% in both periods.
Selling, general and administrative expenses declined by $12 million or 2% in
response to ongoing efforts to reduce costs and increase efficiency. Service
charges from affiliated companies, which are based on a percentage of sales,
rose by $14 million to $73 million. After the Distribution, reduction of such
expenses will be a focus of ITT Industries as these services are developed or
purchased from other sources. Other operating expenses declined from $31 million
to $17 million due chiefly to the absence of significant restructuring
provisions recorded by Automotive in the fourth quarter of 1993 for the
downsizing and consolidation of its European operations. Operating margins
(excluding service charges from affiliated companies) increased to 6.3%,
compared with 4.3% in 1993.
Interest expense, net, benefited from income on notes receivable related to
the 1992 Alcatel N.V. sale totaling $32 million in 1994 and $90 million in 1993.
Excluding interest income, interest expense decreased to $114 million compared
with $153 million in the prior year principally due to the collection of Alcatel
notes in July 1994 and the use of those proceeds to reduce debt. Share
repurchases in excess of $1 billion resulted in higher debt levels at year end.
Miscellaneous expense in 1994 totaled $21 million due primarily to the loss
on the sale of ITT Industries' Instruments subsidiary. Results in 1993 included
the gain on the fourth quarter sale of ITT Components Distribution, partly
offset by smaller losses on the disposition of certain Automotive operations.
Income taxes of $147 million were provided on pretax income of $349 million
representing a 42% effective tax rate. In 1993, the effective income tax rate
was 33%. This rate is unusually low and reflected the one-time remeasurement of
deferred tax liabilities pursuant to changes in the German statutory tax rates
as well as the realization of tax benefits on the disposition of certain
subsidiaries.
Business Segments -- Sales and operating income before service charges from
affiliated companies for each of ITT Industries' three major business segments
were as follows ($ in millions):
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- --------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
$4,784 $3,580.................... Automotive............ $328 $164
</TABLE>
Sales in 1994 for Automotive increased 34% from 1993 levels to $4.8
billion. Approximately 58% of the increase is due to the March 1994 ESI
acquisition, with the balance reflecting higher market penetration of anti-lock
brake systems ("ABS") in North America and Europe as well as increased vehicle
production. The ESI acquisition improved the geographic balance of Automotive's
North American and European sales mix. In 1994, North American sales comprised
50% of the total, compared with 43% in 1993.
Automotive segment operating income doubled in the year on increased sales
volumes (including the ESI acquisition) and continued cost reductions. Lower
sales prices and higher labor costs partly offset the growth in sales. Excluding
ESI, higher sales volume resulted in an operating improvement of 60% compared
with 1993. The benefits of cost reduction programs and the successful
integration of ESI enabled Automotive to improve operating margins despite
significant price concessions granted to customers. Operating margins (excluding
service charges from affiliated companies) increased to 6.9% from 4.6% last
year.
S-14
<PAGE> 15
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- -------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
$1,498 $1,426.........Defense & Electronics.......... $96 $77
</TABLE>
Sales for Defense & Electronics rose 5% compared with 1993, primarily due
to increased international defense radar and radio product sales as well as
higher connector volumes. Operating income increased 25% to $96 million due
principally to the return to profitability of the connectors business, which
benefited from restructuring actions in prior years. Operating income in other
defense businesses declined in 1994 due to lower margin adjustments on mature
military programs, partly offset by higher sales volumes and the benefits of
cost reduction programs. Order backlog at the end of 1994 remained even with the
$2.1 billion backlog at the end of 1993.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- -------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <C> <C> <C> <C>
$1,125 $1,030.............Fluid Technology............ $99 $95
</TABLE>
Fluid Technology reported 9% growth in sales in 1994, the first significant
increase since 1990. The improvement was the result of new product initiatives,
global market development activities, a strong North American heating season
caused by severe winter weather and generally strengthening economic conditions
worldwide. The acquisition of Richter Chemie-Technik, a German manufacturer of
plastic-lined valves and pumps, also contributed to the increase. Flygt, through
an increase in market share, was the primary contributor to the improvements at
Fluid Technology. Operating income improved in 1994 despite intense competition,
increased raw material costs and the absence of favorable 1993 foreign exchange
transactions. The improvement was achieved through higher sales volume, price
increases and benefits from cost reduction efforts.
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1992
Net income in 1993 of $913 million compared with a net loss in 1992 of $885
million. The 1993 net income was adversely impacted by an extraordinary loss of
$50 million after tax, resulting from the retirement of fixed rate debt at ITT
Financial. The net loss in 1992 included the effects of ITT Industries' adoption
of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions", and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", which were recorded effective January 1, 1992, using the immediate
recognition method. These accounting changes resulted in a cumulative catch-up
adjustment of $625 million after tax. In July 1992, ITT Industries completed the
sale of its 30% stake in Alcatel N.V. to its joint venture partner, Alcatel
Alsthom, resulting in a gain of $942 million ($622 million after tax). In
addition, ITT Industries embarked on a significant restructuring program in
1992, and restructuring provisions were recorded at all major business segments,
the most significant of which were recorded at Defense & Electronics. Such
provisions, which totaled $82 million pretax ($54 million after tax), included
the closing of facilities and product lines as well as personnel termination
costs at several of the segment business units.
Income from continuing operations (excluding the Alcatel N.V. gain in 1992)
rose to $135 million in 1993 from $33 million in 1992.
Net sales in 1993 of $6.6 billion declined from the $6.8 billion reported
in 1992 due principally to reduced Defense business as several major programs
were completed.
Gross margins approximated 15% in 1993, up from less than 13% in 1992, with
all major businesses contributing to the improvement. Selling, general and
administrative expenses in 1993, at 9.9% of sales, were $31 million lower than
the $686 million reported in 1992. Service charges from affiliated companies of
$59 million declined $3 million in conjunction with lower sales levels (see
"Plan of Distribution" note to ITT Industries Consolidated Financial Statements
herein). Other operating expenses of $31 million in 1993 were $79 million lower
than in 1992, which included the previously mentioned restructuring provisions.
Expenditures, totaling $8 million in 1993 and $20 million in 1992, to cover
environmental exposures are also included in other operating expenses.
S-15
<PAGE> 16
Interest expense, net, benefited in both 1993 and 1992 from interest income
on notes receivable pertaining to the July 1992 sale of Alcatel N.V. Such income
totaled $90 million in 1993 and $57 million in 1992. Excluding interest income,
interest expense totaled $153 million in 1993, compared with $180 million in
1992. The decrease primarily reflects lower effective interest rates on
interest-bearing debt.
Miscellaneous income of $3 million in 1993 primarily reflected a gain on
the sale of ITT Components Distribution, partly offset by smaller losses on the
disposition of certain Automotive operations. The $10 million expense in 1992
includes a $7 million write-down to reflect a small, non-core operation at its
estimated net realizable value.
Income taxes of $65 million in 1993 were provided on pretax income of $200
million, representing a 33% effective tax rate, which was unusually low for the
reasons discussed above. The 1992 effective tax rate was 32% due to the effect
of the Alcatel N.V. gain and equity earnings. "Cumulative Effect of Accounting
Changes" in the financial statements is presented on a net of tax basis, and,
accordingly, the associated tax benefit is not included in the provision above.
Business Segments -- Sales and operating income, excluding service charges
from affiliated companies for each of ITT Industries' three major business
segments, were as follows ($ in millions):
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
- --------------- -------------
1993 1992 1993 1992
- ------ ------ ---- ----
<S> <C> <C> <C> <C>
$3,580 $3,498.................Automotive................. $164 $118
</TABLE>
Automotive sales increased in 1993 as a result of increased ABS market
penetration, higher light vehicle production in North America and the continued
shift in consumer preference toward light trucks for which Automotive maintains
a strong product offering. Tempering the growth in 1993 was the deepening
recession in Western Europe which resulted in a decline in Western European car
production. Western European sales comprised 57% of the total in 1993 compared
with 68% in 1992. Operating income rose by nearly 40% compared with 1992 due
largely to continued cost reduction efforts partially offset by lower sales
prices and higher labor costs.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
- --------------- ------------
1993 1992 1993 1992
- ------ ------ ---- ----
<S> <C> <C> <C> <C>
$1,426 $1,663................. Defense & Electronics........ $77 $(29)
</TABLE>
The 14% sales reduction at Defense & Electronics in 1993 was anticipated as
the completion of several major programs and reduced U.S. government defense
spending resulted in lower shipments and a decline in operations and maintenance
contracts. Operating income improved substantially in 1993 due in part to
current year cost improvements at several units and favorable margin adjustments
on mature military programs. The comparison with 1992 also benefits from the
absence of the $82 million restructuring charge in 1992. Order backlog totaled
$2.1 billion at both December 31, 1993 and December 31, 1992.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
- --------------- ------------
1993 1992 1993 1992
- ------ ------ ---- ----
<S> <C> <C> <C> <C>
$1,030 $1,070..................Fluid Technology........... $95 $67
</TABLE>
Sales at Fluid Technology were $40 million lower than in 1992 due primarily
to a stronger U.S. dollar versus many currencies of the European countries in
which Fluid Technology operates. Growth in markets including water and
wastewater treatment, power generation, exports and new products was largely
offset by weak market conditions in such industries as construction, industrial
process, oil and gas, mining and leisure marine. Despite sales pressures,
operating income in 1993 improved at all businesses and benefited from the
impact of cost improvement actions taken in 1992, including the consolidation of
facilities to reduce excess capacity. In 1992, provisions for restructuring,
along with devaluation of the Swedish krona, adversely impacted operating
income.
S-16
<PAGE> 17
ALCATEL N.V.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Equity in Earnings of Alcatel N.V. ($ in millions).............. -- -- $97
</TABLE>
ITT Industries sold its 30% interest in Alcatel N.V. to its joint venture
partner, Alcatel Alsthom in July 1992. Proceeds from the sale included $1
billion in cash, two notes collected in July 1993 and 1994 totaling $1.6 billion
(including interest) and 9.1 million shares in Alcatel Alsthom. The shares have
a net book value of $806 million and are included in the net assets of
Discontinued Operations. ITT Industries recognized a pretax gain of $942 million
($622 million after tax) in 1992 on the transaction.
DISCONTINUED OPERATIONS AND UNITS HELD FOR DISPOSITION
The following is a table summarizing the results of discontinued
operations, net of tax ($ in millions):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- -----------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
ITT Destinations..................................... $103 $ 59 $ 74 $ 39 $ 2
ITT Hartford......................................... 418 474 632 537 (274)
ITT Financial, ITT Rayonier and Other................ 12 77 125 252 (643)
---- ---- ---- ---- -----
Total Discontinued Operations...................... $533 $610 $831 $828 $(915)
==== ==== ==== ==== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
ITT Industries generated EBITDA from continuing operations (defined as
operating income before depreciation and amortization) of $659 million in the
nine months ended September 30, 1995, compared with $547 million in the
comparable 1994 period, a 20% improvement. EBITDA for the full year 1994 was
$791 million, a 43% improvement over the $552 million in 1993 and 137% better
than the $334 million generated in 1992. The improvement reflects earnings
growth, primarily in the Automotive business segment, which benefited from the
ESI acquisition in March 1994 as well as smaller improvements in the Defense &
Electronics and Fluid Technology business segments. Cash from continuing
operating activities as defined by Statement of Financial Accounting Standards
("SFAS") No. 95 decreased to $216 million in the nine months ended September 30,
1995, compared with $253 million in the comparable 1994 period due primarily to
higher net interest expense. The SFAS definition of cash from continuing
operating activities differs from EBITDA largely due to the inclusion of
interest, taxes and changes in working capital.
Cash to discontinued operations in the nine months ended September 30, 1995
reflects the net cash activity associated with the discontinued finance,
insurance and hospitality, entertainment and information services business
segments. The $(519) million outflow in the 1995 period compared with the $463
million inflow in the 1994 period reflects the timing of income tax and other
intercompany settlements between ITT Industries and the discontinued business
segments.
In 1995, ITT Industries (ITT) realized $12.4 billion of proceeds through
September 30 from the sale of assets at ITT Financial. Substantially all the
proceeds from these transactions were used to repay ITT Financial indebtedness.
In addition, cash from operating activities was used to fund capital
expenditures, corporate dividends and stock repurchases. In the 1994 period,
cash from operating activities was used to fund the acquisition of ESI ($374
million), to pay corporate dividends and to repurchase stock. Funds of $853
million were generated in 1994 from the sale of divested assets, primarily due
to the receipt of $817 million as the final installment from the 1992 sale of
Alcatel N.V. Previous payments from that sale totaled $767 million in 1993 and
$1.0 billion in 1992. The cash generated was used to fund strategic acquisitions
and capital additions along with repurchases of the ITT Common Stock.
Many of ITT Industries' businesses require substantial investment in plant
and tooling in order to produce competitively superior products, including
development costs of next generation products. Historically, ITT
S-17
<PAGE> 18
Industries' businesses have generated sufficient operating cash flow to fund
such expenditures. Gross plant additions totaled $276 million in the first nine
months of 1995, with approximately 61% of that total incurred at Automotive,
primarily in ABS and traction control technology. At September 30, 1995,
contractual commitments have been made for additional capital expenditures
totalling $169 million in 1995 and an additional $513 million in future years.
Spending on capital expenditures for the 1994 nine months was $232 million, 62%
of which was at Automotive. Gross plant additions totaled $407 million in 1994,
$337 million in 1993 and $351 million in 1992, as expenditures for adaptive
braking systems, including the latest variation of low cost ABS technology, was
and continues to be important to overall strategy. Investments in foundation
brakes and brake actuation technology, electrical systems and motors, and
facilities in developing countries, including the Far East, the Czech Republic
and Hungary, were also integral to ITT Industries' investment strategy. In
addition, certain facilities and equipment are utilized by ITT Industries'
businesses through operating leases. Minimum rentals under operating leases in
effect are $81 million in 1995, $67 million in 1996 and $121 million in the 1997
through 1999 period. The commitments discussed above are expected to be funded
through the operating cash flow of ITT Industries.
Acquisition spending totaled $418 million in 1994, consisting of
Automotive's purchase of ESI for $374 million in March 1994 and Fluid
Technology's acquisition of Richter Chemie-Technik. The first nine months of
1995 included a small acquisition at Automotive. Liquidity needs in connection
with any future acquisitions would, in large part, be met through traditional
debt or equity financings, asset sales or any combination thereof.
Expenditures for research, development and engineering totaled $396 million
in 1994, $460 million in 1993 and $502 million in 1992, approximately 50% of
which was pursuant to customer contracts. The reduction over the three years is
directly attributable to reduced customer requirements in the Defense companies.
Research and development expenditure levels, excluding those pursuant to
customer contracts, are expected to remain at approximately 3% of sales for the
foreseeable future, although there can be no assurance such results will occur.
Research, development and engineering expenditures have funded numerous product
developments such as anti-lock brake and wiper systems and electronic
countermeasures and tactical radio communications technology.
Cash flows after gross plant additions are expected to be sufficient to
cover working capital needs, interest, taxes and, subject to certain
limitations, dividends to shareholders. Working capital needs in the first nine
months of 1995 and 1994 largely reflect seasonality in the Automotive business.
Working capital needs increased in 1994 compared with 1993 and 1992 due
principally to growth in the Automotive business.
External borrowings (excluding discontinued operations) at ITT Industries
were $2.3 billion at September 30, 1995 compared with $2.6 billion at December
31, 1994 and $3.0 billion at December 31, 1993. Cash and cash equivalents were
$183 million at September 30, 1995 compared with $322 million at year-end 1994
and $240 million at year-end 1993.
Effective January 1, 1994, ITT Industries adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", which requires
investments to be reflected at fair value, with the corresponding impact
reported as a separate component of Stockholders Equity in situations where
those investments are "available for sale", as defined in SFAS No. 115. The
accounting standard does not allow for a corresponding fair value adjustment to
liabilities. Stockholders Equity can vary significantly between reporting
periods as market interest rates and other factors change. Accordingly, ITT
Industries does not include unrealized gains or losses in its assessment of debt
to total capitalization. Following the Distribution, the impact of this
accounting standard to ITT Industries' Stockholders Equity will be immaterial.
Stockholders equity increased by $1.2 billion during the first nine months
of 1995, excluding the SFAS 115 impact, due to growth in retained earnings which
included the ITT Financial gain on sale of $403 million after tax and the
elimination of the deferred compensation on the ESOP, as a result of the ESOP
termination in July, 1995. The trustee of the ESOP then converted the preferred
stock held by the trustee to ITT common stock and sold 5.3 million shares into
the open market. The sales proceeds were used to repay the debt associated with
the ESOP during August 1995, which totaled $541 million.
S-18
<PAGE> 19
In July, 1995, as part of a recapitalization plan for its soon to be three
independent businesses, ITT Industries completed a tender offer for $3.4 billion
of its debt securities. The tender offer was financed with the proceeds of
commercial paper borrowings by ITT and resulted in ITT Industries paying a
tender premium of $307 million after tax ($472 million pretax). Such amount has
been recorded as an extraordinary loss on the early extinguishment of debt in
the 1995 third quarter.
ITT Industries uses derivative financial instruments extensively in its
discontinued Insurance segment as part of its risk management strategy.
Derivative financial instruments are also used to a much lesser degree in
several other segments of ITT Industries. Interest rate risk relative to ITT
Industries' debt portfolios is managed through interest rate swap agreements,
primarily in the discontinued Finance segment. The multinational operations of
ITT Industries also create exposure to foreign currency fluctuation. Foreign
currency risk relative to ITT Industries' net investment in a foreign country,
foreign denominated debt or a specific foreign denominated transaction is
managed in part through currency swaps and forward exchange contracts. Foreign
currency transaction gains or losses were not significant in the periods
discussed above.
ITT Industries is an end-user of derivatives and does not utilize them for
speculative purposes. The notional amounts of derivative contracts represent the
basis upon which pay and receive amounts are calculated and therefore are not
reflective of credit risk. Credit risk is limited to the amounts calculated to
be due or owed by ITT Industries on such contracts. ITT Industries expects to
continue to use interest rate swaps to reduce its cost of borrowing in the
future, although the divestment of ITT Financial will result in substantially
reduced activity in the future.
INCOME TAXES
Income taxes have been assessed to ITT Industries historically in
accordance with a tax sharing agreement with ITT Destinations and ITT Hartford
that generally requires the computation of income taxes as if these companies
had been stand-alone entities. In all years presented, credits for income taxes
paid in foreign jurisdictions were fully utilizable in the United States in the
ITT consolidated tax return. This full utilization of credits may not be
achievable in the future and, to the extent foreign tax credits cannot be used
to reduce the U.S. tax obligation, a higher effective income tax rate will be
incurred.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
that affect its operating facilities and impose liability for the clean-up of
past discharges of hazardous substances. These laws include the Federal Clean
Water Act, Clean Air Act, the Resource Conservation and Recovery Act ("RCRA")
and the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"). Management of ITT Industries believes that ITT Industries is in
substantial compliance with these and all other applicable environmental
requirements. Environmental compliance costs are accounted for primarily as
normal operating expenses. Management of ITT Industries does not believe that
such environmental compliance costs will have a material adverse effect on ITT
Industries' financial position, results of operations or cash flow.
In estimating the costs of environmental investigation and remediation, ITT
Industries considers, among other things, its prior experience in remediating
contaminated sites, remediation efforts by other parties, the professional
judgment of environmental experts and the likelihood that other parties which
have been named potentially responsible parties ("PRPs") will have the financial
resources to fulfill their obligations at sites where they and ITT Industries
may be jointly and severally liable. Under the scheme of joint and several
liability, ITT Industries could be liable for the full costs of investigation
and remediation, even if additional parties are found to be responsible under
the applicable laws. It is difficult to estimate the total costs of
investigation and remediation due to various factors, including incomplete
information regarding particular sites and other PRPs, uncertainty regarding the
extent of contamination and ITT Industries' share, if any, of liability for such
problems, the selection of alternative remedies and changes in cleanup
standards. When it is possible to create reasonable estimates of liability with
respect to environmental matters, ITT Industries
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<PAGE> 20
establishes reserves in accordance with generally accepted accounting
principles. While the outcome of ITT Industries' various remediation efforts
presently cannot be predicted with a high level of certainty, management does
not expect that these matters will have a material adverse effect on ITT
Industries' financial position, results of operations or cash flow. See
"BUSINESS OF ITT INDUSTRIES -- LEGAL PROCEEDINGS".
EFFECT OF INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenues or operating results of ITT
Industries during the three most recent fiscal years.
S-20
<PAGE> 21
BUSINESS OF ITT INDUSTRIES
GENERAL
As part of the Distribution, the name of ITT will be changed to ITT
Industries, Inc. As a result of the Reincorporation (as defined below), ITT
Industries will be an Indiana corporation after the Distribution. The corporate
headquarters of ITT Industries will be in White Plains, New York. Unless the
context otherwise indicates, references herein to ITT Industries include its
subsidiaries.
ITT Industries is a worldwide enterprise engaged directly and through its
subsidiaries in the design and manufacture of a wide range of high technology
products, focused on three principal business segments. These segments,
described below, are ITT Automotive, ITT Defense & Electronics and ITT Fluid
Technology. In addition, ITT Industries holds the stock of certain other
subsidiaries whose operations have been, or are in the process of being,
discontinued or sold as described below under "-- DISCONTINUED OPERATIONS".
The table below shows in percentage terms ITT Industries' consolidated net
sales and operating income attributable to each of its ongoing lines of business
for the nine months ended September 30, 1995 and 1994 and for the last three
years:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- -----------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET SALES
ITT Automotive.................................. 67% 64% 65% 59% 56%
ITT Defense & Electronics....................... 18 21 20 24 27
ITT Fluid Technology............................ 15 15 15 17 17
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
OPERATING INCOME
ITT Automotive.................................. 66% 65% 63% 49% 76%
ITT Defense & Electronics....................... 16 17 18 23 (19)
ITT Fluid Technology............................ 18 18 19 28 43
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
BUSINESS AND PRODUCTS
ITT AUTOMOTIVE
ITT Automotive is one of the largest independent suppliers of systems and
components to vehicle manufacturers worldwide and also supplies related products
to the aftermarket. Through operations located in Europe, North America and
South America and joint ventures and licensees in Asia, ITT Automotive designs,
engineers and manufactures a broad range of automotive systems and components
under two major worldwide product groupings -- Brake and Chassis Systems and
Body and Electrical Systems.
The Brake and Chassis Systems group, with annual sales for 1994 approaching
$3 billion, produces anti-lock brake ("ABS") and traction control systems
("TCS"), chassis systems, foundation brake components, fluid handling products
and Koni shock absorbers.
The Body and Electrical Systems group, with sales for 1994 approaching $2
billion, produces automotive products, such as door and window assemblies, wiper
module assemblies, seat systems, air management systems, switches and fractional
horsepower DC motors.
S-21
<PAGE> 22
The following table illustrates the percentage sales by group for the
periods specified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Brake & Chassis Systems....................................... 61 % 71 % 70 %
Body & Electrical Systems..................................... 39 29 30
---- ---- ----
100 % 100 % 100 %
==== ==== ====
</TABLE>
In 1994, ITT Automotive maintained its position as a leading global
supplier of four-wheel ABS and TCS. Global sales of ITT Automotive ABS and TCS
exceeded $1 billion for the second consecutive year. During the year, major new
contracts for ITT Automotive's modular MK20 ABS were received from a number of
major customers, including Chrysler, Ford, Volkswagen and BMW. During 1994, ITT
Automotive also increased its previously established position as a leading
producer of electric motors and wiper systems, through the acquisition from
General Motors of its motors and actuators business unit, now renamed ITT
Automotive Electrical Systems, Inc. ("ESI"). ESI is expected to account for 20%
of ITT Automotive's sales in 1995.
ITT Automotive is beginning to introduce front and rear corner modules
(which contain brake components, suspension components, bearings and other
smaller items) and is developing new product lines such as complete axle
assemblies and vehicle stability management systems (i.e. integrated chassis
systems, including, for example, functions such as traction control, anti-lock
braking, electronic brake-force distribution and control of engine torque to
maintain vehicle stability), although there can be no assurance ITT Automotive
will ultimately have a significant presence in such product areas.
ITT Automotive also has various recognizable brand names in the automotive
industry, including ITT Teves (brake components and systems), ITT SWF (wiper
systems, electric motors and switches) and ITT Koni (shock absorbers).
The principal customers for products of ITT Automotive are the top vehicle
manufacturers worldwide. Of these manufacturers, ITT Automotive's largest
customers are General Motors (26% of 1994 ITT Automotive net sales) and Ford
(18% of 1994 ITT Automotive net sales). In addition, approximately 9% of ITT
Automotive's 1994 net sales were to customers in the aftermarket. ITT Automotive
sells a variety of products in this market, including brake parts, shocks and
struts and windshield wiper components.
ITT Automotive companies have approximately 35,400 employees in 76
facilities located in 18 countries.
ITT DEFENSE & ELECTRONICS
ITT Defense & Electronics companies develop, manufacture and support high
technology electronic systems and components for defense and commercial markets
on a worldwide basis, with operations in North America, Europe and Asia. Defense
market products include tactical communications equipment, electronic warfare
systems, night vision devices, radar, space payloads, and operations and
management services. Commercial products include interconnect products (such as
connectors, switches and cable assemblies) and night vision devices.
The ITT Defense & Electronics business continues to concentrate its efforts
in those market segments where it can be a market leader, with increasing
expansion into international defense markets. In Tactical Communications, ITT
Defense & Electronics manufactures products that facilitate communications in
the forward area battlefield. ITT Aerospace/Communications Division ("A/CD") won
the major share of the U.S. Army's Single Channel Ground and Airborne Radio
System ("SINCGARS") contract competition in 1994 and, in the view of ITT
Industries management, maintains its position as the world's largest producer of
combat radios. In Night Vision, ITT Electro-Optical Products Division provides
United States and Allied soldiers with the capability to conduct night combat
operations (as demonstrated in the Persian Gulf War) with the production of
advanced goggles for airborne and ground applications. Radar, produced by ITT
Gilfillan, includes ship and air defense radar and air traffic control systems.
In Airborne Electronic Warfare, ITT Avionics was selected by the U.S. Army to
develop the next-generation fully integrated airborne
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<PAGE> 23
electronic warfare system, called Advanced Threat Radar Jammer ("ATRJ"). In
addition, ITT Avionics' Airborne Self-Protection Jammer ("ASPJ") was selected by
both Finland and Switzerland to protect their new F-18 fighter aircraft. In
Remote Sensing/Navigation Space Payloads, ITT A/CD produces extremely
sophisticated geostationary sounding and imaging instruments, such as those used
by the National Oceanographic and Atmospheric Agency to track weather patterns
such as hurricanes and tornadoes. In Operations and Maintenance Services, ITT
Federal Services Corporation ("FSC") provides military base operations support,
equipment and facility maintenance, and training services for government sites
around the world. In 1994, ITT FSC was awarded a major contract by the U.S. Army
to provide combat support services in Kuwait and, in 1995, has recently been
awarded a renewal of competitive contracts for continued support at two major
United States military bases in Germany.
In the Interconnect market (which includes products such as connectors,
switches and cable assemblies used with workstations, local area networks and
personal computers and other applications), ITT Cannon maintains a position as
one of the world's largest connector companies based on revenue and is a leading
supplier to the military/aerospace and industrial sectors. Management of ITT
Industries believes that progress continues to be made in redirecting business
growth into the communication and information systems sectors of the
interconnect market, which, in the view of ITT Industries' management, have
strong potential for growth. Expansion into the Asia-Pacific market continued
during 1994 with the establishment of a joint venture in China and a business
office location in Hong Kong.
The following table illustrates the percentage sales by product line for
the periods specified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Tactical Communications..................................... 28 % 29 % 23 %
Electronic Defense.......................................... 7 8 18
Night Vision/Radar.......................................... 16 14 15
Government Services......................................... 16 16 15
Interconnect................................................ 30 30 26
Other....................................................... 3 3 3
--- --- ---
100 % 100 % 100 %
=== === ===
</TABLE>
ITT Defense & Electronics sells its products to a wide variety of
governmental and non-governmental entities located throughout the world.
Approximately 66% of 1994 net sales of ITT Defense & Electronics were to
governmental entities, of which approximately 90% were to the United States
Government (principally in defense programs). As a result, a substantial portion
of the work of ITT Defense & Electronics is performed in the United States under
prime contracts and subcontracts, some of which by statute are subject to profit
limitations and all of which are subject to termination by the United States
Government. Apart from the United States Government, no other governmental or
commercial customer accounted for more than 2% of 1994 net sales for ITT Defense
& Electronics.
Sales to non-governmental entities have remained approximately at one-third
of sales from 1992 through 1994. Certain of the products sold by ITT Defense &
Electronics have particular commercial application, including night vision
products and those products already sold to the commercial sector, such as
connectors and switches. For example, ITT Defense & Electronics has entered into
an agreement with the Sports Optics Division of Bausch & Lomb under the terms of
which Bausch & Lomb has become the sole distributor of certain night vision
products to the sports market. In addition, ITT Defense & Electronics has
entered into a partnership with California Commercial Spaceport, Inc. to form
Spaceport Systems International ("SSI"). SSI will build and operate the first
commercial satellite launch facility in the United States at Vandenberg Air
Force Base in California, to launch commercial satellite payloads into low earth
polar orbits. The new facility is expected to be ready for operation in 1997, at
which time SSI expects to be able to provide full launch and support services to
commercial and government customers worldwide.
ITT Defense & Electronics companies have approximately 14,700 employees in
74 facilities in 15 countries.
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<PAGE> 24
ITT FLUID TECHNOLOGY
ITT Fluid Technology is a worldwide enterprise engaged in the design,
development, production and sale of products, systems and services used to move,
handle, transfer, control and contain fluids of all kinds. Operating in more
than 100 countries, ITT Fluid Technology is a leading supplier of pumps, valves,
heat exchangers, mixers, instruments and controls for the management of fluids.
The majority of ITT Fluid Technology sales are in North America and Western
Europe. Principal markets are water and wastewater treatment, industrial and
process, and construction. Industrial and process market activity includes
strong market niche positions in the chemical processing, pharmaceutical and
biotechnology sectors, and in selected segments of the oil and gas and mining
markets. Construction market activity includes leading market positions in
certain heating, ventilation and air conditioning ("HVAC") segments of the
residential and non-residential construction market and in construction
dewatering. ITT Fluid Technology also has significant niche positions in the
commercial and leisure marine and aerospace markets.
Sales are made directly and through independent distributors and
representatives. ITT Fluid Technology is structured in three divisions, each of
which is briefly described below. No single customer accounted for more than 2%
of 1994 net sales for ITT Fluid Technology.
ITT Flygt, headquartered in Sweden, is a pioneer in submersible technology
and is the world leader in submersible pumping and mixing products. About half
of Flygt's worldwide sales come from wastewater treatment expenditures in the
municipal sector.
ITT Fluid Transfer produces a wide range of commercial and industrial
pumps, heat exchangers and related components. The division holds market
leadership positions in a number of product/market sectors under long
established brand names such as AC Pump, Bell & Gossett, McDonnell & Miller,
Jabsco, Marlow and others. Major markets include construction building trades,
HVAC, general industrial and major original equipment manufacturers, leisure
marine, water and wastewater and fire protection.
ITT Controls & Instruments primarily produces measuring instruments and
valves. This division also holds market leadership positions in a number of
product/market niches under long established brand names such as Barton,
Dia-Flo, Cam-tite and others. Markets include chemical, industrial process, oil
and gas, power generation and aerospace.
The following table illustrates the percentage sales by division for the
periods specified.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
--- --- ---
<S> <C> <C> <C>
Flygt (Submersible Products)................................. 46% 46% 48%
Fluid Transfer............................................... 34 34 33
Controls & Instruments....................................... 20 20 19
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
In May 1994, ITT Fluid Technology acquired Richter Chemie-Technik GmbH
("Richter") of Kempen, Germany. Richter, with annual sales of approximately $25
million, is a leading European producer of specialized pumps and valves designed
to handle the flow of high temperature corrosive liquid and gaseous media. Also,
during 1994, ITT Fluid Technology announced the formation of manufacturing and
sales joint ventures with local partners in China and in Brazil.
Management of ITT Industries believes that ITT Fluid Technology has a solid
technology base and proven expertise in applying its products to meet customer
needs. Management of ITT Industries also believes the continuing development of
new products enables ITT Fluid Technology to maintain and build market
leadership positions in served markets.
ITT Fluid Technology companies have approximately 8,300 employees in 45
facilities located in 18 countries, with sales representation in over 100
countries.
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<PAGE> 25
GEOGRAPHIC MARKETS
Approximately one-half of ITT Industries sales are to customers outside the
United States. The geographic sales mix of ITT Industries is illustrated (in
percentage terms) by the following table for the periods specified.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
United States............................................... 50 % 46 % 44 %
Western Europe.............................................. 38 43 48
Canada...................................................... 6 4 3
Asia/Pacific................................................ 3 3 2
Other....................................................... 3 4 3
--- --- ---
100 % 100 % 100 %
=== === ===
</TABLE>
The geographic sales base of ITT Automotive is predominantly in North
America and Europe. In 1994, approximately 56% of sales of ITT Automotive were
to customers in the United States and Canada and 38% of sales were to customers
in Western Europe.
The economic performance of ITT Automotive is reasonably dependent upon
strong economic growth in all major international markets, including that of the
United States. The geographic sales mix differs between products and is greatly
influenced, from year to year, by vehicle production levels in the relevant
countries. Management of ITT Industries sees particular growth opportunities in
Latin America, Mexico and Asia, particularly China. Most recently, ITT
Automotive formed a joint venture, as a 40% owner, in China with Shanghai
Automotive Industries Co., Ltd. to manufacture brake systems and established a
joint venture, as a 40% owner, in Korea with Kia Motors and Kia Precision Works
to produce advanced braking systems. In 1994, ITT Automotive established a
manufacturing facility in Hungary. The plant currently is producing switches and
door checks and plans call for it also to produce sensors, electric motors and
lamps. A manufacturing facility is presently under construction in the Czech
Republic to produce brake boosters and master cylinders. ITT Automotive is
involved in joint venture arrangements and licensing arrangements throughout the
world as a means of serving its international customer base.
The economic performance of ITT Defense & Electronics is particularly
dependent upon sales in the United States, which accounted for over 70% of 1994
sales. Management of ITT Defense & Electronics is attempting to increase its
international defense business and sees particular growth opportunities in the
Asia/Pacific region and Middle East. For example, a subsidiary of ITT Defense &
Electronics was awarded a $44 million contract in 1994 from the Republic of
Korea for air traffic, precision approach and control radar systems. In
addition, ITT Cannon has formed a joint venture, as a majority owner, in China
with Zhenjiang Connector Factory to supply connectors and switches for, in large
part, consumer electronics products in that growing market. This new Far East
production capability is in addition to ITT Industries' wholly owned subsidiary
in Japan.
The geographic sales mix of ITT Fluid Technology is somewhat diverse. In
1994, slightly under one-half of the sales of ITT Fluid Technology was derived
from the United States while one-third was derived from Western Europe. The
economic performance of ITT Fluid Technology is dependent upon strong economic
growth in major international markets, particularly that of the United States
and Europe. The geographic sales mix differs between products and between
divisions of ITT Fluid Technology. Management of ITT Industries sees particular
growth opportunities in Eastern Europe and Russia, Africa/Middle East, Latin
America and the Asia/Pacific region. Recently, ITT Fluid Technology established
a manufacturing and distribution joint venture arrangement, as a majority owner,
with First Auto Jinbei Automobile Co., Ltd. of Shenyang, China to produce and
sell submersible pumps in China for the sewage handling and mining markets. ITT
Fluid Technology has also established joint venture sales and manufacturing
operations and other operations in Eastern Europe, Latin America and other
locations in the Asia/Pacific region.
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<PAGE> 26
PROPERTIES
ITT Industries considers the condition of the plants, warehouses and other
properties that it owns or leases to be generally good. ITT Industries believes
such properties to be adequate for the needs of its business.
Following the Distribution, ITT Industries' principal executive offices
will be in leased premises at Four West Red Oak Lane, White Plains, New York
10604.
The following is an overview of business premises of ITT Industries in
excess of 100,000 square feet. ITT Industries owns thirty premises in fourteen
states in the United States. Of these premises, twenty-six are used as offices
and manufacturing facilities, one is used as an administration office and
research and development facility, one is an aluminum die casting plant, one is
an office and engineering facility and one is an office and laboratory facility.
In addition, ITT Industries owns nineteen premises in eight foreign countries.
All of these premises are used as offices and manufacturing facilities, and
three are also used as warehouse facilities. ITT Industries leases ten premises
in six states in the United States. Of these premises, two are used as offices
and manufacturing facilities, four are used as only manufacturing facilities,
one is used as only an office, two are used as offices and warehouse facilities
and one is used as an office and laboratory facility. In addition, ITT
Industries leases eight premises in five foreign countries. Of these premises,
five are used as offices and manufacturing facilities, one is used as an office
and research and development facility, one is used as an office, warehouse and
shop and one is used as a manufacturing, office and research and development
facility.
COMPETITION
Substantially all of ITT Industries' operations are in highly competitive
businesses, although the nature of the competition varies among the business
segments. A number of large companies engaged in the manufacture and sale of
similar lines or products and the provision of similar services are included in
the competition, as are many small enterprises with only a few products or
services. Technological innovation, price, quality and reliability are primary
factors in markets served by the various segments of ITT Industries' businesses.
ITT AUTOMOTIVE
In the global automotive industry, competition is strong. This competitive
environment has particularly resulted in increased pressure to reduce costs.
Since purchased items represent a major portion of the total costs of vehicle
manufacturers, vehicle manufacturers are expected to continue to pressure
suppliers such as ITT Automotive to share in these cost reductions through a
variety of means. Suppliers such as ITT Automotive are also likely to continue
to experience competitive and pricing pressures as vehicle manufacturers adopt
manufacturing strategies such as the use of worldwide common platforms for the
manufacture of automobiles.
ITT DEFENSE & ELECTRONICS
Competition in the businesses of ITT Defense & Electronics is increasing as
a result of, among other things, consolidation in the defense industry. The
reduction of government defense budgets, particularly in the United States, has
also produced overcapacity in various market segments, including markets in
which ITT Defense & Electronics participates. This overcapacity has resulted in
various adverse consequences, including aggressive price competition.
In most of the markets served by ITT Defense & Electronics, competition is
based primarily upon price, quality, technology, cycle time and service.
S-26
<PAGE> 27
ITT FLUID TECHNOLOGY
The ITT Fluid Technology business is marked by strong competition fueled by
public bidding, economic conditions, intense pricing pressures, significant
overcapacity, technological changes that produce new market entrants and dynamic
markets. Management of ITT Fluid Technology attempts to compete in this business
and respond to competitive pressures through cost-cutting efforts, broad product
offerings, customer service, efficient manufacturing, quality control and
utilization of and proper reaction to technological changes.
EXPOSURE TO CURRENCY FLUCTUATIONS
ITT Industries companies conduct operations worldwide. ITT Industries is
therefore exposed to the effects of fluctuations in relative currency values.
Although ITT Industries companies engage where appropriate in various hedging
strategies in respect of their foreign currency exposure, it is not possible to
hedge all such exposure. Accordingly, the operating results of ITT Industries
will be impacted by fluctuations in relative currency values.
CYCLICALITY
The markets in which ITT Industries' subsidiaries operate are cyclical, and
operating results therefore fluctuate based on both general economic factors and
factors affecting the relevant markets served by ITT Industries. For example, a
large percentage of the ITT Industries' 1994 net sales were derived from sales
to automobile manufacturers. The automobile industry is highly cyclical. A
decline in the demand for new automobiles and industry production levels is
likely to have an adverse effect on ITT Industries. ITT Industries also
manufactures and sells products used in other historically cyclical industries,
such as the construction, mining and minerals and aerospace industries, and thus
could be adversely affected by negative cycles affecting those and other
industries. In addition, a large percentage of ITT Industries' 1994 net sales
was derived from government contracts with the United States Department of
Defense or other United States and foreign governmental agencies. ITT
Industries' operating results are thus exposed to changes in government budget
levels and budget priorities, particularly in respect of the United States
defense budget. In addition, economic factors that cause a decline in consumer
spending may adversely affect ITT Industries.
GOVERNMENTAL REGULATION AND RELATED MATTERS
A number of ITT Industries' businesses are subject to governmental
regulation by law or through contractual arrangements. ITT Industries' companies
in the defense segment perform work under contracts with the United States
Department of Defense and similar agencies in certain other countries. These
contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations (requiring background
investigations for high-level security clearances) applicable to ITT Industries'
executive officers, and most of such contracts are subject to termination by the
respective governmental parties on various grounds.
ENVIRONMENTAL MATTERS
ITT Industries is subject to stringent environmental laws and regulations
concerning air emissions, water discharges and waste disposal. Such
environmental laws and regulations include the Federal Clean Air Act, RCRA and
CERCLA. Environmental requirements are significant factors affecting all
operations. The ITT Industries companies closely monitor all their respective
environmental responsibilities, together with trends in environmental laws. ITT
Industries has established an internal audit program to assess compliance with
applicable environmental requirements for all its facilities, both domestic and
overseas. The audit procedure is designed to identify problems and to instruct
employees to correct deficiencies and to prevent future noncompliance. Over the
past 15 years, usually with the assistance of independent consultants, ITT
Industries has conducted regular, thorough audits of its major operating
facilities. As a result, the ITT Industries companies are in substantial
compliance with current environmental requirements. Management does not believe
that it will incur compliance costs pursuant to such requirements that will have
a material adverse
S-27
<PAGE> 28
effect on ITT Industries' financial position, results of operations or cash
flows. See "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- ENVIRONMENTAL MATTERS" and "BUSINESS OF
ITT INDUSTRIES -- LEGAL PROCEEDINGS".
RAW MATERIALS
All the businesses of ITT Industries require various raw materials (e.g.,
metals, plastics and packaging) in connection with manufacturing their
respective products. Although some of these costs may be reflected through
increased prices for products, the operating results of ITT Industries are
exposed to fluctuating costs of such raw materials. The subsidiaries of ITT
Industries attempt to control such costs through various purchasing programs and
other techniques. In recent years, the businesses of ITT Industries have not
experienced any significant difficulties in obtaining an adequate supply of raw
materials necessary for manufacturing and related activities.
RESEARCH, DEVELOPMENT AND ENGINEERING
The businesses of ITT Industries require substantial commitment of
resources to research, development and engineering activities. Research,
development and engineering activities of ITT Industries are conducted in
laboratory and engineering facilities at most of its major manufacturing
subsidiaries. ITT Industries believes that continued leadership in technology is
essential to its future, and most ITT Industries funds dedicated to research and
development are applied to areas of high technology, such as aerospace,
automotive braking and electrical systems, and applications involving electronic
components.
For a further discussion of the research, development and engineering
expenditures of ITT Industries, see "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND
CAPITAL RESOURCES".
INTELLECTUAL PROPERTY
While ITT Industries owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, management of ITT Industries believes that ITT Industries'
business, as a whole, is not materially dependent upon any one intellectual
property or related group of such properties. ITT Industries is licensed to use
certain patents, technology and other intellectual property rights owned and
controlled by others, and, similarly, other companies are licensed to use
certain patents, technology and other intellectual property rights owned and
controlled by ITT Industries. The patents, technology and other intellectual
property rights licensed by ITT Industries are of importance to its business,
although management of ITT Industries believes, as noted above, that ITT
Industries' business, as a whole, is not dependent upon any one intellectual
property or group of such properties.
ITT Industries currently has an aggregate of 5,105 patents (2,368 at ITT
Automotive, 2,005 at ITT Defense & Electronics and 732 at ITT Fluid Technology),
5,177 patent applications (3,654 at ITT Automotive, 1,084 at ITT Defense &
Electronics and 439 at ITT Fluid Technology) and 104 active patent license
agreements (54 at ITT Automotive, 49 at ITT Defense & Electronics and 1 at ITT
Fluid Technology). Such patents, patent applications and active patent license
agreements will expire or terminate over time by operation of law, in accordance
with their terms or otherwise. The expiration or termination of such patents,
patent applications and active patent license agreements are not expected by the
management of ITT Industries to have a material adverse effect on ITT
Industries' financial position, results of operations or cash flows.
The rights and licenses granted to ITT Industries under the IP Agreements
(as defined below) to the "ITT" name, mark and logo are considered by ITT
Industries management to be of material importance to ITT Industries. The IP
Agreements are perpetual contracts, subject to the maintenance of certain
quality standards and other conditions in accordance with the terms of the IP
Agreements. See "RELATIONSHIP
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BETWEEN ITT INDUSTRIES, ITT DESTINATIONS AND ITT HARTFORD AFTER THE
DISTRIBUTION -- INTELLECTUAL PROPERTY AGREEMENTS".
EMPLOYEES
As of September 30, 1995, ITT Industries, directly and through its
subsidiaries, employed an aggregate of approximately 58,400 people. Of this
number, approximately 26,000 are employees in the United States, of whom
approximately 35% are represented by labor unions. Generally, labor relations
have been maintained in a normal and satisfactory manner.
LEGAL PROCEEDINGS
ITT or its subsidiaries are responsible, or are alleged to be responsible,
for the investigation and remediation at a total of approximately 100 sites. ITT
or its subsidiaries have received notices that they are PRPs in approximately 30
proceedings instituted by the U.S. Environmental Protection Agency or similar
state agencies. These proceedings generally are pursuant to CERCLA or similar
state laws that provide for joint and several liability for investigation and
clean-up costs at contaminated sites. In many of these proceedings, ITT or its
subsidiaries are considered "de minimis" contributors. Another approximately 70
matters involve ongoing or prospective remedial measures, or, in the case of
several such matters, are the subject of actions brought by other private
parties seeking to recoup or apportion cleanup costs or damages that allegedly
have been or may be incurred by such other parties. These approximately 70
matters arise out of, among other things, indemnification arrangements, contract
disputes, third party claims and RCRA requirements related to contamination or
alleged contamination at sites currently or formerly owned or operated by ITT or
its present or former subsidiaries. The alleged environmental liabilities at
approximately one-half of these sites are in connection with the operations of
former ITT subsidiaries and are not related to the present businesses of ITT
Industries.
ITT and its former subsidiaries, Rayonier and Southern Wood Piedmont
Company ("SWP"), are named defendants in a lawsuit filed in 1991 in the U.S.
District Court for the Southern District of Georgia, Ernest L. Jordan, Sr. et.
al. v. Southern Wood Piedmont Company, et al., in which plaintiffs allege
property damage and personal injury based on alleged exposure to toxic chemicals
used by SWP in its former wood preserving operations, seek certification as a
class action and ask for compensatory and punitive damages in the amount of $700
million. Several other suits arising out of former wood preserving operations of
SWP also include ITT among the named defendants. Under an agreement entered into
by ITT and Rayonier in connection with the distribution of Rayonier stock to ITT
shareholders in February 1994, ITT is entitled to be indemnified by Rayonier for
any expenses or losses incurred by ITT in connection with the aforementioned
suits as well as in any other legal proceedings arising out of Rayonier or SWP
operations. ITT Industries will continue to have the benefit of such agreement
after the Distribution.
While there can be no assurance as to the ultimate outcome of any
litigation involving ITT Industries, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have, after
taking into account ITT Industries' existing provisions for such liabilities, a
material adverse effect on ITT Industries' financial position, results of
operations or cash flows.
DISCONTINUED OPERATIONS
Effective on February 28, 1994, ITT completed the distribution of all the
outstanding common shares of its former forest products subsidiary, Rayonier
(formerly ITT Rayonier Incorporated) to the holders of record on February 24,
1994, of ITT Common Stock and ITT Series N Preferred Stock. The former
subsidiary has been reflected as a "Discontinued Operation." See "NOTES TO ITT
INDUSTRIES CONSOLIDATED FINANCIAL STATEMENTS".
On September 16, 1994, ITT announced plans to seek offers for the purchase
of ITT Financial Corporation ("ITT Financial"), one of the largest independent
finance companies in the United States. On
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such date ITT Financial consisted of businesses conducting commercial and
consumer finance, related insurance and other financial services including a
mortgage banking operation. Gross proceeds of $12.8 billion are expected and
through September 30, 1995, the following portions of ITT Financial have been
sold for the approximate aggregate cash proceeds indicated: Island Finance, $1.5
billion; Commercial Finance, $2.7 billion; Equipment Finance, Small Business
Finance and Real Estate Services, $1.8 billion; home equity loan portfolio, $1.0
billion; residential first mortgage portfolio, $3.9 billion; a major loan
portfolio operated from Costa Mesa, California, $0.5 billion; and other assets,
$0.1 billion. In addition, financial restructuring of Lyndon Insurance Group
provided $0.9 billion of dividends to ITT. On April 30, 1995, ITT recorded a
$403 million gain, after tax, on the sale of the businesses of ITT Financial.
ITT Financial merged into ITT effective May 1, 1995, and indebtedness of ITT
Financial was assumed by ITT. ITT has repaid an amount of indebtedness of ITT
equivalent to the funds generated by the sale of the ITT Financial assets. ITT
Financial has been reflected as a "Discontinued Operation" in the financial
statements of ITT Industries.
ITT Destinations and ITT Hartford have also been reflected as "Discontinued
Operations". See "NOTES TO ITT INDUSTRIES CONSOLIDATED FINANCIAL STATEMENTS".
THE DISTRIBUTION
SHARES TO BE DISTRIBUTED
Based on the 116,683,293 shares of ITT Common Stock outstanding as of
October 31, 1995, the Distribution will consist of 116,683,293 shares of ITT
Destinations Common Stock and 116,683,293 shares of ITT Hartford Common Stock.
Each holder of ITT Common Stock will receive as a dividend one share of ITT
Destinations Common Stock and one share of ITT Hartford Common Stock for every
one share of ITT Common Stock held.
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to receipt of favorable tax rulings from the
Internal Revenue Service as to certain Federal income tax consequences of the
Distribution, all necessary consents of any governmental or regulatory bodies
having been obtained and certain other conditions specified in the Proxy. The
Board has retained discretion, even if the conditions to the Distribution are
satisfied, to abandon, defer or modify the Distribution or any other matter
contemplated in connection with the Distribution. The terms of the Distribution
thus may be modified or conditions thereto may be waived by the Board of
Directors of ITT. However, the Board will not waive the requirement of receipt
of favorable tax rulings from the Internal Revenue Service unless, in the
Board's judgment, based on the opinion of counsel, Section 355 of the Internal
Revenue Code will apply to the Distribution. ITT currently expects the
Distribution to occur on or prior to December 31, 1995, however, there can be no
assurances that the Distribution will occur on or prior to that date or at all.
TREATMENT OF CERTAIN DEBT INSTRUMENTS
ITT has historically incurred indebtedness at the parent company level to a
greater extent than at the operating company level. As a result of the
Distribution, absent action by ITT, the capital structure of ITT Industries
after the Distribution would be inappropriate because ITT Industries would be
highly leveraged relative to many of its competitors. Accordingly, in connection
with the Distribution, management of ITT intends to allocate the consolidated
indebtedness of ITT among ITT Industries, ITT Destinations and ITT Hartford.
ITT expects that it will allocate an aggregate of $2.9 billion of its
indebtedness to ITT Destinations. ITT does not plan to allocate any of its
public indebtedness to ITT Hartford. ITT's remaining indebtedness shall remain
an obligation of ITT Industries. The planned allocation is reflected under
"FORECASTED CAPITALIZATION".
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ITT Destinations, in anticipation of such debt allocation, has filed with
the Commission a shelf registration statement with respect to the issuance, from
time to time, of up to $2 billion of debt securities. Any such debt securities
issued prior to the Distribution will be unconditionally guaranteed by ITT,
which guarantee will be released, subject to satisfaction of certain conditions,
upon the completion of the Distribution. The proceeds from the offering of such
debt securities will be applied to the repayment of short-term debt or will be
added to the general funds of ITT Destinations to be used for general corporate
purposes.
ITT expects to establish commercial bank credit facilities for each of ITT
Industries, ITT Destinations and ITT Hartford in advance of the Distribution.
Although formal documentation has not yet been completed, management of ITT
expects that such credit facilities should provide sufficient liquidity for each
of the companies' respective funding needs and should reflect terms customary in
the commercial bank credit market at the relevant time.
THE REINCORPORATION OF ITT
Subject to the conditions summarized below, ITT will be reincorporated (the
"Reincorporation") in Indiana by merging ITT into ITT Indiana, Inc. pursuant to
a merger agreement (the "Merger Agreement") and, in connection therewith, the
name of ITT Indiana, Inc. will be changed to ITT Industries, Inc. ITT Industries
will succeed to all the business, properties, assets and liabilities of ITT, and
the shareholders of ITT will automatically become shareholders of ITT
Industries. Pursuant to the reincorporation, each outstanding share of ITT
Common Stock will automatically be converted into one share of ITT Industries
Common Stock. The number of shares of outstanding capital stock of ITT
Industries will be the same as that of ITT. ITT Industries intends to implement
a shareholder rights plan. After the Reincorporation, the rights of ITT
Industries' shareholders will be governed by Indiana law and by ITT Industries'
Articles of Incorporation and By-laws, rather than by Delaware law and ITT's
existing Restated Certificate of Incorporation and By-laws.
It is expected that the Reincorporation will be consummated substantially
simultaneously with or immediately following the Distribution.
REASONS FOR THE REINCORPORATION
The Reincorporation is structured so that ITT Industries and its Board of
Directors will have the benefit of certain features of the Indiana Business
Corporation Law (the "IBCL") that are not included in the Delaware General
Corporation Law (the "DGCL"). The most important of such features is Section
23-1-35-1 of the IBCL. This section provides that a board of directors, in
discharging its duties, may consider, in its discretion, both the long-term and
short-term best interests of the corporation, taking into account, and weighing
as the directors deem appropriate, the effects of an action on the corporation's
shareholders, employees, suppliers and customers and the communities in which
offices or other facilities of the corporation are located and any other factors
the directors consider pertinent. If a determination is made with the approval
of a majority of the disinterested directors of the board, that determination is
conclusively presumed to be valid unless it can be demonstrated that the
determination was not made in good faith after reasonable investigation. Once
the board has determined that the proposed action is not in the best interests
of the corporation, it has no duty to remove any barriers to the success of the
action, including a rights plan. Section 23-1-35-1 specifically provides that
certain judicial decisions in Delaware and other jurisdictions, which might be
looked upon for guidance in interpreting Indiana law, including decisions that
propose a higher or different degree of scrutiny in response to a proposed
acquisition of the corporation, are inconsistent with the proper application of
that section.
As a result of this provision of the IBCL, the Board of Directors of ITT
believes that the Reincorporation will provide the Board of Directors of ITT
Industries with greater flexibility to respond to unsolicited proposals for ITT
Industries since Indiana law authorizes directors to consider both the
short-term and long-term interests of the corporation as well as interests of
other constituencies and other relevant factors. This feature, and other
provisions of the IBCL which in some cases have counterparts under Delaware law,
may have the effect of discouraging or preventing certain types of transactions
involving an actual or threatened change of
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control of ITT Industries (including unsolicited takeover attempts), even though
such a transaction may offer ITT Industries' shareholders the opportunity to
sell their stock at a price above the prevailing market rate.
RELATIONSHIP BETWEEN ITT INDUSTRIES,
ITT DESTINATIONS AND ITT HARTFORD AFTER THE DISTRIBUTION
ITT Destinations is wholly owned by ITT, and the results of operations of
its subsidiaries have been included in ITT's consolidated financial results (as
discontinued operations). After the Distribution, ITT Industries will not have
any ownership interest in ITT Destinations, and ITT Destinations will be an
independent public company. Furthermore, except as described below, all
contractual relationships existing prior to the Distribution between ITT and ITT
Destinations will be terminated except for commercial relationships in the
ordinary course of business.
ITT Hartford is also wholly owned by ITT, and the results of operations of
its subsidiaries have been included in ITT's consolidated financial results (as
discontinued operations). After the Distribution, ITT Industries will not have
any ownership interest in ITT Hartford, and ITT Hartford will be an independent
public company. Furthermore, except as described below, all contractual
relationships existing prior to the Distribution between ITT and ITT Hartford
will be terminated except for commercial relationships in the ordinary course of
business.
After the Distribution, neither ITT Destinations nor ITT Hartford will have
any ownership interest in the other. In addition, except as described below, all
contractual relationships existing prior to the Distribution between ITT
Destinations and ITT Hartford will be terminated except for commercial
relationships in the ordinary course of business.
Prior to the Distribution, ITT, ITT Destinations and ITT Hartford will
enter into certain agreements, described below, governing their relationship
subsequent to the Distribution (at which time ITT will have been renamed ITT
Industries) and providing for the allocation of tax and certain other
liabilities and obligations arising from periods prior to the Distribution. Each
of ITT, ITT Destinations and ITT Hartford believes that the agreements are fair
to the parties to the relevant agreements and contain terms which generally are
comparable to those which would have been reached in arms-length negotiations
with unaffiliated parties (although such comparisons are difficult with respect
to certain agreements which relate to the specific circumstances of the
Distribution and the transactions contemplated thereby). In some cases, portions
of the agreements are based on agreements ITT has negotiated with third parties.
In other cases, portions of the agreements are believed to be comparable to
those used by others in similar transactions. In each case, the terms of these
agreements will have been reviewed by individuals who will be included at a
senior management level of ITT Industries, ITT Destinations and ITT Hartford.
It is contemplated that arrangements to the effect described below will be
entered into in connection with the Distribution.
DISTRIBUTION AGREEMENT
ITT, ITT Destinations and ITT Hartford will enter into a distribution
agreement (the "Distribution Agreement") providing for, among other things,
certain corporate transactions required to effect the Distribution and other
arrangements between ITT Industries, ITT Destinations and ITT Hartford
subsequent to the Distribution.
The Distribution Agreement will provide for, among other things,
assumptions of liabilities and cross-indemnities designed to allocate generally,
effective as of the date of the Distribution, financial responsibility for the
liabilities arising out of or in connection with (i) the Automotive, Defense and
Electronics, and Fluid Technology businesses to ITT Industries and its
subsidiaries, (ii) the Hospitality, Entertainment and Information Services
businesses to ITT Destinations and its subsidiaries and (iii) the Insurance
businesses to ITT Hartford and its subsidiaries. The Distribution Agreement will
also provide for the allocation generally of the financial responsibility for
the liabilities arising out of or in connection with former and present
businesses
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not described in the immediately preceding sentence to or among ITT Industries,
ITT Destinations and ITT Hartford.
The Distribution Agreement will provide that ITT Destinations and ITT
Hartford will use their respective commercially reasonable efforts to achieve an
allocation of indebtedness of ITT that reflects the capital structure after the
Distribution of ITT Industries, ITT Destinations and ITT Hartford as
contemplated in the discussion under "THE DISTRIBUTION -- TREATMENT OF CERTAIN
DEBT INSTRUMENTS".
The Distribution Agreement will provide that neither ITT Industries, ITT
Destinations nor ITT Hartford will take any action that would jeopardize the
intended tax consequences of the Distribution. Specifically, each of ITT
Industries, ITT Destinations and ITT Hartford will agree to maintain its status
as a company engaged in the active conduct of a trade or business, as defined in
Section 355(b) of the Internal Revenue Code, until the first anniversary of the
Distribution. Neither ITT Industries, ITT Destinations nor ITT Hartford expects
this limitation to inhibit its financing or other activities or its ability to
respond to unanticipated developments. However, compliance with these provisions
of the Distribution Agreement may make the acquisition of control of each of ITT
Industries, ITT Destinations and ITT Hartford prior to the first anniversary
more difficult or less likely to occur because of the potential substantial
contractual damages associated with a breach of such provisions.
Under the Distribution Agreement, each of ITT Industries, ITT Destinations
and ITT Hartford will agree to provide to the other parties, subject to certain
conditions, on an "as-needed" basis such services on such terms as may be agreed
upon between the applicable parties.
The Distribution Agreement will also provide that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the date of the Distribution in connection with the Distribution will
be charged to and paid by ITT, provided that ITT shall not be responsible for
those costs or expenses specifically incurred by ITT Hartford or ITT
Destinations (including, without limitation, any attorney or financial advisor
fees owing to attorneys or financial advisors retained by ITT Destinations or
ITT Hartford). Except as set forth in the Distribution Agreement or any related
agreement, each party shall bear its own costs and expenses incurred after the
Distribution.
INTELLECTUAL PROPERTY AGREEMENTS
ITT, ITT Destinations and ITT Hartford will enter into Intellectual
Property License Agreements (collectively, "IP Agreements") which will provide
for licensing to or among these companies of, rights under patents, copyrights,
software, technology, trade secrets and certain other intellectual property
(collectively, "Intellectual Property") owned by ITT, ITT Destinations or ITT
Hartford and their respective subsidiaries and associated companies as of the
date of the Distribution. The purpose of these IP Agreements is to provide ITT,
ITT Destinations and ITT Hartford and their respective subsidiaries and
associated companies with those continuing rights and licenses under such
Intellectual Property following the Distribution necessary for the continued
conduct of their respective businesses. Included within the IP Agreements will
be: (i) a grant of rights and licenses to ITT and ITT Hartford, with rights to
license their respective subsidiaries and associated companies, to continue to
use the "ITT" name, mark and logo in the operation of their respective
businesses following the Distribution, subject to the maintenance of certain
quality standards for their products and services and other conditions in
accordance with the terms of the IP Agreements, and (ii) a transfer from ITT to
ITT Destinations of all the right, title and interest in the "ITT" name, mark,
and logo and the applications, registrations, goodwill, and contractual rights
and obligations associated therewith.
TAX ALLOCATION AGREEMENT
ITT Industries, ITT Destinations and ITT Hartford will enter into a Tax
Allocation Agreement to the effect that ITT Destinations and ITT Hartford will
pay their respective shares of ITT's consolidated tax liability for the tax
years that ITT Destinations and ITT Hartford, as applicable, were included in
ITT's consolidated Federal income tax return. The Tax Allocation Agreement will
also provide for sharing, where appropriate, of state, local and foreign taxes
attributable to periods prior to the date of the Distribution, as well as
certain other matters.
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EMPLOYEE BENEFITS AGREEMENT
ITT Industries, ITT Destinations and ITT Hartford will enter into an
Employee Benefits Services and Liability Agreement providing for the allocation
of retirement, medical, disability and other employee welfare benefit plans
among ITT Industries, ITT Destinations and ITT Hartford. The agreement will
provide for the specified treatment of certain retirement plans for salaried
employees, investment and savings programs, excess benefit plans, retiree
medical and life insurance benefits and stock awards. The agreement will provide
that, as of the date of the Distribution, each of ITT Industries, ITT
Destinations and ITT Hartford shall generally assume all liability for their
respective active employees under their respective employee welfare benefit
plans and that each of ITT Industries, ITT Destinations and ITT Hartford will be
allocated a proportionate share of any assets of ITT held with respect thereto.
The agreement will provide that ITT Industries shall retain the obligation to
make any post-Distribution payments to ITT employees in respect of the ITT
Annual Incentive Bonus Plan and the ITT Long-Term Performance Plan with respect
to the 1995 calendar year. Finally, the Agreement will provide that, to the
extent that any non-U.S. retirement plans of ITT cover employees of more than
one of ITT Industries, ITT Destinations and ITT Hartford, the assets and
liabilities with respect to such plans will be allocated between such companies
in an equitable manner, in accordance with applicable law.
DIRECTORS
After the Distribution, there will be individuals on the Boards of
Directors of ITT Industries, ITT Destinations and ITT Hartford who will also
serve on the Board of Directors of one or both of the other companies.
DESCRIPTION OF THE DEBENTURES
The following description of the particular terms of the Debentures offered
hereby supplements the description of the general terms and provisions of Debt
Securities set forth in the Prospectus, to which description reference is hereby
made.
The Debentures will be unsecured general obligations of ITT, will be issued
under an indenture dated as of May 1, 1992 (the "Indenture") between ITT and The
First National Bank of Chicago, as Trustee (the "Trustee"), will be limited to
$250,000,000 principal amount, will be issued in book-entry form only, in
denominations of $1,000 and any integral multiple thereof, and will mature on
November , 2025.
The Debentures will bear interest from November , 1995 or from the most
recent interest payment date to which interest has been paid or provided for, at
the rate of % per annum, payable semi-annually on May and November ,
commencing on May , 1996, to the persons in whose names the Debentures are
registered at the close of business on the preceding and
, respectively. ITT may pay principal and interest by check
and may mail an interest check to a Holder's registered address. Holders may be
required to surrender Debentures to collect principal payments.
OPTIONAL REDEMPTION
The Debentures will be redeemable as a whole or in part, at the option of
ITT Industries at any time, at a redemption price equal to the greater of (i)
100% of their principal amount and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Treasury Yield plus 20 basis points, plus in each
case accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Debentures, which prior to 2006 will be deemed to be a
30-year Treasury security, that would be utilized, at the time of selection and
in accordance with customary financial practice, in pricing new issues of
corporate debt securities of comparable maturity to the remaining term of the
Debentures. "Independent Investment Banker" means Morgan Stanley
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& Co. Incorporated or, if such firm is unwilling or unable to select the
Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Trustee obtains fewer than four such Reference Treasury Dealer
Quotations, the average of all such Quotations. "Reference Treasury Dealer
Quotations" means, with respect to each Reference Treasury Dealer and any
redemption date, the average, as determined by the Trustee, of the bid and asked
prices for the Comparable Treasury Issue (expressed in each case as a percentage
of its principal amount) quoted in writing to the Trustee by such Reference
Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption
date.
"Reference Treasury Dealer" means each of Morgan Stanley & Co.
Incorporated, Lazard Freres & Co. LLC and Lehman Brothers Inc. and their
respective successors; provided however, that if any of the foregoing shall
cease to be a primary U.S. Government securities dealer in New York City (a
"Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer.
Holders of Debentures to be redeemed will receive notice thereof by
first-class mail at least 30 and not more than 60 days prior to the date fixed
for redemption.
BOOK-ENTRY SYSTEM
The Depository Trust Company, New York, New York, will act as depositary
(the "Depositary") for the Debentures. The Debentures will be represented by one
or more Global Securities registered in the name of Cede & Co., the nominee of
the Depositary. The provisions described under "Description of Debt Securities
- -- Global Securities" in the Prospectus will be applicable to the Debentures.
Accordingly, beneficial interests in the Debentures will be shown on, and
transfers thereof will be effected only through, records maintained by the
Depositary and its participants.
The Depositary has advised ITT Industries and the Underwriters as follows:
the Depositary is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
United States Securities Exchange Act of 1934, as amended. The Depositary holds
securities that its participants ("Direct Participants") deposit with the
Depositary. The Depositary also facilitates the settlement among Direct
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in such
Direct Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations, and certain other organizations. The Depositary is owned
by a number of its Direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's book-entry system is also available to
others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Direct and Indirect Participants are on the file with the
United States Securities and Exchange Commission.
Principal and interest payments on the Debentures registered in the name of
the Depositary's nominee will be made in immediately available funds to the
Depositary's nominees as the registered owner of the Global Securities. Under
the terms of the Debentures, ITT Industries and the Trustee will treat the
persons in whose names the Debentures are registered as the owners of such
Debentures for the purpose of receiving
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payment of principal and interest on such Securities and for all other purposes
whatsoever. Therefore, neither ITT Industries, the Trustee nor any paying agent
has any direct responsibility or liability for the payment of principal or
interest on the Securities to owners of beneficial interests in the Global
Securities. The Depositary has advised ITT Industries and the Trustee that its
current practice is, upon receipt of any payment of principal or interest, to
credit Direct Participants' accounts on the payment date in accordance with
their respective holdings of beneficial interests in the Global Securities as
shown on the Depositary's records, unless the Depositary has reason to believe
that it will not receive payment on the payment date. Payments by Direct and
Indirect Participants to owners of beneficial interests in the Global Securities
will be governed by standing instructions and customary practices, as is the
case with securities held for the accounts of customers in bearer form or
registered in "street name", and will be the responsibility of such Direct and
Indirect Participants and not of the Depositary, the Trustee, or ITT Industries,
subject to any statutory requirements that may be in effect from time to time.
Payment of principal and interest to the Depositary is the responsibility of ITT
Industries or the Trustee, disbursement of such payments to the owners of
beneficial interests in the Global Securities shall be the responsibility of the
Depositary and Direct and Indirect Participants.
Debentures represented by a Global Security will be exchangeable for
Debentures in definitive form of like tenor as such Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
if the Depositary notifies ITT Industries that it is unwilling or unable to
continue as Depositary for such Global Security or if at any time the Depositary
ceases to be a clearing agency registered under applicable law and a successor
depositary is not appointed by ITT Industries within 90 days or ITT Industries
in its discretion at any time determines not to require all of the Debentures of
such series to be represented by a Global Security and notifies the Trustee
thereof. Any Debentures that are exchangeable pursuant to the preceding sentence
are exchangeable for Debentures issuable in authorized denominations and
registered in such names as the Depositary shall direct. Subject to the
foregoing, a Global Security is not exchangeable, except for a Global Security
or Global Securities of the same aggregate denominations to be registered in the
name of the Depositary or its nominee.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Debentures will be made by the Underwriters in
immediately available funds. So long as the Depositary continues to make its
Same-Day Funds Settlement System available to ITT Industries, all payments of
principal and interest on the Debentures will be made by ITT Industries in
immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled-in clearing-house or next-day funds. In contrast, the
Debentures will trade in the Depositary's Same-Day Funds Settlement System until
maturity, and secondary market trading activity in the Debentures will therefore
be required by the Depositary to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Debentures.
CONCERNING THE TRUSTEE
ITT and certain of its subsidiaries maintain bank accounts, borrow money
and have other customary banking relationships with the Trustee in the ordinary
course of business. The Trustee acts as trustee with respect to two series of
debt securities previously issued under the Indenture.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, ITT has agreed to sell to each of the Underwriters named below (for
whom Morgan Stanley & Co. Incorporated is acting as lead book runner), and each
of the Underwriters has severally and not jointly agreed to purchase, the
principal amount of the Debentures set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
UNDERWRITER DEBENTURES
--------------------------------------------------------------- ------------
<S> <C>
Lazard Freres & Co. LLC ....................................... $
Lehman Brothers Inc. ..........................................
Morgan Stanley & Co. Incorporated..............................
------------
Total................................................ $250,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Debentures is subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all the Debentures offered hereby
if any are taken.
The Underwriters propose to offer all or part of the Debentures directly to
the public at the public offering price set forth on the cover page hereof and
all or part to certain dealers at a price which represents a concession not in
excess of % of the principal amount of the Debentures. The Underwriters may
allow, and any such dealer may reallow, a concession to certain other dealers
not in excess of % of the principal amount of the Debentures. After the
initial offering of the Debentures, the offering price and other selling terms
may from time to time be varied by the Underwriters.
ITT has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITT does not intend to apply for the listing of the Debentures on a
national securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Debentures as permitted by applicable
laws and regulations. The Underwriters are not obligated, however, to make a
market in the Debentures and any such market making may be discontinued at any
time at the sole discretion of the Underwriters. Accordingly no assurance can be
given as to the liquidity of, or trading markets for, the Debentures.
The Underwriters and their affiliates engage in transactions with and
perform services for ITT and its affiliates in the ordinary course of business
for which customary compensation has been and will be received. Michel
David-Weill is a Director of ITT and is also the Chairman of Lazard Freres & Co.
LLC. S. Parker Gilbert is a Director of ITT and is also Chairman of the Morgan
Stanley Advisory Board, an affiliate of Morgan Stanley & Co. Incorporated.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by ITT with the Securities and Exchange
Commission (the "Commission") (File No. 1-5627) are hereby incorporated by
reference in this Prospectus Supplement:
(a) Annual Report on Form 10-K for the year ended December 31, 1994;
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31,
June 30, and September 30, 1995;
(c) Proxy Statement for the Special Meeting of Stockholders on
September 21, 1995 (Filed with the Commission on August 28, 1995); and
(d) Current Reports on Form 8-K dated February 6, March 31, June 8 and
November 7, 1995.
The following document filed by ITT Destinations with the Commission (File
No. 1-13960) is hereby incorporated by reference in this Prospectus Supplement:
Form 10 dated September 18, 1995, with respect to
S-37
<PAGE> 38
the shares of ITT Destinations common stock (and related ITT Destinations Rights
(as defined therein)) to be received by the Shareholders of ITT in the
Distribution.
All documents filed by ITT with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Securities covered by this Prospectus
Supplement shall be deemed to be incorporated by reference in this Prospectus
Supplement and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus Supplement.
ITT will provide, without charge, to each person, including any beneficial
holder, to whom this Prospectus Supplement is delivered, upon the written or
oral request of any such person, a copy of any or all of the documents
incorporated herein by reference (other than certain exhibits to such
documents). Such requests should be directed to ITT at its principal executive
offices, 1330 Avenue of the Americas, New York, NY 10019-5490, Attention:
Corporate Secretary (telephone number 212-258-1000).
LEGAL OPINIONS
The legality of the Debentures offered hereby will be passed upon for ITT
by Richard S. Ward, Esq., its Executive Vice President and General Counsel, or
such other attorney of ITT as ITT may designate, and for the Underwriters by
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, NY
10019-7475. Mr. Ward has an interest in certain securities of ITT. Cravath,
Swaine & Moore acts from time to time as legal counsel to ITT on various
matters, including the Distribution.
EXPERTS
The audited financial statements and schedules included or incorporated by
reference in this Prospectus Supplement and Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. This statement
supersedes the section entitled "Experts" in the Prospectus.
S-38
<PAGE> 39
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITT INDUSTRIES, INC.
Report of Independent Public Accountants............................................. F-2
Consolidated Income for the Nine Months Ended September 30, 1995 and 1994 (unaudited)
and the Three Years Ended December 31, 1994........................................ F-3
Consolidated Balance Sheet as of September 30, 1995 (unaudited) and December 31, 1994
and 1993........................................................................... F-4
Consolidated Cash Flow for the Nine Months Ended September 30, 1995 and 1994
(unaudited) and the Three Years Ended December 31, 1994............................ F-5
Consolidated Retained Earnings for the Nine Months Ended September 30, 1995
(unaudited) and the Three Years Ended December 31, 1994............................ F-6
Consolidated Capital Stock and Surplus for the Nine Months Ended September 30, 1995
(unaudited) and the Three Years Ended December 31, 1994............................ F-6
Cumulative Preferred Stock as of December 31, 1994 and 1993.......................... F-7
Notes to Financial Statements........................................................ F-8
Business Segment Information......................................................... F-22
Geographical Information............................................................. F-23
Quarterly Results for 1994 and 1993.................................................. F-23
Export Sales......................................................................... F-24
FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts -- ITT Industries, Inc............................. SF-1
</TABLE>
F-1
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITT Corporation:
We have audited the consolidated financial statements of ITT Corporation (a
Delaware corporation; to be renamed ITT Industries, Inc., and reincorporated as
an Indiana corporation) and subsidiaries as of December 31, 1994 and 1993, and
for each of the three years in the period ended December 31, 1994, as described
in the accompanying Index to Financial Statements and Schedules. These
consolidated financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the financial position of ITT Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to financial statements, the Company
adopted new accounting standards promulgated by the Financial Accounting
Standards Board, changing its methods of accounting, effective January 1, 1994,
for certain investments in debt and equity securities and effective January 1,
1992, for postretirement benefits other than pensions and postemployment
benefits. The Corporation also changed effective January 1, 1994, its method
used to discount long-term tabular workers compensation liabilities and its
accounting method for deferred marketing and start-up costs.
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 Schedules 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
June 13, 1995
F-2
<PAGE> 41
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
IN MILLIONS EXCEPT PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994* 1993* 1992*
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales..................................... $6,633 $5,590 $7,758 $6,621 $6,845
Cost of Sales................................. 5,730 4,772 6,607 5,647 5,968
------ ------ ------ ------ ------
903 818 1,151 974 877
Selling, General and Administrative
Expenses.................................... 505 463 643 655 686
Service Charges from Affiliated Companies..... 63 53 73 59 62
Other Operating (Income) Expenses............. (2) 40 17 31 110
------ ------ ------ ------ ------
337 262 418 229 19
Equity in Earnings of Alcatel N.V............. -- -- -- -- 97
Gain on Sale of Alcatel N.V................... -- -- -- -- 942
Interest Expense.............................. (124) (85) (114) (153) (180)
Interest Income............................... 32 58 66 121 98
Miscellaneous Income (Expense), net........... (163) (17) (21) 3 (10)
------ ------ ------ ------ ------
82 218 349 200 966
Income Tax Expense............................ (45) (100) (147) (65) (311)
------ ------ ------ ------ ------
Income from Continuing Operations............. 37 118 202 135 655
Discontinued Operations:
Operating Earnings, net of tax (benefit) of
$208, $240, $328, $310 and $(598)........ 533 610 831 828 (915)
Gain on Sale of Finance Operations, net of
tax of $264.............................. 403 -- -- -- --
Extraordinary Items, net of tax benefit of
$165 and $25................................ (307) -- -- (50) --
Cumulative Effect of Accounting Changes, net
of tax benefit of $8, $8 and $322........... -- (11) (11) -- (625)
------ ------ ------ ------ ------
Net Income (Loss)............................. $ 666 $ 717 $1,022 $ 913 $ (885)
====== ====== ====== ====== ======
EARNINGS (LOSS) PER SHARE*
Income from Continuing Operations
Primary..................................... $ .07 $ .79 $ 1.46 $ .83 $ 5.34
Fully Diluted............................... $ .23 $ .82 $ 1.46 $ .88 $ 4.77
Discontinued Operations
Primary..................................... $ 8.59 $ 5.19 $ 7.21 $ 6.90 $(7.81)
Fully Diluted............................... $ 7.97 $ 4.79 $ 6.65 $ 6.40 $(6.96)
Extraordinary Items
Primary..................................... $(2.78) $ -- -- $ (.41) --
Fully Diluted............................... $(2.61) $ -- -- $ (.38) --
Cumulative Effect of Accounting Changes
Primary..................................... $ -- $ (.10) $ (.10) -- $(5.46)
Fully Diluted............................... $ -- $ (.09) $ (.09) -- $(4.71)
Net Income (Loss)
Primary..................................... $ 5.88 $ 5.88 $ 8.57 $ 7.32 $(7.93)
Fully Diluted............................... $ 5.59 $ 5.52 $ 8.02 $ 6.90 $(6.90)
====== ====== ====== ====== ======
AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY... 110 118 115 120 117
====== ====== ====== ====== ======
AVERAGE COMMON EQUIVALENT SHARES -- FULLY
DILUTED..................................... 118 127 125 129 132
====== ====== ====== ====== ======
</TABLE>
- ---------------
* Restated to reflect Insurance, Hospitality, Entertainment & Information
Services as "Discontinued Operations."
The accompanying notes to financial statements are an integral part of the above
statement.
F-3
<PAGE> 42
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
IN MILLIONS EXCEPT FOR SHARES AND PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1995 1994* 1993*
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 183 $ 322 $ 240
Receivables, net........................................ 1,344 1,138 1,661
Inventories............................................. 960 990 910
Other current assets.................................... 137 80 70
----------- ------- -------
Total current assets................................. 2,624 2,530 2,881
Plant, Property and Equipment, net........................ 2,175 2,114 1,733
Deferred U.S. Income Taxes................................ 262 161 37
Goodwill, net............................................. 357 365 73
Other Assets.............................................. 502 407 339
Net Assets of Discontinued Operations..................... 7,657 5,458 7,918
----------- ------- -------
13,$577.... $11,035 $12,981
=========== ======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable........................................ $ 650 $ 774 $ 591
Accrued expenses........................................ 1,137 848 705
Notes payable and current maturities of long-term
debt................................................. 1,474 928 977
----------- ------- -------
Total current liabilities............................ 3,261 2,550 2,273
Non-U.S. Unfunded Pension................................. 699 610 511
U.S. Unfunded Pension and Postretirement Costs............ 362 388 282
Long-term Debt (including ESOP of $ -- , $562 and $603)... 801 1,712 1,994
Deferred Income Taxes -- Foreign, State and Local......... 71 90 94
Other Liabilities......................................... 433 226 177
----------- ------- -------
5,627 5,576 5,331
----------- ------- -------
Stockholders Equity --
Cumulative preferred stock (aggregate liquidation value
of $695 as of December 31, 1994)..................... -- 655 673
Common stock: Authorized 200,000,000 shares, $1 par
value Outstanding 116,481,589, 105,672,252 and
117,560,877.......................................... 116 106 118
Capital surplus......................................... 685 -- --
Deferred compensation -- ESOP........................... -- (562) (603)
Cumulative translation adjustments...................... (36) (113) (206)
Unrealized (loss) gain on securities, net of tax........ (111) (1,376) 80
Retained earnings....................................... 7,296 6,749 7,588
----------- ------- -------
7,950 5,459 7,650
----------- ------- -------
$13,577 $11,035 $12,981
=========== ======= =======
</TABLE>
- ---------------
* Restated to reflect Insurance, Hospitality, Entertainment and Information
Services as "Discontinued Operations."
The accompanying notes to financial statements are an integral part of the above
statement.
F-4
<PAGE> 43
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
IN MILLIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------
1995 1994* 1994* 1993* 1992*
-------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)............................. $ 666 $ 717 $ 1,022 $ 913 $ (885)
Discontinued Operations:
Operating Earnings....................... (533) (610) (831) (828) 915
Gain on Sale of Finance Operations....... (403) -- -- -- --
Extraordinary Items........................... 307 -- -- 50 --
Cumulative Effect of Accounting Changes....... -- 11 11 -- 625
----- ----- ------- ------- ------
Income from continuing operations... 37 118 202 135 655
Adjustments to income from continuing
operations:
Depreciation and amortization............... 322 285 373 323 315
Provision for doubtful receivables.......... 1 2 4 6 5
(Gain) loss on divestments -- pretax........ 172 1 2 (13) (950)
Change in receivables, inventories, payables
and accruals............................. (173) (259) (18) 83 81
Accrued and deferred taxes.................. (68) 66 87 83 395
Other, net.................................. (75) 40 (13) 11 132
----- ----- ------- ------- ------
Cash from continuing operations............... 216 253 637 628 633
Cash (to) from discontinued operations........ (519) 463 1,152 (496) (903)
----- ----- ------- ------- ------
Cash from (used for) operating
activities........................ (303) 716 1,789 132 (270)
----- ----- ------- ------- ------
INVESTING ACTIVITIES
Additions to plant, property and equipment.... (276) (232) (407) (337) (351)
Proceeds from divestments..................... 12,474 833 853 862 1,028
Acquisitions.................................. (15) (418) (418) -- --
Other, net.................................... (4) (6) (15) 3 (1)
----- ----- ------- ------- ------
Cash from investing activities...... 12,179 177 13 528 676
----- ----- ------- ------- ------
FINANCING ACTIVITIES
Short-term debt, net.......................... (182) 96 (66) 166 170
Long-term debt issued......................... -- -- -- 11 5
Long-term debt repaid......................... (25) (111) (381) (237) (75)
Repayment of Finance obligations.............. (11,640) -- -- -- --
Repurchase of common stock.................... (38) (655) (1,016) (306) (105)
Dividends paid................................ (193) (211) (280) (277) (270)
Other, net.................................... 40 (2) (5) 82 (98)
----- ----- ------- ------- ------
Cash used for financing
activities........................ (12,038) (883) (1,748) (561) (373)
----- ----- ------- ------- ------
EXCHANGE RATE EFFECT ON CASH AND CASH
EQUIVALENTS................................. 23 35 28 (8) (37)
----- ----- ------- ------- ------
Increase (decrease) in cash and cash
equivalents................................. (139) 45 82 91 (4)
Cash and Cash Equivalents -- Beginning of
period...................................... 322 240 240 149 153
----- ----- ------- ------- ------
Cash and Cash Equivalents -- End of period.... $ 183 $ 285 $ 322 $ 240 $ 149
===== ===== ======= ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................... $ 92 $ 97 $ 112 $ 110 $ 139
===== ===== ======= ======= ======
Income Taxes................................ $ 121 $ 57 $ 243 $ 162 $ 174
===== ===== ======= ======= ======
</TABLE>
- ---------------
* Restated to reflect Insurance, Hospitality, Entertainment and Information
Services as "Discontinued Operations."
The accompanying notes to financial statements are an integral part of the above
statement.
F-5
<PAGE> 44
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED RETAINED EARNINGS
IN MILLIONS EXCEPT PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, ------------------------
1995 1994 1993 1992
----------------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Period........................ $ 6,749 $7,588 $7,058 $8,202
Net Income (Loss)................................... 666 1,022 913 (885)
Dividends Declared --
Cumulative preferred stock, net of tax benefit... (15) (36) (36) (43)
Common stock -- $.99, $1.98, $1.98 and $1.84 per
share.......................................... (104) (228) (235) (216)
Common stock of ITT Rayonier..................... -- (621) -- --
Repurchases of Common Stock......................... -- (976) (112) --
------ ------ ------ ------
Balance -- End of Period.............................. $ 7,296 $6,749 $7,588 $7,058
====== ====== ====== ======
</TABLE>
CONSOLIDATED CAPITAL STOCK AND SURPLUS
IN MILLIONS EXCEPT FOR SHARES
<TABLE>
<CAPTION>
CUMULATIVE COMMON STOCK
PREFERRED STOCK -------------------------------
------------------- CAPITAL
SHARES AMOUNT SHARES AMOUNT SURPLUS
---------- ------ ----------- ------ --------
<S> <C> <C> <C> <C> <C>
Balance -- December 31, 1991.................. 14,714,099 $967 114,422,056 $114 $ 8
Redemption of ESOP Series preferred stock... (111,859) (8) -- -- --
Stock incentive plans....................... -- -- 361,031 -- 16
Stock conversions........................... (3,647,710) (174) 5,940,563 6 168
Redemptions and repurchases................. (1,059,777) (98) (1,664,518) (1) (116)
---------- ---- ----------- ---- ----
Balance -- December 31, 1992.................. 9,894,753 687 119,059,132 119 76
Redemption of ESOP Series preferred stock... (175,964) (14) -- -- (2)
Stock incentive plans....................... -- -- 1,915,760 2 121
Stock conversions........................... (137,460) -- 173,993 -- --
Repurchases................................. -- -- (3,588,008) (3) (195)
---------- ---- ----------- ---- ----
Balance -- December 31, 1993.................. 9,581,329 673 117,560,877 118 --
Redemption of ESOP Series preferred stock... (179,555) (13) -- -- --
Stock conversions........................... (99,345) (5) 116,428 -- 5
Stock incentive plans....................... -- -- 283,463 -- 18
Repurchases................................. -- -- (12,288,516) (12) (23)
---------- ---- ----------- ---- ----
Balance -- December 31, 1994.................. 9,302,429 655 105,672,252 106 $ --
(unaudited)
Redemption of ESOP Series preferred stock... (120,652) (9) -- -- (4)
Conversion of ESOP Series preferred stock... (8,636,231) (644) 9,657,383 10 634
Stock conversions........................... (522,647) (2) 661,671 -- 2
Stock redemption............................ (22,899) -- -- -- (2)
Stock incentive plans....................... -- -- 867,485 -- 90
Repurchases................................. -- -- (377,202) -- (35)
---------- ---- ----------- ---- ----
Balance -- September 30, 1995................. -- $ -- 116,481,589 $116 $685
========== ==== =========== ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statements.
F-6
<PAGE> 45
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CUMULATIVE PREFERRED STOCK
STATED VALUE IN MILLIONS
<TABLE>
<CAPTION>
PER SHARE-DECEMBER 31,
1994 1994 1993
----------------------- ------------------ ------------------
CONVERSION REDEMPTION STATED STATED
RATE PRICE SHARES VALUE SHARES VALUE
---------- ---------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
$2.25 Series N......................... 1.2660 $85.00 545,546 $ 2 581,535 $ 2
$5.221 ESOP Series..................... 1.1191 77.20 8,756,883 653 8,999,794 671
--------- ---- --------- ----
9,302,429 $655 9,581,329 $673
========= ==== ========= ====
</TABLE>
The Corporation has authorized 50,000,000 shares of cumulative preferred
stock, without par value, which are issuable in series.
In July 1995, the Corporation terminated the ESOP portion of the ITT
Investment and Savings Plan. The trustee of the ESOP then converted the
preferred stock held by the trustee to ITT Common Stock.
Series N Preferred Stock was redeemed on August 29, 1995.
The accompanying notes to financial statements are an integral part of the above
statement.
F-7
<PAGE> 46
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
PLAN OF DISTRIBUTION
On September 21, 1995, the shareholders of ITT Corporation approved all
seven proposals outlined in the August 30, 1995 Proxy Statement. The proposals,
which are subject to final terms and conditions, authorize, among other things,
the change in ITT Corporation's name to ITT Industries, Inc. ("ITT" or the
"Corporation") and the distribution (the "Distribution") to holders of the
Corporation's common stock (on a pro-rata basis) of all outstanding shares of
common stock of ITT Destinations, Inc., a wholly-owned subsidiary which will
hold the Corporation's interests in hospitality, entertainment and information
services businesses ("ITT Destinations") and ITT Hartford Group, Inc., a
wholly-owned subsidiary holding the Corporation's interests in the insurance
business segment ("ITT Hartford"). Under the proposed plan, ITT Destinations and
ITT Hartford will become publicly traded companies. These financial statements
give effect to the proposed Distribution, reflecting the accounts of the
businesses included in the Distribution as discontinued operations for all
periods presented. For purposes of these financial statements, all references to
ITT Destinations and ITT Hartford include those companies, their subsidiaries,
affiliated companies and other assets and liabilities that will be transferred
to those companies prior to the Distribution.
In the accompanying financial statements for all periods presented, ITT
Destinations and ITT Hartford are reported as Discontinued Operations. The net
assets of ITT Destinations and ITT Hartford are included in Net Assets of
Discontinued Operations in the accompanying balance sheet. See Discontinued
Operations for summarized financial information of ITT Destinations and ITT
Hartford.
Certain centralized general and administrative functions of the
Corporation, including cash management, legal, accounting, tax and insurance
services have been provided by individuals who, for the most part, will be
associated with ITT Destinations. Fees for these services of approximately one
percent of the Corporation's net sales are reflected on the consolidated
statement of income as "Service Charges from Affiliated Companies". In the
opinion of management, the method of allocating these costs is believed to be
reasonable. However, the costs of these services charged to the Corporation are
not necessarily indicative of the costs that would have been incurred if the
Corporation had performed these functions. Subsequent to the Distribution, the
Corporation will perform these functions using its own resources or purchased
services and, in addition, will be responsible for the administrative and
stewardship expenses associated with the management of a public corporation.
For purposes of governing certain of the ongoing relationships between and
among the Corporation, ITT Destinations and ITT Hartford after the Distribution
and to provide for orderly transition, the Corporation, ITT Destinations and ITT
Hartford will enter into various agreements including a Distribution Agreement,
Employee Benefits Services and Liability Agreement, Tax Allocation Agreement and
Intellectual Property Transfer and License Agreements. Summaries of these
agreements are set forth elsewhere in this Prospectus Supplement.
ACCOUNTING POLICIES
Consolidation Principles: The accompanying financial statements include
the accounts of all majority-owned subsidiaries. All significant intercompany
transactions have been eliminated.
Revenue Recognition: The Corporation recognizes sales as products are
shipped to customers. Sales from long-term contracts are recognized on the
percentage of completion method, generally based on the ratio of units delivered
to total units. Expected losses on long-term contracts are recognized currently.
Research and Development: Significant costs are incurred each year in
connection with research, development and engineering programs that are expected
to contribute profits to future operations. Such costs are charged to income as
incurred except to the extent recoverable under existing contracts. Total
F-8
<PAGE> 47
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
expenditures were $396, $460 and $502 for 1994, 1993 and 1992, respectively, of
which approximately 50% was expended pursuant to customer contracts.
Cash and Cash Equivalents: The Corporation considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories: Inventories are valued generally at the lower of cost
(first-in, first-out) or market. A full absorption procedure is employed using
standard cost techniques. The standards are customarily reviewed and adjusted
annually. Potential losses from obsolete or slow-moving inventories are provided
for in the current period.
Plant, Property and Equipment: Plant, property and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Corporation 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 -- 5 to 40 years,
Machinery and equipment -- 2 to 10 years and Other -- 5 to 40 years. Gains or
losses on sale or retirement of assets are included in income.
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
$49, $41 and $31 at September 30, 1995 (unaudited), December 31, 1994 and 1993,
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 occurred.
Foreign Currency Translation: Balance sheet accounts are translated at the
exchange rate in effect at each year-end and income accounts are translated at
the average rates of exchange prevailing during the year. The national
currencies of the foreign companies are generally the functional currencies.
Gains (losses) from foreign currency transactions are reported currently in cost
of sales and were $4, $8 and $(5) in 1994, 1993 and 1992, respectively.
Derivative Financial Instruments: The Corporation uses a variety of
derivative financial instruments, including interest rate swaps and foreign
currency forward contracts and/or swaps as a means of hedging exposure to
interest rate and foreign currency risks. The Corporation and its subsidiaries
are end-users and do not utilize these instruments for speculative purposes. The
Corporation has strict policies regarding financial stability and credit
standing of its major counterparties.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are
recognized as an adjustment to income. Should the swap be terminated, unrealized
gains or losses are deferred and amortized over the shorter of the remaining
life of the hedging instrument or the underlying debt instrument.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS 52. Changes in the spot rate of instruments designated as
hedges of the net investment in a foreign subsidiary are reflected in the
cumulative translation adjustment component of stockholders equity.
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
Corporation and its subsidiaries at September 30, 1995 and their results of
operations and cash flows for the nine months ended September 30, 1995 and 1994.
Interim results are not necessarily indicative of full year performance.
Earnings Per Share: Fully diluted earnings per share is based on the
weighted average of common stock equivalents and assumes conversion of
convertible preferred stock, including the ESOP series. Net income applicable to
fully diluted earnings per share consists of reported net income or loss
adjusted for the amount,
F-9
<PAGE> 48
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
net of tax, the Corporation would be required to contribute to the ESOP if the
ESOP Series preferred shares were converted into common stock.
Primary earnings per share is based, in 1994 and 1993, on the weighted
average of common and common equivalent shares outstanding, which include Series
N convertible preferred stock and stock options. In 1992, common equivalent
shares, which include Series K and N convertible preferred stock and stock
options, have not been considered since the effect is anti-dilutive. With
respect to options, it is assumed that proceeds received upon exercise will be
used to acquire common stock of the Corporation. In 1994 and 1993, net income
applicable to primary earnings per share consists of the reported net income
adjusted for dividend requirements on preferred stock not considered common
stock equivalents, net of the related tax benefits. In 1992, net income
applicable to primary earnings per share consists of reported net loss adjusted
for dividend requirements on all preferred stock series, net of the related tax
benefits. The ESOP was terminated in July 1995 and all ESOP series preferred
stock was converted to shares of ITT Corporation common stock (see "Employee
Benefit Plans"). If the conversion had occurred on January 1, 1995, primary
earnings per share for the nine months ended September 30, 1995 would have been
$5.66 (unaudited).
Reclassifications: Certain amounts in the prior years financial statements
have been reclassified to conform with the current year presentation.
CHANGES IN ACCOUNTING PRINCIPLES
Changes Adopted in 1994: During the 1994 first quarter, the Corporation
adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The new standard requires, among other things, that securities be
classified as "held-to-maturity", "available for sale" or "trading" based on the
Corporation's intentions with respect to the ultimate disposition of the
security and its ability to affect those intentions. The classification
determines the appropriate accounting carrying value (cost basis or fair value)
and, in the case of fair value, whether the adjustment impacts Stockholders
Equity directly or is reflected in the Statement of Income. Investments in
equity securities had previously been recorded at fair value with the
corresponding impact included in Stockholders Equity. Under SFAS No. 115, the
Corporation's portfolios, which are included in Net Assets of Discontinued
Operations, are classified as "available for sale" and, accordingly, investments
are reflected at fair value with the corresponding impact included as a
component of Stockholders Equity designated "Unrealized gain (loss) on
securities, net of tax". At September 30, 1995 and December 31, 1994, the
unrealized loss on securities, net of tax, was $.1 billion (unaudited) and $1.4
billion, respectively.
In adopting SFAS No. 115, the Corporation followed the guidelines of the
Emerging Issues Task Force (EITF) issue no. 93-18 which prescribes specific
accounting treatment with respect to mortgage-backed interest-only investments.
EITF 93-18 reached the conclusion that the measure of impairment of these
instruments should be changed from undiscounted cash flows to fair value.
Accordingly, the amortized cost basis of such instruments that were determined
to have other-than-temporary impairment losses at the time of initial adoption
of SFAS No. 115 have been written down to fair value and reflected as a
cumulative effect of accounting change as of January 1, 1994. The writedown
totaled $36 after tax, or $0.29 per fully diluted share.
Also in the 1994 first quarter, the Corporation changed its method used to
discount long-term tabular workers compensation liabilities at its discontinued
Insurance segment from a statutory interest rate to an appropriate market
interest rate. The market rate, which approximated 7%, represents the rate of
return the Corporation could receive on risk-free investments with maturities
comparable to those of the liabilities being discounted. At December 31, 1993,
those liabilities were discounted at 3 to 3 1/2% in accordance with statutory
insurance guidelines. A $42 after tax, or $0.33 per fully diluted share, benefit
was recorded as a cumulative effect of accounting change in the accompanying
Consolidated Income Statement.
During the 1994 fourth quarter, the Corporation changed its method of
accounting for certain marketing and start-up costs to expense such costs as
incurred effective January 1, 1994. Such costs related principally to
F-10
<PAGE> 49
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
student recruitment at the discontinued ITT Educational Services and had
previously been deferred and amortized. A charge of $17 after tax, or $0.13 per
fully diluted share, has been recorded as a "Cumulative Effect of Accounting
Change" in the accompanying Consolidated Income Statement. The 1994 earnings
impact of this change in accounting was $5 after tax, or $0.04 per fully diluted
share.
Changes Adopted in 1992: Effective January 1, 1992, the Corporation
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions", and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", using the immediate recognition method. Accordingly, cumulative
adjustments (through December 31, 1991) of $580 after tax ($4.37 per fully
diluted share) and $45 after tax ($.34 per fully diluted share), respectively,
have been recognized at January 1, 1992.
The Corporation's cash flows were not impacted by these changes in
accounting principles.
ALCATEL N.V.
In July 1992, the Corporation sold its 30% equity interest in Alcatel N.V.
(Alcatel) to its joint venture partner, Alcatel Alsthom, resulting in a pretax
gain of $942 or $622 after tax ($4.71 per fully diluted share). The Corporation
received cash at the closing of $1 billion, two notes payable in 1993 and 1994
valued at $1.4 billion and 9.1 million shares of Alcatel Alsthom restricted
stock recorded at $806. The Alcatel Alsthom stock, which is carried at cost, is
included in "Net Assets of Discontinued Operations" in the accompanying Balance
Sheet and had a value of $.8 billion (unaudited), $.8 billion and $1.3 billion
based on the quoted market prices at September 30, 1995, December 31, 1994 and
1993, respectively.
Equity in earnings of Alcatel in 1992 represents the Corporation's 30%
equity in after tax income of Alcatel, adjusted for amortization of the amount
by which the Corporation's investment exceeded its equity in the joint venture,
over periods not longer than 40 years.
RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1995 1994 1993
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Trade................................................ $ 1,352 $1,148 $ 888
Alcatel Note......................................... -- -- 785
Accrued for completed work........................... 31 26 21
Less -- reserves..................................... (39) (36) (33)
----------- ------ ------
$ 1,344 $1,138 $1,661
========== ====== ======
</TABLE>
The Alcatel note resulted from the sale of Alcatel, N.V. in 1992. This note
was collected in July 1994.
F-11
<PAGE> 50
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1995 1994 1993
------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Finished goods........................................ $ 419 $ 452 $ 454
Work in process....................................... 470 480 508
Raw materials and supplies............................ 362 355 325
Less -- reserves...................................... (92) (97) (110)
-- progress payments............................. (199) (200) (267)
----------- ----- -----
$ 960 $ 990 $ 910
========== ===== =====
</TABLE>
PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1995 1994 1993
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements.............................. $ 112 $ 106 $ 93
Buildings and improvements......................... 798 788 739
Machinery and equipment............................ 2,763 2,615 2,200
Construction work in progress...................... 338 262 164
Other.............................................. 1,012 858 723
---------- ------- -------
5,023 4,629 3,919
Less -- accumulated depreciation and
amortization..................................... (2,848) (2,515) (2,186)
----------- ------- -------
$ 2,175 $ 2,114 $ 1,733
========== ======= =======
</TABLE>
DEBT
As of December 31, debt consisted of:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Commercial paper................................................. $ 323 $ 115
Bank loans and other short-term.................................. 455 524
Long-term........................................................ 1,300 1,729
ESOP debt........................................................ 562 603
------ ------
$2,640 $2,971
====== ======
</TABLE>
The fair value of the Corporation's commercial paper and bank loans and
other short-term loans approximates carrying value. The weighted average
interest rate for commercial paper was 5.41% and 6.40% at December 1994 and
1993, respectively. The weighted average interest rate for bank loans and other
short-term borrowings was 5.88% and 6.97% at December 31, 1994 and 1993,
respectively. The estimated fair value of long-term debt at December 31, 1994
and 1993 is $1,397 and $2,018, based on discounted cash flows using the
Corporation's incremental borrowing rates for similar arrangements. Bank loans
and other short-term debt are drawn down under lines of credit, some of which
extend for a fixed term of several years. As of December 31, 1994, the
Corporation had unused credit lines of $3.5 billion, approximately 60% of which
supports outstanding commercial paper, the majority of which is classified in
Net Assets of Discontinued Operations (see "Discontinued Operations" for ITT
debt allocated to Discontinued Operations). Separately, the Corporation had
unused lines of credit of $4.6 billion at ITT Financial, substantially all of
which supports outstanding commercial paper of the discontinued Finance segment.
Total debt at September 30, 1995 decreased to approximately $2.3 billion from
$2.6 billion at December 31, 1994.
F-12
<PAGE> 51
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
Long-term debt maturities and interest rate percentages at December 31
were:
<TABLE>
<CAPTION>
BELOW 6.0- 7.0- 8.0- 9.0- OVER
6 6.99 7.99 8.99 9.99 10 TOTAL
----- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1995.............................. $ 77 $ 1 $ -- $ -- $ -- $ 72 $ 150
1996.............................. 202 1 125 150 1 -- 479
1997.............................. 1 6 -- -- -- 112 119
1998.............................. 1 11 -- 100 -- -- 112
1999.............................. 1 -- -- 28 -- -- 29
Thereafter........................ 1 152 150 1 248 5 557
---- ---- ---- ---- ---- ---- ------
Total -- 1994..................... $283 $171 $275 $279 $249 $189 $1,446
==== ==== ==== ==== ==== ==== ======
Total -- 1993..................... $292 $153 $334 $352 $575 $181 $1,887
==== ==== ==== ==== ==== ==== ======
</TABLE>
The balances as of December 31, 1994 and 1993 exclude amortizable debt
discounts of $146 and $158, respectively. Assets pledged to secure indebtedness
(including mortgage loans) amounted to approximately $15 as of December 31,
1994.
ESOP debt of $562 and $603 as of December 31, 1994 and 1993, respectively,
is included in the Consolidated Balance Sheet due to the Corporation's guarantee
of its repayment by the ESOP and is offset by a reduction in Stockholders Equity
as deferred compensation. The debt is at fixed rates ranging between 8.4% and
8.8% and matures in varying amounts through 2004. The fair value of ESOP debt at
December 31, 1994 and 1993 is $566 and $686 based on discounted cash flows using
incremental borrowing rates for similar arrangements. Interest and principal
repayments are funded by dividends on the ESOP Series preferred stock and Plan
contributions from the Corporation. This debt was repaid in August, 1995 with
the proceeds from the sale of ESOP common shares (see "Employee Benefit Plans").
The Corporation enters into interest rate swap agreements with major
financial institutions to manage exposure from fluctuations in interest rates as
described in "Derivative Financial Instruments".
FOREIGN CURRENCY
Translation adjustments recorded in a separate component of Stockholders
Equity were:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1994 1993 1992
------------- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Year................. $(113) $(206) $ (92) $ 107
Translation of foreign currency financial
statements.............................. 79 110 (125) (226)
Hedges of net foreign investments.......... (2) (17) 11 42
Sale or liquidation of investments......... -- -- -- (15)
----- ----- ----- -----
Balance -- End of Year....................... $ (36) $(113) $(206) $ (92)
===== ===== ===== =====
</TABLE>
EMPLOYEE BENEFIT PLANS
Pension Plans: The Corporation and its subsidiaries sponsor numerous
pension plans. The Corporation funds employee pension benefits 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 securities,
fixed income investments and real estate.
F-13
<PAGE> 52
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
Total pension expense for 1994, 1993 and 1992 was:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Defined Benefit Plans
Service cost..................................................... $ 78 $ 71 $ 63
Interest cost.................................................... 218 214 198
Return on assets................................................. (44) (414) (129)
Net amortization and deferral.................................... (130) 234 (34)
Allocated expenses to Discontinued Operations.................... (21) (22) (23)
----- ----- -----
Net periodic pension cost........................................ 101 83 75
Other Pension Cost
Defined contribution (savings) plan.............................. 14 13 14
Other............................................................ 4 4 3
----- ----- -----
Total Pension Expense....................................... $ 119 $ 100 $ 92
===== ===== =====
</TABLE>
U.S. pension expenses included in the net periodic pension costs in the
table above were $39, $28 and $16 for 1994, 1993 and 1992, respectively.
The following table sets forth the funded status of the Corporation's
pension plans, amounts recognized in the consolidated balance sheet of the
Corporation at December 31, 1994 and 1993 and the principal weighted average
assumptions inherent in their determination:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- -------
<S> <C> <C> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS --
Vested benefit obligation........................... $1,820 $ 691 $1,907 $ 621
Accumulated benefit obligation...................... $1,909 $ 720 $2,000 $ 648
====== ===== ====== =====
Projected benefit obligation.......................... $2,064 $ 785 $2,236 $ 764
Plan assets at fair value............................. 1,902 221 2,012 260
------ ----- ------ -----
Projected benefit obligation (in excess of) plan
assets.............................................. (162) (564) (224) (504)
Unrecognized net (gain)/loss.......................... 225 (55) 332 20
Unrecognized net obligation/(asset)................... (35) 32 (41) 31
------ ----- ------ -----
Pension asset (liability) recognized in the balance
sheet............................................... $ 28 $(587) $ 67 $(453)
====== ===== ====== =====
Discount rate......................................... 8.50% 8.31% 7.50% 7.71%
Rate of return on invested assets..................... 9.75% 8.78% 9.75% 8.75%
Salary increase assumption............................ 4.94% 4.34% 5.82% 5.52%
====== ===== ====== =====
</TABLE>
For substantially all domestic plans, assets exceed accumulated benefits
and for substantially all foreign plans accumulated benefits exceed the related
assets.
Investment and Savings Plan -- The ITT Investment and Savings Plan for
Salaried Employees included an Employee Stock Ownership Plan (ESOP) feature. In
1989, ITT sold to the ESOP 9,384,951 shares of a new series of Cumulative
preferred stock at a price of $74.5875 per share, which was financed through
borrowings by the ESOP guaranteed by the Corporation. Shares are allocated to
participants as a percent of each covered employee's salary and respective
contribution. At December 31, 1994, 2,544,514 shares were allocated to
participants.
In connection with the proposed Distribution, ITT terminated the ESOP
portion of the ITT Investment and Savings Plan. As a result of the termination,
in July 1995, the trustee of the ESOP converted the preferred
F-14
<PAGE> 53
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
stock held by the trustee to ITT Corporation common stock. The trustee then
completed the sale of 5.3 million ESOP shares into the open market. The sales
proceeds were used to repay the debt associated with the ESOP. The remainder,
whether it be cash or shares of ITT Corporation, will be allocated pro rata to
participants in the Plan. Also in connection with the Distribution, the
Corporation expects to change the name of the plan to the ITT Industries
Investment and Savings Plan and that balances related to employees of ITT
Destinations and ITT Hartford will be transferred to plans created by those
companies.
Postretirement Health and Life -- The Corporation and its subsidiaries
provide health care and life insurance benefits for certain eligible retired
employees. Effective January 1, 1992, the Corporation adopted SFAS No. 106,
using the immediate recognition method for all benefits accumulated to date.
The Corporation adopted certain changes to a number of its postretirement
benefit plans during 1992. The effect of these changes has been reflected in the
determination of the expense recorded for 1994, 1993 and 1992 as reported below.
The Corporation 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 expense (excluding the cumulative catch-up adjustment in
1992) was comprised of the following in 1994, 1993 and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................. $ 8 $ 5 $ 7
Interest cost................................................. 29 28 28
Return on assets.............................................. 3 (14) (10)
Net amortization and deferral................................. (18) 1 --
Allocated expense to affiliated entities...................... (1) (1) (2)
---- ---- ----
Net periodic expense.......................................... $ 21 $ 19 $ 23
==== ==== ====
</TABLE>
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Corporation's
Balance Sheet at December 31, 1994 and 1993 and the principal weighted average
assumptions inherent in their determination:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Accumulated postretirement benefit obligation..................... $ 392 $ 380
Plan assets at fair value......................................... 121 115
----- -----
Accumulated postretirement benefit obligation (in excess of) plan
assets.......................................................... $(271) $(265)
Unrecognized net (gain)/loss...................................... (27) 22
Unrecognized past service liability............................... (41) (43)
----- -----
Liability recognized in the balance sheet......................... $(339) $(286)
===== =====
Discount rate..................................................... 8.50% 7.50%
Rate of return on invested assets................................. 9.75% 9.75%
Ultimate health care trend rate................................... 6.00% 6.00%
===== =====
</TABLE>
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 11.0% for 1994, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the accumulated postretirement
benefit obligation by $32 and the annual expense by $3. 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.
F-15
<PAGE> 54
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
LEASES AND RENTALS
As of December 31, 1994, minimum rentals under operating leases were $81,
$67, $56, $39 and $26, for 1995, 1996, 1997, 1998 and 1999. For the remaining
years, such commitments amounted to $92, aggregating total minimum lease
payments of $361.
Rental expenses for operating leases were $74, $69 and $74, for 1994, 1993
and 1992, respectively.
INCOME TAX
Income tax data is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- ----
<S> <C> <C> <C>
Pretax income
U.S....................................................... $ 187 $ 104 $937
Foreign................................................... 162 96 29
----- ----- ----
$ 349 $ 200 $966
===== ===== ====
Provision (benefit) for income tax
Current
U.S. Federal........................................... $ 171 $ 160 $251
State and local........................................ 3 8 3
Foreign................................................ 83 32 1
----- ----- ----
257 200 255
----- ----- ----
Deferred
U.S. Federal........................................... (98) (122) 66
Foreign and other...................................... (12) (13) (10)
----- ----- ----
(110) (135) 56
----- ----- ----
$ 147 $ 65 $311
===== ===== ====
</TABLE>
No provision was made for U.S. taxes payable on undistributed foreign
earnings amounting to approximately $1.1 billion (including discontinued
operations) since these amounts are permanently reinvested.
Deferred income taxes represent the tax effect related to recording
revenues and expenses in different periods for financial reporting and tax
purposes. The December 31, 1994 and 1993 Balance Sheets include net U.S. Federal
deferred tax assets of $161 and $37 respectively, and net foreign and other
deferred tax liabilities of $90 and $94, respectively.
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
FOREIGN FOREIGN
U.S. AND U.S. AND
FEDERAL OTHER FEDERAL OTHER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Employee benefits.............................. $ 111 $ 32 $ 91 $ 29
Accelerated depreciation....................... (28) (165) (32) (143)
Installment sale............................... -- -- (108) --
Other.......................................... 78 43 86 20
---- ----- ----- -----
$ 161 $ (90) $ 37 $ (94)
==== ===== ===== =====
</TABLE>
F-16
<PAGE> 55
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Tax provision at U.S. statutory rate........................ $122 $ 70 $328
Foreign tax rate differential............................... 14 (9) (20)
Taxes on repatriation of foreign earnings................... 9 13 10
Tax basis differential on dispositions...................... -- (20) (7)
State income taxes, net of Federal benefit.................. 1 5 2
Other....................................................... 1 6 (2)
---- ---- ----
Provision for income tax.................................... $147 $ 65 $311
==== ==== ====
</TABLE>
STOCK INCENTIVE PLANS
The Corporation's stock option incentive plans provide for the awarding of
options on common shares to employees, exercisable over ten-year periods.
Certain options become exercisable upon the attainment of specified market price
appreciation of the Corporation's common shares or at nine years after the date
of grant, while remaining options become exercisable over a three-year period
commencing with the date of grant. The exercise price per share is the fair
market value on the date each option is granted.
The following table summarizes the activity in common shares subject to
options for the three years ended December 31, 1994 (shares in thousands):
<TABLE>
<CAPTION>
OPTION PRICE SHARES
-------------- ------
<S> <C> <C>
January 1, 1992............................................. $23.00 - $61.13 4,077
Granted................................................... $59.25 - $70.75 110
Exercised................................................. $23.00 - $60.63 (434)
Cancelled or expired...................................... $44.38 - $51.00 (50)
-------
December 31, 1992........................................... $31.00 - $70.75 3,703
Granted................................................... $72.63 - $93.50 1,764
Exercised................................................. $31.00 - $66.75 (1,910)
Cancelled or expired...................................... $44.38 - $55.25 (43)
-------
December 31, 1993........................................... $32.38 - $93.50 3,514
Adjustment for Rayonier spin-off.......................... 304
Granted................................................... $81.13 - $91.14 2,212
Exercised................................................. $32.38 - $84.16 (260)
Cancelled or expired...................................... $44.49 - $92.00 (182)
-------
December 31, 1994........................................... $29.62 - $91.14 5,588
-------
</TABLE>
In March 1994, the number and exercise price of all options outstanding
were adjusted to recognize the effect of the Rayonier spin-off. This adjustment
increased the number of shares and reduced the exercise price to reflect the
value of the Rayonier shares transferred to the Corporation's shareholders.
As of December 31, 1994 and 1993, options for 1,914,000 and 1,684,000
shares, respectively, were exercisable under the Corporation's incentive plans
and at year-end 1994, 212,000 shares were available for future grants. Effective
January 1, 1995, option shares available for future grants increased to
2,390,000 as a result of the allotment formula established in the 1994 Incentive
Stock Plan. Options to purchase approximately 2 million common shares at $108.75
were granted in May, 1995 (unaudited). The incentive stock plans also provide
for the awarding of restricted stock to employees which is subject to a
restriction period and cannot be sold, exchanged, pledged, or otherwise disposed
of during that period. During 1994,
F-17
<PAGE> 56
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
31,500 of such shares were awarded with restriction periods ranging from one to
six years. An additional 48,500 restricted shares were issued in May, 1995
(unaudited).
As part of the Distribution, stock options of the Corporation held by
employees of ITT Destinations and ITT Hartford will be converted to stock
options in stock incentive plans of the respective new companies based upon a
formula. For the remaining holders of the former ITT Corporation's stock
options, the number of options and the related exercise price will be adjusted
to reflect the value of the ITT Destinations and ITT Hartford shares transferred
to the Corporation's shareholders.
DISCONTINUED OPERATIONS
As further discussed in "Plan of Distribution," the assets and liabilities
of ITT Destinations and ITT Hartford are included in Net Assets of Discontinued
Operations. Summarized financial information for ITT Destinations and ITT
Hartford is as follows:
ITT Destinations
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................... $4,629 $3,224 $4,760 $4,169 $4,253
Operating Income............................ 402 190 292 142 34
Income Before Accounting Changes............ 103 59 74 39 2
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1995 1994 1993
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets............................................... $ 8,838 $5,012 $3,791
Debt....................................................... 832 631 187
Investments and Advances from ITT Industries............... 6,231 3,353 2,765
</TABLE>
ITT Hartford
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------------
1995 1994 1994 1993 1992
------ ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................. $8,977 $8,070 $11,102 $10,338 $9,862
Operating Income (Loss)................... 546 643 852 687 (501)
Income (Loss) Before Accounting Changes... 418 474 632 537 (274)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1995 1994 1993
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets............................................. $90,237 $76,765 $66,179
Debt..................................................... 1,511 1,498 963
Equity................................................... 4,988 3,184 4,012
</TABLE>
At September 30, 1995, net assets of discontinued operations have been
reduced by approximately $0.1 billion (unaudited) of the Corporation's debt
which is expected to be repaid prior to the Distribution through the sale of
assets of discontinued operations. Corporate interest expense is allocated to
discontinued operations based upon the amount of debt to be repaid with the
proceeds from those operations or refinanced by those operations. In addition,
results of discontinued operations include $36 million after tax of severance
and other costs related to the rationalization of the Corporation's headquarters
operations in connection with the impending Distribution.
F-18
<PAGE> 57
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
In December 1993, the Corporation announced plans to spin off ITT Rayonier,
the Corporation's wholly-owned Forest Products subsidiary, to shareholders. On
February 28, 1994, all of the shares of common stock of ITT Rayonier
(approximately 29.6 million shares) were distributed to holders of the
Corporation's Common Stock and holders of the Corporation's Cumulative Preferred
Stock, $2.25 Convertible Series N, on the basis of one share of Rayonier Common
Stock for every four shares of Common Stock held and one share of Rayonier
Common Stock for every 3.1595 shares of Series N Preferred Stock held. The net
assets of ITT Rayonier, including total equity of $607 and debt of $498, are
included in Net Assets of Discontinued Operations at December 31, 1993. Sales
totaled $147, $962, and $1,005 for the two months ended February 28, 1994 and
the years ended December 31, 1993 and 1992, respectively. Income (loss) from
Rayonier operations totaled $12, $53 and ($72) for the comparable periods.
In September 1994, the Corporation announced plans to seek offers for the
purchase of its Finance business segment, comprised primarily of its ITT
Financial Corporation subsidiary. Proceeds from the sale are expected to exceed
the carrying value of the net assets. Summarized financial information is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................... $ 476 $1,063 $1,452 $1,633 $2,017
Operating Income (Loss)..................... 79 92 163 276 (888)*
Income (Loss) from Finance Operations....... 48 65 113 199 (571)*
Gain on Sale, net of tax.................... 403 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
1995 1994 1993
------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets............................................. $ 697 $13,398 $11,498
Total Liabilities........................................ 595 12,734 10,626
</TABLE>
- ---------------
* 1993 includes a $95 pretax gain ($63 after tax) on the sale of the domestic
unsecured consumer small loan business. Proceeds from the sale were used to
retire fixed-rate debt resulting in an extraordinary loss of $50 after tax. In
1992, a pretax charge of $928 ($612 after tax) was recorded primarily to
strategically transform its consumer finance business.
ITT realized gross proceeds totaling $12.4 billion (unaudited) through
September 30, 1995 from the sale of the businesses comprising ITT Financial.
Proceeds from these transactions were used to repay ITT Financial debt.
In January 1995, the holders of $3.4 billion in ITT Financial term debt
consented to a merger of ITT Financial with the Corporation. The merger was
completed on May 1, 1995. ITT Industries is the surviving corporation and is the
obligor on the debt. All ITT Financial debt obligations not assumed by the
Corporation in connection with the consent discussed above are expected to be
repaid with proceeds from the divestments.
In the Finance segment, interest rate swaps and other derivative
instruments are generally used in conjunction with debt obligations to hedge the
Segment's exposure to interest rate changes. In all cases, counterparties under
these agreements are major financial institutions with remote risk of
non-performance.
F-19
<PAGE> 58
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
The notional amount of dollar denominated interest rate swaps that are hedging
various categories of debt liabilities at December 31, 1994 is detailed in the
following table:
<TABLE>
<CAPTION>
CONVERT
VARIABLE
PAY PAY INDEX TO
VARIABLE FIXED DIFFERENT TOTAL
CARRYING RECEIVE RECEIVE VARIABLE NOTIONAL LATEST
VALUE FIXED VARIABLE INDEX AMOUNT MATURITY
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial Paper............................ $ 4,457 $ -- $260 $205 $ 465 1998
Bank Loans and Short-term Debt.............. 1,864 42 -- 220 262 1999
Long-term Debt.............................. 5,319 1,170 -- 320 1,490 2011
-------- -------- -------- -------- --------
Total Finance Debt.......................... $ 11,640 $1,212 $260 $745 $2,217
======= ====== ====== ====== ======
</TABLE>
The following table summarizes the maturities of interest rate swaps
outstanding at December 31, 1994 and the related weighted average interest pay
rate or receive rate. The rates in the following table represent spot rates
(primarily 90-day LIBOR):
<TABLE>
<CAPTION>
2000-
1995 1996 1997 1998 1999 2011 TOTAL
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE:
Notional value...................... $ -- $260 $ -- $ -- $ -- $ -- $ 260
Weighted average receive rate....... -- 5.02% -- -- -- -- 5.02%
Weighted average pay rate........... -- 6.08% -- -- -- -- 6.08%
PAY VARIABLE/RECEIVE FIXED:
Notional value...................... $225 $ 75 $ 52 $ 20 $235 $605 $1,212
Weighted average receive rate....... 6.96% 4.56% 6.18% 6.89% 6.92% 7.57% 7.07%
Weighted average pay rate........... 4.96% 4.06% 5.17% 4.99% 4.94% 4.96% 4.91%
PAY A FLOATING RATE/RECEIVE A
DIFFERENT FLOATING RATE:
Notional value...................... $170 $ 25 $335 $ 60 $155 $ -- $ 745
Weighted average receive rate....... 3.66% 3.65% 5.01% 4.98% 5.97% -- 4.48%
Weighted average pay rate........... 5.11% 4.50% 4.83% 4.51% 5.58% -- 5.04%
Total Notional Value................ $395 $360 $387 $ 80 $390 $605 $2,217
Total weighted average --
Receive Rate........................ 5.54% 4.83% 5.17% 5.46% 6.54% 7.57% 6.08%
Pay Rate............................ 5.03% 5.59% 4.88% 4.63% 5.20% 4.96% 5.09%
</TABLE>
In addition, purchased interest rate caps with a notional principal amount
of $1.2 billion were in effect as of December 31, 1994. The caps were used to
mitigate the risk of rising interest rates on the Corporation's variable rate
obligations and were terminated in 1995.
EARLY EXTINGUISHMENT OF DEBT (UNAUDITED)
In July 1995 the Corporation announced the successful completion of a
tender offer for an aggregate of $4.1 billion of its debt securities, with $3.4
billion, or 82% of the aggregate principal amount, having been tendered. The
tender offer resulted in the Corporation paying a tender premium of $307 million
after tax ($472 million pre-tax) in the third quarter of 1995 which has been
recorded as an extraordinary loss on the early extinguishment of debt.
F-20
<PAGE> 59
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate swap agreements are in effect with major financial
institutions to manage exposure from fluctuations in interest rates on the
Corporation's variable rate debt. The Corporation has entered into agreements
with a notional principal amount of $175 which require the Corporation to make
fixed payments in exchange for variable payments. The weighted average pay rate
on these agreements (which mature at various times through 1999) is 6.9% and the
weighted average receive rate is 5.7%. The estimated fair value of these swaps
was $1 at December 31, 1994 and was $(5) at December 31, 1993. Fair value
represents the estimated amount the Corporation would receive (pay) to terminate
the swap agreements based on current interest rates.
The Corporation enters into foreign exchange contracts with major financial
institutions (currency swaps and forward exchange contracts) to hedge exchange
exposure on the net investment in a foreign country or on foreign currency
denominated debt and are therefore of a long-term duration or are meant to hedge
a specified transaction.
The contractual amounts of these foreign exchange contracts at December 31,
1994 and 1993 totaled $843 and $766, respectively, and mature at varying dates
through 1997. Under these contracts, $474 relates to swaps (the Corporation is
the seller under $425 and the buyer under $49) and $369 relates to exchange
contracts (the Corporation is the seller under $36 and the buyer under $333).
Approximately $321 hedges Deutsche marks against Belgian francs, while the
balance principally hedges dollars against other major European currencies.
There is no significant unrealized gain or loss on these contracts. The
estimated fair value at December 31, 1994 and 1993 approximates the recorded
amounts. The estimated fair value is the present value of the change in cash
flows that would result from the agreements being replaced at the year-end
market rate for the remaining term of the agreements.
COMMITMENTS AND CONTINGENCIES
The Corporation and its subsidiaries are involved in various other legal
actions including those related to government contracts and environmental
matters. Some of these actions included claims for substantial sums. Reserves
have been established when the outcome is probable and can be reasonably
estimated. While the ultimate result of these legal actions and related claims
cannot be determined, the Corporation does not expect that they will have a
material adverse effect on its consolidated financial position, results of
operations or cash flow.
F-21
<PAGE> 60
ITT INDUSTRIES, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME
------------------------ ------------------
1994 1993 1992 1994 1993 1992
------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Automotive......................................... $4,784 $3,580 $3,498 $328 $164 $118
Defense & Electronics.............................. 1,498 1,426 1,663 96 77 (29)
Fluid Technology................................... 1,125 1,030 1,070 99 95 67
Dispositions and Other............................. 351 585 614 (26) (35) (51)
------ ------ ------ ---- ---- ----
Total Segments................................... 7,758 6,621 6,845 497 301 105
Other.............................................. -- -- -- (79) (72) (86)
------ ------ ------ ---- ---- ----
$7,758 $6,621 $6,845 $418 $229 $ 19
====== ====== ====== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
GROSS PLANT
IDENTIFIABLE ASSETS ADDITIONS DEPRECIATION
--------------------------- ------------------ ------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------- ------- ------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automotive.................... $ 2,792 $ 1,846 $ 1,867 $274 $235 $216 $209 $150 $154
Defense & Electronics......... 783 678 734 55 43 56 58 61 65
Fluid Technology.............. 728 613 640 43 34 41 38 36 38
Dispositions and Other........ 618 623 754 46 24 35 38 40 39
------ ------ ------ ---- ---- ---- ---- ---- ----
Total Segments.............. 4,921 3,760 3,995 418 336 348 343 287 296
Other......................... 6,114 9,221 8,565 -- -- 2 -- -- --
------ ------ ------ ---- ---- ---- ---- ---- ----
$11,035 $12,981 $12,560 $418 $336 $350 $343 $287 $296
====== ====== ====== ==== ==== ==== ==== ==== ====
</TABLE>
Automotive: ITT Automotive is one of the largest independent suppliers of
systems and components to vehicle manufacturers worldwide and also supplies
related products to the aftermarket. Through operations located in Europe, North
America and South America and joint ventures and licensees in Asia, ITT
Automotive designs, engineers and manufactures a broad range of automotive
systems and components under two major worldwide product groupings.
The Brake and Chassis Systems group produces anti-lock brake ("ABS") and
traction control systems ("TCS"), chassis systems, foundation brake components,
fluid handling products and Koni shock absorbers.
The Body and Electrical Systems group produces automotive products, such as
door and window assemblies, wiper module assemblies, seat systems, air
management systems, switches and fractional horsepower DC motors. Sales to two
customers account for approximately 44% of 1994 sales.
Defense & Electronics: ITT Defense & Electronics companies develop,
manufacture and support high technology electronic systems and components for
defense and commercial markets on a worldwide basis, with operations in North
America, Europe and Asia. Defense market products include tactical
communications equipment, electronic warfare systems, night vision devices,
radar, space payloads, and operations and management services. Commercial
products include interconnect products (such as connectors, switches and cable
assemblies) and night vision devices.
Companies in the electronics sector of this segment operate in several
European countries, Japan and North America and produce a wide variety of
electronic connectors, switches and components which are used in industrial,
professional and telecommunications equipment as well as in consumer appliances
and automobiles.
Fluid Technology: ITT Fluid Technology is a worldwide enterprise engaged
in the design, development, production and sale of products, systems and
services used to move, handle, transfer, control and contain fluids of all
kinds. Operating in more than 100 countries, ITT Fluid Technology is a leading
supplier of pumps, valves, heat exchangers, mixers, instruments and controls for
the management of fluids.
F-22
<PAGE> 61
ITT INDUSTRIES, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFOMATION -- (CONTINUED)
The majority of ITT Fluid Technology sales are in North America and Western
Europe. Principal markets are water and wastewater treatment, industrial and
process, and construction.
"Dispositions and Other" include the operating results of units other than
"Discontinued Operations," including the Corporation's Instruments operations
and ITT Components Distribution which were sold, along with sales and operating
income of other non-core businesses.
"Other" in the Operating Income table primarily includes service charges
from affiliated companies and other corporate charges. "Other" in the
Identifiable Assets table includes assets of Discontinued Operations and
corporate assets. Intercompany sales, which are priced on an arm's-length basis
and eliminated in consolidation, are not material.
GEOGRAPHICAL INFORMATION -- TOTAL SEGMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
OPERATING
NET SALES INCOME (LOSS) IDENTIFIABLE ASSETS
------------------------ ------------------ ------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.......................... $4,063 $3,133 $3,020 $224 $130 $(33) $2,462 $1,737 $1,771
Western Europe............... 3,205 3,033 3,476 223 116 111 2,168 1,798 2,018
Canada and Other............. 490 455 349 50 55 27 291 225 206
------ ------ ------ ---- ---- ---- ------ ------ ------
Total Segments............... $7,758 $6,621 $6,845 $497 $301 $105 $4,921 $3,760 $3,995
====== ====== ====== ==== ==== ==== ====== ====== ======
</TABLE>
QUARTERLY RESULTS
FOR 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- ------
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
1994
Net Sales............................................. $1,691 $ 2,036 $1,863 $ 2,168 $7,758
Costs and Expenses.................................... $1,629 $ 1,917 $1,782 $ 2,012 $7,340
Income from Continuing Operations..................... $ 37 $ 61 $ 20 $ 84 $ 202
Net Income............................................ $ 202 $ 258 $ 257 $ 305 $1,022
Earnings Per Share --
Income Per Share from Continuing Operations
-- Primary.......................................... $ .24 $ .44 $ .11 $ .67 $ 1.46
-- Fully Diluted.................................... $ .25 $ .44 $ .13 $ .64 $ 1.46
Net Income
-- Primary.......................................... $ 1.63 $ 2.11 $ 2.14 $ 2.69 $ 8.57
-- Fully Diluted.................................... $ 1.54 $ 1.97 $ 2.01 $ 2.50 $ 8.02
1993
Net Sales............................................. $1,560 $ 1,748 $1,501 $ 1,812 $6,621
Costs and Expenses.................................... $1,532 $ 1,669 $1,445 $ 1,746 $6,392
Income from Continuing Operations..................... $ 16 $ 49 $ 36 $ 34 $ 135
Net Income............................................ $ 175 $ 267 $ 252 $ 219 $ 913
</TABLE>
F-23
<PAGE> 62
ITT INDUSTRIES, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFOMATION -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- ------
(IN MILLIONS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
Earnings Per Share --
Income Per Share from Continuing Operations
-- Primary.......................................... $ .06 $ .33 $ .23 $ .21 $ .83
-- Fully Diluted.................................... $ .07 $ .35 $ .24 $ .22 $ .88
Net Income
-- Primary.......................................... $ 1.37 $ 2.15 $ 2.03 $ 1.77 $ 7.32
-- Fully Diluted.................................... $ 1.30 $ 2.02 $ 1.91 $ 1.67 $ 6.90
</TABLE>
EXPORT SALES (UNAUDITED)
In serving its global markets, ITT Industries generates significant export
sales, which benefit local economies. Sales of products (including intercompany)
manufactured in various countries for shipment to other countries consisted of
the following:
<TABLE>
<CAPTION>
MANUFACTURING SALES
LOCATION DESTINATION 1994 1993 1992
--------------------------------------- ---------------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
United States.......................... Canada $ 312 $ 177 $ 55
Other 127 105 100
------ ------ ------
439 282 155
------ ------ ------
Canada................................. United States 172 159 83
Other 10 5 11
------ ------ ------
182 164 94
------ ------ ------
Western Europe......................... United States 98 63 55
Western Europe 838 664 750
Other 178 142 143
------ ------ ------
1,114 869 948
------ ------ ------
Other.................................. 13 11 5
------ ------ ------
$1,748 $1,326 $1,202
====== ====== ======
</TABLE>
F-24
<PAGE> 63
ITT INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
MILLIONS OF DOLLARS
<TABLE>
<CAPTION>
ADDITIONS (DEDUCTIONS)
--------------------------------------
CHARGED TO WRITE-OFFS/ BALANCE
BALANCE COSTS AND TRANSLATION PAYMENTS/ DECEMBER
JANUARY 1 EXPENSES ADJUSTMENT OTHER 31
--------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for
doubtful accounts....................... $ 33 $ 4 $ 1 $ (2) $ 36
Accumulated depreciation of plant,
property and equipment.................. 2,186 343 144 (158)(1) 2,515
YEAR ENDED DECEMBER 31, 1993
Trade Receivables -- Allowance for
doubtful accounts....................... $ 40 $ 6 $ (1) $ (12) $ 33
Accumulated depreciation of plant,
property and equipment.................. 2,111 287 (95) (117)(1) 2,186
YEAR ENDED DECEMBER 31, 1992
Trade Receivables -- Allowance for
doubtful accounts....................... $ 48 $ 5 $ (3) $ (10) $ 40
Accumulated depreciation of plant property
and equipment........................... 2,039 296 (104) (120)(1) 2,111
</TABLE>
- ---------------
(1) Principally retirements as well as companies sold during the year.
SF-1
<PAGE> 64
PROSPECTUS
ITT CORPORATION
Debt Securities and
Warrants to Purchase Debt Securities
------------------------------
ITT Corporation ("ITT" or the "Corporation") may offer or issue from time
to time to or through underwriters, or directly to other purchasers or through
agents, in one or more series, its unsecured debt securities ("Debt Securities")
and warrants ("Warrants") to purchase Debt Securities (the Debt Securities and
the Warrants being herein collectively called the "Securities") for proceeds up
to $950,000,000, or the equivalent thereof if any of the Securities are
denominated in foreign currency or a foreign currency unit. The Debt Securities
of each series will be offered on terms determined at the time of sale. The Debt
Securities and Warrants may be sold for U. S. dollars, foreign currencies or
foreign currency units, and the principal of and any interest on the Debt
Securities may be payable in U. S. dollars, foreign currencies or foreign
currency units. The specific designation, aggregate principal amount, the
currency or currency unit in which the principal and any interest is payable,
the rate (or method of calculation) and the time of payment of any interest,
authorized denominations, maturity, offering price, any redemption terms or
other specific terms of the Securities in respect of which this Prospectus is
being delivered are set forth in the accompanying Prospectus Supplement (the
"Prospectus Supplement"). With regard to the Warrants, if any, in respect of
which this Prospectus is being delivered, the Prospectus Supplement sets forth a
description of the Debt Securities for which each Warrant is exercisable and the
offering price, if any, exercise price, duration, detachability and other terms
of the Warrant.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
The Securities may be sold by ITT directly to purchasers, through agents or
dealers designated from time to time, through underwriting syndicates led by one
or more managing underwriters or through one or more underwriters. If
underwriters or agents are involved in the offering of Securities, the name of
the managing underwriter or underwriters or agents will be set forth in the
Prospectus Supplement. If an underwriter, agent or dealer is involved in the
offering of any Securities, the underwriter's discount, agent's commission or
dealer's purchase price will be set forth in, or may be calculated from, the
Prospectus Supplement, and the net proceeds to ITT from such offering will be
the public offering price of the Securities less such discount in the case of an
underwriter, the purchase price of the Securities less such commission in the
case of an agent or the purchase price of the Securities in the case of a
dealer, and less, in each case, the other expenses of ITT associated with the
issuance and distribution of the Securities.
------------------------------
The date of this Prospectus is April 20, 1992.
<PAGE> 65
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT, AND IF GIVEN OR MADE SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ITT OR
ANY AGENT, UNDERWRITER OR DEALER. THIS PROSPECTUS AND THE PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THOSE TO WHICH
IT RELATES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS
AND/OR THE PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the year ended December 31, 1991, filed
by ITT with the Securities and Exchange Commission (the "Commission") (File No.
1-5627) is hereby incorporated by reference in this Prospectus.
All documents filed by ITT with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), subsequent to the date of this Prospectus and prior to the termination of
the offering of the Securities covered by this Prospectus shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
ITT WILL PROVIDE, WITHOUT CHARGE, TO EACH PERSON, INCLUDING ANY BENEFICIAL
HOLDER, TO WHOM THIS PROSPECTUS IS DELIVERED, UPON THE WRITTEN OR ORAL REQUEST
OF ANY SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE (OTHER THAN CERTAIN EXHIBITS TO SUCH DOCUMENTS). SUCH REQUESTS SHOULD
BE DIRECTED TO ITT AT ITS PRINCIPAL EXECUTIVE OFFICES, 1330 AVENUE OF THE
AMERICAS, NEW YORK, NY 10019-5490, ATTENTION: CORPORATE SECRETARY (TELEPHONE
NUMBER 212-258-1000).
AVAILABLE INFORMATION
ITT is subject to the informational requirements of the 1934 Act, and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission located
at Judiciary Plaza, 450 5th Street, N.W., Room 1024, Washington, DC 20549 and at
regional public reference facilities maintained by the Commission located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511; and 75 Park Place, Room 1400, New York, NY 10007. Copies of such
material can be obtained from the Public Reference Section of the Commission at
prescribed rates. Certain securities of ITT are listed on the New York and
Pacific Stock Exchanges, and such reports, proxy statements and other
information can also be inspected at the offices of such exchanges. This
Prospectus does not contain all the information set forth in the Registration
Statement and Exhibits thereto which ITT has filed with the Commission under the
Securities Act of 1933 and to which reference is hereby made.
ITT
ITT Corporation is a Delaware corporation, with World Headquarters at 1330
Avenue of the Americas, New York, NY 10019-5490. Until December 31, 1983, the
corporation was known as International Telephone and Telegraph Corporation. It
is the successor (since 1968) to a Maryland corporation incorporated in 1920.
Unless the context otherwise indicates, references herein to ITT Corporation
("ITT") include its subsidiaries.
ITT is a diversified multinational enterprise engaged, either directly or
through subsidiaries, in manufacturing and selling automotive, components, fluid
technology, defense, and forest products, and in providing and
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selling insurance, financial, communication and information, and hotel services.
ITT has approximately 110,000 employees.
On March 3, 1992, ITT and Alcatel Alsthom, a major French company,
announced that an agreement had been signed for the sale of ITT's 30% equity
interest in Alcatel N.V., a Netherlands joint venture company which is the
largest telecommunications equipment manufacturer in the world, to Alcatel
Alsthom, the owner of the other 70% of the joint venture company. The value of
the transaction to ITT is estimated at approximately $3.6 billion. ITT will
receive $1 billion in cash at the closing of the sale expected to take place
mid-year 1992; two payments totalling approximately $1.6 billion in 1993 and
1994, and 9.1 million newly issued capital shares of Alcatel Alsthom,
representing 7% of the outstanding shares of the French company, and valued at
approximately $1 billion based on market price and exchange rates on the date of
the agreement. Mr. Rand V. Araskog, Chairman, President and Chief Executive of
ITT, will become a member of the board of directors of Alcatel Alsthom. ITT will
retain the 7% equity interest for at least five years unless Alcatel Alsthom and
ITT agree otherwise. The transaction is subject to the approval of the
shareholders of Alcatel Alsthom and any governmental approvals as may be
required. Alcatel N.V. was formed in 1986, when ITT and Alcatel Alsthom, then
known as Compagnie Generale d'Electricite, transferred their respective
telecommunications operations to the joint venture.
USE OF PROCEEDS
The net proceeds from the sale of the Securities will be added to the
general funds of ITT and be used for its general corporate purposes including,
but not limited to, the repayment of commercial paper borrowings, loans under
bank credit agreements and other short-term debt, and the funding and refunding
of investments in or extensions of credit to existing or future subsidiaries.
Except as may be indicated in the Prospectus Supplement, no specific
determination has been made as to the use of the proceeds of the Securities in
respect of which this Prospectus is being delivered.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------
1991 1990 1989 1988 1987
- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
1.63 1.92 1.82 1.90 2.11
</TABLE>
These computations include ITT and its subsidiaries, and 50% or less equity
companies. For the purpose of these ratios, "earnings" is determined by adding
"fixed charges" (excluding interest capitalized), income taxes, minority common
stockholders equity in net income and amortization of interest capitalized to
income from continuing operations after eliminating equity in undistributed
earnings and adding back losses of companies in which at least 20% but less than
50% equity is owned. For this purpose, "fixed charges" consists of (1) interest
on all indebtedness and amortization of debt discount and expense, (2) interest
capitalized, (3) an interest factor attributable to rentals, and (4) preferred
stock dividends of subsidiaries.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities will constitute unsecured general obligations of ITT
and will be issued under one of the indentures described below (each an
"Indenture"), in each case between ITT and a banking institution organized under
the laws of the United States of America or of any State thereof (each a
"Trustee"). The following summary of certain provisions of the Indenture does
not purport to be complete and is qualified in its entirety by reference to the
applicable Indenture, a copy of which is filed as an exhibit to the Registration
Statement. All article and section references appearing herein are to articles
and sections of the applicable Indenture, and all capitalized terms have the
meanings specified in the Indenture.
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GENERAL
None of the Indentures limits the amount of Debt Securities which may be
issued thereunder. Each Indenture provides that Debt Securities may be issued
thereunder up to the aggregate principal amount which may be authorized from
time to time by ITT and may be denominated in any currency or currency unit
designated by ITT. Reference is made to the Prospectus Supplement which
accompanies this Prospectus for the following terms and other information with
respect to the Debt Securities being offered thereby: (1) the title of the Debt
Securities; (2) the designation, aggregate principal amount and authorized
denominations of such Debt Securities; (3) the percentage of their principal
amount at which such Debt Securities will be issued; (4) the currency,
currencies or currency units for which the Debt Securities may be purchased and
the currency, currencies or currency units in which the principal of and any
interest on such Debt Securities may be payable; (5) the date on which such Debt
Securities will mature; (6) the rate per annum at which such Debt Securities
will bear interest, if any, or the method of determination of such rate; (7) the
dates on which such interest, if any, will be payable and the record dates for
such payment dates; (8) the Trustee under the Indenture pursuant to which the
Debt Securities are to be issued; (9) whether the Debt Securities are to be
issued in the form of one or more global securities representing all Debt
Securities of that series (each a "Global Security") and, if so, the identity of
a depositary (the "Depositary") for such Global Security or Securities; and (10)
any redemption terms or other specific terms.
If any of the Securities are sold for foreign currencies or foreign
currency units or if the principal of or any interest on any series of Debt
Securities is payable in foreign currencies or foreign currency units, the
restrictions, elections, tax consequences, specific terms and other information
with respect to such issue of Securities and such currencies or currency units
will be set forth in the Prospectus Supplement relating thereto.
The Debt Securities may be issued in fully registered form without coupons
("Fully Registered Securities"), or in a form registered as to principal only
with coupons or in bearer form with coupons. Unless otherwise specified in the
Prospectus Supplement, the Debt Securities will be only Fully Registered
Securities. In addition, Debt Securities of a series may be issuable in the form
of one or more Global Securities, which will be denominated in an amount equal
to all or a portion of the aggregate principal amount of such Debt Securities.
See "Global Securities" below. (Sections 3.1., 3.2)
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates. Federal income tax
consequences and other special considerations applicable to any such series will
be described in the Prospectus Supplement relating thereto.
CERTAIN COVENANTS OF ITT
None of the Indentures will require ITT to maintain any Domestic
Subsidiaries. Accordingly, if ITT elects not to maintain any Domestic
Subsidiaries, none of the Indentures will provide any limitations on the
activity of any ITT subsidiary. However, each Indenture will contain certain
provisions applicable to any companies maintained as Domestic Subsidiaries, and
such provisions are described below.
Definition of Domestic Subsidiary. The term "Domestic Subsidiary" will be
defined in each Indenture to mean any subsidiary which is neither a Foreign
Subsidiary nor an Unrestricted Subsidiary. "Foreign Subsidiary" will be defined
to mean any subsidiary substantially all of the operating assets of which are
located, or substantially all of the business of which is carried on, outside
the United States of America and its territories and possessions, but such term
shall not include any subsidiary incorporated under the laws of any state of the
United States, substantially all of the assets of which consist of securities of
other subsidiaries. (Section 1.1.)
Definitions of Restricted Subsidiary and Unrestricted Subsidiary. The term
"Restricted Subsidiary" will be defined in each Indenture to mean any subsidiary
other than an Unrestricted Subsidiary; and the term "Unrestricted Subsidiary"
will be defined to mean any subsidiary less than 50% of the voting stock of
which is owned directly by ITT and/or one or more Restricted Subsidiaries, and
any subsidiary designated as an
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<PAGE> 68
Unrestricted Subsidiary by the ITT Board of Directors. A Restricted Subsidiary
may at any time be designated as an Unrestricted Subsidiary, and an Unrestricted
Subsidiary's designation as such may at any time be rescinded by the ITT Board
of Directors; and any subsidiary may be the subject of a series of such
designations and rescissions thereof, without limitation, except that: (i) a
subsidiary may not become an Unrestricted Subsidiary if, upon the effectiveness
thereof, it would own any capital stock of, or hold any indebtedness of, any
Restricted Subsidiary; and (ii) an Unrestricted Subsidiary may not become a
Restricted Subsidiary unless such subsidiary has outstanding no lien upon its
property which such subsidiary would be prohibited, under the restriction on
liens described below, from creating immediately after it becomes a Restricted
Subsidiary and, with certain exceptions, such subsidiary is not a party to any
lease which it would have been prohibited, under the restriction on sale and
lease-back transactions described below, from entering into had it been a
Restricted Subsidiary at the time it entered into such lease. (Section 1.1.)
Among the subsidiaries to be designated initially as Unrestricted Subsidiaries
are ITT's finance company subsidiaries.
Definition of Consolidated Net Tangible Assets. The term "Consolidated Net
Tangible Assets" will be defined in each Indenture to mean the total of all
assets appearing on a consolidated balance sheet of ITT and its Domestic
Subsidiaries prepared in accordance with generally accepted accounting
principles as of a date not more than 90 days prior to the date as of which
Consolidated Net Tangible Assets are to be determined, but excluding (i) the
book amount of all segregated intangible assets, (ii) all depreciation,
valuation and other reserves, (iii) current liabilities, (iv) any minority
interest in the stock and surplus of Domestic Subsidiaries, (v) investments in
subsidiaries which are not Domestic Subsidiaries, (vi) deferred income and
deferred liabilities, and (vii) other items deductible under generally accepted
accounting principles. (Section 1.1.)
Sale and Lease-Back. Each Indenture will provide that neither ITT nor any
Domestic Subsidiary may enter into any sale and lease-back transaction (except
for temporary leases of a term of not more than three years and except for
leases between ITT and a Domestic Subsidiary or between Domestic Subsidiaries)
involving the leasing by ITT or any Domestic Subsidiary of any Principal
Property, more than 120 days after the acquisition thereof or the completion of
construction and commencement of full operation thereof, unless either (i) ITT
applies an amount equal to the greater of the fair value (as determined by the
ITT Board of Directors) of such property or the net proceeds of such sale,
within 120 days, to the retirement of Debt Securities or other indebtedness
ranking on a parity with the Debt Securities, or to the acquisition,
construction, development or improvement of properties, facilities or equipment
used for operating purposes which are, or upon such acquisition, construction,
development or improvement will be, a Principal Property or a part thereof, or
(ii) at the time of entering into such transaction, such Principal Property
could have been subjected to a mortgage securing indebtedness in a principal
amount equal to the Capitalized Lease-Back Obligation (as defined) with respect
to such Principal Property under clause (1) of the provision for limitations on
liens referred to below without securing the Debt Securities as contemplated by
that provision. (Section 4.5.)
The term "Capitalized Lease-Back Obligation" will be defined in each
Indenture to mean the total net rental obligations of ITT or a Domestic
Subsidiary under any lease entered into as part of a sale and lease-back
transaction involving a Principal Property discounted to present value at the
rate of 9% per annum. The term "Principal Property" will be defined in each
Indenture to mean any single manufacturing or processing facility owned by ITT
or any Domestic Subsidiary having a gross book value in excess of 2% of
Consolidated Net Tangible Assets, except any such facility or portion thereof
which the ITT Board of Directors by resolution declares is not of material
importance to the total business conducted by ITT and its Domestic Subsidiaries
as an entirety. (Section 1.1.)
Liens. Each Indenture will prohibit ITT and its Domestic Subsidiaries from
creating any mortgages or other liens upon any Principal Property (without
securing the Debt Securities equally and ratably with all other indebtedness
secured thereby), with the following exceptions: (a) mortgages or other liens on
any such property acquired, constructed or improved by ITT or a Domestic
Subsidiary to secure or provide for the payment of any part of the purchase
price of such property or the cost of such construction or improvement, or any
mortgage or other lien on any such property existing at the time of acquisition
thereof; (b) any mortgage or other lien on any property of another company
existing at the time it is acquired by merger, consolidation or acquisition of
substantially all of its stock or its assets; (c) pledges or deposits to secure
payment of workers'
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<PAGE> 69
compensation or insurance premiums, or relating to tenders, bids, contracts
(except contracts for the payment of money) or leases; (d) pledges or liens in
connection with tax assessments or other governmental charges, or as security
required by law or governmental regulation as a condition to the transaction of
any business or the exercise of any privilege or right; (e) pledges or liens to
secure a stay of process in proceedings to enforce a contested liability, or
required in connection with the institution of legal proceedings or in
connection with any other order or decree in any such proceeding or in
connection with any contest of any tax or other governmental charge, or deposits
with a governmental agency entitling ITT or a Domestic Subsidiary to maintain
self-insurance or to participate in other specified insurance arrangements; (f)
mechanics', carriers', workmen's and other like liens; (g) encumbrances in favor
of the U. S. Government to secure progress or advance payments; (h) mortgages,
pledges or other liens securing any indebtedness incurred to finance the cost of
property leased to the U. S. Government at a rental sufficient to pay the
principal of and interest on such indebtedness; (i) mortgages or other liens
securing indebtedness of a Domestic Subsidiary to ITT or to a Domestic
Subsidiary; (j) mortgages, pledges or other liens affecting property securing
indebtedness of a governmental authority issued to finance the cost of a
pollution control program with respect to operations of ITT or a Domestic
Subsidiary; (k) renewals and extensions of any permitted mortgage, lien, deposit
or encumbrance, provided the amount secured is not increased; and (l) the
creation of any other mortgage, pledge or other lien, if, after giving effect to
the creation thereof, the total of (i) the aggregate principal amount of
indebtedness of ITT and its Domestic Subsidiaries secured by all mortgages,
pledges or other liens created under the provisions referred to in this clause
(l), plus (ii) the aggregate amount of Capitalized Lease-Back Obligations of ITT
and its Domestic Subsidiaries under the entire unexpired terms of all leases
entered into in connection with sale and lease-back transactions which would
have been precluded by the provision for limitations on such transactions
described above but for the satisfaction of the condition referred to in clause
(ii) of the description of such provision, will not exceed an amount equal to 5%
of Consolidated Net Tangible Assets (as defined).
The lease of any property and rental obligations thereunder (whether or not
involving a sale and lease-back and whether or not capitalized) shall not be
deemed to create a lien. The sale or other transfer of (a) timber or other
natural resources in place for a period of time until, or in an amount such
that, the purchaser will realize therefrom a specified amount of money (however
determined) or a specified amount of such resources, or (b) any other interest
in property of the character commonly referred to as a "production payment",
shall not be deemed to create a lien. (Section 4.6.)
MODIFICATION OF INDENTURE
Each applicable Indenture, the rights and obligations of ITT thereunder and
the rights of the Holders thereunder may be modified with respect to one or more
series of Debt Securities issued under such Indenture with the consent of the
Holders of not less than a majority in aggregate principal amount of the
Outstanding Debt Securities of each such series (including Debt Securities of
each such series issuable upon exercise of unexpired Warrants) affected by the
modification or amendment. No modification of the terms of payment of principal
or interest, and no modification reducing the percentage required for
modifications, is effective against any Holder without his consent. For the
purpose of these provisions solely, a holder of an unexpired Warrant shall be
deemed to be the Holder of the principal amount of Debt Securities issuable upon
exercise of such Warrant. (Section 10.2.)
EVENTS OF DEFAULT
Except as may otherwise be set forth in each Prospectus Supplement, each
Indenture provides that the following are Events of Default thereunder with
respect to any series of Debt Securities issued thereunder: (i) default in the
payment of the principal of (or premium, if any, on) any Debt Security of such
series when and as the same shall be due and payable; (ii) default in the
deposit of a sinking fund payment, if any, when and as the same shall be due and
payable by the terms of the Debt Securities of such series; (iii) default for 30
days in the payment of any installment of interest on any Debt Security of such
series; (iv) default for 60 days after notice in the performance of any other
covenant in respect of the Debt Securities of such series contained in such
Indenture; (v) acceleration of certain debt instruments of ITT, which
acceleration shall not have been
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<PAGE> 70
rescinded or annulled within 30 days after notice; (vi) certain events in
bankruptcy, insolvency or reorganization of ITT; or (vii) any other Event of
Default provided in the applicable Board Resolution or supplemental indenture
under which such series of Debt Securities is issued. (Section 6.1.) An Event of
Default with respect to a particular series of Debt Securities issued under an
Indenture does not necessarily constitute an Event of Default with respect to
any other series of Debt Securities issued under such Indenture. The applicable
Trustee may withhold notice to the Holders of any series of Debt Securities of
any default with respect to such series (except in the payment of principal or
interest) if it considers such withholding in the interests of such Holders.
(Section 6.11.)
If an Event of Default with respect to any series of Debt Securities shall
have occurred and be continuing, the applicable Trustee or the Holders of not
less than 25% in aggregate principal amount of the Debt Securities of such
series may declare the principal, or in the case of discounted Debt Securities,
such portion thereof as may be described in the Prospectus Supplement
accompanying this Prospectus, of all the Debt Securities of such series to be
due and payable immediately, provided, however, that, subject to certain
conditions, any such declaration and its consequences may be rescinded and
annulled by the Holders of not less than a majority in aggregate principal
amount of the Debt Securities of such series. (Section 6.1.)
Each Indenture will require the annual filing by ITT with the applicable
Trustee of a certificate, signed by a specified officer, stating whether or not
such officer has obtained knowledge of any default by ITT in the performance,
observance or fulfillment of any condition or covenant of such Indenture, and,
if so, specifying each such default and the nature thereof. (Section 4.7.)
Subject to provisions relating to its duties in case of default, a Trustee
shall be under no obligation to exercise any of its rights or powers under the
applicable Indenture at the request, order or direction of any Holders, unless
such Holders shall have offered to such Trustee reasonable indemnity. (Section
7.2.) Subject to such provisions for indemnification, the Holders of a majority
in principal amount of the Debt Securities of any series may direct the time,
method and place of conducting any proceeding or any remedy available to the
appropriate Trustee, or exercising any trust or power conferred upon such
Trustee, with respect to the Debt Securities of such series. (Section 6.9.)
PAYMENT AND TRANSFER
Principal of, premium, if any, and interest, if any, on Fully Registered
Securities are to be payable at the place or places designated by ITT for such
purposes, provided that payment of interest, if any, may be made at the option
of ITT by check mailed to the persons in whose names such Securities are
registered at the close of business on the day or days specified in the
Prospectus Supplement accompanying this Prospectus. The principal of, premium,
if any, and interest, if any, on Debt Securities in other forms will be payable
in such manner and at such place or places as may be designated by ITT and
specified in the applicable Prospectus Supplement. (Sections 3.1., 4.1., 4.2.)
Fully Registered Securities may be transferred or exchanged at the
Corporate Trust Office of the Trustee under the applicable Indenture or at any
other office or agency maintained by ITT for such purposes, subject to the
limitations in the Indenture, without the payment of any service charge except
for any tax or governmental charge incidental thereto. Provisions with respect
to the transfer and exchange of Debt Securities in other forms will be set forth
in the applicable Prospectus Supplement. (Sections 3.1., 3.6.)
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, the Depositary identified in the Prospectus Supplement relating to such
series. Unless and until it is exchanged in whole or in part for Debt Securities
in definitive form, a Global Security may not be transferred except as a whole
to a nominee of the Depositary for such Global Security, or by a nominee of such
Depositary to such Depositary, or to a successor of such Depositary or a nominee
of such successor. (Section 2.4.)
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The specific terms of the depositary arrangement with respect to any series
of Debt Securities and the rights of and limitations on owners of beneficial
interests in a Global Security representing all or a portion of a series of Debt
Securities will be described in the Prospectus Supplement relating to such
series.
DEFEASANCE
Except as may otherwise be provided in the applicable Prospectus Supplement
with respect to the Securities of any series (Section 3.1.), each Indenture
provides that ITT shall be discharged from its obligations under the Securities
of a series at any time prior to the Stated Maturity or redemption thereof when
(a) ITT has irrevocably deposited with the Trustee, in trust, (i) sufficient
funds in the currency or currency unit in which the Securities are denominated
to pay the principal of (and premium, if any), and interest to Stated Maturity
(or redemption) on, the Securities of such series, or (ii) such amount of direct
obligations of, or obligations the principal of and interest on which are fully
guaranteed by, the government which issued the currency in which the Securities
are denominated, and which are not subject to prepayment, redemption or call, as
will, together with the predetermined and certain income to accrue thereon
without consideration of any reinvestment thereof, be sufficient to pay when due
the principal of (and premium, if any), and interest to Stated Maturity (or
redemption) on, the Securities of such series, and (b) ITT has paid all other
sums payable with respect to the Securities of such series. Upon such discharge,
the Holders of the Securities of such series shall no longer be entitled to the
benefits of the Indenture, except for the purposes of registration of transfer
and exchange of the Securities of such series, and replacement of lost, stolen
or mutilated Securities, and shall look only to such deposited funds or
obligations for payment. (Sections 12.1 and 12.3.)
Under federal income tax law as of the date of this Prospectus, such
deposit and discharge may be treated as an exchange of the related Securities.
As a consequence, each Holder of such Securities might be required to recognize
gain or loss equal to the difference between the Holder's cost or other tax
basis for the Securities and the value of the Holder's interest in the trust.
Such Holders thereafter might be required to include in income a different
amount than would be includable in the absence of the discharge. Prospective
investors are urged to consult their own tax advisers as to the specific
consequences of such a deposit and discharge, including the applicability and
effect of tax laws other than the federal income tax law.
CONCERNING THE TRUSTEES
Business and other relationships (including other trusteeships) between ITT
and its subsidiaries and each Trustee under any Indenture pursuant to which any
of the Debt Securities to which the Prospectus Supplement accompanying this
Prospectus relates are described in such Prospectus Supplement.
DESCRIPTION OF WARRANTS
The following statements with respect to the Warrants are summaries of, and
subject to, the detailed provisions of one or more separate Warrant Agreements
(each a "Warrant Agreement"), in each case between ITT and a banking institution
organized under the laws of the United States of America or any State thereof,
as Warrant Agent (each a "Warrant Agent"), a form of which is filed as an
exhibit to the Registration Statement.
GENERAL
The Warrants, whether evidenced by Warrant Certificates (the "Warrant
Certificates") or not so evidenced, may be issued under a Warrant Agreement
independently or together with any Debt Securities offered by any Prospectus
Supplement and may be attached to or separate from such Debt Securities. If
Warrants are offered, the Prospectus Supplement will describe the terms of the
Warrants, including the following: (i) the offering price, if any; (ii) the
designation, aggregate principal amount, and terms of the Debt Securities
purchasable upon exercise of the Warrants; (iii) if applicable, the designation
and terms of the Debt Securities with which the Warrants are issued and the
number of Warrants issued with each such Debt Security; (iv) if applicable, the
date on and after which the Warrants and the related Debt Securities will be
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separately transferable; (v) the principal amount of Debt Securities purchasable
upon exercise of one Warrant and the price at which such principal amount of
Debt Securities may be purchased upon such exercise; (vi) the date on which the
right to exercise the Warrants shall commence and the date on which such right
shall expire; (vii) federal income tax consequences; (viii) whether the Warrants
represented by the Warrant Certificates will be issued in registered or bearer
form; (ix) whether the Warrants will be issued in certificated or uncertificated
form; and (x) any other terms of the Warrants.
Warrant Certificates, if any, may be exchanged for new Warrant Certificates
of different denominations and may (if in registered form) be presented for
registration of transfer at the corporate trust office of the Warrant Agent or
any Co-Warrant Agent, which will be listed in the Prospectus Supplement, or at
such other office as may be set forth therein. Warrantholders do not have any of
the rights of holders of Debt Securities (except to the extent that the consent
of Warrantholders may be required for certain modifications of the terms of the
Indenture and the series of Debt Securities issuable upon exercise of the
Warrants) and are not entitled to payments of principal, premium, if any, or
interest, if any, on such Debt Securities.
EXERCISE OF WARRANTS
Warrants may be exercised by surrendering the Warrant Certificate, if any,
at the corporate trust office of the Warrant Agent or at the corporate trust
office of the Co-Warrant Agent, if any, with the form of election to purchase on
the reverse side of the Warrant Certificate, if any, properly completed and
executed, and by payment in full of the exercise price, as set forth in the
Prospectus Supplement. Upon exercise of Warrants, the Warrant Agent or
Co-Warrant Agent, if any, will, as soon as practicable, deliver the Debt
Securities in authorized denominations in accordance with the instructions of
the exercising Warrantholder and at the sole cost and risk of such holder. If
less than all of the Warrants evidenced by the Warrant Certificate, if any, are
exercised, a new Warrant Certificate will be issued, if sufficient time exists
prior to the expiration of the exercise period, for the remaining amount of
Warrants.
PLAN OF DISTRIBUTION
ITT may sell the Securities (i) through underwriters or dealers; (ii)
directly to one or more purchasers; or (iii) through agents. The Prospectus
Supplement with respect to the Securities being offered thereby sets forth the
terms of the offering of such Securities, including the name or names of any
underwriters, the purchase price of such Securities and the proceeds to ITT from
such sale, any underwriting discounts and other items constituting underwriters'
compensation, any initial public offering price, any discounts or concessions
allowed or reallowed or paid to dealers, and any securities exchange on which
such Securities may be listed. Only underwriters so named in the Prospectus
Supplement are deemed to be underwriters in connection with the Securities
offered thereby.
If underwriters are used in the sale, the Securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
obligations of the underwriters to purchase such Securities will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all the Securities of the series offered by the Prospectus Supplement if any of
such Securities are purchased. Any initial public offering price and any
discounts or concessions allowed or reallowed or paid to dealers may be changed
from time to time.
Securities may also be sold directly by ITT or through agents designated by
ITT from time to time. Any agent involved in the offering and sale of the
Securities in respect of which this Prospectus is delivered is named, and any
commissions payable by ITT to such agent are set forth, in the Prospectus
Supplement. Unless otherwise indicated in the Prospectus Supplement, any such
agent is acting on a best efforts basis for the period of its appointment.
As one of the means of direct issuance of the Securities, ITT may utilize
the services of another entity to conduct an electronic "Dutch Auction" of the
Securities among potential purchasers who are eligible to participate in the
auction of such Securities, as described in the Prospectus Supplement.
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If so indicated in the Prospectus Supplement, ITT will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase Securities providing for payment and delivery on a future date
specified in the Prospectus Supplement. There may be limitations on the minimum
amount which may be purchased by any such institutional investor or on the
portion of the aggregate principal amount of the particular Securities which may
be sold pursuant to such arrangements. Institutional investors to which such
offers may be made, when authorized, include commercial and savings banks,
insurance companies, pension funds, investment companies, education and
charitable institutions and such other institutions as may be approved by ITT.
The obligations of any such purchasers pursuant to such delayed delivery and
payment arrangements will not be subject to any conditions except (i) the
purchase by an institution of the particular Securities shall not at any time of
delivery be prohibited under the laws of any jurisdiction in the United States
to which such institution is subject, and (ii) if the particular Securities are
being sold to underwriters, ITT shall have sold to such underwriters the total
principal amount of such Securities less the principal amount thereof covered by
such arrangements. Underwriters will not have any responsibility in respect of
the validity of such arrangements or the performance of ITT or such
institutional investors thereunder.
Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from ITT and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions, under the Securities Act
of 1933 (the "Act"). Under agreements which may be entered into by ITT,
underwriters, dealers and agents who participate in the distribution of
Securities may be entitled to indemnification by ITT against certain civil
liabilities, including liabilities under the Act, or to contribution with
respect to payments which the underwriters, dealers or agents may be required to
make with respect thereof. Underwriters, dealers and agents may engage in
transactions with, or perform services for, ITT or subsidiaries of ITT in the
ordinary course of their respective businesses.
LEGAL OPINIONS
The legality of the Securities offered hereby will be passed upon for ITT
by Howard J. Aibel, Esq., its Executive Vice President and General Counsel, or
such other attorney of ITT as ITT may designate, and for the Underwriters by
Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, NY 10019-
7415. Mr. Aibel has an interest in certain securities of ITT. Cravath, Swaine &
Moore acts from time to time as legal counsel to ITT on various matters.
EXPERTS
The financial statements and schedules incorporated by reference in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen & Co., independent public accountants, as indicated in their
reports with respect thereto, and are incorporated herein by reference in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
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