<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
ITT Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, without par value, of ITT Destinations, Inc. and Common
Stock, without par value, of ITT Hartford Group, Inc.
(2) Aggregate number of securities to which transaction applies:
116,151,428 shares of ITT Destinations, Inc. and 116,151,428 shares of
ITT Hartford Group, Inc.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The fee is equal to one-fiftieth of one percent of the book
value of the Common Stock of ITT Destinations, Inc. and
Common Stock of ITT Hartford Group, Inc. The aggregate book
value of such Common Stock at March 31, 1995 was $5.858
billion.
(4) Proposed maximum aggregate value of transaction:
Not Applicable
(5) Total fee paid:
$1,171,600
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PRELIMINARY PROXY MATERIALS
DATED AUGUST 11, 1995,
SUBJECT TO COMPLETION
[Logo]
- --------------------------------------------------------------------------------
ITT CORPORATION
NOTICE OF SPECIAL MEETING
AND PROXY STATEMENT
AUGUST , 1995
<PAGE> 3
PRELIMINARY PROXY STATEMENT DATED AUGUST 11, 1995, SUBJECT TO COMPLETION
August , 1995
[LETTERHEAD OF ITT]
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
ITT Corporation to be held at [ ] A.M. on [ ], [ ], 1995, at
[ ]. At the Special Meeting, you will be asked to consider and vote upon
a group of separate but related proposals to divide ITT into its three separate
business areas: (i) Insurance, (ii) Industries and (iii) Hospitality,
Entertainment and Information Services.
These important proposals provide for the proposed distribution to ITT's
shareholders of all the shares of common stock of ITT Destinations, Inc. ("ITT
Destinations" or "New ITT"), 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. The distribution would separate ITT
into three publicly owned companies. In addition, as part of the distribution,
ITT would change its name to ITT Industries, Inc. and ITT Destinations would
change its name to ITT Corporation. In connection with the distribution, ITT
(which is now a Delaware corporation) also proposes to reincorporate in Indiana.
After the distribution, ITT Industries would continue to conduct the automotive,
defense and electronics, and fluid technology businesses of ITT. ITT
Destinations, renamed ITT Corporation, would continue to conduct the
hospitality, entertainment and information services businesses of ITT. ITT
Hartford would continue to conduct the insurance businesses of ITT.
In the distribution, holders of ITT Common Stock would receive one share of
New ITT Common Stock for every one share of ITT Common Stock held and one share
of ITT Hartford Common Stock for every one share of ITT Common Stock held. To
avoid the confusion that would result if both ITT, whose name will be changed to
ITT Industries, Inc., and New ITT, whose name will be changed to ITT Corporation
as part of the distribution, were to have stock certificates outstanding bearing
the name "ITT Corporation" for an extended period of time, shareholders must
submit their certificates representing shares of ITT Common Stock in connection
with the distribution to receive three separate certificates representing shares
of ITT Industries, New ITT and ITT Hartford.
The Board of Directors of ITT believes that the distribution should
increase the value of the investment of ITT's shareholders. The distribution
should decrease the cost of financing the expansion of the Industries and
Hospitality, Entertainment and Information Services businesses of ITT. The
management of each of ITT Industries, New ITT and ITT Hartford will be able to
concentrate its attention and financial resources wholly on its respective
operations. Each of ITT Industries, New ITT and ITT Hartford should also be able
to better rationalize its organizational structure after the distribution.
Moreover, debt and equity investors should be able better to evaluate the
financial performance of each company and its strategies, enhancing the
likelihood that each will achieve appropriate market recognition.
The Board of Directors of ITT has unanimously approved the proposals to be
presented at the Special Meeting and unanimously recommends that shareholders
vote FOR each of the proposals. The effectiveness of each of the proposals is
conditioned upon approval of all the proposals by ITT shareholders. If any of
the proposals is not approved, the Board of Directors of ITT will reevaluate its
intention to effect the distribution. After such review, the Board could
determine to revise the terms of the distribution, effect the distribution
essentially as proposed or as revised despite such lack of approval or abandon
the distribution. The Board has further retained discretion, even if shareholder
approval of the proposals is obtained and the other conditions to the
distribution are satisfied, to abandon, defer or modify the distribution or any
other element contained in the proposals. The proposals are more fully described
in the accompanying proxy statement, which you should carefully review.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING,
WHETHER OR NOT YOU ARE ABLE TO ATTEND PERSONALLY. YOU ARE, THEREFORE, URGED TO
SIGN, DATE AND MAIL THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID
RETURN ENVELOPE AS PROMPTLY AS POSSIBLE. PLEASE DO NOT SEND IN YOUR STOCK
CERTIFICATES WITH YOUR PROXY CARD.
Sincerely,
Rand V. Araskog
Chairman, President &
Chief Executive
<PAGE> 4
[LETTERHEAD OF ITT]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
[ ], 1995
NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of ITT
Corporation, a Delaware corporation ("ITT"), will be held at [ ] on
[ ], [ ], 1995, at [ ] A.M., local time, for the following
purposes:
1. To consider and vote upon seven separate but related proposals
(collectively, the "Distribution Proposals") described in the accompanying Proxy
Statement providing for:
Proposal One: Approval of the distribution by ITT of all the
outstanding shares of common stock of ITT Destinations, Inc., a wholly
owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or
"New ITT"), and of all the outstanding shares of common stock of ITT
Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware
corporation ("ITT Hartford"), on the basis described in the attached Proxy
Statement (collectively, the "Distribution");
Proposal Two: Approval and adoption of an Agreement and Plan of
Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed
Indiana corporation and a wholly owned subsidiary of ITT, providing for the
reincorporation of ITT in Indiana pursuant to a statutory merger of ITT
into ITT Indiana, to be effective only if the Distribution occurs;
Proposal Three: Approval of amendments to the ITT 1977 Stock Option
Incentive Plan and ITT 1986 Incentive Stock Plan;
Proposal Four: Approval of the adoption by New ITT of the New ITT
1995 Incentive Stock Plan, to be effective only following the Distribution;
Proposal Five: Approval of the adoption by ITT Hartford of the ITT
Hartford 1995 Incentive Stock Plan, to be effective only following the
Distribution;
Proposal Six: Approval of the adoption by ITT of the ITT 1996
Restricted Stock Plan for Non-Employee Directors (to be renamed the ITT
Industries 1996 Restricted Stock Plan for Non-Employee Directors), to be
effective only following the Distribution; and
Proposal Seven: Approval of the amendment of the Restated Certificate
of Incorporation of ITT to change the name of ITT to ITT Industries, Inc.
and remove the article of the Restated Certificate of Incorporation in
respect of ITT's gaming licenses, in each case only if the Distribution
occurs.
2. To transact such other business as may properly come before the Special
Meeting.
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON
THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION
PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS OF ITT WILL REEVALUATE ITS
INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD COULD
DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE DISTRIBUTION
ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF APPROVAL OR ABANDON
THE DISTRIBUTION.
The Board has further retained discretion, even if shareholder approval of
the Distribution Proposals is obtained and the other conditions to the
Distribution are satisfied, to abandon, defer or modify the Distribution or any
other element contained in the Distribution Proposals.
Pursuant to the By-laws of ITT, the Board of Directors has fixed the close
of business on [ ], 1995, as the record date for the determination
of shareholders entitled to notice of, and to vote at, the Special Meeting or
any adjournment thereof. Only shareholders of record at the close of business on
that date will be entitled to notice of, and to vote at, the Special Meeting.
<PAGE> 5
ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON, BUT
EVEN IF YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE REQUESTED TO
MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN
THE POSTAGE-PAID ENVELOPE PROVIDED TO ENSURE YOUR REPRESENTATION. ANY PERSON WHO
HAS EXECUTED A PROXY AND IS PRESENT AT THE SPECIAL MEETING MAY VOTE IN PERSON
INSTEAD OF BY PROXY, THEREBY CANCELLING ANY PROXY PREVIOUSLY GIVEN. ONLY
SHAREHOLDERS OF RECORD (OR THOSE HOLDING A PROXY OF A SHAREHOLDER OF RECORD
ENTITLED TO VOTE) WILL BE ADMITTED. PLEASE DO NOT SEND IN YOUR STOCK
CERTIFICATES WITH YOUR PROXY CARD.
ITT CORPORATION
Gwenn L. Carr
Vice President and Secretary
[ ], 1995
NONE OF THE GAMING AUTHORITIES (AS DEFINED HEREIN) HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT OR THE MERITS OF THE TRANSACTIONS
CONTEMPLATED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROXY STATEMENT SUMMARY............... 1
INTRODUCTION.......................... 16
THE DISTRIBUTION...................... 21
THE REINCORPORATION OF ITT............ 32
EMPLOYEE BENEFITS AND COMPENSATION
MATTERS............................. 35
AMENDMENT OF THE RESTATED CERTIFICATE
OF INCORPORATION
OF ITT.............................. 45
RELATIONSHIP BETWEEN ITT INDUSTRIES,
NEW ITT AND ITT HARTFORD AFTER THE
DISTRIBUTION........................ 46
DIVIDEND POLICY....................... 48
DIVIDENDS AND PRICE RANGE OF ITT
COMMON STOCK........................ 49
ITT INDUSTRIES SUMMARY OF SIGNIFICANT
CAPITALIZATION FORECAST
ASSUMPTIONS......................... 50
ITT INDUSTRIES FORECASTED
CAPITALIZATION...................... 52
NEW ITT SUMMARY OF SIGNIFICANT
CAPITALIZATION FORECAST
ASSUMPTIONS......................... 53
NEW ITT FORECASTED CAPITALIZATION..... 54
ITT HARTFORD SUMMARY OF SIGNIFICANT
CAPITALIZATION FORECAST
ASSUMPTIONS......................... 55
ITT HARTFORD FORECASTED
CAPITALIZATION...................... 56
ITT INDUSTRIES SELECTED FINANCIAL AND
OPERATING DATA...................... 57
NEW ITT SELECTED FINANCIAL AND
OPERATING DATA...................... 58
ITT HARTFORD SELECTED FINANCIAL AND
OPERATING DATA...................... 60
COMPARATIVE FINANCIAL INFORMATION..... 61
ITT INDUSTRIES UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS... 62
NEW ITT UNAUDITED PRO FORMA COMBINED
INCOME STATEMENTS................... 65
ITT INDUSTRIES MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........... 69
NEW ITT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............... 79
ITT HARTFORD MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........... 89
BUSINESS OF ITT INDUSTRIES AFTER THE
DISTRIBUTION........................ 101
<CAPTION>
PAGE
----
<S> <C>
BUSINESS OF NEW ITT AFTER THE
DISTRIBUTION........................ 111
BUSINESS OF ITT HARTFORD AFTER THE
DISTRIBUTION........................ 143
ITT INDUSTRIES MANAGEMENT AND
EXECUTIVE COMPENSATION.............. 156
NEW ITT MANAGEMENT AND EXECUTIVE
COMPENSATION........................ 175
ITT HARTFORD MANAGEMENT AND EXECUTIVE
COMPENSATION........................ 197
DESCRIPTION OF ITT INDUSTRIES CAPITAL
STOCK............................... 217
DESCRIPTION OF NEW ITT CAPITAL
STOCK............................... 229
DESCRIPTION OF ITT HARTFORD CAPITAL
STOCK............................... 239
INDEPENDENT ACCOUNTANTS............... 243
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL
MEETING............................. 244
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE........................... 244
AVAILABLE INFORMATION................. 244
REPORTS OF NEW ITT AND ITT HARTFORD... 245
INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES........................... F-1
ANNEX A AGREEMENT AND PLAN OF MERGER
BETWEEN ITT AND ITT INDIANA... A-1
ANNEX B ARTICLES OF INCORPORATION OF
ITT INDIANA................... B-1
ANNEX C BY-LAWS OF ITT INDIANA........ C-1
ANNEX D ITT DESTINATIONS, INC. 1995
INCENTIVE STOCK
PLAN..................... D-1
ANNEX E ITT HARTFORD GROUP, INC. 1995
INCENTIVE STOCK
PLAN..................... E-1
ANNEX F ARTICLE 7 OF THE RESTATED
CERTIFICATE OF INCORPORATION
OF ITT........................ F-1
ANNEX G ITT CORPORATION 1996
RESTRICTED STOCK PLAN FOR
NON-EMPLOYEE DIRECTORS........ G-1
ANNEX H ITT DESTINATIONS, INC. 1996
RESTRICTED STOCK PLAN FOR
NON-EMPLOYEE DIRECTORS........ H-1
ANNEX I ITT HARTFORD GROUP, INC. 1996
RESTRICTED STOCK PLAN FOR
NON-EMPLOYEE DIRECTORS........ I-1
</TABLE>
i
<PAGE> 7
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained in this Proxy
Statement. This summary is included for convenience only and should not be
considered complete. This summary is qualified in its entirety by the more
detailed information and financial statements contained elsewhere in this Proxy
Statement. Throughout this Proxy Statement (i) the term "ITT Industries" refers
to ITT Corporation (or its successor) after the Distribution, renamed ITT
Industries, Inc., (ii) the term "New ITT" refers to ITT Destinations, Inc. after
the Distribution, renamed ITT Corporation, and (iii) the term "ITT Industries
Common Stock" refers to ITT Common Stock after the Distribution and ITT
Industries Common Stock after the Reincorporation, in each case unless the
context otherwise requires. Certain capitalized terms used in this summary are
defined elsewhere in this Proxy Statement.
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
A Special Meeting of the Shareholders of ITT Corporation ("ITT") will be
held at [ ], at [ ]:00 A.M., local time, on [ ], [ ], 1995.
This Proxy Statement and the accompanying form of proxy are first being mailed
to shareholders of ITT on or about [ ], 1995.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, shareholders of ITT will be asked to consider and
vote upon seven separate but related proposals (collectively, the "Distribution
Proposals") providing for:
Proposal One: Approval of the distribution by ITT of all the
outstanding shares of common stock of ITT Destinations, Inc., a wholly
owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or
"New ITT"), and of all the outstanding shares of common stock of ITT
Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware
corporation ("ITT Hartford"), on the basis described herein (collectively,
the "Distribution");
Proposal Two: Approval and adoption of an Agreement and Plan of
Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed
Indiana corporation and a wholly owned subsidiary of ITT in the form of
Annex A hereto (the "Merger Agreement"), providing for the reincorporation
of ITT in Indiana pursuant to a statutory merger of ITT into ITT Indiana
(the "Reincorporation"), to be effective only if the Distribution occurs;
Proposal Three: Approval of amendments to the ITT 1977 Stock Option
Incentive Plan and ITT 1986 Incentive Stock Plan;
Proposal Four: Approval of the adoption by New ITT of the New ITT
1995 Incentive Stock Plan, to be effective only following the Distribution;
Proposal Five: Approval of the adoption by ITT Hartford of the ITT
Hartford 1995 Incentive Stock Plan, to be effective only following the
Distribution;
Proposal Six: Approval of the adoption by ITT of the ITT 1996
Restricted Stock Plan for Non-Employee Directors (to be renamed the ITT
Industries 1996 Restricted Stock Plan for Non-Employee Directors), to be
effective only following the Distribution; and
Proposal Seven: Approval of the amendment of the Restated Certificate
of Incorporation of ITT to change the name of ITT to ITT Industries, Inc.
and remove the article of the Restated Certificate of Incorporation in
respect of ITT's gaming licenses, in each case only if the Distribution
occurs.
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON
THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION
PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS OF ITT WILL REEVALUATE ITS
INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD COULD
DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE DISTRIBUTION
ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF APPROVAL OR ABANDON
THE DISTRIBUTION.
1
<PAGE> 8
The Board has further retained discretion, even if shareholder approval of
the Distribution Proposals is obtained and the other conditions to the
Distribution are satisfied, to abandon, defer or modify the Distribution or any
other element contained in the Distribution Proposals.
Although ITT believes that shareholder approval of the Distribution is not
required under Delaware law, the Board of Directors of ITT has made shareholder
approval of the Distribution (along with shareholder approval of each of the
other Distribution Proposals) a condition to the Distribution because of the
importance of the Distribution to ITT and its shareholders. In addition,
approval of Proposal Two and Proposal Seven is being sought because the
provisions of applicable state corporate law require such approval. Accordingly,
if Proposal Two is not approved by shareholders, the proposed Reincorporation
could not occur. Similarly, if Proposal Seven is not approved by shareholders,
the proposed amendment to the Restated Certificate of Incorporation could not
occur. Approval of Proposal Three is being sought to preserve ITT's ability to
deduct, for Federal income tax purposes, compensation paid pursuant to the
exercise of stock options and in respect of other stock awards. Under Section
162(m) of the Internal Revenue Code, shareholder approval of performance-based
compensation plans (including material amendments thereto) is necessary to
qualify for the performance-based compensation exception to the limitation on
ITT's ability to deduct compensation paid to certain specified individuals in
excess of $1 million. Such approval is also being sought because of Rule 16b-3
under the Exchange Act, which requires shareholder approval under certain
circumstances of material amendments to stock option plans. Although ITT does
not believe the contemplated amendments to the ITT 1977 Stock Option Incentive
Plan and ITT 1986 Incentive Stock Plan (see "EMPLOYEE BENEFITS AND COMPENSATION
MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS -- ADJUSTMENTS TO AWARDS HELD BY
EMPLOYEES OF ITT INDUSTRIES AND CERTAIN OTHERS") are material, it is seeking
shareholder approval to avoid any potential uncertainty that arguably might
exist if such approval were not obtained. Approval of Proposal Four and Proposal
Five is being sought to establish New ITT's and ITT Hartford's ability, as
applicable, to deduct, for Federal income tax purposes, compensation paid
pursuant to the exercise of stock options and in respect of other stock awards.
As noted above, under Section 162(m) of the Internal Revenue Code, shareholder
approval of performance-based compensation plans is necessary to qualify for the
performance-based compensation exception to the limitation on a company's
ability to deduct compensation paid to certain specified individuals in excess
of $1 million. Approval of Proposal Six is being sought because of Rule 16b-3
under the Exchange Act which provides an exemption from Section 16(b) of the
Exchange Act for certain transactions by an officer or director of a registrant
pursuant to an employee benefit plan satisfying certain specified conditions,
including shareholder approval.
See "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING".
VOTING
Only holders of record of ITT Common Stock at the close of business on
, 1995 (the "Special Meeting Record Date"), are entitled to notice
of, and to vote at, the Special Meeting. Each of the shares of ITT Common Stock
outstanding at the close of business on the Special Meeting Record Date is
entitled to one vote at the Special Meeting. All such shares entitled to vote at
the Special Meeting are referred to herein as "Record Shares". The presence in
person or by proxy of shareholders holding Record Shares which are entitled to
vote a majority of the votes of all holders of Record Shares will constitute a
quorum for the transaction of business at the Special Meeting.
THE BOARD OF DIRECTORS OF ITT UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
FOR ALL OF THE DISTRIBUTION PROPOSALS.
Approval of Proposals One, Two and Seven at the Special Meeting will
require the affirmative vote of outstanding Record Shares which are entitled to
vote a majority of the votes of all holders of Record Shares. Approval of
Proposals Three, Four, Five and Six at the Special Meeting will require the
affirmative vote of outstanding Record Shares which are entitled to vote a
majority of the votes of all holders of Record Shares, present in person or
represented by proxy, at the Special Meeting.
SEE "INTRODUCTION -- VOTING".
NO APPRAISAL RIGHTS
Shareholders of ITT will not be entitled to appraisal rights in connection
with the Distribution Proposals.
2
<PAGE> 9
BUSINESS OF ITT INDUSTRIES, NEW ITT AND ITT HARTFORD
AFTER THE DISTRIBUTION
As part of the Distribution, the name of ITT Corporation will be changed to
ITT Industries, Inc. In addition, the name of ITT Destinations will be changed
to ITT Corporation.
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 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 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 particular focus on
strengthening its position in areas of existing product leadership and expanding
international sales.
ITT Automotive is one of the largest independent suppliers of 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 ("TCS") systems, 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
3
<PAGE> 10
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.
D. Travis Engen, who is currently Executive Vice President of ITT, will
become Chairman, President and Chief Executive of ITT Industries, and certain
persons who are currently directors of ITT will remain as directors of ITT
Industries. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT
INDUSTRIES BOARD OF DIRECTORS". 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. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE
COMPENSATION -- ITT INDUSTRIES EXECUTIVE OFFICERS".
NEW ITT
After the Distribution, New ITT will be engaged, directly and through
subsidiaries, in the hospitality and entertainment business and the information
services business. New ITT will conduct its hospitality and entertainment
business through ITT Sheraton Corporation ("ITT Sheraton"), Ciga S.p.A.
("Ciga"), Caesars World, Inc. ("CWI") and Madison Square Garden, L.P. ("MSG")
and conduct its information services business through ITT World Directories,
Inc. ("ITT World Directories") and ITT Educational Services, Inc. ("ITT
Educational").
New ITT will combine the world's largest hotel and gaming company with a
premier sports and entertainment company and information services businesses to
create a dynamic and rapidly growing enterprise. Management of ITT projects that
New ITT will generate pro forma (i.e., assuming all acquisitions during 1994 and
1995 had been consummated on January 1, 1994) revenues of approximately $6.5
billion in 1995 and pro forma EBITDA of approximately $875 million in 1995. The
projected pro forma EBITDA for 1995 would represent a 36% increase over EBITDA
in 1994 also determined on a pro forma basis (i.e., assuming all acquisitions
during 1994 and 1995 had been consummated on January 1, 1994). For a discussion
of certain important limitations and related assumptions concerning this
projected and other pro forma financial data and ITT management's beliefs as to
future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME
STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL
INFORMATION".
ITT completed the acquisition of one of the world's most recognized gaming
companies, CWI, in January 1995. In March 1995, ITT also acquired the well-known
New York Knickerbockers and New York Rangers sports franchises and Madison
Square Garden arena through its investment in MSG. For a discussion of the
current ownership interest of ITT in MSG, see "BUSINESS OF NEW ITT AFTER THE
DISTRIBUTION -- GENERAL -- HOSPITALITY & ENTERTAINMENT". In addition, the
acquisition in 1994 of 70.3% of Ciga and other key hotel properties enhanced
ITT's geographic balance along with its image and profile. These acquisitions
have helped to create a formidable hotel, gaming and entertainment company that
is a leader in its served markets.
Furthermore, in August 1995, ITT, in partnership with Dow Jones & Co. ("Dow
Jones") agreed to purchase television station WNYC-TV from New York City. The
purchase, subject to approval by the Federal Communications Commission and other
customary conditions, is expected to close in early 1996. Together, ITT and Dow
Jones hope to transform the station into a nationally-broadcast business and
sports television station based in New York City. The purchase price of $207
million will be split evenly by the two companies and the partnership will be
managed on a 50/50 basis.
Through the ITT Sheraton brand name, New ITT is represented in most major
markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton
in 60 countries. When including visitors to CWI and Madison Square Garden and
customers of the Information Services companies, New ITT will provide services
to over 100 million people a year. ITT Sheraton, which has been a wholly owned
subsidiary of ITT since 1968, is a worldwide hospitality network of
approximately 420 owned, leased, managed and franchised properties, including
hotels, casinos and inns. Gaming operations are marketed under the Caesars World
and ITT Sheraton brand names and are represented in Las Vegas, Atlantic City,
Halifax (Nova Scotia), Sydney
4
<PAGE> 11
(Nova Scotia), Lake Tahoe, Tunica County (Mississippi), Lima (Peru), Cairo,
Windsor (Ontario) and Townsville (Australia).
The acquisition of CWI greatly enhanced New ITT's profile in the rapidly
growing gaming business. CWI's flagship property is the renowned Caesars Palace
in Las Vegas, and it also owns and operates Caesars Atlantic City in Atlantic
City and Caesars Tahoe in Stateline, Nevada, both leaders in their served
markets. CWI also owns one-third of a management company that operates Casino
Windsor, which was opened in May 1994 in Windsor, Ontario, and operates four
non-gaming resorts in Pennsylvania's Pocono Mountains.
The MSG investment includes the famed Madison Square Garden arena, the
Paramount special events theater, the New York Knickerbockers and New York
Rangers basketball and hockey franchises, as well as the Madison Square Garden
Network.
ITT World Directories, an 80%-owned subsidiary, engages in the publication
of telephone directories, including classified directory services for telephone
subscribers in numerous countries outside the United States, as well as in
Puerto Rico and the United States Virgin Islands. ITT Educational, which will be
owned 83% by New ITT and 17% by the public, operates technical colleges offering
postsecondary career education.
See "BUSINESS OF NEW ITT AFTER THE DISTRIBUTION".
Rand V. Araskog, who is currently Chairman, President and Chief Executive
of ITT, will become Chairman and Chief Executive of New ITT, and certain persons
who are currently directors of ITT will become directors of New ITT. See "NEW
ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT BOARD OF DIRECTORS". In
addition to Mr. Araskog, the other executive officers of New ITT will be drawn
from the current management of ITT or subsidiaries of ITT. See "NEW ITT
MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT EXECUTIVE OFFICERS".
ITT HARTFORD
After the Distribution, ITT Hartford will continue as one of the largest
insurance companies in the United States, a diversified, international
multi-line organization founded in 1810. In the United States, ITT Hartford is
the eighth largest property and casualty insurer and the twelfth largest life
insurer, with total assets exceeding $86 billion and equity of $4.8 billion at
June 30, 1995.
The property and casualty operations, with premiums written of $6.7 billion
as of December 31, 1994, provide a wide range of personal, commercial, specialty
and reinsurance coverages. In personal lines, ITT Hartford ranks among the 10
largest carriers and is the endorsed provider of automobile and homeowners
coverages to members of the American Association of Retired Persons. Commercial
insurance, the property and casualty company's largest line with $2.7 billion in
written premiums, offers an array of products to address customer needs,
including commercial multi-peril, general liability and workers' compensation.
Specialty lines provides the expertise necessary to meet the needs of customers
with sophisticated insurance, service or risk financing requirements. ITT
Hartford is also a major reinsurer, with subsidiaries and operations located in
Hong Kong, Spain, the United States, the United Kingdom and Canada.
ITT Hartford maintains a dynamic presence in the European insurance market.
The largest operations are London and Edinburgh, a market leader in the United
Kingdom, and Zwolsche Algemeene, which has a strong presence in The Netherlands.
Both operations provide multi-line property and casualty and life products.
ITT Hartford's life insurance operations have been among the fastest
growing major life insurance companies in the United States for five years, with
assets exceeding $50 billion at December 31, 1994. The life operations provide
individual and group life and disability insurance, asset accumulation products
and financial services for individuals, corporations and government entities.
ITT Hartford ranks among the top providers of retirement planning products and
services for corporations and government entities, and, with $7.1 billion in new
fixed and variable annuity deposits in 1994, it continues to rank among industry
leaders in the sale of these products.
See "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION."
5
<PAGE> 12
Donald R. Frahm, who is currently Chairman and Chief Executive of Hartford
Fire Insurance Company ("The Hartford"), will become Chairman and Chief
Executive Officer of ITT Hartford. The directors of ITT Hartford will include
certain persons who are currently directors of ITT and certain persons who are
currently directors or members of senior management of The Hartford. See "ITT
HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD BOARD OF
DIRECTORS". In addition to Mr. Frahm, it is expected that the other executive
officers of ITT Hartford will be drawn from the current management of The
Hartford. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT
HARTFORD EXECUTIVE OFFICERS".
THE DISTRIBUTION
SHARES TO BE DISTRIBUTED
The Distribution will be made to holders of record on the Distribution
Record Date of issued and outstanding shares of ITT Common Stock. Based on the
115,597,874 shares of ITT Common Stock outstanding as of July 5, 1995 (and
assuming conversion of the ITT Series N Preferred Stock which has been called
for redemption on August 29, 1995 (see "THE DISTRIBUTION -- REDEMPTION OF SERIES
N PREFERRED STOCK")), the Distribution will consist of 116,208,496 shares of New
ITT Common Stock and 116,208,496 shares of ITT Hartford Common Stock. Each
holder of ITT Common Stock will receive as a dividend one share of New ITT
Common Stock for every one share of ITT Common Stock held and one share of ITT
Hartford Common Stock for every one share of ITT Common Stock held.
To avoid the confusion that would result if both ITT, whose name will be
changed to ITT Industries, Inc., and New ITT, whose name will be changed to ITT
Corporation as part of the Distribution, were to have stock certificates
outstanding bearing the name "ITT Corporation" for an extended period of time,
ITT will issue new stock certificates in connection with the Distribution.
Accordingly, in order to receive their certificates for New ITT and ITT
Hartford, shareholders must submit their certificates representing shares of ITT
Common Stock to be exchanged for (i) certificates bearing the name "ITT
Industries, Inc." representing their continuing ownership interest in ITT, (ii)
certificates bearing the name "ITT Corporation" representing the shares of New
ITT Common Stock to which they are entitled as a result of the Distribution and
(iii) certificates bearing the name "ITT Hartford Group, Inc." representing the
shares of ITT Hartford Common Stock to which they are entitled as a result of
the Distribution. Certificates for New ITT and ITT Hartford will not be issued
until such submission. If shareholders do not submit their certificates bearing
the name "ITT Corporation", shareholders may be prevented from transferring
their interests in ITT Industries, New ITT and ITT Hartford after the
Distribution since they will not have separate certificates representing such
interests.
On or about the first business day following the Distribution Date, ITT
will instruct the Transfer Agent to mail to each shareholder of record on the
Distribution Record Date a letter of transmittal and instructions for use in
surrendering such shareholder's certificates representing shares of ITT Common
Stock. Each shareholder should immediately complete and sign the letter of
transmittal and return it, along with such shareholder's certificates
representing shares of ITT Common Stock, to the Transfer Agent at the address
set forth on the letter of transmittal. Upon receipt from each shareholder of a
letter of transmittal, properly completed, and the shareholder's certificates
representing shares of ITT Common Stock, the Transfer Agent will issue in
accordance with the directions contained in the completed letter of transmittal,
three separate certificates representing shares of ITT Industries, New ITT and
ITT Hartford, respectively. ITT SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
It is expected that the Board of Directors of New ITT will adopt a
shareholder rights plan. Certificates evidencing shares of New ITT Common Stock
issued in the Distribution will therefore represent the same number of New ITT
Rights issued under the New ITT Rights Plan. It is also expected that the Board
of Directors of ITT Hartford will adopt a shareholder rights plan. Certificates
evidencing shares of ITT Hartford Common Stock issued in the Distribution will
therefore represent the same number of ITT Hartford Rights issued under the ITT
Hartford Rights Plan. Furthermore, it is expected that the Board of Directors of
ITT (or
6
<PAGE> 13
ITT Industries) will approve a shareholder rights plan in respect of the ITT
Industries Common Stock to be effective following the Distribution. Accordingly,
after the Distribution, certificates evidencing shares of ITT Industries Common
Stock will represent the same number of ITT Industries Rights issued under the
ITT Industries Rights Plan. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL
STOCK -- ITT INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL
STOCK -- NEW ITT RIGHTS PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL
STOCK -- ITT HARTFORD RIGHTS PLAN".
ITT shareholders will not have to make any payment to receive their pro
rata share of the Distribution, although any shareholder submitting certificates
representing shares of ITT Common Stock for exchange who is not the record
holder of the shares represented, or who requests that certificates for any of
ITT Industries Common Stock, New ITT Common Stock or ITT Hartford Common Stock
be issued to any other person, must provide evidence of payment of all
applicable transfer taxes. See "THE DISTRIBUTION -- MANNER OF EFFECTING THE
DISTRIBUTION".
DISTRIBUTION RECORD DATE
The "Distribution Record Date" will be established by the Board of
Directors of ITT shortly before the Distribution. The Distribution Record Date
will be the same date as the Distribution Date.
DISTRIBUTION DATE
The "Distribution Date" will be established by the Board of Directors of
ITT and is presently expected to be on or about December 31, 1995. On or about
the first business day following the Distribution Date, ITT will effect the
Distribution by providing for the delivery of replacement certificates for all
outstanding shares of New ITT Common Stock and replacement certificates for all
outstanding shares of ITT Hartford Common Stock to the Transfer Agent for the
transfer and distribution to the holders of record on the Distribution Record
Date of ITT Common Stock. At the same time, ITT will also provide for the
delivery of replacement certificates for shares of ITT Industries Common Stock
to the Transfer Agent. ITT will also instruct the Transfer Agent to mail letters
of transmittal for the exchange of certificates to shareholders of ITT on or
about the first business day following the Distribution Date. See "THE
DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION".
TRANSFER AGENT AND REGISTRAR
The ITT Corporate Stock Services Department will be the Transfer Agent (the
"Transfer Agent") for the Distribution and Chemical Bank will be the Registrar
(the "Registrar").
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to (i) approval of the Distribution Proposals
by shareholders of ITT; (ii) receipt of favorable tax rulings from the Internal
Revenue Service as to certain Federal income tax consequences of the
Distribution; (iii) all necessary consents of any third parties having been
obtained; (iv) all necessary consents of any governmental or regulatory bodies
having been obtained; (v) the Registration Statement on Form 10 under the
Exchange Act, to be filed by New ITT with the SEC in respect of the New ITT
Common Stock, having become effective; (vi) the Registration Statement on Form
8-A under the Exchange Act, to be filed by ITT Hartford with the SEC in respect
of the ITT Hartford Common Stock, having become effective; (vii) the shares of
New ITT Common Stock and ITT Hartford Common Stock to be issued or initially
reserved for issuance having been approved for listing on a national securities
exchange or designated as a national market system security on the National
Association of Securities Dealers Automated Quotation System, subject to
official notice of issuance; (viii) consummation of the Reincorporation
substantially simultaneous with the Distribution; and (ix) there not being in
effect any statute, rule, regulation or order of any court, governmental or
regulatory body which prohibits or makes illegal the transactions contemplated
by the Distribution. The Board has retained discretion, even if shareholder
approval of the Distribution Proposals is obtained and the other conditions to
the Distribution are satisfied, to abandon, defer or modify the Distribution or
any other matter contemplated by the Distribution Proposals. The terms of the
7
<PAGE> 14
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.
See "THE DISTRIBUTION -- CONDITIONS TO THE DISTRIBUTION".
REASONS FOR THE DISTRIBUTION
The Board of Directors believes that the Distribution should occur for the
following reasons:
Facilitate Growth of New ITT and ITT Industries. Each of New ITT and ITT
Industries intends to pursue acquisition and growth opportunities in its
business areas. Such acquisitions and growth would be financed through the
proceeds of indebtedness or through the issuance of capital stock of New ITT or
ITT Industries, as applicable. It is expected that the Distribution will
increase the availability and decrease the cost of raising capital for New ITT
and ITT Industries and, at the same time, protect the insurance and credit
rating of ITT Hartford from being eroded by those financings. Accordingly, the
Distribution should facilitate the growth of New ITT and ITT Industries.
Management Considerations. At present, the insurance business of ITT, the
automotive, defense and electronics, and fluid technology businesses of ITT and
the hospitality, entertainment, and information services businesses of ITT are
conducted as separate operating groups under the direction of ITT. The
Distribution should be beneficial to each of ITT's three operating groups,
because it will enable the management of each group to design and advance
corporate policies and strategies that are based primarily on the business
characteristics of the group and to concentrate its financial resources wholly
on its own operations. Some companies that have been spun-off have experienced
improved performance as independent companies. An example of this is ITT
Rayonier, ITT's former forest products segment. Rayonier's net income in 1994,
the first year of operations after the February 1994 spin-off, exceeded budgeted
expectations by 30%. However, this is only one example and may not be indicative
of post-Distribution operating results for any company. The Distribution will
also permit each of ITT Industries, New ITT and ITT Hartford to design incentive
compensation programs that relate more directly to its own business
characteristics and performance.
Cost Savings. Each of ITT Industries, New ITT and ITT Hartford should be
able to rationalize better its organizational structure after the Distribution.
Accordingly, the administrative and organizational costs of ITT Industries, New
ITT and ITT Hartford, taken together, should be reduced from the aggregate
levels experienced by ITT prior to the Distribution.
Investor Understanding. Debt and equity investors should be able to
evaluate better the financial performance of each of ITT Industries, New ITT and
ITT Hartford and their respective strategies, thereby enhancing the likelihood
that each will achieve appropriate market recognition.
See "THE DISTRIBUTION -- REASONS FOR THE DISTRIBUTION".
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
It is intended that the Distribution will be a tax-free spin-off under
Section 355 of the Internal Revenue Code of 1986. Under Section 355 of the
Internal Revenue Code, in general, no income, gain or loss will be recognized by
holders of ITT Common Stock or by ITT Industries, New ITT or ITT Hartford on the
Distribution. It is a condition to the Distribution that ITT receive a ruling
from the Internal Revenue Service that Section 355 of the Internal Revenue Code
will apply to the Distribution. The Board of Directors of ITT has reserved the
right to waive the receipt of such ruling as a condition to consummation of the
Distribution. The Board will not waive such condition unless, in the Board's
judgment, based on opinion of counsel, Section 355 of the Internal Revenue Code
will apply to the Distribution.
Such a ruling, while generally binding upon the Internal Revenue Service,
is subject to certain factual representations and assumptions. If the
Distribution were not to qualify under Section 355 of the Internal
8
<PAGE> 15
Revenue Code, then, in general, a corporate tax (which, as noted below, would be
very substantial) would be payable by the consolidated group, of which ITT is
the common parent, based upon the difference between (x) the fair market value
of the New ITT Common Stock and the ITT Hartford Common Stock and (y) the
adjusted basis of such New ITT Common Stock and ITT Hartford Common Stock. In
addition, under the consolidated return rules, each member of the consolidated
group (including New ITT and ITT Hartford) would be jointly and severally liable
for such tax liability. If the Distribution occurred and it were not to qualify
under Section 355 of the Internal Revenue Code, the resulting tax liability
would have a material adverse effect on the financial position, results of
operation and cash flows of each of ITT Industries, New ITT and ITT Hartford.
ITT estimates that the aggregate shared tax liability of ITT Industries, New ITT
and ITT Hartford in this regard would be approximately $1.75 billion.
Furthermore, if the Distribution were not to qualify as a tax-free spinoff,
each ITT shareholder receiving shares of New ITT Common Stock and ITT Hartford
Common Stock in the Distribution would be treated as if such shareholder had
received a taxable distribution in an amount equal to the fair market value of
New ITT Common Stock and ITT Hartford Common Stock received, which would result
in (x) a dividend to the extent of such shareholder's pro rata share of ITT's
current and accumulated earnings and profits, (y) a reduction in such
shareholder's basis in ITT Common Stock to the extent the amount received
exceeds such shareholder's share of earnings and profits and (z) a gain from the
exchange of ITT Common Stock to the extent the amount received exceeds both such
shareholder's share of earnings and profits and such shareholder's basis in ITT
Common Stock. ITT estimates that the aggregate tax liability to ITT's
shareholders (after considering the portion of tax-exempt shareholders) would be
approximately $2 billion.
See "THE DISTRIBUTION -- FEDERAL INCOME TAX CONSEQUENCES OF THE
DISTRIBUTION".
STOCK EXCHANGE LISTINGS
There is not currently a public market for either the New ITT Common Stock
or the ITT Hartford Common Stock. Application will be made to list the New ITT
Common Stock and the ITT Hartford Common Stock on the NYSE under the symbols
"ITT" and "HIG", respectively. Application will also be made to list the ITT
Industries Common Stock on the NYSE and the PSE under the new symbol "IIN". It
is presently anticipated that New ITT Common Stock and ITT Hartford Common Stock
will be approved for listing on the NYSE prior to the Distribution Date, and
trading may commence on a "when-issued" basis prior to the Distribution. It is
also possible that ITT Industries Common Stock would be traded on a "when-
distributed" basis prior to the Distribution. On the first NYSE trading day
following the Distribution Date, "when-issued" or "when-distributed" trading, as
applicable, in respect of each of the ITT Industries Common Stock, New ITT
Common Stock and the ITT Hartford Common Stock would end and "regular-way"
trading would begin. See "THE DISTRIBUTION -- LISTING AND TRADING OF ITT
INDUSTRIES COMMON STOCK, NEW ITT COMMON STOCK AND ITT HARTFORD COMMON STOCK".
TREATMENT OF INDEBTEDNESS
ITT's practice has been to incur long-term debt at the parent company to a
greater extent than at the operating company level. Accordingly, management of
ITT intends to allocate the consolidated indebtedness of ITT between ITT
Industries and New ITT. This allocation of indebtedness is expected to reflect,
in part, the capitalization of certain competitors in the industries represented
by such businesses. See "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT
INSTRUMENTS".
LIMITED RELATIONSHIPS BETWEEN THE COMPANIES AFTER THE DISTRIBUTION
After the Distribution, none of ITT Industries, New ITT or ITT Hartford
will have any ownership interest in the others. Each of ITT Industries, New ITT
and ITT Hartford will be an independent public company. ITT Industries, New ITT
and ITT Hartford will enter into certain agreements governing their relationship
subsequent to the Distribution and providing for certain employee benefits
matters and for the allocation of tax and certain other liabilities and
obligations arising from periods prior to the Distribution. There will be
individuals on the Boards of Directors of ITT Industries, New ITT and ITT
Hartford who will
9
<PAGE> 16
also serve on the Board of Directors of one or both of the other companies. See
"RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE
DISTRIBUTION".
DIVIDEND POLICIES
The payment and level of dividends by ITT Industries after the Distribution
will be subject to the discretion of the ITT Industries Board of Directors.
Although it is anticipated that ITT Industries will initially pay quarterly cash
dividends of $.15 per share, dividend decisions will be based on, and affected
by, a number of factors, including the operating results and financial
requirements of ITT Industries on a stand-alone basis.
New ITT does not intend to pay cash dividends on New ITT Common Stock for
the foreseeable future after the Distribution.
In addition to being subject to regulatory approval thresholds, the payment
and level of cash dividends by ITT Hartford after the Distribution will be
subject to the discretion of the ITT Hartford Board of Directors. Although it is
anticipated that ITT Hartford will initially pay quarterly cash dividends of
$.40 per share, dividend decisions will be based on, and affected by, a number
of factors, including the operating results and financial requirements of ITT
Hartford on a stand-alone basis and the impact of the regulatory restrictions
discussed herein.
See "DIVIDEND POLICY".
CORPORATE GOVERNANCE; RIGHTS PLANS
Each of ITT Industries, New ITT and ITT Hartford intend to implement a
shareholder rights plan. A shareholder rights plan is designed to protect
shareholders in the event of an unsolicited offer and other takeover tactics
which, in the opinion of the relevant board of directors, could impair its
ability to represent shareholder interests. The provisions of a shareholder
rights plan may render an unsolicited takeover of ITT Industries, New ITT or ITT
Hartford, as applicable, more difficult or less likely to occur or might prevent
such a takeover. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT
INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEW ITT RIGHTS
PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- ITT HARTFORD RIGHTS
PLAN".
Each of ITT Industries, New ITT and ITT Hartford will be subject to
provisions of state corporate law which may prevent certain business combination
transactions. In this regard, the corporate laws of Indiana (which would govern
ITT Industries as a result of the Reincorporation) and of Nevada (which will
govern New ITT) differ in some material respects from the corporate law of
Delaware (which now governs ITT and will govern ITT Hartford). See "DESCRIPTION
OF ITT INDUSTRIES CAPITAL STOCK -- INDIANA BUSINESS CORPORATION LAW",
"DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEVADA GENERAL CORPORATION LAW" and
"DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW".
New ITT and ITT Hartford are also subject to regulations that may have an
antitakeover effect. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- RESTRICTIONS
ON OWNERSHIP UNDER GAMING LAWS" and "DESCRIPTION OF ITT HARTFORD CAPITAL
STOCK -- RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS".
See also "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- PROVISIONS OF ITT
INDUSTRIES ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL",
"DESCRIPTION OF NEW ITT CAPITAL STOCK -- PROVISIONS OF NEW ITT AMENDED AND
RESTATED ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL",
"DESCRIPTION OF NEW ITT CAPITAL STOCK -- RESTRICTIONS ON ALIEN OWNERSHIP",
"DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- PROVISIONS OF ITT HARTFORD AMENDED
AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN
CONTROL".
DIFFERENT JURISDICTION OF INCORPORATION
As a result of the Reincorporation, ITT Industries would be incorporated
under Indiana law. Accordingly, shareholders should note the difference between
Indiana law and Delaware law, the law under which ITT is
10
<PAGE> 17
incorporated. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- COMPARISON OF
SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW".
Since New ITT will be incorporated under Nevada law, shareholders should
note the difference between Nevada law and Delaware law, the law under which ITT
is incorporated. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- COMPARISON OF
SHAREHOLDER RIGHTS UNDER DELAWARE AND NEVADA LAW".
THE REINCORPORATION OF ITT
Subject to the conditions summarized below, ITT will be reincorporated in
Indiana by merging ITT into ITT Indiana pursuant to the Merger Agreement and, in
connection therewith, the name of ITT Indiana 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, although ITT
Industries intends to implement a shareholder rights plan. See "DESCRIPTION OF
ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES 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. See "THE REINCORPORATION OF ITT -- SIGNIFICANT CHANGES AFFECTING
SHAREHOLDERS".
If Proposal Two is approved, it is expected that the Reincorporation will
be consummated substantially simultaneously with or immediately following the
Distribution.
REASONS FOR THE REINCORPORATION
The Reincorporation is being proposed 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 the Board of Directors of ITT Industries will have greater flexibility
in responding 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 control of ITT Industries (including unsolicited takeover attempts) as
is more fully discussed under "DESCRIPTION OF ITT INDUSTRIES CAPITAL
STOCK -- INDIANA BUSINESS CORPORATION LAW".
ITT Industries also has substantial manufacturing operations in Indiana.
The existence of such operations in Indiana was only a secondary reason for the
proposed Reincorporation. The Board of Directors of ITT
11
<PAGE> 18
believes that, if ITT Industries is to be incorporated in a jurisdiction other
than Delaware, it should be a jurisdiction in which ITT Industries has a
significant presence.
EXCHANGE OF STOCK CERTIFICATES
To avoid the confusion that would result if the presently outstanding
certificates representing shares of ITT Common Stock were to remain outstanding
for an extended period of time after the name of ITT is changed to ITT
Industries, Inc., it will be necessary for shareholders of ITT to exchange their
existing stock certificates of ITT Common Stock for stock certificates of ITT
Industries Common Stock.
On or about the first business day following the Reincorporation (which
would be substantially simultaneous with the Distribution), ITT will instruct
the Transfer Agent to mail to each shareholder of ITT a letter of transmittal
and instructions for use in surrendering such shareholder's certificates
representing shares of ITT Common Stock. Each shareholder should immediately
complete and sign the letter of transmittal and return it, along with such
shareholder's certificates representing shares of ITT Common Stock, to the
Transfer Agent at the address set forth on the letter of transmittal. Upon
receipt from each shareholder of a letter of transmittal, properly completed,
and the shareholder's certificates representing shares of ITT Common Stock, the
Transfer Agent will issue in accordance with the directions contained in the
completed letter of transmittal three separate certificates representing shares
of ITT Industries, New ITT and ITT Hartford, respectively. See "THE
DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION". ITT SHAREHOLDERS SHOULD
NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
ITT shareholders will not have to make any payment in connection with the
exchange of stock certificates, although any shareholder submitting certificates
representing shares of ITT Common Stock for exchange who is not the record
holder of the shares represented, or who requests that certificates for any of
ITT Industries Common Stock, New ITT Common Stock or ITT Hartford Common Stock
be issued to any other person, must provide evidence of payment of all
applicable transfer taxes.
CONDITIONS TO THE REINCORPORATION
The Reincorporation is subject to (i) approval of Proposal Two by
shareholders of ITT; (ii) the Distribution occurring; (iii) receipt of a
favorable opinion of counsel as to the Federal income tax consequences of the
Reincorporation; and (iv) the shares of ITT Industries Common Stock to be issued
or initially reserved for issuance having been approved for listing on the NYSE,
subject to official notice of issuance.
The Merger Agreement may be terminated by ITT's Board of Directors in its
discretion, and the terms of the Merger Agreement may be amended prior to its
effective date.
Approval of Proposal Two is being sought because provisions of state
corporate law require such approval. Accordingly, if Proposal Two is not
approved by shareholders the proposed Reincorporation could not occur.
See "THE REINCORPORATION OF ITT -- MERGER AGREEMENT -- CONDITIONS TO THE
REINCORPORATION".
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
No gain or loss will be recognized to ITT or its shareholders upon the
Reincorporation. It is a condition to the Reincorporation that ITT receive an
opinion of counsel to this effect. See "THE REINCORPORATION OF ITT -- FEDERAL
INCOME TAX CONSEQUENCES OF THE REINCORPORATION".
12
<PAGE> 19
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
six months ended June 30, 1995 and 1994. The Distribution has been recorded as a
discontinuance of the businesses of New ITT 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 Proxy Statement. The
following information is qualified in its entirety by the information and
financial statements appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
($ IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales............................. $ 4,585 $ 3,727 $ 7,758 $ 6,621 $ 6,845 $ 6,430 $ 6,972
Income from Continuing Operations..... $ 91(7) $ 98 $ 202 $ 135 $ 655(1) $ 231 $ 521
Income from Continuing Operations per
Share
Primary............................. $ .69(7) $ .68 $ 1.46 $ .83 $ 5.34 $ 1.58 $ 3.82
Fully Diluted....................... $ .69(7) $ .69 $ 1.46 $ .88 $ 4.77 $ 1.58 $ 3.63
BALANCE SHEET DATA:
Total Assets.......................... $13,450 $11,868 $11,035 $12,981 $12,560 $13,283 $12,810
Long-Term Debt, including Capital
Leases.............................. $ 871 $ 2,006 $ 1,712 $ 1,994 $ 2,272 $ 2,323 $ 2,357
Debt excluding Discontinued
Operations.......................... $ 2,373 $ 2,614 $ 2,640 $ 2,971 $ 2,792 $ 2,717 $ 2,657
Stockholders Equity per Common
Share............................... $ 65.87 $ 56.51 $ 58.10 $ 58.94 $ 54.63 $ 69.47 $ 64.01
OPERATING DATA:
Operating Income...................... $ 242 $ 181 $ 418 $ 229 $ 19 $ 158 $ 305
EBITDA(2)............................. $ 451 $ 366 $ 791 $ 552 $ 334 $ 453 $ 564
Cash from Continuing Operating
Activities(3)....................... $ 395 $ 145 $ 637 $ 628 $ 633 $ 702 $ 455
Cash Dividends Declared per Common
Share(4)............................ $ 0.99 $ 0.99 $ 1.98 $ 1.98 $ 1.84 $ 1.72 $ 1.63
Orders on Hand(5)..................... $ 3,866 $ 3,392 $ 3,713 $ 3,443 $ 3,861
Number of Employees (in thousands).... 58 50 53 55 60
PRO FORMA DATA(6):
Total Assets.......................... $ 6,266
Stockholders Equity per Common
Share............................... $ 7.30
Income from Continuing Operations per
Common Share........................ $ 0.76(7) $ 1.70
</TABLE>
- ---------------
(1) Includes $622 million after tax gain from the sale of the equity interest in
Alcatel N.V.
(2) 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.)
(3) Amounts are as determined on the Consolidated Cash Flow Statements in ITT
Industries' Consolidated Financial Statements contained herein.
(4) Represents the actual cash dividends declared per share by ITT.
(5) Orders on hand reflects contracts representing firm contractual commitments
as of the respective period (i.e., backlog).
(6) Pro forma data is prepared assuming that the Distribution was completed at
January 1, 1994. All per share amounts were prepared assuming 119 million
shares outstanding at the Distribution Date. In addition, the pro forma data
assumes the retirement of indebtedness and the elimination of deferred
compensation relating to the ESOP feature of the ITT Investment and Savings
Plan. The ESOP feature of the ITT Investment and Savings Plan has been
terminated. This information should be read in conjunction with "ITT
INDUSTRIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS"
(including, without limitation, the information under the heading
"-- LIMITATIONS ON PRO FORMA FINANCIAL INFORMATION"), as well as "ITT
INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".
(7) Includes $29 million after tax, or $0.25 ($0.24 pro forma) per fully diluted
share, for provisions for the planned disposal of ITT Semiconductors and a
portion of ITT Community Development Corporation.
13
<PAGE> 20
NEW ITT
SUMMARY FINANCIAL AND OPERATING DATA
The following table summarizes certain selected combined financial data of
New ITT which has been derived from the Combined Financial Statements of New ITT
for the five years ended December 31, 1994, and the six months ended June 30,
1995 and 1994. The historical financial statements of New ITT contained in this
Proxy Statement are presented as if New ITT were a separate entity for all
periods presented. The pro forma financial information for the six months ended
June 30, 1995 and 1994 were prepared as detailed in Note (1) below. A black line
separates the historical financial information presented below from the pro
forma financial information. The information set forth below should be read in
conjunction with the information set forth under "NEW ITT UNAUDITED PRO FORMA
COMBINED INCOME STATEMENTS", "NEW
ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and New ITT's Combined Financial Statements and the Notes thereto
included in this Proxy Statement. The following information is qualified in its
entirety by the information and financial statements appearing elsewhere in this
Proxy Statement. For a discussion of certain important limitations and related
assumptions concerning the pro forma financial data presented below, see "NEW
ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON
PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA SIX MONTHS
SIX MONTHS SIX MONTHS ENDED
ENDED ENDED JUNE 30, YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------- ------------------------------------------
1995(1) 1994(1) 1995 1994 1994 1993 1992 1991 1990
---------- ---------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS)
INCOME STATEMENT DATA:
Revenues.................. $3,064 $2,761 $2,982 $2,116 $4,760 $4,169 $4,253 $3,855 $3,966
Income before Accounting
Changes................. $ 53 $ 37 $ 74 $ 39 $ 2 $ 43 $ 20
BALANCE SHEET DATA:
Total Assets.............. $8,221 $3,755 $5,012 $3,791 $3,375 $2,462 $2,222
Long-Term Debt, including
Capital Leases.......... $ 667 $ 107 $ 600 $ 169 $ 186 $ 160 $ 120
OPERATING DATA:
Operating Income.......... $ 268 $ 158 $ 265 $ 128 $ 292 $ 142 $ 34 $ 126 $ 121
EBITDA(2)................. $ 383 $ 285 $ 374 $ 179 $ 396 $ 222 $ 81 $ 163 $ 147
Cash from Operating
Activities(3)........... $ 243 $ 195 $ 234 $ 93 $ 230 $ 186 $ 143 $ 133 $ 4
Number of Employees (in
thousands).............. 35 19 25 18 18 20 19
</TABLE>
- ---------------
(1) The pro forma financial information assumes that the acquisitions of CWI,
the 70.3% interest in Ciga, certain other hotel properties and MSG in
partnership with another entity were completed on January 1, 1994. Such
information may not be indicative of the results that would have occurred if
the acquisitions were completed on January 1, 1994. This information should
be read in conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME
STATEMENTS" (including, without limitation, the information under the
heading "-- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL
INFORMATION"), as well as "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
(2) EBITDA is presented here as an alternative measure of the ability of New ITT
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 Combined Cash Flow Statements in New ITT's Combined
Financial Statements contained herein.)
(3) Amounts are as determined on the Combined Cash Flow Statements in the New
ITT's Combined Financial Statements contained herein.
14
<PAGE> 21
ITT HARTFORD
SUMMARY FINANCIAL AND OPERATING DATA
The following table summarizes certain selected consolidated financial data
of ITT Hartford which has been derived from the Consolidated Financial
Statements of ITT Hartford for the five years ended December 31, 1994, and the
six months ended June 30, 1995 and 1994. The historical financial statements of
ITT Hartford contained in this Proxy Statement are presented as if ITT Hartford
were a separate entity for all periods presented. The information set forth
below should be read in conjunction with the information set forth under "ITT
HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and ITT Hartford's Consolidated Financial Statements and the
Notes thereto included in this Proxy Statement. The following information is
qualified in its entirety by the information and financial statements appearing
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 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:
Revenues................................ $ 5,919 $ 5,367 $11,102 $10,338 $ 9,862 $ 9,242 $ 8,836
Income (Loss) before Accounting
Changes............................... $ 245 $ 292 $ 632 $ 537 $ (274) $ 431 $ 328
BALANCE SHEET DATA:
Total Assets............................ $86,831 $69,282 $76,765 $66,179 $54,180 $37,771 $32,014
Long-Term Debt, including Capital
Leases................................ $ 598 $ 582 $ 596 $ 579 $ 576 $ 594 $ 63
OPERATING DATA:
Worldwide Combined Ratio(1)(2)(3)....... 105.9 104.1 102.8 105.9 114.8 111.3 109.7
Number of Employees (in thousands)...... 20 21 21 21 21
</TABLE>
- ---------------
(1) "Combined ratio" is a common industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the ratio of
incurred losses and loss adjustment expenses to premiums earned (the "loss
ratio") and the ratio of underwriting expenses incurred to premiums written
(the "expense ratio"). A combined ratio under 100% generally indicates an
underwriting profit; a combined ratio over 100% generally indicates an
underwriting loss. Federal income taxes, investment income, policy
acquisition costs and other non-underwriting expenses are not reflected in
the combined ratio.
(2) For the periods after 1992, the combined ratios exclude the results of the
First State Insurance Companies ("First State"), a group of entities that
ceased writing new and renewal business at the end of 1992. Additionally,
the 1992 combined ratio excludes the impact of $900 million of
reserve-strengthening actions taken to address loss developments in surplus
lines and reinsurance at First State and $250 million of legal defense costs
associated with environmental-related claims. Including the impact of these
actions, the combined ratio for 1992 was 133.7.
(3) For the six months ended June 30, 1995, the combined ratio includes the
impact of excess catastrophe losses and a provision for the estimated
settlement related to Dow Corning breast implant claims. Excluding these
items, the combined ratio for the six months ended June 30, 1995, would have
been 103.9.
15
<PAGE> 22
ITT CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 1995
INTRODUCTION
This Proxy Statement is being furnished to shareholders of ITT Corporation,
a Delaware corporation ("ITT"), in connection with the solicitation of proxies
by the Board of Directors of ITT for use at a Special Meeting of Shareholders to
be held on [ ], [ ], 1995, and at any adjournment thereof (the
"Special Meeting"), for the purpose of considering and acting upon the matters
set forth in the accompanying Notice of Special Meeting of Shareholders. This
Proxy Statement and the accompanying form of proxy are first being mailed to
shareholders of ITT on or about [ ], 1995. Throughout this Proxy
Statement (i) the term "ITT Industries" refers to ITT Corporation (or its
successor) after the Distribution, renamed ITT Industries, Inc., (ii) the term
"New ITT" refers to ITT Destinations, Inc. after the Distribution, renamed ITT
Corporation and (iii) the term "ITT Industries Common Stock" refers to ITT
Common Stock after the Distribution and ITT Industries Common Stock after the
Reincorporation, in each case unless the context otherwise requires.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders of ITT will be asked to consider
and vote upon seven separate but related proposals ("Distribution Proposals")
providing for:
Proposal One: Approval of the distribution by ITT of all the
outstanding shares of common stock of ITT Destinations, Inc., a wholly
owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or
"New ITT"), and of all the outstanding shares of common stock of ITT
Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware
corporation ("ITT Hartford"), on the basis described herein (collectively,
the "Distribution") (see "THE DISTRIBUTION");
Proposal Two: Approval and adoption of an Agreement and Plan of
Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed
Indiana corporation and a wholly owned subsidiary of ITT in the form of
Annex A hereto (the "Merger Agreement"), providing for the reincorporation
of ITT in Indiana pursuant to a statutory merger of ITT into ITT Indiana
(the "Reincorporation"), to be effective only if the Distribution occurs
(see "THE REINCORPORATION OF ITT");
Proposal Three: Approval of amendments to the ITT 1977 Stock Option
Incentive Plan and ITT 1986 Incentive Stock Plan (see "EMPLOYEE BENEFITS
AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS");
Proposal Four: Approval of the adoption by New ITT of the New ITT
1995 Incentive Stock Plan, to be effective only following the Distribution
(see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- NEW ITT INCENTIVE STOCK
PLAN");
Proposal Five: Approval of the adoption by ITT Hartford of the ITT
Hartford 1995 Incentive Stock Plan, to be effective only following the
Distribution (see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT
HARTFORD INCENTIVE STOCK PLAN");
Proposal Six: Approval of the adoption by ITT of the ITT 1996
Restricted Stock Plan for Non-Employee Directors (to be renamed the ITT
Industries 1996 Restricted Stock Plan for Non-Employee Directors), to be
effective only following the Distribution (see "EMPLOYEE BENEFITS AND
COMPENSATION MATTERS -- RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS);
and
Proposal Seven: Approval of the amendment of the Restated Certificate
of Incorporation of ITT to change the name of ITT to ITT Industries, Inc.
and remove the article of the Restated Certificate of
16
<PAGE> 23
Incorporation in respect of ITT's gaming licenses, in each case only if the
Distribution occurs (see "AMENDMENT OF THE RESTATED CERTIFICATE OF
INCORPORATION OF ITT").
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON
THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION
PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS OF ITT WILL REEVALUATE ITS
INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD COULD
DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE DISTRIBUTION
ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF APPROVAL OR ABANDON
THE DISTRIBUTION.
The Board has further retained discretion, even if shareholder approval of
the Distribution Proposals is obtained and the other conditions to the
Distribution are satisfied, to abandon, defer or modify the Distribution or any
other element contained in the Distribution Proposals. See "THE
DISTRIBUTION -- CONDITIONS TO THE DISTRIBUTION".
Although ITT believes that shareholder approval of the Distribution is not
required under Delaware law, the Board of Directors of ITT has made shareholder
approval of the Distribution (along with shareholder approval of each of the
other Distribution Proposals) a condition to the Distribution because of the
importance of the Distribution to ITT and its shareholders. In addition,
approval of Proposal Two and Proposal Seven is being sought because the
provisions of applicable state corporate law require such approval. Accordingly,
if Proposal Two is not approved by shareholders, the proposed Reincorporation
could not occur. Similarly, if Proposal Seven is not approved by shareholders,
the proposed amendment to the Restated Certificate of Incorporation could not
occur. Approval of Proposal Three is being sought to preserve ITT's ability to
deduct, for Federal income tax purposes, compensation paid pursuant to the
exercise of stock options and in respect of other stock awards. Under Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue
Code"), shareholder approval of performance-based compensation plans (including
material amendments thereto) is necessary to qualify for the performance-based
compensation exception to the limitation on ITT's ability to deduct compensation
paid to certain specified individuals in excess of $1 million. Such approval is
also being sought because of Rule 16b-3 under the Exchange Act, which requires
shareholder approval under certain circumstances of material amendments to stock
option plans. Although ITT does not believe the contemplated amendments to the
ITT 1977 Stock Option Incentive Plan and ITT 1986 Incentive Stock Plan (see
"EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER
AWARDS -- ADJUSTMENTS TO AWARDS HELD BY EMPLOYEES OF ITT INDUSTRIES AND CERTAIN
OTHERS") are material, it is seeking shareholder approval to avoid any potential
uncertainty that arguably might exist if such approval were not obtained.
Approval of Proposal Four and Proposal Five is being sought to establish New
ITT's and ITT Hartford's ability, as applicable, to deduct, for Federal income
tax purposes, compensation paid pursuant to the exercise of stock options and in
respect of other stock awards. As noted above, under Section 162(m) of the
Internal Revenue Code, shareholder approval of performance-based compensation
plans is necessary to qualify for the performance-based compensation exception
to the limitation on a company's ability to deduct compensation paid to certain
specified individuals in excess of $1 million. Approval of Proposal Six is being
sought because of Rule 16b-3 under the Exchange Act which provides an exemption
from Section 16(b) of the Exchange Act for certain transactions by an officer or
director of a registrant pursuant to an employee benefit plan satisfying certain
specified conditions, including shareholder approval.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of ITT unanimously recommends a vote FOR adoption of
all the Distribution Proposals.
VOTING
Only holders of record of Common Stock, $1.00 par value, of ITT (the "ITT
Common Stock" or "ITT Industries Common Stock"), at the close of business on
, 1995 (the "Special Meeting Record Date"), are entitled to notice
of, and to vote at, the Special Meeting. Each of the shares of ITT Common Stock
outstanding at the close of business on the Special Meeting Record Date is
entitled to one vote at the
17
<PAGE> 24
Special Meeting. All such shares entitled to vote at the Special Meeting are
referred to herein as "Record Shares". The presence in person or by proxy of
shareholders holding Record Shares which are entitled to vote a majority of the
votes of all holders of Record Shares will constitute a quorum for the
transaction of business at the Special Meeting.
The participants in the ITT Investment and Savings Plan for Salaried
Employees (the "ITT Investment and Savings Plan") will be provided with a proxy
in respect of the Distribution Proposals in their capacities as beneficial
owners of ITT Common Stock. Pursuant to the terms of the ITT Investment and
Savings Plan, shares are voted by the trustee in accordance with the directions
of the employees to whom such shares have been allocated.
Each participant in any of the savings plans for hourly employees will also
receive a proxy in respect of the Distribution Proposals representing the shares
such participant is entitled to vote under the plans. The relevant trustee, as
record holder of the shares, will vote shares corresponding to the relevant
participant's account in accordance with instructions received.
If you are a participant in ITT's Dividend Reinvestment and Common Stock
Purchase Plan, the accompanying proxy indicates the number of shares registered
in your name and the number of full shares credited to your account in the Plan.
Approval of Proposals One, Two and Seven at the Special Meeting will
require the affirmative vote of outstanding Record Shares which are entitled to
vote a majority of the votes of all holders of Record Shares. Approval of
Proposals Three, Four, Five and Six at the Special Meeting will require the
affirmative vote of outstanding Record Shares which are entitled to vote a
majority of the votes of all holders of Record Shares, present in person or
represented by proxy, at the Special Meeting.
Abstentions and broker non-votes are counted as shares present for
determination of a quorum. For purposes of determining whether the Distribution
Proposals are approved by the shareholders, abstentions and broker non-votes
will have the same effect as votes against the Distribution Proposals.
PROXIES
All shares of ITT Common Stock represented by properly executed proxies
will, unless such proxies have previously been revoked, be voted at the Special
Meeting in accordance with the directions on the proxies. If no direction is
indicated on a properly executed proxy, the shares will be voted in favor of the
Distribution Proposals. If any other matters are properly presented at the
Special Meeting for action, which is not anticipated, the proxy holders will
vote the proxies (which confer authority to such holders to vote on such
matters) in accordance with their best judgment. An ITT shareholder returning a
proxy may revoke it at any time before it is voted by communicating such
revocation in writing to the Secretary of ITT or by executing and delivering a
later-dated proxy. In addition, any person who has executed a proxy and is
present at the Special Meeting may vote in person instead of by proxy, thereby
cancelling any proxy previously given, whether or not written revocation of such
proxy has been given. Any written notice revoking a proxy should be sent to ITT
Corporation, 1330 Avenue of the Americas, New York, New York 10019-5490,
Attention: Secretary.
STOCK OWNERSHIP
As of July 31, 1995, there were no shareholders known by ITT to be
beneficial owners of more than 5% of any class of voting securities of ITT.
18
<PAGE> 25
The following table sets forth information concerning the shares of ITT
Common Stock beneficially owned as of July 5, 1995, by (a) those individuals who
will be directors of ITT Industries, New ITT and ITT Hartford and those
individuals named in the summary compensation tables set forth under, as
applicable, "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE
COMPENSATION -- COMPENSATION OF ITT INDUSTRIES EXECUTIVE OFFICERS", "NEW ITT
MANAGEMENT AND EXECUTIVE COMPENSATION -- COMPENSATION OF NEW ITT EXECUTIVE
OFFICERS" and "ITT HARTFORD MANAGEMENT AND EXECUTIVE
COMPENSATION -- COMPENSATION OF ITT HARTFORD EXECUTIVE OFFICERS" and (b) all
those individuals who will be directors and executive officers of ITT
Industries, New ITT and ITT Hartford as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
- -------------------------------------------------------------------- ------------ --------
<S> <C> <C>
ITT INDUSTRIES
D. Travis Engen................................................... 229,017
Louis J. Giuliano................................................. 73,313
Timothy D. Leuliette.............................................. 67,988
Bertil T. Nilsson................................................. 48,760
James P. Smith, Jr................................................ 10,274
Rand V. Araskog(3)................................................ 678,151
Robert A. Burnett(3).............................................. 1,170
Michel David-Weill(3)............................................. 1,000
S. Parker Gilbert................................................. 5,000
Edward C. Meyer(3)................................................ 2,500
All future directors and executive officers of ITT Industries as a
group
(total of 13)..................................................... 1,134,682
NEW ITT
Robert A. Bowman.................................................. 125,407
John Kapioltas.................................................... 102,160
Richard S. Ward................................................... 77,452
Daniel P. Weadock................................................. 131,141
Bette B. Anderson(3)(4)........................................... 2,000
Nolan D. Archibald................................................ 8,350
Paul G. Kirk(3)................................................... 1,010
Benjamin F. Payton................................................ 492
Margita E. White.................................................. 2,000
All future directors and executive officers of New ITT as a group
(total of 19)..................................................... 1,425,150
ITT HARTFORD
Donald R. Frahm................................................... 48,074
Ramani Ayer....................................................... 64,239
John F. Donahue................................................... 27,637
Joseph H. Gareau.................................................. 28,880
Lowndes A. Smith.................................................. 48,627
Arthur A. Hartman................................................. 0
DeRoy C. Thomas................................................... 0
Gordon I. Ulmer................................................... 0
All future directors and executive officers of ITT Hartford as a
group
(total of 17)..................................................... 919,709
All future directors and executive officers of ITT Industries, New
ITT and ITT Hartford as a group (total of 41)..................... 2,120,948 1.8%
</TABLE>
19
<PAGE> 26
- ---------------
(1) All shares reflected are owned directly except as hereinafter otherwise
indicated. Pursuant to regulations of the Securities and Exchange
Commission, shares (i) receivable by directors and executive officers upon
exercise of employee stock options exercisable within 60 days after July 5,
1995, (ii) allocated to the accounts of certain directors and executive
officers under the ITT Investment and Savings Plan at July 5, 1995, and
(iii) acquired by directors and executive officers under the ITT Dividend
Reinvestment and Common Stock Purchase Plan through July 5, 1995, are deemed
to be beneficially owned by such directors and executive officers at said
date. Of the number of shares shown above, (i) the following represent
shares that may be acquired upon exercise of employee stock options for the
accounts of: Mr. Engen, 213,405 common shares; Mr. Giuliano, 69,181 common
shares; Mr. Leuliette, 67,115 common shares; Mr. Nilsson, 46,048 common
shares; Mr. James P. Smith, Jr., 5,902 common shares; Mr. Araskog, 229,312
common shares; Mr. Bowman, 114,696 common shares; Mr. Kapioltas, 78,320
common shares; Mr. Ward, 53,903 common shares; Mr. Weadock, 85,458 common
shares; Mr. Frahm, 42,884; Mr. Ayer, 62,140 common shares; Mr. Donahue,
21,119 common shares; Mr. Gareau, 27,818 common shares; Mr. Lowndes A.
Smith, 47,475 common shares; and all future directors and executive officers
of ITT Industries, New ITT and ITT Hartford as a group, 1,441,867 common
shares; (ii) the following amounts were allocated under the ITT Investment
and Savings Plan to the accounts of: Mr. Engen, 1,033 common shares; Mr.
Giuliano, 732 common shares; Mr. Leuliette, 873 common shares; Mr. Nilsson,
345 common shares; Mr. James P. Smith, Jr., 1,427 common shares; Mr.
Araskog, 18,031 common shares; Mr. Bowman, 711 common shares; Mr. Kapioltas,
5,295 common shares; Mr. Ward, 8,345 common shares; Mr. Weadock, 24,604
common shares; Mr. Frahm, 5,190 common shares; Mr. Ayer, 1,503 common
shares; Mr. Donahue, 2,875 common shares; Mr. Gareau, 1,062 common shares;
Mr. Lowndes A. Smith, 1,152 common shares; and all future directors and
executive officers of ITT Industries, New ITT and ITT Hartford as a group,
86,377 common shares; and (iii) the following amounts were acquired under
the ITT Dividend Reinvestment and Common Stock Purchase Plan for the
accounts of: Mr. Burnett, 170 common shares; Mr. Kapioltas, 2,412 common
shares, Mr. Ward, 1,917 common shares; Mr. Payton, 92 common shares; Mr.
Ayer, 596 common shares; and all future directors and executive officers of
ITT Industries, New ITT and ITT Hartford as a group, 6,165 common shares.
(2) Share ownership does not exceed one percent of the class so owned ,except as
noted above in the case of all future directors and executive officers of
ITT Industries, New ITT and ITT Hartford as a group.
(3) In addition to serving as a director of ITT Industries, Mr. Araskog will
serve as a director and hold the office of Chairman and Chief Executive of
New ITT and he will serve as a director of ITT Hartford. In addition to
serving as a director of ITT Industries, Mr. Burnett will serve as a
director of New ITT and as a director of ITT Hartford. In addition to
serving as directors of ITT Industries, Mr. David-Weill and Mr. Meyer will
also serve as directors of New ITT. In addition to serving as directors of
New ITT, Ms. Anderson and Mr. Kirk will also serve as directors of ITT
Hartford.
(4) An additional 83 shares of ITT Common Stock are owned by Ms. Anderson's
husband. Ms. Anderson disclaims beneficial ownership in such shares.
COSTS OF SOLICITATION
ITT will bear the costs of the solicitation. In addition to solicitation by
mail, ITT will request banks, brokers and other custodian nominees and
fiduciaries to supply proxy material to the beneficial owners of ITT Common
Stock of whom they have knowledge, and will reimburse them for their expenses in
so doing; and certain directors, officers and other employees of ITT, not
specially employed for the purpose, may solicit proxies, without additional
remuneration therefor, by personal interview, mail, telephone or telegraph. In
addition, ITT has retained Georgeson & Company Inc. to assist in the
solicitation for a fee of $30,000, plus reimbursement for its reasonable
out-of-pocket expenses and for payments made to brokers and other nominees for
their expenses in forwarding soliciting material. Georgeson & Company Inc. will
distribute proxy materials to beneficial owners and solicit proxies by personal
interview, mail, telephone and telegram, and will request brokerage houses and
other custodians, nominees and fiduciaries to forward soliciting material to the
beneficial owners of the ITT Common Stock held on the Special Meeting Record
Date by such persons.
NO APPRAISAL RIGHTS
Shareholders of ITT will not be entitled to appraisal rights in connection
with the Distribution Proposals.
20
<PAGE> 27
THE DISTRIBUTION
GENERAL
The Board of Directors of ITT has approved (subject to the satisfaction of
the conditions to the Distribution discussed under "-- CONDITIONS TO THE
DISTRIBUTION" below and the actual declaration of the dividend in respect of the
Distribution) a plan to distribute all the outstanding shares of common stock,
without par value, of New ITT ("New ITT Common Stock"), and all the outstanding
shares of common stock, without par value, of ITT Hartford ("ITT Hartford Common
Stock") to all holders of outstanding ITT Common Stock. In the Distribution,
each holder of ITT Common Stock will receive as a dividend one share of New ITT
Common Stock for every one share of ITT Common Stock held and one share of ITT
Hartford Common Stock for every one share of ITT Common Stock held.
MANNER OF EFFECTING THE DISTRIBUTION
On or about the first business day following the Distribution Date, ITT
will effect the Distribution by providing for the delivery of replacement
certificates for all outstanding shares of New ITT Common Stock and replacement
certificates for all outstanding shares of ITT Hartford Common Stock to the
Transfer Agent for the transfer and distribution to the holders of record on the
Distribution Record Date of ITT Common Stock. At the same time, ITT will also
provide for the delivery of replacement certificates for shares of ITT
Industries Common Stock to the Transfer Agent.
As a result of the Distribution, holders of ITT Common Stock become the
holder of one share of New ITT Common Stock for every one share of ITT Common
Stock held of record on the Distribution Record Date and one share of ITT
Hartford Common Stock for every one share of ITT Common Stock held of record on
the Distribution Record Date. Holders of ITT Common Stock will also retain their
continuing ownership interest in ITT (ITT Industries).
After the Distribution Date and until an outstanding certificate that
represented shares of ITT Common Stock before the Distribution is exchanged
pursuant to the procedures described below, such certificate will be deemed to
represent that number of shares of ITT Industries Common Stock reflected on the
face of such certificate, as well as an equal number of shares of New ITT Common
Stock and an equal number of shares of ITT Hartford Common Stock. As in the case
of the shares of ITT Common Stock (ITT Industries Common Stock after the
Distribution), the shares of New ITT Common Stock and ITT Hartford Common Stock
will be fully paid and nonassessable, and the holders thereof will not be
entitled to preemptive rights. See "DESCRIPTION OF NEW ITT CAPITAL STOCK" and
"DESCRIPTION OF ITT HARTFORD CAPITAL STOCK".
To avoid the confusion that would result if both ITT, whose name will be
changed to ITT Industries, Inc., and New ITT, whose name will be changed to ITT
Corporation as part of the Distribution, were to have stock certificates
outstanding bearing the name "ITT Corporation" for an extended period of time,
ITT will issue new stock certificates in connection with the Distribution.
Accordingly, in order to receive their certificates for New ITT and ITT
Hartford, shareholders must submit their certificates representing shares of ITT
Common Stock to be exchanged for (i) certificates bearing the name "ITT
Industries, Inc." representing their continuing ownership interest in ITT, (ii)
certificates bearing the name "ITT Corporation" representing the shares of New
ITT Common Stock to which they are entitled as a result of the Distribution and
(iii) certificates bearing the name "ITT Hartford Group, Inc." representing the
shares of ITT Hartford Common Stock to which they are entitled as a result of
the Distribution. Certificates for New ITT and ITT Hartford will not be issued
until such submission. If shareholders do not submit their certificates bearing
the name "ITT Corporation", shareholders may be prevented from transferring
their interests in ITT Industries, New ITT and ITT Hartford after the
Distribution since they will not have separate certificates representing such
interests.
On or about the first business day following the Distribution Date, ITT
will instruct the Transfer Agent to mail to each shareholder of record on the
Distribution Record Date a letter of transmittal and instructions for use in
surrendering such shareholder's certificates representing shares of ITT Common
Stock. Each shareholder should immediately complete and sign the letter of
transmittal and return it, along with such
21
<PAGE> 28
shareholder's certificates representing shares of ITT Common Stock, to the
Transfer Agent at the address set forth on the letter of transmittal. Upon
receipt from each shareholder of a letter of transmittal, properly completed,
and the shareholder's certificates representing shares of ITT Common Stock, the
Transfer Agent will issue in accordance with the directions contained in the
completed letter of transmittal three separate certificates representing shares
of ITT Industries, New ITT and ITT Hartford, respectively. Brokerage firms and
other designees holding shares of stock of ITT in street name should complete a
letter of transmittal with respect to the stock so held on behalf of each of
their customers. ITT SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE A TRANSMITTAL FORM.
It is expected that the Board of Directors of New ITT will adopt a
shareholder rights plan. Certificates evidencing shares of New ITT Common Stock
issued in the Distribution will therefore represent the same number of New ITT
Rights issued under the New ITT Rights Plan. It is also expected that the Board
of Directors of ITT Hartford will adopt a shareholder rights plan. Certificates
evidencing shares of ITT Hartford Common Stock issued in the Distribution will
therefore represent the same number of ITT Hartford Rights issued under the ITT
Hartford Rights Plan. Furthermore, it is also expected that the Board of
Directors of ITT will approve a shareholder rights plan in respect of the ITT
Industries Common Stock to be effective immediately following the Distribution.
Accordingly, after the Distribution, certificates evidencing shares of ITT
Industries Common Stock will represent the same number of ITT Industries Rights
issued under the ITT Industries Rights Plan. See "DESCRIPTION OF ITT INDUSTRIES
CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL
STOCK -- NEW ITT RIGHTS PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL
STOCK -- ITT HARTFORD RIGHTS PLAN". Unless the context otherwise requires,
references herein to the ITT Industries Common Stock include the related ITT
Industries Rights, references herein to the New ITT Common Stock include the
related New ITT Rights and references herein to the ITT Hartford Common Stock
include the related ITT Hartford Rights.
ITT shareholders will not have to make any payment to receive their pro
rata share of the Distribution, although any shareholder submitting certificates
representing shares of ITT Common Stock for exchange who is not the record
holder of the shares represented, or who requests that certificates for any of
ITT Industries Common Stock, New ITT Common Stock or ITT Hartford Common Stock
be issued to any other person, must provide evidence of payment of all
applicable transfer taxes.
Fractional share interests are only possible in connection with holdings in
the ITT Dividend Reinvestment and Common Stock Purchase Plan. No certificates
representing fractional shares of either New ITT Common Stock or ITT Hartford
Common Stock will be delivered in the Distribution. The Transfer Agent will
aggregate fractional shares into whole shares of New ITT Common Stock and ITT
Hartford Common Stock, as applicable, and the Registrar will sell them in the
open market at prevailing prices on behalf of holders who otherwise would be
entitled to receive fractional share interests. Such persons will then receive a
cash payment for the amount of their allocable share of the total sale proceeds.
The amount of such payment will depend on the prices at which the aggregated
fractional shares are sold by the Registrar in the open market shortly after the
Distribution Date. Such sales are expected to be made as soon as practicable
after the Distribution. ITT will bear the cost of any commissions incurred in
connection with such sales.
Shareholders of ITT having inquiries relating to the Distribution prior to
the Distribution Date should contact Georgeson & Company Inc., Wall Street
Plaza, New York, New York, 10005, telephone number: 1-800-223-2064, or may call
the special telephone number of ITT for the Distribution, 1-800-DIALITT
(342-5488), for recorded information. Written inquiries may be directed to the
Director of Investor Relations, ITT Corporation, 1330 Avenue of the Americas,
New York, New York, 10019-5490.
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to (i) approval of the Distribution Proposals
by shareholders of ITT; (ii) receipt of favorable tax rulings from the Internal
Revenue Service as to certain Federal income tax consequences of the
Distribution; (iii) all necessary consents of any third parties having been
obtained (see "-- THIRD PARTY CONSENTS"); (iv) all necessary consents of any
governmental or regulatory bodies having been obtained (see "-- REGULATORY
APPROVALS"); (v) the Registration Statement on Form 10 under the
22
<PAGE> 29
Securities Exchange Act of 1934 (the "Exchange Act"), to be filed by New ITT
with the Securities and Exchange Commission (the "SEC") in respect of the New
ITT Common Stock, having become effective; (vi) the Registration Statement on
Form 8-A under the Exchange Act, to be filed by ITT Hartford with the SEC in
respect of the ITT Hartford Common Stock, having become effective; (vii) the
shares of New ITT Common Stock and ITT Hartford Common Stock to be issued or
initially reserved for issuance having been approved for listing on a national
securities exchange or designated as a national market system security on the
National Association of Securities Dealers Automated Quotation System, subject
to official notice of issuance; (viii) consummation of the Reincorporation
substantially simultaneous with the Distribution; and (ix) there not being in
effect any statute, rule, regulation or order of any court, governmental or
regulatory body which prohibits or makes illegal the transactions contemplated
by the Distribution. The Board has retained discretion, even if shareholder
approval of the Distribution Proposals is obtained and the other conditions to
the Distribution are satisfied, to abandon, defer or modify the Distribution or
any other matter contained in the Distribution Proposals. 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 the 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.
As noted above under "-- GENERAL", the Board of Directors of ITT has
approved, subject to the satisfaction of the conditions discussed under this
heading and the actual declaration of the dividend in respect of the
Distribution, a plan to distribute all the outstanding shares of New ITT Common
Stock and all the outstanding shares of ITT Hartford Common Stock.
REGULATORY APPROVALS
ITT does not believe that any material Federal or state regulatory
approvals will be necessary in connection with the Distribution, except as set
forth below.
As is discussed in detail below (see "BUSINESS OF NEW ITT AFTER THE
DISTRIBUTION -- GOVERNMENTAL REGULATION AND RELATED MATTERS"), the ownership
and/or operation of casino gaming facilities in the United States are subject to
extensive Federal, state and local regulations. In this regard, as a result of
the Distribution, ITT must obtain certain approvals under the applicable gaming
laws of Nevada, New Jersey and other jurisdictions in which it has gaming
operations. ITT must also obtain certain approvals in such jurisdictions in
connection with New ITT, while it is a direct wholly owned subsidiary of ITT,
becoming initially the sole stockholder of both CWI and ITT Sheraton, and then
subsequently in connection with CWI becoming the direct wholly owned subsidiary
of ITT Sheraton, in each case with or prior to the Distribution. Currently, ITT
Sheraton and CWI are both direct wholly owned subsidiaries of ITT. Certain
capitalized terms used under this heading to refer to statutes, regulations or
regulatory bodies are defined under "BUSINESS OF NEW ITT AFTER THE DISTRIBUTION
- -- GOVERNMENTAL REGULATION AND RELATED MATTERS".
Nevada
Regulations of the Nevada Commission provide that ownership of
privately-held entities that, directly or indirectly, hold gaming licenses, such
as CWI or ITT Sheraton, cannot be acquired without the prior approval of the
Nevada Commission. ITT, New ITT and ITT Sheraton each have filed applications
for the necessary approvals in this regard with the Nevada Board and the Nevada
Commission in connection with the Distribution and the reorganizational matters
discussed above. Assuming favorable recommendations from the Nevada Board, ITT,
New ITT and ITT Sheraton each anticipates receiving the required approvals from
the Nevada Commission in November 1995. ITT is currently registered as a
publicly traded corporation and has been found suitable to own the shares of ITT
Sheraton and CWI (both of which have licensed gaming facilities in Nevada).
Accordingly, ITT does not expect there to be significant impediments to
obtaining necessary approvals under Nevada law by November 1995. However, there
can be no assurances that such approvals will be granted or will be granted
within such time.
23
<PAGE> 30
In seeking approval for the Distribution and the corporate organizational
changes to occur prior to the Distribution, ITT, New ITT and ITT Sheraton each
must satisfy the Nevada Commission as to a variety of stringent standards. The
Nevada Board and the Nevada Commission will consider all relevant material facts
in determining whether to grant such approval, and may consider not only the
effects of the Distribution and the corporate organizational changes to occur
prior to the Distribution but also any other facts that are deemed relevant.
The Nevada Commission must first register New ITT as an intermediary
company and approve it to be the sole stockholder of CWI and ITT Sheraton prior
to the Distribution, and then register and approve New ITT as a publicly traded
corporation and ITT Sheraton as an intermediary company effective with the
Distribution. Following receipt of the necessary approvals of the Nevada
Commission and consummation of the Distribution, New ITT will be registered as a
publicly traded corporation and found suitable as the sole stockholder of ITT
Sheraton, ITT Sheraton will be registered as an intermediary company and found
suitable as the sole stockholder of CWI, and CWI will be registered as a
publicly traded corporation due to certain outstanding debt securities.
Certain officers, directors and key employees of New ITT who will be
actively and directly involved in the gaming activities of CWI and ITT Sheraton
may also be required to be found suitable or licensed by the Nevada Gaming
Authorities. New ITT expects that all individuals required to file applications
in this regard will receive the required approvals from the Nevada Commission in
November 1995. Nearly all of such officers, directors and key employees have
previously been approved by the Nevada Gaming Authorities in connection with
ITT's gaming operations. However, there can be no assurances that such approvals
will be granted or will be granted within such time.
New Jersey
As discussed below under "BUSINESS OF NEW ITT AFTER THE DISTRIBUTION --
GAMING OPERATIONS", the CWI shares owned by ITT have been held under a trust
arrangement pending the qualification of ITT by the New Jersey Commission as a
holding company of CWI and certain of its subsidiaries. As a result of the
Distribution, such qualification will now be sought for New ITT as a holding
company of the Caesars New Jersey Companies (as defined herein) and ITT Sheraton
as an intermediary company of the Caesars New Jersey Companies (other than ITT
Sheraton).
The New Jersey Act requires prior approval from the New Jersey Commission
before securities of a casino licensee (or holding company) that is not a
publicly-traded company can be transferred. In addition, any person acquiring
securities of a casino licensee (or holding company) that is a publicly-traded
company must become qualified by the New Jersey Commission or dispose of such
securities. However, pursuant to the New Jersey Interim Casino Authorization
Act, the New Jersey Commission may permit an entity to acquire and own
securities of such licensee until the entity is plenarily qualified by the New
Jersey Commission. During the period of interim authorization, the securities of
such licensee must be held in a trust pursuant to the provisions of the New
Jersey Act.
As a result of the Distribution, New ITT and ITT Sheraton will be required
to timely file a completed application with the New Jersey Commission for
qualification as holding companies of a New Jersey casino licensee. In
connection therewith, New ITT and ITT Sheraton will also seek certain approvals,
determinations and waivers from the New Jersey Gaming Authorities, such as (i)
the approval of the transfers of CWI common stock to New ITT and ITT Sheraton as
part of the corporate restructuring of New ITT's gaming business; (ii) the
determination that the New Jersey Interim Casino Authorization Act requirements
are inapplicable to such transfers; (iii) the determination that, after the
Distribution, BRC and its holding and intermediary companies will possess the
financial stability, integrity, and responsibility required by the New Jersey
Act; (iv) the determination that the Amended and Restated Articles of
Incorporation of New ITT and the Certificate of Incorporation of ITT Sheraton
satisfy the requirements of the New Jersey Act; (v) the waiver of the
qualification of the shareholders of New ITT; (vi) the determination that the
relevant officers and directors of New ITT and the Caesars New Jersey Companies
are qualified under the New Jersey Act; (vii) the waiver of the qualification of
all officers and directors of New ITT and the Caesars New Jersey
24
<PAGE> 31
Companies who are not significantly involved in the affairs of BRC; and (vii)
subject to the completion of all necessary background inquiries, the
authorization of certain officers of New ITT and ITT Sheraton to temporarily
assume their duties pending qualification.
New ITT intends to cause appropriate applications to be made to the New
Jersey Commission as soon as practicable and anticipates a decision from the New
Jersey Commission with respect to such matters by November 1995. ITT recently
obtained interim authorization in connection with its acquisition of CWI and
expects to receive plenary qualification by October 1995. Thus, ITT does not
expect there to be significant impediments to obtaining the additional approvals
under New Jersey law by November 1995. However, there can be no assurances that
a favorable decision will be granted or will be granted within such time.
If it appears that such decision will not be granted within such time, New
ITT and ITT Sheraton will seek interim authorization to acquire the stock of CWI
and serve as holding companies under the New Jersey Act provisions described
above so that the Distribution may be completed at the time determined for the
Distribution. In such an event, New ITT and ITT Sheraton, having timely filed a
completed application for qualification, would petition the New Jersey
Commission for interim authorization and qualification. The petition would
include a fully executed and approved, but not operative, trust agreement. The
trust agreement would contain substantially the same terms as ITT's existing
trust arrangement and thus will provide for the deposit of the CWI shares in
trust pending plenary qualification by the New Jersey Commission. The trustee
may not exercise rights incident to the ownership of the property in trust
unless the New Jersey Commission orders that the trust agreement become
operative, which order may not be made unless the New Jersey Commission denies
interim authorization, finds reasonable cause to believe that any person
required to be qualified may be found unqualified or denies plenary
qualification. If such interim authorization were sought, ITT expects that the
required approvals for such authorization and related trust arrangement would be
obtained under New Jersey law by November 1995. However, there can be no
assurances that a favorable decision in this regard will be granted or will be
granted within such time.
If securities are transferred to a trust in applying for casino
authorization and the New Jersey Commission thereafter, upon denial of
authorization or finding reasonable cause to believe that any person required to
be qualified may be found unqualified, orders that the trust become operative,
the applicant, during the time the trust is operative, may not participate in
the earnings of the casino hotel or receive any return on its investment or debt
security holdings. If the New Jersey Commission thereafter denies qualification,
the trustee shall dispose of the trust property. In such event, the proceeds
distributed to the unqualified applicant may not exceed the lower of the actual
cost of the securities to the unqualified applicant or their value calculated as
if the investment had been made on the date the trust became operative. Any
excess remaining proceeds shall be paid to the Casino Revenue Fund maintained in
the New Jersey Department of the Treasury provided by the New Jersey Act.
Other Gaming Jurisdictions
As a result of the Distribution and the corporate organizational changes to
occur prior to the Distribution, New ITT must obtain approvals under laws and
regulations of certain other jurisdictions in which ITT has gaming operations.
These approvals are comparable to some or all of those required under the Nevada
Act. New ITT expects to obtain these approvals by November 1995. However, there
can be no assurance that such approvals will be obtained or will be granted
within such time.
THIRD PARTY CONSENTS
ITT does not believe any material third party consents will be necessary in
connection with the Distribution, except as set forth below.
ITT must obtain approval from the National Basketball Association ("NBA")
and the National Hockey League ("NHL") in connection with New ITT becoming an
owner of MSG. MSG owns the New York Knickerbockers of the NBA and the New York
Rangers of the NHL. ITT does not expect there to be significant impediments to
obtaining these approvals by November 1995. However, there can be no assurances
that such approvals will be granted or will be granted within such time.
25
<PAGE> 32
CERTAIN ORGANIZATIONAL MATTERS
Prior to the Distribution Date, ITT will transfer to New ITT and ITT
Hartford the stock of certain subsidiaries principally engaged in the businesses
to be conducted by New ITT and ITT Hartford after the Distribution,
respectively, and will effectuate certain other transactions intended to
allocate assets and liabilities relating to the businesses of ITT Industries,
New ITT and ITT Hartford after the Distribution (such transfers being referred
to collectively as the "Transfers"). Shareholder approval is not being sought
for the Transfers and ITT could proceed with the Transfers whether or not
shareholder approval is obtained for the Distribution Proposals.
REASONS FOR THE DISTRIBUTION
The Board of Directors of ITT believes that the Distribution should occur
for the following reasons:
Facilitate Growth of New ITT and ITT Industries. Each of New ITT and ITT
Industries intends to pursue acquisition and growth opportunities in its
business areas. Such acquisitions and growth would be financed through the
proceeds of indebtedness or through the issuance of capital stock of New ITT or
ITT Industries, as applicable. It is expected that the Distribution will
increase the availability and decrease the cost of raising capital for New ITT
and ITT Industries and, at the same time, protect the insurance and credit
rating of ITT Hartford from being eroded by those financings. Accordingly, the
Distribution should facilitate the growth of New ITT and ITT Industries.
Management Considerations. At present, the insurance business of ITT, the
automotive, defense and electronics, and fluid technology businesses of ITT and
the hospitality, entertainment, and information services businesses of ITT are
conducted as separate operating groups under the direction of ITT. The
Distribution should be beneficial to each of ITT's three operating groups,
because it will enable the management of each group to design and advance
corporate policies and strategies that are based primarily on the business
characteristics of the group and to concentrate its financial resources wholly
on its own operations. Some companies that have been spun-off have experienced
improved performance as independent companies. An example of this is ITT
Rayonier, ITT's former forest products segment. Rayonier's net income in 1994,
the first year of operations after the February 1994 spin-off, exceeded budgeted
expectations by 30%. However, this is only one example and may not be indicative
of post-Distribution operating results for any company. The Distribution will
also permit each of ITT Industries, New ITT and ITT Hartford to design incentive
compensation programs that relate more directly to its own business
characteristics and performance.
Cost Savings. Each of ITT Industries, New ITT and ITT Hartford should be
able to rationalize better its organizational structure after the Distribution.
Accordingly, the administrative and organizational costs of ITT Industries, New
ITT and ITT Hartford, taken together, should be reduced from the aggregate
levels experienced by ITT prior to the Distribution.
Investor Understanding. Debt and equity investors should be able to
evaluate better the financial performance of each of ITT Industries, New ITT and
ITT Hartford and their respective strategies, thereby enhancing the likelihood
that each will achieve appropriate market recognition.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
ITT has requested rulings from the Internal Revenue Service substantially
to the effect that, among other things, the Distribution will qualify as a
tax-free spinoff under Section 355 of the Internal Revenue Code of 1986. Under
Section 355 of the Internal Revenue Code, in general:
1. Holders of ITT Common Stock will not recognize any income, gain or
loss as a result of the Distribution except that holders of ITT Common
Stock that receive cash in lieu of fractional shares of New ITT Common
Stock or ITT Hartford Common Stock will recognize gain or loss equal to the
difference between such cash and the tax basis allocated to such fractional
shares. Any such gain or loss will constitute capital gain or loss if such
fractional shares would have been held as a capital asset on the
Distribution Date.
26
<PAGE> 33
2. Holders of ITT Common Stock will apportion the tax basis of their
ITT Common Stock among such ITT Common Stock and any New ITT Common Stock
and ITT Hartford Common Stock (including fractional shares of New ITT
Common Stock or ITT Hartford Common Stock) received by such holder in the
Distribution in proportion to the relative fair market values of such stock
on the Distribution Date.
3. The holding period for the New ITT Common Stock and ITT Hartford
Common Stock received in the Distribution by holders of ITT Common Stock
will include the period during which such holder held the ITT Common Stock
with respect to which the Distribution was made, provided that such ITT
Common Stock is held as a capital asset by such holder on the Distribution
Date.
4. The Distribution will not be treated as a taxable disposition of
New ITT or ITT Hartford by ITT Industries.
Current Treasury regulations require each holder of ITT Common Stock who
receives New ITT Common Stock or ITT Hartford Common Stock pursuant to the
Distribution to attach to his or her Federal income tax return for the year in
which the Distribution occurs a detailed statement setting forth such data as
may be appropriate in order to show the applicability of Section 355 of the
Internal Revenue Code to the Distribution. ITT will convey the appropriate
information to each holder of record of ITT Common Stock as of the Distribution
Record Date.
The receipt of an Internal Revenue Service ruling, substantially to the
foregoing effect, is a condition to the Distribution. The Board of Directors of
ITT has reserved the right to waive the receipt of such ruling as a condition to
consummation of the Distribution. The Board will not waive such condition
unless, in the Board's judgment, based on the opinion of counsel, Section 355 of
the Internal Revenue Code will apply to the Distribution.
Such a ruling, while generally binding upon the Internal Revenue Service,
is subject to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in a material respect, such
ruling could become invalid. ITT is not aware of any facts or circumstances
which would cause such representations and assumptions to be untrue. Each of
ITT, New ITT and ITT Hartford has agreed to certain restrictions on its future
actions to provide further assurances that Section 355 of the Internal Revenue
Code will apply to the Distribution. See "RELATIONSHIP BETWEEN ITT INDUSTRIES,
NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION". If the Distribution were not
to qualify under Section 355 of the Internal Revenue Code, then, in general, a
corporate tax (which, as noted below, would be very substantial) would be
payable by the consolidated group, of which ITT is the common parent, based upon
the difference between (x) the fair market value of the New ITT Common Stock and
the ITT Hartford Common Stock and (y) the adjusted basis of such New ITT Common
Stock and ITT Hartford Common Stock. In addition, under the consolidated return
rules, each member of the consolidated group (including New ITT and ITT
Hartford) is jointly and severally liable for such tax liability. If the
Distribution occurred and it were not to qualify under Section 355 of the
Internal Revenue Code, the resulting tax liability would have a material adverse
effect on the financial position, results of operations and cash flows of each
of ITT Industries, New ITT and ITT Hartford. ITT estimates that the aggregate
shared tax liability in this regard of ITT Industries, New ITT and ITT Hartford
would be approximately $1.75 billion.
Furthermore, if the Distribution were not to qualify as a tax-free spinoff,
each ITT shareholder receiving shares of New ITT Common Stock and ITT Hartford
Common Stock in the Distribution would be treated as if such shareholder had
received a taxable distribution in an amount equal to the fair market value of
New ITT Common Stock and ITT Hartford Common Stock received, which would result
in (x) a dividend to the extent of such shareholder's pro rata share of ITT's
current and accumulated earnings and profits, (y) a reduction in such
shareholder's basis in ITT Common Stock to the extent the amount received
exceeds such shareholder's share of earnings and profits and (z) a gain from the
exchange of ITT Common Stock to the extent the amount received exceeds both such
shareholder's share of earnings and profits and such shareholder's basis in ITT
Common Stock. In such an event, ITT estimates that the aggregate tax liability
to ITT's shareholders (after considering the portion of tax-exempt shareholders)
would be approximately $2 billion.
27
<PAGE> 34
ITT has not sought rulings from the Internal Revenue Service as to the
Federal income tax consequences of certain restructurings which were or are to
be effected by ITT prior to the Distribution. Additional taxes may be asserted
against ITT Industries, New ITT or ITT Hartford in the course of audits by the
Internal Revenue Service or state, local or foreign taxing authorities with
respect to ongoing business operations or these restructurings of the ITT group
of companies. Assertions of additional tax liability in the course of such
audits are a routine matter, and ITT believes that it has adequately provided
for any such assertions.
The foregoing summary of the anticipated Federal income tax consequences of
the Distribution is for general information only. ITT SHAREHOLDERS SHOULD
CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL
TAX LAWS.
LISTING AND TRADING OF ITT INDUSTRIES COMMON STOCK, NEW ITT COMMON STOCK
AND ITT HARTFORD COMMON STOCK
Application will be made to list the ITT Industries Common Stock on the New
York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE") under the
new symbol "IIN". As is noted below under "-- CERTAIN FACTORS AFFECTING TRADING
PRICES", the trading price of ITT Industries Common Stock will be affected by
the Distribution. In addition, the price for ITT Industries Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for ITT Industries Common Stock, (ii)
developments affecting the business of ITT Industries, (iii) investor perception
of ITT Industries and (iv) general economic and market conditions.
Prior to the date hereof, there has not been any established trading market
for New ITT Common Stock or ITT Hartford Common Stock. Each of New ITT and ITT
Hartford will make application to the NYSE for the listing, as applicable, of
the New ITT Common Stock and ITT Hartford Common Stock under the symbols "ITT"
and "HIG", respectively. It is presently anticipated that New ITT Common Stock
and ITT Hartford Common Stock will be approved for listing on the NYSE prior to
the Distribution Date, and trading may commence on a "when-issued" basis prior
to the Distribution. It is also possible that ITT Industries Common Stock would
be traded on a "when-distributed" basis prior to the Distribution. On the first
NYSE trading day following the Distribution Date, "when-issued" or
"when-distributed" trading, as applicable, in respect of each of the ITT
Industries Common Stock, New ITT Common Stock and the ITT Hartford Common Stock
would end and "regular-way" trading would begin. The NYSE will not approve any
trading in respect of the New ITT Common Stock or ITT Hartford Common Stock
until the SEC has declared effective the Registration Statement of New ITT on
Form 10 in respect of the New ITT Common Stock and the Registration Statement of
ITT Hartford on Form 8-A in respect of the ITT Hartford Common Stock. It is
expected that New ITT and ITT Hartford will file with the SEC a Registration
Statement on Form 10 and Form 8-A, respectively, prior to the Special Meeting
and request effectiveness of such Registration Statements prior to the
Distribution Date.
There can be no assurance as to the prices at which the ITT Common Stock
(or ITT Industries Common Stock), New ITT Common Stock and ITT Hartford Common
Stock will trade before, on or after the Distribution Date. Until each of the
New ITT Common Stock and ITT Hartford Common Stock is fully distributed and an
orderly market develops in the ITT Industries Common Stock, New ITT Common Stock
and ITT Hartford Common Stock, the respective price at which each such stock
trades may fluctuate significantly and may be lower than the respective price
that would be expected for a fully distributed issue. Prices for each of the New
ITT Common Stock and ITT Hartford Common Stock will be determined in the
marketplace and may be influenced by many factors, including (i) the depth and
liquidity of the market for New ITT Common Stock and ITT Hartford Common Stock,
as applicable, (ii) developments affecting the respective businesses of New ITT
and ITT Hartford generally, (iii) investor perception of New ITT and ITT
Hartford, as the case may be, and (iv) general economic and market conditions.
Shares of New ITT Common Stock and ITT Hartford Common Stock distributed to
ITT shareholders will be freely transferable, except for shares of New ITT
Common Stock received by persons who may be deemed to be "affiliates" of New ITT
under the Securities Act of 1933 (the "Securities Act") and shares of ITT
Hartford Common Stock received by persons who may be deemed to be "affiliates"
of ITT Hartford
28
<PAGE> 35
under the Securities Act. Persons who may be deemed to be affiliates of New ITT
or ITT Hartford after the Distribution generally include individuals or entities
that control, are controlled by, or are under common control with, New ITT or
ITT Hartford, as applicable, and may include certain officers and directors of
New ITT or ITT Hartford, as applicable, as well as principal shareholders of New
ITT or ITT Hartford, as applicable. Persons who are affiliates of New ITT will
be permitted to sell their shares of New ITT Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption from
the registration requirements of the Securities Act, such as the exemption
afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.
Similarly, persons who are affiliates of ITT Hartford will be permitted to sell
their shares of ITT Hartford Common Stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(1) of the Securities Act or Rule 144 thereunder.
CERTAIN FACTORS AFFECTING TRADING PRICES
As a result of the Distribution, the trading price of ITT Industries Common
Stock will be lower immediately following the Distribution as compared to the
trading price of ITT Common Stock immediately prior to the Distribution Date,
although the receipt of the shares of New ITT Common Stock and ITT Hartford
Common Stock is expected to offset such effect. The aggregate market values of
ITT Industries Common Stock, New ITT Common Stock and ITT Hartford Common Stock
after the Distribution may be less than, equal to, or greater than the market
value of ITT Common Stock prior to the Distribution Record Date.
TREATMENT OF CERTAIN DEBT INSTRUMENTS
ITT has historically incurred indebtedness at the parent company 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. The reason for the
potential overleverage is that most of the existing consolidated indebtedness of
ITT, including indebtedness incurred for businesses other than ITT Industries
(principally businesses that will be part of New ITT), is a contractual
obligation of ITT and thus would remain a contractual obligation of ITT
Industries after the Distribution.
Accordingly, in connection with the Distribution, management of ITT intends
to allocate the consolidated indebtedness of ITT between ITT Industries and New
ITT. This allocation of indebtedness is expected to reflect, in part, the
capitalization of certain competitors in the industries represented by such
businesses. The specific goal will be to reach approximately the allocation of
indebtedness after the Distribution as reflected below under "ITT INDUSTRIES
FORECASTED CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION" and "ITT
HARTFORD FORECASTED CAPITALIZATION". ITT (ITT Industries after the
Distribution), New ITT and ITT Hartford will agree in the Distribution Agreement
to 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, New ITT and ITT Hartford set forth under the
above-mentioned captions. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND
ITT HARTFORD AFTER THE DISTRIBUTION -- DISTRIBUTION AGREEMENT".
ITT expects that it will allocate an aggregate of $2.7 billion of its
indebtedness to New ITT. ITT does not plan to allocate any of its public
indebtedness to ITT Hartford. The planned allocation is reflected under "ITT
INDUSTRIES FORECASTED CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION" and
"ITT HARTFORD FORECASTED CAPITALIZATION".
In connection with the allocation, ITT recently announced that it had
successfully completed a tender offer for an aggregate of $4.1 billion of its
debt securities, with an estimated $3.4 billion, or 82% of the aggregate
principal amount of the debt securities having been tendered. The premium paid
for the indebtedness resulted in an after tax accounting loss of approximately
$300 million ($460 million pretax). Although the amount of indebtedness on the
balance sheet will increase by the premium paid, the net interest
29
<PAGE> 36
expense associated with the new principal amount of indebtedness is expected to
decrease relative to the interest expense paid by ITT before the tender offer,
since the weighted average interest rate on the new principal amount of
indebtedness is expected to be substantially below the weighted average interest
rate on the indebtedness prior to the tender offer. On an economic basis, the
present value cost of the tender offer and reissuance of indebtedness is
expected to approximately equal the present value cost of leaving the
indebtedness outstanding.
The tender offer was financed with the proceeds of commercial paper
borrowings by ITT of approximately $3.7 billion. Management expects to refinance
these commercial paper obligations, and then allocate the indebtedness, prior to
the Distribution Date through proceeds of new borrowings by New ITT and ITT
(which, in the case of ITT, will become indebtedness of ITT Industries after the
Distribution), as applicable. These obligations could be in the form of
commercial paper borrowings, bank borrowings or public or private financings or
any combination of the foregoing.
Management of ITT believes that there is sufficient financing capability in
respect of ITT Industries and New ITT to accomplish the allocation of
indebtedness contemplated. See "ITT INDUSTRIES FORECASTED CAPITALIZATION" and
"NEW ITT FORECASTED CAPITALIZATION".
In addition to the above mentioned actions, ITT expects to establish
commercial bank credit facilities for each of ITT Industries, New ITT and ITT
Hartford in advance of the Distribution. Although management of ITT has not
completed formal negotiations with potential lenders, it 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.
REDEMPTION OF SERIES N PREFERRED STOCK
ITT has called for redemption on August 29, 1995, all the outstanding
shares of ITT Series N Preferred Stock. Accordingly, there will be no
outstanding shares of ITT Series N Preferred Stock on the Special Meeting Record
Date. It is expected that the holders of shares of ITT Series N Preferred Stock
will exercise their right to convert the ITT Series N Preferred Stock into ITT
Common Stock since the value of the ITT Common Stock to be received upon
conversion currently exceeds the redemption price.
INTEREST OF CERTAIN PERSONS IN THE DISTRIBUTION
As a result of the Distribution, individuals who are directors and
executive officers of ITT and certain individuals who will be directors and
executive officers of ITT Industries, New ITT or ITT Hartford will receive New
ITT Common Stock and ITT Hartford Common Stock in respect of the ITT Common
Stock held by such individuals. The beneficial ownership of ITT Common Stock for
such individuals is reflected above under "INTRODUCTION -- STOCK OWNERSHIP".
Stock options, stock appreciation rights and restricted stock held by
individuals who are directors and executive officers of ITT and certain
individuals who will be directors and executive officers of ITT Industries, New
ITT or ITT Hartford will be adjusted in connection with the Distribution. For a
discussion of such adjustments, see "EMPLOYEE BENEFITS AND COMPENSATION
MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS". Also, new employee benefit plans
for the benefit of such individuals and others will be adopted by each of New
ITT and ITT Hartford effective after the Distribution.
ITT Industries will enter into an employment agreement with the Chairman,
President and Chief Executive of ITT Industries. See "ITT INDUSTRIES MANAGEMENT
AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENT". Also, New ITT will enter
into an employment agreement with the Chairman and Chief Executive of New ITT.
See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENT".
Furthermore, ITT Hartford will enter into an employment agreement with each of
the President and Chief Operating Officer of The Hartford and the President and
Chief Operating
30
<PAGE> 37
Officer of the Hartford Life Insurance Companies. See "ITT HARTFORD MANAGEMENT
AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENTS".
Information concerning the management and executive compensation
arrangements of ITT Industries, New ITT and ITT Hartford after the Distribution
is set forth under "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION", "NEW
ITT MANAGEMENT AND EXECUTIVE COMPENSATION" AND "ITT HARTFORD MANAGEMENT AND
EXECUTIVE COMPENSATION".
ACCOUNTING TREATMENT
The Distribution has been recorded as a discontinuance of the businesses of
New ITT and ITT Hartford in the consolidated financial statements of ITT
Industries contained herein. The historical financial statements of New ITT and
ITT Hartford contained in this Proxy Statement are presented as if New ITT and
ITT Hartford were separate entities for all periods presented. This Proxy
Statement contains certain pro forma financial information for ITT Industries
that gives effect to the Distribution, as well as the conversion of issued and
outstanding shares of preferred stock to common shares and termination of the
ESOP as of the beginning of each period presented. This Proxy Statement also
contains certain pro forma financial information for New ITT and related
projected pro forma financial information that, in each case, reflects the
acquisition of the 70.3% interest in Ciga, the acquisition of certain other
hotel properties, the acquisition of MSG in partnership with another entity and
the acquisition of CWI as of the beginning of each period presented. Certain
historical financial information is also included for Ciga (presented in Italian
lira and in accordance with Italian accounting principles) and CWI.
The following table sets forth certain exchange rates based on the noon
buying rate in New York City for cable transfers as certified for customs
purposes by the Federal Reserve Bank of New York. Such rates are expressed as
Italian lira per US$1.00. On August 10, 1995, the noon buying rate was ITL
1590.50 per US$1.00.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1993 DECEMBER 31, 1994
----------------- -----------------
<S> <C> <C>
Exchange rate at end of period............................... ITL 1717.50 ITL 1622.00
Average exchange rate during period.......................... 1573.41 1611.49
Highest exchange rate during period.......................... 1726.00 1706.75
Lowest exchange rate during period........................... 1451.00 1511.50
</TABLE>
The capitalization tables included in this Proxy Statement reflect the
actual capitalization of ITT Industries, New ITT and ITT Hartford as of a
particular date, the projected capitalization of such companies immediately
prior to the anticipated Distribution and the capitalization of such companies
adjusted for the Distribution. The projected capitalization set forth for such
companies immediately prior to the anticipated Distribution is based on
important assumptions and qualifications as to the transactions or results
expected to occur prior to the anticipated Distribution Date. This Proxy
Statement also contains per share financial data of ITT Industries, New ITT and
ITT Hartford compared to per share financial data of ITT.
See "ITT INDUSTRIES FORECASTED CAPITALIZATION", "NEW ITT FORECASTED
CAPITALIZATION", "ITT HARTFORD FORECASTED CAPITALIZATION", "ITT INDUSTRIES
SELECTED FINANCIAL AND OPERATING DATA", "NEW ITT SELECTED FINANCIAL AND
OPERATING DATA", "ITT HARTFORD SELECTED FINANCIAL AND OPERATING DATA",
"COMPARATIVE FINANCIAL INFORMATION", "ITT INDUSTRIES UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS" and "NEW ITT UNAUDITED PRO FORMA COMBINED
INCOME STATEMENTS".
After the Distribution, the date of the fiscal year end for both New ITT
and ITT Hartford will be December 31. The date of the fiscal year end for ITT
Industries will remain December 31.
31
<PAGE> 38
THE REINCORPORATION OF ITT
Subject to the conditions summarized below, ITT will be reincorporated in
Indiana by merging ITT into ITT Indiana pursuant to the Merger Agreement and, in
connection therewith, the name of ITT Indiana 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. In addition,
ITT Industries intends to implement a shareholder rights plan. See "DESCRIPTION
OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES 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.
If Proposal Two is approved, it is expected that the Reincorporation will
be consummated substantially simultaneously with the Distribution.
REASONS FOR THE REINCORPORATION
The Reincorporation is being proposed 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 the 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 Board of Directors of ITT Industries will have greater
flexibility in responding 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 control of ITT Industries (including unsolicited takeover
attempts) as is more fully discussed under "DESCRIPTION OF ITT INDUSTRIES
CAPITAL STOCK -- INDIANA BUSINESS CORPORATION LAW".
ITT Industries also has substantial manufacturing operations in Indiana.
The existence of such operations in Indiana was only a secondary reason for the
proposed Reincorporation. The Board of Directors of ITT believes that, if ITT
Industries is to be incorporated in a jurisdiction other than Delaware, it
should be a jurisdiction in which ITT Industries has a significant presence.
MERGER AGREEMENT
The following summary of certain provisions of the Merger Agreement and
related matters is qualified in its entirety by reference to the text of the
Merger Agreement set forth as Annex A hereto.
32
<PAGE> 39
ITT INDUSTRIES COMMON STOCK
Upon the effectiveness of the Reincorporation, each outstanding share of
ITT Common Stock will be automatically converted into one share of ITT
Industries Common Stock. Each outstanding certificate representing shares of ITT
Common Stock will automatically represent the same number of shares of ITT
Industries Common Stock. ITT Industries will be entitled to the same rights,
powers, qualifications, limitations and restrictions as the presently
outstanding ITT Common Stock, although some differences will arise as a result
of the application of Indiana law. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL
STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW".
EXCHANGE OF STOCK CERTIFICATES
To avoid the confusion that would result if the presently outstanding
certificates representing shares of ITT Common Stock were to remain outstanding
for an extended period of time after the name of ITT is changed to ITT
Industries, Inc., it will be necessary for shareholders of ITT to exchange their
existing stock certificates of ITT Common Stock for stock certificates of ITT
Industries Common Stock.
On or about the first business day following the Reincorporation (which
would be substantially simultaneous with the Distribution), ITT will instruct
the Transfer Agent to mail to each shareholder of ITT a letter of transmittal
and instructions for use in surrendering such shareholder's certificates
representing shares of ITT Common Stock. Each shareholder should immediately
complete and sign the letter of transmittal and return it, along with such
shareholder's certificates representing shares of ITT Common Stock, to the
Transfer Agent at the address set forth on the letter of transmittal. Upon
receipt from each shareholder of a letter of transmittal, properly completed,
and the shareholder's certificates representing shares of ITT Common Stock, the
Transfer Agent will issue in accordance with the directions contained in the
completed letter of transmittal, three separate certificates representing shares
of ITT Industries, New ITT and ITT Hartford, respectively. If shareholders do
not submit their certificates bearing the name "ITT Corporation", shareholders
may be prevented from transferring their interests in ITT Industries, New ITT
and ITT Hartford after the Distribution since they will not have separate
certificates representing such interests. See "THE DISTRIBUTION -- MANNER OF
EFFECTING THE DISTRIBUTION". ITT SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM.
ITT shareholders will not have to make any payment in connection with the
exchange of stock certificates, although any shareholder submitting certificates
representing shares of ITT Common Stock for exchange who is not the record
holder of the shares represented, or who requests that certificates for any of
ITT Industries Common Stock, New ITT Common Stock or ITT Hartford Common Stock
be issued to any other person, must provide evidence of payment of all
applicable transfer taxes.
CONDITIONS TO THE REINCORPORATION
The Reincorporation is subject to the (i) approval of Proposal Two by
shareholders of ITT; (ii) the Distribution occurring; (iii) receipt of a
favorable opinion of counsel as to the Federal income tax consequences of the
Reincorporation; and (iv) the shares of ITT Industries Common Stock to be issued
or initially reserved for issuance having been approved for listing on the NYSE,
subject to official notice of issuance.
The Merger Agreement may be terminated by ITT's Board of Directors in its
discretion, and the terms of the Merger Agreement may be amended prior to its
effective date.
Approval of Proposal Two is being sought because provisions of state
corporate law require such approval. Accordingly, if Proposal Two is not
approved by shareholders the proposed Reincorporation could not occur.
REGULATORY APPROVALS
ITT does not believe that any material Federal or state regulatory
approvals will be necessary in connection with the Reincorporation.
33
<PAGE> 40
SIGNIFICANT CHANGES AFFECTING SHAREHOLDERS
Differences between Delaware and Indiana law would result in certain
significant changes affecting shareholders. For a discussion of certain
significant differences between Delaware and Indiana law, see "DESCRIPTION OF
ITT INDUSTRIES CAPITAL STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE
AND INDIANA LAW".
The Articles of Incorporation of ITT Industries after the Reincorporation
would be the same as the Restated Certificate of Incorporation of ITT in all
material respects, except as summarized in this paragraph. The provision
pertaining to gaming licenses would be removed. See "AMENDMENT OF THE RESTATED
CERTIFICATE OF INCORPORATION OF ITT -- REMOVAL OF GAMING LICENSE PROVISION". A
provision expressly limiting the preemptive rights of the shareholders to
subscribe for additional issues of stock and a provision expressly providing
that the shareholders will not be liable for the debts of the company would also
be added. A copy of the Articles of ITT Indiana (ITT Industries) is included as
Annex B hereto.
The By-laws of ITT Industries would be the same as the By-laws of ITT in
all material respects, except that the "alien" ownership provision may be
removed. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- RESTRICTIONS ON
ALIEN OWNERSHIP". A copy of the By-laws of ITT Indiana (ITT Industries) is
included as Annex C hereto.
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
No gain or loss will be recognized to ITT or its shareholders in connection
with the Reincorporation.
As a condition to the Reincorporation, ITT must receive an opinion of
counsel concerning the treatment of the Reincorporation for Federal income tax
purposes. The opinion of counsel will be substantially to the effect that for
Federal income tax purposes:
(1) No gain or loss will be recognized to ITT shareholders upon the
automatic conversion of ITT Common Stock into ITT Industries Common Stock,
as described above.
(2) The basis of the ITT Industries Common Stock into which a
shareholder's ITT Common Stock is to be converted will be the same as the
basis of such ITT Common Stock.
(3) The holding period of the ITT Industries Common Stock into which a
shareholder's ITT Common Stock is to be converted will include the period
during which such ITT Common Stock was held, provided that the shares of
ITT Common Stock were held as a capital asset on the date of the
conversion.
(4) The merger of ITT into ITT Indiana (ITT Industries), as described
above, will constitute a reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code.
(5) No gain or loss will be recognized to ITT Industries upon the
receipt of the assets of ITT in exchange for ITT Industries Common Stock.
(6) No gain or loss will be recognized to ITT upon the transfer of its
assets to ITT Industries solely in exchange for shares of and the
assumption by ITT Industries of the liabilities of ITT.
(7) The basis of the assets of ITT in the hands of ITT Industries will
be the same as the basis of such assets in the hands of ITT immediately
prior to the transfer.
(8) The holding period of the assets of ITT in the hands of ITT
Industries will include the period during which such assets were held by
ITT.
Tax counsel for ITT has informed management of ITT that it will deliver
this opinion on the date of the Reincorporation.
34
<PAGE> 41
EMPLOYEE BENEFITS AND COMPENSATION MATTERS
In connection with the Distribution, nearly all of ITT's existing employee
benefit and incentive compensation plans and outstanding awards thereunder will
be amended and adjusted. Moreover, certain plans will be adopted by New ITT and
by ITT Hartford. The employee benefits and compensation matters being undertaken
in connection with the Distribution are being done with the overriding goal of
putting in place or continuing essentially the same benefits arrangements at the
three companies after the Distribution as those that currently exist at ITT.
Some adjustments to employee incentive stock awards will also take place to
preserve the economic value of such awards.
Approval of Proposal Three set forth under "INTRODUCTION -- PURPOSE OF THE
SPECIAL MEETING" will constitute approval of the amendments to certain of the
employee compensation plans of ITT described below under the heading "-- ITT
STOCK OPTIONS AND OTHER AWARDS -- ADJUSTMENTS TO AWARDS HELD BY EMPLOYEES OF ITT
INDUSTRIES AND CERTAIN OTHERS". Such approval is being sought to preserve ITT's
ability to deduct, for Federal income tax purposes, compensation paid pursuant
to the exercise of stock options and in respect of other stock awards. Under
Section 162(m) of the Internal Revenue Code, shareholder approval of
performance-based compensation plans (including material amendments thereto) is
necessary to qualify for the performance-based compensation exception to the
limitation on ITT's ability to deduct compensation paid to certain specified
individuals in excess of $1 million. Such approval is also being sought because
of Rule 16b-3 under the Exchange Act, which requires shareholder approval under
certain circumstances of material amendments to stock option plans. Although ITT
does not believe the contemplated amendments are material, it is seeking
shareholder approval to avoid any potential uncertainty that arguably might
exist if such approval were not obtained.
Approval of Proposal Four set forth under the heading
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
incentive stock plan of New ITT described below under the heading "-- NEW ITT
INCENTIVE STOCK PLAN". Approval of Proposal Five set forth under the heading
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
incentive stock plan of ITT Hartford described below under the heading "-- ITT
HARTFORD INCENTIVE STOCK PLAN". Approval of Proposal Four and Proposal Five is
being sought to establish New ITT's and ITT Hartford's ability, as applicable,
to deduct, for Federal income tax purposes, compensation paid pursuant to the
exercise of stock options and in respect of other stock awards. As noted above,
under Section 162(m) of the Internal Revenue Code, shareholder approval of
performance-based compensation plans is necessary to qualify for the
performance-based compensation exception to the limitation on a company's
ability to deduct compensation paid to certain specified individuals in excess
of $1 million.
Approval of Proposal Six set forth under the heading "INTRODUCTION --
PURPOSE OF THE SPECIAL MEETING" will constitute approval of the restricted stock
plan for non-employee directors of ITT described below under the heading "--
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS". Approval of Proposal Six is
being sought because of Rule 16b-3 under the Exchange Act which provides an
exemption from Section 16(b) of the Exchange Act for certain transactions by an
officer or director of a registrant pursuant to an employee benefit plan
satisfying certain specified conditions, including shareholder approval.
In addition to the foregoing, ITT Industries, New ITT and ITT Hartford will
enter into an Employee Benefits Services and Liability Agreement pursuant to
which the liability of ITT with respect to certain employee benefits matters
will be allocated among ITT Industries, New ITT and ITT Hartford in the manner
described below. For a discussion of additional terms of such agreement, see
"RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE
DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT".
ITT STOCK OPTIONS AND OTHER AWARDS
Stock options, stock appreciation rights and restricted stock awards
(collectively, "stock awards") of ITT currently are outstanding under the ITT
1977 Stock Option Incentive Plan (the "1977 Plan"), the ITT 1986 Incentive Stock
Plan (the "1986 Plan") and the ITT 1994 Incentive Stock Plan (the "1994 Plan").
These stock awards would be adjusted or substituted as a result of the
Distribution. The treatment of stock awards
35
<PAGE> 42
that are outstanding prior to the Distribution is designed to preserve, as a
general matter, the economic value of each award. In addition, with respect to
individuals who will continue their employment with either ITT Industries, New
ITT or ITT Hartford, the treatment of outstanding stock awards is designed to
provide an incentive for such employees to remain employed with their respective
employers and to benefit by their efforts to increase the market value of the
stock of such employer. With respect to individuals who hold outstanding stock
awards but who will not continue employment after the Distribution with either
ITT Industries, New ITT or ITT Hartford, including individuals who are retired
or who were employed in ITT's discontinued businesses, the treatment of
outstanding stock awards is designed to permit such individuals to elect either
to liquidate their investment in ITT prior to the Distribution or to retain
their stock awards with respect to ITT Industries, as adjusted to reflect the
Distribution.
ADJUSTMENTS TO AWARDS HELD BY EMPLOYEES OF ITT INDUSTRIES AND CERTAIN OTHERS
In general, it is expected that the number of shares of ITT Industries
Common Stock in respect of each stock option and related right held by employees
of ITT Industries and certain others (including any employees of New ITT or ITT
Hartford who do not surrender their ITT stock awards as contemplated below) and
the exercise price with respect thereto, and the number of shares in respect of
restricted stock awards, will be adjusted as necessary to reflect the
Distribution. The 1977 Plan provides that, in the event the number of
outstanding shares of ITT Common Stock is changed by reason of a split-up or
combination of shares or recapitalization or by reason of a stock dividend, the
ITT Board of Directors shall appropriately adjust the number of shares then
subject to options granted under the Plan and the price per share payable upon
exercise of such options so as to reflect such change. The 1986 Plan provides
that, in the event of any recapitalization, reclassification, split-up or
consolidation of shares, merger or consolidation of ITT or sale by ITT of all or
a substantial portion of its assets, the Compensation and Personnel Committee of
the Board of Directors of ITT may make such adjustments in the stock subject to
stock awards granted under the Plan as such Committee deems equitable.
The Distribution is not one of the transactions specifically listed in the
adjustment provisions of the 1977 Plan or the 1986 Plan. The Board of Directors
of ITT, however, believes that it would be inequitable and inconsistent with the
clear intent of these Plans not to adjust outstanding awards for the effect of
the Distribution. Accordingly, the 1977 Plan and the 1986 Plan will be amended
to provide expressly that stock options and related rights and restricted stock
awards under the 1977 Plan and the 1986 Plan shall be appropriately adjusted by
the Compensation and Personnel Committee of the Board of Directors of ITT to
reflect the Distribution in the case of the 1977 Plan and the 1986 Plan.
Approval of Proposal Three set forth under "INTRODUCTION --PURPOSE OF THE
SPECIAL MEETING" will constitute approval of such amendments. As amended, the
relevant portion of the 1977 Plan would read as follows:
"In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split,
reclassification, combination of shares, rights offering, split-up, or
extraordinary dividend (including a spin-off) or divestiture, or any
other change in the corporate structure or shares of the Corporation,
the number of shares for which options may thereafter be granted under
this Plan, the number of shares then subject to options theretofore
granted under this Plan and the price per share payable upon exercise of
such options, shall be appropriately adjusted as determined by the
Committee so as to reflect such change."
As amended, the relevant portion of the 1986 Plan would read as follows:
"In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split,
reclassification, combination of shares, rights offering, split-up, or
extraordinary dividend (including a spin-off) or divestiture, or any
other change in the corporate structure or shares, the Committee may
make such adjustment in the Stock subject to Awards, including Stock
subject to purchase by an Option, or the terms, conditions or
restrictions on Stock or Awards, including the price payable upon the
exercise of such Option and the number of shares subject to restricted
stock awards, as the Committee deems equitable."
36
<PAGE> 43
Under the 1994 Plan, in the event of any recapitalization,
reclassification, split-up or consolidation of shares of stock or stock
dividend, merger or consolidation of ITT or sale by ITT of all or a portion of
its assets, the Compensation and Personnel Committee of the Board of Directors
may make such adjustments in the stock subject to awards under the plan as such
Committee deems equitable. Pursuant to that provision, awards granted under the
1994 Plan will be adjusted to reflect the Distribution.
Immediately following the Distribution Date, unexercised ITT employee stock
options held by employees of ITT Industries (and unexercised options held by
retirees, employees of discontinued operations and employees who will not
continue their employment with ITT Industries, New ITT or ITT Hartford) will be
adjusted to preserve as closely as possible their respective economic value
immediately prior to the Distribution (defined as the aggregate spread on the
options or the difference between the fair market value of the shares underlying
the option and the option exercise price, multiplied by the number of shares
subject to option). For a discussion of the expected treatment of stock awards
held by those individuals who will be employees of New ITT or ITT Hartford after
the Distribution, see "-- TREATMENT OF AWARDS HELD BY EMPLOYEES OF NEW ITT" and
"-- TREATMENT OF AWARDS HELD BY EMPLOYEES OF ITT HARTFORD". Those individuals
who will be employees of New ITT and ITT Hartford after the Distribution who do
not surrender their awards as contemplated below will be treated in the same
manner as those individuals who will be employees of ITT Industries and
retirees, employees of discontinued operations and employees who will not
continue their employment with ITT Industries, New ITT or ITT Hartford.
The adjusted option exercise price will be determined by multiplying the
ITT option exercise price by a fraction, the numerator of which is the average
of the high and low trading prices of ITT Industries Common Stock for the five
consecutive trading days immediately after the Distribution Date and the
denominator of which is the average of the high and low prices of ITT Common
Stock for the five consecutive trading days immediately preceding the
ex-dividend date. The number of ITT Industries shares subject to an option will
be determined by multiplying the number of ITT shares covered by the option by a
fraction, the numerator of which is the average of the high and low prices of
ITT Common Stock for the five consecutive trading days immediately preceding the
ex-dividend date and the denominator of which is the average of the high and low
trading prices of ITT Industries Common Stock for the five consecutive trading
days immediately after the Distribution Date.
As of May 31, 1995, there were approximately 2.5 million shares of ITT
Common Stock subject to options outstanding held by individuals who will be
employees of ITT Industries, retirees, employees of discontinued operations and
employees who will not continue their employment with ITT Industries, New ITT or
ITT Hartford (including 600,000 shares of ITT Common Stock subject to options
held by retirees, employees of discontinued operations and employees who will
not continue their employment with ITT Industries, New ITT or ITT Hartford). It
is impossible to predict with certainty how many shares of ITT Industries Common
Stock will be subject to adjusted ITT Industries options outstanding after the
Distribution Date, although it is estimated that a portion of these options will
be exercised prior to the Distribution Date. The remaining balance of
unexercised ITT options will be adjusted according to the formula described
above, but the stock prices upon which the adjustment will be based will not be
known until after the Distribution is completed. Shareholders of ITT Industries
are, however, likely to experience some dilutive impact from the above-described
adjustments, although such impact is not expected to be material.
For those employees who will continue their employment with ITT Industries,
all of the original terms and conditions of the ITT options, including the
restrictions on option exercisability and expiration dates, will remain in
effect after the adjustments as to price and number of shares. For those option
holders who will not continue employment with ITT Industries, New ITT or ITT
Hartford, any remaining restrictions on exercisability will be waived and the
options will terminate at the earlier of the original expiration date or five
years following the Distribution Date. There are no outstanding restricted stock
awards held by individuals who will be or are employees of ITT Industries. The
number of outstanding stock appreciation rights is not significant and such
rights are no longer exercisable.
37
<PAGE> 44
TREATMENT OF AWARDS HELD BY EMPLOYEES OF NEW ITT
It is expected that stock awards in respect of ITT Common Stock held by
those individuals who will become employees of New ITT will be replaced with
substitute awards in respect of New ITT Common Stock under the 1995 New ITT
Incentive Stock Plan discussed below under "-- NEW ITT INCENTIVE STOCK PLAN".
Although such individuals are not contractually required to surrender their
awards in respect of ITT Common Stock, it is expected that such individuals will
do so in order to have their stock awards relate to shares of the company with
which they are employed after the Distribution. The surrender of such awards is
expected to be encouraged by ITT because ITT management believes the efforts of
key employees should be directed toward enhancing the value of their employer's
stock.
Such substitute awards will be designed to preserve the economic value of
the related ITT stock awards, and the vesting and expiration dates and other
terms of the related awards will remain in effect under the New ITT substitute
stock awards. In order to obtain such substitute stock awards, the employees
will be required to surrender their unexercised ITT stock awards. Replacement of
surrendered ITT stock awards is believed to be beneficial to New ITT and its
shareholders because it will allow New ITT to restore meaningful compensation
incentives to its key employees. All other terms and conditions of the ITT stock
awards will apply to the substitute stock awards, and the vesting provisions
with respect thereto are expected to provide a continuing incentive to remain in
the employ of New ITT after the Distribution.
With respect to ITT stock options, the substitute option exercise price
will be determined by multiplying the ITT option exercise price by a fraction,
the numerator of which is the average of the high and low trading prices of New
ITT Common Stock for the five consecutive trading days immediately after the
Distribution Date and the denominator of which is the average of the high and
low prices of ITT Common Stock for the five consecutive trading days immediately
preceding the ex-dividend date. The number of New ITT shares subject to
substitute options will be determined by multiplying the number of ITT shares
covered by the option by a fraction, the numerator of which is the average of
the high and low prices of ITT Common Stock for the five consecutive trading
days immediately preceding the ex-dividend date and the denominator of which is
the average of the high and low trading prices of New ITT Common Stock for the
five consecutive trading days immediately after the Distribution Date.
With regard to unvested ITT restricted stock awards held by continuing
employees of New ITT, they would be asked to surrender their ITT restricted
stock award and they will then be issued a substitute restricted stock award of
equivalent economic value based on New ITT Common Stock. The number of New ITT
shares to be issued in substitution will be determined by multiplying the number
of ITT restricted shares by a fraction, the numerator of which is the average of
the high and low prices of ITT Common Stock for the five consecutive trading
days immediately preceding the ex-dividend date and the denominator of which is
the average of the high and low trading prices of New ITT Common Stock for the
five consecutive trading days immediately after the Distribution Date. All
restrictions and other terms and conditions that applied to the original ITT
restricted stock award would be carried forward to the substitute New ITT
restricted stock award.
It is impossible to predict with certainty how many shares of New ITT
Common Stock will be subject to substitute New ITT Options and substitute New
ITT restricted stock awards outstanding after the Distribution Date. It is
expected that some ITT stock options held by individuals who will become
employees of New ITT will be exercised prior to the Distribution Date. In
addition, the remaining balance of unexercised ITT options and outstanding ITT
restricted stock awards will be adjusted according to the formula described
above, but the ratio of stock prices upon which the adjustment will be based
will not be known until after the Distribution is completed. Shareholders of New
ITT are, however, likely to experience some dilutive impact from the
above-described adjustments, although such impact is not expected to be
material.
TREATMENT OF AWARDS HELD BY EMPLOYEES OF ITT HARTFORD
It is expected that stock awards in respect of ITT Common Stock held by
those individuals who will become employees of ITT Hartford will be replaced
with substitute awards in respect of ITT Hartford Common Stock under the 1995
ITT Hartford Incentive Stock Plan discussed below under "-- ITT
38
<PAGE> 45
HARTFORD INCENTIVE STOCK PLAN". Although such individuals are not contractually
required to surrender their awards in respect of ITT Common Stock, it is
expected that such individuals will do so in order to have their stock awards
relate to shares of the company with which they are employed after the
Distribution. The surrender of such awards is expected to be encouraged by ITT
because ITT management believes the efforts of key employees should be directed
toward enhancing the value of their employer's stock.
Such substitute awards will be designed to preserve the economic value of
the related ITT stock awards, and the vesting and expiration dates and other
terms of the related awards will remain in effect under the ITT Hartford
substitute stock awards. In order to obtain such substitute stock awards, the
employees will be required to surrender their unexercised ITT stock awards.
Replacement of surrendered ITT stock awards is believed to be beneficial to ITT
Hartford and its shareholders because it will allow ITT Hartford to restore
meaningful compensation incentives to its key employees. All other terms and
conditions of the ITT stock awards will apply to the substitute stock awards,
and the vesting provisions with respect thereto are expected to provide a
continuing incentive to remain in the employ of ITT Hartford after the
Distribution.
With respect to ITT stock options, the substitute option exercise price
will be determined by multiplying the ITT option exercise price by a fraction,
the numerator of which is the average of the high and low trading prices of ITT
Hartford Common Stock for the five consecutive trading days immediately after
the Distribution Date and the denominator of which is the average of the high
and low prices of ITT Common Stock for the five consecutive trading days
immediately preceding the ex-dividend date. The number of ITT Hartford shares
subject to substitute options will be determined by multiplying the number of
ITT shares covered by the option by a fraction, the numerator of which is the
average of the high and low prices of ITT Common Stock for the five consecutive
trading days immediately preceding the ex-dividend date and the denominator of
which is the average of the high and low trading prices of ITT Hartford Common
Stock for the five consecutive trading days immediately after the Distribution
Date.
With regard to unvested ITT restricted stock awards held by continuing
employees of ITT Hartford, they would be asked to surrender their ITT restricted
stock award and they will then be issued a substitute restricted stock award of
equivalent economic value based on ITT Hartford Common Stock. The number of ITT
Hartford shares to be issued in substitution will be determined by multiplying
the number of ITT restricted shares by a fraction, the numerator of which is the
average of the high and low prices of ITT Common Stock for the five consecutive
trading days immediately preceding the ex-dividend date and the denominator of
which is the average of the high and low trading prices of ITT Hartford Common
Stock for the five consecutive trading days immediately after the Distribution
Date. All restrictions and other terms and conditions that applied to the
original ITT restricted stock award would be carried forward to the substitute
ITT Hartford restricted stock award.
It is impossible to predict with certainty how many shares of ITT Hartford
Common Stock will be subject to substitute ITT Hartford Options and substitute
ITT Hartford restricted stock awards outstanding after the Distribution Date. It
is expected that some options ITT stock options held by individuals who will
become employees of ITT Hartford will be exercised prior to the Distribution
Date. In addition, the remaining balance of unexercised ITT options and
outstanding ITT restricted stock awards held by such individuals will be
adjusted according to the formula described above, but the ratio of stock prices
upon which the adjustment will be based will not be known until after the
Distribution is completed. Shareholders of ITT Hartford are, however, likely to
experience some dilutive impact from the above-described adjustments, although
such impact is not expected to be material.
TREATMENT OF AWARDS HELD BY OTHER INDIVIDUALS
A number of retirees and former employees of ITT, including executives of
certain of ITT's discontinued businesses, currently hold outstanding ITT stock
awards. With respect to holders of ITT stock awards in these categories, it is
expected that the Board of Directors of ITT and/or the Compensation and
Personnel Committee of the Board of Directors of ITT will waive any remaining
restrictions on the exercisability and vesting of such stock awards beginning
October 1, 1995 (or such earlier date as the Board or Committee may determine).
Those holders who do not exercise their stock options and related rights (or
dispose of their
39
<PAGE> 46
restricted stock) on or prior to the Distribution Date will continue to hold
their stock awards with respect to ITT Industries, as adjusted to reflect the
Distribution in the same manner as for stock awards held by employees of ITT
Industries, as described above.
It was determined that stock options held by this category of individuals
should be made fully exercisable since these holders will not be continuing
their employment after the Distribution Date and thus there is not any need to
create retention incentives through exercise restrictions.
At May 31, 1995, approximately 600,000 ITT options were held by retirees,
employees of discontinued operations and employees who will not continue their
employment with ITT Industries, New ITT or ITT Hartford. It is expected that a
substantial number of these ITT stock options will be exercised prior to the
Distribution Date. Any dilutive impact of adjusted options on shareholders of
ITT (ITT Industries) is not expected to be material.
NEW ITT INCENTIVE STOCK PLAN
Effective prior to the Distribution, New ITT is expected to adopt the 1995
New ITT Incentive Stock Plan (the "1995 New ITT Stock Plan"), under which New
ITT may grant to its employees awards in the form of stock options, stock
appreciation rights, restricted stock and performance shares, as well as
substitute stock options, stock appreciation rights and restricted stock awards.
The 1995 New ITT Stock Plan will be administered by the New ITT Compensation and
Personnel Committee, and is designed to enable New ITT to attract and retain key
employees and to directly link their incentives to the performance of New ITT
Common Stock. The 1995 New ITT Stock Plan will be substantially similar to the
current 1994 ITT Incentive Stock Plan. For a more complete description of the
1995 New ITT Stock Plan, see "NEW ITT MANAGEMENT AND EXECUTIVE
COMPENSATION -- NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS". The 1995
New ITT Stock Plan is also set forth in full as Annex D hereto.
Approval of Proposal Four set forth under the heading "
INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
1995 New ITT Stock Plan.
ITT HARTFORD INCENTIVE STOCK PLAN
Effective prior to the Distribution, ITT Hartford is expected to adopt the
1995 ITT Hartford Incentive Stock Plan (the "1995 ITT Hartford Stock Plan"),
under which ITT Hartford may grant to its employees awards in the form of stock
options, stock appreciation rights, restricted stock and performance shares, as
well as substitute stock options, stock appreciation rights and restricted stock
awards. The 1995 ITT Hartford Stock Plan will be administered by the ITT
Hartford Compensation and Personnel Committee, and is designed to enable ITT
Hartford to attract and retain key employees and to directly link their
incentives to the performance of ITT Hartford Common Stock. The 1995 ITT
Hartford Stock Plan will be substantially similar to the current 1994 ITT
Incentive Stock Plan. For a more complete description of the terms of the 1995
ITT Hartford Stock Plan, see "ITT HARTFORD MANAGEMENT AND EXECUTIVE
COMPENSATION -- ITT HARTFORD COMPENSATION, BENEFIT AND RETIREMENT PLANS". The
1995 ITT Hartford Stock Plan is also set forth in full as Annex E hereto.
Approval of Proposal Five set forth under the heading
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
1995 ITT Hartford Stock Plan.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Effective prior to the Distribution, ITT is expected to adopt the 1996 ITT
Restricted Stock Plan for Non-Employee Directors (the "1996 ITT Non-Employee
Directors Plan"), under which ITT will grant to its non-employee directors
restricted stock awards in lieu of annual retainer fees. The 1996 Non-Employee
Directors Plan will be administered by the ITT Compensation and Personnel
Committee, and is designed to further ITT's objectives of attracting and
retaining individuals of ability as directors and providing the directors with a
closer identity with the interests of the ITT (ITT Industries) shareholders.
Such Plan will be renamed the "1996 ITT Industries Restricted Stock Plan for
Non-Employee Directors" in connection with the Distribu-
40
<PAGE> 47
tion. For a more complete description of the 1996 ITT Non-Employee Directors
Plan, see "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- RESTRICTED
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS". The 1996 ITT Non-Employee Directors Plan
is also set forth in full as Annex G hereto.
Approval of Proposal Six set forth under the heading
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
1996 ITT Non-Employee Directors Plan.
New ITT and ITT Hartford intend to adopt similar plans. These plans are
described below under "NEW ITT MANAGEMENT AND EXECUTIVE
COMPENSATION -- RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS" and "ITT
HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- RESTRICTED STOCK PLAN FOR
NON-EMPLOYEE DIRECTORS".
TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP
The ITT Investment and Savings Plan is a tax-qualified profit sharing,
stock bonus and 401(k) plan covering all eligible employees of ITT and its
affiliates (including New ITT and ITT Hartford and their respective
subsidiaries). The leveraged employee stock ownership portion ("ESOP") of the
ITT Investment and Savings Plan was terminated in July 1995.
On May 9, 1989, the leveraged ESOP acquired 9,384,951 shares of Cumulative
Preferred Stock, ESOP Convertible Series, of ITT (the "ITT ESOP Preferred
Stock") from ITT for approximately $700 million. The acquisition was financed by
the ITT Investment and Savings Plan with a cash contribution from ITT of $1.2
million and the issuance by the ITT Investment and Savings Plan of its
promissory note to ITT in the aggregate principal amount of approximately $698.8
million. The ITT Investment and Savings Plan's note was refinanced on June 19,
1989, through the issuance of two series of notes (the "ESOP Notes") to a number
of banks and other institutional investors pursuant to a Note and Guaranty
Agreement among ITT, as guarantor, the ITT Investment and Savings Plan, acting
by and through Bankers Trust Company, the trustee of the ESOP, and the various
purchasers of the ESOP Notes. The proceeds of the sale of the ESOP Notes were
used to repay all but approximately $5 million of the promissory note held by
ITT. Excluding accrued interest, approximately $541 million of the ESOP Notes
and $5 million of the original ITT note remained unpaid as of June 30, 1995.
ITT called for redemption all the outstanding shares of ITT ESOP Preferred
Stock in June 1995. The trustee of the ESOP subsequently exercised its right to
convert the ITT ESOP Preferred Stock into ITT Common Stock. Accordingly, there
are no outstanding shares of ITT ESOP Preferred Stock. As noted above, ITT has
terminated the ESOP portion of the ITT Investment and Savings Plan. In
connection with such termination, the trustee of the ESOP sold a portion of the
then unallocated converted shares of ITT Common Stock sufficient to prepay the
ESOP Notes and the remaining balance on the loan from ITT. The ESOP Notes and
the remaining balance on the loan from ITT were prepaid in August 1995. After
taking into account the payment of the ESOP Notes, the loan from ITT and the
"makewhole" prepayment penalty in respect of the ESOP Notes, the remaining value
attributable to the unallocated shares of ITT Common Stock (substantially in the
form of shares of ITT Common Stock) was allocated to the accounts of
participants in the ITT Investment and Savings Plan based on the value of their
individual ESOP account in proportion to the value of all ESOP accounts. Shares
of ITT Common Stock issued upon conversion of the ITT ESOP Preferred Stock,
whether held or sold by the trustee for the ESOP, will participate in the
Distribution.
Effective as of the Distribution Date, the ITT Investment and Savings Plan
will be divided into three separate plans: a plan (the "ITT Industries
Investment and Savings Plan") covering eligible salaried employees of ITT
Industries and its affiliates ("ITT Industries Employees"); a plan (the "New ITT
Investment and Savings Plan") covering eligible salaried employees of New ITT
and its affiliates ("New ITT Employees"); and a plan (the "ITT Hartford
Investment and Savings Plan") covering eligible salaried employees of ITT
Hartford and its affiliates ("ITT Hartford Employees"). Existing account
balances of current New ITT Employees, including all shares of ITT Common Stock
acquired by the ESOP that have been allocated to the accounts of such employees,
will be transferred from the ITT Investment and Savings Plan to the New ITT
Investment and Savings Plan. See "NEW ITT MANAGEMENT AND EXECUTIVE
COMPENSATION -- NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS -- NEW ITT
INVES-
41
<PAGE> 48
TMENT AND SAVINGS PLAN". Existing account balances of current ITT Hartford
Employees, including all shares of ITT Common Stock acquired by the ESOP that
have been allocated to the accounts of such employees, will be transferred from
the ITT Investment and Savings Plan to the ITT Hartford Investment and Savings
Plan. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD
COMPENSATION, BENEFIT AND RETIREMENT PLANS -- ITT HARTFORD INVESTMENT AND
SAVINGS PLAN". Existing account balances of current ITT Industries Employees,
including all shares of ITT Common Stock acquired by the ESOP that have been
allocated to the accounts of such employees, will remain in the ITT Investment
and Savings Plan, which will continue in existence as the ITT Industries
Investment and Savings Plan. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE
COMPENSATION -- ITT INDUSTRIES COMPENSATION, BENEFIT AND RETIREMENT PLANS -- ITT
INDUSTRIES INVESTMENT AND SAVINGS PLAN". Existing account balances of each
former employee of ITT Industries, New ITT and ITT Hartford, including all
shares of ITT Common Stock acquired by the ESOP that have been allocated to the
accounts of such former employee, will be transferred to the investment and
savings plan maintained by the company responsible for providing retirement plan
benefits to such former employee.
ITT SALARIED RETIREMENT PLAN
ITT currently maintains the Retirement Plan for Salaried Employees of ITT
Corporation (the "ITT Salaried Retirement Plan"), a defined benefit retirement
plan that, as of March 31, 1995, covered approximately 15,000 active U.S.
salaried employees, approximately 5,500 active U.S. salaried employees at
divested companies who continue to earn credit under the ITT Salaried Retirement
Plan for purposes of eligibility (but not benefit accrual) and 29,000 former
employees of ITT, including retirees. The Hartford currently maintains the
Hartford Fire Insurance Company Retirement Plan (the "ITT Hartford Retirement
Plan"), a defined benefit retirement plan that, as of March 31, 1995, covered
approximately 17,600 active U.S. salaried employees and 9,200 former employees
of The Hartford, including retirees. In addition, ITT Sheraton sponsors the
Sheraton Corporation Retirement Plan for Salaried Employees (the "ITT Sheraton
Salaried Retirement Plan"), a defined benefit retirement plan for its U.S.
salaried employees, which, as of March 31, 1995, covered approximately 4,100
active employees and 3,700 former employees of ITT Sheraton, including retirees.
Management of ITT has determined that, after the Distribution, the ITT
Salaried Retirement Plan should remain with ITT Industries and be renamed the
"ITT Industries Salaried Retirement Plan". See "RELATIONSHIP BETWEEN ITT
INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS
AGREEMENT". As a result of those arrangements, ITT Industries will be
responsible for administering benefits under the ITT Industries Salaried
Retirement Plan with respect to its own employees as well as ITT retirees and
certain employees of ITT Hartford and New ITT.
As sponsor of the ITT Industries Salaried Retirement Plan, ITT Industries
will be responsible for all benefits accrued thereunder. To the extent that the
assets in the ITT Industries Salaried Retirement Plan are insufficient to
satisfy the benefit liabilities thereunder, ITT Industries will be responsible,
in accordance with applicable law, for satisfying those liabilities with its own
assets. As of December 31, 1994, the fair market value of the assets of the ITT
Salaried Retirement Plan exceeded the accumulated benefit obligations
thereunder, as calculated for purposes of Statement of Financial Accounting
Standards No. 87.
Since the public announcement of the Distribution, ITT has received
inquiries from the Pension Benefit Guaranty Corporation (the "PBGC") regarding
the funding status of the ITT Salaried Retirement Plan and the effect of the
Distribution on the ability of ITT Industries to satisfy its obligations in the
event that the assets under such Plan were not sufficient to satisfy the benefit
liabilities thereunder. ITT is responding to the inquiries by the PBGC and,
although there can be no assurance as to the ultimate result, does not believe
that any material liabilities will arise as a result of those inquiries.
Effective as of the Distribution Date, the ITT Hartford Retirement Plan
will be amended and will continue to be maintained by ITT Hartford following the
Distribution. Effective as of the Distribution Date, New ITT will adopt the ITT
Sheraton Salaried Retirement Plan as the New ITT Salaried Employees
42
<PAGE> 49
Retirement Plan (the "New ITT Salaried Retirement Plan"), and New ITT will
maintain such Plan following the Distribution.
Each of the ITT Industries Salaried Retirement Plan, the New ITT Salaried
Retirement Plan and the ITT Hartford Retirement Plan will be amended to
recognize all service rendered on or prior to the Distribution Date with other
ITT companies for all purposes of determining eligibility, vesting and benefit
accrual and to further provide for an offset of any benefit payable from any
other ITT retirement plan covering the same period of service. Each such plan
will be further amended to recognize post-Distribution Date service with other
ITT companies for purposes of eligibility and vesting.
EXCESS BENEFIT PLANS
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation that may be recognized under a tax-qualified retirement
plan. Accordingly, ITT currently maintains a non-qualified retirement plan (the
"ITT Excess Pension Plan") for payment of those benefits at retirement that
cannot be paid from the ITT Salaried Retirement Plan. In addition, ITT maintains
a "rabbi trust" (the "ITT Excess Pension Plan Trust") to fund excess retirement
benefits for its officers. The Hartford and ITT Sheraton maintain similar
non-qualified retirement plans, and The Hartford maintains a similar rabbi trust
for certain plan members.
Applicable Federal legislation also limits the annual contributions that an
employee can make to a tax-qualified savings plan. Accordingly, ITT and ITT
Hartford each currently maintain non-qualified excess savings plans which enable
employees who are precluded by these limitations from contributing to tax-
qualified plans to make up any shortfall through salary deferrals.
It is expected that, as of the Distribution Date, each of ITT Industries,
New ITT and ITT Hartford will assume all liability for benefits that have
accrued as of the Distribution Date under the excess pension plans and excess
savings plans with respect to each of their respective employees, except that,
to the extent such benefits are funded under an excess pension plan trust
maintained by another company, such assumption of liability shall be effective
only if and to the extent that such employee waives his or her right to receive
such benefits under such other excess pension plan and related excess pension
plan trust (in which case such employee would receive his or her benefits from
similar plans maintained by his or her employer).
Although the liabilities associated with the rabbi trusts are funded, the
assets in such trusts are subject to the claims of creditors. After considering
various alternatives with respect to providing additional security for both
funded and unfunded excess plan benefits, ITT has determined that, with respect
to the period after the Distribution Date, ITT Industries, New ITT and ITT
Hartford will enter into an agreement to provide joint and several guarantees to
employees and retirees who are participants in any of the existing excess
pension plans and excess savings plans as of the Distribution Date for
obligations accrued as of the Distribution Date and will further provide for
indemnification in favor of the company required to provide excess benefit
payments pursuant to such guarantee. See "RELATIONSHIP BETWEEN ITT INDUSTRIES,
NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT".
RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS
ITT currently maintains an employee welfare benefit program that includes
retiree medical and life insurance benefits for certain of its salaried
employees and certain hourly employees. ITT salaried retirees, as of June 30,
1995, currently covered for such benefits numbered approximately 7,500. Retiree
medical and life insurance benefits for these retirees, including retirees who
were employed by companies no longer affiliated with ITT, will remain the
responsibility of ITT Industries after the Distribution Date. The Hartford and
ITT Destinations (through its subsidiaries) each maintains a separate employee
welfare benefit program that also includes retiree medical and life insurance
benefits for certain of their respective salaried employees. The Hartford
salaried retirees and ITT Destinations salaried retirees currently covered for
such benefits numbered approximately 4,100 and 450, respectively, as of June 30,
1995. ITT Hartford and New ITT, as applicable, will continue to be responsible
for providing benefits to these retirees. After the Distribution Date, each of
ITT Industries, New ITT and ITT Hartford will also assume the responsibility for
providing retiree medical and
43
<PAGE> 50
life insurance benefits to their respective employees and future retirees
pursuant to applicable plans, including plans for hourly employees and others.
ITT is required to reflect in its financial statements a reasonable
estimate of the present value of the liabilities associated with retiree medical
and life insurance benefits. As of December 31, 1994, the actuarially computed
value of these liabilities (the Accumulated Postretirement Benefit Obligation,
or the "APBO") amounted to $679 million, of which $191 million has been funded
through various trust arrangements, leaving a net unfunded APBO of $488 million.
Based on the allocation of the responsibility of these benefits described above,
the portion of the net unfunded APBO allocable to ITT Industries, New ITT and
ITT Hartford is $271 million, $23 million and $194 million, respectively. ITT
has previously established reserves to provide for the net unfunded APBO, which
reserves will be apportioned among ITT Industries, New ITT and ITT Hartford in
accordance with the Employee Benefits Services and Liability Agreement.
Effective as of the Distribution Date, ITT Industries, New ITT and ITT
Hartford will enter into the Employee Benefits Services and Liability Agreement
pursuant to which ITT Industries, New ITT and ITT Hartford will agree that, upon
the occurrence of a change in corporate control (as defined in the Employee
Benefits Services and Liability Agreement) of ITT Industries, New ITT or ITT
Hartford, as applicable, during the ten-year period immediately following the
Distribution, the company at which a change in control occurred will not reduce
or eliminate, during the balance of such ten-year period, medical benefits (or
increase associated retiree contributions) provided to individuals who were
retirees as of the Distribution Date unless the other companies consent to such
reduction or elimination, except that the company in respect of which a change
in control occurred may, in its sole discretion, modify such benefits in
accordance with the changes contemplated in the assumptions that were used to
establish the APBO in effect immediately preceding the change in control. See
"RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE
DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". This portion of the Agreement may
tend to restrict the flexibility of ITT Industries, New ITT and ITT Hartford to
take steps to manage costs associated with retiree medical benefits after a
change in corporate control. Accordingly, the Agreement may limit the financial
flexibility of ITT Industries, New ITT and ITT Hartford during its term. This
portion of the agreement may also make the acquisition of control of ITT
Industries, New ITT and ITT Hartford more difficult or less likely to occur.
The Employee Benefits Services and Liability Agreement expressly provides
that there are no third-party beneficiaries to that Agreement (although the
Agreement will provide for direct guarantees to employees and retirees of ITT
Industries, New ITT and ITT Hartford with respect to certain excess plan
benefits as discussed above). Accordingly, retirees of ITT and others will have
no right to enforce the Agreement and thus should not rely in any respect on the
agreement by ITT Industries, New ITT and ITT Hartford to maintain a level of
retiree medical benefits for a specified period of time either before or after a
change in corporate control or the other agreements specified therein.
OTHER
Pursuant to the Employee Benefits Services and Liability Agreement between
ITT Industries, New ITT and ITT Hartford, which will be effective as of the
Distribution Date, the liability of ITT for the employee benefits matters
discussed above and certain other matters will be allocated among ITT
Industries, New ITT and ITT Hartford. See "RELATIONSHIP BETWEEN ITT INDUSTRIES,
NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT".
As a result, each of ITT Industries, New ITT and ITT Hartford will have certain
direct and indirect liabilities and obligations to certain individuals who were
employed by ITT prior to the Distribution Date, including ITT retirees.
44
<PAGE> 51
AMENDMENT OF THE RESTATED CERTIFICATE
OF INCORPORATION OF ITT
Approval of Proposal Seven will constitute approval of the amendments to
the Restated Certificate of Incorporation of ITT discussed under this heading.
Approval of Proposal Seven is being sought because provisions of state corporate
law require such approval. Accordingly, if Proposal Seven is not approved by the
shareholders the proposed amendments could not occur.
NAME CHANGE
Shareholders will be asked to vote to amend the Restated Certificate of
Incorporation of ITT to change the name of ITT Corporation to ITT Industries,
Inc. effective only if the Distribution occurs. Immediately prior to or
simultaneous with the Distribution, the name of ITT Destinations, Inc. will be
changed to ITT Corporation. Shareholders are being asked to vote to so amend the
Restated Certificate of Incorporation of ITT so that New ITT will be able to
conduct its business under the name ITT Corporation. It would not be possible
for two publicly traded companies to have the same name.
Shareholders are also being asked to vote to so amend the Restated
Certificate of Incorporation of ITT to allow New ITT to conduct its business
under the name ITT Corporation in the event ITT Industries remains incorporated
in Delaware (which would be necessary if Proposal Two is not approved).
REMOVAL OF GAMING LICENSE PROVISION
After the Distribution, ITT (renamed ITT Industries) will no longer be in
the gaming business. Accordingly, shareholders of ITT will be asked to vote to
amend the Restated Certificate of Incorporation of ITT, effective only if the
Distribution occurs, to remove certain provisions that had been included therein
solely because of ITT's gaming operations and will not be relevant after the
Distribution.
Article 7 of ITT's Restated Certificate of Incorporation provides that (i)
all securities of ITT are subject to redemption by ITT to the extent necessary
to prevent the loss, or to secure the reinstatement, of any casino gaming
license held by ITT or any of its subsidiaries in any jurisdiction within or
without the United States of America, (ii) all securities of ITT are held
subject to the condition that if a holder thereof is found by a gaming authority
in any such jurisdiction to be disqualified or unsuitable pursuant to any gaming
law, such holder will be required to dispose of all securities of ITT held by
such holder and (iii) it will be unlawful for any such disqualified person to
(A) receive payments of interest or dividends on any ITT securities, (B)
exercise, directly or indirectly, any rights conferred by any securities of ITT
or (C) receive any remuneration in any form, for services rendered or otherwise,
from the subsidiary that holds the gaming license in such jurisdiction. The full
text of Article 7 is attached as Annex F hereto.
A provision comparable to such Article will be included in the Articles of
Incorporation of New ITT after the Distribution. See "DESCRIPTION OF NEW ITT
CAPITAL STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS".
45
<PAGE> 52
RELATIONSHIP BETWEEN ITT INDUSTRIES,
NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION
New ITT is wholly owned by ITT, and the results of operations of its
subsidiaries have been included in ITT's consolidated financial results. After
the Distribution, ITT Industries will not have any ownership interest in New
ITT, and New ITT will be an independent public company. Furthermore, except as
described below, all contractual relationships existing prior to the
Distribution between ITT and New ITT 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.
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 New ITT 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 New ITT and
ITT Hartford will be terminated except for commercial relationships in the
ordinary course of business.
Prior to the Distribution, ITT, New ITT 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, New ITT
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, New ITT and ITT Hartford.
Copies of the forms of such agreements will be filed as exhibits to the
Registration Statements of each of New ITT and ITT Hartford in respect of the
registration of the New ITT Common Stock and the ITT Hartford Common Stock under
the Exchange Act. In addition, ITT intends to file a Current Report on Form 8-K
in connection with the Distribution, and the agreements either will be filed as
exhibits to such Report or will be included in a later filing by ITT under the
Exchange Act. See "AVAILABLE INFORMATION". The following description summarizes
certain terms of such agreements, but is qualified by reference to the texts of
such agreements, which are incorporated herein by reference.
DISTRIBUTION AGREEMENT
ITT, New ITT and ITT Hartford will enter into the Distribution Agreement
providing for, among other things, certain corporate transactions required to
effect the Distribution and other arrangements between ITT Industries, New ITT
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 Distribution Date, 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 New ITT 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 not described
in the immediately preceding sentence to or among ITT Industries, New ITT and
ITT Hartford.
46
<PAGE> 53
The Distribution Agreement will provide that New ITT 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, New ITT 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, New
ITT nor ITT Hartford will take any action that would jeopardize the intended tax
consequences of the Distribution. Specifically, each of ITT Industries, New ITT
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 Date.
Neither ITT Industries, New ITT 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, New ITT 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, New ITT 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 Distribution Date 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 New ITT (including,
without limitation, any attorney or financial advisor fees owing to attorneys or
financial advisors retained by New ITT 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 Date.
INTELLECTUAL PROPERTY AGREEMENT
ITT (ITT Industries), New ITT 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, New ITT or ITT Hartford
and their respective subsidiaries and associated companies as of the
Distribution Date. The purpose of these IP Agreements is to provide ITT, New ITT
and ITT Hartford and their respective subsidiaries and associated companies with
those continuing rights and licenses under such Intellectual Property following
the Distribution Date 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 (ITT Industries) 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 Date, subject to the maintenance of certain quality standards
for their products and services and other conditions in accordance with the
terms of the IP Agreements, and (ii) a transfer from ITT to New ITT 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, New ITT and ITT Hartford will enter into a Tax Allocation
Agreement to the effect that New ITT and ITT Hartford will pay their respective
shares of ITT's (ITT Industries') consolidated tax liability for the tax years
that New ITT and ITT Hartford, as applicable, were included in ITT's (ITT
Industries') consolidated Federal income tax return. The Tax Allocation
Agreement will also provide for sharing, where appropriate, of state, local and
foreign taxes attributable to periods prior to the Distribution Date, as well as
certain other matters.
47
<PAGE> 54
EMPLOYEE BENEFITS AGREEMENT
ITT Industries, New ITT 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, New ITT and ITT Hartford. The Agreement will provide for the
treatment described above of certain retirement plans for salaried employees,
investment and savings programs, excess benefit plans, retiree medical and life
insurance benefits and stock awards. See "EMPLOYEE BENEFITS AND COMPENSATION
MATTERS". In addition, the Agreement will provide that, as of the Distribution
Date, each of ITT Industries, New ITT 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, New ITT 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, New ITT 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 Date, there will be individuals on the Boards of
Directors of ITT Industries, New ITT and ITT Hartford who will also serve on the
Board of Directors of one or both of the other companies. See "ITT INDUSTRIES
MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD OF DIRECTORS",
"NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT BOARD OF DIRECTORS"
and "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD BOARD OF
DIRECTORS".
DIVIDEND POLICY
ITT INDUSTRIES DIVIDEND POLICY
The payment and level of cash dividends by ITT Industries after the
Distribution will be subject to the discretion of the Board of Directors of ITT
Industries. Although it is anticipated that ITT Industries will initially
declare quarterly dividends of $.15 per share, dividend decisions will be based
on, and affected by, a number of factors, including the operating results and
financial requirements of ITT Industries on a stand-alone basis. Although there
can be no assurance that dividends will be paid, and no dividends have been
declared, management of ITT Industries believes that its cash flows after the
Distribution should be sufficiently strong, after giving effect to the
Distribution, that, barring unforeseen circumstances, the initial dividend rate
can be maintained for the foreseeable future.
NEW ITT DIVIDEND POLICY
New ITT does not intend to pay cash dividends on New ITT Common Stock for
the foreseeable future after the Distribution.
ITT HARTFORD DIVIDEND POLICY
In addition to being subject to regulatory approval thresholds, the payment
and level of cash dividends by ITT Hartford after the Distribution will be
subject to the discretion of the Board of Directors of ITT Hartford. Although it
is anticipated that ITT Hartford will initially declare quarterly dividends of
$.40 per share, dividend decisions will be based on, and affected by, a number
of factors, including the operating results and financial requirements of ITT
Hartford on a stand-alone basis and the impact of the regulatory restrictions
discussed below under "BUSINESS OF ITT HARTFORD AFTER THE
DISTRIBUTION -- HOLDING COMPANY; LIMITATION ON DIVIDENDS". Although there can be
no assurance that dividends will be paid, and no dividends have been declared,
management of ITT Hartford believes that its cash flows after the Distribution
should be sufficiently strong, after giving effect to the Distribution, that,
barring unforeseen circumstances, the initial dividend rate can be maintained
for the foreseeable future.
48
<PAGE> 55
DIVIDENDS AND PRICE RANGE OF ITT COMMON STOCK
The ITT Common Stock is listed and traded on the NYSE and the PSE. The
following table reflects for the periods subsequent to the spin-off of Rayonier
Inc. ("Rayonier") in February 1994 the high and low sales prices per share of
ITT Common Stock, as reported on the NYSE Composite Tape. Such prices prior to
the spin-off of Rayonier have been adjusted by a factor to reflect the value of
Rayonier. The table also sets forth the cash dividends paid per share of ITT
Common Stock in the period actually paid.
<TABLE>
<CAPTION>
PRICE RANGE OF
ITT COMMON STOCK CASH
DIVIDENDS
------------------ PAID ON ITT
HIGH LOW COMMON STOCK
------ ------- ------------
<S> <C> <C> <C>
1993
First Quarter...................................... $73.55 $62.65 $ .495
Second Quarter..................................... 78.77 70.14 .495
Third Quarter...................................... 86.03 76.04 .495
Fourth Quarter..................................... 86.15 78.77 .495
1994
First Quarter...................................... 94.66 80.25 $ .495
Second Quarter..................................... 90.75 81.13 .495
Third Quarter...................................... 87.13 78.63 .495
Fourth Quarter..................................... 90.38 77.00 .495
1995
First Quarter...................................... 104 86.63 .495
Second Quarter..................................... 119.50 99.63 .495
Third Quarter (through August 10, 1995)............ 121.88 112.00 .495
</TABLE>
In connection with its approval (subject to the satisfaction of the
conditions to the Distribution discussed under "THE DISTRIBUTION -- CONDITIONS
TO THE DISTRIBUTION" below and the actual declaration of the dividend in respect
of the Distribution) of the Distribution, the Board of Directors of ITT has
determined that ITT will not pay any additional cash dividend on the ITT Common
Stock prior to the currently anticipated Distribution Date of December 31, 1995.
On June 12, 1995, the last trading day before ITT announced that, subject
to the matters in the previous paragraph, its Board of Directors had approved
the Distribution, the high and low sales prices for ITT Common Stock on the NYSE
Composite Tape were $109.88 and $109, respectively. On August , 1995, the last
trading day for which quotations were available at the time of the printing of
this Proxy Statement, the closing price for ITT Common Stock on the NYSE
Composite Tape was $ . SHAREHOLDERS ARE URGED TO OBTAIN CURRENT TRADING
PRICE INFORMATION. ITT Common Stock is also listed on the following exchanges:
U.S. regional exchanges, Amsterdam, Antwerp, Basel, Bern, Brussels, Frankfurt,
Geneva, Lausanne, London, Paris, Vienna and Zurich.
For a discussion of the impact of the Distribution on the trading price of
ITT Industries Common Stock, see "THE DISTRIBUTION -- CERTAIN FACTORS AFFECTING
TRADING PRICES". For a discussion of the dividend policy of ITT Industries, New
ITT and ITT Hartford after the Distribution, see "DIVIDEND POLICY".
There has not been any established public trading market for New ITT Common
Stock or ITT Hartford Common Stock. For a discussion of certain matters in
respect thereof, see "THE DISTRIBUTION -- LISTING AND TRADING OF ITT INDUSTRIES
COMMON STOCK, NEW ITT COMMON STOCK AND ITT HARTFORD COMMON STOCK".
49
<PAGE> 56
ITT INDUSTRIES
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The following 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 anticipated
Distribution Date), including future results of operations and other events. For
purposes of this forecasted capitalization, net income in the last six months of
1995 is assumed to approximate the same level as the comparable 1994 period
before the effects of the debt tender offer as discussed below. In addition,
restructuring plans associated with the Distribution are currently being
developed and may result in an additional charge to equity of $50 million to
$100 million. Events reflected in the forecasted capitalization that have
occurred or are assumed to occur between June 30, 1995 and December 31, 1995,
include the following:
- - The completion of the sale of assets of ITT Financial which was merged into
ITT in May 1995. Gross proceeds of $12.8 billion are assumed and through July
31, 1995, $12.0 billion of gross proceeds have been received. Agreements for
the sale or monetization of an additional $.3 billion in assets have been
negotiated. Net proceeds, after repayment of ITT Financial debt and payment of
related income taxes, are expected to approximate $1.3 billion.
- - The repayment by the ITT Investment and Savings Plan of ESOP debt which
totalled $541 million at June 30, 1995. The ESOP portion of the ITT Investment
and Savings Plan was terminated by ITT and the unallocated converted shares of
ITT Common Stock were sold by the trustee during July 1995.
- - The sale of certain non-strategic assets resulting in debt reduction of
approximately $90 million, for which negotiations are in progress.
- - The exercise of 2.8 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 $200 million.
- - Completion of a tender offer and consent solicitation for all ITT public
indebtedness maturing after December 31, 1995. The tender offer was completed
on July 21, 1995, and resulted in the payment of a tender premium of
approximately $300 million after tax and an extraordinary loss on the
retirement of indebtedness tendered of $300 million. Although the amount of
indebtedness on the balance sheet will increase by the premium paid, the net
interest expense associated with the new principal amount of indebtedness is
expected to decrease relative to the interest expense paid by ITT before the
tender offer, since the weighted average interest rate on the new principal
amount of indebtedness is expected to be substantially below the weighted
average interest rate on the indebtedness prior to the tender offer.
- - Receipt of a dividend from ITT Hartford of approximately $270 million.
- - The use of $300 million in cash balances at various subsidiaries of ITT
Industries to repay existing short-term borrowings, primarily in Germany.
- - Net capital expenditures totalling $300 million in the last six months of 1995
($275 million was incurred in the comparable 1994 period).
- - Conversion into ITT Common Stock of the 482,000 shares of the ITT Series N
Preferred Stock which will result in an additional 611,000 common shares
outstanding based on June 30, 1995 data.
In ITT management's judgment, the listed assumptions and forecasts reflect
those material events or transactions that occurred since June 30, 1995, or are
expected to occur prior to the Distribution, other than the potential
restructuring charge discussed in the first paragraph above. There have been no
changes in accounting principles anticipated in this capitalization forecast nor
are any such changes currently contemplated.
* * * *
50
<PAGE> 57
LIMITATIONS ON PROJECTIONS AND FORECASTS
The assumptions and estimates underlying the projected and forecasted data
and information in this Proxy Statement 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 PROXY STATEMENT TO UPDATE ANY FORECASTED OR
PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT 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 PROXY STATEMENT.
51
<PAGE> 58
ITT INDUSTRIES FORECASTED CAPITALIZATION
The following table sets forth the consolidated capitalization of ITT
Industries as of June 30, 1995 on a historical basis, forecasted as to December
31, 1995 (the anticipated Distribution Date), and as adjusted to give effect to
the Distribution and the transactions contemplated thereby, including the
allocation of amounts of indebtedness discussed under "THE
DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The significant
assumptions used below have been described in "ITT INDUSTRIES SUMMARY OF
SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding two pages. The
following data is qualified in its entirety by the financial statements of ITT
Industries and other information contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
(A) (A)(B)
FORECASTED PRO FORMA
JUNE 30, 1995 AT DECEMBER 31, AFTER
ACTUAL 1995 DISTRIBUTION
-------------- --------------- -------------
($ IN MILLIONS)
<S> <C> <C> <C>
Cash and Cash Equivalents.............................. $ 411 $ 111 $ 111
=========== ============ =========
Debt, excluding ESOP Debt.............................. 1,832 1,866 1,866
ESOP Debt.............................................. 541 -- --
Cumulative Preferred Stock............................. 648 -- --
Common Stock........................................... 106 119 119
Capital Surplus........................................ -- 831 831
Deferred Compensation -- ESOP.......................... (541) -- --
Cumulative Translation Adjustment...................... (14) (14) (14)
Unrealized Loss on Securities, Net of Tax.............. (149) (149) --
Retained Earnings...................................... 7,462 7,612 140
-------------- --------------- -------------
Total Capitalization......................... $ 9,885 $10,265 $ 2,942
=========== ============ =========
</TABLE>
- ---------------
(a) See "ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST
ASSUMPTIONS" on the preceding two pages.
(b) Column gives effect to the distribution of ITT Hartford Common Stock and New
ITT Common Stock (book values of $4.5 billion and $2.8 billion,
respectively) and the allocation of amounts of indebtedness contemplated by
"THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The unrealized
loss on securities, net of tax, relates solely to the investment portfolios
at ITT Hartford and is included in the forecasted capitalization of ITT
Hartford after the Distribution. See "ITT HARTFORD FORECASTED
CAPITALIZATION".
52
<PAGE> 59
NEW ITT
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The following financial forecast of the capitalization of New ITT 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 anticipated
Distribution Date), including future results of operations and other events. For
purposes of this forecasted capitalization, net income in the last six months of
1995 is assumed to approximate the same level as the comparable 1994 period.
Assumptions with respect to events that will occur between June 30, 1995 and
December 31, 1995, include the following:
- The sale of certain non-strategic assets resulting in debt reduction of
approximately $400 million. Negotiations are in progress for the sale of
assets with an estimated fair value of approximately $500 million.
- The completion of the planned independent financing of a hotel joint
venture project in which New ITT provided the initial funding. The
independent financing contemplated in 1995 would have the effect of
reducing debt by $110 million.
- The transfer to New ITT, through ITT Industries, of approximately 4.3
million shares of Alcatel Alsthom at net carrying value which was $380
million at June 30, 1995.
- Net capital expenditures totalling $175 million in the last six months of
1995 ($327 million was incurred in the comparable 1994 period).
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 Proxy Statement 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 PROXY STATEMENT TO UPDATE ANY FORECASTED OR
PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND
THE ABSENCE OF SUCH AN UPDATE SHOULD NOT BE CONSTRUED AS ANY INDICATION
REGARDING THE VIEWS OF MANAGEMENT OF ITT (OR OF NEW ITT AFTER THE DISTRIBUTION)
CONCERNING THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS
PROXY STATEMENT.
53
<PAGE> 60
NEW ITT FORECASTED CAPITALIZATION
The following table sets forth the consolidated capitalization of New ITT
as of June 30, 1995 on a historical basis, forecasted as to December 31, 1995
(the anticipated Distribution Date), and as adjusted to give effect to the
Distribution and the transactions contemplated thereby, including the allocation
of the amount of indebtedness discussed under "THE DISTRIBUTION -- TREATMENT OF
CERTAIN DEBT INSTRUMENTS". The significant assumptions used below have been
described in "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST
ASSUMPTIONS" on the preceding page. The following data is qualified in its
entirety by the financial statements of New ITT and other information contained
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
(A) (A)(B)
FORECASTED PRO FORMA
JUNE 30, 1995 AT DECEMBER 31, AFTER
ACTUAL 1995 DISTRIBUTION
-------------- ---------------- --------------
($ IN MILLIONS)
<S> <C> <C> <C>
Cash and Cash Equivalents......................... $ 384 $ 184 $ 184
=========== ============ ==========
Debt from Non-Affiliated Entities(c).............. 835 976 3,644
Investments and Advances from ITT Industries
(ITT)(c)........................................ 5,806 5,510 --
Common Shares and Capital Surplus................. -- -- 2,842
Minority Interest................................. 244 244 244
------- ------- -------
Total Capitalization.............................. $6,885 $6,730 $6,730
=========== ============ ==========
</TABLE>
- ---------------
(a) See "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on
the preceding page.
(b) Column gives effect to the distribution of New ITT Common Stock and the
transfer of various long-term debt agreements to New ITT as contemplated by
"THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS".
(c) Prior to the Distribution, New ITT financed its operations with
interest-bearing debt from both external and internal sources. Debt from
non-affiliated entities represents external borrowings, while Investments
and Advances from ITT Industries (ITT) represents internal sources of
capital.
54
<PAGE> 61
ITT HARTFORD
SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS
The following financial forecast of the capitalization of ITT Hartford 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 anticipated
Distribution Date), including future results of operations and other events. For
purposes of this forecasted capitalization, net income in the last six months of
1995 is assumed to approximate the same level as the comparable 1994 period.
Assumptions with respect to events that will occur between June 30, 1995 and
December 31, 1995, include the following:
- The transfer to New ITT, through ITT Industries, of approximately 4.3
million shares of Alcatel Alsthom at net carrying value which was $380
million at June 30, 1995.
- A dividend to ITT Industries of approximately $270 million.
- Redemption of the remainder of ITT Hartford's currently outstanding
preferred stock with new borrowings totalling $86 million.
- Additional borrowings of approximately $220 million by December 31, 1995.
- No change in the unrealized loss on securities, net of tax, between June
30, 1995 and December 31, 1995.
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 Proxy Statement 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 PROXY STATEMENT TO UPDATE ANY FORECASTED OR
PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND
THE ABSENCE OF SUCH AN UPDATE SHOULD NOT BE CONSTRUED AS ANY INDICATION
REGARDING THE VIEWS OF MANAGEMENT OF ITT (OR OF ITT HARTFORD AFTER THE
DISTRIBUTION) CONCERNING THE FORECASTED OR PROJECTED DATA OR INFORMATION
CONTAINED IN THIS PROXY STATEMENT.
55
<PAGE> 62
ITT HARTFORD FORECASTED CAPITALIZATION
The following table sets forth the consolidated capitalization of ITT
Hartford as of June 30, 1995 on a historical basis, forecasted as to December
31, 1995 (the anticipated Distribution Date), and as adjusted to give effect to
the Distribution and the transactions contemplated thereby. The significant
assumptions used below have been described in "ITT HARTFORD SUMMARY OF
SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding page. The
following data is qualified in its entirety by the financial statements of ITT
Hartford and other information contained elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
(A) (A)(B)
FORECASTED PRO FORMA
JUNE 30, 1995 AT DECEMBER 31, AFTER
ACTUAL 1995 DISTRIBUTION
-------------- --------------- ---------
($ IN MILLIONS)
<S> <C> <C> <C>
Cash................................................ $ 112 $ 112 $ 112
====== ====== ======
Short-Term Debt..................................... 915 1,220 1,220
Long-Term Debt...................................... 598 598 598
Subsidiary Preferred Stock.......................... 86 -- --
Common Stock and Capital Surplus.................... 1,610 1,610 1,610
Cumulative Translation Adjustments.................. 79 79 79
Unrealized Loss on Securities, Net of Tax........... (149) (149) (149)
Retained Earnings................................... 3,267 2,941 2,941
------ ------ ------
Total Capitalization................................ $6,406 $ 6,299 $ 6,299
====== ====== ======
</TABLE>
- ---------------
(a) See "ITT HARTFORD SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST
ASSUMPTIONS" on the preceding page.
(b) Column gives effect to the distribution of ITT Hartford Common Stock.
56
<PAGE> 63
ITT INDUSTRIES SELECTED FINANCIAL AND OPERATING DATA
The following data is qualified in its entirety by the financial statements
of ITT Industries and other information contained elsewhere in this Proxy
Statement. The financial data as of December 31, 1994 and 1993, and for the
years ended December 31, 1994, 1993 and 1992, has been derived from the audited
financial statements of ITT Industries (currently ITT Corporation) contained
elsewhere in this Proxy Statement. The financial data as of June 30, 1995 and
1994, and December 31, 1991 and 1990, for the six months ended June 30, 1995 and
1994, and for the years ended December 31, 1991 and 1990, are unaudited. The
Distribution has been recorded as a discontinuance of the businesses of New ITT
and ITT Hartford in the consolidated financial statements of ITT Industries
contained herein. The following financial and operating data 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 Notes thereto appearing
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
($ IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales........................................ $ 4,585 $ 3,727 $ 7,758 $ 6,621 $ 6,845 $ 6,430 $ 6,972
Income from Continuing Operations................ $ 91(7) $ 98 $ 202 $ 135 $ 655(1) $ 231 $ 521
Income from Continuing Operations per Share
Primary........................................ $ .69(7) $ .68 $ 1.46 $ .83 $ 5.34 $ 1.58 $ 3.82
Fully Diluted.................................. $ .69(7) $ .69 $ 1.46 $ .88 $ 4.77 $ 1.58 $ 3.63
BALANCE SHEET DATA:
Total Assets..................................... $13,450 $11,868 $11,035 $12,981 $12,560 $13,283 $12,810
Long-Term Debt, including Capital Leases......... $ 871 $ 2,006 $ 1,712 $ 1,994 $ 2,272 $ 2,323 $ 2,357
Debt excluding Discontinued Operations........... $ 2,373 $ 2,614 $ 2,640 $ 2,971 $ 2,792 $ 2,717 $ 2,657
Stockholders Equity per Common Share............. $ 65.87 $ 56.51 $ 58.10 $ 58.94 $ 54.63 $ 69.47 $ 64.01
OPERATING DATA:
Operating Income................................. $ 242 $ 181 $ 418 $ 229 $ 19 $ 158 $ 305
EBITDA(2)........................................ $ 451 $ 366 $ 791 $ 552 $ 334 $ 453 $ 564
Cash from Continuing Operating Activities(3)..... $ 395 $ 145 $ 637 $ 628 $ 633 $ 702 $ 455
Cash Dividends Declared per Common Share(4)...... $ 0.99 $ 0.99 $ 1.98 $ 1.98 $ 1.84 $ 1.72 $ 1.63
Orders on Hand(5)................................ $ 3,866 $ 3,392 $ 3,713 $ 3,443 $ 3,861
Number of Employees (in thousands)............... 58 50 53 55 60
PRO FORMA DATA(6):
Total Assets..................................... $ 6,266
Stockholders Equity per Common Share............. $ 7.30
Income from Continuing Operations per Common
Share.......................................... $ 0.76(7) $ 1.70
</TABLE>
- ---------------
(1) Includes $622 million after tax gain from the sale of the equity interest in
Alcatel N.V.
(2) 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 from operating activities (as
determined on the Consolidated Cash Flow Statements in ITT Industries'
Consolidated Financial Statements contained herein.)
(3) Amounts are as determined on the Consolidated Cash Flow Statements in ITT
Industries' Consolidated Financial Statements contained herein.
(4) Represents the actual cash dividends declared per share by ITT.
(5) Orders on hand reflects contracts representing firm contractual commitments
as of the respective period (i.e., backlog).
(6) Pro forma data is prepared assuming that the Distribution was completed at
the beginning of each period presented. All per share amounts were prepared
assuming 119 million shares outstanding. Such number of shares assumes
conversion of all common stock equivalents and preferred stock issuances. In
addition, the pro forma data assumes the retirement of indebtedness and the
elimination of deferred compensation relating to the ESOP feature of the ITT
Investment and Savings Plan. The ESOP feature of the ITT Investment and
Savings Plan has been terminated. This information should be read in
conjunction with "ITT INDUSTRIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS" (including, without limitation, the information under the
heading "-- LIMITATIONS ON PRO FORMA FINANCIAL INFORMATION"), as well as
"ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS".
(7) Includes $29 million after tax, or $0.25 ($0.24 pro forma) per fully diluted
share, for provisions for the planned disposal of ITT Semiconductors and a
portion of ITT Community Development Corporation.
57
<PAGE> 64
NEW ITT SELECTED FINANCIAL AND OPERATING DATA
The following data is qualified in its entirety by the financial statements
of ITT Destinations and other information contained elsewhere in this Proxy
Statement. The financial data as of December 31, 1994 and 1993, and for the
years ended December 31, 1994, 1993 and 1992, has been derived from the audited
financial statements of ITT Destinations contained elsewhere in this Proxy
Statement. The pro forma financial information for the six months ended June 30,
1995, and 1994 were prepared as detailed in Note (1) below. A black line
separates the historical financial information presented below from the pro
forma financial information. The financial data as of June 30, 1995 and 1994,
and December 31, 1991 and 1990, for the six months ended June 30, 1995 and 1994,
and for the years ended December 31, 1991 and 1990, are unaudited. The
historical financial statements of New ITT contained in this Proxy Statement are
presented as if New ITT were a separate entity for all periods presented. The
pro forma financial data for the six months ended June 30, 1995 and 1994, are
unaudited. The following financial and operating data should be read in
conjunction with the information set forth under "NEW ITT UNAUDITED PRO FORMA
COMBINED INCOME STATEMENTS", "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and New ITT's Combined Financial
Statements and Notes thereto appearing elsewhere in this Proxy Statement. For a
discussion of certain important limitations and related assumptions concerning
the pro forma financial data contained below, see "NEW ITT UNAUDITED PRO FORMA
COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO
FORMA FINANCIAL INFORMATION".
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA SIX MONTHS
SIX MONTHS SIX MONTHS ENDED
ENDED ENDED JUNE 30, YEAR ENDED DECEMBER 31,
JUNE 30, JUNE 30, --------------- ------------------------------------------
1995(1) 1994(1) 1995 1994 1994 1993 1992 1991 1990
---------- ---------- ------ ------ ------ ------ ------ ------ ------
($ IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................... $3,064 $2,761 $2,982 $2,116 $4,760 $4,169 $4,253 $3,855 $3,966
Income before Accounting
Changes..................... $ 53 $ 37 $ 74 $ 39 $ 2 $ 43 $ 20
Pro Forma Income before
Accounting Changes per
Share(2).................... $ .45 $ .31 $ .62 $ .33 $ .02 $ .36 $ .17
BALANCE SHEET DATA:
Total Assets.................. $8,221 $3,755 $5,012 $3,791 $3,375 $2,462 $2,222
Long-Term Debt, including
Capital Leases.............. $ 667 $ 107 $ 600 $ 169 $ 186 $ 160 $ 120
Pro Forma Stockholders Equity
per Common Share(3)......... $19.97
OPERATING DATA:
Operating Income.............. $ 268 $ 158 $ 265 $ 128 $ 292 $ 142 $ 34 $ 126 $ 121
EBITDA(4)..................... $ 383 $ 285 $ 374 $ 179 $ 396 $ 222 $ 81 $ 163 $ 147
Cash from Operating
Activities(5)............... $ 243 $ 195 $ 234 $ 93 $ 230 $ 186 $ 143 $ 133 $ 4
Number of Employees (in
thousands).................. 35 19 25 18 18 20 19
</TABLE>
- ---------------
(1) The pro forma financial information assumes that the acquisitions of CWI,
the 70.3% interest in Ciga, certain other hotel properties and MSG in
partnership with another entity were completed on January 1, 1995, or
January 1, 1994, as applicable. Such information may not be indicative of
the results that would have occurred if the acquisitions had been completed
on January 1, 1995, or January 1, 1994. This information should be read in
conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS"
(including, without limitation, the information under the heading
"-- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL
INFORMATION"), as well as "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
(2) Pro forma per share income before accounting changes was computed assuming
the issuance of 119 million shares of New ITT Common Stock in the
Distribution for all periods presented above. Such number of shares assumes
conversion of all common stock equivalents and preferred stock issuances.
58
<PAGE> 65
(3) Pro forma stockholders equity per common share was computed assuming the
issuance of 119 million shares of New ITT Common Stock in the Distribution.
Such number of shares assumes conversion of all common stock equivalents and
preferred stock issuances. Stockholders equity is assumed to be equal to the
Investments and Advances from ITT Industries, Inc. (see New ITT's Combined
Financial Statements contained herein) less the amount deemed to be interest
bearing.
(4) EBITDA is presented here as an alternative measure of the ability of New ITT
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 Combined Cash Flow Statements in New ITT's Combined
Financial Statements contained herein).
(5) Amounts are as determined on the Combined Cash Flow Statements in New ITT's
Combined Financial Statements contained herein. Cash from operating
activities, as defined by Statement of Financial Accounting Standards
("SFAS") No. 95, differs from EBITDA largely due to the inclusion of
interest, income taxes and changes in working capital.
59
<PAGE> 66
ITT HARTFORD SELECTED FINANCIAL AND OPERATING DATA
The following data is qualified in its entirety by the financial statements
of ITT Hartford and other information contained elsewhere in this Proxy
Statement. The financial data as of December 31, 1994 and 1993, and for the
years ended December 31, 1994, 1993 and 1992, has been derived from the audited
financial statements of ITT Hartford contained elsewhere in this Proxy
Statement. The financial data as of June 30, 1995 and 1994, and December 31,
1991 and 1990, for the six months ended June 30, 1995 and 1994, and for the
years ended December 31, 1991 and 1990, are unaudited. The historical financial
statements of ITT Hartford contained in this Proxy Statement are presented as if
ITT Hartford were a separate entity for all periods presented. The following
financial and operating data should be read in conjunction with "ITT HARTFORD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and ITT Hartford's Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- -------
($ IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................... $ 5,919 $ 5,367 $11,102 $10,338 $ 9,862 $ 9,242 $ 8,836
Income (Loss) before
Accounting Changes........ $ 245 $ 292 $ 632 $ 537 $ (274) $ 431 $ 328
Pro Forma Income before
Accounting Changes per
Share(1).................. $ 2.06 $ 2.45 $ 5.31 $ 4.51 $ (2.30) $ 3.62 $ 2.76
BALANCE SHEET DATA:
Total Assets................ $86,831 $69,282 $76,765 $66,179 $54,180 $37,771 $32,014
Long-Term Debt, including
Capital Leases............ $ 598 $ 582 $ 596 $ 579 $ 576 $ 594 $ 63
Pro Forma Stockholders
Equity per Common
Share(1).................. $ 40.39
OPERATING DATA:
Worldwide Combined
Ratio(2)(3)(4)............ 105.9 104.1 102.8 105.9 114.8 111.3 109.7
Number of Employees
(in thousands)............ 20 21 21 21 21
</TABLE>
- ---------------
(1) Pro forma per share income before accounting changes and stockholders equity
per common share were computed assuming the issuance of 119 million shares
of ITT Hartford Common Stock in the Distribution for all periods presented.
Such number of shares assumes conversion of all common stock equivalents and
preferred stock issuances.
(2) "Combined ratio" is a common industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the ratio of
incurred losses and loss adjustment expenses to premiums earned (the "loss
ratio") and the ratio of underwriting expenses incurred to premiums written
(the "expense ratio"). A combined ratio under 100% generally indicates an
underwriting profit; a combined ratio over 100% generally indicates an
underwriting loss. Federal income taxes, investment income, policy
acquisition costs and other non-underwriting expenses are not reflected in
the combined ratio.
(3) For the periods after 1992, the combined ratios exclude the results of the
First State Insurance Companies ("First State"), a group of entities that
ceased writing new and renewal business at the end of 1992. Additionally,
the 1992 combined ratio excludes the impact of $900 million of
reserve-strengthening actions taken to address loss developments in surplus
lines and reinsurance at First State and $250 million of legal defense costs
associated with environmental-related claims. Including the impact of these
actions, the combined ratio for 1992 was 133.7.
(4) For the six months ended June 30, 1995, the combined ratio includes the
impact of excess catastrophe losses and a provision for the estimated
settlement related to Dow Corning breast implant claims. Excluding these
items, the combined ratio for the six months ended June 30, 1995, would have
been 103.9.
60
<PAGE> 67
COMPARATIVE FINANCIAL INFORMATION
The following table reflects, in comparative columnar format, certain
financial information for ITT Industries, New ITT and ITT Hartford as of June
30, 1995. The table reconciles certain June 30, 1995 historical financial
information of ITT with that of ITT Industries, New ITT and ITT Hartford. Such
table also reconciles certain December 31, 1994, historical income statement
data of ITT with that of ITT Industries, New ITT and ITT Hartford. This table
only reflects historical financial information (except that ITT Industries data
gives effect to the Distribution as if it had occurred at the beginning of each
period presented) and does not reflect any events and transactions that are
expected to occur between June 30, 1995, and the Distribution Date, except for
the termination of the ESOP which was completed in July 1995. Accordingly, the
capitalization of ITT Industries, New ITT and ITT Hartford will be different as
of the Distribution Date. For a presentation of the forecasted capitalizations
of ITT Industries, New ITT and ITT Hartford, see "ITT INDUSTRIES FORECASTED
CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION" and "ITT HARTFORD
FORECASTED CAPITALIZATION" and the related assumptions.
<TABLE>
<CAPTION>
(A) (B)
ITT INDUSTRIES NEW ITT ITT HARTFORD OTHER ITT
-------------- ------- ------------ ------ --------
($ IN MILLIONS, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets at June 30, 1995....... $6,266 $8,221 $ 86,831 $ 44 $101,362
Stockholders' Equity at June 30,
1995............................. $ 869 $2,377 $ 4,807 $ (541) $ 7,512
Stockholders' Equity per share at
June 30, 1995.................... $ 7.30 $19.97 $ 40.39 $(1.79) $ 65.87
INCOME STATEMENT DATA:
Income from Continuing Operations:
Six months ended June 30, 1995... $ 91 $ 53 $ 245 $ -- $ 389
Per share(d)................... $ 0.76 $ 0.45 $ 2.06 $ -- $ 3.27
Year ended December 31, 1994..... $ 202 $ 74 $ 632 $ (56) $ 852
Per share(d)................... $ 1.70 $ 0.62 $ 5.31 $(0.47) $ 7.16
Net Income:
Six months ended June 30, 1995... $ 542(c) $ 53 $ 245 $ -- $ 840
Per share(d)................... $ 4.55 $ 0.45 $ 2.06 $ -- $ 7.06
Year ended December 31, 1994..... $ 321 $ 74 $ 644 $ (17) $ 1,022
Per share(d)................... $ 2.70 $ 0.62 $ 5.41 $(0.14) $ 8.59
</TABLE>
- ---------------
(a) The data in this column, with respect to the June 30, 1995 balance sheet
data, reflects the impact of the ESOP termination which was completed in
July 1995. The data in this column, with respect to the December 31, 1994
income statement data, reflects interest costs associated with carrying the
previously discontinued Finance and Forest Products segments of ITT and the
cumulative effect of changes in accounting principles reflected on ITT's
historical financial statements.
(b) Represents historical financial information as previously reported in public
filings by ITT.
(c) Includes $451 million related to the operating results of ITT Financial and
the gain on the sale of ITT Financial.
(d) All per share amounts were prepared assuming 119 million shares outstanding.
61
<PAGE> 68
ITT INDUSTRIES UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet of ITT
Industries, Inc. as of June 30, 1995, gives effect to the Distribution and the
conversion of the issued and outstanding shares of preferred stock to common
shares and the termination of the ESOP. The Unaudited Pro Forma Consolidated
Income Statements of ITT Industries for the year ended December 31, 1994 and the
six months ended June 30, 1995, present the results of operations of ITT
Industries as if the Distribution and the conversion of the issued and
outstanding shares of preferred stock to common shares and the termination of
the ESOP were completed at the beginning of each period.
The Unaudited Pro Forma Consolidated Financial Statements are based on the
historical financial statements of ITT Industries and the assumptions and
adjustments set forth in the accompanying Notes to Unaudited Pro Forma
Consolidated Financial Statements.
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1995
($ IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets............................................. $ 2,999 $ -- $ 2,999
Net assets of discontinued operations...................... 7,184 (7,184) --
Other assets............................................... 3,267 -- 3,267
---------- ----------- ---------
Total assets..................................... $ 13,450 $(7,184) $ 6,266
======= ========= ========
Current liabilities........................................ $ 3,502 $ (541) $ 2,961
Other liabilities.......................................... 2,436 -- 2,436
Stockholders equity --
Cumulative preferred stock............................ 648 (648) --
Common stock.......................................... 106 11 117
Paid-in capital....................................... -- 637 637
Deferred compensation -- ESOP......................... (541) 541 --
Cumulative translation adjustments.................... (14) -- (14)
Unrealized gain (loss) on securities.................. (149) 149 --
Retained earnings..................................... 7,462 (7,333) 129
---------- ----------- ---------
7,512 (6,643) 869
---------- ----------- ---------
Total liabilities and equity..................... $ 13,450 $(7,184) $ 6,266
======= ========= ========
Pro forma equity per common share.......................... $ 7.30
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Statements
62
<PAGE> 69
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1994
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<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
Other...................................................... 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
======= ========= ========
Pro Forma earnings per fully diluted share:
Income from continuing operations................................................. $ 1.70
Net income........................................................................ $ 2.70
</TABLE>
ITT INDUSTRIES
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1995
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................................. $4,585 $ -- $ 4,585
Cost of sales.............................................. 3,954 -- 3,954
Selling, general, administrative and other operating
expenses................................................. 389 -- 389
Interest expense, net...................................... 59 -- 59
Other...................................................... 30 -- 30
---------- ----------- ---------
153 -- 153
Income tax expense......................................... (62) -- (62)
---------- ----------- ---------
Income from continuing operations.......................... 91 -- 91
Discontinued operations:
Results of operations, net of tax..................... 346 (298) 48
Gain on disposition, net of tax....................... 403 -- 403
---------- ----------- ---------
Net income................................................. $ 840 $(298) $ 542
======= ========= ========
Pro Forma earnings per fully diluted share:
Income from continuing operations................................................. $ 0.76
Net income........................................................................ $ 4.55
</TABLE>
See accompanying Notes to Unaudited Pro Forma Financial Statements
63
<PAGE> 70
NOTES TO ITT INDUSTRIES 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 New ITT 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
New ITT 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 termination of the ESOP and corresponding retirement of ESOP debt
and related deferred compensation.
- The conversion of all preferred stock into common stock and the
corresponding increase to common stock and paid-in-capital.
- The elimination of the income, including cumulative effects of
accounting changes, of New ITT and ITT Hartford.
PER SHARE AMOUNTS
Earnings per fully diluted share assumes 119 million shares of ITT
Industries Common Stock outstanding in all periods. This represents ITT's fully
diluted shares outstanding at June 30, 1995.
* * * *
LIMITATIONS ON PRO FORMA FINANCIAL INFORMATION
The pro forma financial information contained in this Proxy Statement 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 Proxy Statement and these limitations.
64
<PAGE> 71
NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
The following Unaudited Pro Forma Combined Income Statements of New ITT for
the year ended December 31, 1994, and the six months ended June 30, 1995, give
effect under the purchase method of accounting to the acquisitions of CWI, MSG
in partnership with another entity, the 70.3% interest in Ciga and other luxury
hotel properties. The Unaudited Pro Forma Combined Income Statements are based
on the historical financial statements of these entities and the assumptions and
adjustments set forth in the accompanying Notes to the Unaudited Pro Forma
Combined Income Statements and below.
The Unaudited Pro Forma Combined Income Statements assume the acquisitions
were consummated on January 1, 1994. The pro forma adjustments are based on the
terms of the acquisitions which, among other things, provide:
- CWI -- In January 1995, CWI shareholders received $67.50 in cash for each
share of CWI common stock. New ITT made cash payments totaling $1,754
million to CWI shareholders and incurred $10 million in expenses for the
transaction.
- MSG -- In March 1995, New ITT's interest in MSG required an initial
investment of $610 million which is expected to be reduced by $250
million in 1996, as contemplated by the terms of the agreement related to
the acquisition of MSG.
- Ciga and other luxury hotel properties -- New ITT paid $523 million for a
70.3% interest in Ciga and $550 million for three other hotels. These
properties were acquired at various times during 1994.
The pro forma adjustments reflect acquisition financing costs to the extent
such interest expense is not included in the historical statements. For purposes
of developing the adjustment to depreciation and amortization, assets and
liabilities have been recorded at their fair market values and the excess
purchase price has been assigned to goodwill.
The MSG acquisition was made through a partnership with Cablevision Systems
Corporation for approximately $1 billion and accounted for under the equity
method. MSG recorded its assets and liabilities at their fair market values and
the excess purchase price was assigned to goodwill. The Unaudited Pro Forma
Combined Income Statements include New ITT's share of MSG's results, including
the amortization of the excess purchase price.
The New ITT Unaudited Pro Forma Combined Income Statements do not take into
account any benefits that have or may result from these acquisitions as a result
of cost savings and synergies that may be derived from the elimination of
duplicate efforts or other factors.
65
<PAGE> 72
NEW ITT
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1994
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CIGA AND
EQUITY OTHER HOTEL PRO FORMA PRO FORMA
HISTORICAL CWI IN MSG ACQUISITIONS ADJUSTMENTS COMBINED
---------- ------ ------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $4,760 $1,005 $ -- $196 $ -- $ 5,961
Costs and expenses before
depreciation
and amortization................... 4,336 812 -- 168 -- 5,316
Depreciation & Amortization.......... 132 57 -- 30 16 235
---------- ------ ------ ------ ----------- ---------
Operating Income..................... 292 136 -- (2) (16) 410
Interest expense, net................ (131) (15) -- (8) (143) (297)
Other................................ (17) -- (29) (5) -- (51)
Income tax (expense) benefit......... (58) (45) 10 (7) 51 (49)
Minority (income) loss............... (12) -- -- 7 -- (5)
---------- ------ ------ ------ ----------- ---------
Net Income (Loss).................... $ 74 $ 76 $(19) $(15) $(108) $ 8
======= ====== ====== ========= ========= ========
Pro Forma Earnings per share......... $0.62 $0.07
</TABLE>
NEW ITT
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1995
($ IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY PRO FORMA PRO FORMA
HISTORICAL CWI IN MSG ADJUSTMENTS COMBINED
---------- --- ------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $2,982 $82 $ -- $ -- $3,064
Costs and expenses before depreciation and
amortization................................... 2,589 73 -- -- 2,662
Depreciation & Amortization...................... 128 4 -- 2 134
---------- --- ------ ----------- ----------
Operating Income................................. 265 5 -- (2) 268
Interest expense, net............................ (157) (1 ) -- (21) (179)
Other............................................ 9 -- (1) -- 8
Income tax (expense) benefit..................... (55) (3 ) 1 7 (50)
Minority (Income) loss........................... (9) -- -- -- (9)
---------- --- ------ ----------- ----------
Net Income (Loss)................................ $ 53 $1 $ -- $ (16) $ 38
======= ==== ====== ========= ========
Pro Forma Earnings per share..................... $0.45 $0.32
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Income Statements
66
<PAGE> 73
NOTES TO NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS
In addition to the historical results of New ITT, CWI, MSG, Ciga and such
other hotel properties for the respective periods presented, the Unaudited Pro
Forma Combined Income Statements reflect the following:
CWI
- The CWI column on the 1995 pro forma income statement reflects the 1995
results of CWI prior to the date of acquisition and before purchase
accounting adjustments.
- CWI's results for 1994 were depressed due to an abnormally low table game
win percentage at Caesars Palace in Las Vegas. The table game win
percentage at CWI's casinos has been reasonably predictable over the
long-term, but may vary considerably over the short-term because of the
significant amount of high-wagering play. In 1994, CWI experienced lower
table game win percentages at Caesars Palace as a result of unusually
large losses to a small number of table game customers. If operating
margins were at a normalized rate based on the average for the three
previous fiscal years, operating income would have been $159 million.
This adjustment is not reflected in the CWI column or for 1994.
MSG
- The acquisition of MSG was completed on March 10, 1995, in partnership
with Cablevision Systems Corporation for $1 billion. MSG has recorded
goodwill representing the excess of the fair value over the assets
acquired which is being amortized over 40 years on a straight-line basis.
The amortization of such goodwill and of other intangibles is included in
the Equity in MSG column. New ITT has a 50% voting interest in MSG, and,
accordingly, the acquisition is accounted for on the equity method.
- The MSG column on the 1994 pro forma income statement reflects New ITT's
equity in MSG's 1994 losses, including amortization of goodwill. The
column on the 1995 pro forma income statement reflects New ITT's equity
in MSG's 1995 losses, including amortization of goodwill, prior to the
date of acquisition.
OTHER ACQUISITIONS
The acquisitions of the 70.3% interest in Ciga and other luxury hotels
within the Hotel operations (including the Phoenician and Crescent hotels in
Scottsdale, Arizona and the Park Grand in Australia) were made at different
times during 1994. Therefore, the 1994 historical results of New ITT include the
results of Ciga and these luxury hotels from their respective acquisition dates
along with the related purchase accounting adjustments (comprised primarily of
additional goodwill amortization). The Ciga and Other Hotel Acquisition column
on the 1994 pro forma statement represents the 1994 results of these hotels
prior to the dates of acquisition and before purchase accounting adjustments.
PRO FORMA ADJUSTMENTS
- The recorded values of CWI's assets and liabilities approximated fair
market value as of the acquisition date except for: (1) land whose
estimated fair value was $250 million in excess of its recorded value and
(2) goodwill representing the excess of the fair value over the assets
acquired. Amortization of goodwill is on a straight-line basis over 40
years. A Federal income tax benefit was not provided on goodwill
amortization as no basis step-up is allowable for tax purposes.
- Interest cost on the acquisition financing was calculated based on the
acquisitions being funded with approximately 50% debt and 50% advances
from ITT Industries (ITT). Interest on the debt is 8%, the rate ITT
Industries (ITT) charges New ITT on interest bearing advances. A Federal
income tax benefit computed at the statutory rate is also reflected.
- The pro forma adjustments column on the 1994 income statement reflects a
full year of the acquisition financing costs to the extent not reflected
in the historical results.
67
<PAGE> 74
PER SHARE AMOUNTS
Earnings (loss) per share assumes 119 million shares of New ITT Common
Stock outstanding in all periods. This represents ITT's fully diluted shares
outstanding at June 30, 1995.
* * * *
LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION
The assumptions and estimates underlying the projected and forecasted data
or information in this Proxy Statement 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 PROXY STATEMENT TO UPDATE ANY FORECASTED OR
PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND
THE ABSENCE OF SUCH AN UPDATE SHOULD NOT BE CONSTRUED AS ANY INDICATION
REGARDING THE VIEWS OF MANAGEMENT OF ITT (OR OF NEW ITT AFTER THE DISTRIBUTION)
CONCERNING THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS
PROXY STATEMENT. THERE IS NO PROJECTED OR FORECASTED INFORMATION IN THE
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS ABOVE. THIS IMPORTANT PARAGRAPH
IS INCLUDED HERE FOR EASE OF REFERENCE WHEN PROJECTED OR FORECASTED DATA IN
RESPECT OF NEW ITT IS INCLUDED ELSEWHERE IN THIS PROXY STATEMENT.
In addition, the pro forma financial information contained in this Proxy
Statement 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 New ITT in the future. Pro forma information
in respect of New ITT assumes that the acquisitions of CWI, the 70.3% interest
in Ciga, certain other hotel properties and MSG in partnership with another
entity were completed at the beginning of the relevant reporting period.
The Unaudited Pro Forma Combined Income Statements and projected,
forecasted and pro forma financial data contained in this Proxy Statement should
be read in conjunction with, and are qualified by, information set forth under
"NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" and New ITT's Combined Financial Statements and Notes thereto
appearing elsewhere in this Proxy Statement and these limitations.
68
<PAGE> 75
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 New
ITT 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 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.
ITT Automotive is one of the largest independent suppliers of 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 ("TCS") systems, 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
69
<PAGE> 76
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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
Net income from continuing operations of $91 million or $0.69 per fully
diluted share declined 7%, compared with the $98 million or $0.69 per fully
diluted share reported in the 1994 period. The decline was caused by an
after-tax provision of $29 million or $0.25 per fully diluted share for the
expected loss on the disposal of ITT Semiconductors (a business unit that
manufactures and produces semiconductors) and a portion of ITT Community
Development Corporation (a business unit that develops real estate). Excluding
this provision, net income was $120 million or $0.94 per fully diluted share, a
22% 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 due to
higher volumes in a number of product lines and the favorable impact of
continuing cost reduction programs. Income from discontinued operations totaled
$749 million (including $403 million reflecting the gain on the sale of ITT
Financial) and $373 million for the first six months of 1995 and 1994,
respectively, and represents the results of ITT Hartford, New ITT, ITT Financial
and, in 1994, Rayonier. Net income was $840 million or $7.08 per fully diluted
share, compared with $460 million or $3.51 per fully diluted share in the 1994
period.
Net sales totaling $4.6 billion rose 23% with improvements at Automotive,
Defense & Electronics and Fluid Technology. Excluding the ESI contribution, net
sales improved 16%. Gross margin approximated 14% in the 1995 period and 15% in
the 1994 period due to higher material costs, while selling, general and
administrative expenses decreased to 7.4% 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 of ITT
before the Distribution. Such services represent advice and assistance in
connection with cash management, legal, accounting, tax and insurance services
and charges totaled $44 million and $35 million in the 1995 and 1994 first six
months, respectively. The fees for these services, which are based upon a
general relations agreement, approximate 1% of ITT Industries' sales. See "Plan
of Distribution" note to ITT Industries Consolidated Financial Statements
herein. 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, which include gains and losses from foreign exchange
transactions and other charges, totaled $6 million in the 1995 period, compared
with $37 million in the 1994 period. Operating margins (excluding service
charges from affiliated companies) rose to 6.2% in the six months, up from 5.8%
in the first six months of 1994, a result of the factors discussed above.
Interest expense, net, benefited in the 1994 period from interest income
totaling $32 million on a note receivable from the sale of Alcatel N.V. in 1992.
Excluding interest income in both periods, interest expense increased to $80
million compared with $63 million in 1994, reflecting higher borrowings in
connection with the March 1994 ESI acquisition and capital additions.
Miscellaneous Income (Expense) includes the provision for the expected loss
on the disposal of ITT Semiconductors and a portion of ITT Community Development
Corporation. The effective income tax rate approximated 41% in the 1995 and 1994
periods. Income tax expense decreased by $7 million, to $62 million in the 1995
period, due to the lower pretax earnings.
70
<PAGE> 77
Business Segments -- Sales and operating income before service charges from
affiliated companies for each of ITT Industries' three major business segments
were as follows for the first six months of 1995 and 1994 ($ in millions):
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- --------------
SIX MONTHS SIX MONTHS
----------------- --------------
1995 1994 1995 1994
------ ------ ---- ----
<C> <C> <S> <C> <C> <C>
$3,028 $2,283 ............... Automotive.................... $205 $164
</TABLE>
Automotive's 1995 six month 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>
OPERATING
SALES INCOME
----------------- --------------
SIX MONTHS SIX MONTHS
----------------- --------------
1995 1994 1995 1994
------ ------ ---- ----
<C> <C> <S> <C> <C> <C>
$ 762 $ 753 ............... Defense & Electronics......... $ 45 $ 37
</TABLE>
At Defense & Electronics, 1995 six 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 $2.2 billion at
both June 30, 1995 and 1994.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- --------------
SIX MONTHS SIX MONTHS
----------------- --------------
1995 1994 1995 1994
------ ------ ---- ----
<C> <C> <S> <C> <C> <C>
$ 605 $ 519 ............... Fluid Technology.............. $ 47 $ 38
</TABLE>
At Fluid Technology, 1995 six month sales and operating income increased at
all units, most significantly at Flygt due to higher volume and favorable
foreign exchange.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Net income was $1.022 billion or $8.02 per fully diluted share, compared
with $913 million or $6.90 per fully diluted share 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
or $.09 per fully diluted share 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 or $.29 per fully diluted share. 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 or $.33 per fully diluted share. 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 or $.13 per fully
diluted share. The 1993 net income was adversely impacted by an extraordinary
loss of $50 million after tax or $.38 per fully diluted share resulting from the
retirement of fixed rate debt.
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
71
<PAGE> 78
impact of ongoing cost reduction programs in all businesses to contribute 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. See "Plan of Distribution" note to ITT
Industries Consolidated Financial Statements herein. 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 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>
$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.
<TABLE>
<CAPTION>
OPERATING
SALES INCOME
----------------- --------------
1994 1993 1994 1993
------ ------ ---- ----
<S> <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
72
<PAGE> 79
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>
$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. ITT 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 ($6.90 per fully diluted share) compared
with a net loss in 1992 of $885 million (($6.90) per fully diluted share). The
1993 net income was adversely impacted by an extraordinary loss of $50 million
after tax, or $.38 per fully diluted share, 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 or $4.71
per fully diluted share. In July 1992, ITT Industries (ITT) 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) or $4.71 per fully
diluted share. 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 closedown 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.
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.
73
<PAGE> 80
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>
$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>
$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>
$1,030 $1,070.............................. Fluid Technology ... $ 95 $ 67
</TABLE>
Sales at Fluid Technology were $40 million lower than in 1992 due primarily
to a stronger U.S. dollar versus many currencies of the European countries in
which Fluid Technology operates. Growth in markets including water and
wastewater treatment, power generation, exports and new products was largely
offset by weak market conditions in such industries as construction, industrial
process, oil and gas, mining and leisure marine. Despite sales pressures,
operating income in 1993 improved at all businesses and benefited from the
impact of cost improvement actions taken in 1992, including the consolidation of
facilities to reduce excess capacity. In 1992, provisions for restructuring,
along with devaluation of the Swedish krona, adversely impacted operating
income.
ALCATEL N.V.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Equity in Earnings of Alcatel N.V. ($ in millions).............. -- -- $97
</TABLE>
ITT Industries (ITT) 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
74
<PAGE> 81
value of $806 million and are included in the net assets of Discontinued
Operations. ITT Industries (ITT) 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>
FOR THE SIX
MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, DECEMBER 31,
------------- -----------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
New ITT.............................................. $ 53 $ 37 $ 74 $ 39 $ 2
ITT Hartford......................................... 245 292 632 537 (274)
ITT Financial........................................ 48 32 113 199 (571)
ITT Rayonier......................................... -- 12 12 53 (72)
---- ---- ---- ---- -----
Total Discontinued Operations...................... $346 $373 $831 $828 $(915)
==== ==== ==== ==== =====
</TABLE>
The Board of Directors of ITT has approved (subject to the satisfaction of
the conditions to the Distribution discussed under "THE
DISTRIBUTION -- CONDITIONS TO THE DISTRIBUTION" and the actual declaration of
the dividend in respect of the Distribution) a plan to distribute to its
shareholders all outstanding shares of common stock of New ITT and ITT Hartford.
Under the proposed plan, New ITT (to be renamed ITT Corporation) and ITT
Hartford will become independent, publicly-traded companies in which ITT
Industries will not retain any equity interest. The accompanying financial
statements reflect these businesses as discontinued operations in all periods
presented. ITT Financial and Rayonier, which were previously discontinued, are
also included in discontinued operations in the appropriate periods.
LIQUIDITY AND CAPITAL RESOURCES
ITT Industries generated EBITDA (defined as earnings before interest,
taxes, depreciation and amortization) of $451 million in the six months ended
June 30, 1995, compared with $366 million in the comparable 1994 period, a 23%
improvement. EBITDA is expected to continue to grow in the balance of 1995, but
at a slower pace than in the first six months of 1995 where the comparison
benefited from the March 1994 ESI acquisition. 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 improvements are a result of ITT
Industries' earnings growth, primarily in the Automotive business segment which
benefited from the ESI acquisition. Cash from continuing operating activities as
defined by Statement of Financial Accounting Standards ("SFAS") No. 95 increased
to $395 million in the six months ended June 30, 1995, compared with $145
million in the comparable 1994 period. 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. The improvement reflects the
improved operating results discussed above as well as timing differences with
respect to tax payments and receipts and working capital requirements. In each
of the full years of 1994, 1993 and 1992, cash from continuing operating
activities exceeded $600 million.
In 1995, ITT Industries realized $11.7 billion of proceeds through June 30
from the sale of assets at ITT Financial. From July 1, 1995 through July 31,
1995, ITT completed additional sales of assets of ITT Financial for $.3 billion
in cash, and all the proceeds from these transactions were used to repay ITT
Financial indebtedness. Funds of $853 million were generated in 1994 from the
sale of divested assets, primarily 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 Industries
businesses have generated sufficient operating cash flow to fund such
expenditures. Gross plant additions totaled $165 million in the first six months
of 1995, with approximately 60% of that total incurred at
75
<PAGE> 82
Automotive, primarily in ABS and traction control technology. At June 30, 1995,
contractual commitments have been made for additional capital expenditures
totalling $264 million in 1995 and an additional $513 million in future years.
Spending on capital expenditures for the 1994 six months was $124 million, two-
thirds 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.
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 six 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 the limitations
discussed under "DIVIDEND POLICY", a dividend to shareholders. Working capital
needs in the first six 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 at ITT Industries were $2.4 billion at June 1995
compared with $2.6 billion at December 1994 and $3.0 billion at December 1993.
Cash and cash equivalents of $411 million at June 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 $826 million during the first six months of
1995, excluding the SFAS No. 115 impact, due to growth in retained earnings but
decreased $0.7 billion in 1994 mainly as the result of share repurchases ($1.0
billion), dividends ($0.3 billion) and the spin-off of Rayonier ($0.6 billion),
which were partly offset by 1994 net income.
ITT terminated the ESOP portion of the ITT Investment and Savings Plan and
in July 1995 the trustee of the ESOP completed the sale of 5.3 million
unallocated shares of ITT Common Stock in the ESOP. The sales proceeds will be
used to repay the debt associated with the ESOP, which totaled $541 million at
June 30, 1995. In addition, proceeds from the sale of ITT Financial assets as
well as other non-strategic assets are expected to continue to be used to repay
outstanding borrowings. Management of ITT expects to capitalize
76
<PAGE> 83
ITT Industries in a manner similar to comparable companies following the
Distribution. See "ITT INDUSTRIES FORECASTED CAPITALIZATION." In connection
therewith, ITT expects that it will allocate an aggregate of $2.7 billion of its
indebtedness to New ITT. See "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT
INSTRUMENTS".
In connection with the allocation, ITT recently announced that it has
successfully completed a tender offer for an aggregate of $4.1 billion of its
debt securities, with an estimated $3.4 billion of the aggregate principal
amount of the debt securities having been tendered. The premium paid for the
indebtedness resulted in an after tax accounting loss of approximately $300
million ($460 million pretax). Although the amount of indebtedness on the
balance sheet will increase by the premium paid, the net interest expense
associated with the new principal amount of indebtedness is expected to decrease
relative to the interest expense paid by ITT before the tender offer, since the
weighted average interest rate on the new principal amount of indebtedness is
expected to be substantially below the weighted average interest rate on the
indebtedness prior to the tender offer. On an economic basis, the present value
cost of the tender offer and reissuance of indebtedness is expected to
approximately equal the present value cost of leaving the indebtedness
outstanding. The tender offer was financed with the proceeds of commercial paper
borrowings by ITT of approximately $3.7 billion. Management expects to refinance
these commercial paper obligations, and then allocate the indebtedness, prior to
the Distribution Date, through proceeds of new borrowings by New ITT and ITT
Industries, as applicable. These obligations could be in the form of commercial
paper borrowings, bank borrowings or public or private financings or any
combination of the foregoing.
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 New ITT 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 and the
Comprehensive Environmental Response, Compensation and Liability Act. 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
77
<PAGE> 84
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 theoretically 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 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
AFTER THE DISTRIBUTION -- 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.
78
<PAGE> 85
NEW ITT 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 as if New ITT were a separate entity for all periods
discussed.
BACKGROUND AND BUSINESS CONDITIONS
ITT Destinations, Inc. (to be renamed ITT Corporation after the
Distribution and hereafter referred to as "New ITT"), combines the world's
largest hotel and gaming company with a premier sports and entertainment company
and information services businesses to create a dynamic and rapidly growing
enterprise. Management of ITT projects that New ITT will generate pro forma
(i.e., assuming all acquisitions during 1994 and 1995 had been consummated on
January 1, 1994) revenues of approximately $6.5 billion in 1995 and pro forma
operating income before interest, taxes, depreciation and amortization
("EBITDA") of approximately $875 million in 1995. The projected pro forma EBITDA
for 1995 would represent a 36% increase over EBITDA in 1994 also determined on a
pro forma basis (i.e., assuming all acquisitions during 1994 and 1995 had been
consummated on January 1, 1994). For a discussion of certain important
limitations and related assumptions concerning this projected and other pro
forma financial data and ITT management's belief as to future results, see "NEW
ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON
PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
ITT completed the acquisition of one of the world's most recognized gaming
companies, CWI, in January 1995. In March 1995, ITT also acquired the well-known
New York Knickerbockers and New York Rangers sports franchises and the Madison
Square Garden arena, through its investment in MSG. In addition, the acquisition
in 1994 of 70.3% of Ciga and other key hotel properties enhanced ITT's
geographic balance along with its image and profile. These acquisitions have
helped to create a formidable hotel, gaming and entertainment company that is a
leader in its served markets. Furthermore, in August 1995, ITT, in partnership
with Dow Jones & Co. ("Dow Jones") agreed to purchase television station WNYC-TV
from New York City. The purchase, subject to approval by the Federal
Communications Commission and other customary conditions, is expected to close
in early 1996. Together, ITT and Dow Jones hope to transform the station into a
nationally-broadcast business and sports television station based in New York
City. The purchase price of $207 million will be split evenly by the two
companies and the partnership will be managed on a 50/50 basis.
New ITT also operates a telephone directory publishing business for
telephone subscribers outside the United States, as well as in Puerto Rico and
the U.S. Virgin Islands, a United States-based provider of post-secondary career
education, and will own approximately 6% of Alcatel Alsthom, a French
telecommunications equipment company, as of the Distribution Date.
Through the ITT Sheraton brand name, New ITT is represented in most major
markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton
in 60 countries. When including visitors to CWI and Madison Square Garden, and
customers of the Information Services companies, New ITT will provide services
to over 100 million people in a year. ITT Sheraton, which has been a wholly
owned subsidiary of ITT since 1968, is a worldwide hospitality network of
approximately 420 owned, leased, managed and franchised properties including
hotels, casinos and inns. Gaming operations are marketed under the Caesars World
and ITT Sheraton brand names and are represented in Las Vegas, Atlantic City,
Halifax (Nova Scotia), Sydney (Nova Scotia), Lake Tahoe, Tunica County
(Mississippi), Lima (Peru), Cairo, Windsor (Ontario) and Townsville (Australia).
The Information Services segment consists of an 80% interest in ITT World
Directories, a directory publishing business, and an 83% interest in ITT
Educational, a provider of postsecondary degree technical education. As of June
30, 1995, ITT Educational operated 55 ITT Technical Institutes in 25 states for
approximately 20,000 students.
New ITT's revenues, operating income and EBITDA have historically been
lowest in the first quarter and highest in the fourth quarter, the result of
seasonality in the Hotels segment and the timing of the directory publishing
schedule at ITT World Directories. In the Gaming segment, CWI's results have not
been particularly seasonal (as a result of its mix of gaming jurisdictions);
however, such results have been volatile
79
<PAGE> 86
as a result of the nature of high limit baccarat wagering. These seasonality
factors are not expected to differ significantly in 1995, although there can be
no assurance the historical seasonality trends will continue. The following
table reflects the historical seasonality of New ITT:
<TABLE>
<CAPTION>
PERCENT OF TOTAL YEAR
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues
1994...................... 18% 26% 23% 33% 100%
1993...................... 19% 28% 24% 29% 100%
EBITDA
1994...................... 13% 30% 24% 33% 100%
1993...................... 12% 31% 24% 33% 100%
</TABLE>
Operating performance in the Hotels segment is cyclical and fluctuates to
some degree based on general economic conditions as well as specific factors
affecting relevant local markets. In the Gaming segment, operating performance
is impacted by, among other things, competition in the markets in which ITT
operates and increased competition is likely as other states and countries
authorize casino gaming. Certain casino analysts, however, believe that such
competition will be beneficial to established markets. Management of ITT
generally concurs with such belief. In the Information Services segment, ITT
World Directories has historically been the sole provider of yellow page
directories in specific markets and has performed its services on behalf of the
local telephone companies. In 1994, ITT World Directories began competing with
another directory publisher in The Netherlands and, in 1995, began competing
with the national telephone company in that country. Such competition could
adversely impact the operating results of ITT World Directories, although there
has been no adverse impact to date. The higher education industry is usually
counter-cyclical to the health of the national economy, with student enrollment
softening in periods of strong job creation. ITT Educational continues to grow
through new school openings and added curricula and management of ITT believes
it is well positioned to benefit from the expected rise in high school graduates
entering the work force over the next ten years (as currently forecasted by the
U.S. Department of Labor).
A substantial portion of the remaining discussion and analysis of results
of operations relates to the historical periods of New ITT which, for the most
part, do not include the results of the acquisitions completed in late 1994 and
the 1995 first quarter. The unaudited pro forma combined income statements of
New ITT appearing elsewhere in this Proxy Statement for the year ended December
31, 1994, and the six months ended June 30, 1995, give effect to these
acquisitions as if they had been completed on January 1, 1994. See "NEW ITT
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS". This pro forma information
relates to a large degree to periods prior to New ITT's ownership and does not
take into account synergies that may be derived or ongoing cost reduction
efforts. The following table sets forth unaudited pro forma results for the six
months ended June 30, 1995 compared with unaudited pro forma results for the six
months ended June 30, 1994:
<TABLE>
<CAPTION>
REVENUES EBITDA OPERATING INCOME
-------------------------------- -------------------------------- --------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 30, % 30, 30, % 30, 30, %
1995 1994 CHANGE 1995 1994 CHANGE 1995 1994 CHANGE
---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels...................... $1,994 $1,822 9% $163 $130 25% $102 $ 65 57%
Gaming...................... 676 566 19 123 92 34 77 47 64
Information Services........ 394 373 6 113 82 38 100 65 54
Corporate Overhead, MSG, and
Minority.................. -- -- -- (16) (19) -- (29) (21) --
-- -- --
---------- ---------- ----- ----- ----- -----
$3,064 $2,761 11% $383 $285 34% $250 $156 60%
========= ========= ====== ========= ========= ====== ========= ========= ======
</TABLE>
The unaudited pro forma financial information presented above assumes that
the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel
properties and MSG in partnership with another entity were
80
<PAGE> 87
completed on January 1, 1994. Such information may not be indicative of the
results that would have occurred if the acquisitions were completed on January
1, 1994.
RESULTS OF OPERATIONS
All per share amounts are computed based on New ITT net income divided by
119 million shares of New ITT Common Stock, the estimated number of shares to be
outstanding after the Distribution.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
Revenues of $2,982 million in the 1995 six months increased 41% compared to
the 1994 six months levels, reflecting the contribution of CWI and other
significant hotel acquisitions completed during and subsequent to the 1994 six
months along with higher room rates in all major hotel divisions. CWI revenues
totalled $417 million in the period while Ciga and other acquisitions
contributed $247 million. Excluding these acquisitions, revenues increased 10%.
Average daily rates of owned, leased and managed hotels improved 13% to $124 in
the 1995 six months.
Salaries, benefits and other operating costs increased 31% in the 1995 six
month period, representing the costs of the acquired properties and smaller
increases in the cost of services. Overall, salaries, benefits and other
operating costs represented 74% of revenues to date in 1995, down from 80% in
the comparable 1994 period, as higher average rates and occupancy outpaced the
increase in direct costs. In addition, improved performance in the Information
Services segment, representing lower telephone company fees in Belgium and
favorable foreign exchange experience, contributed to the favorable results.
Selling, general and administrative expenses include $54 million in the
1995 six months and $59 million in the 1994 six months, representing overhead
expenses related to world headquarters management and supervision of the
entities comprising ITT before the Distribution. These expenses are reflected
and charged out of New ITT since this entity includes many of the corporate
personnel and functions that are expected to remain with New ITT after the
Distribution. Of these amounts, $52 million and $43 million were charged in the
respective periods to affiliated companies (ITT Hartford and ITT Industries) and
represent fees for advice and assistance provided by New ITT in connection with
cash management, legal, accounting, tax and insurance services. The fees for
these services are based upon a general relations agreement with each affiliate.
See "Basis of Presentation" note to the New ITT Combined Financial Statements
herein. Excluding these overhead expenses and related service fee income,
selling, general and administrative expenses increased approximately 69% in the
1995 six month period due primarily to the overhead of the acquired companies
and hotels.
Operating income rose 107% in the period reflecting the impact of the
acquisitions discussed above, along with a 13% improvement in the average room
rates of owned, leased and managed hotels. The 1995 first quarter was the first
full quarter that Ciga was under New ITT's control and operating income included
an $11 million loss. Ciga generated operating income of $17 million in the 1995
second quarter. Excluding these acquisitions, operating income increased 45% in
the 1995 six months on higher average room rates in all major hotel divisions
and the aforementioned improvement in Information Services. Depreciation and
amortization rose 94% in the period due primarily to the fixed asset additions
made through acquisitions and the goodwill amortization associated with CWI,
Ciga and The Phoenician.
Interest expense, before interest income of $13 million in 1995 and $8
million in 1994, increased to $170 million compared with $54 million in the 1994
six months, the result of higher debt due to the 1994 and 1995 acquisitions
discussed above and the acquisition of MSG on March 10, 1995 (which required an
initial investment of $610 million which is expected to be reduced by $250
million no later than March 1996 as contemplated by the terms of the agreement
related to the acquisition of MSG). Average interest-bearing debt of $3.3
billion in the 1995 period rose significantly from the $0.8 billion average in
the 1994 six months. Interest-bearing debt represents external borrowings
(averaging $0.7 billion in 1995 and $0.2 billion in 1994) and interest-bearing
advances from ITT Industries (ITT) (averaging $2.6 billion in 1995 and $0.6
billion in 1994). The acquisitions and acquired debt of CWI ($1.8 billion), MSG
($610 million), Ciga and other
81
<PAGE> 88
significant hotel acquisitions ($1.3 billion) is the principal cause of the
increase. Upon completion of the Distribution, New ITT is expected to carry a
$3.6 billion debt portfolio. See "NEW ITT FORECASTED CAPITALIZATION".
Miscellaneous income is comprised of numerous small non-operating gains and
losses and the results of claims and settlements. Operating income, less
interest expense and miscellaneous income, resulted in pretax earnings of $117
million in the 1995 six months, a 58% improvement over the $74 million recorded
in the 1994 period for the reasons discussed above.
Income tax expense rose in the period in proportion to the higher pretax
earnings as well as for higher state income taxes and resulted in an effective
tax rate of 47% for the 1995 six months compared with 42% in the 1994 six
months.
Net income, after minority equity, of $53 million or $0.45 per pro forma
share in 1995 compares with $37 million or $0.31 per pro forma share in the 1994
period.
EBITDA doubled in the 1995 period to $374 million from $179 million in the
comparable 1994 period, reflecting the $88 million contribution of CWI since its
January 31, 1995 acquisition date along with improved results in the Hotels
segment. EBITDA represented 12.5% of revenues in the 1995 period compared with
8.5% in the 1994 period.
Cash from operating activities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 95, increased to $234 million in the 1995 six
months from $93 million in the comparable 1994 period for the reasons described
above. The SFAS definition of cash from operating activities differs from EBITDA
largely due to the inclusion of interest, income taxes and changes in working
capital.
Business Segments -- Revenues, EBITDA and operating income (excluding the
effect of corporate overhead and minority income) for each of New ITT's three
major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
SIX MONTHS 1995 SIX MONTHS 1994
- ------------------------------- -------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............ Hotels ............
$1,994 $163 $ 102 $1,640 $107 $68
</TABLE>
Hotels revenues, EBITDA and operating income benefited significantly from
the Ciga and other acquisitions. Excluding these acquisitions, revenues
increased 8%, EBITDA 15% and operating income 16%, primarily the result of
significantly higher average daily rates. Average daily rates at ITT Sheraton's
owned, leased and managed properties totaled $124 in the 1995 period, compared
with $110 in the 1994 period.
<TABLE>
<CAPTION>
SIX MONTHS 1995 SIX MONTHS 1994
- ------------------------------- -------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............ Gaming ............
$594 $114 $74 $103 $9 $ 5
</TABLE>
The Gaming segment includes five months of CWI results in 1995 along with
the Sheraton Desert Inn and Sheraton Casino in Tunica County, Mississippi. In
the future, the Gaming segment is expected to contribute an increasing portion
of New ITT's revenues and operating income.
<TABLE>
<CAPTION>
SIX MONTHS 1995 SIX MONTHS 1994
- ----------------------------- -----------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$394 $113 $ 100 ........ Information Services ........ $373 $ 82 $65
</TABLE>
The Information Services segment includes ITT World Directories, the
80%-owned yellow page directory operation based in Europe, and New ITT's 83%
interest in ITT Educational, a provider of postsecondary degree technical
programs. Results in the 1995 period benefited from lower telephone company fees
in Belgium and favorable foreign exchange experience. Higher student enrollment
and tuition price increases offset the operating costs of newly-opened schools
at ITT Educational.
82
<PAGE> 89
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993
Revenues of $4,760 million in 1994 increased 14% over 1993 results,
reflecting the contribution of 70.3% of Ciga, the Italian luxury hotel chain
purchased in stages during the second half of the year, The Phoenician, the
Crescent and The Park Grande Hotel, all acquired in 1994, along with improved
results at Hotels in the North American and Asia-Pacific regions. The
improvement was partially offset by the loss of revenues from the World
Directories United Kingdom unit disposed of in 1993. Revenues of Ciga and the
other acquisitions totalled $271 million in 1994. Excluding these acquisitions,
revenues increased 3%. Average occupancy of owned, leased and managed hotels
(excluding the newly acquired Ciga hotels) improved 3.8% to 72.9% in 1994.
Salaries, benefits and other operating costs increased 11% in 1994 over
1993 levels, representing the costs of the acquired properties as well as
smaller increases in the cost of services. Overall, salaries, benefits and other
operating costs represented 81% of revenues in 1994, down from 83% in 1993 as
higher average rates and occupancy outpaced the increase in direct costs.
Selling, general and administrative expenses include $118 million in 1994
and $122 million in 1993, representing overhead expenses related to the
management and supervision of the entities comprising ITT before the
Distribution. Of these amounts, $88 million and $73 million were charged in the
respective years to affiliated companies (ITT Hartford and ITT Industries) and
represented fees for advice and assistance provided by New ITT in connection
with cash management, legal, accounting, tax and insurance services. The fees
for these services are based upon a general relations agreement with each
affiliate. See "Plan of Distribution" note to New ITT Combined Financial
Statements herein. Excluding these overhead expenses and related service fee
income, selling, general and administrative expenses increased approximately 12%
due primarily to the overhead of the acquired companies and hotels.
Operating income rose 106% in 1994, reflecting the aforementioned North
American occupancy and rate improvement at Hotels, a full year of Gaming
operations and benefits from cost reduction actions initiated in 1993 in all
major business segments. Operating income in 1993 included restructuring
provisions totaling $49 million aimed at increasing the efficiency and
productivity of overhead functions at the segment and regional headquarters
locations. These provisions have yielded the desired improvements as evidenced,
in part, by the increased operating cash flow in 1994 and ITT management's
expectations for projected increased operating cash flow in 1995. See "NEW ITT
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS,
FORECASTS AND PRO FORMA FINANCIAL INFORMATION." In addition, the 1993 results
included a $29 million provision for the accelerated write-off of capitalized
development expenses stemming from a reevaluation of future plans and projects.
Depreciation and amortization rose 21% due primarily to the fixed asset
additions made through acquisition and the goodwill amortization associated with
the Ciga and Phoenician acquisitions.
Interest expense, before interest income of $16 million in 1994 and $14
million in 1993, increased to $147 million compared with $47 million in 1993,
the result of additional debt required to fund the Desert Inn purchase in 1993
and the 1994 acquisitions discussed above. Average interest-bearing debt of $1.4
billion in 1994 compares with $0.4 billion in 1993. Interest-bearing debt
represents external borrowings (averaging $0.4 billion in 1995 and $0.2 billion
in 1994) and interest-bearing advances from ITT Industries ($1.0 billion in 1994
and $0.2 billion in 1993).
Miscellaneous income (expense) reflects non-operating items of a
non-recurring nature including gains and losses on the sale of investments. In
1994, miscellaneous expense of $17 million primarily relates to the write-off of
expenses incurred in connection with the Desert Kingdom, an indefinitely
postponed gaming project, partly offset by the gain on the public offering of
17% of ITT Educational. In 1993, miscellaneous income of $10 million related
primarily to the gain on the sale of an ITT World Directories unit.
Income taxes of $58 million in 1994 were provided on pretax income of $144
million representing a 40% effective tax rate. Tax on repatriation of foreign
earnings in addition to U.S. state and local income taxes raises New ITT's
effective tax rate above the U.S. statutory rate. The decrease from the 1993 53%
effective tax rate
83
<PAGE> 90
results primarily from the absence of the 1993 tax cost associated with
repatriating cash to the United States from ITT World Directories units in
Portugal, Belgium and The Netherlands.
Minority income in 1994 represents the effect of minority ownership in ITT
World Directories and Ciga. In 1993, minority income related solely to ITT World
Directories. Net income of $74 million or $0.62 per pro forma share in 1994
improved 90% compared with $39 million or $0.33 per pro forma share in 1993, the
result of the factors discussed above.
EBITDA increased a substantial 78% in 1994 to $396 million from the $222
million generated in 1993. Improved occupancy and rates in the Hotels segment
(primarily in the North American region) and lower overhead costs coupled with
the absence of 1993 restructuring provisions, which totaled $49 million, are the
primary contributors to the improvement. As in 1995, acquisitions made
throughout 1994 impacted revenues to a much larger degree than EBITDA. EBITDA
represented 8.3% of revenues in 1994 compared with 5.3% in 1993.
Cash from operating activities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 95, increased to $230 million in 1994 from
$186 million in 1993 for the reasons described above. The SFAS definition of
cash from operating activities differs from EBITDA largely due to the inclusion
of interest, income taxes and changes in working capital.
Business Segments -- Revenues, EBITDA and operating income (excluding the
effect of corporate overhead, minority income and dispositions) for each of New
ITT's three major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
1994 1993
- ------------------------------ ------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- ------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............. Hotels .............
$3,700 $239 $ 152 $3,160 $167 $87
</TABLE>
Properties in the Hotels segment are marketed under the ITT Sheraton brand
name and include 209 properties (49%) which are owned, leased or managed under
long-term agreements and 214 properties (51%) which are franchised at December
31, 1994. At year end 1993, 176 properties (43%) were owned or managed and 230
properties (57%) were franchised. The shift in mix toward owned hotels,
including the purchase of a controlling interest in Ciga in 1994, is indicative
of New ITT's focus on improving the standards of properties carrying the ITT
Sheraton brand name. Hotels revenues increased in 1994 due to improved results
in the North American and Asia-Pacific regions and the contribution of new
acquisitions, namely Ciga, The Phoenician and The Park Grande. EBITDA improved a
substantial 43% from 1993, partly as a result of acquisitions. Operating income
in 1994 reflected, among other things, the improvements in the North American
region and benefits from cost reductions. In 1993, operating income reflected
the accelerated write-off of capitalized development expenses totaling $23
million, partly offset by an $11 million gain on the sale of an investment in
Bally's Las Vegas operations. Room rates of owned and leased properties
(excluding the newly acquired Ciga hotels) averaged $109.53 in 1994, compared
with $105.24 in 1993, while occupancy rates rose to 72.9% from 70.2% in the
prior year.
Hotels segment revenues are geographically diverse with 45% and 48%
generated in North America in 1994 and 1993, respectively. New York, Washington,
D.C. and Miami are among the larger markets served.
<TABLE>
<CAPTION>
1994 1993
- ------------------------------ ------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- ------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............ Gaming ............
$ 227 $ 19 $ 9 $24 $ (3) $(9)
</TABLE>
The Sheraton Desert Inn is included in the Gaming segment for the full year
in 1994 compared with two months in 1993. ITT Sheraton opened the Sheraton
Casino in Tunica County, Mississippi in August 1994. Gaming contributed $19
million to New ITT's EBITDA in 1994, up $22 million from $(3) million in 1993,
when New ITT began its gaming efforts in the United States. As discussed
earlier, the acquisition of CWI in
84
<PAGE> 91
the first quarter of 1995 will further increase the revenue and income
contribution from the Gaming segment in future periods.
<TABLE>
<CAPTION>
1994 1993
- ------------------------------ ------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- ------- ------ --------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
....... Information Services .......
$ 833 $181 $ 155 $ 800 $178 $ 162
</TABLE>
Operating income fell at the Information Services segment in 1994 on
modestly higher revenues, reflecting additional expenses of publishing in
competitive markets and ITT World Directories' share of the costs of
establishing a European directory in a joint venture with the Thomas Publishing
Co. Both revenues and income improved at ITT Educational.
YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1992
Revenues of $4,169 million were down slightly from 1992, reflecting the
absence of several units sold during the period, principally the United Kingdom
operation of ITT World Directories. The Sheraton Desert Inn property in Las
Vegas, the acquisition of which in November marked New ITT's entrance into the
U.S. gaming industry, contributed $24 million to 1993 revenues.
Salaries, benefits and other operating costs declined 6% in 1993 from 1992
levels, primarily representing the absence of the costs associated with the sale
of a World Directories unit in 1992. Overall, salaries, benefits and other
operating costs represented 83% of revenues in 1993, down from 86% in 1992 which
included provisions totalling $86 million to write down financial assets at
Hotels ($45 million) and to closedown the ITT World Directories unit in Turkey
($41 million). Excluding these provisions, salaries, benefits and other
operating costs totalled 84% of revenues in 1992. Operating income quadrupled to
$142 million from 1992 results, reflecting strength in Hotels' North American
region and the effect of the unusual provisions.
Selling, general and administrative expenses include $122 million in 1993
and $127 million in 1992, representing overhead expenses related to the
management and supervision of the entities comprising ITT before the
Distribution. Of these amounts, $73 million and $74 million were charged in the
respective years to affiliated companies (ITT Hartford and ITT Industries) and
represent fees for advice and assistance provided by New ITT in connection with
manufacturing, operating, accounting, commercial, financial and other matters.
The fees for these services were based upon a general relations agreement with
each affiliate. These expenses are reflected and charged out of New ITT since
this entity includes many of the corporate functions that are expected to remain
with New ITT after the Distribution. See "Basis of Presentation" note to New ITT
Combined Financial Statements herein. Excluding these overhead expenses and
related service fee income, selling, general and administrative expenses were
approximately even compared with 1992.
Interest expense, before interest income of $14 million in 1993 and $21
million in 1992, increased to $47 million compared with $41 million in 1992, the
result of additional debt required to fund the Desert Inn and other asset
purchases in 1993.
Miscellaneous income (expense) reflects nonoperating items of a
nonrecurring nature, including gains and losses on the sale of investments. In
1993, miscellaneous income of $10 million related primarily to the gain on the
sale of ITT World Directories' United Kingdom unit and, in 1992, miscellaneous
income of $7 million related to a number of small non-operating items.
The effective income tax rate of 53% in 1993 was unusually high due to the
tax cost associated with repatriating cash to the United States from ITT World
Directories units in Portugal, Belgium and The Netherlands. In addition, U.S.
state and local income taxes raises New ITT's effective tax rate above the U.S.
statutory rate. Absent unusual tax transactions, the New ITT's effective rate
approximates 40%. The 1992 income tax provision of $4 million was provided on
pretax income of $21 million, resulting in an abnormal effective rate due to the
mix of earnings from various taxing jurisdictions on a small pretax income base.
85
<PAGE> 92
Minority income in both periods represents the effect of minority ownership
in ITT World Directories. Net income of $39 million or $0.33 per pro forma share
in 1993 compares with income before accounting changes of $2 million or $0.02
per pro forma share in 1992, the result of the factors discussed above.
EBITDA almost tripled in 1993 to $222 million, compared with $81 million in
1992, reflecting dramatic improvements at Hotels, as the increase in both
occupancy and room rates in the North American region more than offset the
impact of room rate reductions in Europe which was driven by a strong U.S.
dollar at such time. Provisions in 1993 totaling $49 million, which were aimed
at increasing the efficiency and productivity of overhead functions at the
segment and regional headquarters locations, and $29 million for the accelerated
write-off of capitalized development expenses adversely impacted the results. In
1992, provisions totalling $45 million to write down financial assets at Hotels
and $41 million for the closedown of ITT World Directories unit in Turkey also
adversely impacted EBITDA. Excluding these items, EBITDA increased 80% and
represented 7.2% of revenues in 1993 compared with 3.9% in 1992.
Cash from operating activities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 95, increased to $186 million in 1993 from
$143 million in 1992 for the reasons described above. The SFAS definition of
cash from operating activities differs from EBITDA largely due to the inclusion
of interest, income taxes and changes in working capital.
Additionally in 1992, New ITT adopted 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 $47 million after tax or $0.39
per pro forma share.
Business Segments -- Revenues, EBITDA and operating income (excluding the
effect of corporate overhead, minority income and Dispositions) for each of New
ITT's three major business segments were as follows ($ in millions):
<TABLE>
<CAPTION>
1993 1992
- ------------------------------- -------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............. .............
$3,160 $167 $87 Hotels $3,109 $ 25 $ (28)
</TABLE>
Properties in the Hotels segment are marketed under the ITT Sheraton brand
name and include 176 properties (43%) which are owned or managed under long term
agreements and 230 properties (57%) which were franchised at December 31, 1993.
At year end 1992, 174 properties (41%) were owned or managed and 252 properties
(59%) were franchised. EBITDA and operating income at Hotels improved as the
combined impact of increased occupancy and room rates in the North American
region more than offset lower results in Europe reflecting the impact of room
rate reductions, caused by the strengthened U.S. dollar, and lower occupancy.
Results in 1993 also reflected the accelerated write-off of capitalized
development expenses totaling $23 million, partially offset by an $11 million
gain on the sale of an investment in Bally's Las Vegas operations. In 1992, a
provision of $45 million to write down hotel investments resulted in a reported
operating loss.
Hotels segment revenues are geographically diverse, with 48% and 46%
generated in North America in 1993 and 1992, respectively. New York, Washington,
D.C. and Miami are among the larger markets served.
<TABLE>
<CAPTION>
1993 1992
- ------------------------------- -------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
............ ............
$ 24 $ (3) $(9) Gaming $ -- $ -- $ --
</TABLE>
In November 1993, New ITT entered the U.S. gaming industry with the
acquisition of the Desert Inn Properties in Las Vegas. This acquisition afforded
New ITT with the opportunity to immediately enter the North American land-based
gaming industry. The EBITDA and operating income results reported for 1993
reflect start-up costs for the gaming operations.
86
<PAGE> 93
<TABLE>
<CAPTION>
1993 1992
- ------------------------------- -------------------------------
OPERATING OPERATING
REVENUES EBITDA INCOME REVENUES EBITDA INCOME
- -------- ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
...... ......
$800 $178 $ 162 Information Services $817 $185 $ 170
</TABLE>
The decline in Information Services reflects unfavorable foreign exchange
impacts. When excluding these impacts, revenues, EBITDA and operating income
rose approximately 5%. The increases reflected improvements in the telephone
directory operations in Western Europe as well as an increase in the number of
ITT Technical Institutes and student enrollment at those institutes at ITT
Educational.
LIQUIDITY AND CAPITAL RESOURCES
The preceding discussion of the results of operations of New ITT describes
New ITT over a period of significant transformation and growth. ITT has
historically incurred debt at the parent level to a greater extent than at the
operating company level, particularly when funding major capital programs or
acquisitions. In connection with the Distribution, a portion of parent company
debt would be substituted with newly issued borrowings of New ITT so that the
aggregate amount of debt of New ITT after the Distribution would be less than
the aggregate amount of debt from non-affiliated entities and investments and
advances from ITT Industries (ITT) prior to the Distribution. See "NEW ITT
FORECASTED CAPITALIZATION". The future liquidity of New ITT will, to a large
degree, depend on the integration and performance of its recent acquisitions as
well as the previously existing businesses of New ITT. New ITT will not be able
to rely on the earnings, assets or cash flows of ITT Industries or ITT Hartford
after the Distribution nor, however, will its earnings, assets or cash flows be
used to contribute to the capital requirements of those entities. In addition,
income taxes have been assessed to New ITT in accordance with a tax sharing
agreement with ITT Industries that generally requires the computation of income
taxes as if New ITT had been a stand-alone entity. 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.
New ITT generated EBITDA of $396 million in 1994 which was prior to the
acquisition of CWI and without the benefit of a full year of Ciga, MSG and other
luxury hotel acquisitions. On a pro forma basis giving effect to the
acquisitions (see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS"),
EBITDA was $604 million in 1994. Management of ITT expects that pro forma EBITDA
for 1995 will substantially exceed pro forma EBITDA for 1994 based on
preliminary results to date and expectations for the balance of the period.
However, for a discussion of certain important limitations and related
assumptions concerning this projected and other pro forma financial data and ITT
management's beliefs as to future results, see "NEW ITT UNAUDITED PRO FORMA
COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS, AND PRO
FORMA FINANCIAL INFORMATION". These cash flows are expected to be sufficient to
service indebtedness, satisfy tax obligations and cover maintenance capital
expenditures and other liquidity needs. Additional liquidity needs would be
funded through traditional debt or equity financings, asset sales or any
combination thereof.
Cash from operating activities, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 95, was $234 million in the first six months
of 1995, $230 million in 1994 and $186 million in 1993 for the reasons described
in the discussion above with respect to such periods. The SFAS definition of
cash from operating activities differs from EBITDA largely due to the inclusion
of interest, income taxes and changes in working capital.
Funds used for capital expenditures and acquisitions totaled $2.4 billion
in the six months ended June 30, 1995, and $1.5 billion in the year ended
December 31, 1994, for combined expenditures of $3.9 billion since January 1,
1994. Of this amount, the acquisition of CWI ($1.7 billion), MSG ($0.6 billion),
Ciga ($0.5 billion) and other major hotel acquisitions ($0.5 billion) comprised
85%. The balance was used for smaller acquisitions and to maintain New ITT's
facilities. New ITT did not generate sufficient cash flows from its operations
to fund these acquisitions and capital expenditures. Such funding has been
provided to New ITT
87
<PAGE> 94
by its parent from the operating cash flow at other ITT companies and by debt
incurred at the parent company level. At June 30, 1995, contractual commitments
have been made for additional capital expenditures totalling $133 million in
1995, all of which is expected to be funded through the operating cash flow of
New ITT. In addition, certain equipment is utilized through operating leases.
Minimum rentals under such leases are $53 million in 1995 and $47 million in
1996. In addition, New ITT expects to pay $103.5 million in connection with its
proposed acquisition of WNYC-TV.
Interest charges have historically been incurred based on the external debt
outstanding as well as on interest-bearing advances from ITT Industries at 8%.
Management of ITT expects to capitalize New ITT in a manner similar to
comparable companies in the industries represented by such businesses following
the Distribution. In the 1995 six months, New ITT had borrowings from
non-affiliated entities averaging $0.7 billion and interest-bearing advances
from ITT Industries (currently ITT) averaging $2.6 billion. These
interest-bearing advances are expected to be substituted with new borrowings of
approximately $2.7 billion prior to the Distribution. These new borrowings could
be in the form of commercial paper borrowings, bank borrowings or public or
private financings or any combination of the foregoing. Total debt of New ITT is
expected to approximate $3.6 billion after the Distribution. For a discussion of
certain important limitations and related assumptions concerning the projected
capitalization of New ITT, see "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION
FORECAST ASSUMPTIONS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA
FINANCIAL INFORMATION". For a discussion of the expected allocation of
indebtedness of ITT to New ITT, see "THE DISTRIBUTION -- TREATMENT OF CERTAIN
DEBT INSTRUMENTS".
ENVIRONMENTAL MATTERS
New ITT is subject to stringent environmental laws and regulations in all
jurisdictions in which it operates. Management of ITT believes that New ITT is
in substantial compliance with all applicable environmental requirements.
Environmental compliance costs are accounted for primarily as normal operating
expenses. Management does not believe that such environmental compliance costs
will have a material adverse effect on New ITT's financial position, results of
operations or cash flow.
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 New
ITT during the three most recent fiscal years.
88
<PAGE> 95
ITT HARTFORD 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 as if ITT Hartford were a separate entity for all periods
presented.
BACKGROUND AND BUSINESS CONDITIONS
ITT Hartford is a diversified, multi-national, multi-line insurance
organization which offers a wide array of products and services. The North
American property and casualty operations ("Property & Casualty"), headquartered
in Hartford, Connecticut, provide a wide range of personal, commercial,
specialty and reinsurance coverages. Property & Casualty includes the First
State companies, formerly Cameron and Colby, a group of three Boston-based
excess and surplus lines and reinsurance subsidiaries of ITT prior to the
Distribution. Effective at the end of 1992, First State ceased writing new and
renewal business and is being managed as an operation in run-off until all
claims have been resolved. The International Property & Casualty operations are
located primarily in the United Kingdom and The Netherlands. In the property and
casualty arena, ITT Hartford ranks among the leaders in a competitive
environment which includes stock companies, mutual companies and other
underwriting organizations. The residual effects of the recession in the early
1990s coupled with a demand for low cost, high quality service have created
difficult conditions in the domestic property and casualty market, as evidenced
by a leveling or reduction in premium rates in certain lines of business.
Additionally, some competitors obtain their business at less cost through
captive agents or salaried employees rather than through independent agents and
brokers such as those utilized by ITT Hartford. In meeting the challenges of
this environment, ITT Hartford has implemented an effective cost containment
program, increasing efficiencies across all segments of its property and
casualty business. In personal lines insurance, ITT Hartford has obtained an
exclusive marketing arrangement with The American Association of Retired Persons
("AARP") through the year 2002, providing a competitive advantage in a growing
segment of the population.
ITT Hartford's life operations ("Life") rank among the fastest growing life
insurance organizations in the United States based on total assets. Products
offered include individual life insurance, retirement annuities, group pension
plans, deferred compensation plans, group life, group disability and
corporate-owned life insurance ("COLI"). The life markets in which ITT Hartford
operates are highly competitive, with approximately 2,000 stock life and mutual
life companies in the United States competing in the areas of price, quality of
service, effectiveness of distribution systems and perceived financial strength.
Other factors that could potentially impact the life insurance business include
current and proposed Federal measures allowing banks to engage in the insurance
business and tax law changes affecting the tax treatment of life insurance
products. Hartford Life Insurance Company, ITT Hartford's largest subsidiary, is
ranked twelfth among U.S. life insurers based on total assets according to the
July 1995 edition of Best's Review, a trade publication.
RESULTS OF OPERATIONS
All per share amounts are computed based on ITT Hartford net income divided
by 119 million shares of ITT Hartford Common Stock, the estimated number of
shares to be outstanding after the Distribution.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
Revenues and Income
Insurance revenues were $5.9 billion in the first six months of 1995 as
compared with $5.4 billion in 1994. This increase over the comparable prior year
period reflects the continued growth of the Life segment, including a greater
volume of COLI business, coupled with growth in the Property & Casualty
segment's International subsidiaries.
Net income for the first six months of 1995 was $245 million or $2.06 per
share compared with $304 million or $2.55 per share in the comparable 1994
period. Included in these results were after tax
89
<PAGE> 96
portfolio gains of $31 million or $.26 per share in the first six months,
compared with $40 million or $.34 per share in the prior year first six months.
Operating income for the six months ended June 30, 1995, was $323 million,
compared with $403 million in the prior year first six months. The reduced
earnings, primarily at Property & Casualty, were largely due to a provision for
the estimated settlement related to the Dow Corning breast implant insurance
claims, partially offset by increased investment income.
BUSINESS SEGMENTS -- SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS
ENDED JUNE 30, 1994
The following is a discussion of important factors affecting the revenues
and operating income of each of the business segments.
PROPERTY AND CASUALTY OPERATIONS ($ IN MILLIONS):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Revenues
Domestic Commercial.................................... $ 1,582 $ 1,592
Domestic Personal...................................... 878 840
Reinsurance............................................ 351 321
International.......................................... 599 497
Net Investment Income.................................. 448 399
Net Realized Investment Gains.......................... 42 54
------- -------
Total.......................................... 3,900 3,703
Claims and Expenses...................................... (3,699) (3,425)
------- -------
Operating Income....................................... $ 201 $ 278
======= =======
</TABLE>
Year-to-date June 1995 Property & Casualty revenues of $3.9 billion grew
$197 million, or 5%, over the prior year's first six months. Excluding portfolio
gains, revenues grew $209 million or 6%. This increase was due primarily to
growth in earned premium in domestic personal lines and international operations
combined with increased investment income, the result of a larger asset base.
The increase in domestic personal lines, $38 million or 5%, was attributable in
large part to business volume associated with its exclusive marketing
arrangement with the AARP. The growth in international earned premium, primarily
the United Kingdom, was due to a combination of improved European market
conditions and changes in foreign exchange rates. Property and casualty
operating income for the first six months of 1995 was $201 million as compared
to $278 million in the prior year first six months, a decrease of $77 million,
or 28%. Excluding portfolio gains, operating income decreased $65 million or 29%
due to lower underwriting results, partially offset by increased investment
income.
For the six months ended June 30, 1995 property and casualty underwriting
results reflected a decrease from the prior comparable period. This decrease was
largely due to a provision made for the insurance claims in connection with the
settlement of claims against breast implant manufacturers, including Dow Corning
Corporation, alleging product defects in the implants. Additionally, the prior
year first six months benefited from unusually good workers compensation results
due to the impacts of managed care initiatives and favorable legislative reform.
Excluding operations in runoff, the worldwide property and casualty combined
ratio was 105.9 for the first six months of 1995, compared with 104.1 for the
first six months of 1994. The worldwide property and casualty combined ratio
would have been two points lower, or 103.9 in the 1995 period, without the
aforementioned excess catastrophes and Dow Corning settlement (for a discussion
of combined ratios, see "BUSINESS OF ITT HARTFORD AFTER THE
DISTRIBUTION -- PROPERTY AND CASUALTY INSURANCE OPERATIONS -- COMBINED RATIOS").
90
<PAGE> 97
LIFE OPERATIONS ($ IN MILLIONS):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1995 1994
------- -------
<S> <C> <C>
Revenues
Individual Life and Annuity............................ $ 407 $ 306
Employee Benefits...................................... 601 572
Asset Management Services.............................. 389 395
Specialty.............................................. 564 348
International Operations............................... 58 43
------- -------
Total.......................................... 2,019 1,664
Benefits and expenses.................................... (1,897) (1,539)
------- -------
Operating Income....................................... $ 122 $ 125
======= =======
</TABLE>
Six months ended June 30, 1995 revenues of $2.0 billion increased $355
million or 21% over the first six months of 1994. This increase reflects a
greater volume of account charge revenues from COLI business (within the
specialty line of business) and continued expansion of the individual life and
annuity lines of business. Growth in fixed and variable annuity sales, which are
generally recorded as deposits, as well as the impacts of several assumption
reinsurance transactions in recent years have dramatically increased assets
under management in the Life segment. The premiums, management and maintenance
fees, and cost of insurance associated with the growing policyholder asset base
have continued to increase revenues, including investment income.
Deposits on investment-type products, which are not reported as premiums or
revenues, totaled $6.9 billion at June 30, 1995, as compared with $5.8 billion
at June 30, 1994, reflecting a $1.1 billion or 18% increase. Deposits have
increased dramatically in the individual life and annuity, COLI and group
pension lines of business.
Life operations' year-to-date June 1995 operating income was $122 million,
a 2% decrease when compared with the first six months of 1994. This decrease was
largely due to reduced earnings within the group pension line of business, the
result of lower investment income on mortgage-backed securities which have
experienced prepayments in excess of anticipated levels. Offsetting this
decrease was improved earnings in the individual life and annuity, employee
benefits and COLI lines of business, the result of increased sales.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEARS ENDED DECEMBER 31, 1993 AND
1992
Revenues and Income
Worldwide insurance revenues were $11.1 billion in 1994 compared with $10.3
billion in 1993 and $9.9 billion in 1992. Revenues increased 7% and 5% in 1994
and 1993, respectively, despite lower portfolio gains in each of those years.
Portfolio gains included in revenues totaled $90 million, $155 million, and $443
million in 1994, 1993 and 1992, respectively. These increases reflect the
dramatic growth of the Life operations combined with consistent increases in
business volume in worldwide property and casualty operations.
Net income was $644 million or $5.41 per share compared with $537 million
or $4.51 per share in 1993 and a net loss of $653 million or $5.49 per share in
1992. The net loss in 1992 was due to several significant nonrecurring items and
accounting changes in that year.
Items excluded from the results of operations include the impact in 1994 of
the net effect of two accounting changes, the cumulative effect of which totaled
$12 million after tax or $0.10 per share recorded as of January 1, 1994, and the
effects in 1992 of two accounting changes, the cumulative effect of which
totaled
91
<PAGE> 98
$(379 million) after tax or ($3.18) per share. The table below summarizes the
(charge) benefit of the cumulative effect adjustments, net of tax ($ in
millions):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- -----
<S> <C> <C> <C>
Adjustment to fair value of mortgage-backed, interest-only
investments.......................................................... $(30) $-- $ --
Change in basis of discounting certain workers' compensation
liabilities.......................................................... 42 -- --
Change in accounting for post-retirement benefits other than
pensions............................................................. -- -- (358)
Change in accounting for post-employment benefits...................... -- -- (21)
---- ---- -----
Net cumulative effect benefit (charge)................................. $ 12 $-- $(379)
==== ==== =====
</TABLE>
See the "Changes in Accounting Policies" note in the Notes to ITT Hartford's
Consolidated Financial Statements for additional information on the accounting
changes referenced in this table.
Income (loss) before cumulative effect of accounting changes was $632
million or $5.31 per share compared with $537 million or $4.51 per share in 1993
and $(274) million or ($2.30) per share in 1992.
Income before cumulative effect of accounting changes for 1994 increased
over 1993 due to improved international property and casualty underwriting
results combined with continued profitable growth of the life insurance
operation annuity and COLI lines of business. The impact of the California
earthquake and winter freezes generated excess catastrophe losses at domestic
property and casualty of $40 million or $0.34 per share, which partially offset
these improvements.
Income before the cumulative effect of accounting changes for 1993
increased $811 million over 1992. A number of items dramatically affected the
comparison to 1992 results.
- In the fourth quarter of 1992, ITT Hartford established reserves in the
amounts of $594 million after tax ($900 million before tax) to fund
expected loss developments in surplus lines and reinsurance business and
$165 million after tax ($250 million before tax) for expected legal
defense costs associated with environmental-related claims.
- During 1992, record catastrophes which included Hurricanes Andrew and
Iniki, the Los Angeles riots and the Chicago flood reduced earnings $224
million after tax, as compared with catastrophe losses of $69 million
after tax in 1993.
- Portfolio gains in 1993 totaled $101 million after tax as compared with
$292 million after tax in 1992.
In addition, 1993 net income increased over 1992 due to improved
international property and casualty underwriting results combined with the
growth of the life insurance operation annuity and COLI lines of business.
CASH FLOW
ITT Hartford reported cash flow of $824 million from operating activities
in 1994, compared with $807 million and $816 million in 1993 and 1992,
respectively. Investment contracts written at Life provided $2.6 billion in
1994, compared with $1.7 billion in 1993 and $1.6 billion in 1992.
These funds, along with cash reserves, were invested in securities held by
ITT Hartford ($3.3 billion), used to fund capital additions ($.1 billion) and
used in connection with the redemption of preferred stock ($.2 billion).
During the first six months of 1995, ITT Hartford generated $393 million of
cash from operating activities, up from $250 million in the 1994 first six
months. The increase is due primarily to lower operating cash requirements. Cash
was used for capital additions ($38 million) and to purchase investments. In
addition, investment life contracts provided $1.0 billion and $1.2 billion for
the first six months of 1995 and 1994, respectively.
92
<PAGE> 99
BUSINESS SEGMENTS -- YEAR ENDED DECEMBER 31, 1994 COMPARED WITH
THE YEARS ENDED DECEMBER 31, 1993 AND 1992
The following is a discussion of important factors affecting the revenues
and operating income of each of the business segments.
PROPERTY AND CASUALTY OPERATIONS ($ IN MILLIONS):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Revenues
Domestic Commercial................................. $ 3,194 $ 3,234 $ 3,219
Domestic Personal................................... 1,698 1,622 1,492
Reinsurance......................................... 623 465 379
International....................................... 1,065 1,017 1,005
Net Investment Income............................... 828 847 924
Net Realized Investment Gains....................... 85 143 427
------- ------- -------
Total............................................ 7,493 7,328 7,446
Claims and Expenses................................... (6,887) (6,862) (8,117)
------- ------- -------
Operating Income.................................... $ 606 $ 466 $ (671)
======= ======= =======
</TABLE>
1994 property and casualty revenues of $7.5 billion grew $165 million, or
2%, over 1993. Revenues in 1993 were $7.3 billion, or 2%, below 1992. Excluding
net realized investment gains, revenues grew over the prior year by $223 million
in 1994 and $166 million in 1993. Investment income decreased $19 million and
$77 million in 1994 and 1993, respectively, due primarily to declining interest
rates. Despite difficult conditions in the domestic property and casualty
market, domestic underwriting revenues increased moderately, growing $194
million (4%) over 1993 results, which had grown $231 million (5%) when compared
with 1992 revenues. International underwriting revenues reflected year-to-year
growth rates of 5% and 1% in 1994 and 1993, respectively, largely as a result of
improving market conditions in Europe.
Property & Casualty operating income increased $140 million, or 30%, in
1994, reflecting improved underwriting results, partially offset by lower
portfolio gains and investment income. ITT Hartford's underwriting results
reflect a combination of improved market conditions at its London-based
subsidiary, London & Edinburgh, and favorable loss experience in the workers'
compensation line of business within the domestic operations. Results in the
workers' compensation line of domestic Property & Casualty benefited from the
impacts of managed care initiatives and favorable legislative reform. Operating
income at First State also improved as a reduction in losses more than offset
the impacts of a shrinking investment portfolio.
Operating income in 1993 improved dramatically when compared to 1992,
reflecting the impact in 1992 of $900 million of reserve strengthening for
expected loss developments in surplus lines and reinsurance at First State, $250
million of legal defense costs associated with environmental-related claims and
record-setting catastrophe losses. The worldwide combined ratio improved for
three consecutive years, reflecting a combination of business growth, better
European market conditions and effective cost containment strategies. The
combined ratio was 104.0 (102.8, excluding First State), 107.3, and 133.7 in
1994, 1993 and 1992, respectively (for a discussion of combined ratios, see
"BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION -- PROPERTY AND CASUALTY
INSURANCE OPERATIONS -- COMBINED RATIOS").
A continuation of improving operating performance is expected in 1995,
although there can be no assurance such improvement will, in fact, occur.
Property & Casualty underwriting results are expected to continue to be enhanced
by business development and cost containment strategies.
93
<PAGE> 100
LIFE OPERATIONS ($ IN MILLIONS):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Revenues
Individual Life and Annuity......................... $ 682 $ 599 $ 374
Employee Benefits................................... 1,130 1,105 1,080
Asset Management Services........................... 789 794 770
Specialty........................................... 919 424 97
International Operations............................ 89 88 95
------- ------- -------
Total............................................ 3,609 3,010 2,416
Benefits and Expenses................................. (3,363) (2,789) (2,246)
------- ------- -------
Operating Income.................................... $ 246 $ 221 $ 170
======= ======= =======
</TABLE>
Life insurance revenues in 1994 of $3.6 billion increased $599 million, or
20%, over the $3.0 billion recorded in 1993, which in turn had increased $594
million, or 25% over 1992 reserves. This dramatic growth reflects a greater
volume of account charge revenues from COLI within Specialty, significant growth
in annuity business and continued expansion of the individual life line of
business.
Three recent assumption reinsurance transactions have helped fuel Life's
growth: in June 1993, ITT Hartford assumed and reinsured $3.2 billion in fixed
and variable annuity assets of Fidelity Bankers Life Insurance Company
(Fidelity); in August 1993, ITT Hartford assumed a portion of Mutual Benefit
group COLI contract obligations; and in May 1994, ITT Hartford assumed and
reinsured the life insurance policies and individual annuity contracts of
Pacific Standard Life Insurance Company in Receivership ("Pacific Standard")
adding $219 million of annual life premiums and $181 million of annuity assets.
Driven by the rapid expansion of the COLI business and the continued
significant growth in annuity sales, Life operations operating income grew 11%
from 1993 to $246 million in 1994, up from $221 million and $170 million in 1993
and 1992, respectively. The impact of the assumption reinsurance transactions
described above, combined with new deposits from fixed and variable annuity
sales (which are not reported as revenues) of $10.7 billion, $8.2 billion
(excluding the Fidelity transaction) and $5.9 billion in 1994, 1993 and 1992,
respectively, has served to increase assets under management dramatically. The
management and maintenance fees and cost of insurance associated with this
growing policyholder base are the source of Individual Life and Annuity's
increased revenues and operating income.
Partially offsetting this improvement was a decline in operating income of
the GRC line of business within Asset Management Services ("AMS") due to lower
investment earnings on mortgage-backed securities which experienced prepayments
in excess of assumed levels. The GRC portfolio was also affected by the interest
rate rise in 1994 where the duration of the assets lengthened more than the
liabilities. Although income for this line will continue to be reduced by these
factors, additional strategies were formulated to limit income volatility due to
interest rate movements and to mitigate any resulting liquidity needs.
Notwithstanding the foregoing, it is anticipated that the life insurance segment
in total will continue to grow in both size and profitability, particularly in
the area of individual annuities.
INCOME TAXES
Income taxes of $214 million in 1994 were provided on pretax income of $852
million representing a 25% effective tax rate. Tax exempt interest earned on
invested assets is the principal cause of a lower effective rate than the U.S.
statutory rate. The increase in ITT Hartford's effective tax rate from 20% in
1993 is due primarily to the absence of several one-time benefits, the largest
of which related to a change in the U.S. Federal tax rate. This benefit,
totaling $22 million, resulted from the remeasurement of ITT Hartford's net
deferred tax assets at 35%. The line item, "Cumulative Effect of Accounting
Changes", in the ITT Hartford income statement is presented on a net of tax
basis and, accordingly, the associated taxes are not included in the provision
above. Income taxes paid in 1994, 1993 and 1992 were $317 million, $383 million
and $57 million, respectively.
94
<PAGE> 101
Income taxes decreased in the first six months of 1995 versus the first six
months of 1994 due to a decrease in pretax income before the cumulative effect
of accounting changes. Income taxes related to the "Cumulative Effect of
Accounting Changes" are reflected within this caption separately on the ITT
Hartford income statement. ITT Hartford's effective tax rate was 24% in the six
months ended June 30, 1995, compared with 27% in the six months ended June 30,
1994.
ENVIRONMENTAL MATTERS
ITT Hartford continues to receive claims asserting injuries from asbestos
and asbestos-related products and damages from environmental and related
clean-up costs. With regard to these claims, deviations from past experience
significantly impact the ability of insurance companies to estimate the ultimate
reserves for unpaid losses and related settlement expenses. ITT Hartford finds
that conventional reserving techniques cannot estimate the ultimate cost of
these claims because of inadequate development patterns and inconsistent
emerging legal doctrine. For many types of asbestos claims and the majority of
environmental claims, unlike any other type of contractual claim, there is
almost no agreement or consistent precedent to determine what, if any, coverage
exists or which, if any, policy years and insurers may be liable. Further
uncertainty arises with environmental claims because claims are often made under
policies the existence of which may be in dispute, the terms of which may have
changed over many years, which may or may not provide for legal defense costs
and which may or may not contain pollution exclusion clauses that may be
absolute or allow for fortuitous events. Courts in different jurisdictions have
reached disparate conclusions on similar issues and in certain situations have
broadened the interpretation of policy coverage and liability issues. If future
social, economic or legal developments continue to expand the original intent of
policies and the scope of coverage as they have in the past, the need for
additional reserves may arise, adversely affecting future results. Due to the
uncertainties described above, a range of such reserve increases cannot be
meaningfully quantified.
In light of the extensive claim settlement process with asbestos and
environmental claims, involving comprehensive fact gathering, subject matter
expertise and intensive litigation, ITT Hartford has established an
environmental claims facility to defend itself aggressively against unwarranted
claims. In addition, ITT Hartford in 1992 provided $250 million of additional
loss adjustment expense reserves for expected environmental claim defense costs.
Reserve activity for both reported and unreported claims relating to
asbestos and environmental, including reserves for legal defense costs, is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, --------------------------------
1995 1994 1993 1992
---------- ------ ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Beginning Liability for Unpaid Asbestos
and Environmental Claims and Claim
Adjustment Expenses.................... $1,191 $1,179 $1,118 $ 853
Loss and Loss Expenses Incurred, Less
Reinsurance............................ 99 124 166 381
Loss and Loss Expenses Paid, Less
Reinsurance............................ (92) (112) (105) (116)
---------- ------ ------ ------
Ending Liability for Unpaid Asbestos and
Environmental Claims and Claim
Adjustment Expenses(1)................. $1,198 $1,191 $1,179 $1,118
======== ====== ====== ======
</TABLE>
- ---------------
(1) The ending reserves for asbestos and environmental claims are net of
reinsurance on reported claims of $971 in the first six months of 1995, $969
million in 1994, $937 million in 1993 and $876 million in 1992.
LIQUIDITY AND CAPITAL RESOURCES
ITT Hartford's outstanding debt and preferred stock was 24% of total
capitalization at June 30, 1995 (before recognition of the unrealized loss on
investment securities as required by SFAS No. 115 beginning in
95
<PAGE> 102
1994), compared with 26% and 24% on the same basis at December 31, 1994 and
1993, respectively. The decrease in the first six months of 1995 is due to the
absence of dividend payments in 1995. The increase in 1994 is reflected in
borrowings which total $1.6 billion at June 30, 1995, as compared with $1.6
billion and $1.2 billion at December 31, 1994 and 1993, respectively.
Effective January 1, 1994, ITT Hartford 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 these
investments are "available for sale" as defined in SFAS No. 115. The accounting
standard does not allow for a corresponding fair value adjustment to ITT
Hartford's liabilities. Stockholders' Equity can vary significantly between
reporting periods as market interest rates and other factors change.
Accordingly, ITT Hartford does not include unrealized gains or losses in its
assessment of debt to total capitalization.
ITT Hartford, after the Distribution, will not be able to rely on the
earnings or cash flow of New ITT or ITT Industries to service debt obligations
or fund its operations. In addition, ITT Hartford, after the Distribution, will
likely maintain leverage ratios that are lower than the current leverage ratio
of ITT Industries (ITT). After the Distribution, management believes that the
liquidity requirements of ITT Hartford will be met by funds from operations as
well as the issuance of commercial paper, debt securities and bank borrowings.
The principal sources of funds are premiums and investment income as well as
maturities and sales of invested assets. The primary uses of funds are to pay
claims, policy benefits, operating expenses and commissions and to purchase new
investments. In addition, ITT Hartford carries a significant short-term
investment position and accordingly does not anticipate selling intermediate and
long-term fixed maturity investments to meet any liquidity needs. Capital
expenditures are not a significant expenditure at ITT Hartford and relate
primarily to computer and other ancillary equipment. Such capital expenditures
totalled $76 million in 1994 and $61 million in 1993 and are expected to
increase proportionately in 1995 and 1996. In addition, certain facilities and
equipment are utilized through operating leases. Minimum rentals under such
leases are $82 million in 1995 and $73 million in 1996.
ITT Hartford has 1,700,000 shares of Class A Preferred Stock -- Series 2
outstanding that are subject to mandatory redemption by November 15, 1995. These
shares will be redeemed during 1995 at $50 per share, totaling $85 million.
ITT Hartford 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 Hartford on such contracts. ITT Hartford expects to
continue to use interest rate swaps to reduce its cost of borrowing in the
future.
INVESTMENT OPERATIONS
An important element of the financial results of ITT Hartford is return on
invested assets. ITT Hartford's investment activities are divided between
property and casualty insurance and life insurance. The investment portfolios of
both the property and casualty and the life operations are managed based on the
underlying characteristics and nature of their respective policy liabilities.
Investment management strategies differ significantly as do the nature of these
two businesses.
PROPERTY AND CASUALTY OPERATIONS
Property and casualty investment strategies are developed based on a
variety of factors including business needs, duration, regulatory requirements
and tax considerations. The weighted average duration of the property and
casualty investments approximates four and one-half years while the weighted
average duration of the policy obligations approximates three years. Property
and casualty policy liabilities totaled $14.8 billion (net of ceded reinsurance)
at December 31, 1994, which are backed by $20.2 billion in total assets
(including insurance investments of $14.1 billion). There are generally no
guaranteed interest requirements related to property and casualty policy
liabilities. Investments are comprised primarily of intermediate fixed maturity
96
<PAGE> 103
bonds and notes, taxable and non-taxable, and corporate bonds. The
characteristics of these investments have generally not been altered through the
use of derivative financial instruments.
LIFE OPERATIONS -- POLICY LIABILITY CHARACTERISTICS
Policy liabilities in the Life operations totaled $19.5 billion (net of
ceded reinsurance) at December 31, 1994, which are backed by $22.0 billion in
total assets (including insurance investments of $18.4 billion). Matching of the
duration of Life investments with respective policyholder obligations is an
explicit objective of the Life management strategy. Policy liabilities in the
Life operations, along with estimated duration periods, can be summarized based
on investment needs in the following five categories at December 31, 1994 ($ in
billions):
<TABLE>
<CAPTION>
ESTIMATED DURATION (YEARS)
BALANCE AT -----------------------------------
DECEMBER 31, LESS OVER
DESCRIPTION 1994 THAN 1 1-5 6-10 10
---------------------------------------- ------------ ------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
Fixed rate asset accumulation
vehicles.............................. $ 6.6 $1.3 $ 5.2 $ .1 $--
Indexed asset accumulation vehicles..... .9 .5 .1 -- .3
Interest credited asset accumulation
vehicles.............................. 9.4 .2 5.0 3.2 1.0
Long-term payout liabilities............ 1.8 -- 1.1 .5 .2
Short-term payout liabilities........... .8 .8 -- -- --
------ ------ ----- ---- -----
Total......................... $ 19.5 $2.8 $11.4 $3.8 $1.5
========== ===== ===== ==== ====
</TABLE>
Fixed Rate Asset Accumulation Vehicles -- Products in this category require
ITT Hartford to pay a fixed rate for a certain period of time. The cash flows
are not interest sensitive, because the products are written with a market value
adjustment, and the liabilities have protection against the early withdrawal of
funds through surrender charges. The primary risk associated with these products
is that the spread between investment return and credited rate is not sufficient
to earn the required return. Product examples include fixed rate annuities with
a market rate adjustment and fixed rate guaranteed investment contracts.
Contract duration is reflected above and is dependent on the policyholder's
choice of guarantee period. The weighted average credited policyholder rate for
these policyholder liabilities is 7.5%.
Indexed Asset Accumulation Vehicles -- Products in this category are
similar to the fixed rate asset accumulation vehicles, but require ITT Hartford
to pay a rate that is determined by an external index. The amount and/or timing
of cash flows will therefore vary based on the level of the particular index.
The risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk of changes in the index adversely
affecting profitability. The weighted average credited rate for these contracts
is 5.8%. Product examples include indexed guaranteed investment contracts with
an estimated duration of up to two years.
Interest Credited Asset Accumulation Vehicles -- Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value, but are subject to
surrender charges for an initial period. The risks vary depending on the degree
of insurance element contained in the product. Product examples include
universal life contracts and fixed account or variable annuity contracts.
Liability duration is short to intermediate term and is reflected in the table
above. The average credited rate for these liabilities is 5.75%.
Long-Term Pay-Out Liabilities -- Products in this category are long-term in
nature and contain significant actuarial (mortality, morbidity) pricing risks.
The cash flows are not interest sensitive, but do vary based on the timing and
amount of benefit payments. The risks associated with these products are that
the benefits will exceed expected actuarial pricing and/or the investment return
is lower than assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities and long-term disability contracts. Contract
duration is generally six to 10 years but, at times, exceeds 30 years. Policy
liabilities under these contracts are not interest sensitive. Asset and
liability durations are matched with the cash flow characteristics of the
claims.
97
<PAGE> 104
Short-Term Pay-Out Liabilities -- These liabilities are short-term in
nature with a duration less than one year. Substantially all risks associated
with these products are determined by the non-investment contingencies such as
mortality or morbidity. Liquidity is of greater concern than for the long-term
pay-out liabilities. Products include individual and group term contracts and
short-term disability contracts.
SEPARATE ACCOUNT PRODUCTS
These represent products for which a separate investment and liability
account is maintained on behalf of the policyholder. Separate accounts reflect
two categories of risk assumption: non-guaranteed separate accounts totaling
$15.3 billion, wherein the policyholder assumes the investment risk, and
guaranteed separate accounts totaling $8.0 billion, wherein ITT Hartford
contractually guarantees either a minimum return or account value to the
policyholder. Investment strategy varies by fund choice, as outlined in the fund
prospectus or separate account plan of operations. Non-guaranteed products
include variable annuities and variable life contracts. Guaranteed separate
account products primarily consist of modified guaranteed individual annuity and
modified guaranteed life insurance and generally include market value adjustment
provisions to mitigate the impact of early surrenders.
LIFE OPERATIONS -- INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES TO
FACILITATE ASSET-LIABILITY MANAGEMENT
Invested assets in the Life operations totaled $18.4 billion at December
31, 1994, and are comprised of asset-backed securities ($6.2 billion), bonds and
notes ($8.5 billion), inverse floating securities ($0.5 billion) and other
investments, primarily policy loans ($3.2 billion). The estimated maturities of
these fixed and variable rate investments, along with the respective yields at
December 31, 1994, are reflected below ($ in millions). Asset-backed securities
are distributed to maturity year based on ITT Hartford's estimate of the rate of
future prepayments of principal over the remaining life of the securities.
Expected maturities differ from contractual maturities reflecting borrowers'
rights to call or prepay their obligations.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET-BACKED SECURITIES
VARIABLE RATE*
Amortized Cost.................. $ 93 $ 141 $ 144 $ 109 $ 68 $ 452 $ 1,007
Market Value.................... $ 71 $ 166 $ 164 $ 129 $ 81 $ 310 $ 921
Taxable Equivalent Yield........ 6.93% 7.27% 6.99% 7.37% 7.66% 7.80% 7.47%
FIXED RATE
Amortized Cost.................. $ 768 $ 960 $ 548 $ 464 $ 816 $2,044 $ 5,600
Market Value.................... $ 772 $ 933 $ 519 $ 415 $ 757 $1,858 $ 5,254
Taxable Equivalent Yield........ 7.36% 6.89% 7.26% 7.12% 6.83% 7.20% 7.11%
BONDS AND NOTES
VARIABLE RATE*
Amortized Cost.................. $ 260 $ 130 $ 141 $ 25 $ 146 $ 373 $ 1,075
Market Value.................... $ 257 $ 126 $ 131 $ 25 $ 131 $ 320 $ 990
Taxable Equivalent Yield........ 6.79% 4.56% 5.40% 5.53% 6.41% 6.46% 6.15%
FIXED RATE
Amortized Cost.................. $1,272 $1,247 $1,143 $ 710 $ 903 $2,622 $ 7,897
Market Value.................... $1,256 $1,207 $1,093 $ 661 $ 820 $2,429 $ 7,466
Taxable Equivalent Yield........ 6.21% 6.06% 6.21% 6.21% 6.93% 7.17% 6.58%
INVERSE FLOATING
Amortized Cost.................. $ 14 $ 38 $ 56 $ 35 $ 40 $ 551 $ 734
Market Value.................... $ 14 $ 30 $ 43 $ 25 $ 25 $ 381 $ 518
Taxable Equivalent Yield........ 11.98% 7.73% 6.17% 8.32% 8.13% 7.50% 7.59%
TOTAL FIXED MATURITIES
Amortized Cost.................. $2,407 $2,516 $2,032 $1,343 $1,973 $6,042 $16,313
Market Value.................... $2,370 $2,462 $1,950 $1,255 $1,814 $5,298 $15,149
Taxable Equivalent Yield........ 6.71% 6.40% 6.50% 6.67% 6.90% 7.22% 6.84%
</TABLE>
- ---------------
* Variable rate securities are instruments for which the coupon rates move
directly with an index rate. Included in the caption are ITT Hartford's
holdings of residuals which represent less than 1% of the Life operations
investment assets. Residuals, for which cost approximates market, have an
average life of 4.8 years and earn an average yield of 12.2%. Interest-only
securities, for which cost approximates market, have an average life of 7
years and earn an average yield of 10.7%.
98
<PAGE> 105
In addition, other investments, comprised primarily of policy loans,
totaled $3.2 billion at December 31, 1994. These loans, which carry a current
weighted average interest rate of 10%, are secured by the cash value of the life
policy. These loans do not mature in a conventional sense but expire in
conjunction with the supporting actuarial assumptions and developments.
Life investments are managed to conform with the various liability-driven
objectives discussed above. Derivatives play an important role in facilitating
the management of interest rate risk, in creating opportunities to develop asset
packages which efficiently fund product obligations, in hedging against
indexation risks which affect the value of certain liabilities and in adjusting
broad investment risk characteristics when dictated by significant changes in
market risks. As an end-user of derivatives, ITT Hartford uses a variety of
derivative financial instruments, including swaps, caps, floors and
exchange-traded financial futures and options as a means of prudently hedging
exposure to price, foreign currency and/or interest rate risk on anticipated
investment purchases or existing assets and liabilities. The notional amounts of
derivative contracts represent the basis upon which pay and receive amounts are
calculated and are not reflective of credit risk. Credit risk is limited to the
amounts calculated to be due to ITT Hartford on such contracts. Payment
obligations between ITT Hartford and its counterparties are typically netted on
a quarterly basis. ITT Hartford has strict policies regarding the financial
stability and credit standing of its major counterparties and typically requires
credit enhancement requirements to further limit its credit risk. Notional
amounts pertaining to derivative financial instruments totaled $9.4 billion at
December 31, 1994 ($7.7 billion related to Life investments and $1.7 billion on
the liabilities).
The following strategies are used to manage the aforementioned risks
associated with the Life obligations:
Anticipatory Hedging -- For certain liability types, ITT Hartford commits
to the price of the product in advance of the receipt of the associated premium
or deposit. To hedge ITT Hartford's expected cash flows against adverse changes
in market interest rates, ITT Hartford routinely executes anticipatory hedges
which immunize ITT Hartford against asset price changes which would result from
changes in market interest rates. Typically, these hedges involve taking a long
position in an interest rate future or swap which has a duration equivalent to
the anticipated investments, which in turn approximate the duration of the
associated liabilities. The notional amount of derivatives used for anticipatory
hedges totaled $1.1 billion at December 31, 1994.
Liability Risk Adjustments -- Several products obligate ITT Hartford to
credit a return to the contractholder which is indexed to a market rate.
Derivatives, typically in the form of swaps, are extensively used to convert the
specific liability indexation risk to a risk which is more common, such as a
fixed rate or a floating rate of LIBOR. By swapping the liability risk into a
more common asset risk, a broader array of assets may be effectively matched
against these liabilities. This strategy permits the customization of liability
indexation to meet customer objectives without the need to identify assets which
directly match each index. The notional amount of derivatives used for liability
risk adjustment totaled $1.7 billion at December 31, 1994.
Asset Hedges/Synthetic Asset Investments -- The selection of investment
risk characteristics is driven by the liability-specific needs of each
obligation. Investment needs may range from very short duration to very long
duration, from floating rate to fixed rate, from callable to non-callable. To
meet the obligations of life policyholders, investment managers consider a range
of available investment alternatives. In order to provide greater risk
diversification, ITT Hartford often invests in securities for which most, but
not all, of the desired investment characteristics are met. ITT Hartford may
choose to create a synthetic asset by combining two or more instruments to
achieve the desired investment characteristics. Many times, the unwanted risks
can be effectively managed through the use of derivatives. As an example,
currency-linked notes or inverse floating rate characteristics can be converted
to alternative fixed or floating rate notes with any currency or unwanted
interest risk eliminated or reduced. The choice of derivative instrument for
hedging depends upon the investment risk to be offset, the cost efficiency and
liquidity of the derivative instrument, as well as the ongoing need to review
the overall balance of asset and liability characteristics in the Life
operations. The notional amount of derivatives used for hedges of physical or
synthetic assets totaled $3.0 billion at December 31, 1994.
99
<PAGE> 106
Duration Hedges -- The term "duration" refers to the degree of change in
the value or return of an asset (or group of assets) which results from an
external market change, such as a change in level of current interest rates. As
market conditions change, these duration characteristics sometimes require
adjustments in order to preserve the appropriate asset/liability balance. As an
example, a precipitous drop in interest rates may accelerate mortgage
prepayments and shorten the expected maturity of a portfolio of mortgage
securities. Duration hedges compensate for this risk by adjusting average asset
duration parameters. The notional amount of derivatives used for duration hedges
totaled less than $3.6 billion at December 31, 1994.
ITT Hartford is committed to maintaining an effective risk management
discipline. Approved derivatives usage must support at least one of the
following objectives: to manage the risk to the operation arising from price,
interest rate and foreign currency volatility, to manage liquidity and/or to
control transaction costs. All investment activity in the Insurance operations
is subject to regular review and approval by the Insurance Operations Finance
Committee. Credit limits, diversification standards and review procedures for
all credit risk, whether borrower, issuer or counterparty, have been
established. The Life operations analyze the aggregate interest rate risk
through the use of a proprietary, multi-scenario cash flow projection model
which encompasses all liabilities and their associated investments, including
derivatives.
For an important discussion of (i) the investments of ITT Hartford,
including assets of both Property & Casualty and Life, segregated by major
category, (ii) the types of derivatives related to the type of investment and
their respective notional amounts and (iii) the accounting policies utilized by
ITT Hartford for derivative financial instruments, see the Notes to the ITT
Hartford Consolidated Financial Statements contained herein.
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
Hartford during the three most recent fiscal years.
100
<PAGE> 107
BUSINESS OF ITT INDUSTRIES AFTER THE DISTRIBUTION
GENERAL
As part of the Distribution, the Restated Certificate of Incorporation of
ITT will be amended to change the name of ITT Corporation to ITT Industries,
Inc. As a result of the Reincorporation, ITT Industries will be an Indiana
corporation after the Distribution. The corporate headquarters of ITT Industries
will be in Harrison, New York. Unless the context otherwise indicates,
references herein to ITT Industries include its subsidiaries.
ITT Industries is a worldwide enterprise engaged 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 will also hold the stock of certain other subsidiaries
whose operations have been, or are in the process of being, discontinued or sold
as described 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 six months ended June 30, 1995 and June 30, 1994 and for the last three
years:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE YEAR ENDED DECEMBER
30, 31,
----------- ---------------------
1995 1994 1994 1993 1992
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
NET SALES
ITT Automotive.................................. 69% 64% 65% 59% 56%
ITT Defense & Electronics....................... 17 21 20 24 27
ITT Fluid Technology............................ 14 15 15 17 17
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
OPERATING INCOME
ITT Automotive.................................. 69% 69% 63% 49% 76%
ITT Defense & Electronics....................... 15 15 18 23 (19)
ITT Fluid Technology............................ 16 16 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 ("TCS")
systems, 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.
101
<PAGE> 108
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
102
<PAGE> 109
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.
103
<PAGE> 110
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.
104
<PAGE> 111
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 Europe and
North America. In 1994, approximately 50% of sales of ITT Automotive were to
customers in the United States and Canada and 46% 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
in 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.
105
<PAGE> 112
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
the properties to be adequate for the needs of its business.
ITT Industries' principal executive offices will be in leased premises at
Four West Red Oak Lane, Harrison, New York 10528.
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 leases 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, technological know-how, cycle time and
service.
106
<PAGE> 113
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 its 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, the Clean
Water Act, the Resource, Conservation and Recovery Act ("RCRA") and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund"). 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
107
<PAGE> 114
environmental requirements. Management does not believe that it will incur
compliance costs pursuant to such requirements that will have a material adverse
effect on ITT Industries' financial position, results of operations or cash
flows.
See "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS -- ENVIRONMENTAL MATTERS" and "-- 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 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
to the "ITT" name, mark and logo are considered by ITT Industries management to
be of material importance to ITT Industries. The IP
108
<PAGE> 115
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 BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD
AFTER THE DISTRIBUTION -- INTELLECTUAL PROPERTY".
EMPLOYEES
As of June 30, 1995, ITT Industries, 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 contained herein.
109
<PAGE> 116
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 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 July 31, 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. 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.
New ITT and ITT Hartford have also been reflected as "Discontinued
Operations". See Notes to ITT Industries Consolidated Financial Statements.
110
<PAGE> 117
BUSINESS OF NEW ITT AFTER THE DISTRIBUTION
GENERAL
After the Distribution, New ITT will be engaged through its subsidiaries in
two major businesses: Hospitality & Entertainment and Information Services. New
ITT also will own approximately 6% of the outstanding capital shares of Alcatel
Alsthom, a French company which owns, among other things, Alcatel N.V., one of
the largest telecommunications equipment manufacturers in the world.
New ITT will be a Nevada corporation, with World Headquarters at 1330
Avenue of the Americas, New York, NY 10019-5490. New ITT will hold the capital
stock of the companies engaged in the Hospitality & Entertainment and
Information Services businesses of ITT. Immediately prior to the Distribution,
the name of ITT Destinations will be changed to ITT Corporation. Unless the
context otherwise indicates, references herein to ITT Destinations (or New ITT)
include its subsidiaries after the Distribution.
HOSPITALITY & ENTERTAINMENT
New ITT will conduct its hospitality and entertainment business through ITT
Sheraton Corporation ("ITT Sheraton"), Ciga S.p.A. ("Ciga"), Caesars World, Inc.
("CWI") and Madison Square Garden, L.P. ("MSG").
After the Distribution, New ITT will combine the world's largest hotel and
gaming company with a premier sports and entertainment company to create a
dynamic and rapidly growing enterprise. Management of ITT projects that New ITT
will generate pro forma (i.e., assuming all acquisitions during 1994 and 1995
had been consummated on January 1, 1994) revenues of approximately $6.5 billion
in 1995 and pro forma EBITDA of $875 million in 1995. The projected pro forma
EBITDA for 1995 would represent a 36% increase over EBITDA in 1994 also
determined on a pro forma basis (i.e., assuming all acquisitions during 1994 and
1995 had been consummated on January 1, 1994). However, for a discussion of
certain important limitations and related assumptions concerning this projected
and other pro forma financial data and ITT management's beliefs as to future
results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS --
LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
ITT completed the acquisition of one of the world's most recognized gaming
companies, CWI, in January 1995. In March 1995, ITT also acquired the well-known
New York Knickerbockers and New York Rangers sports franchises and the Madison
Square Garden arena through its investment in MSG, which was made through a
partnership with an indirect subsidiary of Cablevision Systems Corporation
("Cablevision"). ITT currently owns 84.7% of the partnership as a result of the
relative equity contributions of ITT and Cablevision, although Cablevision has
the right to equalize the equity ownership interest in such partnership (see "--
HOSPITALITY & ENTERTAINMENT -- MADISON SQUARE GARDEN -- OWNERSHIP STRUCTURE").
However, under the agreement governing ITT's investment in MSG, MSG is managed
on a 50/50 basis with Cablevision and voting is handled on a 50/50 basis.
In addition, the acquisition in 1994 of 70.3% of Ciga and other key hotel
properties enhanced ITT's geographic balance along with its image and profile.
These acquisitions have helped to create a formidable hotel, gaming and
entertainment company that is a leader in its served markets. Furthermore, in
August 1995, ITT, in partnership with Dow Jones & Co. ("Dow Jones") agreed to
purchase television station WNYC-TV from New York City. The purchase, subject to
approval by the Federal Communications Commission and other customary
conditions, is expected to close in early 1996. Together, ITT and Dow Jones hope
to transform the station into a nationally-broadcast business and sports
television station based in New York City. The purchase price of $207 million
will be split evenly by the two companies and the partnership will be managed on
a 50/50 basis.
Through the ITT Sheraton brand name, New ITT is represented in most major
markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton
in 60 countries. When including visitors to CWI and Madison Square Garden and
customers of the Information Services companies, New ITT will provide services
to over 100 million people a year. ITT Sheraton, which has been a wholly owned
subsidiary of ITT since 1968,
111
<PAGE> 118
is a worldwide hospitality network of approximately 420 owned, leased, managed
and franchised properties, including hotels, casinos and inns. Gaming operations
are marketed under the Caesars World and ITT Sheraton brand names and are
represented in Las Vegas, Atlantic City, Halifax (Nova Scotia), Sydney (Nova
Scotia), Lake Tahoe, Tunica County (Mississippi), Lima (Peru), Cairo, Windsor
(Ontario) and Townsville (Australia).
The acquisition of CWI greatly enhanced New ITT's profile in the rapidly
growing gaming business. CWI's flagship property is the renowned Caesars Palace
in Las Vegas, and it also owns and operates Caesars Atlantic City in Atlantic
City and Caesars Tahoe in Stateline, Nevada, both leaders in their served
markets. CWI also owns one-third of a management company that operates Casino
Windsor which was opened in May 1994 in Windsor, Ontario, and operates four
non-gaming resorts in Pennsylvania's Pocono Mountains.
The MSG investment includes the famed Madison Square Garden arena, the
Paramount special events theater, the New York Knickerbockers and New York
Rangers basketball and hockey franchises, as well as the Madison Square Garden
Network. New ITT companies in this segment have approximately 30,000 employees.
Unless the context otherwise required, references herein to "ITT Sheraton"
include its subsidiaries after the Distribution (including Ciga).
INFORMATION SERVICES
ITT World Directories, Inc., an 80%-owned subsidiary, engages in the
publication of telephone directories, including classified directory services
for telephone subscribers in numerous countries outside the United States, as
well as in Puerto Rico and the United States Virgin Islands. ITT Educational
Services, Inc., a subsidiary in the United States, operates technical colleges
offering postsecondary career education. On December 27, 1994, ITT completed an
underwritten public offering of approximately 17% of the common stock of ITT
Educational Services, Inc. New ITT companies in this segment have approximately
5,000 employees.
112
<PAGE> 119
The table below shows in percentage terms New ITT's EBITDA attributable to
each of its lines of business on a pro forma basis for the six months ended June
30, 1995, the six months ended June 30, 1994, and the year ended December 31,
1994. The percentages for all periods give effect to the relevant transactions
discussed under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the
same manner as under such heading. For a discussion of certain important
limitations and related assumptions concerning the pro forma financial data
reflected below, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME
STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL
INFORMATION".
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUES(1)(2)
Hospitality & Entertainment
Hotel Operations.................. 65% 66% 65%
Gaming Operations................. 22 20 21
Information Services
ITT World Directories............. 10 11 11
ITT Educational................... 3 3 3
--- --- ---
100% 100% 100%
============= ============= =============
EBITDA(1)(2)
Hospitality & Entertainment
Hotel Operations.................. 41% 43% 41%
Gaming Operations................. 31 30 33
Information Services
ITT World Directories............. 27 24 25
ITT Educational................... 1 3 3
Other............................... -- -- (2)
--- --- ---
100% 100% 100%
============= ============= =============
</TABLE>
- ---------------
(1) The pro forma financial information presented above assumes that the
acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel
properties and MSG in partnership with another entity were completed on
January 1, 1994. The pro forma financial information includes ITT
management's estimates of results which, among other things, assume revenue
and expense levels based on historical trends and ITT management's views of
current economic conditions. Such information may not be indicative of the
results that would have occurred if the acquisitions were completed on
January 1, 1994.
(2) MSG is accounted for using the equity method and, accordingly, its revenues
and EBITDA are not included above. MSG has generated EBITDA of $34 million,
$25 million and $12 million for the respective periods shown above.
HOSPITALITY & ENTERTAINMENT
HOTEL OPERATIONS
ITT Destinations' revenues from hotel operations are derived worldwide from
ITT Sheraton's owned, leased and managed hotels, and franchise fees. Revenues in
the hotel business are essentially a function of number of rooms, average daily
rate charged for rooms and number of rooms occupied. Six of the hotels in the
ITT Sheraton network have casino operations. The gaming operations in the ITT
Sheraton network and the gaming operations of CWI are discussed below under
"-- HOSPITALITY & ENTERTAINMENT -- GAMING OPERATIONS".
The following table illustrates in percentage terms the sources of revenues
of New ITT's hotel operations. The percentages for the 1994 periods give effect
to the relevant transactions discussed under "NEW ITT
113
<PAGE> 120
UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the same manner as under such
heading. ITT Sheraton's owned hotel/casinos and CWI are not included in the
table.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Owned or Leased Hotels.................... 31% 20% 26%
Managed and Joint Venture Hotels.......... 66 76 71
Franchised Hotels(1)...................... 1 1 1
Other(2).................................. 2 3 2
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
- ---------------
(1) Includes franchise fees to ITT Sheraton, not revenues of franchise hotels.
(2) Other revenues primarily include reservations fees and Sheraton Club
International fees.
Owned and Leased Hotels
The following table illustrates for ITT Sheraton's owned and leased
properties the number of properties, available room nights, average daily
occupancy rate and average daily rate, in each case for the periods indicated.
For the 1994 periods, the table gives effect to the relevant transactions
discussed under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the
same manner as under such heading. ITT Sheraton's owned hotel/casinos and CWI
are not included in the table.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Number of properties at period end........ 69 65 66
Available room nights(1).................. 3,917,620 3,532,574 7,426,414
Average daily occupancy rate(2)........... 70.7% 68.4% 70.0%
Average daily rate(3)..................... $132.54 $123.93 $124.22
</TABLE>
- ---------------
(1) Based on properties held at period end.
(2) Occupied rooms in the period divided by rooms available for sale in the same
period.
(3) Room revenues for the period divided by rooms occupied for the same period.
The owned and leased properties in the ITT Sheraton network are, in many
cases, subject to mortgage and lease indebtedness. As of June 30, 1995, the
aggregate mortgage and lease indebtedness in respect of such hotels was $545
million. In connection with the leased properties in the ITT Sheraton network,
an ITT Sheraton subsidiary generally leases the land upon which the hotel has
been built and the hotel building. Upon expiration of the lease, the buildings
and other leasehold improvements owned by such subsidiary revert to the
landlord. Usually, such ITT Sheraton subsidiary will own the furniture and
equipment, is responsible for repairs, maintenance, operating expenses and lease
rentals and retains managerial discretion over operations. Generally, ITT
Sheraton pays a percentage rental based on total revenues (as defined) or gross
operating profit (as defined) in respect of the relevant facility but with a
minimum fixed annual rent. During the six months ended June 30, 1995, and the
year ended December 31, 1994, ITT Sheraton paid aggregate rentals, including
rentals attributable to the leased properties referenced above, of $12 million
and $17 million, respectively.
Managed and Joint Venture Hotels
ITT Sheraton through subsidiary companies manages, under long-term
agreements, a number of hotels throughout the world. The following table
illustrates for the managed and joint venture hotels in the ITT Sheraton network
the number of managed and joint venture properties, available room nights,
average daily occupancy rate and average daily rate, in each case for the
periods indicated. For the 1994 periods, the table
114
<PAGE> 121
gives effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO
FORMA COMBINED INCOME STATEMENTS" in the same manner as under such heading.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994
---------------- ------------------ -----------------
<S> <C> <C> <C>
Number of properties at period end...... 130 142 143
Available rooms nights(1)............... 8,979,595 9,290,890 18,961,017
Average daily occupancy rate(2)......... 70.0% 69.3% 70.4%
Average daily rate(3)................... $120.36 $110.36 $111.64
</TABLE>
- ---------------
(1) Based on properties held at period end.
(2) Occupied rooms in the period divided by rooms available for sale in the same
period.
(3) Room revenues for the period divided by rooms occupied for the same period.
Under its standard management agreement, ITT Sheraton operates lodging
facilities under long-term arrangements with property owners. ITT Sheraton's
responsibilities include hiring, training and supervising the managers and
employees required to operate the facilities. ITT Sheraton provides reservation
services, national advertising, marketing and promotional services. ITT Sheraton
prepares and implements annual budgets for lodging facilities under its
management and is responsible for allocating property-owner funds for periodic
maintenance and repair of buildings and furnishings. ITT Sheraton's management
fee is generally based on a percentage of the hotel's total revenues (as
defined), plus, in certain instances, an incentive fee based on the operating
performance.
Expansion Program
In 1990 and 1991, ITT Sheraton began a deliberate and accelerated expansion
and refurbishment program designed to exploit the downturn in the hospitality
sector occurring at that time and to position ITT Sheraton for the ensuing
upturn which began in 1994. Significant renovations to key properties such as
The St. Regis Hotel, Sheraton New York/Manhattan and Sheraton Bal Harbour Beach
Resort in Miami were undertaken. Negotiations began to purchase the interests of
ITT Sheraton's partners in several hotels in a period when the values of those
interests were believed to be depressed due to market conditions. The search for
acquisition opportunities that both enhanced ITT Sheraton's image and its
geographic reach was a primary focus and, most recently, resulted in the 1994
acquisitions of The Phoenician and Crescent Hotels in Arizona, The Park Grande
Hotel in Australia and the Ciga hotel group in Europe. Management of ITT
believes that this expansion and refurbishment program has uniquely positioned
ITT Sheraton as the premier hotelier in terms of global reach and customer
service.
As a general matter, the development and acquisition of hotels involves
certain risks, including the possibility, as applicable, of construction cost
overruns and delays, uncertainties as to market potential, market deterioration,
political risks, the emergence of competition from unanticipated sources and
difficulties associated with integrating new operations into existing
operations. Although ITT Sheraton aggressively manages its hotel developments
and acquisitions so as to minimize these risks, there can be no assurance that
recent or future acquisitions or development projects will perform in accordance
with ITT Sheraton's expectations.
115
<PAGE> 122
Selected Key Properties
The following table sets forth some of the prominent properties in the ITT
Sheraton network by geographic region and market segment.
<TABLE>
<CAPTION>
BUSINESS/CONVENTION
LOCATION HOTELS RESORT HOTELS LUXURY HOTELS
- ------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
North America New York Harbor Island, San St. Regis, New York
Boston Diego Carlton, Washington,
Seattle The Phoenician, Arizona D.C.
New Orleans Disney Dolphin, Florida Palace, San Francisco
Chicago Moana Surfrider, Hawaii Princeville, Hawaii
Bal Harbor, Miami The Royal Hawaiian,
Hawaii
Europe Brussels Algarve, Portugal Prince de Galles, Paris
Copenhagen Costa Smeralda: Park Tower, London
Frankfurt -- Cala di Volpe Hotel Imperial, Austria
Rome -- Pitrizza Danieli, Venice
Skyline, London -- Romazzino Principe di Savoia,
Lisbon, Portugal Milan
Palace Madrid, Spain
Africa/Middle East Cairo Luxor, Egypt Kuwait
Lagos Jeddah, Saudi Arabia
Abu Dhabi
Asia/Pacific Hong Kong Fiji Royal Orchid, Bangkok
Brisbane Bali, Indonesia Sheraton on the Park,
Auckland, New Zealand Gold Coast, Australia Sydney
Port Douglas, Australia Grande Tokyo Bay
Southgate, Melbourne
Latin America Buenos Aires Cancun, Mexico Mofarrej, Brazil
Lima Macuto, Venezuela San Cristobal, Chile
Maria Isabel, Mexico
City
Rio de Janiero
</TABLE>
INTERNATIONAL OPERATIONS
The hotel operations of ITT Sheraton are conducted worldwide. As a general
matter, ITT Sheraton's presence outside of North America consists of contracts
to manage hotels and, to a far more limited extent, equity positions in hotels.
With the acquisition of 70.3% of Ciga, a deluxe hotel group in Europe with 33
hotels, and The Park Grande Hotel in Sydney, Australia, ITT Sheraton has
recently expanded its role as an owner of hotels outside of North America. As of
June 30, 1995, ITT Sheraton had an equity interest of 50% or more in 26
properties in Europe (including Ciga), one property in the Asia/Pacific region,
five properties in Latin America and one property in the Africa/Middle East
region.
The source of revenues in geographic terms of New ITT's operations
(excluding revenues from gaming operations and reservations-based revenues) is
set forth in the following table for the periods indicated. The data for 1994
gives effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO
FORMA COMBINED INCOME STATEMENTS". ITT Sheraton's hotel/casinos and CWI are not
included in the table.
116
<PAGE> 123
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUES
North America(1)......................... 46% 49% 45%
Europe................................... 20 13 18
Africa/Middle East....................... 9 10 10
Latin America............................ 5 6 6
Asia/Pacific............................. 19 19 19
Headquarters and Other................... 1 3 2
---- ---- ----
Total............................ 100% 100% 100%
==== ==== ====
EBITDA
North America(1)......................... 62% 55% 60%
Europe................................... 15 5 6
Africa/Middle East....................... 3 2 3
Latin America............................ 16 22 21
Asia/Pacific............................. 12 20 15
Headquarters and Other................... (8) (4) (5)
---- ---- ----
Total............................ 100% 100% 100%
==== ==== ====
</TABLE>
- ---------------
(1) Includes franchise fees.
The operation of hotels and other business entities internationally is
affected by the political and economic conditions of the countries and regions
in which they are located, in addition to factors affecting the hotel industry
generally. Certain countries have also restricted, from time to time, the
repatriation of funds. ITT Sheraton considers the foregoing factors, among
others, when evaluating a management and/or investment opportunity abroad, but
there can be no assurance that changes in law or governmental policy will not
adversely affect international operations in the future. For a discussion of
certain matters relating to the currency risk of international operations, see
"-- EXPOSURE TO CURRENCY FLUCTUATIONS".
FRANCHISE BUSINESS
The franchise business of ITT Sheraton largely relates to properties based
in North America. Only 20 of the franchise hotels and inns (631 rooms) are
located outside of North America. The following table illustrates for ITT
Sheraton's franchise business the number of properties, available room nights,
average daily occupancy rate and average daily rate, in each case for the
periods indicated.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 JUNE 30 1994 DECEMBER 31, 1994
---------------- ---------------- -----------------
<S> <C> <C> <C>
Number of properties at period end........ 217 221 214
Available room nights(1).................. 9,553,488 10,373,000 20,530,000
Average daily occupancy rate(2)........... 67.3% 66.7% 67.4%
Average daily rate(3)..................... $76.28 $71.56 $72.89
</TABLE>
- ---------------
(1) Based on properties held at period end.
(2) Occupied rooms in the period divided by rooms available for sale in the same
period.
(3) Room revenues for the period divided by rooms occupied for the same period.
Sheraton franchise hotels are licensed to operate under the "Sheraton"
tradename and the stylized "S" and Wreath service mark. The franchise hotels
operated under the "Sheraton" name are generally smaller than the hotels owned,
leased or managed by ITT Sheraton. In each instance, ITT Sheraton approves the
plans for, and the location of, franchise hotels and reviews their design.
117
<PAGE> 124
ITT Sheraton recently began a process of converting Sheraton franchise
hotels to the new "Four Points Hotels" tradename. ITT Sheraton plans to convert
nearly all of its franchise hotels to the "Four Points Hotels" name. It is
expected that the "Four Points Hotels" will be operated and marketed with a view
toward providing hospitality services to the business-oriented traveler. Nearly
all new franchise hotels are also expected to be operated under the "Four Points
Hotels" name.
At June 30, 1995, there were 217 franchise hotels operated by other
business entities under the "Sheraton" name. In general, each franchisee pays
ITT Sheraton an initial minimum fee, plus an additional fee for every room over
100. There is a continuing monthly license fee based on a percentage of the
facility's room revenues. Although ITT Sheraton does not directly participate in
the management or operation of franchise hotels, it periodically inspects those
facilities to ensure that ITT Sheraton's standards are maintained.
MARKETING
ITT Sheraton is a leading global marketing organization in the hospitality
industry, delivering a well-coordinated, worldwide marketing strategy through
the tactical use of regional and local units. A primary focus of ITT Sheraton's
marketing efforts is the creation of a competitive advantage, which translates
into rate premiums and incremental revenue, through brand management, superior
sales force coverage and effectiveness, the development of new marketing
products and programs, including customer loyalty programs, and the use of
sophisticated sales and distribution technology as well as direct marketing and
advertising campaigns. Another primary focus of ITT Sheraton's marketing efforts
is to serve each of ITT Sheraton's four business units: Luxury Group, Business
Convention Group, Resort Hotels and Franchise.
ITT Sheraton's marketing organization consists of a global sales force of
more than 130 sales professionals located in 24 offices and 15 countries. This
sales force is accompanied by a number of marketing programs including the
Global Preference/SET Preferred Program, which is a leading, volume-based
corporate rate program in the hotel industry, involving more than 450 major
multinational corporations and producing more than $120 million in revenues for
ITT Sheraton's hotels, the ITT Sheraton Connections Program, which offers
meeting planners a simplified solution to booking multiple meetings in single or
multiple destinations, and the Global Awards Plus Program, which offers
incentives for travel to individuals.
ITT Sheraton has also successfully developed marketing partnerships. These
marketing partnerships allow for the effective use of marketing resources by
creating opportunities for joint marketing initiatives, which reinforce core
brand qualities through association with partners sharing identical values and
expand ITT Sheraton's potential customer base by providing access to the
partners' existing customers.
RESERVATIONS
In 1992, ITT Sheraton implemented a state-of-the-art computerized
reservations system. This system, called Reservatron IV, has significantly
improved the worldwide reservations network at ITT Sheraton in the opinion of
its management.
Reservatron IV allows the delivery of up-to-the-minute status information
on each of ITT Sheraton's approximately 420 properties and each of Ciga's
approximately 33 properties. It delivers instant confirmation of specific rates,
room types and local destination information which formerly was available only
by calling the property directly. Reservatron IV also allows for the
specification of a large number of regular and special rates on the system,
confirmation of guests' special requests and storing of special preferences of
members of Sheraton Club International (the frequent guest program). ITT
Sheraton continues to add new development and features to Reservatron IV from
time to time.
The system is owned and operated by a wholly owned subsidiary of ITT
Sheraton with offices located worldwide.
118
<PAGE> 125
GAMING OPERATIONS
New ITT's gaming operations consist primarily of CWI, acquired by ITT in
January 1995, ITT Sheraton's Desert Inn Resort & Casino in Las Vegas, the
Sheraton Casino in Tunica County, Mississippi and various hotel/casino
operations in the ITT Sheraton network outside of the United States.
Caesars World
In January 1995, a subsidiary of ITT acquired through a cash tender offer
approximately 92.9% of the outstanding shares of CWI. Upon the merger of the ITT
subsidiary into CWI, effective March 2, 1995, CWI became a direct, wholly owned
subsidiary of ITT. The cost of the transaction to ITT was approximately $1.7
billion. For purposes of the New Jersey gaming laws (see "-- GOVERNMENTAL
REGULATION AND RELATED MATTERS -- CASINO GAMING REGULATION -- GENERAL -- NEW
JERSEY CASINO GAMING REGULATION"), the CWI shares owned by ITT have been held
under a trust arrangement pending the qualification of ITT by the New Jersey
Casino Control Commission (the "New Jersey Commission") as a holding company of
CWI and certain of its subsidiaries. The New Jersey Commission's decision on
ITT's plenary qualification is scheduled to be made by October 1995, subject to
the New Jersey Commission extending the time for such determination until
January 1996. If the New Jersey Commission extends the time for such
determination until January 1996 or if the Distribution were to occur soon after
determination by the New Jersey Commission in October 1995, then it would be
unlikely that New ITT would be qualified by the New Jersey Commission as a
holding company of the Caesars New Jersey Companies (as defined below) and that
ITT Sheraton would be qualified as a holding company of the Caesars New Jersey
Companies (other than ITT Sheraton) prior to the time determined for the
Distribution. In either such event, the CWI shares, which will be owned by New
ITT through ITT Sheraton, could be held under a similar trust arrangement
pending such qualification by the New Jersey Commission of New ITT and ITT
Sheraton as holding companies. For a discussion of this trust arrangement and
the regulatory approvals related thereto, see "THE DISTRIBUTION -- REGULATORY
APPROVALS".
CWI's wholly owned subsidiaries operate three destination gaming resorts:
Caesars Palace in Las Vegas, Nevada; Caesars Tahoe in Stateline, Nevada; and
Caesars Atlantic City in Atlantic City, New Jersey. A CWI subsidiary carries on
operations of small casinos on two cruise ships in conjunction with the operator
of the ships. CWI also owns one-third of a management company which operates
Casino Windsor, a casino opened on May 17, 1994, in Windsor, Canada, which is
owned by the Government of the Province of Ontario. CWI's subsidiaries also own
and operate four non-gaming resorts in the Pocono Mountains of Pennsylvania.
Nevada Properties. Caesars Palace, which opened in 1966 and was purchased
by CWI in 1969, is a casino/hotel complex located on approximately 80 acres on
the "Strip" in Las Vegas, Nevada. At June 30, 1995, Caesars Palace had 1,495
hotel rooms and suites, 10 restaurants, a 1,126-seat showroom, a convention
complex with approximately 100,000 square feet of meeting and banquet space,
numerous bars and lounges, a shopping arcade, two swimming pools, tennis
facilities, a 4,500-seat sports pavilion, a 15,000-seat outdoor stadium, health
spas, and an "Omnimax" theater. Its casino is approximately 118,000 square feet,
and it offers wagering limits among the highest in Nevada. Casino games include
baccarat, blackjack, dice, roulette, slot machines, keno, pai gow, big "6" and a
Race and Sports Book.
For the eleven months ended June 30, 1995, the average occupancy rate at
Caesars Palace of 89.7% included occupancy of approximately 42.7% of the
available rooms and suites by guests receiving complimentary rooms. The average
occupancy rate at Caesars Palace was 90.4%, 91.6% and 85.8% for the years ended
July 31, 1994, 1993, and 1992, respectively, including occupancy of 35.9%, 35.6%
and 33.6%, respectively, of the available rooms and suites by guests receiving
complimentary rooms.
Recent major capital projects at Caesars Palace include room and public
area refurbishments, replacement of slot machines, enhancements to security
systems in the casino and completion of luxury suites. Scheduled capital
projects include Caesars Magical Empire, a new state-of-the-art magical and
dining entertainment facility scheduled to open in January 1996, a second
parking garage, guest room and public area refurbishments and replacement of
slot machines.
119
<PAGE> 126
Caesars Tahoe casino/hotel opened in 1979 and is located in Stateline,
Nevada, adjacent to Lake Tahoe. In 1979, CWI entered into a long-term lease of
the 24-acre property on which the casino/hotel stands. At June 30, 1995, Caesars
Tahoe had 440 hotel rooms and suites, six restaurants, a 1,500-seat showroom,
25,000 square feet of convention rooms, a Roman-themed nightclub, a
40,000-square-foot casino including a race and sports book, bars, shops, four
outdoor tennis courts and an indoor health spa containing a swimming pool and a
racquetball court.
For the eleven months ended June 30, 1995, the average occupancy rate at
Caesars Tahoe of 88.2% included occupancy of approximately 26.5% of the
available rooms and suites by guests receiving complimentary rooms. The average
occupancy rate at Caesars Tahoe was 89.5%, 90.1% and 86.3% for the years ended
July 31, 1994, 1993, and 1992, respectively, including occupancy of 32.7%, 38.3%
and 41.2%, respectively, of the available rooms and suites by guests receiving
complimentary rooms.
Recent major capital projects at Caesars Tahoe include costs for a themed
restaurant, room renovations and remodeling/refurbishing of the casino floor.
Scheduled capital projects include room renovations and replacement of slot
equipment.
CWI's casino gaming operations in Nevada are conducted by Desert Palace,
Inc. ("DPI"), which is a wholly owned subsidiary of Caesars Palace Corporation
("CPC"), which, in turn, is a wholly owned subsidiary of CWI, which in turn,
will be a wholly owned subsidiary of ITT Sheraton (ITT Sheraton, CWI, CPC and
DPI collectively referred to as the "Caesars Nevada Companies"). In addition,
DPI owns all of the issued and outstanding capital stock of Tele/Info, Inc.,
which is a Nevada-licensed disseminator of horse race simulcasts for the purpose
of receiving and disseminating live telecasts of horse racing information. After
the Distribution, ITT Sheraton will be a wholly owned subsidiary of New ITT.
Caesars Atlantic City. Caesars Atlantic City is a 638-room casino/hotel on
the Boardwalk in Atlantic City, New Jersey. At June 30, 1995, it had a
74,000-square-foot casino, including table games, slots, keno, poker and race
simulcasting, 13 restaurants and bars, 10,000 square feet of meeting and banquet
space, an 1,100-seat showroom, a shopping arcade, a Roman-themed transportation
center which accommodates 2,500 cars and 11 buses, a health club and tennis
courts. The property on which Caesars Atlantic City stands consists of
approximately 8.1 acres, including contiguous parcels totaling approximately 5.4
acres bounded on three sides by Missouri, Arkansas and Pacific Avenues, with an
entire block of Boardwalk frontage.
For the eleven months ended June 30, 1995, the average occupancy rate at
Caesars Atlantic City of 92.9% included occupancy of approximately 82.6% of the
available rooms and suites by guests receiving complimentary rooms. The average
occupancy rate at Caesars Atlantic City was 91.8%, 89.5% and 86.4% for the years
ended July 31, 1994, 1993, and 1992, respectively, including occupancy of 69.9%,
63.2% and 64.9%, respectively, of the available rooms and suites by guests
receiving complimentary rooms.
Recent major capital expenditures at Caesars Atlantic City include
completion of a casino expansion (including additional slot machines, table
games, poker games, and a keno and simulcasting area), remodeling and
refurbishing of guest rooms and the baccarat casino area and purchase of slot
equipment. Scheduled capital projects include casino renovation to add slot
machines, computer equipment, themed restaurants, replacement of slot machines
and renovation of guest rooms and suites.
CWI's casino gaming operations in Atlantic City, New Jersey are conducted
by Boardwalk Regency Corporation ("BRC"), which is a wholly owned subsidiary of
Caesars New Jersey, Inc. ("CNJ"), which, in turn, is a wholly owned subsidiary
of CWI, which in turn, will be a wholly owned subsidiary of ITT Sheraton (ITT
Sheraton, CWI, CNJ and BRC collectively referred to as the "Caesars New Jersey
Companies"). After the Distribution, ITT Sheraton will be a wholly owned
subsidiary of New ITT.
Windsor, Ontario. In December 1993, a newly-formed corporation, Windsor
Casino Limited ("WCL"), owned equally by a subsidiary of CWI, Circus Circus
Enterprises, Inc. and a subsidiary of Hilton Hotels Corporation was selected by
the government of Ontario, Canada, to develop and operate the Province's first
casino, in Windsor, Canada. In May 1994, a 50,000-square-foot interim casino,
owned by the government of Ontario and operated by WCL, was opened in Windsor.
WCL receives a management fee based on specified performance criteria of the
interim casino. The permanent hotel/casino complex, to be located on
120
<PAGE> 127
13 acres in downtown Windsor, is anticipated to be completed in 1997 at an
approximate estimated cost of $300 million. Each shareholder of WCL, including
CWI, is required to provide approximately $25 million of such capital. The
remaining $225 million is expected to be financed through outside sources.
Pocono Mountain Resorts. CWI also owns four non-gaming resorts in the
Pocono Mountains of Pennsylvania (collectively, the "Pocono Resorts"). The
Pocono Resorts are resort hotels which cater primarily to honeymoon and other
couples. At June 30, 1995, the Pocono Resorts had an aggregate of 769 rooms.
Subsidiaries of CWI exercised purchase options in respect of two of the Pocono
Resorts in June 1995.
Casino Credit. CWI's casino/hotels extend substantial amounts of credit to
their customers. Betting and credit limits of CWI are among the highest in the
industry. Substantial reserves are maintained against such casino accounts
receivable. For the year ended July 31, 1992, the provision for doubtful
accounts was 4.6% of credit extended. For the year ended July 31, 1993, the
provision was 4.8% of credit extended and for the year ended July 31, 1994,
increased to 5.3% of credit extended. For the eleven months ended June 30, 1995,
the provision was 4.1% of credit extended. The provision for doubtful accounts
includes the use of receivable allowances as a marketing tool to high-wagering
customers in Nevada. The amount of credit extended as a percentage of table game
drop at CWI's casinos is substantially higher in CWI's Nevada properties than in
New Jersey. The collectability of receivables depends, in part, upon the future
economic stability or significant events in the countries in which these
high-wagering customers live, including the enforceability of collecting casino
accounts receivable.
Marketing -- International and National. CWI has centralized its
international and national marketing activities in a subsidiary which markets on
behalf of, and coordinates among, CWI's three casino/hotels. The subsidiary's
international division has 82 representatives in 21 countries, including branch
offices in Bangkok, Hong Kong, Singapore, two in Taiwan, Vancouver, and Tokyo,
as well as several in the United States which serve national ethnic markets.
Through this subsidiary, CWI's international marketing division representatives:
search out and attract upper income customers to each of CWI's three
casino/hotels by actively promoting them as world class destination resorts;
evaluate and, in conjunction with CWI executives, oversee credit extension
practices in accordance with and to the extent allowed under gaming regulations;
and coordinate travel and entertainment arrangements. Although it is difficult
to estimate reasonably the level of casino win from international customers, CWI
estimates that table game (including baccarat) win from international customers
in the year ended July 31, 1994 comprised approximately 45% of its total table
game win.
CWI's marketing subsidiary also has a national marketing division similar
to the international division whose goal is to centralize and coordinate the
marketing activities of CWI's national branch offices and to attract national
customers to the three casino/hotels. This division has branch offices in ten
United States cities as well as independent agents in various United States
cities. National representatives perform functions similar to those of the
international division representatives, but have an additional objective of
broadening CWI's customer base to include additional middle-market customers.
Merchandising. Merchandising of Caesars branded products, including
fragrance products, is centralized in a subsidiary of CWI. Clothing, accessories
and gift items with the Caesars name are sold primarily at retail outlets
located at CWI's properties. This subsidiary manages these outlets as well as a
retail outlet at McCarran International Airport in Las Vegas and a retail site
and vendor carts in The Forum Shops at Caesars, a shopping complex adjacent to
Caesars Palace owned by an unaffiliated party. CWI's fragrance lines, "Caesars
for Women" and "Caesars Man", along with the "Ferentina" spa line, are sold in
retail outlets located at CWI's properties, in a limited number of other stores
and through other distribution channels domestically and internationally. The
subsidiary also has licensing agreements for jewelry, games and giftware and has
the responsibility for creating unique merchandise for special entertainment and
sporting events held at CWI's properties.
Sheraton Desert Inn Resort & Casino
The Sheraton Desert Inn Resort & Casino, which was purchased, through a
wholly owned subsidiary, by ITT Sheraton in November 1993, is a casino/hotel
complex located on approximately 200 acres on the
121
<PAGE> 128
"Strip" in Las Vegas, Nevada. At June 30, 1995, the Sheraton Desert Inn had 821
hotel rooms and suites, five restaurants, a 636-seat showroom, a convention
complex with approximately 24,500 square feet of meeting and banquet space,
numerous bars and lounges, a shopping arcade, three swimming pools, tennis
facilities, an 18 hole golf course and other facilities. Its casino is
approximately 20,000 square feet. Casino games include baccarat, black jack,
dice, roulette, slot machines, keno and big "6".
For the six months ended June 30, 1995, the average occupancy rate at
Sheraton Desert Inn of 82.3% included occupancy of approximately 19.4% of the
available rooms and suites by guests receiving complimentary rooms. In 1994, the
average occupancy rate at Sheraton Desert Inn of 78.4% included occupancy of
approximately 18.3% of the available rooms and suites by guests receiving
complimentary rooms. The average hotel occupancy rate at Sheraton Desert Inn was
82.6% and 80.4% in 1993 and 1992, respectively, including occupancy of 18.9% and
16.8%, respectively, of the available rooms and suites by guests receiving
complimentary rooms.
The Sheraton Desert Inn is owned and operated by Sheraton Desert Inn
Corporation ("SDI"), which is a wholly owned subsidiary of Sheraton Gaming
Corporation ("SGC"), which, in turn, is a wholly owned subsidiary of ITT
Sheraton (ITT Sheraton, SGC and SDI, collectively referred to as the "Sheraton
Desert Inn Companies"). After the Distribution, ITT Sheraton will be a wholly
owned subsidiary of New ITT.
Like the CWI casino/hotels, the Sheraton Desert Inn extends substantial
amounts of credit to its customers. Betting and credit limits at this casino are
among the highest in the industry. Substantial reserves are maintained against
such casino accounts receivable. As in the case of the CWI casino/hotels, the
provision for doubtful accounts includes the use of receivable allowances as a
marketing tool to high-wagering customers. The collectability of receivables
depends, in part, upon the future economic stability or significant events in
the countries in which these high-wagering customers live, including the
enforceability of casino accounts receivable.
Tunica
The Sheraton Casino opened in Robinsonville, Tunica County, Mississippi in
August 1994. At June 30, 1995, the Sheraton Casino had three restaurants, three
bars and lounges and other facilities. Its casino has approximately 31,000
square feet. Casino games include mini-baccarat, black jack, craps, roulette,
slot machines, Caribbean stud poker, big "6" and "let it ride". There are
currently no hotel facilities at this casino. ITT Sheraton has a plan under
consideration in which it would manage a new Sheraton hotel adjacent to the
casino.
The Sheraton Casino is owned and operated by Sheraton Tunica Corporation
("STC"), which is a wholly owned subsidiary of SDI.
Other
In October, 1994, ITT Sheraton expanded its foreign casino gaming
operations with the opening of a casino in Lima, Peru in the Sheraton Lima Hotel
& Towers now renamed the Sheraton Lima Hotel & Casino, which has 438 rooms and
suites. In December 1994, the government of the Province of Nova Scotia, Canada
announced that a 95%-owned joint venture of ITT Sheraton had been selected as
the developer for the only two casinos to be permitted in the Province and that
ITT Sheraton had been selected as the operator, on behalf of the Provincial
government, of such casinos. These casinos will be located in the city of
Halifax, the Provincial capital, and in the city of Sydney, located in the Cape
Breton area of the Province. A temporary casino in Halifax will initially be
housed in the 353-room ITT Sheraton hotel in Halifax, while a new ITT Sheraton
casino is being constructed in Halifax in close proximity to that ITT Sheraton
hotel. ITT Sheraton also operates casinos in Australia and Egypt.
Both ITT Sheraton and CWI are actively exploring various gaming
opportunities in the United States and internationally. There can be no
assurance, however, that any of these projects or proposals will ultimately
result in completed and operating facilities.
122
<PAGE> 129
MADISON SQUARE GARDEN
In March 1995, ITT, in partnership with an indirect subsidiary of
Cablevision, acquired MSG for approximately $1 billion. MSG's activities include
owning and operating the Madison Square Garden Arena, which seats approximately
20,000 people, The Paramount, a special events theater which seats approximately
5,600 people, the New York Knicks of the National Basketball Association (the
"NBA") and the New York Rangers of the National Hockey League (the "NHL"). It
also supplies and distributes television programming for cable systems
principally in New York, New Jersey and Connecticut through the MSG Network. Its
programming includes its own sporting events and rights to the New York Yankees
baseball games through the year 2000. In addition, MSG produces, promotes and/or
presents live entertainment, which includes television event production of the
Miss Universe, Miss USA and Miss Teen USA pageants and auto thrill shows through
SRO Motorsports, an operating unit of MSG.
Ownership Structure
On March 10, 1995, MSG Holdings, L.P. ("Holdings"), a partnership among
subsidiaries of Rainbow Programming Holdings, Inc. ("Rainbow Programming"), a
wholly owned subsidiary of Cablevision, and wholly owned subsidiaries of ITT
acquired the business and assets of Madison Square Garden Corporation in a
transaction in which that corporation merged with and into Holdings.
Holdings funded the purchase price of the acquisition through (i)
borrowings of $289.1 million under a credit agreement among Holdings, various
lending institutions and Chemical Bank as administrative agent, (ii) an equity
contribution from Rainbow Programming of $110 million and (iii) an equity
contribution from ITT of $610 million. Pursuant to agreements among ITT, Rainbow
Programming and Cablevision, within 12 months (18 months under certain
circumstances) following the MSG closing, Rainbow Programming may elect to
acquire interests in Holdings from ITT sufficient to equalize the equity
ownership of ITT and Rainbow Programming in Holdings (the "Equalization
Interest"). Rainbow Programming has the option during such period to (i) acquire
all or a portion of the Equalization Interest for cash (including interest on
such Equalization Interest at the rate of 11 1/2% per year calculated from the
MSG acquisition closing date), (ii) maintain its investment at the initial level
or (iii) require ITT to purchase all or any portion of Rainbow Programming's
initial interest in Holdings at the price paid by Rainbow Programming plus an
adjustment for Rainbow Programming's share of Holdings' operating income after
interest expense following the MSG acquisition closing. Management of ITT
expects to receive payment in respect of the Equalization Interest as
contemplated by the terms of the applicable agreements.
Initially Holdings will be managed on a 50-50 basis by Rainbow Programming
and ITT. If Rainbow Programming does not equalize its ownership interest in
Holdings as discussed above, its management role will effectively be eliminated.
The name of Holdings has been changed to Madison Square Garden, L.P.
MSG Network
The MSG Network is an advertiser-supported cable television entertainment
program service that was launched in October 1969. The MSG Network's programming
is distributed primarily via satellite for distribution by cable television
operators and other video distributors principally in New York, New Jersey and
Connecticut. The MSG Network currently has over 5,000,000 homes that are
subscribers in the New York, New Jersey and Connecticut metropolitan area.
The MSG Network derives revenue from two principal sources: sale of
advertising time on the network and receipt of per-subscriber license fees paid
by cable operators and other distributors pursuant to negotiated carriage
arrangements.
The sale of advertising time is affected by viewer demographics, viewer
ratings and market conditions. In order to evaluate the level of its viewing
audience, the MSG Network makes use of the metered method of audience
measurement. This method, which provides a sample through the use of meters
attached to television sets, produces a continuous measurement of viewing
activity within those households. The MSG
123
<PAGE> 130
Network utilizes the services of A.C. Nielsen, the metered estimates of which
are widely accepted by advertisers as a basis for determining advertising
placement strategy and rates.
The MSG Network programming generally consists of sporting events and is
filled through program rights to various sporting events, particularly rights
with respect to the New York Yankees baseball games, and its own sporting events
and related productions, particularly New York Knicks and New York Rangers games
and events held at the Madison Square Garden Arena.
The MSG Network has acquired programming rights from the New York Yankees
to broadcast its baseball games through the year 2000, for an aggregate of
$493.5 million. In addition to rights fees paid to the New York Yankees, the MSG
Network pays a fee to (i) the NBA for distribution of New York Knicks games to,
as a general matter, households located outside of a 75 mile radius of New York
City and (ii) the NHL for distribution of New York Rangers games to, as a
general matter, households located outside of a 50 mile radius of New York City.
New York Knicks
MSG owns the New York Knicks, a member of the NBA. The New York Knicks play
their home games in the Madison Square Garden Arena, which is owned and operated
by MSG.
The NBA, through its constitution, has established rules governing club
operations, including drafting of players and trading player contracts. The New
York Knicks are subject to payment of ongoing assessments and dues to the NBA
and to compliance with the constitution and by-laws of the NBA, as the same may
be modified from time to time by the membership, as well as with rules
promulgated by the Commissioner of the NBA. These rules include standards of
conduct for players and front office personnel; methods of operation; procedures
for drafting new players and for purchasing, selling and trading player
contracts; rules for implementing disciplinary action relative to players,
coaches and front office personnel; and certain financial requirements.
In addition to ticket revenues from home games (basketball clubs in the NBA
do not share in gate receipts from games away from home), a portion of the New
York Knicks' revenues is derived from a pro-rata share of the network broadcast
rights fees received by the NBA, pursuant to a broadcast rights fee agreement
through the 1997-1998 seasons awarded to NBC Sports, a division of the National
Broadcasting Company, and from a pro-rata share of the broadcast rights fees
received by the NBA, pursuant to the broadcast rights fee agreement through the
1997-1998 season awarded to TBS Superstation and Turner Network Television,
Inc., affiliates of Turner Broadcasting System, Inc. The New York Knicks also
receive revenue from local cable rights fees for games broadcast by the MSG
Network and from local radio rights fees for games broadcast by WFAN-AM.
Other sources of revenues for the New York Knicks' operations include
promotional and novelty revenues, including royalties from NBA Properties, Inc.,
and a pro rata share of expansion fees paid by new NBA franchises.
NBA players are represented for collective bargaining purposes by the
National Basketball Players' Association (the "NBPA"). During June 1988, the NBA
and the NBPA agreed to a new six-year collective bargaining agreement, that,
among other things, reduced the NBA draft to three rounds for the 1988-89 season
(two rounds in subsequent years), continued the salary cap, which ties a team's
payroll to the league's gross revenues, as defined, and altered free agency
guidelines regarding the right of first refusal. A player may, under certain
circumstances, become a total free agent upon termination of his contract. For
the 1994-95 season, the NBA and NBPA operated without a collective bargaining
agreement but essentially under the same terms as the last agreement. On July 1,
1995, with the NBA team owners and the players unable to reach an agreement on a
new collective bargaining agreement, the owners decided to "lock-out" the
players. During the "lock-out", teams are prohibited from making trades, signing
players and conducting summer rookie and free agent camps, and the players are
prohibited from using team training facilities. On August 8, 1995 the NBA and
NBPA reached a new collective bargaining agreement; however, the "lock-out" will
remain in effect until such agreement is ratified by the players.
124
<PAGE> 131
New York Rangers
MSG owns the New York Rangers, a member of the NHL. In addition to owning
the New York Rangers, MSG licenses the Rangers name in connection with the
operation of a minor league hockey team in Binghamton, New York. The New York
Rangers play their home games in the Madison Square Garden Arena.
The NHL, through its constitution, has established rules governing club
operations, including drafting of players and trading player contracts. The New
York Rangers are subject to payment of ongoing assessments and dues to the NHL
and to compliance with the constitution and by-laws of the NHL, as the same may
be modified from time to time by the membership, as well as with rules
promulgated by the Commissioner of the NHL. These rules include standards of
conduct for players and front office personnel; methods of operation; procedures
for drafting new players and for purchasing, selling and trading player
contracts; rules for implementing disciplinary action relative to players,
coaches and front office personnel; and certain financial requirements.
In addition to ticket revenues from home games, a portion of the New York
Rangers' revenues is derived from a pro-rata share of the revenues generated
through contracts negotiated with television networks. The principal broadcast
agreements are with the Entertainment and Sports Programming Network ("ESPN")
and the Fox Television Network, covering the 1994-1995 through 1998-1999
seasons. In early 1994, the NHL negotiated a four-year extension of the
exclusive Canadian television broadcast agreement with Molson Companies Ltd. The
New York Rangers also receive revenue from local cable rights fees for games
broadcast by the MSG Network and from local radio rights fees for games
broadcast by WFAN-AM.
Other sources of revenues for the New York Rangers' operations include
promotional and novelty revenues including royalties from NHL Enterprises, Inc.,
and a pro rata share of expansion fees paid by new NHL franchises.
NHL hockey players are represented for collective bargaining purposes by
the National Hockey League Players' Association (the "NHLPA"). During the
1993-1994 season, the NHL and NHLPA operated without a collective bargaining
agreement as the existing agreement expired on September 15, 1993. However, as a
result of a labor dispute between the NHL and NHLPA concerning the terms of a
new collective bargaining agreement, the 1994-1995 season began with a
"lock-out". A new collective bargaining agreement was agreed to in mid-January
1995, which, among other things, instituted an escalating salary cap on draft
picks and altered salary arbitration allowing teams to decline three times over
a period of two years (but not all in one year) to accept an unfavorable salary
arbitration decision over $550,000, the league average salary (which figure
escalates as the league average salary grows). Negotiations on the collective
bargaining agreement may be opened by either side after the 1997-1998 season. As
a result of the "lock-out", the NHL scheduled only 48 regular season games for
the 1994-1995 season.
Madison Square Garden Arena
The principal tenants of the Madison Square Garden Arena are the New York
Knicks and the New York Rangers. In addition to the New York Knicks basketball
games and New York Rangers hockey games, MSG derives revenues from various other
activities and events held at the Madison Square Garden Arena and The Paramount.
These events include various other sporting events, concerts, family shows, the
circus, trade shows, conventions and other special events. MSG generates revenue
through luxury suite licensing, concessions (fast food, restaurants and
catering), ticket sales and merchandise sales.
Other
MSG produces, promotes and/or presents live entertainment. Some of the more
prominent events or activities include television event production of the Miss
Universe, Miss USA and Miss Teen USA pageants and auto thrill shows through SRO
Motorsports, an operating unit of MSG.
125
<PAGE> 132
WNYC-TV
In August 1995, ITT, in a 50/50 partnership with Dow Jones & Co. ("Dow
Jones"), agreed to purchase television station WNYC-TV Channel 31 from New York
City. The purchase, subject to approval by the Federal Communications Commission
and other customary conditions, is expected to close in early 1996. The purchase
price of $207 million will be split evenly by the two companies and the
partnership will be managed on a 50/50 basis.
Together, ITT and Dow Jones plan to rename the station WBIS+, and to
replace the station's mix of public-service and international programming with a
broad range of business news during the day and professional sports and other
events at night. Among other things, the companies would hope to broadcast
coverage of the New York Knicks, the New York Rangers and the New York Yankees,
whose broadcast rights are currently owned by the ITT/Cablevision partnership
relating to MSG.
INFORMATION SERVICES
ITT WORLD DIRECTORIES
After the Distribution, New ITT through an 80%-owned subsidiary, ITT World
Directories, Inc. ("ITT World Directories"), will engage in the publication of
telephone directories, including classified directory services for telephone
subscribers in numerous countries outside the United States, as well as in
Puerto Rico and the United States Virgin Islands. ITT World Directories is among
the world's largest publishers of yellow pages directories (in terms of
advertising revenues). BellSouth Corporation owns the remaining 20% of ITT World
Directories.
Overview
ITT World Directories publishes traditional telephone
directories -- alphabetical and classified -- and also publishes specialized
directories, including directories of facsimile numbers and business-to-business
directories. ITT World Directories' principal source of revenues in connection
with its operations is advertising revenue generated by advertisements published
in its directories. Its principal publications are in Belgium, The Netherlands,
Portugal, The Republic of Ireland, Puerto Rico and the United States Virgin
Islands. ITT publishes directories in these jurisdictions either pursuant to a
contract with the existing national telecommunications provider or as a
proprietary directory in such jurisdiction after expiration of such a contract.
ITT World Directories is currently the largest publisher of telephone
directories in each of the various countries that it serves. ITT World
Directories is continuing a program of product diversification and, where
possible, geographic expansion, as exemplified by its recent return to South
Africa and the participation with the entity providing management services to
the publisher of telephone directories in that country. It also recently
established a joint venture with Thomas Publishing Co. for a Pan-European
industrial directory. The first directory was published in Europe by this joint
venture in April 1995.
Historically, the business of ITT World Directories had consisted of
contracts for the publication of telephone directories with monopoly providers
of telecommunications services. In many jurisdictions, the monopoly provider of
telecommunications services was obligated to publish white pages telephone
directories and the obligation or right (depending on the jurisdiction) to
publish yellow pages directories (and thus claim significant advertising
revenues) went along with the requirement to publish white pages. As a means of
satisfying its publication obligations, various monopoly providers contracted
with ITT World Directories to publish telephone directories. Some of the current
business of ITT World Directories remains consistent with this historical source
of business. However, one of the most important factors currently affecting the
business of ITT World Directories is the changing competitive environment in the
member states of the European Union in which it publishes telephone directories.
Specifically, in Belgium and The Netherlands, the historical contractual
relationship between ITT World Directories and the national telecommunications
entity, namely Belgacom and PTT Telecom, respectively, were not renewed or
extended when the last contract term expired. As contracts are scheduled for
renewal in other jurisdictions within the European Union, the contracts there
may also not be renewed or extended, thereby possibly adversely affecting ITT
World Directories.
126
<PAGE> 133
A second important factor affecting the business of ITT World Directories
is the challenge presented by new interactive and other technologies (including
as the traditional yellow pages market moves to a paperless product). The
operating performance of ITT World Directories is not expected to be materially
adversely affected by the emergence of new technologies in the immediate future.
However, if ITT World Directories is not successful in implementing a strategy
to apply new technologies to its business, its longer-term operating results may
be adversely affected. These new technologies are likely to include information
delivery methods such as CD ROMs and computer diskettes and operator-assisted
yellow pages. ITT World Directories has activities in this arena. Specifically,
in Portugal, ITT World Directories has had an operator-assisted yellow pages in
operation for three years; in Belgium and The Netherlands, it is publishing its
classified directories on CD ROM and it is publishing a fax directory in
Portugal on CD ROM; and it is working with the directory operation in South
Africa on enhancing the operator-assisted yellow pages that have been in
operation there for approximately nine years.
Belgium
ITT World Directories through its subsidiary, ITT Promedia, had been the
only publisher of a classified directory in Belgium for approximately 25 years.
ITT World Directories is now facing competition in Belgium from Belgacom
Directory Services ("BDS"), an 80% subsidiary of Belgacom, the Belgian national
telephone company, in partnership with GTE Directories. Previously, ITT
Worldwide Directories had a contract with Belgacom to publish telephone
directories. When the completion of the last contract with the publication of
the 1994 directories occurred and a renewal was not negotiated, Belgacom chose
to compete with ITT World Directories through BDS.
The operations of ITT World Directories in Belgium are among its most
significant. Accordingly, any adverse developments in the competitive
environment in Belgium could adversely impact the operating performance of ITT
World Directories. Belgacom and ITT World Directories are currently in
litigation in Belgium over Belgacom's position regarding the financial and
commercial terms for access by ITT World Directories to the database necessary
to publish classified and alphabetical directories. Belgacom maintains that,
under the current regulatory framework in Belgium, ITT World Directories is
required both to purchase the database from it and to publish white pages
directories. ITT World Directories maintains that the regulatory framework
permits Belgacom to abuse its dominant position in violation of Belgian and
European Union law; and that the fee for the subscriber data established by
Belgacom is in violation of Belgian and European Union law in that it is not
fair or reasonable and may well be discriminatory. In addition to the matter
pending in Belgian Commercial Court, the issues have been raised in a complaint
by ITT Promedia filed with the European Union and in a complaint filed by ITT
Promedia with the Belgian Competition Service.
The Netherlands
ITT World Directories, through its subsidiary, ITT World Directories
Netherlands, had been the principal publisher of a classified directory in The
Netherlands for approximately 25 years. The national telephone company of The
Netherlands, PTT Telecom Nederland ("PTT"), has now begun publishing a
classified directory along with the white pages directories it previously
published. PTT is in partnership with Telemedia of Sweden. This new competitive
dynamic could adversely impact ITT World Directories. Previously, ITT World
Directories had a contract with PTT to publish classified telephone directories
which was not renewed or extended. Instead, PTT chose to compete with ITT World
Directories. The impact of this new competitor could be adverse to ITT World
Directories, but to a lesser extent than in Belgium since the more limited
market penetration in classified directory advertising in The Netherlands leaves
more room for expansion in the market.
Portugal
ITT World Directories, through its subsidiary, ITT Paginas Amarelas, has a
contract with the national telephone company of Portugal, Portugal Telecom, for
the publication of telephone directories in Portugal. The contract expires with
the completion of the 1997 directories and discussions toward an extension or
127
<PAGE> 134
renewal of the collaboration have not yet commenced. Telecom Portugal has
recently introduced a product facsimile directory (outside the contract with ITT
Paginas Amarelas) that competes with ITT World Directories' facsimile directory.
This new competitive dynamic may portend an adverse impact for ITT World
Directories in Portugal after 1997.
Puerto Rico/United States Virgin Islands
ITT World Directories publishes telephone directories in Puerto Rico and
the United States Virgin Islands through its subsidiary, ITT Intermedia. ITT
Intermedia has a contract with the Puerto Rico Telephone Company through 1996
and has reached an agreement in principle for a three-year extension on more
favorable terms, which extension would run through 1999. These markets are
characterized by the continuing effects of an economic downturn.
The Republic of Ireland
ITT World Directories, through its 51%-owned subsidiary, Golden Pages Ltd.
("Golden Pages"), has a contract with Telecom Eireann, the national telephone
company of The Republic of Ireland, for the publication of telephone directories
in The Republic of Ireland. The contract expires in 1999. Telecom Eireann owns
the remaining equity in Golden Pages. In the Republic of Ireland, Golden Pages
competes with a proprietary directory, The Independent, which competitor is
concentrated in the Dublin market.
South Africa
In September 1994, ITT World Directories acquired a 50% equity interest in
the Maister Management Company ("MMC") in South Africa, an ownership position
that ITT World Directories previously had disposed of as a result of political
events in South Africa. MMC has a contract to manage sales, marketing and other
operations of telephone directories published by South African Telkom, including
proprietary software for electronic directory services. The contract expires in
1999 when the contract of South African Telkom to publish directories also
expires.
Other
ITT World Directories has a consulting agreement and software license and
support agreements with Nippon Telegraph and Telephone ("NTT") in Japan through
a joint venture company in which ITT World Directories has a minority position.
The consulting and related agreements expire on March 31, 1999. Under the
agreements, ITT World Directories provides consulting and other assistance in
connection with the publication by NTT of telephone directories. The contract
that expires on March 31, 1999, is for a term of three years and follows two
previous five-year contracts between NTT and ITT World Directories.
ITT World Directories recently entered into a consulting arrangement with
Norwegian Telkom to assist such company in the publication of telephone
directories and other matters. ITT also is pursuing opportunities in other
jurisdictions, although there can be no assurance that any such efforts will be
successful.
ITT EDUCATIONAL
Prior to its initial public offering, which was consummated on December 27,
1994, ITT Educational Services, Inc. ("ITT Educational") was a wholly owned
subsidiary of ITT. After the Distribution, New ITT will beneficially own 83.3%
of the outstanding shares of common stock of ITT Educational. The shares of
common stock of ITT Educational are traded on the NYSE under the symbol "ESI".
The term "ITT Technical Institutes" (in singular or plural form) refers to
educational institutions owned and operated by ITT Educational.
Overview
ITT Educational is a leading proprietary provider of technical
postsecondary degree programs in the United States based on student enrollment.
ITT Educational offers degree programs and non-degree diploma
128
<PAGE> 135
programs to over 20,000 students through a system of 56 ITT Technical Institutes
located in 25 states. These programs are designed, after consultation with
employers, to provide students with the knowledge and skills necessary for
entry-level employment in technical positions in a variety of industries.
ITT entered the education services business in 1966 through the acquisition
of a predecessor of ITT Educational which owned three technical institutes. In
1981, ITT Educational began a strategy of significant expansion, acquiring three
and establishing 43 new technical institutes since that date. Of the 56
institutes currently operating, 23 were established since 1989. As a result of
adding new institutes and increasing enrollment at existing institutes, the
number of students attending Technical Institutes rose from 15,582 students at
December 31, 1989, to 20,365 students at June 30, 1995, while the number of new
high school graduates in the general population continued to decline. ITT
Educational has recently accelerated its expansion program, opening five new
technical institutes in 1993 and six more institutes in 1994. ITT Educational
expects to have a total of 58 institutes operating by the end of 1995.
ITT Educational's revenue varies based on the aggregate student population,
which is influenced by the number of students attending ITT Technical Institutes
at the beginning of a fiscal period, by the number of new students entering and
former students reentering ITT Technical Institutes during such period and by
student retention rates. New students enter ITT Technical Institutes at the
beginning of each academic quarter, which commence in March, June, September and
December. ITT Educational believes that the size of its student population is
affected to some extent by general economic conditions, and that, in the absence
of countervailing factors, student enrollments and retention rates would tend to
increase as opportunities for immediate employment for high school graduates
decline and decrease as such opportunities increase. The establishment of new
ITT Technical Institutes and the introduction of additional program offerings at
existing ITT Technical Institutes have been significant factors in increasing
the aggregate student population in recent years.
The postsecondary education industry is highly regulated and thus the
business of ITT Educational is materially influenced by applicable regulations.
For a discussion of the regulatory environment applicable to ITT Educational,
see "-- GOVERNMENTAL REGULATION AND RELATED MATTERS -- ITT EDUCATIONAL".
Student Admissions and Retention
All applicants for admission to any of the ITT Technical Institutes are
required to have a high school diploma or a recognized equivalent and also must
pass an admissions examination. Students interested in bachelor's degree
programs must satisfy additional admissions criteria which generally require,
among other things, that the student first earn an associate's degree or
complete an equivalent level program in the same or a related subject matter.
Students are most likely to withdraw before they begin their second
academic quarter of study at an ITT Technical Institute. Approximately 70% of
all students who continue their education past their first academic quarter
complete their education at an ITT Technical Institute. It is anticipated that
certain state regulatory entities may establish certain standards for withdrawal
and completion rates. See "-- GOVERNMENTAL REGULATION AND RELATED MATTERS -- ITT
EDUCATIONAL" for a more detailed discussion.
Graduate Placement
ITT Technical Institutes have graduated over 100,000 students since 1976.
Based on information from students and employers, ITT Educational believes that
students graduating from the ITT Technical Institutes during 1990-1994 obtained
employment in a field related to their program of study as of June 30 or earlier
of the year following graduation at rates ranging from 80-85% of placeable
graduates (excluding graduates who continue in a bachelor's degree program at an
ITT Technical Institute).
129
<PAGE> 136
Administration
Each ITT Technical Institute is administered by a director who has overall
responsibility for the management of the technical institute. The administrative
staff of each ITT Technical Institute also includes a director of recruitment, a
director of placement, a director of finance and a director of education.
Intercompany Agreements
Under agreements with ITT Educational, ITT provides certain administrative,
financial, treasury, accounting, tax and other services to ITT Educational and
makes available certain of its employee benefit plans to ITT Educational's
employees. In addition, ITT Educational and ITT have entered into a number of
intercompany agreements covering matters such as corporate governance, tax
sharing arrangements, registration rights and the use of the "ITT" name. As part
of the Distribution, these various agreements will be amended to replace ITT
with New ITT as the counterparty to ITT Educational.
Dividend Policy
ITT Educational does not currently pay dividends in respect of its shares
of common stock and does not intend to pay dividends for the foreseeable future.
ALCATEL ALSTHOM
In July 1992, ITT sold its 30% equity interest in Alcatel N.V., a
Netherlands company which is one of the largest telecommunications equipment
manufacturers in the world, to Alcatel Alsthom, a major French company which
owned the other 70% of Alcatel N.V. At the closing of the sale, ITT received $1
billion in cash and 9.1 million capital shares of Alcatel Alsthom, recorded at
$806 million, which, at December 31, 1994, represented approximately 6% of the
outstanding capital shares of Alcatel Alsthom. In addition, ITT received a cash
payment of approximately $767 million in July 1993 and a cash payment of
approximately $817 million in July 1994. New ITT expects to retain its equity
interest in Alcatel Alsthom until at least July 1997, unless Alcatel Alsthom and
New ITT agree otherwise. Mr. Rand V. Araskog, Chairman, President and Chief
Executive of ITT is a member of the board of directors of Alcatel Alsthom.
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 company.
COMPETITION
HOSPITALITY & ENTERTAINMENT
Hotel operations
Competition in the hotel industry is vigorous and is generally based on
quality of service, attractiveness of facilities and locations, consistency of
product offerings, price and other factors. Room revenues, which are determined
by occupancy levels and room rates, have continued to be constrained in certain
of the markets in which ITT Sheraton hotels are located as a result of economic
factors, overbuilt markets, price sensitive customers and other factors. The
principal competitors of ITT Sheraton hotels include Hilton, Marriott, Hyatt,
and various other hotels, motels and inns located in the markets in which ITT
Sheraton hotels compete. Ciga faces similar competitive dynamics in its markets.
Gaming Operations
New ITT's gaming operations face intense competition from other companies
in the gaming industry. New ITT's Las Vegas properties compete primarily with
casino/hotels on the Las Vegas Strip, and to a lesser extent with operations
outside of Las Vegas and the State of Nevada. Although the Las Vegas market has
absorbed recent growth, the trend of industry expansion is expected to continue
over the next several years. It is possible that the expansion of existing
casinos and the opening of additional casino/hotels may further increase the
competition for customers and for trained employees and thus adversely impact
New ITT's gaming operations in Las Vegas. New ITT casino facilities in
Stateline, Nevada, Atlantic City, New Jersey
130
<PAGE> 137
and Tunica County, Mississippi also face intense competition for similar reasons
and under similar circumstances. New ITT's casino/hotel and casino operations
are likely to experience increased competition as other states authorize casino
gaming and other gaming activities and as non-United States countries authorize
gaming.
Competition in the gaming industry is generally based on the quality of the
facilities and services and the entertainment offered at such facilities. In
addition, New ITT believes that name and reputation are significant competitive
factors.
Madison Square Garden
As a supplier and distributor of television programming, the MSG Network
competes with other such suppliers and distributors of television programming
for cable systems. The MSG Network also competes for viewers with other forms of
programming provided to cable subscribers such as broadcasting networks and
local over-the-air television stations, home video viewership, movie theaters
and all other forms of audio/visual entertainment, news and information
services. MSG's sports and entertainment operations compete against other
sporting and entertainment events in their respective areas and other
entertainment and leisure activities.
INFORMATION SERVICES
ITT World Directories
ITT World Directories faces competition in various of its markets from
other publishers of telephone directories. In particular, new competitors in
Belgium and The Netherlands and existing competitors in other jurisdictions
could adversely impact the operating results of ITT World Directories and thus
New ITT. For a more complete discussion of the competitive environment affecting
the business of ITT World Directories, see "-- INFORMATION SERVICES -- ITT WORLD
DIRECTORIES -- OVERVIEW". ITT World Directories also faces competition from
other sources of advertising, including newspapers, television, direct mail,
radio, magazines, outdoor advertising and other sources.
ITT Educational
The postsecondary education market in the United States is highly
fragmented and competitive, with no private or public institution enjoying a
significant market share. ITT Technical Institutes compete for students with
four-year and two-year degree granting institutions, which include
not-for-profit public and private colleges and proprietary institutions, as well
as with alternatives to higher education, such as military service or immediate
employment. Competition among educational institutes is believed to be based on
the quality of the educational program, perceived reputation of the institution,
cost of the program and employability of graduates. Certain public and private
colleges may offer programs similar to those of ITT Technical Institutes at a
lower tuition cost due in part to government subsidies, foundation grants, tax
deductible contributions or other financial resources not available to
proprietary institutions. Other proprietary institutions offer programs that
compete with those of the ITT Technical Institutes. Certain of ITT Educational's
competitors in both the public and private sectors have greater financial and
other resources than ITT Educational.
EXPOSURE TO CURRENCY FLUCTUATIONS
Certain of the subsidiaries of New ITT conduct operations worldwide. New
ITT is therefore exposed to the effects of fluctuations in relative currency
values. Accordingly, the operating results of New ITT will be impacted by
fluctuations in relative currency values.
GOVERNMENTAL REGULATION AND RELATED MATTERS
CASINO GAMING REGULATION -- GENERAL
The ownership and/or operation of casino gaming facilities in the United
States are subject to extensive Federal, state and local regulations. On the
Federal level, in addition to all other relevant Federal regulation,
131
<PAGE> 138
New ITT's casino gaming operations are specifically subject to the compliance
with the Gambling Devices Act of 1962, as amended, and the Bank Secrecy Act, as
amended; these govern the ownership, possession, manufacture, distribution and
transportation in interstate commerce of gaming devices and the recording and
reporting of currency transactions, respectively. New ITT's Nevada casino gaming
operations -- at the Sheraton Desert Inn in Las Vegas, Caesars Palace in Las
Vegas, and Caesars Tahoe in Stateline -- are subject to the Nevada Gaming
Control Act (the "Nevada Act") and the licensing and regulatory control of the
Nevada Gaming Commission (the "Nevada Commission") and the Nevada State Gaming
Control Board (the "Nevada Control Board"), as well as various local, county and
state regulatory agencies (hereinafter collectively referred to as the "Nevada
Gaming Authorities"). New ITT's New Jersey casino gaming operations -- at
Caesars Atlantic City -- are subject to the New Jersey Casino Control Act (the
"New Jersey Act") and the licensing and regulatory control of the New Jersey
Commission and the New Jersey Department of Law & Public Safety, Division of
Gaming Enforcement (the "New Jersey DGE"), as well as various local, county and
state regulatory agencies (hereinafter collectively referred to as the "New
Jersey Gaming Authorities"). Due to its casino gaming operations in Mississippi,
New ITT's Mississippi casino gaming operations -- at the Sheraton Casino in
Robinsonville, Mississippi -- are subject to the Mississippi Gaming Control Act
(the "Mississippi Act") and the licensing and regulatory control of the
Mississippi Gaming Commission (the "Mississippi Commission"), as well as various
local, county and state regulatory agencies (hereinafter collectively referred
to as the "Mississippi Gaming Authorities").
New ITT's Ontario casino gaming operations -- through its one-third
interest in WCL -- are subject to the Ontario Gaming Control Act (the "Ontario
Act"), and the registration and regulatory control of the Ontario Gaming Control
Commission (the "Ontario Commission"), the Ontario Casino Corporation (the
"Ontario Corporation"), the Registrar of Gaming Control (the "Ontario
Registrar"), and the Director of Gaming Control (the "Ontario Director"), as
well as various local, county and provincial regulatory agencies (hereinafter
collectively referred to as the "Ontario Gaming Authorities"). New ITT's
incipient Nova Scotia casino gaming operations -- at Sheraton Casinos Nova
Scotia/Halifax and Sheraton Casinos Nova Scotia/Sydney -- are subject to the
Nova Scotia Gaming Control Act (the "Nova Scotia Act"), and the registration and
regulatory control of the Nova Scotia Gaming Commission, and the Nova Scotia
Gaming Corporation (the "Nova Scotia Corporation"), as well as various local,
county and provincial regulatory agencies (hereinafter collectively referred to
as the "Nova Scotia Gaming Authorities").
The casino gaming laws, regulations and supervisory procedures of Nevada,
New Jersey, Mississippi, Ontario and Nova Scotia are extensive and reflect
certain public policy considerations as to (i) the integrity of casino gaming
operations and its participants, (ii) the need for strict governmental and
regulatory control of casino gaming operations, (iii) the creation of economic
development, taxes and employment and (iv) the need to foster and enhance the
public confidence and trust in casino gaming regulation and control.
Changes to such laws, regulations and supervisory procedures could have an
adverse effect on New ITT's casino gaming operations and thus New ITT.
For a discussion of certain gaming regulatory approvals required in
connection with the Distribution, see "THE DISTRIBUTION -- REGULATORY
APPROVALS".
Nevada Gaming Regulation
The ownership and/or operation of casino gaming facilities in Nevada are
subject to state and local regulation. Nevada's casino gaming laws, regulations
and supervisory procedures are extensive and reflect certain broad declarations
of public policy. In general, Nevada's gaming laws, regulations and supervisory
procedures seek to (i) prevent unsavory or unsuitable persons from having any
direct or indirect involvement with gaming at any time or in any capacity, (ii)
establish and maintain responsible accounting practices and procedures, (iii)
maintain effective control over the financial practices of licensees, including
establishing minimum procedures for internal fiscal affairs and the safeguarding
of assets and revenues, providing reliable recordkeeping, and making periodic
reports to the applicable casino gaming authority, (iv) prevent cheating and
fraudulent practices and (v) provide a source of state and local revenues
through taxation and licensing fees.
132
<PAGE> 139
SDI, as the operator of the Sheraton Desert Inn, and DPI, as the operator
of Caesars Palace and Caesars Tahoe, are required to be licensed by the Nevada
Gaming Authorities. The casino gaming licenses are not transferable and must be
renewed periodically by the payment of casino gaming license fees and taxes. The
Nevada Commission requires that (i) SGC and ITT Sheraton be registered as
intermediary companies of SDI and (ii) CPC, CWI and ITT Sheraton be registered
as intermediary companies of DPI; the Nevada Commission also requires that New
ITT be registered as a publicly traded corporation. No person may become a
shareholder of, or receive any percentage of profits from, SDI or DPI without
first obtaining certain required licenses and approvals from the Nevada Gaming
Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, New ITT, the Sheraton
Desert Inn Companies or the Caesars Nevada Companies in order to determine
whether such individual is suitable or should be licensed as a business
associate of either SDI or DPI. Officers, directors and key employees of each of
SDI and DPI must be individually licensed by, and changes in corporate positions
must be reported to, the Nevada Gaming Authorities; the Nevada Gaming
Authorities may disapprove a change in corporate position. Certain officers,
directors and key employees of New ITT, ITT Sheraton and SGC who are actively
and directly involved in the gaming activities of SDI may be required to be
licensed or found suitable by the Nevada Gaming Authorities; similarly, certain
officers, directors and key employees of New ITT, ITT Sheraton, CWI and CPC who
are actively and directly involved in the gaming activities of DPI may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application for licensing for any cause
which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or finding of
suitability must pay all of the costs of the investigation.
If the Nevada Gaming Authorities find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
New ITT, the Sheraton Desert Inn Companies or the Caesars Nevada Companies, the
companies involved would be required to sever all relationships with such
person. In addition, the Nevada Gaming Authorities may require a registered
company or licensee to terminate the employment of any person who refuses to
file appropriate disclosures.
New ITT, the Sheraton Desert Inn Companies and the Caesars Nevada Companies
are required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all loans, leases, sales of securities and similar
financing transactions by either SDI or DPI must be reported to or approved by
the Nevada Commission. New ITT is required to maintain a current stock ledger in
Nevada that may be examined by the Nevada Gaming Authorities at any time. If any
securities are held in trust by an agent or by a nominee, the record holder may
be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such disclosure may be grounds for finding
the record holder unsuitable. New ITT is also required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require New ITT's stock certificates to bear a
legend indicating that such securities are subject to the Nevada Act. In
conjunction with its application for registration and approval of the
Distribution and the corporate organizational changes to occur prior to the
Distribution, New ITT intends to request that the Nevada Commission not impose
such a requirement on it. Neither New ITT nor any affiliated company of New ITT
may make a public offering of any securities without the prior approval of the
Nevada Commission if the securities or the proceeds therefrom are intended to be
used to construct, acquire or finance gaming facilities in Nevada, or to retire
or extend obligations incurred for such purposes. Such approval, if given, does
not constitute a finding, recommendation or approval by the Nevada Commission or
the Nevada Control Board as to the accuracy or adequacy of the prospectus or the
investment merits of the securities. Any representation to the contrary is
unlawful.
If it is determined that Nevada gaming laws were violated by SDI or DPI,
the gaming license each respectively holds could be limited, conditioned,
suspended or revoked. In addition, at the discretion of the Nevada Commission,
New ITT, the Sheraton Desert Inn Companies and the persons involved could be
subject to substantial fines for each separate violation of the Nevada gaming
laws by the Sheraton Desert Inn; similarly, and also at the discretion of the
Nevada Commission, New ITT, the Caesars Nevada Companies and the persons
involved could be subject to substantial fines for each separate violation of
the Nevada gaming
133
<PAGE> 140
laws by either Caesars Palace or Caesars Tahoe. Further, a supervisor could be
appointed by the Nevada Commission to operate either SDI's or DPI's respective
gaming properties and, under certain circumstances, earnings generated during
the supervisor's appointment (except for the reasonable rental value of SDI's or
DPI's respective gaming properties) could be forfeited to the State of Nevada.
Any suspension or revocation of either SDI's or DPI's license would have a
materially adverse effect on SDI or DPI, respectively, and thus could have a
materially adverse effect on New ITT.
The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of New ITT's voting securities at any
time. Nevada law requires any person who acquires more than 5% of any class of
New ITT's voting securities to report the acquisition to the Nevada Commission
and such person may be investigated and found suitable. Any person who becomes a
beneficial owner of more than 10% of any class of New ITT's voting securities
must apply for a finding of suitability by the Nevada Commission within 30 days
after the Nevada Control Board Chairman mails a written notice requiring such
filing, and must pay the costs and fees incurred by the Nevada Control Board in
connection with the investigation. Under certain circumstances, an
"institutional investor", as such term is defined in the Nevada Act and
regulations, that acquires more than 10% but not more than 15% of New ITT's
voting securities, may apply to the Nevada Commission for a waiver of such
finding of suitability requirements if such institutional investor holds the
voting securities for investment purposes only. An institutional investor shall
not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the Board of Directors
of New ITT, any change in New ITT's corporate charter, by-laws, management,
policies or operations of New ITT or any of its casino gaming operations, or any
other action which the Nevada Commission finds to be inconsistent with holding
New ITT's voting securities for investment purposes only. Notwithstanding the
foregoing, activities which are not deemed to be inconsistent with holding
voting securities for investment purposes only include (i) voting on all matters
voted on by shareholders, (ii) making financial and other inquiries of
management of the type normally made by securities analysts for informational
purposes and not to cause a change in its management, policies or operations and
(iii) such other activities as the Nevada Commission may determine to be
consistent with such investment intent. If the shareholder who must be found
suitable is a corporation, partnership or trust, it must submit detailed
business and financial information, including a list of beneficial holders.
The Nevada Commission may, in its discretion, require the holder of any
debt security of New ITT or any affiliated company of New ITT to file an
application, be investigated and found suitable to own such debt security. If
the Nevada Commission determines that a person is unsuitable to own such debt
security, then pursuant to the Nevada Act, New ITT, the Sheraton Desert Inn
Companies and the Caesars Nevada Companies can be sanctioned, including the loss
of their approvals, if without the prior approval of the Nevada Commission,
they: (i) pay to the unsuitable person any dividend, interest or any
distribution whatsoever; (ii) recognize any voting right by such unsuitable
person in connection with such securities; (iii) pay the unsuitable person
remuneration in any form; or (iv) make any payment to the unsuitable person by
way of principal, redemption, conversion, exchange, liquidation or similar
transaction.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
by the Chairman of the Nevada Control Board may be found unsuitable. Any holder
of any equity or debt security found unsuitable and who holds, directly or
indirectly, any beneficial ownership of New ITT's debt or equity voting
securities beyond such period or periods of time as may be prescribed by the
Nevada Commission may be guilty of a gross misdemeanor. New ITT could be subject
to disciplinary action if, without the prior approval of the Nevada Commission
and after New ITT receives notice that a person is unsuitable to be an equity or
debt security holder or to have any other relationship with New ITT, the
Sheraton Desert Inn Companies or the Caesars Nevada Companies, New ITT, the
Sheraton Desert Inn Companies, the Caesars Nevada Companies or any one of them
either (i) pays to the unsuitable person any dividend, interest or any
distribution whatsoever, (ii) recognizes any voting right by such unsuitable
person in connection with such securities, (iii) pays the unsuitable person
remuneration in any form, (iv) makes any payment to the unsuitable person by way
of principal, redemption, conversion, exchange, liquidation or similar
transaction or (v) fails to pursue all lawful efforts to require such unsuitable
134
<PAGE> 141
person to relinquish his securities including, if necessary, the immediate
purchase of such securities for cash at fair market value.
Regulations of the Nevada Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements or any form of
takeover without the prior approval of the Nevada Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Nevada Commission as to a variety of stringent standards prior to assuming
control of such corporation. The failure of a person to obtain such approval
prior to assuming control over the registered publicly traded corporation may
constitute grounds for finding such person unsuitable.
Regulations of the Nevada Commission also prohibit certain repurchases of
securities by registered publicly traded corporations without the prior approval
of the Nevada Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over
market price from certain holders of more than 3% of the outstanding securities
of the registered publicly traded corporation. The regulations of the Nevada
Commission also require prior approval for a "plan of recapitalization", as such
term is defined in the Nevada regulations; generally, a plan of recapitalization
is a plan proposed by the management of a registered publicly traded corporation
that contains recommended action in response to a proposed corporate acquisition
opposed by management of the corporation which acquisition itself would require
the prior approval of the Nevada Commission.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming operation outside
the State of Nevada is required to deposit with the Nevada Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Control Board of the Licensees'
participation in such foreign gaming. The revolving fund is subject to increase
or decrease in the discretion of the Nevada Commission. Once such revolving fund
is established, the Licensees may engage in gaming activities outside the State
of Nevada without seeking the approval of the Nevada Commission provided (i)
such activities are lawful in the jurisdiction in which they are to be conducted
and (ii) the Licensees comply with certain reporting requirements imposed by the
Nevada Act. Licensees are subject to disciplinary action by the Nevada
Commission if they or any one of them (i) knowingly violates any laws of the
foreign jurisdiction pertaining to the foreign gaming operation, (ii) fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, (iii) engages in activities
that are harmful to the State of Nevada or its ability to collect gaming taxes
and fees or (iv) employs a person in the foreign operation who has been denied a
license or finding of suitability in Nevada on the ground of personal
unsuitability.
New Jersey Casino Gaming Regulation
Casino gaming in New Jersey is subject to strict compliance with the New
Jersey Act, the strict supervision of the New Jersey Commission and compliance
with the regulations adopted by the New Jersey Commission. The New Jersey gaming
laws and regulations primarily concern (a) the financial stability and character
of casino operators, their employees, their security holders and others
financially interested in casino operations, and (b) the operating
methods -- including the rules of the games and credit issuance
procedures -- and the financial and accounting procedures used in connection
with casino operations. The New Jersey gaming laws and regulations include
detailed provisions concerning, among other things, (i) the type, manner and
number of applications and licenses required to conduct casino gaming and
ancillary activities, (ii) the licensing, regulation and curricula of gaming
schools, (iii) the establishment of minimum standards of accounting and internal
control, including the issuance and enforceability of casino credit, (iv) the
manufacture, sale, distribution and possession of gaming equipment, (v) the
rules of the games, (vi) the exclusion of undesirable persons, (vii) the use,
regulation and reporting of junket activities, (viii) the possession, sale and
distribution of alcoholic beverages, (ix) the regulation and licensing of
suppliers to licensed casino operators, (x) the conduct of entertainment within
licensed casino facilities, (xi) equal employment opportunity for employees of
licensed casino operators, contractors for casino facilities and the like, (xii)
the payment of gross revenue taxes and similar fees and expenses, (xiii) the
conduct of casino
135
<PAGE> 142
simulcasting and (xiv) the imposition and discharge of casino reinvestment
development obligations. A number of these regulations require practices which
are different from those in many casinos elsewhere and some of them result in
casino operating costs greater than those in comparable facilities elsewhere. As
a prerequisite to being licensed, a New Jersey casino/hotel facility must meet
certain facilities requirements concerning, among other things, the size and
number of guest rooms.
In order to operate Caesars Atlantic City, BRC must be licensed by the New
Jersey Commission, which has broad discretion with regard to the issuance,
renewal, revocation or suspension of licenses. A New Jersey casino license is
not transferable and must be renewed at designated periods of up to four years;
renewal is not automatic and involves an extensive review by the New Jersey DGE,
a report by the New Jersey DGE to the New Jersey Commission, an independent
intensive review by the New Jersey Commission, and the affirmative vote of at
least four of the five sitting Commissioners of the New Jersey Commission
sitting in a scheduled open public meeting. BRC's license to operate Caesars
Atlantic City was renewed on October 5, 1994 and expires on November 30, 1996.
Except for certain banking and lending institutions exempted under the New
Jersey Act, all financial backers, investors, mortgagees, debt holders,
landlords under leases relating to New Jersey casino/hotel facilities, all
lenders to BRC, all officers and directors of BRC and all casino and casino
service employees who work at Caesars Atlantic City have to be qualified,
licensed, approved or registered by or with the New Jersey Commission. In
addition, all contracts and leases entered into by BRC are subject to approval
by the New Jersey Commission.
As a prerequisite to BRC holding a license, New ITT, ITT Sheraton, CWI and
CNJ have to be approved by the New Jersey Commission due to their corporate
relationship to BRC. Thus, any debt or equity security holder of New ITT, ITT
Sheraton, CWI or CNJ will have to be found qualified. The qualification
requirement of any debt or equity security holder of New ITT may be waived based
on an express finding by the New Jersey Commission, with the consent of the
Director of the New Jersey DGE, that the security holder either (a) (i) is not
significantly involved in the activities of BRC, (ii) does not have the ability
to control New ITT, ITT Sheraton, CWI, CNJ or BRC and (iii) does not have the
ability to elect one or more members of the respective boards of directors of
New ITT, ITT Sheraton, CWI, CNJ or BRC, or (b) is an "institutional investor",
as such term is defined in the New Jersey Act and regulations; for purposes of
the former, the New Jersey Act presumes that any non-"institutional investor"
security holder who owns or beneficially holds 5% or more of the equity
securities of New ITT has the ability to control New ITT, ITT Sheraton, CWI, CNJ
or BRC, unless such presumption is rebutted by clear and convincing evidence.
The New Jersey Act and regulations define an "institutional investor" as
(i) any retirement fund administered by a public agency for the exclusive
benefit of Federal, state or local public employees, (ii) an investment company
registered under the Investment Company Act of 1940, (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency, (iv) a closed end investment trust, (v) a chartered
or licensed life insurance company or property and casualty insurance company,
(vi) banking or other licensed or chartered lending institutions, (vii) an
investment adviser registered under the Investment Advisers Act of 1940 or
(viii) such other persons as the New Jersey Commission may determine for reasons
consistent with the policies of the New Jersey Act. In the absence of a prima
facie showing by the Director of the New Jersey DGE that there is any cause to
believe that such institutional investor may be found unqualified, upon
application and for good cause shown, an institutional investor holding either
(a) less than 10% of the equity securities of New ITT or (b) New ITT debt
securities constituting less than 20% of the outstanding debt of New ITT and
less than 50% of the issue involved shall be granted a waiver of qualification
as to such holdings if (i) such securities are those of a publicly traded
corporation, (ii) the institutional investor's holdings of such securities were
purchased for investment purposes only and (iii) upon request by the New Jersey
Commission, the institutional investor files with the New Jersey Commission a
certified statement to the effect that the institutional investor has no
intention of influencing or affecting the affairs of New ITT, ITT Sheraton, CWI,
CNJ or BRC; notwithstanding the foregoing, the institutional investor is
permitted to vote on matters put to the vote of the outstanding security holders
of New ITT.
136
<PAGE> 143
If an institutional investor who has been granted a waiver subsequently
determines to influence or affect the affairs of New ITT, the institutional
investor must provide to the New Jersey Commission not less than 30 days prior
notice of such intent and the institutional investor must file with the New
Jersey Commission an application for qualification before taking any action that
may influence or affect the affairs of New ITT. Notwithstanding the foregoing,
the institutional investor is permitted to vote on matters put to the vote of
the outstanding security holders of New ITT. If an institutional investor
changes its investment intent, or if the New Jersey Commission finds reasonable
cause to believe that the institutional investor may be found unqualified, no
action other than divestiture shall be taken by such institutional investor with
respect to its security holdings until there has been compliance with the
interim casino authorization provisions of the New Jersey Act, including the
execution of a trust agreement. New ITT, ITT Sheraton, CWI, CNJ and BRC are
required to immediately notify the New Jersey Commission and the New Jersey DGE
of any information about, or action of, an institutional investor holding its
equity or debt securities where such information or action may impact on the
eligibility of such institutional investor for a waiver. If the New Jersey
Commission finds an institutional investor unqualified or if the New Jersey
Commission finds that, by reason of the extent or nature of its holdings, an
institutional investor is in the position to exercise a substantial impact on
the controlling interests of BRC so that qualification of the institutional
investor is necessary to protect the public interest, the New Jersey Act vests
in the New Jersey Commission the power to take all necessary action to protect
the public interest, including the power to require that the institutional
investor submit to qualification and become qualified under the New Jersey Act.
An equity or debt security holder -- including institutional
investors -- of New ITT, ITT Sheraton, CWI, CNJ or BRC who is required to be
found qualified by the New Jersey Commission must submit an application for
qualification within 30 days after being ordered to do so or divest all security
holdings within 120 days after the New Jersey Commission determines such
qualification is required. The application for qualification must include a
trust agreement by which the security holder places its interest in New ITT in
trust with a trustee qualified by the New Jersey Commission. If the security
holder is ultimately found qualified, the trust agreement is terminated. If the
security holder is not found qualified or withdraws its application for
qualification prior to a determination on qualification being made, the trustee
will be empowered with all rights of ownership pertaining to such security
holder's New ITT securities, including all voting rights and the power to sell
the securities; in any event, the unqualified security holder will not be
entitled to receive in exchange for its New ITT securities an amount in excess
of the lower of (i) the actual cost the security holder incurred in acquiring
the securities or (ii) the value of such securities calculated as if the
investment had been made on the date the trust became operative. By the same
token, if the security holder is not found qualified, it is unlawful for the
security holder to (i) receive any dividends or interest on such securities,
(ii) exercise, directly or through any trustee or nominee, any right conferred
by such securities, or (iii) receive any remuneration in any form from New ITT,
ITT Sheraton, CWI, CNJ or BRC for services rendered or otherwise.
Each officer, director, lender and certain other persons of New ITT, ITT
Sheraton, CWI and CNJ must be found qualified unless the New Jersey Commission,
with the consent of the Director of the New Jersey DGE, finds that such officer,
director, lender or other person of New ITT, ITT Sheraton, CWI or CNJ is not
significantly involved in the affairs of BRC and is thus waived from
qualification. New Jersey law requires that an officer or director of New ITT,
ITT Sheraton, CWI or CNJ must apply for temporary qualification at least 30 days
before assuming any duties; such temporary qualification, if granted by the New
Jersey Commission, will be valid for a period not to exceed the earlier of (i)
nine consecutive calendar months or (ii) the effective date of BRC's next casino
license renewal.
The New Jersey Act requires that each of New ITT, ITT Sheraton, CWI, CNJ
and BRC maintain financial stability and capability. For purposes of these
requirements, the New Jersey Commission has adopted regulations defining
"financial stability" as the same applies to the licensed casino operation and
has set forth certain standards for determining compliance with the financial
stability regulations. Under the regulations of the New Jersey Commission,
"financial stability" has been defined as (i) the ability to assure the
financial integrity of casino operations by the maintenance of a casino bankroll
or equivalent provisions adequate to pay winning wagers to casino patrons when
due, (ii) the ability to meet ongoing operating expenses which are
137
<PAGE> 144
essential to the maintenance of continuous and stable casino operations, (iii)
the ability to pay, as and when due, all local, state and Federal taxes and any
and all fees imposed by the New Jersey Act, (iv) the ability to make necessary
capital and maintenance expenditures in a timely manner which are adequate to
insure maintenance of a superior first class facility of exceptional quality as
required by the New Jersey Act and (v) the ability to pay, exchange, refinance
or extend debts, including long-term and short-term principal and interest and
capital lease obligations, which will mature or otherwise come due and payable
during either the license term or within 12 months after the end of the license
term or to otherwise manage such debts and any default with respect to the
debts. The New Jersey Commission regulations provide that the financial
stability standards concerning casino bankroll, operating expenses and capital
and maintenance expenditures are met if the following is shown by clear and
convincing evidence: (i) casino bankroll -- the maintenance, on a daily basis,
of a casino bankroll at least equal to the average daily casino bankroll,
calculated on a monthly basis, for the corresponding month in the previous year,
(ii) operating expenses -- the demonstration of the ability to achieve positive
gross operating profit measured on an annual basis and (iii) capital and
maintenance expenditures -- the demonstration that its capital and maintenance
expenditures over the five year period, which includes the previous 36 calendar
months and the upcoming license period, average at least 5% of net revenue per
annum. New ITT believes that, at current operating levels, BRC will have no
difficulty in complying with these requirements.
The New Jersey Commission has the authority to restrict or prohibit the
transfer of cash or the assumption of liabilities by BRC if such action will
adversely impact the financial stability of BRC and the prior approval of the
New Jersey Commission is required to incur indebtedness and guarantees of
affiliated indebtedness by BRC involving amounts greater than $25 million.
If it is determined that New Jersey gaming laws were violated by BRC, BRC
could be subject to fines or its casino license could be limited, conditioned,
suspended or revoked. In addition, if a security holder of New ITT, ITT
Sheraton, CWI, CNJ or BRC is found disqualified but does not dispose of the
securities, the New Jersey Commission is authorized to take any necessary action
to protect the public interest, including the suspension or revocation of the
casino license; however, the New Jersey Commission may not take any action
against New ITT, ITT Sheraton, CWI, CNJ or BRC with respect to the continued
ownership of the security interest by the disqualified holder if the New Jersey
Commission finds that (i) New ITT has provided in its corporate charter that any
New ITT securities are held subject to the condition that, if a holder thereof
is found to be disqualified by the New Jersey Commission pursuant to the
provisions of the New Jersey Act, such holder shall dispose of his interest in
New ITT, (ii) New ITT has made a good faith effort, including the prosecution of
all legal remedies, to comply with any order of the New Jersey Commission
requiring the divestiture of the security interest held by the disqualified
holder and (iii) such disqualified holder does not have the ability to control
New ITT, ITT Sheraton, CWI, CNJ or BRC or to elect one or more members of the
boards of directors of New ITT, ITT Sheraton, CWI, CNJ or BRC. If BRC's license
is revoked, not renewed or suspended for a period in excess of 120 days, the New
Jersey Commission is empowered to appoint a conservator to operate, and to
dispose of, BRC's casino/hotel facilities. If a conservator operates the
casino/hotel facilities, payments to shareholders would be limited to a "fair
return" on their investment, with any excess going to the State of New Jersey.
If a conservator is appointed, the conservator's charges and expenses become a
lien against the property which is paramount to all prior and subsequent liens.
Mississippi Casino Gaming Regulation
The ownership and/or operation of casino gaming facilities in Mississippi
are similarly subject to extensive state and local regulation. Gaming in
Mississippi can be legally conducted only on vessels of a certain minimum size
either in navigable waters of counties bordering the Mississippi River or in the
waters of the State of Mississippi which lie adjacent to the coastline of the
three counties bordering the Gulf of Mexico. STC possesses a license for the
ownership and operation of the Sheraton Casino in Robinsonville, Tunica County,
Mississippi issued by the Mississippi Commission pursuant to the Mississippi
Act.
The Mississippi Act does not restrict the amount or percentage of space on
a vessel that may be utilized for casino gaming; the Mississippi Act also does
not limit the number of licenses that the Mississippi Commission can grant for a
particular area.
138
<PAGE> 145
New ITT and STC are required to submit detailed financial, operating and
other reports to the Mississippi Commission. Substantially all loans, leases,
sales of securities and similar financing transactions entered into by New ITT
or by STC must be reported to or approved by the Mississippi Commission. New ITT
and STC are also required to periodically submit detailed financial and
operating reports to the Mississippi Commission and furnish any other
information that the Mississippi Commission may require.
Each of the directors, officers and certain key employees of New ITT and
STC who is actively and directly engaged in the administration or supervision of
casino gaming in Mississippi, or who has any other significant involvement with
the activities of STC, must be found suitable therefor and may be required to be
licensed by the Mississippi Commission. A finding of suitability is comparable
to licensing, and both require the submission of detailed personal financial
information followed by a thorough investigation. An application for licensing
may be denied for any cause deemed reasonable by the Mississippi Commission.
Changes in licensed positions must be reported to the Mississippi Commission. In
addition to its authority to deny an application for a license, the Mississippi
Commission has the authority to disapprove a change in corporate position. If
the Mississippi Commission finds a director, officer or key employee of New ITT
or STC unsuitable for licensing or unsuitable to continue having a relationship
with New ITT or STC, New ITT or STC, as the case may be, is required to suspend,
dismiss and sever all relationships with such person. New ITT and STC have
similar obligations with regard to any person who fails or refuses to file
appropriate applications. Each gaming employee must obtain a work permit; the
Mississippi Commission may refuse to issue a work permit to a gaming employee
(i) if the employee has committed larceny, embezzlement or any other crime of
moral turpitude or knowingly violated the Mississippi Act or the regulations of
the Mississippi Commission or (ii) for any other reasonable cause.
Mississippi gaming licenses are not transferable and must be renewed
periodically. The Mississippi Commission is empowered to deny, limit, condition,
revoke and/or suspend any license, finding of suitability or registration, and
to fine any person as it deems reasonable and in the public interest, subject to
the due process considerations of notice and an opportunity for a hearing. The
Mississippi Commission may fine any licensee or other person who is subject to
the Mississippi Act up to $100,000 for each violation of the Mississippi Act
which is the subject of an initial complaint and up to $250,000 for each
violation of the Mississippi Act which is the subject of any subsequent
complaint. The Mississippi Act provides for judicial review of certain decisions
of the Mississippi Commission; however, the filing for such judicial review does
not automatically stay the action taken by the Mississippi Commission pending
the court's review.
License fees and taxes, computed in various ways depending on the type of
casino gaming involved, are payable to the State of Mississippi and to the
counties and cities in which the gaming operations are located. Depending on the
particular fee or tax imposed, these fees and taxes are based on a percentage of
the gross gaming revenues received by the casino operation, the number of slot
machines operated by such casino or the number of table games operated by such
casino. Moreover, several local governments have been authorized to impose
either additional gross fees on adjusted gross gaming revenues or,
alternatively, per person boarding fees and annual license fees based on the
number of gaming devices aboard the vessel. License fees paid to the State of
Mississippi are allowed as a credit against Mississippi state income taxes.
In all other material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada and New Jersey.
Windsor, Ontario Casino Gaming Regulation
The operation of casino facilities by WCL is subject to extensive
regulation under the registration and regulatory control of the Ontario Gaming
Authorities. So long as WCL operates a casino in Ontario, it must be registered
as a casino operator under the Ontario Act.
An application for registration or renewal of registration in Ontario will
be denied if there are reasonable grounds to believe either that the applicant
will not be financially responsible in the conduct of its business or that the
applicant will not act in accordance with the law or with integrity, honesty and
in the public interest. In determining whether registration should be granted or
renewed, the Ontario Gaming Authorities may have regard to the financial history
and past conduct of the applicant, its officers, directors and "interested
persons"
139
<PAGE> 146
who have a beneficial interest in, control of or have financed the applicant's
business or any of its officers' or directors' businesses. Thus, the Ontario
Gaming Authorities are empowered to investigate the character, financial history
and competence of WCL, or of any person who has a beneficial interest in,
control of, or who has financed WCL's business, including WCL's officers,
directors and shareholders. The applicant for registration or renewal must pay
the reasonable costs of such investigations. Each gaming employee at an Ontario
casino gaming facility must be registered under the Ontario Act, which
registration may be revoked upon the occurrence of certain events.
The Ontario Gaming Authorities may, subject to a registrant's right to a
hearing under the Ontario Act, suspend or revoke a registration for any reason
that would disentitle such registrant to registration or renewal. A change in
control of WCL could result in revocation of WCL's registration if the new
person or entity in control is determined to be unsuitable by the Ontario Gaming
Authorities. WCL's registration is deemed to expire immediately upon any change
in the composition of the officers and directors of WCL, unless the Ontario
Gaming Authorities have consented in writing to such change. There can be no
assurance that the Ontario Gaming Authorities will approve any renewal
applications.
All suppliers of goods and services to WCL must be either (i) registered as
a "supplier" under the Ontario Act and the regulations promulgated thereunder or
(ii) issued a certificate of exemption by the Ontario Gaming Authorities.
Investigators appointed by the Ontario Gaming Authorities have the right,
subject to certain limitations, to conduct warrantless searches for the purpose
of determining compliance with the Ontario Act, its regulations or the terms of
a registration. The Ontario Gaming Authorities may issue an order freezing the
assets of a person (i) if it is alleged that such person has contravened the
Ontario Act or the regulations promulgated thereunder, (ii) such person is
subject to a criminal proceeding or is the subject of an investigation under the
Ontario Act and (iii) the Ontario Gaming Authorities find reasonable grounds to
believe that the interests of the person on whose behalf the assets are being
held require protection.
Substantial fines for each violation of the Ontario Act or its regulations
may be levied against WCL. Suspension or revocation of registration could lead
to a termination of any contract with WCL and could have a materially adverse
effect on any business conducted by WCL in Ontario. Similarly, the revocation of
WCL's license to sell alcoholic beverages at its casino gaming facilities could
have a materially adverse effect on WCL's casino business.
WCL is required to submit audited financial statements to the Ontario
Gaming Authorities and to retain certain records as required by regulation. WCL
must make available to the Ontario Gaming Authorities all reports, accounts,
records and other documents related to the operation of the casino.
The Ontario Act and the regulations promulgated thereunder are subject to
amendment, change, modification or repeal. Any such amendment, change,
modification or repeal could have a materially adverse effect on WCL's
operations and New ITT's interests therein.
All games of chance must be played in accordance with the rules of play
prescribed by the regulations and approved in writing by the Ontario Gaming
Authorities.
Nova Scotia Casino Gaming Regulation
ITT Sheraton's subsidiary, which will both (i) own and operate the proposed
casino in the City of Halifax, Nova Scotia and (ii) operate the proposed casino
in the City of Sydney, Nova Scotia, all on behalf of the Nova Scotia
Corporation, will be required to comply with registration requirements set forth
in the Nova Scotia Act and the regulations promulgated thereunder and will also
be subject to operational regulation by the Nova Scotia Gaming Authorities. The
requirements of the Nova Scotia Act and its attendant regulations are
substantially similar to those in effect in the Province of Ontario.
140
<PAGE> 147
Casino Gaming -- Related Provisions of the New ITT Amended and Restated
Articles of Incorporation
New ITT's Amended and Restated Articles of Incorporation provide that (i)
all securities of New ITT are subject to redemption by New ITT to the extent
necessary to prevent the loss, or to secure the reinstatement, of any casino
gaming license held by New ITT or any of its subsidiaries in any jurisdiction
within or without the United States of America, (ii) all securities of New ITT
are held subject to the condition that if a holder thereof is found by a gaming
authority in any such jurisdiction to be disqualified or unsuitable pursuant to
any gaming law, such holder will be required to dispose of all New ITT
securities held by such holder, and (iii) it will be unlawful for any such
disqualified person to (A) receive payments of interest or dividends on any New
ITT securities, (B) exercise, directly or indirectly, any rights conferred by
any New ITT securities or (C) receive any remuneration in any form, for services
rendered or otherwise, from the subsidiary that holds the gaming license in such
jurisdiction.
MADISON SQUARE GARDEN
Suppliers and distributors of cable television programming such as the MSG
Network are not regulated by the Federal Communications Commission under the
Communications Act of 1934. To the extent that regulations and laws, either
presently in force or proposed, hinder or stimulate the growth of the cable
television industries, the business of the MSG Network will be directly
affected. Management of New ITT does not believe that the currently proposed
regulatory developments in the area of cable regulation or other areas affecting
its business should have a significant adverse effect on its operations.
ITT EDUCATIONAL
The postsecondary education industry is highly regulated. ITT Educational
must be authorized by each state in which it operates an ITT Technical
Institute. Each ITT Technical Institute must be accredited by a national or
regional accrediting commission, and that commission in turn must satisfy
applicable Federal requirements. Most students at the ITT Technical Institutes
rely on funds received under various government-sponsored student financial aid
programs, especially Federal programs, to pay a substantial portion of their
tuition and other education-related expenses. Accordingly, a substantial
majority of ITT Educational's revenues are indirectly derived from Federal
student financial aid programs. In order for an individual ITT Technical
Institute to continue to participate in such programs, the institute must comply
with applicable Federal standards for these programs. Some of the standards and
regulations governing institutions such as the ITT Technical Institutes recently
have been expanded and made more stringent. Because such a substantial portion
of ITT Educational's revenues are derived from student aid programs, the direct
and indirect application of these and other standards and regulations to
institutions such as the ITT Technical Institutes (including to the students of
institutions such as the ITT Technical Institutes) could have a material adverse
impact on such institutions and the expansion plans of ITT Educational. In
addition, any failure of ITT Educational or any ITT Technical Institute to be in
compliance with such regulations and standards could have a material adverse
effect on the operating performance of ITT Educational and the ability of ITT
Educational to participate in Federal student financial aid programs. For the
fiscal year ended December 31, 1994, ITT Educational derived an aggregate of
approximately 78.6% of its revenues from Federal or state student aid programs
(with only approximately 2% of revenues coming from state student aid programs).
OTHER
In addition, a number of New ITT's businesses are subject to other
governmental regulation by law or through contractual arrangements. For example,
ITT Sheraton hotels in the United States are liquor retailers where permitted,
licensed in each state in which they do such business and in certain states are
subject to statutes which prohibit ITT Sheraton or its owner from being both a
wholesaler and retailer of alcoholic beverages.
141
<PAGE> 148
EMPLOYEES
As of June 30, 1995, New ITT, through its subsidiaries, employed
approximately 35,000 people. Of this number, approximately 24,000 are employees
in the United States, of whom approximately 37% are represented by labor unions.
Generally, labor relations have been maintained in a normal and satisfactory
manner.
LEGAL PROCEEDINGS
On April 26, 1994, a purported class action lawsuit was filed in the United
States District Court, Middle District of Florida, captioned William H. Poulos,
et al., v. Caesars World, Inc., et al., against 41 manufacturers, distributors
and casino operators of video poker and electronic slot machines, including CWI.
The suit alleges that the defendants have engaged in a course of fraudulent and
misleading conduct intended to induce persons to play such games by collectively
misrepresenting how the gaming machines operate, as well as the extent to which
there is an opportunity to win. It also alleges violations of the Racketeer
Influenced and Corrupt Organizations Act, as well as claims of common law fraud,
unjust enrichment and negligent misrepresentation, and seeks damages in excess
of $6 billion. Management of New ITT believes that the claims are without merit
and intends to defend this case vigorously.
While there can be no assurance as to the ultimate outcome of any
litigation involving New ITT, management does not believe any pending legal
proceeding will result in a judgment or settlement that will have, after taking
into account New ITT's existing provisions for such liabilities, a material
adverse effect on New ITT's financial position, results of operations or cash
flows.
142
<PAGE> 149
BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION
GENERAL
After the Distribution, ITT Hartford will be a holding company which owns,
directly or indirectly, a number of insurance companies including Hartford Fire
Insurance Company ("The Hartford"), First State Insurance Company and its
subsidiaries ("First State") and Fencourt Reinsurance Company Ltd. ("Fencourt").
The Hartford, organized in 1810, is one of the nation's oldest and largest
international insurance organizations. ITT Hartford has stockholders' equity of
$4.8 billion and assets of $86.8 billion as of June 30, 1995. The Hartford is
engaged in the writing of commercial property and casualty insurance, personal
automobile and homeowners coverages and a variety of life insurance plans. The
business of ITT Hartford may be generally categorized as (i) property and
casualty insurance operations ("Property & Casualty") and (ii) life insurance
operations ("Life"), and, in both instances, related investment activities.
Unless the context otherwise indicates, references herein to ITT Hartford
include its subsidiaries after the Distribution. The corporate headquarters of
ITT Hartford is located at Hartford Plaza, Hartford, Connecticut 06115.
First State, formerly Cameron and Colby, is a group of three Boston-based
excess and surplus lines and reinsurance subsidiaries of ITT prior to the
Distribution. Effective at the end of 1992, First State ceased writing new and
renewal business and is being managed as an operation in run-off until all
claims have been resolved. During 1992, First State strengthened reserves
related to future asbestos and pollution claims in the amount of $594 million
after tax. This action was necessary due to adverse development on excess and
surplus lines and reinsurance business written before 1986.
Fencourt, a reinsurance company located in Bermuda, reinsures third-party
risks as well as risks of ITT and related third-parties and engages in related
investment activities.
The table below shows in percentage terms ITT Hartford's consolidated
revenues attributable to each of its lines of business for the six months ended
June 30, 1995 and June 30, 1994 and for the last three years:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------- -------------------
1995 1994 1994 1993 1992
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
REVENUES
Property & Casualty:
Domestic Commercial...................................... 27% 30% 29% 31% 33%
Domestic Personal........................................ 15 16 15 16 15
Reinsurance.............................................. 6 6 6 4 4
International............................................ 10 9 10 10 10
Net Investment Income.................................... 8 7 7 8 9
Net realized investment gains............................ 1 1 1 1 4
Life:
Individual Life and Annuity.............................. 7 6 6 6 4
Employee Benefits........................................ 10 11 10 11 11
Asset Management Services................................ 6 7 7 8 8
Specialty................................................ 9 6 8 4 1
International Operations................................. 1 1 1 1 1
--- --- --- --- ---
100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
HOLDING COMPANY; LIMITATION ON DIVIDENDS
As of the Distribution Date, ITT Hartford's investment in its insurance
subsidiaries will represent all the assets of ITT Hartford. ITT Hartford does
not intend to engage in any significant business activities unrelated to the
funding of its insurance subsidiaries, the purchase from time to time from The
Hartford of certain short-
143
<PAGE> 150
term assets and the performance by ITT Hartford of its obligations under certain
agreements governing the arrangements among ITT Hartford, ITT Industries and New
ITT after the Distribution.
After the Distribution, ITT Hartford will continue to be an entity separate
and distinct from its insurance subsidiaries. The principal source of funds for
the payment of dividends by, as well as other obligations of, ITT Hartford is
expected to be dividends paid on common stock of these subsidiaries. The rights
of ITT Hartford to participate in any distribution of assets of any of its
subsidiaries upon the liquidation or reorganization thereof or otherwise (and
thus the ability of holders of ITT Hartford Common Stock to benefit indirectly
from such distribution) will be subject to the prior claims of creditors of the
applicable subsidiary, except to the extent that ITT Hartford may itself be a
valid creditor of that subsidiary. Claims on these subsidiaries by persons other
than ITT Hartford include claims by policyholders for benefits payable, claims
of trade creditors, claims from guaranty funds and claims from holders of debt
obligations and any preferred shareholders.
Various legal limitations govern the extent to which ITT Hartford's
insurance subsidiaries may extend credit, pay dividends or otherwise provide
funds to ITT Hartford. A number of these subsidiaries are organized and
regulated under the laws of the State of Connecticut, although insurance laws of
other jurisdictions are also applicable to certain subsidiaries of ITT Hartford.
Under Connecticut law, notice to and approval by the state insurance
commissioner is required for the declaration or payment of any dividend from a
property and casualty insurance company to its shareholders which, together with
other dividends or distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of such insurance company's surplus with respect
to policyholders as of the thirty-first day of December last preceding, or (ii)
net income for the twelve-month period ending on the thirty-first day of
December last preceding, in each case determined under statutory insurance
accounting policies. The insurance laws of other jurisdictions in which ITT
Hartford's subsidiaries are organized contain analogous restrictions. The total
amount of statutory dividends which may be paid by The Hartford in 1995 without
prior approval is estimated to be approximately $310 million. ITT Hartford does
not expect to receive payment of dividends from First State for the foreseeable
future.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
Property & Casualty writes most types of property and casualty insurance,
including personal lines insurance, commercial lines insurance and specialty
insurance. Property & Casualty engages in business throughout the United States,
Canada and Western Europe and participates in the worldwide reinsurance
144
<PAGE> 151
market. The following table summarizes for the periods indicated the net written
premiums of Property & Casualty:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------------------
1995 1994 1994 1993 1992(1)
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Personal Lines -- Excluding
AARP...................... $ 341 10% $ 348 11% $ 708 11% $ 741 11% $ 670 11%
Personal Lines -- AARP...... 550 16 504 15 1,032 15 944 15 859 15
Commercial Lines............ 1,378 39 1,307 39 2,743 41 2,593 41 2,273 38
Specialty, Reinsurance &
Surplus Lines............. 553 16 599 18 1,166 17 1,079 17 702 12
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Domestic Companies --
All Lines................. 2,822 81 2,758 83 5,649 84 5,357 84 4,504 76
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
International Companies --
All Lines................. 652 19 551 17 1,085 16 1,059 16 1,160 19
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
First State................. -- -- 3 -- 5 -- 32 -- 310 5
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total Property and
Casualty.................. $3,474 100% $3,312 100% $6,739 100% $6,448 100% $5,974 100%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) In 1992, the domestic operations of Property & Casualty changed their method
of recognizing written and unearned premiums on indeterminate premium
products. The change involved recognizing written premiums billed rather
than estimated and booked at policy inception. The effect of this change was
a one-time reduction in written premiums and the unearned premium reserve of
$254 million with no impact on revenues.
PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION
Property & Casualty is serviced in North America through its home office
and 40 regional offices and is represented by approximately 6,000 independent
agents in North America. Property & Casualty conducts business through
approximately 8,800 brokers in Western Europe. Independent agents, who often
represent other companies as well, and brokers are compensated on a commission
basis and are not employees of ITT Hartford. ITT Hartford also assumes insurance
from other insurers and cedes insurance to other insurers or reinsurers in the
worldwide reinsurance market. In addition, Property & Casualty has been endorsed
by the American Association of Retired Persons ("AARP") to provide automobile
and homeowners insurance programs to A.A.R.P. members on a direct response
basis.
Approximately 80% of the net written premiums of Property & Casualty is
written in the United States. In 1994, five percent or more of the net written
premiums of ITT Hartford's domestic property and casualty insurance operations
was written in each of New York (12%), California (10%), Connecticut (6%) and
Florida (5%).
COMBINED RATIOS
A common industry measurement of the results of property and casualty
insurance underwriting is the "combined ratio". This ratio is the sum of the
ratio of incurred losses and loss adjustment expenses to premiums earned (the
"loss ratio"), the ratio of underwriting expenses incurred to premiums written
(the "expense ratio") and the ratio of dividends to policyholders to premiums
earned. A combined ratio under 100% generally indicates an underwriting profit;
a combined ratio over 100% generally indicates an underwriting loss. Federal
income taxes, investment income, deferred policy acquisition costs and other
non-underwriting income or expenses are not reflected in the combined ratio. The
profitability of property and casualty insurance companies depends on income
from underwriting, investment and service operations.
145
<PAGE> 152
As shown in the following table, the combined ratios for several lines of
insurance of Property & Casualty have improved significantly over the past three
years, although 1992 results were adversely affected by actions taken to
strengthen loss and loss adjustments.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1995 1994 1994 1993 1992(1)
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Personal Lines -- Excluding A.A.R.P............... 104.7 110.0 103.0 104.4 109.1
Personal Lines -- A.A.R.P......................... 102.1 104.9 102.6 102.0 102.3
Commercial Lines.................................. 103.6 101.2 101.7 105.3 113.9
Specialty, Reinsurance & Surplus Lines............ 114.5 105.8 104.3 100.6 120.0
Domestic Companies -- All Lines................... 105.6 103.9 102.5 103.6 112.3
International Companies -- All Lines.............. 107.1 104.7 104.6 118.0 127.5
Total Property and Casualty....................... 105.9 104.1 102.8 105.9 114.8
</TABLE>
- ---------------
(1) For the periods after 1992, the combined ratios exclude the results of First
State.
(2) The 1992 combined ratios exclude the impact of actions taken to strengthen
loss and loss adjustment expense reserves costing $1.2 billion before-tax.
See "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS" and the Notes to the ITT Hartford Consolidated Financial
Statements. Including the impact of these actions, the 1992 combined ratios
for Specialty, Reinsurance & Surplus Lines, Domestic Companies -- All Lines
and Total Property and Casualty would have been 232.5, 135.4 and 133.7,
respectively.
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Property & Casualty establishes reserves to provide for the estimated costs
of paying claims made by or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to Property & Casualty and include estimates of
all expenses associated with processing and settling these claims. Estimating
the ultimate cost of future claims and claim adjustment expenses is an uncertain
and complex process that is based on the assumption that past developments are
an appropriate predictor of future events. The process involves a variety of
actuarial and scientific techniques that analyze experience, trends and other
relevant factors.
ITT Hartford continually reviews its loss and loss adjustment expense
reserves as additional experience and other relevant data become available and
adjusts reserve levels accordingly. The uncertainties involved with the
reserving process have become increasingly unpredictable due to a number of
complex factors, including social and economic trends and changes in the concept
of legal liability and damage awards. Accordingly, final claim settlements may
vary from the present estimates, particularly when those payments may not occur
until well into the future. Any adjustments to previously established reserves
are reflected in net income of the period in which they are made. In the
judgment of ITT Hartford management, all information currently available has
been properly considered in establishing reserves for losses and loss adjustment
expenses, and, except to the extent such reserves are related to asbestos and
environmental claims (as discussed below), such reserves are adequate to cover
their eventual costs.
ITT Hartford continues to receive claims asserting injuries from asbestos
and asbestos-related products and damages from environmental pollution and
related cleanup costs. With regard to these claims, deviations from past
experience adversely and significantly impact the ability of insurance companies
to estimate the ultimate reserves for unpaid losses and related settlement
expenses. ITT Hartford finds that conventional reserving techniques cannot be
used to create reliable estimates of the ultimate cost of these claims because
of inadequate development patterns and inconsistent emerging legal doctrine. For
many types of asbestos claims and the majority of environmental claims, unlike
any other type of contractual claim, there is almost no agreement or consistent
precedent determining what, if any, coverage exists or which, if any, policy
years and insurers may be liable. Additional uncertainty exists with respect to
environmental claims, because such claims are often made under policies, the
existence of which may be in dispute, the terms of which may have changed over
many years, that may not provide for legal defense costs, and that may or may
not include pollution exclusion clauses which, if included, may not be absolute
or allow for fortuitous events. There is also
146
<PAGE> 153
substantial uncertainty concerning the ultimate costs of cleanup at the sites
that are the subject of such claims. Because insurance coverage issues have been
held to be governed by state contract law, courts in different jurisdictions
have reached disparate conclusions on similar issues and in certain situations
have broadened the interpretation of policy coverage and liability issues. If
future legislative, social, economic or legal developments continue to expand
the scope of policy coverage as they have in the past, the need for additional
reserves may arise, adversely affecting future results. Due to the uncertainties
described above, a range of such reserve increases, if any, cannot be
meaningfully quantified. For a further discussion of these matters, see "ITT
HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- ENVIRONMENTAL MATTERS".
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties have been discounted to present value. The amount
of the discount was approximately $432 million and $362 million as of December
31, 1994 and 1993, and the amortization of the discount had no material effect
on net income during 1994, 1993 and 1992, respectively.
A reconciliation of liabilities for unpaid claims and claim adjustment
expenses for the last three years follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT
EXPENSES.................................................... $17,284 $17,418 $16,034
Less Reinsurance Recoverables................................. 5,339 5,633 5,476
------- ------- -------
11,945 11,785 10,558
ADD PROVISIONS FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT
EXPENSES:
Current year................................................ 4,841 4,611 4,822
Prior years(1).............................................. 55 248 1,406
------- ------- -------
Total Provision for Unpaid Claims and Claim
Adjustment Expenses............................... 4,896 4,859 6,228
------- ------- -------
LESS PAYMENTS:
Current year................................................ 1,891 1,856 1,927
Prior years................................................. 2,832 2,806 2,879
------- ------- -------
Total Payments...................................... 4,723 4,662 4,806
------- ------- -------
Foreign Currency Translation.................................. 65 (37) (195)
Cumulative Effect of Accounting Change(2)..................... (65) -- --
------- ------- -------
ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT
EXPENSES EXCLUDING REINSURANCE RECOVERABLES................. 12,118 11,945 11,785
Add Reinsurance Recoverables.................................. 5,317 5,339 5,633
------- ------- -------
ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT
EXPENSES.................................................... $17,435 $17,284 $17,418
======= ======= =======
</TABLE>
- ---------------
Note: The liabilities for unpaid claims and claim adjustment expenses shown
above are greater than those reported in the domestic insurance
subsidiaries statutory filings by $1.8 billion for both 1994 and 1993 and
$1.7 billion for 1992. These amounts are related to non-U.S. subsidiaries.
(1) Does not include the effects of foreign exchange adjustments which are
included in the table on the following page.
(2) Reflects a change in the method of discounting to present value certain
workers' compensation reserves, principally for permanently disabled
claimants. See Notes to ITT Hartford Consolidated Financial Statements for
further discussion of this accounting change.
147
<PAGE> 154
The following table shows the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
PROPERTY AND CASUALTY CLAIMS AND CLAIM ADJUSTMENT EXPENSES LIABILITY DEVELOPMENT
(IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Liabilities for Unpaid Claims and Claim Adjustment
Expenses(Note 1).................................... $ 4,287 $ 4,868 $ 5,903 $ 7,262 $ 8,168 $ 8,666 $ 9,366
Cumulative Paid Claims and Claim Expenses(Note 1):
One year later...................................... 1,393 1,607 1,808 2,089 2,296 2,545 2,789
Two years later..................................... 2,283 2,632 2,916 3,323 3,618 4,013 4,428
Three years later................................... 2,953 3,356 3,683 4,187 4,577 5,132 5,511
Four years later.................................... 3,425 3,883 4,275 4,846 5,341 5,863 6,304
Five years later.................................... 3,808 4,308 4,743 5,392 5,872 6,435 --
Six years later..................................... 4,136 4,633 5,168 5,787 6,320 -- --
Seven years later................................... 4,346 4,980 5,481 6,155 -- -- --
Eight years later................................... 4,628 5,248 5,803 -- -- -- --
Nine years later.................................... 4,784 5,534 -- -- -- -- --
Ten years later..................................... 5,020 -- -- -- -- -- --
Liabilities Reestimated:
One year later...................................... 4,469 5,324 6,293 7,437 8,342 8,879 9,636
Two years later..................................... 4,860 5,558 6,422 7,619 8,432 9,052 10,780
Three years later................................... 5,002 5,656 6,718 7,719 8,482 10,200 10,905
Four years later.................................... 5,074 6,100 6,885 7,827 9,645 10,342 11,151
Five years later.................................... 5,484 6,291 7,021 9,117 9,829 10,578 --
Six years later..................................... 5,653 6,456 8,504 9,287 10,068 --
Seven years later................................... 5,767 8,015 8,652 9,521 -- -- --
Eight years later................................... 7,177 8,157 8,878 -- -- -- --
Nine years later.................................... 7,280 8,363 -- -- -- -- --
Ten years later..................................... 7,500 -- -- -- -- -- --
Deficiency............................................ 3,213 3,495 2,975 2,259 1,900 1,912 1,785
<CAPTION>
1991 1992 1993 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Liabilities for Unpaid Claims and Claim Adjustment
Expenses(Note 1).................................... $ 9,796 $11,103 $ 11,441 $ 11,623
Cumulative Paid Claims and Claim Expenses(Note 1):
One year later...................................... 2,879 2,806 2,832 --
Two years later..................................... 4,465 4,415 -- --
Three years later................................... 5,605 -- -- --
Four years later.................................... -- -- -- --
Five years later.................................... -- -- -- --
Six years later..................................... -- -- -- --
Seven years later................................... -- -- -- --
Eight years later................................... -- -- -- --
Nine years later.................................... -- -- -- --
Ten years later..................................... -- -- -- --
Liabilities Reestimated:
One year later...................................... 11,053 11,311 11,484 --
Two years later..................................... 11,202 11,354 -- --
Three years later................................... 11,315 -- -- --
Four years later.................................... -- -- -- --
Five years later.................................... -- -- -- --
Six years later..................................... -- -- -- --
Seven years later................................... -- -- -- --
Eight years later................................... -- -- -- --
Nine years later.................................... -- -- -- --
Ten years later..................................... -- -- -- --
Deficiency............................................ 1,519 251 43 --
</TABLE>
- ---------------
Note:
(1) The above table excludes the liabilities and claim developments for
reinsurance coverage written for unrelated parties that fund ultimate net
aggregate loss run-offs since changes to those reserves do not illustrate
the manner in which those reserve estimates changed. Liabilities for unpaid
claims and claim adjustment expenses excluded were $629 million, $762
million, $682 million, $504 million and $495 million as of December 31,
1990, 1991, 1992, 1993 and 1994.
The liability for unpaid claims and claim adjustment expenses is shown net of
reinsurance recoverables on ceded reinsurance contracts. Presentation of the
above table to reflect liabilities on ceded reinsurance contracts is not
practicable.
Liabilities on all lines of insurance are monitored regularly and corrective
action is taken as required.
148
<PAGE> 155
PREMIUM RATES
Subject to regulatory requirements, Property & Casualty management
determines the premium rates charged for its policies. Methods for arriving at
rates vary by line of business, exposure assumed and size of risk. For some
lines of business, Property & Casualty uses the rates and rating plans that are
filed in various states by certain fire, casualty and surety rating
organizations of which Property & Casualty is a member, while for other lines of
business it uses loss cost data published by such organizations. Property &
Casualty also uses its own independent rates or otherwise departs from rating
organization rates, where appropriate.
Regulatory requirements applicable to premium rates vary from state to
state, but generally provide that rates shall not be inadequate, excessive or
unfairly discriminatory. In many states, rates for many lines of business,
including automobile and homeowners insurance, are subject to prior regulatory
approval.
Proposition 103 is a voter initiative adopted in California in 1988 which,
among other things, mandated a rollback of premium charges for the year
commencing on November 8, 1988. The California Supreme Court subsequently ruled
that the rollback need not be made if the insurer required higher rates in order
to earn a fair rate of return. In November 1994, the California Insurance
Commissioner issued an order to ITT Hartford pursuant to Proposition 103 to pay
premium refunds under 1989 insurance policies with interest accruing from May
1989. The Commissioner alleged that the rates charged by ITT Hartford during
1989 in California were in excess of those allowed by Proposition 103 as
modified by the California Supreme Court and that ITT Hartford's refund
obligation was $95 million plus interest. In December 1994, ITT Hartford
responded to the Commissioner, arguing that ITT Hartford did not have a rollback
obligation. In May 1995, the newly-elected Commissioner announced that the
Insurance Department had determined that ITT Hartford did not have a rollback
obligation. A California consumer group exercised its statutory right on June
22, 1995 to request a hearing to examine the validity of the Insurance
Department's most recent determination that ITT Hartford does not have a
rollback obligation. The Commissioner granted this request and it appears that
such a hearing will be held in September or October of 1995.
COMPETITION
The property and casualty insurance industry is highly competitive.
Property & Casualty competes with other stock companies, mutual companies and
other underwriting organizations. Some competitors obtain their business at less
cost through captive agents or salaried personnel rather than through
independent agents and brokers. Intense competition among insurers combined with
the continued effects of the recession has created difficult market conditions
in the domestic property and casualty industry. This situation continues to be
evidenced by a leveling or reduction in premium rates in certain lines of
business. In order to compete effectively in this environment, Property &
Casualty has implemented programs to control costs across all segments of its
property and casualty business. In personal lines insurance, Property & Casualty
has an exclusive marketing arrangement with A.A.R.P. through the year 2002,
providing a competitive advantage in a growing segment of the population. Net
written premiums resulting from this arrangement represented 15% of total net
written premiums for the operations of Hartford Property and Casualty in each of
1994, 1993 and 1992.
REINSURANCE
In accordance with normal industry practice, Property & Casualty is
involved in both the ceding of property and casualty insurance to, and the
assumption of property and casualty insurance of, other companies. These
reinsurance arrangements provide greater diversification of business and limit
Property & Casualty's maximum net loss arising from large risks or from
catastrophes. A major portion of Property & Casualty's reinsurance is effected
under general reinsurance contracts known as treaties, and in some instances is
negotiated on individual risks, the latter type of reinsurance being known as
facultative reinsurance. The Hartford also has in-force excess of loss contracts
with other companies that protect it against a specified part or all of certain
losses over stipulated amounts arising from any one occurrence.
The ceding of insurance does not discharge the original insurer from its
primary liability to the policyholder. The original insurer remains liable in
situations in which the reinsurance provided is insufficient to meet the
obligations assumed under the reinsurance agreements. Virtually all of Property
& Casualty's
149
<PAGE> 156
reinsurance is placed among reinsurers that are required to meet strict
financial criteria established by a credit committee of The Hartford, including
the maintenance of ratings among the highest by major insurance rating agencies.
LIFE INSURANCE OPERATIONS
The operations of Life in the United States are comprised of the sale of
individual and group life and health insurance and the sale of individual and
group annuity contracts, both fixed and variable. In conjunction with its life
insurance operations, Life sponsors a number of mutual funds and separate
accounts which serve primarily as underlying investments for variable life
insurance and annuity products. Life's operations include its wholly owned
subsidiaries, Hartford Life Insurance Company ("HLIC") and Life and Accident
Insurance Company ("HLA"), both of which are based in Simsbury, Connecticut, ITT
Hartford Life and Annuity Insurance Company, which is based in Minneapolis,
Minnesota, ITT Hartford International Life Reassurance Corporation ("HLre"),
which is based in Westport, Connecticut, ITT Hartford Life Insurance Company of
Canada, which is based in Ontario, Canada, and Alpine Life Insurance Company,
which is based in Princeton, New Jersey.
In 1993, Life initiated a transfer of a majority of its group medical and
dental benefits business to Massachusetts Mutual Life Insurance Company ("Mass
Mutual"). The transfer to Mass Mutual, which was completed in 1994, reflects the
strategy of ITT Hartford to move away from traditional medical health insurance.
This strategy is further reflected by the decision of the management of Life to
discontinue selling individual and group health insurance in September, 1993,
other than stop loss and supplementary medical insurance sold with group life
insurance plans. Life's current participation in the health insurance market
consists solely of the administration of self-funded health benefit plans sold
prior to that date. In June, 1994, Life made its first international investment
outside North America by forming, through a wholly-owned subsidiary, a joint
venture in Argentina. The joint venture, ITT Cenit Seguros S. A., which provides
individual retirement accounts, became the sixth largest pension administrator
in Argentina within the five-month period after its formation.
PRODUCT LINES
Life sells a variety of individual and group insurance products and
financial services through a combination of a direct sales force, licensed
agents and third party administrators. These operations are managed in the
following product lines:
Employee Benefits
The Employee Benefits division sells group life insurance, short-term and
long-term managed disability insurance, and stop loss and supplementary medical
insurance to employers and to employee-sponsored plans, and also provides
underwriting, administrative and claim processing services. These and other
products are sold through licensed agents and third party administrators. HLA is
the eighth largest provider of group life insurance and the fourth largest
provider of group disability insurance in the United States based on in-force
levels as of March 31, 1995.
Specialty
ITT Hartford sells individual and group corporate owned life insurance
("COLI") products directly and through a marketing company in which ITT Hartford
owns a 60% interest. ITT Hartford offers both leveraged and non-leveraged COLI
products. ITT Hartford earns fees for management and cost of insurance.
Policyholders may receive dividends based on experience. ITT Hartford began
offering a new COLI product in 1994 for which the investments and liabilities
are held in a separate account. No policy loans are permitted under this
product, and the policy owner bears the investment risks.
150
<PAGE> 157
Asset Management Services
Asset Management Services ("AMS") offers retirement products and services
to employer groups through a direct sales force, assisted by home office
personnel. As part of its services, AMS manages assets and acts as plan
administrator for pension plans qualified under Sections 401, 403 and 457 of the
Internal Revenue Code. The most significant product type offered by AMS is the
guaranteed rate contract ("GRC"). GRCs offer fixed or indexed rates that are
guaranteed for a specific period. The assets related to the remaining products
are managed for various IRS qualified plans and other pension plan products.
Credited rates for these products vary with interest rate conditions. The
related policyholder liabilities are held at account value less amounts held for
deferred expenses. AMS faces significant competition from a number of financial
institutions, including other insurance companies, based on rates and credit
quality.
Individual Life and Annuity
The Individual Life and Annuity Division ("ILAD") sells to individuals life
insurance products that include universal life insurance, traditional and
interest-sensitive whole life insurance, individual and group annuity contracts,
term and modified guaranteed life insurance and variable life insurance. ILAD's
products are primarily sold through brokers and licensed agents affiliated with
Life, assisted by home office personnel and HLIC's own sales offices. ILAD's
products face significant competition from most other insurers, based somewhat
on price, name recognition and quality of distribution systems.
LIFE INSURANCE REVENUES
The following table summarizes for the periods indicated total revenues of
ITT Hartford's life insurance operations. Revenues regarding each type of
insurance set forth in the table include not only revenues arising from the sale
of insurance but also net investment income and net realized investment gains
related to such sales of insurance.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------------ --------------------------------------------------------
1995 1994 1994 1993(1) 1992(1)
---------------- ---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Employee Benefits --
Domestic.............. $ 601 30% 572 34% $1,130 31% 1,105 37% 1,080 45%
Specialty -- Domestic... 564 28 348 21 919 26 424 14 97 4
Asset Management
Services -- Domestic... 389 19 395 24 789 22 794 26 770 32
Individual Life and
Annuity -- Domestic... 407 20 306 18 682 19 599 20 374 15
International
Operations............ 58 3 43 3 89 2 88 3 95 4
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total........... $2,019 100% $1,664 100% $3,609 100% $3,010 100% $2,416 100%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Prior year amounts have been restated to conform with current year
presentation.
RESERVES
In accordance with the insurance laws and regulations under which Life
operates, life insurance subsidiaries of ITT Hartford are obligated to carry on
their books, as liabilities, actuarially determined reserves to meet their
obligations on their outstanding life insurance contracts, as well as reserves
for their universal life and investment contracts. Reserves for life insurance
contracts are based on mortality and morbidity tables in general use in the
United States, modified to reflect ITT Hartford's experience. ITT Hartford
management believes that these reserves, with additions from premiums to be
received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet ITT Hartford's policy obligations at
their maturities or in the event of an insured's death. Reserves for universal
life insurance and investment products represent policy account balances before
applicable surrender charges. In the ITT Hartford Consolidated Financial
Statements, life insurance reserves are determined in accordance with generally
accepted accounting principles, which vary from statutory requirements.
151
<PAGE> 158
COMPETITION
The life insurance industry in the United States is highly competitive and
includes approximately 2,000 insurers, primarily stock life and mutual life
companies. Among the stock life companies, HLIC and HLA rank 12th and 115th,
respectively, as of December 31, 1994 based on total assets, according to AM
Best's Review, a trade publication.
For the year ended December 31, 1994, total assets for ITT Hartford's
domestic life operations grew 27%. HLIC and HLA have been assigned AM Best's
highest rating, A++, as of December 31, 1994.
REINSURANCE
Life, like many other companies engaged in writing life insurance,
reinsures with other companies portions of the life insurance risks it
underwrites. Currently, the maximum amount of life insurance retained on any one
life by any of the life operations is approximately one million dollars,
excluding accidental death benefits.
In June 1993, ITT Hartford acquired, in an assumption reinsurance
transaction, the annuity, life and accident and sickness insurance contracts and
related liabilities of Fidelity Bankers Life Insurance Company in Receivership
("Fidelity Bankers"). ITT Hartford received approximately $3.2 billion of cash
and investment grade assets to support the liabilities assumed.
In November 1992, ITT Hartford acquired the individual COLI contracts of
Mutual Benefit Life Insurance Company in Rehabilitation ("Mutual Benefit")
pursuant to an assumption reinsurance agreement. In August 1993, ITT Hartford
acquired the group COLI contracts of Mutual Benefit in an assumption reinsurance
transaction. Assets assumed consisted primarily of policy loans and investment
grade securities. All assets supporting Mutual Benefit's reinsurance liability
are held in a security trust, with ITT Hartford as the sole beneficiary. In May
1994, ITT Hartford assumed and reinsured the life insurance policies and
individual annuity contracts of Pacific Standard Life Insurance Company in
Receivership.
INVESTMENT OPERATIONS
An important element of the financial results of ITT Hartford is the return
on invested assets. The following table summarizes ITT Hartford's investment
results for the period indicated(1):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
($ IN MILLIONS) 1995 1994 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Cash and Investments(1).......... $35,432 $31,437 $32,477 $29,221 $26,144
Net Investment Income Excluding Realized
Gains.................................. 1,183 1,023 2,259 2,033 1,985
Net Realized Gains(2).................... 48 57 90 155 443
% Earned on Investments and Cash......... 6.68% 6.51% 6.96% 6.96% 7.59%
</TABLE>
- ---------------
(1) The average amount for investments is the average of the cost at the
beginning and end of the relevant period.
(2) Net realized gains includes net gains on sales of bonds, stock, real estate,
other investments and policyholder gains before applicable income taxes.
ITT Hartford's investment activities are divided between property and
casualty insurance and life insurance. The investment portfolios of both the
Property and Casualty and the Life operations are managed based on the
underlying characteristics and nature of the respective policy liabilities.
Investment management strategies differ significantly as do the nature of these
two businesses.
The investment objective of the Property and Casualty companies is the
maximization of after-tax yields consistent with maintenance of appropriate
liquidity and preservation of capital. Property and Casualty investment
strategies are developed based on a variety of factors including business needs,
duration, regulatory requirements and tax considerations. Investments are
comprised primarily of taxable and non-taxable
152
<PAGE> 159
intermediate fixed maturity bonds and notes and corporate bonds. The
characteristics of these investments have generally not been altered through the
use of derivative financial instruments.
The investment objective of Life operations is to maximize after-tax yields
consistent with acceptable risk and appropriate liquidity. Matching of the
duration of life investments with respective policyholder obligations is an
explicit objective of the life management strategy.
Derivatives utilization plays an important role in the management of
interest rate risk, in creating opportunities to develop asset packages which
efficiently fund product obligations, in hedging against indexation risks which
affect the value of certain liabilities, and in adjusting broad investment risk
characteristics when dictated by significant changes in market risks. Approved
derivatives usage must support at least one of the following objectives: to
manage the risk to the operation arising from price, interest rate and foreign
current volatility, to manage liquidity, and/or control transaction costs. All
investment activity is subject to regular review and approval by ITT Hartford's
Finance Committee. Credit limits, diversification standards and review
procedures for all credit risk, whether borrower, issuer, or counterparty, have
been established. The Life operations analyze the aggregate interest rate risk
through the use of a proprietary, multi-scenario cash flow projection model
which encompasses all liabilities and their associated investments, including
derivatives. See "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" for further discussion of these matters.
REGULATION
ITT Hartford's insurance businesses are subject to comprehensive and
detailed regulation and supervision throughout the United States and in the
foreign jurisdictions in which they operate. While the insurance laws of the
jurisdictions in which ITT Hartford and its subsidiaries operate vary, such laws
generally establish supervisory agencies with broad administrative powers with
respect to, among other things, licensing to transact business, overseeing trade
practices, licensing agents, regulating premium rates, approving policy forms,
underwriting and claims practices, establishing reserve requirements and
solvency standards, fixing maximum interest rates on life insurance policy loans
and minimum rates for accumulation of surrender values and regulating the types,
amounts and valuations of investments. See "-- PROPERTY AND CASUALTY INSURANCE
OPERATIONS -- PREMIUM RATES". In addition, each insurance company is required to
file detailed annual reports and statutory financial statements with supervisory
agencies in each of the jurisdictions in which it does business, and its
operations and accounts are subject to examination by such agencies at regular
intervals.
As a holding company with no significant business operations of its own,
ITT Hartford will rely on dividends from its insurance company subsidiaries,
particularly The Hartford, as the principal source of cash to meet its
obligations and to pay dividends to its shareholders. The payment of dividends
by The Hartford is limited under the insurance holding company laws of
Connecticut which require notice to and approval by the state insurance
commissioner for the declaration or payment of any dividend, which together with
other dividends or distributions made within the preceding twelve months,
exceeds the greater of (i) 10% of the insurer's policyholder surplus as of
December 31 of the preceding year or (ii) net income for the twelve-month period
ending on the thirty-first day of December last preceding, in each case
determined under statutory insurance accounting policies. The insurance holding
company laws of the other jurisdictions in which ITT Hartford's insurance
subsidiaries are incorporated generally contain similar (although in certain
instances somewhat more restrictive) limitations on the payment of dividends.
ITT Hartford is also subject to laws governing insurance holding companies
in the states in which its insurance subsidiaries are incorporated or deemed to
be commercially domiciled, including Connecticut, Florida, Hawaii, Indiana,
Illinois, New Jersey, Texas, Wisconsin and California. The insurance holding
company statutes generally provide that each insurance company in the system is
required to register with the insurance department of its state of incorporation
(or commercial domicile) and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and reasonable. Notice to the insurance departments is
153
<PAGE> 160
required prior to the consummation of transactions affecting the control of an
insurer and of certain transactions between an insurer and any person in its
holding company system, and certain of such transactions may not be consummated
without the applicable department's prior approval. Many of the foreign
jurisdictions in which various insurance subsidiaries are incorporated impose
similar requirements.
The insurance holding company laws of each of the jurisdictions in which
ITT Hartford's insurance subsidiaries are incorporated or commercially domiciled
(as well as state corporation laws) will also govern any acquisition of control
of such insurance subsidiaries or of ITT Hartford. In general, such laws provide
that no person or entity may directly or indirectly acquire control of an
insurance company unless such person or entity has received the prior approval
of the insurance regulatory authorities. Such acquisition of control would be
presumed in the case of any person or entity who purchase 10% or more of ITT
Hartford's outstanding Common Stock (5% or more, in the case of the Florida
insurance holding company laws) unless the applicable insurance regulatory
authorities determine otherwise.
Although the Federal government does not directly regulate the insurance
business, Federal initiatives often have an impact on the insurance industry in
a variety of ways. Legislation has been introduced in the Congress during the
past several sessions which, if enacted, would result in substantially greater
Federal regulation of the property and casualty and life insurance industries.
Current and proposed Federal measures which may significantly affect the life
insurance business include removal of barriers preventing banks from engaging in
the insurance and annuity business, medical testing for insurability, tax law
changes affecting the taxation of life insurance companies, the tax treatment of
life insurance products and its impact on the relative desirability of various
personal investment vehicles and proposed legislation to prohibit the use of
gender in determining insurance and pension rates and benefits. Such measures
which may significantly impact the property and casualty industry include
possible modifications to the Superfund program and the tax laws governing
property and casualty insurance companies, proposed limits to product liability
lawsuits and other tort reform proposals.
In all states, insurers licensed to transact certain classes of insurance
are required to become members of an insolvency fund. In most states, in the
event of the insolvency of an insurer writing any such class of insurance in the
state, all members of the fund are assessed to pay certain claims of the
insolvent insurer. A particular state's fund assesses its members based on their
respective written premiums in the state for the classes of insurance in which
the insolvent insurer engaged. Assessments are generally limited for any year to
one or two percent of premiums written per year depending on the state. Such
assessments on The Hartford approximated $23 million in 1994, $25 million in
1993 and $20 million in 1992.
State insurance regulation also requires insurers to participate in
assigned risk plans, reinsurance facilities and joint underwriting associations,
which are mechanisms to provide various basic or minimum insurance coverage of
certain risks for which insurance is not available in voluntary markets. Such
mechanisms are most prevalent for automobile and workers' compensation
insurance, but a majority of states also mandate participation in so-called FAIR
Plans or Windstorm Plans providing basic property coverages, and some states
also mandate such participation in facilities for providing medical malpractice
insurance. Participation is based upon the amount of a company's written
premiums in a particular state for the classes of insurance involved.
In recent years the insurance industry has been subject to increasing
scrutiny. The National Association of Insurance Commissioners (the "NAIC") and
state insurance regulatory authorities have taken a number of initiatives to
expand existing laws and regulations applicable to insurance companies for the
protection of policyholders, particularly with respect to assessments of
solvency and of investment and insurance risks. For example, the NAIC has
approved and recommended for adoption by the states several initiatives designed
to identify weakly capitalized insurance companies and to decrease the risk of
insolvency. The rules, known as Risk Based Capital ("RBC"), apply to both
property and casualty and life companies. For property and casualty companies,
the RBC requirements are effective starting with 1994 statutory financial
statements filed in 1995, and for life insurance companies RBC requirements are
effective starting with 1993 statutory financial statements filed in 1994. ITT
Hartford's property and casualty and life operations exceeded the applicable RBC
requirements as of December 31, 1994.
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance
154
<PAGE> 161
capacity and pricing. These regulations include (i) the creation of "market
assistance plans" under which insurers are induced to provide certain coverages,
(ii) restrictions on the ability of insurers to cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted to
be charged.
It is not possible to predict the future impact of changing state and
Federal regulation of ITT Hartford's operations, and there can be no assurance
that existing insurance-related laws and regulations will not become more
restrictive in the future or that laws and regulations enacted in the future
will not be more restrictive than existing laws.
PROPERTIES
The Hartford owns its home office complex, comprising several buildings in
greater Hartford, Connecticut which total approximately 1.6 million square feet.
The Hartford's international companies own approximately 185,000 square feet in
the United Kingdom and 177,000 square feet in the Netherlands. In addition, The
Hartford and its subsidiaries lease approximately 4.8 million square feet
throughout the United States and 145,000 square feet in other countries.
EMPLOYEES
The Hartford had approximately 20,000 employees as of June 30, 1995. Of
this number, approximately 19,000 are employees in the United States, none of
which are represented by labor unions.
LEGAL PROCEEDINGS
The Hartford, together with other companies, associations and organizations
involved in the business of property and casualty insurance and reinsurance, was
named as a defendant in a group of lawsuits filed by Attorneys General of 20
states and by various private parties in the United States District Court for
the Northern District of California. All of the suits, which were filed in 1988,
1990 and 1991, were based upon allegations that the defendants violated federal
and/or state antitrust laws by reason of their activities in connection with the
development of new standard commercial general liability policy forms by the
Insurance Services Office, an industry organization. In June 1991, the Ninth
Circuit U.S. Court of Appeals reversed the United States District Court for the
Northern District of California, which had granted summary judgment in September
1989 in favor of the defendants. On June 28, 1993, the United States Supreme
Court reversed the Ninth Circuit U.S. Court of Appeals, holding that the
domestic insurers, including The Hartford, had not lost their McCarran-Ferguson
Act exemption from the antitrust laws generally, as a result of activities
alleged in the complaints, but remanded the case for further proceedings to
determine if certain of those activities came within the "boycott" exception to
the McCarran-Ferguson Act exemption. On October 3, 1994, The Hartford announced
that it, along with the other 31 defendants, had settled this lawsuit. The
settlement provides for a payment of $36 million, the majority of which funds
will be used to create a public entity risk institute and national public risk
database. It also calls for changes in control of Insurance Services, Inc., a
nationwide organization which develops standardized policy language and compiles
information insurers use to determine their own insurance rates. Following
notice of the settlement to all class members in the private actions, the Court
granted final approval of the settlement at a final fairness hearing on March
29, 1995. The time for appeal has now passed.
ITT Hartford is involved in claim litigation arising in the ordinary course
of business and accounts for such activity through the establishment of policy
reserves. As discussed above and in the accompanying ITT Hartford Consolidated
Financial Statements, ITT Hartford continues to receive claims related to
environmental and asbestos disputes that involve significant uncertainty
regarding policy coverage issues. See "-- PROPERTY AND CASUALTY INSURANCE
OPERATIONS -- UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES".
155
<PAGE> 162
ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION
After the Distribution, it is intended that ITT Industries will operate the
Automotive, Defense & Electronics and Fluid Technology businesses of ITT
substantially in the manner in which they currently are operated. D. Travis
Engen, who is currently Executive Vice President of ITT, will become Chairman,
President and Chief Executive of ITT Industries, and certain persons who are
currently directors of ITT will remain as directors of ITT Industries. See
"-- ITT INDUSTRIES BOARD OF DIRECTORS". 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. See "-- ITT INDUSTRIES EXECUTIVE
OFFICERS".
ITT INDUSTRIES BOARD OF DIRECTORS
Immediately after the Distribution, ITT Industries expects to have a board
of six directors.
Effective as of the Distribution Date, following the resignations from the
Board of Directors of ITT of Bette B. Anderson, who will serve on the Boards of
Directors of New ITT and ITT Hartford, Nolan D. Archibald, who will serve on the
Board of Directors of New ITT, Paul G. Kirk, Jr., who will serve on the Boards
of Directors of New ITT and ITT Hartford, Benjamin F. Payton, who will serve on
the Board of Directors of New ITT, and Margita E. White, who will serve on the
Board of Directors of New ITT, and the election by the remaining directors of D.
Travis Engen, the Board of Directors of ITT Industries is expected to consist of
the persons listed below. Mr. Araskog, who will become Chairman and Chief
Executive of New ITT, will resign as Chairman, President and Chief Executive of
ITT effective as of the Distribution Date, although he will continue as a
director of ITT Industries. As noted above, Mr. Engen will become Chairman,
President and Chief Executive of ITT Industries effective as of the Distribution
Date. It is thus the intent of ITT Industries that a majority of the directors
comprising ITT Industries' Board of Directors will not be employees of ITT
Industries.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of ITT
Industries following the Distribution.
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Rand V. Araskog, 63..................... Mr. Araskog joined ITT in 1966 and has been chief
Chairman, President and executive of ITT since 1979 and chairman since
Chief Executive of ITT 1980. In March 1991, he assumed the title of
president. Mr. Araskog is currently a director of
ITT and has been a director of ITT since 1977. He
will be a director of New ITT and of ITT Hartford
and will continue as well as a director of Alcatel
Alsthom of France. He is also a director of Dow
Jones & Company, Inc., Dayton-Hudson Corporation,
Rayonier Inc., ITT Educational Services, Inc. and
Shell Oil Company. He is a member of The Business
Council, the Council on Foreign Relations and the
Trilateral Commission. He is a trustee of the New
York Zoological Society and Salk Institute. Mr.
Araskog is a graduate of the U.S. Military Academy
at West Point and attended Harvard Graduate School
of Arts and Sciences.
</TABLE>
156
<PAGE> 163
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Robert A. Burnett, 68................... Mr. Burnett served as chairman of Meredith
Chairman and Chief Executive Corporation from 1988 until his retirement in 1992.
Officer (Retired) of He served as president and chief executive officer
Meredith Corporation from 1977 and relinquished the latter office in
(diversified media company) 1989. Mr. Burnett is currently a director of ITT
and has been a director of ITT since 1985, and he
will be a director of New ITT and of ITT Hartford.
Mr. Burnett is a director of Meredith Corporation,
Whirlpool Corporation, and Midwest Resources Inc.
Mr. Burnett is a member of the Board of Trustees of
Grinnell College, Grinnell, Iowa. He also is a
director of the Greater Des Moines Committee and
the Des Moines Art Center. Mr. Burnett has a BA
degree in economics from the University of
Missouri.
Michel David-Weill, 62.................. Mr. David-Weill has been Chairman of Lazard Freres
Chairman of Lazard Freres & Co. LLC & Co. LLC since May 1995, when Lazard Freres & Co.,
(investment bankers) of which he had been Senior Partner since 1977, was
restructured and its name was changed. He became a
partner in Lazard Freres & Co., New York, in 1961,
where he served until 1965. In 1965 he became a
partner of Lazard Freres & Cie., Paris, and a
director of Lazard Brothers & Co. Limited, London.
He is currently a director of ITT and has been a
director of ITT since 1981. He will also be a
director of New ITT. Mr. David-Weill is a director
of a number of corporations, including Groupe
Danone ad Publicis S.A. in France, Fiat S.p.A. in
Italy, Pearson plc in England and The Dannon
Company, Inc. and New York Stock Exchange, Inc. in
the United States, as well as other companies of
which Lazard Freres & Cie., Paris, or one of its
affiliates, is the principal shareholder. He
graduated from the Institut des Sciences
Politiques, Paris, France.
D. Travis Engen, 51..................... Mr. Engen has been Executive Vice President of ITT
Executive Vice President of ITT since January 1991, and he served as Senior Vice
President of ITT and Chief Executive Officer of ITT
Defense, Inc. from 1987 until January 1991. Mr.
Engen joined ITT in April 1985. He is a director of
Lyondell Petrochemical Company and a member of the
Manufacturers Alliance Board of Trustees. Mr. Engen
has a B.S. degree in Aeronautics and Astronautics
from the Massachusetts Institute of Technology.
S. Parker Gilbert, 61................... Mr. Gilbert retired in 1990 from Morgan Stanley
Chairman, Morgan Stanley Advisory Board Group Inc., where he served as chairman from 1984
(international consultants) until he retired. He joined Morgan Stanley in 1960,
was elected a partner in 1969, a managing director
in 1970, and president in 1983. He is currently a
director of ITT and has been a director of ITT
since 1991. Mr. Gilbert is a director of Morgan
Stanley Group Inc., Burlington Resources Inc. and
Taubman Centers, Inc. He is president, Board of
Trustees, the Pierpont Morgan Library; member,
Board of Trustees, the Metropolitan Museum of Art,
the Alfred P. Sloan Foundation and the John Simon
Guggenheim Memorial Foundation; and director,
Josiah H. Macy Foundation. Mr. Gilbert is a
graduate of Yale University.
</TABLE>
157
<PAGE> 164
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Edward C. Meyer, 66..................... General Meyer retired in 1983 as chief of staff of
Chairman of GRC International the United States Army. He is currently a director
(professional and technical of ITT and has been a director of ITT since 1989.
services provider) He will also be a director of New ITT. General
Meyer is a member of the supervisory board of
Compagnie Financiere Alcatel. He is a director of
FMC Corporation and its joint venture company in
Turkey, Savunma Sanayii A.S., the United Defense
Group, the Brown Group, and GRC International. He
is a managing partner of Cilluffo Associates
Limited Partnership, which owns approximately 20%
of GRC International. General Meyer is a trustee of
The Mitre Corporation and the George C. Marshall
Foundation. He is president of the Army Emergency
Relief Association, the Board of Overseers of the
Hoover Institution and the Board of Advisors of the
Center for Strategic and International Studies, and
he is a board member of the Smith Richardson
Foundation. General Meyer received a BS degree in
engineering from the U.S. Military Academy at West
Point and an MS degree in international affairs
from George Washington University.
</TABLE>
Mr. Harold S. Geneen will be designated Chairman Emeritus of ITT Industries
as well as New ITT and ITT Hartford. Mr. Geneen was named President and Chief
Executive of ITT in 1959 and Chairman in 1964. He relinquished the post of
President in 1973, the post of Chief Executive in 1978 and the chairmanship on
January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen continued
to serve on the Board of Directors of ITT until 1983.
DIRECTORS' COMPENSATION; CERTAIN RELATIONSHIPS
ITT Industries will continue the policy of ITT that members of the ITT
Industries Board of Directors who are employees of ITT Industries or its
subsidiaries will not be compensated for service on the ITT Industries Board or
any Committee of the ITT Industries Board. Compensation for non-employee
directors will consist of an annual retainer fee of $30,000 payable solely in
restricted shares of ITT Industries Common Stock, a $1,000 fee for each meeting
of the ITT Industries Board attended and a $750 fee for each Committee meeting
attended. Directors will continue to be reimbursed for travel expenses incurred
on behalf of ITT Industries.
Lazard Freres & Co. LLC, of which Mr. David-Weill is Chairman, performed
various investment banking services for ITT and its subsidiaries in 1994. It is
anticipated that such firm will perform similar services for ITT and its
subsidiaries during 1995 and ITT Industries and its subsidiaries thereafter. In
1988, the ITT Master Retirement Trust, Hartford Accident and Indemnity Company
and Hartford Life Insurance Company (the "ITT Investment Vehicles") committed to
invest an aggregate of $35 million in, and became limited partners of, Corporate
Partners, L.P., a fund organized by Lazard Freres & Co. With certain exceptions,
such commitment expired in 1994. Under the terms of the limited partnership
agreement, the ITT Investment Vehicles have agreed to pay Corporate Advisors,
L.P., the general partner of Corporate Partners, L.P., certain amounts in
connection with their investment. During 1994, the ITT Investment Vehicles paid
Corporate Advisors, L.P. fees aggregating $204,377. Lazard is advising the Board
of Directors of ITT in connection with the Distribution and will receive
compensation for its services.
DIRECTORS' RETIREMENT POLICY
The ITT Industries Board of Directors will continue the retirement policy
adopted by the ITT Board of Directors which provides that (i) no person may be
nominated for election or reelection as a non-employee director after reaching
age 72 and (ii) no employee of ITT Industries or of any of its subsidiaries
(other than
158
<PAGE> 165
an employee who has served as chief executive of ITT Industries) may be
nominated for election or reelection as a director after reaching age 65, unless
there has been a specific waiver by the ITT Industries Board of Directors of
these age requirements.
DIRECTORS' BENEFITS
The directors of ITT Industries who are currently non-employee directors of
ITT have been participants in the 1995 ITT Deferred Compensation Plan, the
Retirement Benefit Plan for Non-Management Directors of ITT Corporation (the
"ITT Directors Retirement Plan"), a group life insurance program and the ITT
Group Accident Program for Officers and Directors. At or prior to the
Distribution Date, the ITT Industries Board of Directors will continue such
plans and programs as the "1995 ITT Industries Deferred Compensation Plan", the
"ITT Industries Directors Retirement Plan", the "ITT Industries Directors Group
Life Plan" and the "ITT Industries Group Accident Program for Officers and
Directors". Under the 1995 ITT Industries Deferred Compensation Plan,
non-employee directors will be permitted to elect to defer receipt of all or a
portion of their 1995 ITT Industries and ITT Industries' subsidiaries fees. ITT
Industries will credit interest on the deferred compensation based upon the
performance of benchmark investment funds made available under the 1995 ITT
Industries Deferred Compensation Plan and selected by the director.
Under the ITT Industries Directors Retirement Plan, non-employee directors
who retire from the Board of Directors at or after age 65 after completing five
years of service on the ITT Industries Board of Directors will be entitled to an
annual pension based on the ITT Industries Board of Directors annual retainer
fee payable at retirement. Pensions will range from 50% of such fee after five
years of service to 100% after 10 years, with an additional 5% for each year of
service in excess of 10, to a maximum of 200% of the annual retainer fee after
30 or more years of service. With respect to any non-management director of ITT
Industries who, immediately following the Distribution, is not also a director
of New ITT, the ITT Industries Directors Retirement Plan will provide credit for
any accrued benefit with respect to ITT board service prior to the Distribution
Date, but only to the extent such prior service benefit accrual is not
duplicated under a plan maintained by New ITT or ITT Hartford. A director will
be permitted to indicate a preference, subject to certain conditions, to receive
any accrued benefit under the ITT Industries Directors Retirement Plan in the
form of a single (discounted) lump sum payment immediately payable upon such
director's retirement. The ITT Industries Directors Group Life Plan will provide
$100,000 of non-contributory group life insurance to participating non-employee
directors during their service on the ITT Industries Board of Directors.
The non-employee directors of ITT Industries will be covered under the ITT
Industries Group Accident Program for Officers and Directors, which is a
non-contributory group accidental death and dismemberment program that provides
each director $750,000 of coverage during his or her service on the ITT
Industries Board. Additional benefits are permitted to be purchased.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Prior to the Distribution, ITT is expected to adopt the 1996 ITT Restricted
Stock Plan for Non-Employee Directors (the "1996 ITT Non-Employee Directors
Plan"). The 1996 Non-Employee Directors Plan is designed to further ITT's
objectives of attracting and retaining individuals of ability as directors and
providing the directors with a closer identity with the interests of the ITT
Industries shareholders. Such Plan will be renamed the "1996 ITT Industries
Restricted Stock Plan for Non-Employee Directors" in connection with the
Distribution. The 1996 ITT Non-Employee Directors Plan is also set forth in full
as Annex G hereto.
Approval of Proposal Six set forth under the heading
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the
1996 ITT Non-Employee Directors Plan.
Overview
Under the proposed 1996 ITT Non-Employee Directors Plan, directors of ITT
Industries who are not employees of ITT Industries or any of its subsidiaries
will automatically participate in the 1996 ITT Non-Employee Directors Plan.
There are presently five designated directors of ITT Industries who will be
eligible to participate in the 1996 ITT Non-Employee Directors Plan.
159
<PAGE> 166
The 1996 ITT Non-Employee Directors Plan will be administered by the
Compensation and Personnel Committee of the Board of Directors of ITT
Industries. The Committee will have the responsibility of interpreting the 1996
ITT Non-Employee Directors Plan and establishing the rules appropriate for the
administration of the 1996 ITT Non-Employee Directors Plan.
Grants of restricted stock will be made automatically on the date of each
Annual Meeting of Shareholders to each non-employee director elected at the
meeting or continuing in office following the meeting. The amount of the award
shall equal (and be in lieu of) the annual retainer in effect for the calendar
year within which the award date falls, divided by the fair market value of ITT
Industries Common Stock. "Annual retainer" is defined as the amount payable to a
director for service on the Board during the calendar year and does not include
meeting attendance fees. The annual retainer is presently set at $30,000. "Fair
market value" is defined as the average of the high and low sales price per
share of ITT Industries Common Stock on the date of the Annual Meeting, as
reported on the NYSE Composite Tape. A total of 100,000 shares would be reserved
for issuance under the 1996 ITT Non-Employee Directors Plan. The shares to be
issued may be treasury shares or newly issued shares of ITT Industries Common
Stock. The shares of ITT Industries Common Stock that are granted under the 1996
ITT Non-Employee Directors Plan will be held in escrow by ITT Industries and
will be subject to a restriction period (after which restrictions will lapse)
which shall mean a period commencing on the grant date and ending on the
earliest of (i) the fifth anniversary of the grant date, (ii) upon retirement at
age 72, (iii) upon a "change of control" (as defined) of ITT Industries, (iv)
death, (v) the onset of disability or (vi) resignation under cases of special
circumstances with the consent of the Committee. Except as provided above, any
resignation from board service within the restriction period will result in
forfeiture of the shares. Shares may not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of during the restriction period.
Until such risk of forfeiture lapses or the shares are forfeited, a director
will have the right to vote and to receive dividends on the shares granted under
the 1996 ITT Non-Employee Directors Plan.
The Board of Directors may amend, suspend or discontinue the 1996 ITT
Non-Employee Directors Plan at any time except that the Board may not, without
stockholder approval, take any action which would cause the 1996 ITT
Non-Employee Directors Plan to no longer comply with Rule 16b-3 under the
Exchange Act. No amendment, suspension or discontinuance of the 1996 ITT
Non-Employee Directors 1996 Plan may impair a director's right under a
restricted stock award previously granted without his consent.
The 1996 ITT Non-Employee Directors Plan would become effective as of the
Distribution Date and terminate on December 31, 2005, provided that grants of
Restricted Stock made prior to the termination of the Plan may vest following
such termination in accordance with their terms.
Federal Income Tax Consequences
A director will not be taxed upon grant of a restricted stock award, but
will realize ordinary income in an amount equal to the fair market value of ITT
Industries Common Stock at the time the shares are no longer subject to a
substantial risk of forfeiture (as defined in the Internal Revenue Code). ITT
Industries will be entitled to a deduction at the time and to the extent that
the director realizes ordinary income. However, a director may elect (not later
than 30 days after acquiring such shares) to realize ordinary income at the time
the restricted shares are awarded in an amount equal to their fair market value
at that time, notwithstanding the fact that such shares are subject to
restrictions and a substantial risk of forfeiture. If such an election is made,
no additional taxable income will be recognized by such director at the time the
restrictions lapse. ITT Industries will be entitled to a tax deduction at the
time and to the extent income is realized by such director. However, if shares
with respect to which such election was made are later forfeited, no tax
deduction is allowable to the officer for the forfeited shares, and ITT
Industries will be deemed to realize ordinary income equal to the amount of the
deduction allowed to ITT Industries at the time of the election with respect to
such forfeited shares. THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX
CONSEQUENCES IN RESPECT OF THE 1996 ITT NON-EMPLOYEE DIRECTORS PLAN IS FOR
GENERAL INFORMATION ONLY. INTERESTED PARTIES SHOULD CONSULT THEIR OWN ADVISORS
AS TO THE SPECIFIC TAX CONSEQUENCES OF SUCH PLAN, INCLUDING THE APPLICATION AND
EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS.
The above summary of the 1996 ITT Non-Employee Directors Plan is qualified
in its entirety by reference to the full plan text which is set forth as Annex G
hereto.
160
<PAGE> 167
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of ITT Industries waive the personal
liability of a director for damages for breach of fiduciary duty except for (i)
a breach of duty if such breach constitutes wilful misconduct or recklessness or
(ii) the payment of distributions in violation of Section 23-1-28-3 of the
Indiana Business Corporation Law, which concerns the unlawful payment of
distributions to shareholders.
While the Articles of Incorporation of ITT Industries provide directors
with protection from awards for monetary damages for breaches of their duty of
care, they do not eliminate such duty. Accordingly, the Articles of
Incorporation of ITT Industries will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's
breach of his or her duty of care.
The By-laws of ITT Industries provide for indemnification of the directors
and officers of ITT Industries to the fullest extent permitted by applicable
state law, as then in effect. The indemnification rights conferred by the
By-laws of ITT Industries are not exclusive of any other right to which a person
seeking indemnification may otherwise be entitled. ITT Industries also has
provided liability insurance for the directors and officers for certain losses
arising from claims or charges made against them while acting in their
capacities as directors or officers and has entered into, or expects to enter
into, an indemnification agreement with each of its directors. Under its form of
indemnification agreement, ITT Industries agrees to indemnify its directors
against all expenses, liabilities or losses incurred by the directors in their
capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as
provided in the By-laws of ITT Industries as in effect on the date of such
agreement; and (iii) in the event ITT Industries does not maintain the
aforementioned insurance or comparable coverage, to the full extent provided in
the applicable policies as in effect on the date of such agreement (ITT
Industries obligations described in (ii) and (iii) being subject to certain
exceptions). Contractual rights under such indemnification agreements are
believed to provide the directors more protection than the By-laws which are
subject to change.
COMMITTEES OF THE ITT INDUSTRIES BOARD OF DIRECTORS
ITT currently has seven standing committees: Audit, Capital, Compensation
and Personnel, Executive and Policy, Legal Affairs, Nominating and Public
Affairs. It is expected that ITT Industries will combine the Legal Affairs and
Public Affairs Committees into the Corporate Responsibility Committee and
eliminate the Executive and Policy Committee after the Distribution. No final
determination has yet been made as to the memberships of such standing
committees.
AUDIT COMMITTEE
The Audit Committee recommends the selection of independent auditors for
ITT (and after the Distribution, ITT Industries), confirms the scope of audits
to be performed by such auditors, reviews audit results and internal accounting
and control procedures and policies and reviews the fees paid to the independent
auditors. The Audit Committee also reviews and recommends approval of the
audited financial statements of ITT (and after the Distribution, ITT Industries)
and the annual reports to shareholders. It also reviews the expense accounts of
senior executives.
CAPITAL COMMITTEE
The Capital Committee is responsible for maximizing the effective use of
the assets of ITT (and after the Distribution, ITT Industries) and its
subsidiaries and reviewing capital expenditures and appropriations.
COMPENSATION AND PERSONNEL COMMITTEE
The Compensation and Personnel Committee oversees the compensation and
benefits of employees, evaluates management performance and establishes
executive compensation. In the performance of its functions, the Compensation
and Personnel Committee has access to independent compensation counsel. ITT
Industries will maintain the current ITT policy as of the Distribution Date of
comprising the Compensation and Personnel Committee entirely of non-employee
directors.
161
<PAGE> 168
CORPORATE RESPONSIBILITY COMMITTEE
The Corporate Responsibility Committee will review and define social
responsibilities and will review and consider major claims and litigation and
legal, regulatory, intellectual property and related governmental policy matters
affecting ITT Industries and its subsidiaries. The Corporate Responsibility
Committee will review and approve management policies and programs relating to
compliance with legal and regulatory requirements and business ethics.
NOMINATING COMMITTEE
The Nominating Committee makes recommendations concerning the organization,
size and composition of the Board of Directors and its Committees, proposes
nominees for election to the Board of Directors and its Committees and considers
the qualifications, compensation, and retirement of directors.
ITT INDUSTRIES EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH ITT INDUSTRIES AND
AGE BIOGRAPHICAL DATA
- ---------------------------------------- ---------------------------------------------------
<S> <C>
D. Travis Engen, 51..................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman, President and Chief Executive AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
OF DIRECTORS".
Louis J. Giuliano, 48................... Mr. Giuliano has been Senior Vice President of ITT
Senior Vice President and President of since 1991 and Chief Executive Officer of ITT
ITT Defense & Electronics, Inc. Defense & Electronics, Inc. from September 1992 to
the present. Prior to that time, Mr. Giuliano
served as Vice President of ITT and Vice
President/Director -- Defense Operations of ITT
Defense, Inc. from 1988 until June 1991.
Richard J.M. Hamilton, 45............... Mr. Hamilton has been Director of Corporate
Senior Vice President and Controller Analysis from October 1993 to the present and also
Vice President of ITT from February 1992 to the
present. He served as Assistant Controller and
General Auditor of ITT between 1991 and October
1993. After joining ITT in September 1971, Mr.
Hamilton held various financial positions in ITT
companies located in Europe and the United States.
Martin Kamber, 47....................... Mr. Kamber has been Vice President, Corporate
Senior Vice President, Development of ITT Automotive from 1993 to the
Corporate Development present. He served as Executive Assistant to the
President, Chief Operating Officer and Executive
Vice President at ITT Headquarters from 1984 to
January 1993. Prior to joining ITT in July 1977,
Mr. Kamber held various positions in companies
located in Europe and the United States.
Timothy D. Leuliette, 45................ Mr. Leuliette has been Senior Vice President of ITT
Senior Vice President and President of and President and Chief Executive Officer of ITT
ITT Automotive, Inc. Automotive, Inc. since September 1991. Prior to
that time, Mr. Leuliette served as President and
Chief Executive of Siemens Automotive and Vice
President of Siemens A.G. from 1988 to September
1991.
</TABLE>
162
<PAGE> 169
<TABLE>
<CAPTION>
NAME, POSITION WITH ITT INDUSTRIES AND
AGE BIOGRAPHICAL DATA
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Vincent A. Maffeo, 44................... Mr. Maffeo joined ITT in July 1977. He has been
Senior Vice President and Vice President and General Counsel of ITT
General Counsel Automotive, Inc. since January 1992. Prior to that
time, Mr. Maffeo served as Vice President and
General Counsel of ITT Defense, Inc. from January
1987 to December 1991.
Bertil T. Nilsson, 63................... Mr. Nilsson has been Senior Vice President of ITT
Senior Vice President and President, and President and Chief Executive Officer of ITT
ITT Fluid Technology Corporation Fluid Technology Corporation from September 1992 to
the present. He served as Vice President of ITT
between 1987 and September 1992, and as President
and Chief Operating Officer of ITT Fluid Technology
Corporation from October 1991 to August 1992.
James P. Smith, Jr., 52................. Mr. Smith has been Executive Vice President and
Senior Vice President, Human Resources Director of Administration of ITT Sheraton from
1993 to the present. From 1990 to 1993 he was
Senior Vice President and Director of
Administration of ITT Sheraton. Mr. Smith served as
Director of Executive Continuity and Headquarters
Personnel of ITT from 1987 to 1990. Prior to
joining ITT in June 1973, Mr. Smith held various
positions in companies located in the United
States.
</TABLE>
163
<PAGE> 170
EMPLOYMENT AGREEMENT
Prior to the Distribution, ITT Industries is expected to enter into an
employment agreement with Mr. Engen (the "Engen Employment Agreement") which
will provide for, among other things: (i) a base salary in an amount not less
than $700,000 per annum, participation in ITT Industries' benefits plans and
possible awards under ITT Industries' executive incentive bonus program; (ii)
Mr. Engen's employment as chairman and chief executive of ITT Industries from
the Distribution Date through December 31, 1999; and (iii) certain payments and
benefits in the event of termination, without cause, by ITT Industries such that
Mr. Engen will (A)(I) receive (x) salary, on a monthly basis, equivalent in the
aggregate to the amounts of salary remaining unpaid until the expiration of the
Engen Employment Agreement or (y) at ITT Industries discretion, the balance
remaining of such aggregate amount in a lump sum payment if Mr. Engen accepts
other full-time employment and (II) as long as salary under clause (A) above
continues to be paid, be eligible (x) for participation in certain ITT
Industries benefit plans and (y) to exercise outstanding stock options or (B)
receive in lieu of such payments and benefits described in clause (A) above, if
Mr. Engen is entitled to receive a termination allowance under any ITT
Industries severance plan or termination allowance plan which exceeds the salary
described in clause (A)(I) above, such termination allowance amount.
COMPENSATION OF ITT INDUSTRIES EXECUTIVE OFFICERS
The following table discloses the compensation received by ITT Industries'
Chief Executive Officer and the four other most highly paid executive officers
for services rendered to ITT for the three fiscal years ended December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(2)(3)(#) COMPENSATION(4)($)
- --------------------------------------- ---- --------- -------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
D. Travis Engen........................ 1994 608,333 638,250 15,991 60,000 23,073
Executive Vice 1993 541,667 731,000 13,043 54,656 19,930
President -- ITT Corporation 1992 504,167 -- 9,645 -- 17,646
Louis J. Giuliano...................... 1994 333,814 280,000 27,577 37,000 13,465
Sr. Vice President -- ITT & 1993 315,000 205,000 13,201 40,445 11,996
President and Chief 1992 289,667 149,700 11,463 -- 10,172
Executive -- ITT Defense & Electronics
Timothy D. Leuliette................... 1994 425,417 360,000 10,230 37,000 16,668
Sr. Vice President -- ITT & 1993 405,000 197,200 114,912 40,445 15,146
President and Chief 1992 377,500 248,600 109,198 -- 6,694
Executive -- ITT Automotive, Inc.
Bertil T. Nilsson...................... 1994 327,100 190,000 9,331 33,000 12,806
Sr. Vice President -- ITT & 1993 315,000 152,000 16,738 36,073 11,996
President and Chief 1992 305,000 69,300 51,750 -- 10,709
Executive -- ITT Fluid Technology
Corp.
James P. Smith, Jr. ................... 1994 220,000 105,000 4,464 6,000 9,481
Executive Vice President and 1993 201,000 43,000 -- 6,559 8,338
Director of Administration -- 1992 192,000 -- -- -- 6,765
ITT Sheraton Corporation
</TABLE>
- ---------------
(1) Amounts shown in this column include the value of certain benefits, except
that (a) the amounts shown for Mr. Leuliette for 1992 and 1993 include
payments of $100,000 each year pursuant to his offer of employment with ITT
and (b) the amount shown for Mr. Nilsson includes $39,773 in relocation
allowance for 1992.
(2) The column for Long-Term Incentive Plan Payouts was eliminated because there
were no such items during the three-year period ending in 1994. The column
for Restricted Stock Awards was eliminated because there were no such awards
during the three-year period ending in 1994.
(3) The named executives do not hold any stock appreciation rights in connection
with the options shown.
The number and exercise prices of all ITT stock options outstanding at the
time of the spin-off to shareholders of ITT of Rayonier Inc., a former
subsidiary of ITT, were adjusted for decreases in the economic value of the
options as a result of the distribution to shareholders. This adjustment
increased the number of options by 9.3% and decreased the exercise prices of
the options then outstanding by approximately 8.5%.
(4) All amounts shown in this column are company contributions under the ITT
Investment and Savings Plan and the ITT Excess Savings Plan, which are
defined contribution plans. ITT makes a matching contribution in an amount
equal to 50% of an employee's contribution, such matching contribution not
to exceed three percent (3%) of such employee's salary. Under these plans,
ITT also makes a nonmatching contribution equal to one-half of one percent
( 1/2 of 1%) of an employee's salary.
164
<PAGE> 171
ANNUAL INCENTIVE BONUS PLAN
Mr. Engen participates in an annual incentive bonus program sponsored by
ITT. For a discussion of the terms of this bonus program, see "NEW ITT
MANAGEMENT AND EXECUTIVE COMPENSATION -- ANNUAL INCENTIVE BONUS PLAN". Certain
amendments to the bonus program were recently approved by the shareholders of
ITT. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- ANNUAL INCENTIVE
BONUS PLAN". If the amendments had been in effect at the time the performance
bonuses for 1994 were determined, the amount of the performance bonus payable to
Mr. Engen would have been $777,000 instead of the amount shown opposite his name
under "Bonus" in the Summary Compensation Table shown above.
In connection with the Distribution, responsibility for payments (and the
corresponding reserves) for 1995 bonuses to current ITT executives (including
Mr. Engen in respect of the ITT Annual Incentive Bonus Plan and Mr. Smith in
respect of the ITT Sheraton Bonus Plan) will be allocated between ITT Industries
and New ITT pursuant to the Employee Benefits Services and Liability Agreement
described under "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD
AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". Responsibility for
payments under the bonus plans of ITT Industries discussed immediately below
will remain that of ITT Industries after the Distribution.
Messrs. Giuliano, Leuliette, Nilsson and Smith participate in bonus
programs applicable to their respective companies. The bonus plans for ITT
Automotive and ITT Defense & Electronics measure actual net income, return on
total capital ("ROTC") and operating funds flow ("OFF") against the approved
budgeted amounts for the year for each performance measure. Net income, ROTC and
OFF performance is weighted 60%, 25% and 15%, respectively. For ITT Fluid
Technology, the formula measures (i) operating income vs. budget, (ii) operating
income vs. the prior year, (iii) controllable assets as a percent of sales vs.
the prior year and (iv) sales against budget. For ITT Fluid Technology, these
measures are weighted 30%, 30%, 30% and 10%, respectively. ITT Sheraton's bonus
plan measures operating income against budget and against the prior year, and
these measures are weighted 50% each. With respect to the operating company
plans, the maximum bonus pool is 150% of the aggregated standard bonus pool.
Individual bonus amounts within the authorized pool are determined on a
discretionary basis taking into account specific personal contributions during
the year.
Bonus awards for ITT Industries' executive officers for 1995 are subject to
approval by ITT senior line management and the ITT Compensation and Personnel
Committee.
During 1994, the standard bonus adjustment factors pursuant to the above
formula for Messrs. Engen (under the ITT bonus plan), Giuliano, Leuliette,
Nilsson and Smith were 148%, 150%, 141%, 109% and 140%, respectively. In total
$1,858,250 was authorized for expenditure to eight individuals who are or will
become executive officers of ITT Industries, including the amounts indicated in
the Summary Compensation Table for the named executives.
It is contemplated that the annual bonus program described above in respect
of ITT Industries will be used by ITT Industries in substantially the same form
for 1995. It is also contemplated that a new program based on industry
competitive practices and complying with Federal income tax requirements with
regard to performance-based, tax deductible executive compensation will become
effective after the Distribution.
165
<PAGE> 172
OPTION GRANTS ON ITT COMMON STOCK TO ITT INDUSTRIES EXECUTIVES IN LAST FISCAL
YEAR
The following table provides information on fiscal year 1994 grants of
options to the named ITT Industries executives to purchase shares of ITT Common
Stock. No options to acquire ITT Industries Common Stock have been granted or
are outstanding.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK
- ------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR OPTION
OPTIONS GRANTED TO EXERCISE TERM(4)
GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION -------------------------
NAME (#) 1994(2) ($/SHARE) DATE 5% 10%
- --------------------- ---------- ------------ -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
D. Travis Engen...... 60,000 3.2 $84.00 10/13/04 $3,169,800 $8,032,200
Louis J. Giuliano.... 37,000 2.0 $84.00 10/13/04 1,954,710 4,953,190
Timothy D.
Leuliette.......... 37,000 2.0 $84.00 10/13/04 1,954,710 4,953,190
Bertil T. Nilsson.... 33,000 1.8 $84.00 10/13/04 1,743,390 4,417,710
James P. Smith,
Jr. ............... 6,000 0.3 $84.00 10/13/04 316,980 803,220
</TABLE>
- ---------------
(1) The numbers in this column represent options to purchase ITT Common Stock.
(2) Percentages indicated are based on a total of 1,876,198 options granted to
656 employees of ITT during 1994.
(3) The exercise price per share is 100% of the fair market value of a share of
ITT Common Stock on the date of grant. The exercise price may be paid in
cash or in shares of ITT Common Stock valued at their fair market value on
the date of exercise. Options granted to Messrs. Engen, Giuliano, Leuliette
and Nilsson on October 11, 1994 at the exercise price of $84.00 per share
are not exercisable until the trading price of ITT Common Stock equals or
exceeds $105.00 per share for 10 consecutive trading days (which occurred on
May 15, 1995) at which time two-thirds of the options will be exercisable;
when the trading price equals or exceeds $117.60 per share for 10
consecutive trading days, the options will be fully exercisable.
Notwithstanding the above, the options will be fully exercisable after
October 11, 2003, but no later than October 13, 2004.
Mr. Smith's stock option will vest in three equal annual installments
commencing on the first anniversary date of the grant and the option will
expire on October 13, 2004.
(4) At the end of the term of the options granted October 11, 1994, the
projected price per share of ITT Common Stock would be $136.83 and $217.87
at an assumed annual appreciation rate of 5% and 10%, respectively.
On May 9, 1995, the Compensation and Personnel Committee awarded 185,500
stock options to eight executive officers of ITT Industries including Messrs.
Engen, Giuliano, Leuliette, Nilsson and Smith for 60,000, 37,000, 37,000, 33,000
and 5,000 shares of ITT Common Stock, respectively. These options were granted
at the exercise price of $108.75 per share. Options for Messrs. Engen, Giuliano,
Leuliette and Nilsson will become fully exercisable at the earlier of the ninth
anniversary date of the grant or when the closing price on an ITT share is equal
to or greater than $135.94 for 10 consecutive trading days. Mr. Smith's option
will become exercisable in three equal annual installments commencing on the
first anniversary date of the grant. All of these options will expire on May 11,
2005.
In connection with the Distribution, it is expected that each of these
outstanding options will be adjusted under the 1994 ITT Incentive Stock Plan to
preserve its economic value. For a discussion of the treatment of stock options
and other stock awards held by current employees of ITT and future employees of
ITT Industries, New ITT or ITT Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION
MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS".
166
<PAGE> 173
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on option exercises in 1994 by the
named executives of ITT Industries and the value of each such executive's
unexercised options to acquire ITT Common Stock at December 31, 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT HELD AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
D. Travis Engen................ -- -- 141,887 114,658 5,972,719 522,112
Louis J. Giuliano.............. -- -- 28,057 77,445 1,182,986 352,099
Timothy D. Leuliette........... -- -- 15,486 77,445 631,654 352,099
Bertil T. Nilsson.............. -- -- 17,308 69,073 734,324 314,036
James P. Smith, Jr............. -- -- 5,902 10,373 161,068 47,327
</TABLE>
- ---------------
(1) The number and exercise price of all options outstanding at the time of the
spin-off to shareholders of ITT of Rayonier Inc., a former subsidiary of
ITT, were adjusted for decreases in the economic value of the options as a
result of the distribution to shareholders. This adjustment increased the
number of options by 9.3% and decreased the exercise prices of the options
then outstanding by approximately 8.5%.
(2) Based on the NYSE consolidated trading closing price of ITT Common Stock on
December 30, 1994 of $88.63.
ITT LONG-TERM PERFORMANCE PLAN
Under the ITT Long-Term Performance Plan, target contingent cash awards
were made on December 12, 1991 (the "1992 Class Awards") to ITT executives
including certain of those individuals who will be executive officers of ITT
Industries after the Distribution. Under the 1992 Class Awards, with respect to
Mr. Engen, the ultimate payment value of his target award, if any, will be based
upon ITT's return on equity ("ROE") performance during the three-year period
1993 through 1995 as measured against predetermined ROE goals for each year.
Each year of the performance period has been assigned a specific weighting: 15%,
35% and 50% for 1993, 1994 and 1995, respectively. If the actual weighted
average ROE performance is less than 90% of the ROE goals, no payment is earned.
The ultimate payment values for Messrs. Leuliette, Nilsson and Smith will be
determined in the same manner as described for Mr. Engen except that the ROE
performance will be for their respective companies: ITT Automotive for Mr.
Leuliette, ITT Fluid Technology for Mr. Nilsson and ITT Sheraton for Mr. Smith.
With respect to Mr. Giuliano, the ultimate payment value of his target award, if
any, will be based upon the ROE performance of the Defense segment of ITT
Defense & Electronics during the four-year period 1992 through 1995 as measured
against predetermined ROE goals for each year. For the ITT Defense segment, each
year of the performance period has been assigned a specific weighting: 10%, 15%,
25% and 50% for 1992, 1993, 1994 and 1995, respectively. If the actual weighed
average ROE performance is less than 90% of the ROE goals, no payment is earned.
167
<PAGE> 174
1992 Class Awards for the five most highly compensated executive officers
of ITT Industries are listed in the table below:
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
CONTINGENT PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS
TARGET MATURATION OR AWARD AWARD AWARD
NAME AWARDS PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3)
- ----------------------- ---------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
D. Travis Engen........ $1,500,000 12/31/95 $500,000 $1,500,000 $3,000,000
Louis J. Giuliano...... 500,000 12/31/95 166,667 500,000 1,000,000
Timothy D. Leuliette... 700,000 12/31/95 233,333 700,000 1,400,000
Bertil T. Nilsson...... 500,000 12/31/95 166,667 500,000 1,000,000
James P. Smith, Jr. ... 250,000 12/31/95 83,333 250,000 500,000
</TABLE>
- ---------------
(1) Based upon a weighted average ROE goal achievement of 90%, resulting in
payment of 33% of the target award in the first quarter of 1996.
(2) Based upon a weighted average ROE goal achievement of 100%, resulting in
payment of 100% of the target award in the first quarter of 1996.
(3) Based upon a weighted average ROE goal achievement of 130% or more,
resulting in payment of 200% of the target award in the first quarter of
1996.
In connection with the Distribution, ITT Industries will retain the
responsibility for payments (and the corresponding reserves) to current ITT
executives (including Messrs. Engen and Smith) under the ITT Long-Term
Performance Plan pursuant to the Employee Benefits Services and Liability
Agreement described under "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT
HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". The ITT
Long-Term Performance Plan will not be continued as such by ITT Industries after
the Distribution. It is contemplated that a comparable long-term incentive plan,
which will be administered by the Compensation and Personnel Committee of the
ITT Industries Board of Directors, will become effective after the Distribution.
The Plan provides that in the event of material changes in accounting
practices, principles or their application, the ITT Compensation and Personnel
Committee may make such adjustments as it deems appropriate in performance goals
and/or target values so that the performance measurement for all purposes of
this Plan with respect to awards may be made as nearly as practicable on the
same accounting basis. In addition, the ITT Compensation and Personnel Committee
may make such other adjustments as it deems appropriate in performance goals
and/or target values for material acquisitions or dispositions of stock or
property or for other circumstances specified by the ITT Compensation and
Personnel Committee in order to limit or avoid distortion in the operation of
the Plan that may result from such circumstances.
ITT INDUSTRIES COMPENSATION, BENEFIT AND RETIREMENT PLANS
The following is a description of the compensation, benefit and retirement
plans currently in effect with respect to ITT and which, as of the Distribution
Date, will be in effect with respect to ITT Industries.
1994 ITT INCENTIVE STOCK PLAN
After the Distribution, ITT Industries will continue the ITT 1994 Incentive
Stock Plan (the "1994 Stock Plan"). The 1994 Stock Plan will be administered by
ITT Industries' Compensation and Personnel Committee after the Distribution.
The 1994 Stock Plan provides for the grant of incentive stock options
(qualifying under Section 422 of the Internal Revenue Code), non-qualified stock
options, stock appreciation rights ("SARs"), performance shares and restricted
stock, or any combination of the foregoing, as the Compensation and Personnel
Committee may determine (collectively, "Awards"). The 1994 Stock Plan will
expire on December 31, 2003.
The 1994 Stock Plan contains a formula for establishing an annual limit on
the number of shares which may be awarded (or with respect to which non-stock
Awards may be made) in any given calendar year (the "Annual Limit"). The Annual
Limit formula is expressed as a percentage of ITT Industries' total issued and
168
<PAGE> 175
outstanding Common Stock as of the year end immediately preceding the year of
awards ("Plan Year"). Under the Annual Limit formula, the maximum number of
shares of ITT Industries Common Stock for which Awards may be granted under the
Plan in each Plan Year shall be 1.5% of the total of the issued and outstanding
shares of ITT Industries Common Stock and treasury stock as reported in the
Annual Report on Form 10-K of ITT Industries for the fiscal year ending
immediately prior to any Plan Year. Any unused portion of the Annual Limit for
any Plan Year shall be carried forward and be made available for awards in
succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
shares of ITT Industries Common Stock be cumulatively available for Awards of
incentive stock options under the 1994 Stock Plan, and provided further, that no
more than 20% of the total number of shares available on a cumulative basis
shall be available for restricted stock and performance share awards. For any
Plan Year, no individual employee may receive stock options for more than the
lesser of (i) 10% of the Annual Limit applicable to that Plan Year and (ii)
500,000 shares.
Subject to the above limitations, shares of ITT Industries Common Stock to
be issued under the 1994 Stock Plan may be made available from the authorized
but unissued ITT Industries Common Stock or from shares purchased on the open
market. In the event of any recapitalization, reclassification, split-up or
consolidation of shares of stock or stock dividend, merger or consolidation of
ITT Industries or sale by ITT Industries of all or a portion of its assets, the
Compensation and Personnel Committee may make such adjustments in the stock
subject to awards as such Committee deems equitable. Other than the above
adjustments, it is expected that the ITT Industries Board of Directors will
continue the ITT Board's policy that no options will be cancelled and reissued
at a lower price unless the shareholders of ITT approve such action.
For the purpose of computing the total number of shares of stock available
for Awards under the 1994 Stock Plan, there shall be counted against the
foregoing limitations the number of shares of ITT Industries Common Stock
subject to issuance upon exercise or settlement of Awards and the number of
shares of ITT Industries Common Stock which equal the value of Performance Share
Awards, in each case determined as at the dates on which such Awards are
granted. If any Awards under the 1994 Stock Plan are forfeited, are terminated,
expire unexercised, are settled in cash in lieu of ITT Industries Common Stock
or are exchanged for other Awards, the shares of stock which were theretofore
subject to such Awards shall again be available for Awards under the 1994 Stock
Plan to the extent of such forfeiture, termination, expiration, cash settlement
or exchange of such Awards. Further, any shares that are exchanged (either
actually or constructively) by optionees as full or partial payment to ITT
Industries of the purchase price of shares being acquired through the exercise
of a stock option granted under the 1994 Stock Plan may be available for
subsequent Awards, provided however, that such shares may be awarded only to
those participants who are not directors or executive officers (as that term is
defined in the rules and regulations under Section 16 of the Exchange Act).
The Compensation and Personnel Committee, made up entirely of non-employee
directors, none of whose members may receive any award under the 1994 Stock
Plan, will administer the 1994 Stock Plan, including, but not limited to, making
determinations with respect to the designation of those employees who shall
receive Awards, the number of shares to be covered by options, SARs and
restricted stock awards, the exercise price of options (which may not be less
than 100% of the fair market value of ITT Industries Common Stock on the date of
grant), other option terms and conditions and the number of performance shares
to be granted and the applicable performance objectives. The Compensation and
Personnel Committee may impose such additional terms and conditions on an Award
as it deems advisable. The Compensation and Personnel Committee's decisions in
the administration of the 1994 Stock Plan shall be binding on all persons for
all purposes.
The Compensation and Personnel Committee may in its sole discretion
delegate such administrative powers as it may deem appropriate to the chief
executive officer or other members of senior management, except that Awards to
executive officers shall be made solely by the Compensation and Personnel
Committee and subject to compliance with Rule 16b-3 of the Exchange Act.
169
<PAGE> 176
Awards will be made, in the discretion of the Compensation and Personnel
Committee, to employees of ITT Industries and any of its subsidiaries (including
officers and members of the Board of Directors who are also employees) whose
responsibilities and decisions directly affect the performance of ITT Industries
and its subsidiaries.
Stock Options and Related SARs
Incentive stock options and related SARs under the 1994 Stock Plan must
expire within 10 years after grant; non-qualified stock options and related SARs
will expire not more than 10 years and two days after grant. No SAR may be
exercised until at least six months after it is granted. The exercise price for
options and SARs must be at least equal to the fair market value of the ITT
Industries Common Stock on the date of grant. The exercise price for options
must be paid to ITT Industries at the time of exercise and, in the discretion of
the Compensation and Personnel Committee, may be paid in the form of cash or
already-owned shares of ITT Industries Common Stock or a combination thereof.
During the lifetime of an employee, an option must be exercised only by the
individual (or his or her estate or designated beneficiary) but no later than
three months after his or her termination of employment (or for longer periods
as determined by the Compensation and Personnel Committee if termination is
caused by retirement, disability or death, but in no event later than the
expiration of the original term of the option). If an optionee voluntarily
resigns or is terminated for cause, the options and SARs are cancelled
immediately.
Performance Shares
Performance shares under the 1994 Stock Plan are contingent rights to
receive future payments based on the achievement of individual or company
performance objectives as prescribed by the Compensation and Personnel
Committee. The maximum number of performance shares that may be granted to any
individual employee in any given year is 100,000. The amounts paid will be based
on actual performance over a period from two to five years, as determined by the
Compensation and Personnel Committee, using one or more of the following
objective criteria, as it deems appropriate: earnings per share, return on
equity, cash flow or total shareholder return of ITT Industries. Payments may be
made in the form of shares of ITT Industries Common Stock, cash or a combination
of ITT Industries Common Stock and cash. The ultimate payments are determined by
the number of shares earned and the price of ITT Industries Common Stock at the
end of the performance period. In the event an employee terminates employment
during such a performance period, the employee will forfeit any right to
payment. However, in the case of retirement, permanent total disability, death
or cases of special circumstances, the employee may, in the discretion of the
Compensation and Personnel Committee, be entitled to an award prorated for the
portion of the performance period during which he or she was employed by ITT
Industries.
Restricted Shares
Restricted shares of ITT Industries Common Stock awarded under the 1994
Stock Plan will be issued subject to a restriction period set by the
Compensation and Personnel Committee during which time the shares may not be
sold, transferred, assigned or pledged. In the event an employee terminates
employment during a restriction period, all such shares still subject to
restrictions will be forfeited by the employee and reacquired by ITT Industries.
The Compensation and Personnel Committee may provide for the lapse of
restrictions in installments where deemed appropriate and it may also require
the achievement of predetermined performance objectives in order for such shares
to vest. The recipient, as owner of the awarded shares, shall have all other
rights of a shareholder, including the right to vote the shares and receive
dividends and other distributions during the restriction period. The
restrictions may be waived, in the discretion of the Compensation and Personnel
Committee, in the event of the awardee's retirement, permanent total disability,
death or in cases of special circumstances.
Compensation Upon Change of Control
The 1994 Stock Plan provides for the automatic protection of intended
economic benefits by key employees in the event of a change in control of ITT
Industries (i.e., upon the occurrence of an "Acceleration
170
<PAGE> 177
Event" as defined in the 1994 Stock Plan). Notwithstanding any other provisions
of the 1994 Stock Plan, upon the occurrence of an Acceleration Event (a) all
options and SARs will generally become immediately exercisable for a period of
60 calendar days; (b) options and SARs will continue to be exercisable for a
period of seven months in the case of an employee whose employment is terminated
other than for cause or who voluntarily terminates employment because of a good
faith belief that such employee will not be able to discharge his or her duties;
(c) SARs exercised during the 60-day period will be settled fully in cash based
on a formula price generally reflecting the highest price paid for a share of
ITT Industries Common Stock during the 60-day period preceding the date such SAR
is exercised; (d) "limited stock appreciation rights" shall automatically be
granted on all outstanding options not otherwise covered by a SAR, which shall
generally be immediately exercisable in full and which shall entitle the holders
to the same exercise period and formula price referred to in (a), (b) and (c)
above; (e) outstanding performance share awards shall automatically vest, with
the valuation of such performance shares based on the formula price; and (f)
restrictions applicable to awards of restricted stock shall be automatically
waived.
Options, SARs, performance shares or restricted stock which are granted,
accelerated or enhanced upon the occurrence of a takeover (i.e., an
"Acceleration Event" as defined in the 1994 Stock Plan) may give rise, in whole
or in part, to "excess parachute payments" within the meaning of Section 280G of
the Internal Revenue Code and, to such extent, will be nondeductible by ITT
Industries and subject to a 20% excise tax to the awardee.
"Acceleration Event" is generally defined in the 1994 Stock Plan as any of
the following events: (i) a report on Schedule 13D shall be filed with the SEC
pursuant to Section 13(d) of the Exchange Act disclosing that any person (within
the meaning of Section 13(d) of the Exchange Act), other than ITT Industries or
a subsidiary of ITT Industries or any employee benefit plan sponsored by ITT
Industries or a subsidiary of ITT Industries, is the beneficial owner directly
or indirectly of 20% or more of the outstanding ITT Industries Common Stock;
(ii) any person (within the meaning of Section 13(d) of the Exchange Act), other
than ITT Industries or a subsidiary of ITT Industries or any employee benefit
plan sponsored by ITT Industries or a subsidiary of ITT Industries, shall
purchase shares pursuant to a tender offer or exchange offer to acquire any ITT
Industries Common Stock (or securities convertible into such Common Stock) for
cash, securities or any other consideration, provided that after consummation of
the offer, the person in question is the beneficial owner (as such term is
defined in Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or
more of the outstanding ITT Industries Common Stock (calculated as provided in
paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to
acquire Common Stock); (iii) the shareholders of ITT Industries shall approve
(A) any consolidation or merger of ITT Industries in which ITT Industries is not
the continuing or surviving corporation or pursuant to which shares of ITT
Industries Common Stock would be converted into cash, securities or other
property, other than a merger of ITT Industries in which holders of ITT
Industries Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all or
substantially all the assets of ITT Industries; or (iv) there shall have been a
change in a majority of the members of the Board of Directors of ITT Industries
within a 12-month period unless the election or nomination for election by ITT
Industries' shareholders of each new director during such 12-month period was
approved by the vote of two-thirds of the directors then still in office who
were directors at the beginning of such 12-month period.
The ITT Industries Board may amend or discontinue the 1994 Stock Plan at
any time and, specifically, may make such modifications to the 1994 Stock Plan
as it deems necessary to avoid the application of Section 162(m) of the Internal
Revenue Code and the Treasury regulations issued thereunder. However,
shareholder approval is required for certain amendments, including any amendment
which may (i) increase the number of shares reserved for awards (except as
provided in the 1994 Stock Plan with respect to stock splits or other similar
changes), (ii) materially change the group of employees eligible for Awards,
(iii) materially increase the benefits accruing to participants under the 1994
Stock Plan or (iv) permit Awards after December 31, 2003.
171
<PAGE> 178
After the Distribution, ITT Industries will also continue necessary
administration of grants remaining outstanding and governed by the ITT 1977
Stock Option Incentive Plan and the ITT 1986 Incentive Stock Plan.
ITT INDUSTRIES SEVERANCE PAY PLAN
The existing ITT severance pay plan applies to ITT senior executives who
are United States citizens or who are employed in the United States. Under the
plan, if a participant's employment is terminated by ITT, other than for cause
or as a result of other occurrences specified in the plan, the participant is
entitled to severance pay in an amount up to 24 months of base salary depending
upon his or her length of service. In no event shall such severance pay exceed
the amount of base salary for the number of months remaining between the
termination of employment and the participant's normal retirement date or two
times the participant's total annual compensation during the year immediately
preceding such termination. The plan includes offset provisions for other
compensation from ITT and requirements on the part of executives with respect to
non-competition and compliance with the ITT Code of Corporate Conduct. Under the
plan, severance payments would ordinarily be made monthly over the scheduled
term of such payments; however, ITT has the option to make such payments in the
form of a single lump sum payment discounted to present value. At June 1, 1995,
the named executive officers in the Summary Compensation Table (see
"-- COMPENSATION OF ITT INDUSTRIES EXECUTIVE OFFICERS") participate in this
plan.
The annual salaries of Messrs. Engen, Giuliano, Leuliette, Nilsson and
Smith as of June 1, 1995, were $700,000, $375,000, $500,000, $335,000 and
$228,500, respectively.
After the Distribution, it is anticipated that ITT Industries will adopt a
similar plan for its senior executives, except for Mr. Engen who will be covered
by an employment agreement, "-- EMPLOYMENT AGREEMENT".
ITT INDUSTRIES INVESTMENT AND SAVINGS PLAN
Many of the salaried employees of ITT Industries have been participants in
the ITT Investment and Savings Plan for Salaried Employees. Effective as of the
Distribution Date, the ITT Investment and Savings Plan will be split into three
separate plans, each covering the ITT Industries Employees, the New ITT
Employees or the ITT Hartford Employees. Existing account balances of current
New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP
that have been allocated to the accounts of such employees, will be transferred
from the ITT Investment and Savings Plan to the New ITT Investment and Savings
Plan. Existing account balances of current ITT Hartford Employees, including all
shares of ITT Common Stock acquired by the ESOP that have been allocated to the
accounts of such employees, will be transferred from the ITT Investment and
Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account
balances of current ITT Industries Employees, including all shares of ITT Common
Stock acquired by the ESOP that have been allocated to the accounts of such
employees, will remain in the ITT Investment and Savings Plan, which will
continue in existence as the ITT Industries Investment and Savings Plan.
Existing account balances of each former employee of ITT Industries, New ITT and
ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that
have been allocated to the accounts of such former employee, will be transferred
to the investment and savings plan maintained by the company responsible for
providing retirement benefits to such former employee.
Federal legislation limits the annual contributions that an employee may
make to the ITT Industries Investment and Savings Plan, a tax-qualified
retirement plan. Accordingly, ITT has adopted, and ITT Industries will continue
after the Distribution, the ITT Excess Savings Plan (after the Distribution, the
"ITT Industries Excess Savings Plan"), which enables an employee who is
precluded by these limitations from contributing six percent of salary to the
tax-qualified plan to make up the shortfall through salary deferrals and thereby
receive the three percent maximum matching company contribution and one-half of
one percent non-matching company contribution otherwise allowable under the
tax-qualified plan. Salary deferrals, company contributions and imputed earnings
are entered into a book reserve account maintained by ITT Industries for each
participant.
172
<PAGE> 179
ITT INDUSTRIES RETIREMENT PROGRAM
Most of the U.S. salaried employees of ITT Industries have been
participants in the Retirement Plan for Salaried Employees of ITT Corporation.
After the Distribution, this plan will remain with ITT Industries (after the
Distribution, the "ITT Industries Salaried Retirement Plan"). The ITT Industries
Salaried Retirement Plan will be amended to recognize service with other ITT
companies prior to the Distribution Date for eligibility, vesting and benefit
accrual purposes and will further provide for an offset of any benefits payable
from any other ITT retirement plan covering the same period of service. The Plan
will be further amended to recognize service with New ITT and ITT Hartford after
the Distribution Date for eligibility and vesting purposes.
The ITT Industries Salaried Retirement Plan will continue to cover
substantially all eligible salaried employees of ITT Industries, including
senior executive officers and other ITT Industries executives. The cost of the
ITT Industries Salaried Retirement Plan will be borne entirely by ITT
Industries.
A member's annual pension will equal two percent of the member's average
final compensation for each of the first 25 years of benefit service, plus one
and one-half percent of a member's average final compensation for each of the
next 15 years of benefit service, reduced by one and one-quarter percent of the
member's primary Social Security benefit for each year of benefit service to a
maximum of 40 years; provided that no more than one-half of the member's primary
Social Security benefit is used for such reduction. A member's average final
compensation (including salary plus approved bonus payments) is defined under
the Plan as the total of (i) a member's average annual base salary for the five
calendar years of the last 120 consecutive calendar months of eligibility
service affording the highest such average plus (ii) a member's average annual
compensation not including base salary for the five calendar years of the
member's last 120 consecutive calendar months of eligibility service affording
the highest such average. The Plan will also provide for undiscounted early
retirement pensions for members who retire at or after age 60 following
completion of 15 years of eligibility service. A member will be vested in
benefits accrued under the Plan upon completion of five years of eligibility
service.
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation which may be recognized under a tax-qualified retirement
plan. ITT currently maintains an excess benefit plan. ITT Industries will
continue this non-qualified unfunded retirement plan (the "ITT Industries Excess
Pension Plan") for payment of those benefits at retirement that cannot be paid
from the ITT Industries Salaried Retirement Plan. The practical effect of the
ITT Industries Excess Pension Plan is to continue calculation of retirement
benefits to all employees on a uniform basis. Benefits under the ITT Industries
Excess Pension Plan are generally paid directly by ITT Industries. ITT
Industries will also adopt an excess plan trust under which excess benefits
accrued after the Distribution Date under the ITT Industries Excess Pension Plan
for certain officers of ITT Industries will be funded. Any such employee may
indicate a preference, subject to certain conditions, to receive any excess
benefit in the form of a single discounted lump sum payment. Any "excess"
benefit accrued to any such employee will be immediately payable in the form of
a single discounted lump sum payment upon the occurrence of a change in
corporate control (as defined in the ITT Industries Excess Pension Plan).
At the time of the Distribution, certain retired employees of ITT will have
accrued certain benefits under the ITT Excess Pension Plan (the "ITT Excess
Pension Plan") for payment of those benefits at retirement that cannot be paid
from the ITT Salaried Retirement Plan. ITT Industries will continue to be
responsible for such accrued benefits after the Distribution. For a discussion
of certain matters in respect of cross-guarantees to secure such benefits and
the trust that funds certain such benefits, see "EMPLOYEE BENEFITS AND
COMPENSATION MATTERS -- EXCESS BENEFIT PLANS".
Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Retirement Program at retirement at age 65 that
are paid for by ITT Industries.
173
<PAGE> 180
For a discussion of certain contractual relationships among ITT Industries,
New ITT and ITT Hartford that relate to the ITT Industries Salaried Retirement
Plan, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT SALARIED RETIREMENT
PLAN".
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL --------------------------------------------------------------
COMPENSATION 20 25 30 35 40
------------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$ 50,000............... $20,000 $25,000 $28,750 $32,500 $36,250
100,000............... 40,000 50,000 57,500 65,000 72,500
300,000............... 120,000 150,000 172,500 195,000 217,500
500,000............... 200,000 250,000 287,500 325,000 362,500
750,000............... 300,000 375,000 431,250 487,500 543,750
1,000,000............... 400,000 500,000 575,000 650,000 725,000
1,500,000............... 600,000 750,000 862,500 975,000 1,087,500
</TABLE>
The amounts shown under "Salary" and "Bonus" opposite the names of the
individuals in the ITT Industries Summary Compensation Table comprise the
compensation which is used for purposes of determining "average final
compensation" under the plan. The years of service with ITT of each of the
individuals for eligibility and benefit purposes as of June 1, 1995, are as
follows: D. Travis Engen, 10.15 years; Louis J. Giuliano, 6.92 years; Timothy D.
Leuliette, 3.70 years; Bertil T. Nilsson, 39.92 years; and James P. Smith, Jr.,
21.94 years.
1995 ITT INDUSTRIES DEFERRED COMPENSATION PLAN
Executives of ITT Industries have been participants in the 1995 ITT
Deferred Compensation Plan. Effective as of the Distribution Date, it is
intended that ITT Industries will continue that plan as the 1995 ITT Industries
Deferred Compensation Plan. Under the plan, executives with a base salary of
$200,000 or more could elect to defer receipt of all or a portion of their 1994
bonus and those with a base salary of at least $300,000 could in addition defer
up to 50% of their 1995 salary. ITT Industries will credit interest on the
deferred compensation based upon the performance of benchmark investment funds
made available under the plan and selected by the executive.
ITT INDUSTRIES EMPLOYEE WELFARE BENEFITS
At or prior to the Distribution Date, ITT Industries and its participating
subsidiaries will continue the broad-based ITT employee welfare benefits program
which is currently available to ITT salaried employees. ITT Industries'
executives will participate in ITT Industries' comprehensive benefits program
which will include group medical and dental coverage, group life insurance and
other benefit plans, in addition to the pension program and investment and
savings plan described previously. For a discussion of certain contractual
relationships among ITT Industries, New ITT and ITT Hartford that affect welfare
benefit programs, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- RETIREE
MEDICAL AND LIFE INSURANCE BENEFIT PLANS".
174
<PAGE> 181
NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION
After the Distribution, it is intended that New ITT will operate the
Hospitality & Entertainment and Information Services businesses of ITT
substantially in the manner in which they currently are operated. Rand V.
Araskog, who is currently Chairman, President and Chief Executive of ITT, will
become Chairman and Chief Executive of New ITT, and certain persons who are
currently directors of ITT will become directors of New ITT. See "-- NEW ITT
BOARD OF DIRECTORS". In addition to Mr. Araskog, the other executive officers of
New ITT will be drawn from the current management of ITT or subsidiaries of ITT.
See "-- NEW ITT EXECUTIVE OFFICERS".
NEW ITT BOARD OF DIRECTORS
Immediately after the Distribution, New ITT expects to have a board of ten
directors.
Prior to the Distribution Date, ITT, as sole shareholder of New ITT, plans
to elect, as necessary, the following directors of ITT to the Board of Directors
of New ITT: Bette B. Anderson, Rand V. Araskog, Nolan D. Archibald, Robert A.
Burnett, Michel David-Weill, Paul G. Kirk, Edward C. Meyer, Benjamin F. Payton
and Margita E. White. In addition, Robert A. Bowman will be so elected to the
Board of Directors of New ITT. As noted above, Mr. Araskog will become Chairman
and Chief Executive of New ITT effective as of the Distribution Date. It is thus
the intent of New ITT that a majority of the directors comprising New ITT's
Board of Directors will not be employees of New ITT.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of New ITT
following the Distribution.
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT
PRINCIPAL OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Bette B. Anderson, 66................... Mrs. Anderson joined Kelly, Anderson, Pethick &
President, Kelly, Anderson, Associates, Inc., a Washington-based management
Pethick & Associates, Inc. firm, in 1990 and was elected president effective
(consultants) January 1, 1991. She had previously been executive
vice president of the firm. Mrs. Anderson was
formerly a partner in the public affairs company of
Anderson, Benjamin, Read & Haney. She was
Undersecretary of the Treasury from 1977 to 1981.
Mrs. Anderson was affiliated for 27 years with the
Citizens and Southern National Bank of Savannah,
having served as a vice president until she assumed
the Treasury post. Mrs. Anderson is currently a
director of ITT and has been a director of ITT
since 1981. She will also be a director of ITT
Hartford. Mrs. Anderson is a director of ITT
Educational Services, Inc., the Miller Foundation
and the University of Virginia and a member of the
Advisory Council of Girl Scouts of America. She
attended Georgia Southern and Armstrong State
Colleges and is a graduate of the Stonier Graduate
School of Banking at Rutgers University.
</TABLE>
<TABLE>
<S> <C>
Rand V. Araskog, 63..................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman, President and Chief AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
Executive of ITT OF DIRECTORS".
</TABLE>
175
<PAGE> 182
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT
PRINCIPAL OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Nolan D. Archibald, 52.................. Mr. Archibald joined Black & Decker in 1985 as
Chairman, President and Chief Executive president and chief operating officer and since
Officer of The Black & Decker that time has been elected chief executive officer
Corporation (consumer and commercial and chairman. Prior to joining Black & Decker, he
products company) was senior vice president and president of the
Consumer and Commercial Products Group of the
Beatrice Companies, Inc. and held various executive
and marketing positions with Beatrice Companies,
Inc. during the period 1977 to 1985. Mr. Archibald
is currently a director of ITT and has been a
director of ITT since 1991. He previously served as
a director of ITT from September 1986 to March
1988. Mr. Archibald serves as a member of the Board
of Trustees for The Johns Hopkins University and is
a member of The Business Roundtable. Mr. Archibald
received a BS degree from Weber State University
and an MBA degree from The Harvard Business School.
Robert A. Bowman, 40.................... Mr. Bowman has been Executive Vice President and
Executive Vice President and Chief Chief Financial Officer since September 1992. From
Financial Officer of ITT July to September 1992, Mr. Bowman served as
Executive Vice President and Chief Financial
Officer of ITT Sheraton Corporation. From April
1991 to July 1992, Mr. Bowman served as Senior Vice
President and Chief Financial Officer of ITT
Sheraton. From January to April 1991, Mr. Bowman
was an economics commentator on an American
Broadcasting Company affiliated television station
in Detroit. Mr. Bowman was Treasurer of the State
of Michigan from 1983 until December 1990. He is
also a director of ITT Educational Services, Inc.
Mr. Bowman is a member of The Wharton Graduate
Executive Board. Mr. Bowman has an AB degree in
Economics from Harvard College and an MBA degree
from The Wharton School.
Robert A. Burnett, 68................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman and Chief Executive Officer AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
(Retired) of Meredith Corporation OF DIRECTORS".
(diversified media company)
Michel David-Weill, 62.................. See information under "ITT INDUSTRIES MANAGEMENT
Chairman of Lazard Freres & Co. LLC AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
(investment bankers) OF DIRECTORS".
</TABLE>
176
<PAGE> 183
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT
PRINCIPAL OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Paul G. Kirk, Jr., 57................... Mr. Kirk became a partner in the law firm of
Of Counsel to Sullivan & Worcester Sullivan & Worcester in 1977 and is presently of
(law firm) counsel to the firm. He served as chairman of the
Democratic National Committee from 1985 to 1989 and
as treasurer from 1983 to 1985. Following his
resignation in 1989 as chairman of the Democratic
National Committee, he returned to Sullivan &
Worcester as a partner in general corporate
practice at the firm's Boston and Washington
offices. He is currently a director of ITT and has
been a director of ITT since 1989. Mr. Kirk is a
director of Kirk-Sheppard & Co., Inc., of which he
also is chairman and treasurer. He is a director of
the Bradley Real Estate Corporation and Rayonier
Inc., and he will be a director of ITT Hartford.
Mr. Kirk is co-chairman of the Commission on
Presidential Debates, chairman of the John F.
Kennedy Library Foundation Board of Directors,
Chairman of the Board of Directors of the National
Democratic Institute for International Affairs and
a trustee of Stonehill College. He is a graduate of
Harvard College and Harvard Law School.
Edward C. Meyer, 66..................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman of GRC International AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
(professional and technical services OF DIRECTORS".
provider)
Benjamin F. Payton, 62.................. Dr. Payton has been president of Tuskegee
President of Tuskegee University University in Alabama since 1981. Previously he had
served as president of Benedict College and as
program officer, education and public policy, of
the Ford Foundation. He is currently a director of
ITT and has been a director of ITT since 1987. He
is also a director of Amsouth Bancorporation,
Amsouth Bank, the Liberty Corporation, Praxair
Corporation, SONAT Inc., Morrisons, Inc., the
Southern Regional Council and the Alabama
Shakespeare Festival. He is a member of the
Business-Higher Education Forum and of the Visiting
Committee of the Board of Overseers of Harvard
College. Dr. Payton has been awarded honorary
degrees from Eastern Michigan University, Lehigh
University, Morris Brown College, Morgan State
University, Benedict College and the University of
Maryland. He is a graduate of South Carolina State
College and received a Bachelor of Divinity degree
from Harvard University, an MA degree from Columbia
University and a PhD from Yale University.
</TABLE>
177
<PAGE> 184
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT
PRINCIPAL OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Margita E. White, 58.................... Mrs. White joined the Association for Maximum
President of the Association for Maximum Service Television, Inc. as president in 1987 after
Service Television, Inc. (television serving as an independent consultant and
trade association) coordinator of the Television Operations Caucus,
Inc. She was a member of the Federal Communications
Commission between 1976 and 1979. Previously she
served in the Federal government as director of the
White House office of communications, assistant
press secretary to President Ford and assistant
director of the U.S. Information Agency. Mrs. White
is currently a director of ITT and has been a
director of ITT since 1980. She is a director of
ITT Educational Services, Inc., The Growth Fund of
Washington, Leitch Technology Corp. and Washington
Mutual Investors Fund. Mrs. White received BA and
LLD degrees from the University of Redlands and an
MA degree from Rutgers University.
</TABLE>
Mr. Harold S. Geneen will be designated Chairman Emeritus of New ITT as
well as ITT Industries and ITT Hartford. Mr. Geneen was named President and
Chief Executive of ITT in 1959, and Chairman in 1964. He relinquished the post
of President in 1973, the post of Chief Executive in 1978 and the chairmanship
on January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen
continued to serve on the Board of Directors of ITT until 1983.
Messrs. Thomas W. Keesee, Jr. and Richard S. Perkins will each be
designated a Director Emeritus of New ITT. Mr. Perkins served on the Board of
Directors of ITT from 1953 until 1986. Mr. Keesee served on the ITT Board of
Directors from 1976 until 1991. Each is now a Director Emeritus of ITT.
DIRECTORS' COMPENSATION; OTHER RELATIONSHIPS
Members of the New ITT Board of Directors who are employees of New ITT or
its subsidiaries will not be compensated for service on the New ITT Board or any
Committee of the New ITT Board. Compensation for non-employee directors will
consist of a $1,000 fee for each meeting of the New ITT Board of Directors
attended and a $1,000 fee for each Committee meeting attended. Members of the
Executive and Policy Committee, except for Mr. Araskog, will receive an annual
retainer fee of $48,000 payable solely in restricted shares of New ITT Common
Stock. Directors will be reimbursed for travel expenses incurred on behalf of
New ITT. The non-employee directors of New ITT who serve on the Board of
Directors of ITT Educational Services, Inc. will continue to receive an annual
retainer fee of $18,000 and a fee of $750 for each meeting of the Board of
Directors of ITT Educational Services, Inc. and a fee of $500 for each Committee
meeting attended.
Lazard Freres & Co. LLC, of which Mr. David-Weill is Chairman, performed
various investment banking services for ITT and its subsidiaries in 1994. It is
anticipated that such firm will perform similar services for ITT and its
subsidiaries during 1995 and New ITT and its subsidiaries thereafter. In 1988,
the ITT Master Retirement Trust, Hartford Accident and Indemnity Company and
Hartford Life Insurance Company (the "ITT Investment Vehicles") committed to
invest an aggregate of $35 million in, and became limited partners of, Corporate
Partners, L.P., a fund organized by Lazard Freres & Co. With certain exceptions,
such commitment expired in 1994. Under the terms of the limited partnership
agreement, the ITT Investment Vehicles have agreed to pay Corporate Advisors,
L.P., the general partner of Corporate Partners, L.P., certain amounts in
connection with their investment. During 1994, the ITT Investment Vehicles paid
Corporate Advisors, L.P. fees aggregating $204,377. Lazard is advising the Board
of Directors of ITT in connection with the Distribution and will receive
compensation for its services.
178
<PAGE> 185
DIRECTORS' RETIREMENT POLICY
New ITT's Board of Directors will adopt a retirement policy which provides
that (i) no person may be nominated for election or reelection as a non-employee
director after reaching age 72 and (ii) no employee of New ITT or of any of its
subsidiaries (other than an employee who has served as chief executive of New
ITT) may be nominated for election or reelection as a director after reaching
age 65, unless there has been a specific waiver by the New ITT Board of
Directors of these age requirements.
DIRECTORS' BENEFITS
The directors of New ITT who are currently non-employee directors of ITT
have been participants in the 1995 ITT Deferred Compensation Plan, the ITT
Directors Retirement Plan, a group life insurance program and the ITT Group
Accident Program for Officers and Directors. At or prior to the Distribution
Date, the New ITT Board of Directors will adopt identical "mirror image" plans
and programs (the "1995 New ITT Deferred Compensation Plan", the "New ITT
Directors Retirement Plan", the "New ITT Directors Group Life Plan" and the "New
ITT Group Accident Program for Officers and Directors"). Under the 1995 New ITT
Deferred Compensation Plan, non-employee directors will be permitted to elect to
defer receipt of all or a portion of their 1995 New ITT and New ITT subsidiary
fees. New ITT will credit interest on the deferred compensation based upon the
performance of benchmark investment funds made available under the 1995 New ITT
Deferred Compensation Plan and selected by the director.
Under the New ITT Directors Retirement Plan, non-employee directors who
retire from the Board of Directors at or after age 65 after completing at least
five years of service on the New ITT Board of Directors will be entitled to an
annual pension based on the New ITT Board's annual retainer fee payable at
retirement. Pensions will range from 50% of such fee after five years of service
to 100% after 10 years, with an additional 5% for each year of service in excess
of 10, to a maximum of 200% of the annual retainer fee after 30 or more years of
service. The New ITT Directors Retirement Plan will provide to non-employee
directors credit for any accrued benefit with respect to ITT board service prior
to the Distribution Date, but only to the extent such prior service benefit
accrual is not duplicated under a plan maintained by ITT Industries or ITT
Hartford. A director will be permitted to indicate a preference, subject to
certain conditions, to receive any accrued benefit under the New ITT Directors
Retirement Plan in the form of a single (discounted) lump sum payment
immediately payable upon such director's retirement. The New ITT Directors Group
Life Plan will provide $100,000 of non-contributory group life insurance to
participating non-employee directors during their service on the New ITT Board
of Directors.
The non-employee directors of New ITT will be covered under the New ITT
Group Accident Program for Officers and Directors, which will be a
non-contributory group accidental death and dismemberment program that will
provide each director $750,000 of coverage during his or her service on the New
ITT Board. Additional benefits will be permitted to be purchased.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Prior to the Distribution, New ITT is expected to adopt the 1996 New ITT
Restricted Stock Plan for Non-Employee Directors (the "1996 New ITT Non-Employee
Directors Plan"). The 1996 Non-Employee Directors Plan is designed to further
New ITT's objectives of attracting and retaining individuals of ability as
directors and providing the directors with a closer identity with the interests
of the New ITT shareholders. The 1996 New ITT Non-Employee Directors Plan is
also set forth in full as Annex H hereto.
Overview
Under the proposed 1996 New ITT Non-Employee Directors Plan, directors of
New ITT who are not employees of New ITT or any of its subsidiaries will
automatically participate in the 1996 New ITT Non-Employee Directors Plan. There
are presently eight designated directors of New ITT who will be eligible to
participate in the 1996 New ITT Non-Employee Directors Plan.
179
<PAGE> 186
The 1996 New ITT Non-Employee Directors Plan will be administered by the
Compensation and Personnel Committee of the Board of Directors. The Committee
will have the responsibility of interpreting the 1996 New ITT Non-Employee
Directors Plan and establishing the rules appropriate for the administration of
the 1996 New ITT Non-Employee Directors Plan.
Grants of restricted stock will be made automatically on the date of each
Annual Meeting of Shareholders to each non-employee director elected at the
meeting or continuing in office following the meeting. The amount of the award
shall equal (and be in lieu of) the annual retainer in effect for the calendar
year within which the award date falls, divided by the fair market value of New
ITT Common Stock. "Annual retainer" is defined as the amount payable to a
director for service on the Board during the calendar year and does not include
meeting attendance fees. The annual retainer is presently set at $48,000. "Fair
market value" is defined as the average of the high and low sales price per
share of New ITT Common Stock on the date of the Annual Meeting, as reported on
the NYSE Composite Tape. A total of 120,000 shares would be reserved for
issuance under the 1996 New ITT Non-Employee Directors Plan. The shares to be
issued may be treasury shares or newly issued shares of New ITT Common Stock.
The shares of New ITT Common Stock that are granted under the 1996 New ITT
Non-Employee Directors Plan will be held in escrow by New ITT and will be
subject to a restriction period (after which restrictions will lapse) which
shall mean a period commencing on the grant date and ending on the earliest of
(i) the fifth anniversary of the grant date, (ii) upon retirement at age 72,
(iii) upon a "change of control" (as defined) of New ITT, (iv) death, (v) the
onset of disability or (vi) resignation under cases of special circumstances
with the consent of the Committee. Except as provided above, any resignation
from board service within the restriction period will result in forfeiture of
the shares. Shares may not be sold, assigned, transferred, pledged, hypothecated
or otherwise disposed of during the restriction period. Until such risk of
forfeiture lapses or the shares are forfeited, a director will have the right to
vote and to receive dividends on the shares granted under the 1996 New ITT
Non-Employee Directors Plan.
The Board of Directors may amend, suspend or discontinue the 1996 New ITT
Non-Employee Directors Plan at any time except that the Board may not, without
stockholder approval, take any action which would cause the 1996 New ITT
Non-Employee Directors Plan to no longer comply with Rule 16b-3 under the
Exchange Act. No amendment, suspension or discontinuance of the 1996 New ITT
Non-Employee Directors 1996 Plan may impair a director's right under a
restricted stock award previously granted without his consent.
The 1996 New ITT Non-Employee Directors Plan would become effective as of
the Distribution Date and terminate on December 31, 2005, provided that grants
of Restricted Stock made prior to the termination of the Plan may vest following
such termination in accordance with their terms.
Federal Income Tax Consequences
A director will not be taxed upon grant of a restricted stock award, but
will realize ordinary income in an amount equal to the fair market value of New
ITT Common Stock at the time the shares are no longer subject to a substantial
risk of forfeiture (as defined in the Internal Revenue Code). New ITT will be
entitled to a deduction at the time and to the extent that the director realizes
ordinary income. However, a director may elect (not later than 30 days after
acquiring such shares) to realize ordinary income at the time the restricted
shares are awarded in an amount equal to their fair market value at that time,
notwithstanding the fact that such shares are subject to restrictions and a
substantial risk of forfeiture. If such an election is made, no additional
taxable income will be recognized by such director at the time the restrictions
lapse. New ITT will be entitled to a tax deduction at the time and to the extent
income is realized by such director. However, if shares with respect to which
such election was made are later forfeited, no tax deduction is allowable to the
officer for the forfeited shares, and New ITT will be deemed to realize ordinary
income equal to the amount of the deduction allowed to New ITT at the time of
the election with respect to such forfeited shares. THE FOREGOING SUMMARY OF THE
FEDERAL INCOME TAX CONSEQUENCES IN RESPECT OF THE 1996 NEW ITT NON-EMPLOYEE
DIRECTORS PLAN IS FOR GENERAL INFORMATION ONLY. INTERESTED PARTIES SHOULD
CONSULT THEIR OWN ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF SUCH PLAN,
INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS.
180
<PAGE> 187
The above summary of the 1996 New ITT Non-Employee Directors Plan is
qualified in its entirety by reference to the full plan text which is set forth
as Annex H hereto.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Articles of Incorporation of New ITT waive the
personal liability of a director or officer for damages for breach of fiduciary
duty except for (i) acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law or (ii) the payment of distributions in
violation of Section 78.300 of the Nevada General Corporation Law, which
concerns the unlawful payment of distributions to stockholders.
While the Amended and Restated Articles of Incorporation of New ITT provide
directors and officers with protection from awards for monetary damages for
breaches of their duty of care, they do not eliminate such duty. Accordingly,
the Amended and Restated Articles of Incorporation of New ITT will have no
effect on the availability of equitable remedies such as an injunction or
rescission based on a director's or officer's breach of his or her duty of care.
The By-laws of New ITT provide for indemnification of the directors and
officers of New ITT to the fullest extent permitted by applicable state law, as
then in effect. The indemnification rights conferred by the By-laws of New ITT
are not exclusive of any other right to which a person seeking indemnification
may otherwise be entitled. New ITT will also provide liability insurance for the
directors and officers for certain losses arising from claims or charges made
against them while acting in their capacities as directors or officers and will
enter into an indemnification agreement with each of its directors. Under its
form of indemnification agreement, New ITT agrees to indemnify its directors
against all expenses, liabilities or losses incurred by the directors in their
capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as
provided in the By-laws of New ITT as in effect on the date of such agreement;
and (iii) in the event New ITT does not maintain the aforementioned insurance or
comparable coverage, to the full extent provided in the applicable policies as
in effect on the date of such agreement (New ITT's obligations described in (ii)
and (iii) being subject to certain exceptions). Contractual rights under such
indemnification agreements are believed to provide the directors more protection
than the By-laws which are subject to change.
COMMITTEES OF THE NEW ITT BOARD OF DIRECTORS
Prior to the Distribution, the New ITT Board of Directors will establish
Audit, Capital, Compensation and Personnel, Executive and Policy, Legal Affairs,
Nominating and Public Affairs Committees. No final determination has yet been
made as to the memberships of such standing committees.
AUDIT COMMITTEE
The Audit Committee will recommend the selection of independent auditors
for New ITT, confirm the scope of audits to be performed by such auditors,
review audit results and internal accounting and control procedures and policies
and review the fees paid to the independent auditors of New ITT. The Audit
Committee will review and recommend approval of the audited financial statements
of New ITT and the annual reports to shareholders. It will also review the
expense accounts of senior executives.
CAPITAL COMMITTEE
The Capital Committee will be responsible for maximizing the effective use
of the assets of New ITT and its subsidiaries and reviewing capital expenditures
and appropriations.
COMPENSATION AND PERSONNEL COMMITTEE
The Compensation and Personnel Committee, which will be comprised entirely
of non-employee directors, will oversee the compensation and benefits of
employees, evaluate management performance and establish executive compensation.
In the performance of its functions, the Compensation and Personnel Committee
will have access to independent compensation counsel.
181
<PAGE> 188
EXECUTIVE AND POLICY COMMITTEE
The Executive and Policy Committee will exercise the powers of the Board of
Directors in the management of the business and affairs of New ITT in the
intervals between meetings of the Board of Directors.
LEGAL AFFAIRS COMMITTEE
The Legal Affairs Committee will review and consider major claims and
litigation and legal, regulatory, intellectual property and related governmental
policy matters affecting New ITT and its subsidiaries. The Legal Affairs
Committee will review management policies and programs relating to compliance
with legal and regulatory requirements and business ethics.
NOMINATING COMMITTEE
The Nominating Committee will make recommendations concerning the
organization, size and composition of the Board of Directors and its Committees,
propose nominees for election to the Board of Directors and its Committees and
will consider the qualifications, compensation, and retirement of directors.
PUBLIC AFFAIRS COMMITTEE
The Public Affairs Committee will review and define New ITT's social
responsibilities, including issues of significance to New ITT and its
shareholders and employees.
NEW ITT EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH NEW ITT AND AGE BIOGRAPHICAL DATA
- ------------------------------------------ -------------------------------------------------
<S> <C>
Rand V. Araskog, 63....................... See information under "-- NEW ITT BOARD OF
Chairman and Chief Executive DIRECTORS".
Robert A. Bowman, 40...................... See information under "-- NEW ITT BOARD OF
President and Chief Operating Officer DIRECTORS".
</TABLE>
<TABLE>
<S> <C>
Peter G. Boynton, 52...................... Mr. Boynton has been Senior Vice President of ITT
Senior Vice President; President and Chief since July 1995 and President and Chief Operating
Operating Officer Of CWI Officer of Caesars World, Inc. since February
1995. After joining Caesars World, Inc. in 1975,
Mr. Boynton held various positions, including
President and Chief Operating Officer of Caesars
Atlantic City Hotel/Casino from 1982 to December
1994.
Juan C. Cappello, 57...................... Mr. Cappello has been Senior Vice President and
Senior Vice President, Corporate Relations Director of Corporate Relations since 1984 and a
corporate officer since 1981. He has occupied
executive positions with ITT, both in Latin
America and the United States, since joining ITT
in 1968. Mr. Cappello is a director of ITT
Educational Services, Inc., Ciga S.p.A. and Ciga
Immobiliaria Sardegna, a 51% owned subsidiary of
Ciga S.p.A.
</TABLE>
182
<PAGE> 189
<TABLE>
<CAPTION>
NAME, POSITION WITH NEW ITT AND AGE BIOGRAPHICAL DATA
- ------------------------------------------ -------------------------------------------------
<S> <C>
Gerald C. Crotty, 43...................... Mr. Crotty has been Senior Vice President of ITT
Senior Vice President; Chairman, President since October 1994 and Chairman, President and
and Chief Executive Officer of ITT Chief Executive Officer of ITT Information
Information Services Services, Inc. from October 1993 to the present.
He served as Vice President of ITT from August
1991 until September 1994 and also served as
President and Chief Operating Officer of ITT
Consumer Financial Corporation from February 1992
until September 1993. Mr. Crotty served for
several years as Secretary to the Governor of the
State of New York ending in July 1991.
Jon F. Danski, 42......................... Mr. Danski has been Senior Vice President and
Senior Vice President and Controller Controller of ITT since October 1993. Prior to
that time, Mr. Danski served as Vice President
and General Auditor of RJR Nabisco Corporation
from August 1989 until October 1993.
John Kapioltas, 68........................ Mr. Kapioltas has been Chairman of the Board and
Chairman and Chief Executive Officer of Chief Executive Officer of ITT Sheraton since
ITT Sheraton and CWI 1985 and was also President of ITT Sheraton
between 1985 and 1993. He was named Chairman and
Chief Executive Officer of Caesars World, Inc. as
of July 31, 1995.
Ralph W. Pausig, 60....................... Mr. Pausig has been Senior Vice President and
Senior Vice President, Human Resources Director of Human Resources of ITT since 1987. He
is a director of ITT Educational Services, Inc.
Ann N. Reese, 42.......................... Ms. Reese has been Senior Vice President and
Executive Vice President and Chief Treasurer of ITT since September 1992. Ms. Reese
Financial Officer served as Vice President and Assistant Treasurer
of ITT from January 1989 to August 1992.
Richard S. Ward, 54....................... Mr. Ward has been Executive Vice President and
Executive Vice President, General Counsel General Counsel of ITT since May 1994. Prior to
and Corporate Secretary that time, he served as Senior Vice President and
General Counsel of ITT from September 1992 to May
1994 and as Vice President and Associate General
Counsel of ITT from 1984 to August 1992. Mr. Ward
also serves on the Board of Directors of ITT
Educational Services, Inc.
Daniel P. Weadock, 56..................... Mr. Weadock has been Senior Vice President of ITT
Senior Vice President; President and Chief since July 1995 and President and Chief Operating
Operating Officer of ITT Sheraton Officer of ITT Sheraton Corporation since
November 1993 to present. He served as Chairman,
President and Chief Executive Officer of ITT
Communications and Information Services, Inc.
from May 1988 until October 1993. Since joining
ITT in 1961, he has served in various other
positions.
</TABLE>
EMPLOYMENT AGREEMENT
Prior to the Distribution, New ITT is expected to enter into an employment
contract with Mr. Araskog (the "Araskog Employment Agreement") which will
provide for, among other things: (i) a base salary of $2,000,000 per year,
entitlement to receive bonus and additional incentive compensation each year as
may be awarded in the discretion of the Compensation and Personnel Committee of
the New ITT Board, participation in New ITT's benefit plans (other than
pre-retirement and post-retirement life insurance benefits), contrac-
183
<PAGE> 190
tual disability and death benefits, his employment as chairman and chief
executive of New ITT until October 31, 2000 (when he will have reached age 69);
(ii) his service as consultant to his successor as chief executive of New ITT
from November 1, 2000 through October 31, 2003 for a fee of not less than
$400,000 per year; (iii) his nomination as director of New ITT at each annual
meeting of New ITT shareholders commencing with the annual meeting for 2001 and
including the annual meeting to be held in 2003 and, upon election, payment to
him of the usual director's fees for service in such capacity; (iv) the
provision of office space and certain staff and transportation assistance in
connection with his service as a director and consultant subsequent to October
31, 2000; (v) certain payments in the event that (A) at any time prior to
October 31, 2000, Mr. Araskog is not re-elected as chairman and employed as
chief executive, which payments would be made (I) in monthly installments over
the term of the contract remaining through October 31, 2000 in amounts equal per
annum to the salary received by Mr. Araskog for the calendar year immediately
preceding such event plus a percentage of the average bonus received by Mr.
Araskog with respect to the three calendar years immediately preceding such
event and (II) in the form of a discounted lump sum payment on or about October
31, 2000 equal to the then present value of the consulting fee and the
director's fees referred to above, or (B) after completion of services through
October 31, 2000 in accordance with the terms of the contract, Mr. Araskog at
any time prior to October 31, 2003 is not nominated as a director of New ITT,
which payment would be in the form of a discounted lump sum payment equal to the
then present value of the balance remaining of the consulting fee and the
director's fees referred to above; and (vi) covenants by Mr. Araskog against
competition with any business actively conducted by New ITT or any of its
subsidiaries and for compliance with the New ITT Code of Corporate Conduct.
COMPENSATION OF NEW ITT EXECUTIVE OFFICERS
The following table discloses the compensation received by New ITT's Chief
Executive and the four other most highly paid executive officers for services
rendered to ITT for the three fiscal years ending December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- ----------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) (1)($) OPTIONS(2)(3)(#) (4)($)
- ----------------------------------------------- ---- --------- --------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog................................ 1994 1,625,000 2,405,000 219,457 180,000 58,656
Chairman, President and 1993 1,525,000 2,584,900 185,793 163,968 54,346
Chief Executive ITT 1992 1,462,500 -- 210,459 -- 51,188
Robert A. Bowman............................... 1994 456,250 471,750 25,534 60,000 13,844
Executive Vice President 1993 416,667 540,300 368,537 65,587 11,388
and Chief Financial Officer-ITT 1992 289,166 -- 587 5,466 6,544
John Kapioltas................................. 1994 510,417 400,000 13,051 15,000 19,652
Chairman and Chief Executive 1993 500,000 175,000 8,693 16,397 18,471
Officer-ITT Sheraton 1992 479,167 -- 4,601 -- 16,805
Richard S. Ward................................ 1994 358,750 336,874 22,544 35,000 14,338
Executive Vice President 1993 285,833 200,000 30,953 27,328 10,976
and General Counsel-ITT 1992 226,667 -- 246,293 -- 7,986
Daniel P. Weadock.............................. 1994 500,000 385,000 13,408 35,000 17,500
President and Chief Operating 1993 462,689 278,000 24,468 38,259 16,194
Officer -- ITT Sheraton 1992 461,248 220,500 15,681 -- 16,037
</TABLE>
- ---------------
(1) All allowances shown in this column are tax reimbursement allowances, which
are intended to offset the inclusion in taxable income of the value of
certain benefits, except that: (a) the amounts shown for Mr. Araskog also
includes $128,873, $99,929, and $132,052 in 1994, 1993, and 1992,
respectively, for personal benefits including tax and financial counseling
and transportation services, (b) the amount shown for Mr. Bowman in 1993
also includes $205,373 in relocation allowance and (c) the amounts for Mr.
Ward include $11,167 and $164,057 in relocation allowances in 1993 and 1992,
respectively.
(2) The column for Long-Term Incentive Plan Payouts was eliminated because there
were no such items during the three-year period ending in 1994. The column
for Restricted Stock Awards was eliminated because there were no such awards
during the three-year period ending in 1994.
(3) The named executives do not hold any stock appreciation rights in connection
with the options shown.
184
<PAGE> 191
The number and exercise prices of all ITT stock options outstanding at the
time of the spin-off to shareholders of ITT of Rayonier Inc., a former
subsidiary of ITT, were adjusted for decreases in the economic value of the
options as a result of the distribution to shareholders. This adjustment
increased the number of options by 9.3% and decreased the exercise prices of
the options then outstanding by approximately 8.5%.
(4) All amounts shown in this column are company contributions under the ITT
Investment and Savings Plan and the ITT Excess Savings Plan, which are
defined contribution plans. ITT makes a matching contribution in an amount
equal to 50% of an employee's contribution, such matching contribution not
to exceed three percent (3%) of such employee's salary. Under these plans,
ITT also makes a non-matching contribution equal to one-half of one percent
( 1/2 of 1%) of an employee's salary.
ANNUAL INCENTIVE BONUS PLAN
Under the ITT Annual Incentive Bonus Plan, the amounts of annual bonus
awards are based upon corporate financial performance for the year compared to
annual performance goals established by the Compensation and Personnel Committee
at the beginning of the year. For 1994, such performance goals were earnings per
share compared to budget, earnings per share compared to the prior year and
return on equity compared to budget. These measures were weighted 40%, 40% and
20%, respectively. The weighted average performance factor under the formula was
calculated at 116%. Under a leveraged performance/payout schedule, the
performance factor generated a standard bonus adjustment factor of 148%. The
calculated bonus amounts for 1994 performance are shown in the Summary
Compensation Table above.
The Compensation and Personnel Committee awarded a bonus of $2,405,000 to
Mr. Araskog for 1994. This amount, as well as the awards for the other named
officers, was determined strictly in accordance with the above described formula
and standard bonus adjustment factor, except for Mr. Ward, who earned a 1994
bonus of $236,874 pursuant to the formula. In addition, the Compensation and
Personnel Committee authorized a special discretionary bonus of $100,000 for Mr.
Ward to recognize his contributions as General Counsel in negotiating new
business acquisitions in 1994.
At the 1995 Annual Meeting of ITT Shareholders, the shareholders approved
certain amendments to the annual incentive bonus program. One of the proposed
amendments established a maximum amount of $4 million which may be paid to any
covered executive. The other amendment provides that a participant's target
bonus award for a particular performance year will be based upon the covered
employee's annual rate of salary and position as of the end of such performance
year rather than at the beginning thereof.
If the proposed amendments had been in effect at the time the performance
bonuses for 1994 were determined, the amount of the performance bonus payable to
Mr. Araskog would still have been the amount actually paid as shown under
"Bonus" in the Summary Compensation Table set forth above, while the amounts of
the bonuses payable to Mr. Bowman and Mr. Ward would have been $555,000 and
$440,000, respectively, instead of the amounts shown opposite their respective
names under "Bonus" in such table.
Mr. Kapioltas' and Mr. Weadock's bonuses were determined according to a
bonus plan applicable to ITT Sheraton.
It is contemplated that an annual bonus program with substantially
comparable terms will be carried forward in future years by New ITT in
substantially the same form after the Distribution Date and that it will be
administered by the Compensation and Personnel Committee of the New ITT Board of
Directors. The Compensation and Personnel Committee, however, will evaluate the
program and may adopt a new program based on industry competitive practices and
to comply with Federal income tax requirements with regard to performance-based,
tax deductible executive compensation.
185
<PAGE> 192
OPTION GRANTS ON ITT COMMON STOCK TO NEW ITT EXECUTIVES IN LAST FISCAL YEAR
The following table provides information on fiscal year 1994 grants of
options to the named New ITT executives to purchase shares of ITT Common Stock.
No options to acquire New ITT Common Stock have been granted or are outstanding.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK
- ------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE APPRECIATION
UNDERLYING OPTIONS FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(4)
GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION --------------------------
NAME (#) 1994(2) ($/SHARE) DATE 5% 10%
- --------------------------- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog............ 180,000 9.6 $ 84.00 10/13/04 $9,509,400 $24,096,600
Robert A. Bowman........... 60,000 3.2 84.00 10/13/04 3,169,800 8,032,200
John Kapioltas............. 15,000 0.8 84.00 10/13/04 792,450 2,008,050
Richard S. Ward............ 35,000 1.9 84.00 10/13/04 1,849,050 4,685,450
Daniel P. Weadock.......... 35,000 1.9 84.00 10/13/04 1,849,050 4,685,450
</TABLE>
- ---------------
(1) The numbers in this column represent options to purchase ITT Common Stock.
(2) Percentages indicated are based on a total of 1,876,198 options granted to
656 employees of ITT during 1994.
(3) The exercise price per share is 100% of the fair market value of a share of
ITT Common Stock on the date of grant. The exercise price may be paid in
cash or in shares of ITT Common Stock valued at their fair market value on
the date of exercise. Options granted on October 11, 1994 at the exercise
price of $84.00 per share are not exercisable until the trading price of ITT
Common Stock equals or exceeds $105.00 per share for 10 consecutive trading
days (which occurred on May 15, 1995) at which time two-thirds of the
options will be exercisable; when the trading price equals or exceeds
$117.60 per share for 10 consecutive trading days, the options will be fully
exercisable. Notwithstanding the above, the options will be fully
exercisable after October 11, 2003, but no later than October 13, 2004.
(4) At the end of the term of the options granted on October 11, 1994, the
projected price of a share of ITT Common Stock would be $136.83 and $217.67
at an assumed annual appreciation rate of 5% and 10%, respectively.
On May 9, 1995, the Compensation and Personnel Committee of ITT awarded
455,000 stock options to eight executive officers of New ITT including Messrs.
Araskog, Bowman, Kapioltas, Ward and Weadock for 180,000, 60,000, 15,000, 35,000
and 25,000 shares of ITT Common Stock, respectively. These options were granted
at the exercise price of $108.75 per share and will become fully exercisable at
the earlier of the ninth anniversary date of the grant or when the closing price
of ITT Common Stock is equal to or greater than $135.94 for ten consecutive
trading days. All of these options will expire on May 11, 2005.
In addition, on May 9, 1995, the Committee granted 47,500 shares of
restricted stock to five executive officers of New ITT including Messrs.
Araskog, Bowman and Ward for 25,000, 10,000 and 2,500 shares, respectively. Mr.
Araskog's award will vest in full on January 1, 2001. Awards for the other named
officers will vest in full on the fifth anniversary of the date of grant.
Termination of employment before restrictions lapse will generally cause the
shares to be forfeited except in cases of death, disability or retirement.
Recipients of restricted stock receive dividends in the same manner as other
shareholders.
In connection with the Distribution, it is expected that each of the above
stock options and restricted stock awards will be surrendered to ITT and that
substitute stock options and substitute restricted stock awards will be made
under the 1995 New ITT Incentive Stock Plan (as described below). For a
discussion of the treatment of stock options and other stock awards held by
current employees of ITT and future employees of ITT Industries, New ITT or ITT
Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS
AND OTHER AWARDS".
186
<PAGE> 193
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUE(1)
The following table provides information on option exercises in 1994 by the
named executives of New ITT and the value of each such executive's unexercised
options to acquire ITT Common Stock at December 31, 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS HELD AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ---------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rand V. Araskog.............. -- -- -- 343,968 -- 1,566,337
Robert A. Bowman............. -- -- 34,615 123,766 1,249,083 736,343
John Kapioltas............... -- -- 57,389 31,397 2,194,311 142,745
Richard S. Ward.............. -- -- 12,352 62,328 518,413 284,206
Daniel P. Weadock............ -- -- 36,619 73,259 1,590,624 533,068
</TABLE>
- ---------------
(1) The number and exercise price of all options outstanding at the time of the
spin-off to shareholders of ITT of Rayonier Inc., a former subsidiary of
ITT, were adjusted for decreases in the economic value of the options as a
result of the distribution to shareholders. This adjustment increased the
number of options by 9.3% and decreased the exercise prices of the options
then outstanding by approximately 8.5%.
(2) Based on the NYSE consolidated trading closing price of ITT Common Stock on
December 30, 1994 of $88.63.
ITT LONG-TERM PERFORMANCE PLAN
Under the ITT Long-Term Performance Plan, target contingent cash awards
were made on December 12, 1991 (the "1992 Class Awards") to ITT executives,
including certain of those individuals who will be executive officers of New ITT
after the Distribution. Under the 1992 Class Awards, for Messrs. Araskog, Bowman
and Ward, the ultimate payment value of a target award, if any, will be based
upon ITT's return on equity ("ROE") performance during the three-year period
1993 through 1995 as measured against predetermined ROE goals for each year.
Each year of the performance period has been assigned a specific weighting: 15%,
35% and 50% for 1993, 1994 and 1995, respectively. If the actual weighted
average ROE performance is less than 90% of the ROE goals, no payment is earned.
A similar formula will apply to Mr. Kapioltas based on ITT Sheraton's ROE
performance. Mr. Weadock is a participant in the ITT COINS Long-Term Performance
Plan. The ultimate payment value of his target contingent award, if any, will be
based upon ITT COINS' ROE performance during the four-year period 1992 through
1995 as measured against pre-established ROE goals for each year. Each year of
the performance period has been assigned a specific weighting: 10%, 15%, 25% and
50% for 1992, 1993, 1994 and 1995, respectively. If the actual weighted average
ROE performance is less than 90% of the ROE goals, no payment is earned.
1992 Class Awards for the five most highly compensated executive officers
of New ITT are listed in the table below:
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS
CONTINGENT TARGET MATURATION AWARD AWARD AWARD
NAME AWARDS OR PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3)
- --------------------------------- ----------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Rand V. Araskog.................. $ 3,500,000 12/31/95 $1,166,667 $3,500,000 $7,000,000
Robert A. Bowman................. 1,200,000 12/31/95 400,000 1,200,000 2,400,000
John Kapioltas................... 700,000 12/31/95 233,333 700,000 1,400,000
Richard S. Ward.................. 300,000 12/31/95 100,000 300,000 600,000
Daniel P. Weadock................ 640,000 12/31/95 213,333 640,000 1,280,000
</TABLE>
- ---------------
(1) Based upon a weighted average ROE goal achievement of 90%, resulting in
payment of 33% of the target award in the first quarter of 1996.
187
<PAGE> 194
(2) Based upon a weighted average ROE goal achievement of 100%, resulting in
payment of 100% of the target award in the first quarter of 1996.
(3) Based upon a weighted average ROE goal achievement of 130% or more,
resulting in payment of 200% of the target award in the first quarter of
1996.
In connection with the Distribution, any post-Distribution payments (and
the corresponding reserves of ITT) to current ITT executives in respect of the
Plan will remain the responsibility of ITT Industries pursuant to the Employee
Benefits Services and Liability Agreement described under "RELATIONSHIP BETWEEN
ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE
BENEFITS AGREEMENT". It is contemplated that New ITT may adopt a comparable
long-term incentive plan after the Distribution Date and, if adopted, the plan
will be administered by the Compensation and Personnel Committee of the New ITT
Board of Directors.
For a description of certain other aspects of the Plan, see "ITT INDUSTRIES
MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT LONG-TERM PERFORMANCE PLAN".
NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS
The following is a description of the compensation, benefit and retirement
plans currently expected to be adopted by New ITT.
1995 NEW ITT INCENTIVE STOCK PLAN
One of the reasons for the Distribution is to enable New ITT to provide
meaningful long-term incentives for its executives and other key employees,
directly related to their individual and collective performance in enhancing
shareholder value. Once the Distribution has been effected and a public market
has developed for the New ITT Common Stock, market-based incentives based on New
ITT stock performance will allow New ITT to provide significant incentives to
the key employees of New ITT to a degree not previously available under ITT's
compensation programs. Awards of stock options and other market-based incentives
will permit key employees to profit proportionately as shareholder value is
enhanced (as evidenced by the market price for New ITT Common Stock) and will
also give New ITT an effective tool to encourage key employees to continue in
the employ of New ITT.
In order to achieve these objectives, effective prior to the Distribution,
the Board of Directors of New ITT is expected to adopt the 1995 New ITT
Incentive Stock Plan (the "1995 New ITT Stock Plan"). The 1995 New ITT Stock
Plan will be administered by the New ITT Compensation and Personnel Committee.
Approval of Proposal Four set forth under "INTRODUCTION -- PURPOSE OF THE
SPECIAL MEETING" will constitute shareholder approval of the 1995 New ITT Stock
Plan.
The 1995 New ITT Stock Plan provides for the grant of incentive stock
options (qualifying under Section 422 of the Internal Revenue Code),
non-qualified stock options, SARs, performance shares and restricted stock, or
any combination of the foregoing, as the Compensation and Personnel Committee
may determine, as well as substitute stock options, stock appreciation rights
and restricted stock (collectively, "Awards"). The 1995 New ITT Stock Plan will
expire on December 31, 2005. No determination has yet been made as to the number
of employees of New ITT who will be eligible to participate in the 1995 New ITT
Stock Plan. During 1995, approximately 345 persons who will be employees of New
ITT will have received stock options under the ITT 1994 Incentive Stock Plan.
The 1995 New ITT Stock Plan contains a formula for establishing an annual
limit on the number of shares which may be awarded (or with respect to which
non-stock Awards may be made) in any given calendar year (the "Annual Limit").
The Annual Limit formula is expressed as a percentage of New ITT's total issued
and outstanding Common Stock and treasury stock as of the year end immediately
preceding the year of awards ("Plan Year"). In addition, for the Plan Year that
includes the Distribution, the number of shares which may be awarded will equal
the Annual Limit plus the number of substitute Awards granted to employees who
surrender ITT stock awards. Under the Annual Limit formula, the maximum number
of shares of New ITT Common Stock for which Awards may be granted under the Plan
in each Plan Year shall
188
<PAGE> 195
be 1.5% of the total of the issued and outstanding shares of New ITT Common
Stock and treasury stock as reported in the Annual Report on Form 10-K of New
ITT for the fiscal year ending immediately prior to any Plan Year. Any unused
portion of the Annual Limit for any Plan Year shall be carried forward and be
made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
shares of New ITT Common Stock be cumulatively available for Awards of incentive
stock options under the 1995 New ITT Stock Plan, and provided further, that no
more than 20% of the total number of shares available on a cumulative basis
shall be available for restricted stock and performance share awards. For any
Plan Year, no individual employee may receive stock options for more than the
lesser of (i) 10% of the Annual Limit applicable to that Plan Year and (ii)
500,000 shares; except that, for the Plan Year that follows the Distribution
Date, each individual employee may receive in addition to the foregoing limit
that number of stock options equal to the lesser of (x) 2,600,000 and (y) the
number of substitute stock options required to replace ITT stock options
surrendered by such employee in connection with the spin-off by ITT of the
shares of New ITT to ITT shareholders.
Subject to the above limitations, shares of New ITT Common Stock to be
issued under the 1995 New ITT Stock Plan may be made available from the
authorized but unissued New ITT Common Stock or from shares purchased on the
open market. In the event of a reorganization, merger, stock dividend, or any
other change in the corporate structure of New ITT or the New ITT Common Stock,
the number of shares subject to the 1995 New ITT Stock Plan, the number of
shares then subject to Awards and the price per share payable on exercise of
options may be appropriately adjusted by the Compensation and Personnel
Committee. Other than the above adjustments, it is the New ITT Board's policy
that no options will be cancelled and reissued at a lower price unless the
shareholders approve such action.
For the purpose of computing the total number of shares of stock available
for Awards under the 1995 New ITT Stock Plan, there shall be counted against the
foregoing limitations the number of shares of New ITT Common Stock subject to
issuance upon exercise or settlement of Awards and the number of shares of New
ITT Common Stock which equal the value of Performance Share Awards, in each case
determined as at the dates on which such Awards are granted. If any Awards under
the 1995 New ITT Stock Plan are forfeited, are terminated, expire unexercised,
are settled in cash in lieu of New ITT Common Stock or are exchanged for other
Awards, the shares of stock which were theretofore subject to such Awards shall
again be available for Awards under the 1995 New ITT Stock Plan to the extent of
such forfeiture, termination, expiration, cash settlement or exchange of such
Awards. Further, any shares that are exchanged (either actually or
constructively) by optionees as full or partial payment to New ITT of the
purchase price of shares being acquired through the exercise of a stock option
granted under the 1995 New ITT Stock Plan may be available for subsequent
Awards, provided however, that such shares may be awarded only to those
participants who are not directors or executive officers (as that term is
defined in the rules and regulations under Section 16 of the Exchange Act).
The Compensation and Personnel Committee, made up entirely of non-employee
directors, none of whose members may receive any award under the 1995 New ITT
Stock Plan, will administer the 1995 New ITT Stock Plan, including, but not
limited to, making determinations with respect to the designation of those
employees who shall receive Awards, the number of shares to be covered by
options, SARs and restricted stock awards, the exercise price of options (which
may not be less than 100% of the fair market value of New ITT Common Stock on
the date of grant), other option terms and conditions and the number of
performance shares to be granted and the applicable performance objectives. The
Compensation and Personnel Committee may impose such additional terms and
conditions on an Award as it deems advisable. The Compensation and Personnel
Committee's decisions in the administration of the 1995 New ITT Stock Plan shall
be binding on all persons for all purposes.
The Compensation and Personnel Committee may in its sole discretion
delegate such administrative powers as it may deem appropriate to the chief
executive officer or other members of senior management, except that Awards to
executive officers shall be made solely by the Compensation and Personnel
Committee and subject to compliance with Rule 16b-3 of the Exchange Act.
189
<PAGE> 196
Awards will be made, in the discretion of the Compensation and Personnel
Committee, to employees of New ITT and any of its subsidiaries (including
officers and members of the Board of Directors who are also employees) whose
responsibilities and decisions directly affect the performance of New ITT and
its subsidiaries.
Substitute Awards
To provide meaningful compensation in the form of stock options to acquire
New ITT Common Stock to key employees of New ITT who surrendered options to
acquire stock in ITT in connection with the Distribution, the Compensation and
Personnel Committee is authorized to issue substitute New ITT stock options and
related rights in the aggregate amount of 16,500,000 shares or such lower number
as may be necessary to preserve the economic value of the surrendered ITT
options and related rights. Subject to this limitation, shares of New ITT Common
Stock to be issued upon the exercise of substitute stock options may be made
available from authorized but unissued shares or from treasury shares or from
shares purchased in the open market.
The maximum number of substitute New ITT stock options and related rights
that may be granted to any individual employee is 2,600,000 or such lower number
as may be necessary to preserve the economic value of the surrendered ITT
options and related rights by any such individual employee.
The Compensation and Personnel Committee is also authorized to issue
substitute grants of New ITT restricted stock to replace the ITT restricted
stock surrendered by New ITT employees in connection with the Distribution.
The terms and conditions of each substitute stock award, including, without
limitation, the time or times when, and the manner in which, each substitute
option shall be exercisable, the duration of the exercise period, the permitted
method of exercise, settlement and payment, the rules that shall apply in the
event of the termination of employment of the key employee, the events, if any,
that may give rise to a key employee's right to accelerate the time of exercise
of an option and the vesting provisions of restricted stock, shall be the same
as those of the surrendered ITT stock award.
Stock Options and Related SARs
Incentive stock options and related SARs under the 1995 New ITT Stock Plan
must expire within 10 years after grant; non-qualified stock options and related
SARs will expire not more than 10 years and two days after grant. No SAR may be
exercised until at least six months after it is granted. The exercise price for
options and SARs must be at least equal to the fair market value of the New ITT
Common Stock on the date of grant. The exercise price for options must be paid
to New ITT at the time of exercise and, in the discretion of the Compensation
and Personnel Committee, may be paid in the form of cash or already-owned shares
of New ITT Common Stock or a combination thereof. During the lifetime of an
employee, an option must be exercised only by the individual (or his or her
estate or designated beneficiary) but no later than three months after his or
her termination of employment (or for longer periods as determined by the
Compensation and Personnel Committee if termination is caused by retirement,
disability or death, but in no event later than the expiration of the original
term of the option). If an optionee voluntarily resigns or is terminated for
cause, the options and SARs are cancelled immediately.
Performance Shares
Performance shares under the 1995 New ITT Stock Plan are contingent rights
to receive future payments based on the achievement of individual or company
performance objectives as prescribed by the Compensation and Personnel
Committee. The maximum number of performance shares that may be granted to any
individual employee in any given year is 100,000. The amounts paid will be based
on actual performance over a period from two to five years, as determined by the
Compensation and Personnel Committee, using one or more of the following
objective criteria, as it deems appropriate: earnings per share, return on
equity, cash flow or total shareholder return of New ITT. Payments may be made
in the form of shares of New ITT Common Stock, cash or a combination of New ITT
Common Stock and cash. The ultimate payments are determined
190
<PAGE> 197
by the number of shares earned and the price of New ITT Common Stock at the end
of the performance period. In the event an employee terminates employment during
such a performance period, the employee will forfeit any right to payment.
However, in the case of retirement, permanent total disability, death or cases
of special circumstances, the employee may, in the discretion of the
Compensation and Personnel Committee, be entitled to an award prorated for the
portion of the performance period during which he or she was employed by New
ITT.
Restricted Shares
Restricted shares of New ITT Common Stock awarded under the 1995 New ITT
Stock Plan will be issued subject to a restriction period set by the
Compensation and Personnel Committee during which time the shares may not be
sold, transferred, assigned or pledged. In the event an employee terminates
employment during a restriction period, all such shares still subject to
restrictions will be forfeited by the employee and reacquired by New ITT. The
Compensation and Personnel Committee may provide for the lapse of restrictions
in installments where deemed appropriate and it may also require the achievement
of predetermined performance objectives in order for such shares to vest. The
recipient, as owner of the awarded shares, shall have all other rights of a
shareholder, including the right to vote the shares and receive dividends and
other distributions during the restriction period. The restrictions may be
waived, in the discretion of the Compensation and Personnel Committee, in the
event of the awardee's retirement, permanent total disability, death or in cases
of special circumstances.
Compensation Upon Change of Control
The 1995 New ITT Stock Plan provides for the automatic protection of
intended economic benefits by key employees in the event of a change in control
of New ITT (i.e., upon the occurrence of an "Acceleration Event" as defined in
the 1995 New ITT Stock Plan). Notwithstanding any other provisions of the 1995
New ITT Stock Plan, upon the occurrence of an Acceleration Event (a) all options
and SARs will generally become immediately exercisable for a period of 60
calendar days; (b) options and SARs will continue to be exercisable for a period
of seven months in the case of an employee whose employment is terminated other
than for cause or who voluntarily terminates employment because of a good faith
belief that such employee will not be able to discharge his or her duties; (c)
SARs exercised during the 60-day period will be settled fully in cash based on a
formula price generally reflecting the highest price paid for a share of New ITT
Common Stock during the 60-day period preceding the date such SAR is exercised;
(d) "limited stock appreciation rights" shall automatically be granted on all
outstanding options not otherwise covered by a SAR, which shall generally be
immediately exercisable in full and which shall entitle the holders to the same
exercise period and formula price referred to in (a), (b) and (c) above; (e)
outstanding performance share awards shall automatically vest, with the
valuation of such performance shares based on the formula price; and (f)
restrictions applicable to awards of restricted stock shall be automatically
waived.
Options, SARs, performance shares or restricted stock which are granted,
accelerated or enhanced upon the occurrence of a takeover (i.e., an
"Acceleration Event" as defined in the 1995 New ITT Stock Plan) may give rise,
in whole or in part, to "excess parachute payments" within the meaning of
Section 280G of the Internal Revenue Code and, to such extent, will be
nondeductible by New ITT and subject to a 20% excise tax to the awardee.
"Acceleration Event" is generally defined in the 1995 New ITT Stock Plan as
any of the following events: (i) a report on Schedule 13D shall be filed with
the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person
(within the meaning of Section 13(d) of the Exchange Act), other than New ITT or
a subsidiary of New ITT or any employee benefit plan sponsored by New ITT or a
subsidiary of New ITT, is the beneficial owner directly or indirectly of 20% or
more of the outstanding New ITT Common Stock; (ii) any person (within the
meaning of Section 13(d) of the Exchange Act), other than New ITT or a
subsidiary of New ITT or any employee benefit plan sponsored by New ITT or a
subsidiary of New ITT, shall purchase shares pursuant to a tender offer or
exchange offer to acquire any New ITT Common Stock (or securities convertible
into such Common Stock) for cash, securities or any other consideration,
provided that after consummation of the offer, the person in question is the
beneficial owner (as such term is defined in
191
<PAGE> 198
Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or more of the
outstanding New ITT Common Stock (calculated as provided in paragraph (d) of
Rule 13d-3 under the Exchange Act in the case of rights to acquire Common
Stock); (iii) the shareholders of New ITT shall approve (A) any consolidation or
merger of New ITT in which New ITT is not the continuing or surviving
corporation or pursuant to which shares of New ITT Common Stock would be
converted into cash, securities or other property, other than a merger of New
ITT in which holders of New ITT Common Stock immediately prior to the merger
have the same proportionate ownership of common stock of the surviving
corporation immediately after the merger as immediately before or (B) any sale,
lease, exchange or other transfer (in one transaction or a series of related
transactions) of all or substantially all the assets of New ITT; or (iv) there
shall have been a change in a majority of the members of the Board of Directors
of New ITT within a 12-month period unless the election or nomination for
election by New ITT's shareholders of each new director during such 12-month
period was approved by the vote of two-thirds of the directors then still in
office who were directors at the beginning of such 12-month period.
The New ITT Board may amend or discontinue the 1995 New ITT Stock Plan at
any time and, specifically, may make such modifications to the 1995 New ITT Plan
as it deems necessary to avoid the application of Section 162(m) of the Internal
Revenue Code and the Treasury regulations issued thereunder. However,
shareholder approval is required for certain amendments, including any amendment
which may (i) increase the number of shares reserved for awards (except as
provided in the 1995 New ITT Stock Plan with respect to stock splits or other
similar changes), (ii) materially change the group of employees eligible for
Awards, (iii) materially increase the benefits accruing to participants under
the 1995 New ITT Stock Plan or (iv) permit Awards after December 31, 2005.
Certain Tax Consequences
The following is a brief summary of the current Federal income tax rules
generally applicable to awards under the 1995 New ITT Stock Plan.
Non-qualified Options. An optionee is not subject to Federal income tax
upon grant of a non-qualified stock option. At the time of exercise, the
optionee will realize compensation income (subject to withholding) to the extent
that the then fair market value of the stock exceeds the option price. The
amount of such income will constitute an addition to the optionee's tax basis in
the optioned stock. Sale of the shares will result in capital gain or loss
(long-term or short-term depending on the optionee's holding period). New ITT is
entitled to a Federal tax deduction at the same time and to the same extent that
the optionee realizes compensation income.
Incentive Stock Options ("ISOs"). Options under the 1995 New ITT Stock
Plan denominated as ISOs are intended to constitute incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended. An optionee
is not subject to Federal income tax upon either the grant or exercise of an
ISO. If the optionee holds the shares acquired upon exercise for at least one
year after issuance of the optioned shares and until at least two years after
grant of the option, then the difference between the amount realized on a
subsequent sale or other disposition of the shares and the option price will
constitute long-term capital gain or loss. New ITT will not be entitled to a
Federal tax deduction with respect to the grant or exercise of the ISO.
If the optionee sells the shares acquired under an ISO before the requisite
holding period, he or she will be deemed to have made a "disqualifying
disposition" of the shares and will realize compensation income in the year of
disposition equal to the lesser of the fair market value of the shares at
exercise or the amount realized on their disposition over the option price of
the shares. Any gain recognized upon a disqualifying disposition in excess of
the ordinary income portion will constitute either short-term or long-term
capital gain. In the event of a disqualifying disposition, new ITT will be
entitled to a Federal tax deduction in the amount of the compensation income
realized by the optionee.
The option spread on the exercise of an ISO is an adjustment in computing
alternative minimum taxable income. No adjustment is required, however, if the
optionee made a disqualifying disposition of the shares in the same year as he
is taxed on the exercise.
192
<PAGE> 199
Stock Appreciation Rights ("SARs"). An optionee is not taxed upon the
grant of SARs. An optionee exercising SARs for cash will realize compensation
income (subject to withholding) in the amount of the cash or the fair market
value of the shares received. New ITT is entitled to a tax deduction at the same
time and to the same extent that the optionee realized compensation income.
Performance Shares. An awardee of performance shares will generally
realize compensation income (subject to withholding) when and to the extent that
payment is made, whether in the form of cash or shares of New ITT Common Stock.
To the extent that payment is made in the form of stock, income shall be
measured by the then fair market value of the shares, which shall constitute an
addition to the awardee's tax basis in such shares. New ITT will be entitled to
a Federal tax deduction of the value of payment at the time of payment.
Restricted Stock. An awardee of restricted stock will generally realize
compensation income (subject to withholding) when and to the extent that the
restrictions on the shares lapse, as measured by the value of the shares at the
time of lapse. The awardee's holding period for the shares will not commence
until the date of lapse, and dividends paid during the restriction period will
be treated as compensation. The income realized on lapse of the restrictions
will constitute an addition to the awardee's tax basis in the shares.
In lieu of deferred recognition of income, the awardee may formally elect,
within 30 days of award, to realize compensation income at the time of award, as
measured by the fair market value of the stock on the date of award determined
without regard to the restrictions. The income realized will constitute an
addition to the tax basis of the shares. In the case of such election, any
appreciation (or depreciation) on the shares during the restriction period will
give rise to capital gain (or capital loss) upon the sale or other disposition
of the shares. In the event that the awardee terminates employment during the
restriction period and forfeits his shares, no deduction may be claimed and the
taxes paid on award of the shares shall be forfeited.
New ITT will be entitled to a Federal tax deduction at the same time and to
the same extent that the awardee realizes compensation income.
Excess Parachute Payments. Options, SARs, performance shares or restricted
stock which are granted, accelerated or enhanced upon the occurrence of a
takeover (i.e., an Acceleration Event as defined in the 1995 New ITT Stock Plan)
may give rise, in whole or in part, to "excess parachute payments" within the
meaning of Section 280G of the Internal Revenue Code and, to such extent, will
be nondeductible by New ITT and subject to a 20% excise tax to the awardee.
If the 1995 New ITT Stock Plan is approved by the shareholders, the Board
may amend or discontinue it at any time. However, shareholder approval is
required for any amendment which may (i) increase the number of shares reserved
for awards (except as provided in Section 13 of the 1995 New ITT Stock Plan with
respect to stock splits or other similar changes), (ii) materially change the
group of employees eligible for Awards, (iii) materially increase the benefits
accruing to participants under the 1995 New ITT Stock Plan, or (iv) permit
Awards after December 31, 2005.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES IN RESPECT OF
THE 1995 NEW ITT STOCK PLAN IS FOR GENERAL INFORMATION ONLY. INTERESTED PARTIES
SHOULD CONSULT THEIR OWN ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF SUCH
PLAN, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS.
The above summary of the 1995 New ITT Stock Plan is qualified in its
entirety by reference to the full plan text which is set forth as Annex D
hereto.
NEW ITT SEVERANCE PAY PLAN
The existing ITT severance pay plan applies to ITT senior executives who
are United States citizens or who are employed in the United States. Under the
plan, if a participant's employment is terminated by ITT, other than for cause
or as a result of other occurrences specified in the plan, the participant is
entitled to severance pay in an amount up to 24 months of base salary depending
upon his or her length of service. In no event shall such severance pay exceed
the amount of base salary for the number of months remaining between the
termination of employment and the participant's normal retirement date or two
times the participant's
193
<PAGE> 200
total annual compensation during the year immediately preceding such
termination. The plan includes offset provisions for other compensation from ITT
and requirements on the part of executives with respect to non-competition and
compliance with the ITT Code of Corporate Conduct. Under the plan, severance
payments would ordinarily be made monthly over the scheduled term of such
payments; however, ITT has the option to make such payments in the form of a
single lump sum payment discounted to present value. At June 1, 1995, the named
executive officers in the Summary Compensation Table (see "-- COMPENSATION OF
NEW ITT EXECUTIVE OFFICERS") participate in this plan, except for Mr. Araskog
who is covered by an employment contract.
The annual salaries of Messrs. Bowman, Kapioltas, Ward and Weadock as of
June 1, 1995, were $500,000, $525,000, $400,000 and $525,000 respectively.
After the Distribution, it is anticipated that New ITT will adopt a similar
plan for its senior executives, except for Mr. Araskog who will be covered by an
employment agreement (see "-- EMPLOYMENT AGREEMENT").
NEW ITT INVESTMENT AND SAVINGS PLAN
Many of the salaried employees of New ITT have been participants in the ITT
Investment and Savings Plan for Salaried Employees. CWI maintains a similar plan
which will be continued after the Distribution Date. Effective as of the
Distribution Date, the ITT Investment and Savings Plan will be split into three
separate plans, each covering the ITT Industries Employees, the New ITT
Employees or the ITT Hartford Employees. Existing account balances of current
New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP
that have been allocated to the accounts of such employees, will be transferred
from the ITT Investment and Savings Plan to the New ITT Investment and Savings
Plan. Existing account balances of current ITT Hartford Employees, including all
shares of ITT Common Stock acquired by the ESOP that have been allocated to the
accounts of such employees, will be transferred from the ITT Investment and
Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account
balances of current ITT Industries Employees, including all shares of ITT Common
Stock acquired by the ESOP that have been allocated to the accounts of such
employees, will remain in the ITT Investment and Savings Plan, which will
continue in existence as the ITT Industries Investment and Savings Plan.
Existing account balances of each former employee of ITT Industries, New ITT and
ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that
have been allocated to the accounts of such former employee, will be transferred
to the investment and savings plan maintained by the company responsible for
providing retirement benefits to such former employee.
Federal legislation limits the annual contributions which an employee may
make to the New ITT Investment and Savings Plan, a tax-qualified retirement
plan. Accordingly, prior to the Distribution Date, New ITT will adopt the New
ITT Excess Savings Plan, which will enable an employee who is precluded by these
limitations from contributing six percent of salary to the tax-qualified plan to
make up the shortfall through salary deferrals and thereby receive the three
percent maximum matching company contribution and one-half of one percent
non-matching company contribution otherwise allowable under the tax-qualified
plan. Salary deferrals, company contributions and imputed earnings will be
entered into a book reserve account maintained by New ITT for each participant.
NEW ITT RETIREMENT PROGRAM
ITT Sheraton sponsors a retirement plan for its U.S. salaried employees
which mirrors the ITT Salaried Retirement Plan. CWI maintains a non-qualified
pension arrangement for certain senior level executives, which will be continued
after the Distribution Date. New ITT will adopt the ITT Sheraton Plan as the New
ITT Salaried Retirement Plan and extend it to employees formerly covered by the
ITT Salaried Retirement Plan. The New ITT Salaried Retirement Plan will be
amended to recognize service with other ITT companies prior to the Distribution
Date for eligibility, vesting and benefit accrual purposes and will further
provide for an offset of any benefit payable from any ITT retirement plan
covering the same period of service. The Plan will
194
<PAGE> 201
be further amended to recognize service with ITT Industries and ITT Hartford
after the Distribution Date for eligibility and vesting purposes.
The New ITT Salaried Retirement Plan will cover all eligible salaried
employees of New ITT, including senior executive officers and other New ITT
executives, but will not cover any employees of ITT Industries or ITT Hartford.
The cost of the New ITT Salaried Retirement Plan will be borne entirely by New
ITT.
A member's annual pension will equal two percent of the member's average
final compensation for each of the first 25 years of benefit service, plus one
and one-half percent of a member's average final compensation for each of the
next 15 years of benefit service, reduced by one and one-quarter percent of the
member's primary Social Security benefit for each year of benefit service to a
maximum of 40 years; provided that no more than one-half of the member's primary
Social Security benefit is used for such reduction. A member's average final
compensation (including salary plus approved bonus payments) will be defined
under the Plan as the total of (i) a member's average annual base salary for the
five calendar years of the last 120 consecutive calendar months of eligibility
service affording the highest such average plus (ii) a member's average annual
compensation not including base salary for the five calendar years of the
member's last 120 consecutive calendar months of eligibility service affording
the highest such average. The Plan also will provide for undiscounted early
retirement pensions for members who retire at or after age 60 following
completion of 15 years of eligibility service. A member will be vested in
benefits accrued under the Plan upon completion of five years of eligibility
service.
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation which may be recognized under a tax-qualified retirement
plan. ITT Sheraton currently maintains an excess benefit plan. New ITT will
adopt this non-qualified unfunded retirement plan (the "New ITT Excess Pension
Plan") for payment of those benefits at retirement that cannot be paid from the
qualified Retirement Plan. The practical effect of the New ITT Excess Pension
Plan is to continue calculation of retirement benefits to all employees on a
uniform basis. Benefits under the New ITT Excess Pension Plan will generally be
paid directly by New ITT. New ITT will also adopt an excess plan trust under
which excess benefits under the New ITT Excess Pension Plan for certain officers
of New ITT will be funded. Any such employee may indicate a preference, subject
to certain conditions, to receive any excess benefit in the form of a single
discounted lump sum payment. Any "excess" benefit accrued to any such employee
will be immediately payable in the form of a single discounted lump sum payment
upon the occurrence of a change in corporate control (as defined in the New ITT
Excess Pension Plan).
195
<PAGE> 202
Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Retirement Program at retirement at age 65 that
are paid for by New ITT, subject to the offset described above.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL -----------------------------------------------------------------
COMPENSATION 20 25 30 35 40
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 50,000 $20,000 $25,000 $28,750 $32,500 $36,250
100,000 40,000 50,000 57,500 65,000 72,500
300,000 120,000 150,000 172,500 195,000 217,500
500,000 200,000 250,000 287,500 325,000 362,500
750,000 300,000 375,000 431,250 487,500 543,750
1,000,000 400,000 500,000 575,000 650,000 725,000
1,500,000 600,000 750,000 862,500 975,000 1,087,500
2,000,000 800,000 1,000,000 1,150,000 1,300,000 1,450,000
2,500,000 1,000,000 1,250,000 1,437,500 1,625,000 1,812,500
3,000,000 1,200,000 1,500,000 1,725,000 1,950,000 2,175,000
3,500,000 1,400,000 1,750,000 2,012,500 2,275,000 2,537,500
4,000,000 1,600,000 2,000,000 2,300,000 2,600,000 2,900,000
5,000,000 2,000,000 2,500,000 2,875,000 3,250,000 3,625,000
</TABLE>
The amounts shown under "Salary" and "Bonus" opposite the names of the
individuals in the Summary Compensation Table comprise the compensation which is
used for purposes of determining "average final compensation" under the plan.
The years of service with ITT of each of the individuals for eligibility and
benefit purposes as of June 1, 1995, are as follows: Rand V. Araskog, 28.51
years; Robert A. Bowman, 4.15 years; John Kapioltas, 23.92 years; Richard S.
Ward, 25.86 years; and Daniel P. Weadock, 33.9 years of service. In addition to
the above service, Mr. Kapioltas has 11.47 years of service recognized under a
former plan of ITT Sheraton.
1995 NEW ITT DEFERRED COMPENSATION PLAN
Executives of New ITT have been participants in the 1995 ITT Deferred
Compensation Plan. Effective as of the Distribution Date, it is intended that
New ITT will adopt a "mirror image" 1995 New ITT Deferred Compensation Plan.
Under that plan, executives with a base salary of $200,000 or more could elect
to defer receipt of all or a portion of their 1994 bonus and those with a base
salary of at least $300,000 could in addition defer up to 50% of their 1995
salary. New ITT will credit interest on the deferred compensation based upon the
performance of benchmark investment funds made available under the plan and
selected by the executive.
NEW ITT EMPLOYEE WELFARE BENEFITS
At or prior to the Distribution Date, New ITT and its participating
subsidiaries will adopt the broad-based employee welfare benefits program of ITT
Sheraton which is a "mirror image" of the various welfare benefit programs
previously available to salaried employees of ITT. New ITT executives will
participate in New ITT's comprehensive benefits program which will include group
medical and dental coverage, group life insurance and other benefit plans, in
addition to the pension program and investment and savings plan described
previously. CWI will continue its separate employee welfare benefit program
covering its own employees. For a discussion of certain contractual
relationships among ITT Industries, New ITT and ITT Hartford that affect
employee welfare benefit programs, see "EMPLOYEE BENEFITS AND COMPENSATION
MATTERS -- RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS".
196
<PAGE> 203
ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION
After the Distribution, it is intended that ITT Hartford will operate the
Insurance businesses of ITT substantially in the manner in which they currently
are operated. Donald R. Frahm, who is currently Chairman and Chief Executive
Officer of The Hartford will become Chairman and Chief Executive Officer of ITT
Hartford. The directors of ITT Hartford will include certain persons who are
currently directors of ITT, and certain persons who are currently directors or
members of senior management of The Hartford. See "-- ITT HARTFORD BOARD OF
DIRECTORS". In addition to Mr. Frahm, it is expected that the other executive
officers of ITT Hartford will be drawn from the current management of The
Hartford. See "-- ITT HARTFORD EXECUTIVE OFFICERS".
ITT HARTFORD BOARD OF DIRECTORS
Immediately after the Distribution, ITT Hartford expects to have a board of
ten directors.
Prior to the Distribution Date, ITT, as sole shareholder of ITT Hartford,
plans to elect, as necessary, the following directors of ITT to the Board of
Directors of ITT Hartford: Bette B. Anderson, Rand V. Araskog, Robert A. Burnett
and Paul G. Kirk, Jr. In addition, Ramani Ayer, Donald R. Frahm, Arthur A.
Hartman, Lowndes A. Smith, DeRoy C. Thomas and Gordon I. Ulmer, who are
currently directors of Hartford Fire Insurance Company, will be so elected to
the Board of Directors of ITT Hartford. As noted above, Mr. Frahm will become
Chairman and Chief Executive Officer of ITT Hartford effective as of the
Distribution Date. It is thus the intent of ITT Hartford that a majority of the
directors comprising ITT Hartford's Board of Directors will not be employees of
ITT Hartford.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of ITT
Hartford following the Distribution.
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Bette B. Anderson, 66................... See information under "NEW ITT MANAGEMENT AND
President, Kelly, Anderson, EXECUTIVE COMPENSATION -- NEW ITT BOARD OF
Pethick & Associates, Inc. DIRECTORS".
(consultants)
Rand V. Araskog, 63..................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman, President and AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
Chief Executive of ITT OF DIRECTORS".
Ramani Ayer, 48......................... Mr. Ayer has been President and Chief Operating
President and Officer of The Hartford since 1991. Prior to that
Chief Operating Officer time, he served as Executive Vice President of the
of The Hartford domestic property-casualty operations of The
Hartford. Mr. Ayer joined The Hartford in 1973 as a
member of the operations research department. In
1981 he was appointed the secretary and director of
corporate reinsurance. In 1983 he was named Vice
President of HartRe, The Hartford's reinsurance
subsidiary, and in 1984 he joined the Hartford
Specialty Company, of which he was appointed
President in 1986. Mr. Ayer was elected Senior Vice
President of The Hartford in 1989 and named
Executive Vice President in 1990.
Robert A. Burnett, 68................... See information under "ITT INDUSTRIES MANAGEMENT
Chairman and Chief Executive Officer AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD
(Retired) of Meredith Corporation OF DIRECTORS".
(diversified media company)
</TABLE>
197
<PAGE> 204
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Donald R. Frahm, 63..................... Mr. Frahm has been Chairman and Chief Executive
Chairman and Chief Executive Officer of Officer of The Hartford since April 1988. He is a
The Hartford member of the Board of Directors of the Insurance
Information Institute and a member of the Board of
Trustees and the Executive Committee of the
American Institute for Property and Liability
Underwriters, the Insurance Institute of America
and the American Insurance Association. Mr. Frahm
is a director of the Hartford Hospital and Junior
Achievement North Central Connecticut Inc. and the
Greater Hartford Chamber of Commerce. He is also a
corporator of Newington Children's Hospital and
Co-chairman of the Advocates for Highway and Auto
Safety.
Arthur A. Hartman, 69................... Mr. Hartman has been Senior Consultant to APCO
Senior Consultant to APCO Associates Associates, Washington, D.C., since 1989.
(consulting firm) Previously, he was the U.S. Ambassador to the
former Union of Soviet Socialist Republics and
France. He is a director of the Dreyfus Fund,
Lawter International Inc. and Ford Meter Box Co.,
Inc. He is also Chairman of the First NIS Regional
Fund -- Barings/ING.
Paul G. Kirk, Jr., 57................... See information under "NEW ITT MANAGEMENT AND
Of Counsel to Sullivan & EXECUTIVE COMPENSATION -- NEW ITT BOARD OF
Worcester (law firm) DIRECTORS".
Lowndes A. Smith, 55.................... Mr. Smith has been President and Chief Operating
President and Chief Operating Officer of Officer of Hartford Life Insurance Companies since
Hartford Life Insurance Companies 1989. Prior to that time, he served as Senior Vice
President and Group Controller for all companies
owned or operated by The Hartford. Mr. Smith joined
The Hartford in 1968 as a member of the corporate
accounting department. In 1972 he was appointed the
secretary and director of corporate accounting. He
was elected Assistant Vice President in 1974, and
he was named Controller in 1977. He is a director
of the Newington Children's Hospital and the
American Council of Life Insurance.
DeRoy C. Thomas, 69..................... Mr. Thomas was a partner of LeBoeuf, Lamb, Greene &
Retired Partner, LeBoeuf, Lamb, MacRae, a law firm in New York, New York, from 1991
Greene & MacRae (law firm) through December 31, 1994. He was President, Chief
Operating Officer and Director of ITT from 1988 to
1991, and from 1983 to 1988 he was Vice Chairman
and Chief Operating Officer, ITT Diversified
Services, and Chairman and Chief Executive Officer
of The Hartford. He is a director of
Houghton-Mifflin, Connecticut National Gas and
Connecticut Health Services. He is also a director
of Fordham University, Wheelock College, University
of Hartford, Hartford Hospital, CT Health System,
Goodspeed Opera House and the Old State House
Association.
</TABLE>
198
<PAGE> 205
<TABLE>
<CAPTION>
NAME, AGE AND CURRENT PRINCIPAL
OCCUPATION INFORMATION
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Gordon I. Ulmer, 62..................... Mr. Ulmer joined Connecticut Bank and Trust Company
Former Chairman and Chief Executive ("CBT") in 1957 and held numerous positions before
Officer of the Connecticut Bank and being elected President and Director in 1980 and
Trust Company and Retired President of Chairman and Chief Executive Officer in 1985. In
the Bank of New England Corporation 1988 he was elected President of the Bank of New
England Corporation ("BNEC"), the holding company
of CBT. He retired as President in December 1990.
In January 1991, BNEC filed a petition under
Chapter 7 of the Bankruptcy Code and CBT commenced
insolvency proceedings. The Chapter 7 filing by
BNEC occurred shortly after Federal regulators
declared insolvent, and took over, three of BNEC's
subsidiary banks, CBT, Bank of New England and
Maine National Bank. Mr. Ulmer also serves as a
director of Rayonier, Inc. and the Old State House
Association. He is a graduate of Middlebury
College, the American Institute of Banking and
Harvard Business School Advanced Management Program
and attended New York University's Graduate School
of Engineering.
</TABLE>
Mr. Harold S. Geneen will be designated Chairman Emeritus of ITT Hartford
as well as ITT Industries and New ITT. Mr. Geneen was named President and Chief
Executive of ITT in 1959, and Chairman in 1964. He relinquished the post of
President in 1973, the post of Chief Executive in 1978 and the chairmanship on
January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen continued
to serve on the Board of Directors of ITT until 1983.
Senator Abraham A. Ribicoff will be designated a Director Emeritus of ITT
Hartford. Senator Ribicoff currently serves on the Board of Directors of
Hartford Fire Insurance Company and has been a director of The Hartford since
1981.
Mr. Isaac B. Grainger will also be designated a Director Emeritus of ITT
Hartford. Mr. Grainger currently serves as Director Emeritus of The Hartford and
was a member of the Board of Directors of The Hartford from January 10, 1956 to
January 31, 1987.
DIRECTORS' COMPENSATION
Members of the ITT Hartford Board of Directors who are employees of ITT
Hartford or its subsidiaries will not be compensated for service on the ITT
Hartford Board or any Committee of the ITT Hartford Board. Compensation for
non-employee directors will consist of an annual retainer fee of $30,000 payable
solely in restricted shares of ITT Hartford Common Stock, a $1,000 fee for each
meeting of the ITT Hartford Board attended and a $1,000 fee for each Committee
meeting attended. Directors will be reimbursed for travel expenses incurred on
behalf of ITT Hartford.
DIRECTORS' RETIREMENT POLICY
The ITT Hartford Board of Directors will adopt a retirement policy which
provides that (i) no person may be nominated for election or reelection as a
non-employee director after reaching age 72 and (ii) no employee of ITT Hartford
or of any of its subsidiaries (other than an employee who has served as chief
executive of ITT Hartford) may be nominated for election or reelection as a
director after reaching age 65, unless there has been a specific waiver by the
ITT Hartford Board of Directors of these age requirements.
DIRECTORS' BENEFITS
The directors of ITT Hartford who are currently non-employee directors of
ITT have been participants in the 1995 ITT Deferred Compensation Plan. At or
prior to the Distribution Date, the ITT Hartford Board of Directors will adopt
an identical "mirror image" plan, the "1995 ITT Hartford Deferred Compensation
Plan", which is also applicable to certain executives. Under this ITT Plan,
non-employee directors were permitted to
199
<PAGE> 206
elect to defer receipt of all or a portion of their 1995 fees. ITT Hartford will
credit interest on the deferred compensation based upon the performance of
benchmark investment funds made available under the ITT Hartford Deferred
Compensation Plan and selected by the individual.
After the Distribution, ITT Hartford also intends to adopt an unfunded
retirement benefit plan for non-employee directors who retire from the ITT
Hartford Board of Directors at or after age 65 after completing at least five
years of service on the Board of Directors (the "ITT Hartford Directors
Retirement Plan"). The ITT Hartford Directors Retirement Plan will be identical
in all material respects to the ITT Directors Retirement Plan. Under the ITT
Hartford Directors Retirement Plan, non-employee directors who retire from the
Board of Directors at or after age 65 after completing at least five years of
service on the ITT Hartford Board of Directors will be entitled to an annual
pension based on the ITT Hartford Board's annual retainer fee payable at
retirement. Pensions will range from 50% of such fee after five years of service
to 100% after 10 years, with an additional 5% for each year of service in excess
of ten, to a maximum of 200% of the annual retainer fee after 30 or more years
of service. The ITT Hartford Directors Retirement Plan will provide to
non-employee directors credit for any accrued benefit with respect to ITT or The
Hartford Boards of Directors service prior to the Distribution Date, but only to
the extent such prior service benefit accrual is not duplicated under a plan
maintained by ITT Industries or New ITT. A director will be permitted to
indicate a preference, subject to certain conditions, to receive any accrued
benefit under the ITT Hartford Directors Retirement Plan in the form of a single
(discounted) lump sum payment immediately payable upon such director's
retirement. After the Distribution, ITT Hartford intends to adopt a group life
insurance plan (the "ITT Hartford Directors Group Life Plan") that is identical
in all material respects to the ITT group life insurance program. The ITT
Hartford Directors Group Life Plan will provide $100,000 of non-contributory
group life insurance to participating non-employee directors during their
service on the ITT Hartford Board of Directors.
After the Distribution, ITT Hartford intends to adopt a group accident
program (the "ITT Hartford Group Accident Program for Officers and Directors")
that is identical in all material respects to the ITT Group Accident Program for
Officers and Directors. The ITT Hartford Group Accident Program for Officers and
Directors will provide each director with $750,000 of coverage during his or her
service on the ITT Hartford Board. Additional benefits also will be permitted to
be purchased.
RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
Prior to the distribution, ITT Hartford is expected to adopt the 1996 ITT
Hartford Restricted Stock Plan for Non-Employee Directors (the "1996 ITT
Hartford Non-Employee Directors Plan"). The 1996 Non-Employee Directors Plan is
designed to further ITT Hartford's objectives of attracting and retaining
individuals of ability as directors and providing the directors with a closer
identity with the interests of the ITT Hartford shareholders. The 1996 ITT
Hartford Non-Employee Directors Plan is also set forth in full as Annex I
hereto.
Overview
Under the proposed 1996 ITT Hartford Non-Employee Directors Plan, directors
of ITT Hartford who are not employees of ITT Hartford or any of its subsidiaries
will automatically participate in the 1996 ITT Hartford Non-Employee Directors
Plan. There are presently seven designated directors of ITT Hartford who will be
eligible to participate in the 1996 ITT Hartford Non-Employee Directors Plan.
The 1996 ITT Hartford Non-Employee Directors Plan will be administered by
the Compensation and Personnel Committee of the Board of Directors. The
Committee will have the responsibility of interpreting the 1996 ITT Hartford
Non-Employee Directors Plan and establishing the rules appropriate for the
administration of the 1996 ITT Hartford Non-Employee Directors Plan.
Grants of restricted stock will be made automatically on the date of each
Annual Meeting of Shareholders to each non-employee director elected at the
meeting or continuing in office following the meeting. The amount of the award
shall equal (and be in lieu of) the annual retainer in effect for the calendar
year within which the award date falls, divided by the fair market value of ITT
Hartford Common Stock. "Annual retainer" is defined as the amount payable to a
director for service on the Board during the calendar
200
<PAGE> 207
year and does not include meeting attendance fees. The annual retainer is
presently set at $30,000. "Fair market value" is defined as the average of the
high and low sales price per share of ITT Hartford Common Stock on the date of
the Annual Meeting, as reported on the NYSE Composite Tape. A total of 100,000
shares would be reserved for issuance under the 1996 ITT Hartford Non-Employee
Directors Plan. The shares to be issued may be treasury shares or newly issued
shares of ITT Hartford Common Stock. The shares of ITT Hartford Common Stock
that are granted under the 1996 ITT Hartford Non-Employee Directors Plan will be
held in escrow by ITT Hartford and will be subject to a restriction period
(after which restrictions will lapse) which shall mean a period commencing on
the grant date and ending on the earliest of (i) the fifth anniversary of the
grant date, (ii) upon retirement at age 72, (iii) upon a "change of control" (as
defined) of ITT Hartford, (iv) death, (v) the onset of disability or (vi)
resignation under cases of special circumstances with the consent of the
Committee. Except as provided above, any resignation from board service within
the restriction period will result in forfeiture of the shares. Shares may not
be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of
during the restriction period. Until such risk of forfeiture lapses or the
shares are forfeited, a director will have the right to vote and to receive
dividends on the shares granted under the 1996 ITT Hartford Non-Employee
Directors Plan.
The Board of Directors may amend, suspend or discontinue the 1996 ITT
Non-Employee Directors Plan at any time except that the Board may not, without
stockholder approval, take any action which would cause the 1996 ITT Hartford
Non-Employee Directors Plan to no longer comply with Rule 16b-3 under the
Exchange Act. No amendment, suspension or discontinuance of the 1996 ITT
Hartford Non-Employee Directors 1996 Plan may impair a director's right under a
restricted stock award previously granted without his consent.
The 1996 ITT Hartford Non-Employee Directors Plan would become effective as
of the Distribution Date and terminate on December 31, 2005, provided that
grants of Restricted Stock made prior to the termination of the Plan may vest
following such termination in accordance with their terms.
Federal Income Tax Consequences
A director will not be taxed upon grant of a restricted stock award, but
will realize ordinary income in an amount equal to the fair market value of ITT
Hartford Common Stock at the time the shares are no longer subject to a
substantial risk of forfeiture (as defined in the Internal Revenue Code). ITT
Hartford will be entitled to a deduction at the time and to the extent that the
director realizes ordinary income. However, a director may elect (not later than
30 days after acquiring such shares) to realize ordinary income at the time the
restricted shares are awarded in an amount equal to their fair market value at
that time, notwithstanding the fact that such shares are subject to restrictions
and a substantial risk of forfeiture. If such an election is made, no additional
taxable income will be recognized by such director at the time the restrictions
lapse. ITT Hartford will be entitled to a tax deduction at the time and to the
extent income is realized by such director. However, if shares with respect to
which such election was made are later forfeited, no tax deduction is allowable
to the officer for the forfeited shares, and ITT Hartford will be deemed to
realize ordinary income equal to the amount of the deduction allowed to ITT
Hartford at the time of the election with respect to such forfeited shares. THE
FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES IN RESPECT OF THE 1996
ITT HARTFORD NON-EMPLOYEE DIRECTORS PLAN IS FOR GENERAL INFORMATION ONLY.
INTERESTED PARTIES SHOULD CONSULT THEIR OWN ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF SUCH PLAN, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN,
STATE AND LOCAL TAX LAWS.
The above summary of the 1996 ITT Hartford Non-Employee Directors Plan is
qualified in its entirety by reference to the full plan text which is set forth
as Annex I hereto.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Amended and Restated Certificate of Incorporation of ITT Hartford
waives the personal liability of a director or officer for damages for breach of
fiduciary duty except for (i) a breach of duty of loyalty to ITT Hartford or its
shareholders, (ii) acts or omissions not in good faith or which include
intentional misconduct or a knowing violation of law, (iii) any transaction from
which the director derived an improper personal
201
<PAGE> 208
benefit, (iv) a violation of Section 174 of the Delaware General Corporation
Law, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (iv) for any act of omission occurring prior to the effective
date of such applicable provision of the ITT Hartford Amended and Restated
Certificate of Incorporation.
While the Amended and Restated Certificate of Incorporation of ITT Hartford
provides directors with protection from awards for monetary damages for breaches
of their duty of care it does not eliminate such duty. Accordingly, the Amended
and Restated Certificate of Incorporation of ITT Hartford will have no effect on
the availability of equitable remedies such as an injunction or rescission based
on a director's or officer's breach of his or her duty of care.
The By-laws of ITT Hartford provide for indemnification of the directors
and officers of ITT Hartford to the fullest extent permitted by applicable state
law, as then in effect. The indemnification rights conferred by the By-laws of
ITT Hartford are not exclusive of any other right to which a person seeking
indemnification may otherwise be entitled. ITT Hartford will also provide
liability insurance for the directors and officers for certain losses arising
from claims or charges made against them while acting in their capacities as
directors or officers.
COMMITTEES OF THE ITT HARTFORD BOARD OF DIRECTORS
Prior to the Distribution, the ITT Hartford Board of Directors will
establish Audit, Compensation and Personnel, Finance, Legal and Public Affairs,
and Nominating Committees. No final determination has yet been made as to the
memberships of such standing committees.
AUDIT COMMITTEE
The Audit Committee will recommend the selection of independent auditors
for ITT Hartford, confirm the scope of audits to be performed by such auditors,
review audit results and internal accounting and control procedures and policies
and review the fees paid to the independent auditors of ITT Hartford. The Audit
Committee will review and recommend approval of the audited financial statements
of ITT Hartford and the annual reports to shareholders. It will also review the
expense accounts of senior executives.
COMPENSATION AND PERSONNEL COMMITTEE
The Compensation and Personnel Committee, which will be comprised entirely
of non-employee directors, will oversee the compensation and benefits of
employees, evaluate management performance and establish executive compensation.
In the performance of its functions, the Compensation and Personnel Committee
will have access to independent compensation counsel.
FINANCE COMMITTEE
The Finance Committee will be responsible for reviewing capital
expenditures and appropriations and maximizing the effective use of the assets
of ITT Hartford and its subsidiaries. Such responsibility will include the
direction of investment allocation and risk management policies.
LEGAL AND PUBLIC AFFAIRS
The Legal and Public Affairs Committee will review and consider major
claims and litigation and legal, regulatory, intellectual property and related
governmental policy matters affecting ITT Hartford and its subsidiaries. The
Legal and Public Affairs Committee will review and approve management policies
and programs relating to compliance with legal and regulatory requirements,
business ethics and environmental matters. The Legal and Public Affairs
Committee will also review and define ITT Hartford's social responsibilities,
including issues of significance to ITT Hartford and its shareholders and
employees.
202
<PAGE> 209
NOMINATING COMMITTEE
The Nominating Committee will make recommendations concerning the
organization, size and composition of the Board of Directors and its Committees,
propose nominees for election to the Board of Directors and its Committees and
will consider the qualifications, compensation, and retirement of directors.
ITT HARTFORD EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH ITT HARTFORD AND AGE BIOGRAPHICAL DATA
- ---------------------------------------- ---------------------------------------------------
<S> <C>
Donald R. Frahm, 63..................... See information under "-- ITT HARTFORD BOARD OF
Chairman and Chief Executive Officer DIRECTORS".
Ramani Ayer, 48......................... See information under "ITT HARTFORD BOARD OF
President and Chief Operating Officer of DIRECTORS."
The Hartford
</TABLE>
<TABLE>
<S> <C>
John F. Donahue, 59..................... Mr. Donahue has been Senior Vice President of The
Senior Vice President, Business Hartford since 1989. In addition, he is the Senior
Development Underwriting Officer and Director of Business
Development and Corporate Services for The
Hartford. Mr. Donahue holds the designation of
Chartered Property Casualty Underwriter. He was
elected Vice President of The Hartford in 1980 and
named Director of the commercial lines of business
for The Hartford in 1987.
Joseph H. Gareau, 48.................... Mr. Gareau has been Executive Vice President and
Executive Vice President and Chief Chief Investment Officer of The Hartford since
Investment Officer 1993. Prior to that time, he served as Senior Vice
President and Chief Investment Officer for the
domestic property-casualty operations of The
Hartford. Mr. Gareau was elected Vice President of
The Hartford in 1987.
Helen G. Goodman, 54.................... Ms. Goodman has been Senior Vice President and
Senior Vice President, Human Resources Director of Human Resources of The Hartford since
1994. Prior to that time, she held the position of
Senior Vice President of Human Resources for
Tambrands Inc.
Edward L. Morgan, 52.................... Mr. Morgan has been Senior Vice President,
Senior Vice President, Corporate Corporate Relations and Government Affairs of The
Relations and Government Affairs Hartford since 1993. From 1991 to 1993, he served
as Vice President and Director of Corporate
Relations of The Hartford. Prior to that time, Mr.
Morgan held the position of Vice President of
Corporate Relations at Allstate Insurance Company.
Lowndes A. Smith, 55.................... See information under "-- ITT HARTFORD BOARD OF
President and Chief Operating Officer of DIRECTORS".
Hartford Life Insurance Companies
James J. Westervelt, 49................. Mr. Westervelt has been Senior Vice President and
Senior Vice President, Group Controller Group Controller of The Hartford since 1994. He was
elected Vice President and became Group Controller
in 1989.
Michael S. Wilder, 53................... Mr. Wilder has been Senior Vice President of The
Senior Vice President, General Counsel Hartford since 1987 and General Counsel and
and Secretary Corporate Secretary of The Hartford since 1975.
</TABLE>
203
<PAGE> 210
<TABLE>
<CAPTION>
NAME, POSITION WITH ITT HARTFORD AND AGE BIOGRAPHICAL DATA
- ---------------------------------------- ---------------------------------------------------
<S> <C>
David K. Zwiener, 41.................... Mr. Zwiener has been Executive Vice President and
Executive Vice President and Chief Chief Financial Officer of ITT Hartford since
Financial Officer August 1995. He previously served as Executive Vice
President and Chief Financial Officer of ITT
Financial Corporation from March 1993. From 1987 to
February 1993, Mr. Zwiener served as Senior Vice
President and Treasurer, and Executive Vice
President--Capital Markets Division, of Heller
International Corporation.
</TABLE>
EMPLOYMENT AGREEMENTS
Prior to the Distribution, ITT Hartford is expected to enter into
employment agreements with Messrs. Ayer and Smith (the "Employment Agreements")
which will provide for, among other things: (i) a base salary in an amount not
less than $425,000 per annum, participation in ITT Hartford's benefits plans and
possible awards under ITT Hartford's executive incentive bonus program; (ii) Mr.
Ayer's and Mr. Smith's employment as president and chief operating officer of,
respectively, The Hartford and The Hartford Life Insurance Companies, from the
Distribution Date through December 31, 1999 and (iii) certain payments and
benefits in the event of termination, without cause, by ITT Hartford such that
the executive will (A)(I) receive (x) salary, on a monthly basis, equivalent in
the aggregate to the amounts of salary remaining unpaid until the expiration of
the Employment Agreement or (y) at ITT Hartford's discretion, the balance
remaining of such aggregate amount in a lump sum payment if the executive
accepts other full-time employment and (II) as long as salary under clause (A)
above continues to be paid, be eligible (x) for participation in certain ITT
Hartford benefit plans and (y) to exercise outstanding stock options or (B)
receive in lieu of such payments and benefits described in clause (A) above, if
the executive is entitled to receive a termination allowance under any ITT
Hartford severance plan or termination allowance plan which exceeds the salary
described in clause (A)(I) above, such termination allowance amount.
204
<PAGE> 211
COMPENSATION OF ITT HARTFORD EXECUTIVE OFFICERS
The following table discloses compensation received by ITT Hartford's Chief
Executive Officer and the four other most highly paid executive officers for
services rendered to The Hartford for the three fiscal years ending December 31.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------- ----------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND COMPENSA- UNDERLYING COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) TION(1)($) OPTIONS(2)(3)(#) SATION(4)($)
- -------------------------------------------- ----- --------- -------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Donald R. Frahm............................. 1994 565,833 270,000 6,149 37,000 21,585
Chairman and Chief 1993 540,000 280,000 4,934 27,328 20,428
Executive Officer -- 1992 565,833 -- 8,351 -- 18,247
Hartford Fire Insurance Company
Ramani Ayer................................. 1994 333,333 235,000 2,185 25,000 13,448
President and Chief Operating 1993 291,667 150,000 1,012 26,235 11,180
Officer -- Hartford 1992 264,167 -- 4,504 -- 9,280
Fire Insurance Company
John Donahue................................ 1994 233,333 75,000 286 6,100 9,929
Senior Vice President and 1993 227,500 66,000 475 5,903 9,437
Senior Underwriting Officer 1992 215,000 15,300 345 -- 7,575
Joseph H. Gareau............................ 1994 264,583 140,000 1,379 15,000 11,041
Executive Vice President and 1993 218,750 150,000 376 10,931 9,074
Chief Investment Officer 1992 181,333 160,000 -- -- 6,389
Lowndes A. Smith............................ 1994 333,333 200,000 3,075 25,000 13,448
President and Chief Operating 1993 279,167 145,000 1,966 21,862 10,796
Officer -- Hartford 1992 255,417 117,100 5,604 -- 9,000
Life Insurance Co.
</TABLE>
- ---------------
(1) Amounts shown in this column include the value of certain benefits.
(2) The column for Long-Term Incentive Payouts was eliminated because there were
no such items during the three-year period ending in 1994. The column for
Restricted Stock Awards was eliminated because there were no such awards
during the three-year period ending in 1994.
(3) The named executives do not hold any stock appreciation rights in connection
with the options shown.
The number and exercise prices of all ITT stock options outstanding at the
time of the spin-off to shareholders of ITT of Rayonier Inc., a former
subsidiary of ITT, were adjusted for decreases in the economic value of the
options as a result of the distribution to shareholders. This adjustment
increased the number of options by 9.3% and decreased the exercise prices of
the options then outstanding by approximately 8.5%.
(4) All amounts shown in this column are company contributions under the ITT
Investment and Savings Plan and the ITT Excess Savings Plan, which are
defined contribution plans. ITT makes a matching contribution in an amount
equal to 50% of an employee's contribution, such matching contribution not
to exceed three percent (3%) of such employee's salary. Under these plans,
ITT also makes a non-matching contribution equal to one-half of one percent
( 1/2 of 1%) of an employee's salary.
ANNUAL BONUS PLAN
Eligible executives and key managers of ITT Hartford participate in an
annual incentive bonus program sponsored by ITT. Under this program, each
executive and key manager is assigned to a salary grade which has a standard
bonus associated with it expressed as a percentage of the executive's year-end
base salary rate ("standard bonus"). At year end, the aggregate amount of
individual standard bonuses is adjusted in accordance with a pre-established
formula to create a bonus pool for the year. The current formula for the
Property & Casualty Operations measures actual net income, return on total
capital ("ROTC") and cash flow against the approved budgeted amounts for the
year for each performance measure. Net income, ROTC and cash flow performance
are weighted 65%, 25% and 10%, respectively. For Life Insurance Operations, the
formula measures net income and ROTC against budgeted amounts and the measures
are weighted 60% and 40%, respectively. The corporate staff, including Messrs.
Frahm and Gareau, are measured by a weighted average performance factor for both
the Property & Casualty and the Life Operations. The maximum bonus pool is 150%
of the aggregated standard bonus pool. Individual bonus amounts within the
authorized pool are determined on a discretionary basis taking into account
specific personal contributions during the year.
205
<PAGE> 212
Bonus awards for ITT Hartford executive officers in 1995 are subject to
approval by the compensation committee of The Hartford Board of Directors, ITT
senior line management and the ITT Compensation and Personnel Committee.
During 1994, the standard bonus adjustment factors pursuant to the above
formulas were 95.8% for Messrs. Frahm and Gareau, 94.2% for Mr. Ayer, 92.5% for
Mr. Donahue and 99.9% for Mr. Smith. In total $1,164,000 was authorized for
expenditure to nine executive officers, including the amounts indicated in the
Summary Compensation Table for the named executives.
It is contemplated that the annual bonus program described above will be
used by ITT Hartford in substantially the same form for 1995. After the
Distribution Date, the Compensation and Personnel Committee of the ITT Hartford
Board will evaluate the program and may adopt a new program based on industry
competitive practices and to comply with the requirements of the Federal Tax
Code with regard to performance-based, tax deductible executive compensation.
OPTION GRANTS ON ITT COMMON STOCK TO ITT HARTFORD EXECUTIVES IN LAST FISCAL YEAR
The following table provides information on fiscal year 1994 grants of
options to the named ITT Hartford executives to purchase shares of ITT Common
Stock. No options to acquire ITT Hartford Common Stock have been granted or are
outstanding.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK
- ------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(4)($)
GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION ---------------------------
NAME (#) 1994(2) ($/SHARE) DATE 5% 10%
- ------------------------ ------------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Donald R. Frahm......... 37,000 2.0 $84.00 10/13/04 $1,954,710 $4,953,190
Ramani Ayer............. 25,000 1.3 84.00 10/13/04 1,320,750 3,346,750
John Donahue............ 6,100 0.3 84.00 10/13/04 322,263 816,607
Joseph H. Gareau........ 15,000 0.8 84.00 10/13/04 792,450 2,008,050
Lowndes A. Smith........ 25,000 1.3 84.00 10/13/04 1,320,750 3,346,750
</TABLE>
- ---------------
(1) The numbers in this column represent options to purchase ITT Common Stock.
(2) Percentages indicated are based on a total of 1,876,198 options granted to
656 employees of ITT during 1994.
(3) The exercise price per share is 100% of the fair market value of a share of
ITT Common Stock on the date of grant. The exercise price may be paid in
cash or in shares of ITT Common Stock valued at their fair market value on
the date of exercise. Options granted on October 11, 1994 at the exercise
price of $84.00 per share are not exercisable until the trading price of ITT
Common Stock equals or exceeds $105.00 per share for 10 consecutive trading
days (which occurred on May 15, 1995) at which time two-thirds of the
options will be exercisable; when the trading price equals or exceeds
$117.60 per share for 10 consecutive trading days, the options will be fully
exercisable. Notwithstanding the above, the options will be fully
exercisable after October 11, 2003, but no later than October 13, 2004.
(4) At the end of the term of the options granted on October 11, 1994, the
projected price of a share of ITT Common Stock would be $136.83 and $217.87
at an assumed annual appreciation rate of 5% and 10%, respectively.
On May 9, 1995, the Compensation and Personnel Committee of ITT awarded
126,200 stock options to nine executive officers of ITT Hartford including
Messrs. Frahm, Ayer, Donahue, Gareau and Smith for 37,000, 25,000, 6,000, 15,000
and 25,000 shares of ITT Common Stock, respectively. These options were granted
at the exercise price of $108.75 per share. Options for Messrs. Frahm, Ayer,
Gareau and Smith will become fully exercisable at the earlier of the ninth
anniversary date of the grant or when the closing price on an ITT share is equal
to or greater than $135.94 for 10 consecutive trading days. Mr. Donahue's option
will become exercisable in three equal annual installments commencing on the
first anniversary date of the grant. All of these options will expire on May 11,
2005.
In connection with the Distribution, it is expected that each of the
outstanding options will be surrendered to ITT and that substitute stock options
will be made under the 1995 ITT Hartford Incentive Stock Plan (as described
below). For a discussion of the treatment of stock options and other stock
awards
206
<PAGE> 213
held by current employees of ITT and future employees of ITT Industries, New ITT
or ITT Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK
OPTIONS AND OTHER AWARDS".
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table provides information on option exercises in 1994 by the
named executives of ITT Hartford and the value of each such executive's
unexercised options to acquire ITT Common Stock at December 31, 1994.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
- ------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS HELD
ACQUIRED ON FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2)
EXERCISE VALUE --------------------------- ------------------------------
NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Donald R. Frahm ............. -- -- -- 64,328 -- 293,466
Ramani Ayer ................. -- -- 27,964 51,235 1,198,208 233,020
John Donahue ................ -- -- 13,118 12,003 562,423 54,629
Joseph H. Gareau ............ -- -- 10,531 25,931 449,893 118,312
Lowndes A. Smith............. -- -- 26,235 46,862 1,019,998 213,473
</TABLE>
- ---------------
(1) The number and exercise price of all options outstanding at the time of the
spin-off to shareholders of ITT of Rayonier Inc., a former subsidiary of
ITT, were adjusted for decreases in the economic value of the options as a
result of the distribution to shareholders. This adjustment increased the
number of options by 9.3% and decreased the exercise prices of the options
then outstanding by approximately 8.5%.
(2) Based on the NYSE consolidated trading closing price of ITT Common Stock on
December 30, 1994 of $88.63.
ITT LONG-TERM PERFORMANCE PLAN
Under the ITT Long-Term Performance Plan, target contingent cash awards
were made on December 12, 1991 (the "1992 Class Awards") to ITT executives,
including certain of those individuals who will be executive officers of ITT
Hartford after the Distribution. Under the 1992 Class Awards, the ultimate
payment value of a target award, if any, will be based upon ITT Hartford's
return on equity ("ROE") performance during the three-year period 1993 through
1995 as measured against predetermined ROE goals for each year. Each year of the
performance period has been assigned a specific weighting: 15%, 35% and 50% for
1993, 1994 and 1995, respectively. If the actual weighted average ROE
performance is less than 90% of the ROE goals, no payment is earned.
1992 Class Awards for the five most highly compensated executive officers
of ITT Hartford are listed in the table below:
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS
CONTINGENT TARGET MATURATION OR AWARD AWARD AWARD
NAME AWARDS PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3)
- ------------------------------- ----------------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Donald R. Frahm................ $ 1,200,000 12/31/95 $600,000 $1,200,000 $2,400,000
Ramani Ayer.................... 625,000 12/31/95 208,333 625,000 1,300,000
John Donahue................... 280,000 12/31/95 140,000 280,000 560,000
Joseph H. Gareau............... 250,000 12/31/95 83,333 250,000 500,000
Lowndes A. Smith............... 500,000 12/31/95 166,667 500,000 1,000,000
</TABLE>
- ---------------
(1) Based upon a weighted average ROE goal achievement of 90%, resulting in
payment of 33% of the target award in the first quarter of 1996.
(2) Based upon a weighted average ROE goal achievement of 100%, resulting in
payment of 100% of the target award in the first quarter of 1996.
(3) Based upon a weighted average ROE goal achievement of 130% or more,
resulting in payment of 200% of the target award in the first quarter of
1996.
207
<PAGE> 214
In connection with the Distribution, any post-Distribution payments (and
the corresponding reserves of ITT) to current ITT executives in respect of the
Plan will remain the responsibility of ITT Industries pursuant to the Employee
Benefits Services and Liabilities Agreement described under "RELATIONSHIP
BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION --
EMPLOYEE BENEFITS AGREEMENT". It is contemplated that ITT Hartford may consider
adopting a comparable long-term incentive plan after the Distribution Date and,
if adopted, the plan will be administered by the Compensation and Personnel
Committee of the ITT Hartford Board of Directors.
For a discussion of certain other aspects of the Plan, see "ITT INDUSTRIES
MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT LONG-TERM PERFORMANCE PLAN".
ITT HARTFORD COMPENSATION, BENEFIT AND RETIREMENT PLANS
The following is a description of the compensation, benefit and retirement
plans currently expected to be adopted by ITT Hartford.
1995 ITT HARTFORD INCENTIVE STOCK PLAN
One of the reasons for the Distribution is to enable ITT Hartford to
provide meaningful long-term incentives for its executives and other key
employees, directly related to their individual and collective performance in
enhancing shareholder value. Once the Distribution has been effected and a
public market has developed for the ITT Hartford Common Stock, market-based
incentives based on ITT Hartford stock performance will allow ITT Hartford to
provide significant incentives to the key employees of ITT Hartford to a degree
not previously available under ITT's compensation programs. Awards of stock
options and other market-based incentives will permit key employees to profit
proportionately as shareholder value is enhanced (as evidenced by the market
price for ITT Hartford Common Stock) and will also give ITT Hartford an
effective tool to encourage key employees to continue in the employ of ITT
Hartford.
In order to achieve these objectives, effective prior to the Distribution,
the Board of Directors of ITT Hartford is expected to adopt the 1995 ITT
Hartford Incentive Stock Plan (the "1995 ITT Hartford Stock Plan"). The 1995 ITT
Hartford Stock Plan will be administered by the ITT Hartford Compensation and
Personnel Committee. Approval of Proposal Five set forth under
"INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute shareholder
approval of the 1995 ITT Hartford Plan.
The 1995 ITT Hartford Stock Plan provides for the grant of incentive stock
options (qualifying under Section 422 of the Internal Revenue Code),
non-qualified stock options, SARs, performance shares and restricted stock, or
any combination of the foregoing, as the Compensation and Personnel Committee
may determine, as well as substitute stock options, stock appreciation rights
and restricted stock (collectively, "Awards"). The 1995 ITT Hartford Stock Plan
will expire on December 31, 2005. No determination has yet been made as to the
number of employees of ITT Hartford who will be eligible to participate in the
1995 ITT Hartford Stock Plan. During 1995, approximately 238 persons who will be
employees of ITT Hartford will have received stock options under the ITT 1994
Incentive Stock Plan.
The 1995 ITT Hartford Stock Plan contains a formula for establishing an
annual limit on the number of shares which may be awarded (or with respect to
which non-stock Awards may be made) in any given calendar year (the "Annual
Limit"). The Annual Limit formula is expressed as a percentage of ITT Hartford's
total issued and outstanding Common Stock and treasury stock as of the year end
immediately preceding the year of awards ("Plan Year"). In addition, for the
Plan Year that includes the Distribution, the number of shares which may be
awarded will equal the Annual Limit plus the number of substitute Awards granted
to employees who surrender ITT stock awards. Under the Annual Limit formula, the
maximum number of shares of ITT Hartford Common Stock for which Awards may be
granted under the Plan in each Plan Year shall be 1.5% of the total of the
issued and outstanding shares of ITT Hartford Common Stock and treasury stock as
reported in the Annual Report on Form 10-K of ITT Hartford for the fiscal year
ending immediately prior to any Plan Year. Any unused portion of the Annual
Limit for any Plan Year shall be carried forward and be made available for
awards in succeeding Plan Years.
208
<PAGE> 215
In addition to the foregoing, in no event shall more than five million
shares of ITT Hartford Common Stock be cumulatively available for Awards of
incentive stock options under the 1995 ITT Hartford Stock Plan, and provided
further, that no more than 20% of the total number of shares available on a
cumulative basis shall be available for restricted stock and performance share
awards. For any Plan Year, no individual employee may receive stock options for
more than the lesser of (i) 10% of the Annual Limit applicable to that Plan Year
and (ii) 500,000 shares; except that, for the Plan Year that follows the
Distribution Date, each individual employee may receive in addition to the
foregoing limit a number of substitute stock options equal to the lesser of (x)
525,000 and (y) the number of stock options required to replace ITT stock
options surrendered by such employee in connection with the spin-off by ITT of
the shares of ITT Hartford to ITT shareholders.
Subject to the above limitations, shares of ITT Hartford Common Stock to be
issued under the 1995 ITT Hartford Stock Plan may be made available from the
authorized but unissued ITT Hartford Common Stock or from shares purchased on
the open market. In the event of a reorganization, merger, stock dividend or any
other change in the corporate structure of ITT Hartford or the ITT Hartford
Common Stock, the number of shares subject to the 1995 ITT Hartford Stock Plan,
the number of shares then subject to Awards and the price per share payable on
exercise of options may be appropriately adjusted by the Compensation and
Personnel Committee. Other than the above adjustments, it is the ITT Hartford
Board's policy that no options will be cancelled and reissued at a lower price
unless the shareholders approve such action.
For the purpose of computing the total number of shares of stock available
for Awards under the 1995 ITT Hartford Stock Plan, there shall be counted
against the foregoing limitations the number of shares of ITT Hartford Common
Stock subject to issuance upon exercise or settlement of Awards and the number
of shares of ITT Hartford Common Stock which equal the value of Performance
Share Awards, in each case determined as at the dates on which such Awards are
granted. If any Awards under the 1995 ITT Hartford Stock Plan are forfeited,
terminated, expire unexercised, are settled in cash in lieu of ITT Hartford
Common Stock or are exchanged for other Awards, the shares of stock which were
theretofore subject to such Awards shall again be available for Awards under the
1995 ITT Hartford Stock Plan to the extent of such forfeiture, termination
expiration, cash settlement or exchange of such Awards. Further, any shares that
are exchanged (either actually or constructively) by optionees as full or
partial payment to ITT Hartford of the purchase price of shares being acquired
through the exercise of a stock option granted under the 1995 ITT Hartford Stock
Plan may be available for subsequent Awards, provided, however, that such shares
may be awarded only to those participants who are not directors or executive
officers (as that term is defined in the rules and regulations under Section 16
of the Exchange Act).
The Compensation and Personnel Committee, made up entirely of non-employee
directors, none of whose members may receive any award under the 1995 ITT
Hartford Stock Plan, will administer the 1995 ITT Hartford Stock Plan,
including, but not limited to, making determinations with respect to the
designation of those employees who shall receive Awards, the number of shares to
be covered by options, SARs and restricted stock awards, the exercise price of
options (which may not be less than 100% of the fair market value of ITT
Hartford Common Stock on the date of grant), other option terms and conditions,
and the number of performance shares to be granted and the applicable
performance objectives. The Compensation and Personnel Committee may impose such
additional terms and conditions on an Award as it deems advisable. The
Compensation and Personnel Committee's decisions in the administration of the
1995 ITT Hartford Plan shall be binding on all persons for all purposes.
The Compensation and Personnel Committee may in its sole discretion
delegate such administrative powers as it may deem appropriate to the chief
executive officer or other members of senior management, except that Awards to
executive officers shall be made solely by the Compensation and Personnel
Committee and subject to compliance with Rule 16b-3 of the Exchange Act.
Awards will be made, in the discretion of the Compensation and Personnel
Committee, to employees of ITT Hartford and any of its subsidiaries (including
officers and members of the Board of Directors who are also employees) whose
responsibilities and decisions directly affect the performance of ITT Hartford
and its subsidiaries.
209
<PAGE> 216
Substitute Awards
To provide meaningful compensation in the form of stock options to acquire
ITT Hartford Common Stock to key employees of ITT Hartford who surrendered
options to acquire stock in ITT in connection with the Distribution, the
Compensation and Personnel Committee is authorized to issue substitute ITT
Hartford stock options and related rights in the aggregate amount of 8,000,000
shares or such lower number as may be necessary to preserve the economic value
of the surrendered ITT options and related rights. Subject to this limitation,
shares of ITT Hartford Common Stock to be issued upon the exercise of substitute
stock options may be made available from authorized but unissued shares or from
treasury shares or from shares purchased in the open market.
The maximum number of substitute ITT Hartford stock options and related
rights that may be granted to any individual employee is 525,000 or such lower
number as may be necessary to preserve the economic value of the surrendered ITT
options and related rights by any such individual employee.
The Compensation and Personnel Committee is also authorized to issue
substitute grants of ITT Hartford restricted stock to replace the ITT restricted
stock surrendered by ITT Hartford employees in connection with the Distribution.
The terms and conditions of each substitute stock award, including, without
limitation, the time or times when, and the manner in which, each substitute
option shall be exercisable, the duration of the exercise period, the permitted
method of exercise, settlement and payment, the rules that shall apply in the
event of the termination of employment of the key employee, the events, if any,
that may give rise to a key employee's right to accelerate the time of exercise
of an option and the vesting provisions of restricted stock, shall be the same
as those of the surrendered ITT award.
Stock Options and Related SARs
Incentive stock options and related SARs under the 1995 ITT Hartford Stock
Plan must expire within 10 years after grant; non-qualified stock options and
related SARs will expire not more than 10 years and two days after grant. No SAR
may be exercised until at least six months after it is granted. The exercise
price for options and SARs must be at least equal to the fair market value of
the ITT Hartford Common Stock on the date of grant. The exercise price for
options must be paid to ITT Hartford at the time of exercise and, in the
discretion of the Compensation and Personnel Committee, may be paid in the form
of cash or already-owned shares of ITT Hartford Common Stock or a combination
thereof. During the lifetime of an employee, an option must be exercised only by
the individual (or his or her estate or designated beneficiary) but no later
than three months after his or her termination of employment (or for longer
periods as determined by the Compensation and Personnel Committee if termination
is caused by retirement, disability or death, but in no event later than the
expiration of the original term of the option). If an optionee voluntarily
resigns or is terminated for cause, the options and SARs are cancelled
immediately.
Performance Shares
Performance shares under the 1995 ITT Hartford Stock Plan are contingent
rights to receive future payments based on the achievement of individual or
company performance objectives as prescribed by the Compensation and Personnel
Committee. Such performance objectives will be determined by the Compensation
and Personnel Committee over a measurement period or periods of not less than
two years established by such Committee and related to at least one of the
following criteria, which may be (i) determined solely by reference to the
performance of ITT Hartford, any subsidiary or affiliate of ITT Hartford or any
division or unit of any of the foregoing or (ii) based on comparative
performance of any one or more of the foregoing relative to other entities:
earnings per share, return on equity, cash flow, return on total capital, return
on assets, economic value added, increase in surplus, reductions in operating
expenses, increases in operating margins, earnings before income taxes and
depreciation or total shareholder return of ITT Hartford. The maximum number of
performance shares that may be granted to any individual employee in any given
year is 100,000. Payments may be made in the form of shares of ITT Hartford
Common Stock, cash or a combination of ITT Hartford Common Stock and cash. The
ultimate payments are determined by the number of shares
210
<PAGE> 217
earned and the price of ITT Hartford Common Stock at the end of the performance
period. In the event an employee terminates employment during such a performance
period, the employee will forfeit any right to payment. However, in the case of
retirement, permanent total disability, death or cases of special circum
stances, the employee may, in the discretion of the Compensation and Personnel
Committee, be entitled to an award prorated for the portion of the performance
period during which he or she was employed by ITT Hartford.
Restricted Shares
Restricted shares of ITT Hartford Common Stock awarded under the 1995 ITT
Hartford Stock Plan will be issued subject to a restriction period set by the
Compensation and Personnel Committee during which time the shares may not be
sold, transferred, assigned or pledged. In the event an employee terminates
employment during a restriction period, all such shares still subject to
restrictions will be forfeited by the employee and reacquired by ITT Hartford.
The Compensation and Personnel Committee may provide for the lapse of
restrictions in installments where deemed appropriate and it may also require
the achievement of predetermined performance objectives in order for such shares
to vest. The recipient, as owner of the awarded shares, shall have all other
rights of a shareholder, including the right to vote the shares and receive
dividends and other distributions during the restriction period. The
restrictions may be waived, in the discretion of the Compensation and Personnel
Committee, in the event of the awardee's retirement, permanent total disability,
death or in cases of special circumstances.
Compensation Upon Change of Control
The 1995 ITT Hartford Stock Plan provides for the automatic protection of
intended economic benefits by key employees in the event of a change in control
of ITT Hartford (i.e., upon the occurrence of an "Acceleration Event" as defined
in the 1995 ITT Hartford Stock Plan). Notwithstanding any other provisions of
the 1995 ITT Hartford Stock Plan, upon the occurrence of an Acceleration Event
(a) all options and SARs will generally become immediately exercisable for a
period of 60 calendar days; (b) options and SARs will continue to be exercisable
for a period of seven months in the case of an employee whose employment is
terminated other than for cause or who voluntarily terminates employment because
of a good faith belief that such employee will not be able to discharge his or
her duties; (c) SARs exercised during the 60-day period will be settled fully in
cash based on a formula price generally reflecting the highest price paid for a
share of ITT Hartford Common Stock during the 60-day period preceding the date
such SAR is exercised; (d) "limited stock appreciation rights" shall
automatically be granted on all outstanding options not otherwise covered by a
SAR, which shall generally be immediately exercisable in full and which shall
entitle the holders to the same exercise period and formula price referred to in
(a), (b) and (c) above; (e) outstanding performance share awards shall
automatically vest, with the valuation of such performance shares based on the
formula price; and (f) restrictions applicable to awards of restricted stock
shall be automatically waived.
Options, SARs, performance shares or restricted stock which are granted,
accelerated or enhanced upon the occurrence of a takeover (i.e., an
"Acceleration Event" as defined in the 1995 ITT Stock Hartford Plan) may give
rise, in whole or in part, to "excess parachute payments" within the meaning of
Section 280G of the Internal Revenue Code and, to such extent, will be
nondeductible by ITT Hartford and subject to a 20% excise tax to the awardee.
"Acceleration Event" is generally defined in the 1995 ITT Hartford Plan as
any of the following events: (i) a report on Schedule 13D shall be filed with
the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person
(within the meaning of Section 13(d) of the Exchange Act), other than ITT
Hartford or a subsidiary of ITT Hartford or any employee benefit plan sponsored
by ITT Hartford or a subsidiary of ITT Hartford, is the beneficial owner
directly or indirectly of 20% or more of the outstanding ITT Hartford Common
Stock; (ii) any person (within the meaning of Section 13(d) of the Exchange
Act), other than ITT Hartford or a subsidiary of ITT Hartford or any employee
benefit plan sponsored by ITT Hartford or a subsidiary of ITT Hartford, shall
purchase shares pursuant to a tender offer or exchange offer to acquire any ITT
Hartford Common Stock (or securities convertible into such Common Stock) for
cash, securities or any other consideration, provided that after consummation of
the offer, the person in question is the beneficial
211
<PAGE> 218
owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or
indirectly of 15% or more of the outstanding ITT Hartford Common Stock
(calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in
the case of rights to acquire Common Stock); (iii) the shareholders of ITT
Hartford shall approve (A) any consolidation or merger of ITT Hartford in which
ITT Hartford is not the continuing or surviving corporation or pursuant to which
shares of ITT Hartford Common Stock would be converted into cash, securities or
other property, other than a merger of ITT Hartford in which holders of ITT
Hartford Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before or (B) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all or
substantially all the assets of ITT Hartford; or (iv) there shall have been a
change in a majority of the members of the Board of Directors of ITT Hartford
within a 12-month period unless the election or nomination for election by ITT
Hartford's shareholders of each new director during such 12-month period was
approved by the vote of two-thirds of the directors then still in office who
were directors at the beginning of such 12-month period.
The ITT Hartford Board may amend or discontinue the 1995 ITT Hartford Stock
Plan at any time and, specifically, may make such modifications to the 1995 ITT
Hartford Plan as it deems necessary to avoid the application of Section 162(m)
of the Internal Revenue Code and the Treasury regulations issued thereunder.
However, shareholder approval is required for certain amendments, including any
amendment which may (i) increase the number of shares reserved for awards
(except as provided in the 1995 ITT Hartford Plan with respect to stock splits
or other similar changes), (ii) materially change the group of employees
eligible for Awards, (iii) materially increase the benefits accruing to
participants under the 1995 ITT Hartford Stock Plan or (iv) permit Awards after
December 31, 2005.
Certain Tax Consequences
The following is a brief summary of the current Federal income tax rules
generally applicable to awards under the 1995 ITT Hartford Stock Plan.
Non-qualified Options. An optionee is not subject to Federal income tax
upon grant of a non-qualified stock option. At the time of exercise, the
optionee will realize compensation income (subject to withholding) to the extent
that the then fair market value of the stock exceeds the option price. The
amount of such income will constitute an addition to the optionee's tax basis in
the optioned stock. Sale of the shares will result in capital gain or loss
(long-term or short-term depending on the optionee's holding period). ITT
Hartford is entitled to a Federal tax deduction at the same time and to the same
extent that the optionee realizes compensation income.
Incentive Stock Options ("ISOs"). Options under the 1995 ITT Hartford
Stock Plan denominated as ISOs are intended to constitute incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended. An
optionee is not subject to Federal income tax upon either the grant or exercise
of an ISO. If the optionee holds the shares acquired upon exercise for at least
one year after issuance of the optioned shares and until at least two years
after grant of the option, then the difference between the amount realized on a
subsequent sale or other disposition of the shares and the option price will
constitute long-term capital gain or loss. ITT Hartford will not be entitled to
a Federal tax deduction with respect to the grant or exercise of the ISO.
If the optionee sells the shares acquired under an ISO before the requisite
holding period, he or she will be deemed to have made a "disqualifying
disposition" of the shares and will realize compensation income in the year of
disposition equal to the lesser of the fair market value of the shares at
exercise or the amount realized on their disposition over the option price of
the shares. Any gain recognized upon a disqualifying disposition in excess of
the ordinary income portion will constitute either short-term or long-term
capital gain. In the event of a disqualifying disposition, ITT Hartford will be
entitled to a Federal tax deduction in the amount of the compensation income
realized by the optionee.
The option spread on the exercise of an ISO is an adjustment in computing
alternative minimum taxable income. No adjustment is required, however, if the
optionee made a disqualifying disposition of the shares in the same year as he
is taxed on the exercise.
212
<PAGE> 219
Stock Appreciation Rights ("SARs"). An optionee is not taxed upon the
grant of SARs. An optionee exercising SARs for cash will realize compensation
income (subject to withholding) in the amount of the cash or the fair market
value of the shares received. ITT Hartford is entitled to a tax deduction at the
same time and to the same extent that the optionee realized compensation income.
Performance Shares. An awardee of performance shares will generally
realize compensation income (subject to withholding) when and to the extent that
payment is made, whether in the form of cash or shares of ITT Hartford Common
Stock. To the extent that payment is made in the form of stock, income shall be
measured by the then fair market value of the shares, which shall constitute an
addition to the awardee's tax basis in such shares. ITT Hartford will be
entitled to a Federal tax deduction of the value of payment at the time of
payment.
Restricted Stock. An awardee of restricted stock will generally realize
compensation income (subject to withholding) when and to the extent that the
restrictions on the shares lapse, as measured by the value of the shares at the
time of lapse. The awardee's holding period for the shares will not commence
until the date of lapse, and dividends paid during the restriction period will
be treated as compensation. The income realized on lapse of the restrictions
will constitute an addition to the awardee's tax basis in the shares.
In lieu of deferred recognition of income, the awardee may formally elect,
within 30 days of award, to realize compensation income at the time of award, as
measured by the fair market value of the stock on the date of award determined
without regard to the restrictions. The income realized will constitute an
addition to the tax basis of the shares. In the case of such election, any
appreciation (or depreciation) on the shares during the restriction period will
give rise to capital gain (or capital loss) upon the sale or other disposition
of the shares. In the event that the awardee terminates employment during the
restriction period and forfeits his shares, no deduction may be claimed and the
taxes paid on award of the shares shall be forfeited.
ITT Hartford will be entitled to a Federal tax deduction at the same time
and to the same extent that the awardee realizes compensation income.
Excess Parachute Payments. Options, SARs, performance shares or restricted
stock which are granted, accelerated or enhanced upon the occurrence of a
takeover (i.e., an Acceleration Event as defined in the 1995 ITT Hartford Stock
Plan) may give rise, in whole or in part, to "excess parachute payments" within
the meaning of Section 280G of the Internal Revenue Code and, to such extent,
will be nondeductible by ITT Hartford and subject to a 20% excise tax to the
awardee.
If the 1995 ITT Hartford Stock Plan is approved by the shareholders, the
Board may amend or discontinue it at any time. However, shareholder approval is
required for any amendment which may (i) increase the number of shares reserved
for awards (except as provided in Section 13 of the 1995 ITT Hartford Stock Plan
with respect to stock splits or other similar changes), (ii) materially change
the group of employees eligible for Awards, (iii) materially increase the
benefits accruing to participants under the 1995 ITT Hartford Stock Plan, or
(iv) permit Awards after December 31, 2005.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES IN RESPECT OF
THE 1995 ITT HARTFORD PLAN IS FOR GENERAL INFORMATION ONLY. INTERESTED PARTIES
SHOULD CONSULT THEIR OWN ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF SUCH
PLAN, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS.
The above summary of the 1995 ITT Hartford Stock Plan is qualified in its
entirety by reference to the full plan text which is set forth as Annex E
hereto.
ITT HARTFORD SEVERANCE PAY PLAN
The existing ITT severance pay plan applies to ITT senior executives who
are United States citizens or who are employed in the United States. Under the
plan, if a participant's employment is terminated by ITT, other than for cause
or as a result of other occurrences specified in the plan, the participant is
entitled to severance pay in an amount up to 24 months of base salary depending
upon his or her length of service. In no event shall such severance pay exceed
the amount of base salary for the number of months remaining between the
termination of employment and the participant's normal retirement date or two
times the participant's
213
<PAGE> 220
total annual compensation during the year immediately preceding such
termination. The plan includes offset provisions for other compensation from ITT
and requirements on the part of executives with respect to non-competition and
compliance with the ITT Code of Corporate Conduct. Under the plan, severance
payments would ordinarily be made monthly over the scheduled term of such
payments; however, ITT has the option to make such payments in the form of a
single lump sum payment discounted to present value. At June 1, 1995, the named
executive officers in the Summary Compensation Table (see "-- COMPENSATION OF
ITT HARTFORD EXECUTIVE OFFICERS") participate in this plan.
The annual salaries of Messrs. Frahm, Ayer, Donahue, Gareau and Smith as of
June 1, 1995, were $600,000, $425,00, $240,000, $300,000 and $425,000,
respectively.
After the Distribution, it is anticipated that ITT Hartford will adopt a
similar plan for its senior executives, except for Messrs. Ayer and Smith, each
of whom will be covered by employment agreements, see
"-- EMPLOYMENT AGREEMENTS".
ITT HARTFORD INVESTMENT AND SAVINGS PLAN
Many of the salaried employees of ITT Hartford have been participants in
the ITT Investment and Savings Plan for Salaried Employees. Effective as of the
Distribution Date, the ITT Investment and Savings Plan will be split into three
separate plans, each covering the ITT Industries Employees, the New ITT
Employees or the ITT Hartford Employees. Existing account balances of current
New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP
that have been allocated to the accounts of such employees, will be transferred
from the ITT Investment and Savings Plan to the New ITT Investment and Savings
Plan. Existing account balances of current ITT Hartford Employees, including all
shares of ITT Common Stock acquired by the ESOP that have been allocated to the
accounts of such employees, will be transferred from the ITT Investment and
Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account
balances of current ITT Industries Employees, including all shares of ITT Common
Stock acquired by the ESOP that have been allocated to the accounts of such
employees, will remain in the ITT Investment and Savings Plan, which will
continue in existence as the ITT Industries Investment and Savings Plan.
Existing account balances of each former employee of ITT Industries, New ITT and
ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that
have been allocated to the accounts of such former employee, will be transferred
to the investment and savings plan maintained by the company responsible for
providing retirement benefits to such former employee.
Federal legislation limits the annual contributions which an employee may
make to the ITT Hartford Investment and Savings Plan, a tax-qualified retirement
plan. Accordingly, prior to the Distribution Date, ITT Hartford will adopt the
ITT Hartford Excess Savings Plan, which will enable an employee who is precluded
by these limitations from contributing six percent of salary to the
tax-qualified plan to make up the shortfall through salary deferrals and thereby
receive the three percent maximum matching company contribution and one-half of
one percent non-matching company contribution otherwise allowable under the
tax-qualified plan. Salary deferrals, company contributions and imputed earnings
will be entered into a book reserve account maintained by ITT Hartford for each
participant.
ITT HARTFORD RETIREMENT PROGRAM
Most of the U.S. salaried employees of The Hartford have been participants
in the ITT Hartford Retirement Plan. The ITT Hartford Retirement Plan will be
amended to recognize service with other ITT companies prior to the Distribution
Date for eligibility, vesting and benefit accrual purposes and will further
provide for an offset of any benefit payable from any ITT retirement plan
covering the same period of service. The Plan will be further amended to
recognize service with ITT Industries and New ITT after the Distribution Date
for eligibility and vesting purposes.
The ITT Hartford Retirement Plan will cover substantially all eligible U.S.
salaried employees of ITT Hartford, including senior executive officers and
other ITT Hartford executives. The cost of the ITT Hartford Retirement Plan will
be borne entirely by ITT Hartford.
214
<PAGE> 221
A member's annual pension will equal two percent of the member's average
final compensation for each of the first 30 years of benefit service, reduced by
one and two-thirds percent of the member's primary Social Security benefit for
each year of benefit service to a maximum of 30 years; provided that no more
than one-half of the member's primary Social Security benefit is used for such
reduction. A member's average final compensation (including salary plus approved
bonus payments) will be defined under the Plan as the total of (i) a member's
average annual base salary for the five calendar years of the last 120
consecutive calendar months of eligibility service affording the highest such
average plus (ii) a member's average annual compensation not including base
salary for the five calendar years of the member's last 120 consecutive calendar
months of eligibility service affording the highest such average. The Plan also
will provide for undiscounted early retirement pensions for members who retire
at or after age 60 following completion of 15 years of eligibility service. A
member will be vested in benefits accrued under the Plan upon completion of five
years of eligibility service.
Applicable Federal legislation limits the amount of benefits that can be
paid and compensation which may be recognized under a tax-qualified retirement
plan. ITT Hartford will continue its non-qualified unfunded retirement plan (the
"Hartford Excess Pension Plan") for payment of those benefits at retirement that
cannot be paid from the qualified Retirement Plan. The practical effect of the
Hartford Excess Pension Plan is to continue calculation of retirement benefits
to all employees on a uniform basis. Benefits under the Hartford Excess Pension
Plan will generally be paid after the Distribution Date directly by ITT
Hartford. ITT Hartford will also continue to maintain the excess plan trust
under which excess benefits under the Hartford Excess Pension Plan for certain
officers of ITT Hartford are funded. Any such employee may indicate a
preference, subject to certain conditions, to receive any excess benefit in the
form of a single discounted lump sum payment. Any "excess" benefit accrued to
any such employee will be immediately payable in the form of a single discounted
lump sum payment upon the occurrence of a change in corporate control (as
defined in the Hartford Excess Pension Plan).
Based on various assumptions as to remuneration and years of service,
before Social Security reductions, the following table illustrates the estimated
annual benefits payable from the Retirement Program at retirement at age 65 that
are paid for by ITT Hartford.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE YEARS OF SERVICE
FINAL -----------------------------------------------
COMPENSATION 15 20 25 30
- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000
100,000 30,000 40,000 50,000 60,000
300,000 90,000 120,000 150,000 180,000
500,000 150,000 200,000 250,000 300,000
750,000 225,000 300,000 375,000 450,000
1,000,000 300,000 400,000 500,000 600,000
1,500,000 450,000 600,000 750,000 900,000
</TABLE>
The amounts shown under "Salary" and "Bonus" opposite the names of the
individuals in the Summary Compensation Table comprise the compensation which is
used for purposes of determining "average final compensation" under the plan.
The years of service with ITT Hartford of each of the individuals for
eligibility and benefit purposes as of June 1, 1995, are as follows: Donald R.
Frahm, 26.83 years; Ramani Ayer, 21.92 years; John F. Donahue, 30.00 years;
Joseph H. Gareau, 21.83 years; and Lowndes A. Smith, 28.17 years. Mr. Frahm's
years of service include five years that were granted to him by ITT Hartford on
the date of his employment. Mr. Donahue has 40.92 years of service with ITT
Hartford, but the ITT Hartford Retirement Plan recognizes a maximum of 30 years
of service.
1995 ITT HARTFORD DEFERRED COMPENSATION PLAN
Executives of ITT Hartford have been participants in the 1995 ITT Deferred
Compensation Plan. Effective as of the Distribution Date, it is intended that
ITT Hartford will adopt a "mirror image" 1995 ITT Hartford Deferred Compensation
Plan. Under that plan, executives with a base salary of $200,000 or more
215
<PAGE> 222
could elect to defer receipt of all or a portion of their 1994 bonus and those
with a base salary of at least $300,000 could in addition defer up to 50% of
their 1995 salary. ITT Hartford will credit interest on the deferred
compensation based upon the performance of benchmark investment funds made
available under the plan and selected by the executive.
ITT HARTFORD EMPLOYEE WELFARE BENEFITS
After the Distribution Date, ITT Hartford and its participating
subsidiaries will continue the broad-based employee welfare benefits program
which is currently available to salaried employees of The Hartford. ITT Hartford
executives will participate in ITT Hartford's comprehensive benefits program
which will include group medical and dental coverage, group life insurance and
other benefit plans, in addition to the pension program and investment and
savings plan available to salaried employees of The Hartford described
previously. For a discussion of certain contractual relationships among ITT
Industries, New ITT and ITT Hartford that affect employee welfare benefits
programs, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- RETIREE MEDICAL AND
LIFE INSURANCE BENEFIT PLANS".
216
<PAGE> 223
DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
After the Distribution, ITT Industries' authorized capital stock will be
the same as ITT's authorized capital stock prior to the Distribution.
Accordingly, ITT Industries' authorized capital stock will consist of
200,000,000 shares of Common Stock, $1.00 par value per share, and 50,000,000
shares of Preferred Stock, without par value. As of July 5, 1995, there were
outstanding 115,597,874 shares of ITT Common Stock and 482,324 shares of ITT
Series N Preferred Stock (convertible into 610,622 shares of ITT Common Stock).
ITT has called for redemption on August 29, 1995, all the outstanding shares of
ITT Series N Preferred Stock. See "THE DISTRIBUTION -- REDEMPTION OF SERIES N
PREFERRED STOCK".
ITT INDUSTRIES COMMON STOCK
Subject to any preferential rights of any ITT Industries Preferred Stock
created by the Board of Directors of ITT Industries, each outstanding share of
ITT Industries Common Stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors of ITT Industries. See
"DIVIDEND POLICY -- ITT INDUSTRIES DIVIDEND POLICY". Each outstanding share is
entitled to one vote on all matters submitted to a vote of shareholders. The ITT
Industries Articles of Incorporation do not provide for cumulative voting
rights; therefore, the holders of a majority of the shares voting for the
election of the Board of Directors of ITT Industries can elect all the directors
up for election, if they so choose. In the event of liquidation, dissolution or
winding up of ITT Industries, holders of ITT Industries Common Stock are
entitled to receive on a pro rata basis any assets remaining after provision for
payment of creditors and after payment of any liquidation preferences to holders
of ITT Industries Preferred Stock.
ITT INDUSTRIES PREFERRED STOCK
The authorized Preferred Stock of ITT Industries is available for issuance
from time to time at the discretion of the Board of Directors of ITT Industries
without shareholder approval. The ITT Industries Board of Directors has the
authority to prescribe for each series of ITT Industries Preferred Stock it
establishes the number of shares in that series, the number of votes (if any) to
which such shares in that series are entitled, the consideration for such shares
in that series and the designations, powers, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock, the issuance of ITT Industries Preferred Stock
could have an adverse effect on holders of ITT Industries Common Stock by
delaying or preventing a change in control of ITT Industries, making removal of
the present management of ITT Industries more difficult or resulting in
restrictions upon the payment of dividends and other distributions to the
holders of ITT Industries Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Indiana law does not require shareholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the ITT Industries Common Stock remained listed on the NYSE,
require shareholder approval of certain issuances equal to or exceeding 20% of
the then outstanding voting power or then outstanding number of shares of ITT
Industries Common Stock. These additional shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions.
One of the effects of the existence of unissued and unreserved ITT
Industries Common Stock and ITT Industries Preferred Stock may be to enable the
Board of Directors of ITT Industries to issue shares to persons friendly to
current management, which issuance could render more difficult or discourage an
attempt to obtain control of ITT Industries by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of ITT
Industries' management and possibly deprive the shareholders of opportunities to
217
<PAGE> 224
sell their shares of ITT Industries Common Stock at prices higher than
prevailing market prices. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of ITT Industries
pursuant to the operation of the ITT Industries Rights Plan, which is discussed
below.
ITT INDUSTRIES RIGHTS PLAN
ITT INDUSTRIES RIGHTS
It is anticipated that the Board of Directors of ITT Industries will
declare a dividend of one right (the "ITT Industries Rights") for each
outstanding share of ITT Industries Common Stock. The ITT Industries Rights will
be issued to the holders of record of ITT Industries Common Stock outstanding on
the ITT Industries Rights issuance date (the "Issuance Date"), and with respect
to ITT Industries Common Stock issued thereafter until the Distribution Date (as
defined below), and, in certain circumstances, with respect to ITT Industries
Common Stock issued after the Distribution Date. Each ITT Industries Right, when
it becomes exercisable as described below, will entitle the registered holder to
purchase from ITT Industries one one-thousandth (1/1000th) of a share of
Preferred Stock of ITT Industries (the "ITT Industries Preferred Shares") at a
price (substantially above the expected current trading value for ITT
Industries) to be determined, subject to adjustment in certain circumstances
(the "Purchase Price"). The description and terms of the ITT Industries Rights
will be set forth in a form of Rights Agreement (the "ITT Industries Rights
Agreement") between ITT Industries and the Rights Agent named therein. A copy of
the ITT Industries Rights Agreement will be filed as an exhibit to the
Registration Statement of ITT Industries in respect of the registration of the
ITT Industries Rights under the Exchange Act. The ITT Industries Rights will not
be exercisable until the Distribution Date and will expire on the tenth annual
anniversary of the ITT Industries Rights Agreement (the "Expiration Date"),
unless earlier redeemed by ITT Industries as described below. Until an ITT
Industries Right is exercised, the holder thereof, as such, will have no rights
as a shareholder of ITT Industries, including, without limitation, the right to
vote or to receive dividends with respect to the ITT Industries Rights or the
ITT Industries Preferred Shares relating thereto. Unless the context otherwise
requires, references herein to the ITT Industries Common Stock include the
related ITT Industries Rights.
DISTRIBUTION DATE
Under the ITT Industries Rights Agreement, the Distribution Date is the
earlier of (i) such time as ITT Industries learns that a person or group
(including any affiliate or associate of such person or group) has acquired, or
has obtained the right to acquire, beneficial ownership of more than 15% of the
outstanding shares of ITT Industries Common Stock (such person or group being an
"Acquiring Person"), unless provisions preventing accidental triggering of the
distribution of the ITT Industries Rights apply, and (ii) the close of business
on such date, if any, as may be designated by the Board of Directors of ITT
Industries following the commencement of, or first public disclosure of an
intent to commence, a tender or exchange offer for more than 15% or more of the
outstanding shares of ITT Industries Common Stock. A person or group (or any
affiliate or associate of such person or group), however, that inadvertently
acquires more than 15% of the outstanding shares of ITT Industries Common Stock
will not be deemed to be an Acquiring Person provided that such person or group
reduces the percentage of beneficial ownership to less than 15% of the
outstanding shares of ITT Industries Common Stock by the close of business on
the fifth business day after notice from ITT Industries that such person's or
group's ownership interest exceeds 15% of the outstanding shares of ITT
Industries Common Stock. Such person or group will be deemed to be an Acquiring
Person at the end of such five business day period absent such reduction.
EVIDENCE OF ITT INDUSTRIES RIGHTS
Until the Distribution Date, the ITT Industries Rights will be evidenced by
the certificates for ITT Industries Common Stock registered in the names of the
holders thereof (which certificates for ITT Industries Common Stock shall also
be deemed to be ITT Industries Right Certificates, as defined below) rather than
separate ITT Industries Right Certificates. Therefore, on and after the Issuance
Date and until the Distribution Date, the ITT Industries Rights will be
transferred with and only with the ITT Industries
218
<PAGE> 225
Common Stock and each transfer of ITT Industries Common Stock also will transfer
the associated ITT Industries Rights. As soon as practicable following the
Distribution Date, separate certificates evidencing the ITT Industries Rights
("ITT Industries Right Certificates") will be mailed to holders of record of the
ITT Industries Common Stock as of the close of business on the Distribution Date
(and to each initial record holder of certain ITT Industries Common Stock
originally issued after the Distribution Date), and such separate ITT Industries
Right Certificates alone will thereafter evidence the ITT Industries Rights.
ADJUSTMENTS
The number of ITT Industries Preferred Shares or other securities issuable
upon exercise of the ITT Industries Rights, the Purchase Price, the Redemption
Price (as defined below) and the number of ITT Industries Rights associated with
each share of ITT Industries Common Stock are all subject to adjustment from
time to time in the event of any change in the ITT Industries Common Stock or
the ITT Industries Preferred Shares, whether by reason of stock dividends, stock
splits, recapitalizations, mergers, consolidations, combinations or exchanges of
securities, split-ups, split-offs, spin-offs, liquidations, other similar
changes in capitalization or any distribution or issuance of cash, assets,
evidences of indebtedness or subscription rights, options or warrants to holders
of ITT Industries Common Stock or ITT Industries Preferred Shares.
ITT Industries may, but is not required to, issue fractions of ITT
Industries Rights or distribute ITT Industries Rights Certificates which
evidence fractional ITT Industries Rights. In lieu of such fractional ITT
Industries Rights, ITT Industries may make a cash payment based on the market
price of such rights. In addition, ITT Industries may, but is not required to,
issue fractions of shares upon the exercise of the ITT Industries Rights or
distribute certificates which evidence fractional ITT Industries Preferred
Shares. In lieu of fractional ITT Industries Preferred Shares, ITT Industries
may utilize a depository arrangement as provided by the terms of the ITT
Industries Preferred Shares and, in the case of fractions other than one
one-thousandth (1/1000th) of an ITT Industries Preferred Share or integral
multiples thereof, may make a cash payment based on the market price of such
shares.
TRIGGERING EVENT AND EFFECT OF TRIGGERING EVENT
At such time as there is an Acquiring Person, the ITT Industries Rights
will entitle each holder (other than such Acquiring Person) of an ITT Industries
Right to purchase, for the Purchase Price, that number of one one-thousandths
(1/1000ths) of an ITT Industries Preferred Share equivalent to the number of
shares of ITT Industries Common Stock which at the time of such event would have
a market value of twice the Purchase Price.
In the event ITT Industries is acquired in a merger or other business
combination by an Acquiring Person or an affiliate or associate of an Acquiring
Person that is a publicly traded corporation or 50% or more of ITT Industries'
assets or assets representing 50% or more of ITT Industries' revenues or cash
flow are sold, leased, exchanged or otherwise transferred (in one or more
transactions) to an Acquiring Person or an affiliate or associate of an
Acquiring Person that is a publicly traded corporation, each ITT Industries
Right will entitle its holder (subject to the next paragraph) to purchase, for
the Purchase Price, that number of common shares of such corporation which at
the time of the transaction would have a market value of twice the Purchase
Price. In the event ITT Industries is acquired in a merger or other business
combination by an Acquiring Person or an affiliate or associate of an Acquiring
Person that is not a publicly traded entity or 50% or more of ITT Industries'
assets or assets representing 50% or more of ITT Industries' revenues or cash
flow are sold, leased, exchanged or otherwise transferred (in one or more
transactions) to an Acquiring Person or an affiliate or associate of an
Acquiring Person that is not a publicly traded entity, each ITT Industries Right
will entitle its holder (subject to the next paragraph) to purchase, for the
Purchase Price, at such holder's option, (i) that number of shares of the
surviving corporation in the transaction with such entity (which surviving
corporation could be ITT Industries) which at the time of the transaction would
have a book value of twice the Purchase Price, (ii) that number of shares of
such entity which at the time of the transaction would have a book value of
twice the Purchase Price or (iii) if such entity has an affiliate which has
publicly traded common shares, that number of common shares of such affiliate
which at the time of the transaction would have market value of twice the
Purchase Price.
219
<PAGE> 226
Any ITT Industries Rights that are at any time beneficially owned by an
Acquiring Person (or any affiliate or associate of an Acquiring Person) will be
null and void and nontransferable and any holder of any such ITT Industries
Right (including any purported transferee or subsequent holder) will be unable
to exercise or transfer any such ITT Industries Right.
REDEMPTION
At any time prior to the earlier of (i) such time as a person or group
becomes an Acquiring Person and (ii) the Expiration Date, the Board of Directors
of ITT Industries may redeem the ITT Industries Rights in whole, but not in
part, at a price (in cash or ITT Industries Common Stock or other securities of
ITT Industries deemed by the Board of Directors to be at least equivalent in
value) of $.01 per ITT Industries Right (which amount shall be subject to
adjustment as provided in the ITT Industries Rights Agreement) (the "Redemption
Price"). Immediately upon the action of the Board of Directors of ITT Industries
ordering the redemption of the ITT Industries Rights, and without any further
action and without any notice, the right to exercise the ITT Industries Rights
will terminate and the only right of the holders of ITT Industries Rights will
be to receive the Redemption Price. Within 10 business days after the action of
the Board of Directors ordering the redemption of the ITT Industries Rights, ITT
Industries will give notice of such redemption to the holders of the then
outstanding ITT Industries Rights by mail. Each such notice of redemption will
state the method by which payment of the Redemption Price will be made.
In addition, at any time after there is an Acquiring Person, the Board of
Directors of ITT Industries may elect to exchange each ITT Industries Right
(other than ITT Industries Rights that have become null and void and
nontransferable as described above) for consideration per ITT Industries Right
consisting of one-half of the securities that would be issuable at such time
upon exercise of one ITT Industries Right pursuant to the terms of the ITT
Industries Rights Agreement.
AMENDMENT
At any time prior to the Distribution Date, ITT Industries may, without the
approval of any holder of any ITT Industries Rights, supplement or amend any
provision of the ITT Industries Rights Agreement (including, without limitation,
the date on which the Distribution Date shall occur, the definition of Acquiring
Person, the time during which the ITT Industries Rights may be redeemed or the
terms of the ITT Industries Preferred Shares), except that no supplement or
amendment shall be made which reduces the Redemption Price (other than pursuant
to certain adjustments therein) or provides for an earlier Expiration Date. From
and after the Distribution Date and subject to applicable law, ITT Industries
may amend the ITT Industries Rights Agreement without the approval of any
holders of ITT Industries Right Certificates (i) to cure any ambiguity or to
correct or supplement any provision contained in the ITT Industries Rights
Agreement which may be defective or inconsistent with any other provision of the
ITT Industries Rights Agreement or (ii) to make any other provisions which ITT
Industries may deem necessary or desirable and which shall not adversely affect
the interests of the holders of ITT Industries Right Certificates (other than an
Acquiring Person or an affiliate or associate of an Acquiring Person). Any
supplement or amendment adopted during any period after any person or group has
become an Acquiring Person but prior to the Distribution Date shall be null and
void unless such supplement or amendment could have been adopted under the prior
sentence from and after the Distribution Date.
CERTAIN EFFECTS OF THE ITT INDUSTRIES RIGHTS PLAN
The ITT Industries Rights Plan is designed to protect shareholders of ITT
Industries in the event of unsolicited offers to acquire ITT Industries and
other coercive takeover tactics which, in the opinion of the Board of Directors
of ITT Industries, could impair its ability to represent shareholder interests.
The provisions of the ITT Industries Rights Plan may render an unsolicited
takeover of ITT Industries more difficult or less likely to occur or might
prevent such a takeover, even though such takeover may offer ITT Industries'
shareholders the opportunity to sell their stock at a price above the prevailing
market rate and may be favored by a majority of the shareholders of ITT
Industries.
220
<PAGE> 227
NO PREEMPTIVE RIGHTS
No holder of any class of stock of ITT Industries authorized at the time of
the Distribution will have any preemptive right to subscribe to any securities
of ITT Industries of any kind or class.
INDIANA BUSINESS CORPORATION LAW
The terms of the Indiana Business Corporation Law (the "IBCL") would apply
to ITT Industries as an Indiana corporation. Under certain circumstances, the
following selected provisions of the IBCL may delay, prevent or make more
difficult unsolicited acquisitions or changes of control of ITT Industries. The
Articles of Incorporation and By-laws of ITT Industries will not exclude ITT
Industries from such provisions of the IBCL. Such provisions also may have the
effect of preventing changes in the management of ITT Industries. It is possible
that such provisions could make it more difficult to accomplish transactions
which shareholders may otherwise deem to be in their best interests.
CONTROL SHARE ACQUISITIONS
Pursuant to Sections 23-1-42-1 to 23-1-42-11 of the IBCL, an "acquiring
person" who makes a "control share acquisition" in an "issuing public
corporation" may not exercise voting rights on any "control shares" unless such
voting rights are conferred by a majority vote of the disinterested shareholders
of the issuing corporation at a special meeting of such shareholders held upon
the request and at the expense of the acquiring person. In the event that
control shares acquired in a control share acquisition are accorded full voting
rights and the acquiring person acquires control shares with a majority or more
of all voting power, all shareholders of the issuing corporation have
dissenters' rights to receive the fair value of their shares. Under the IBCL,
"control shares" means shares acquired by a person that, when added to all other
shares of the issuing public corporation owned by that person or in respect of
which that person may exercise or direct the exercise of voting power, would
otherwise entitle that person to exercise voting power of the issuing public
corporation in the election of directors within any of the following ranges: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority or (iii) a majority or more. "Control share acquisition" means,
subject to certain exceptions, the acquisition, directly or indirectly, by any
person of ownership of, or the power to direct the exercise of voting power with
respect to, issued and outstanding control shares. Shares acquired within 90
days or pursuant to a plan to make a control share acquisition are considered to
have been acquired in the same acquisition. "Issuing public corporation" means a
corporation which is organized in Indiana, has 100 or more shareholders, its
principal place of business, its principal office or substantial assets within
Indiana and either (i) more than 10% of its shareholders resident in Indiana,
(ii) more than 10% of its shares owned by Indiana residents or (iii) 10,000
shareholders resident in Indiana. The above provisions do not apply if, before a
control share acquisition is made, the corporation's articles of incorporation
or by-laws (including a board adopted by-law) provide that said provisions do
not apply. As noted above, ITT Industries' Articles of Incorporation and By-laws
do not exclude ITT Industries from the restrictions imposed by such provisions.
Section 23-1-22-4 of the IBCL provides that, in addition to any other
provision authorized by any other section of the IBCL or contained in the
articles of incorporation or the by-laws, a corporation may establish one or
more procedures to regulate transactions that would, when consummated, result in
a change of "control" of the corporation. Such a procedure may be established in
the original articles or incorporation or by-laws, by an amendment to the
articles of incorporation or, notwithstanding the fact that a vote of the
shareholders would otherwise be required by any other provision of the IBCL or
the articles of incorporation, by an amendment to the by-laws. For the purposes
of Section 23-1-22-4, "control" means, for any corporation that has 100 or more
shareholders, the beneficial ownership, or the direct or indirect power to
direct the voting, of no less than 10% of the voting shares of a corporation's
outstanding voting shares.
CERTAIN BUSINESS COMBINATIONS
Sections 23-1-43-1 to 23-1-43-23 of the IBCL restrict the ability of a
"resident domestic corporation" to engage in any combination with an "interested
shareholder" for five years after the interested shareholder's date of acquiring
shares unless the combination or the purchase of shares by the interested
shareholder on the
221
<PAGE> 228
interested shareholder's date of acquiring shares is approved by the board of
directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested shareholder may effect a
combination after the five-year period only if such shareholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria. For purposes of the above provisions, "resident domestic
corporation" means an Indiana corporation that has 100 or more shareholders.
"Interested shareholder" means any person, other than the resident domestic
corporation or its subsidiaries, who is (a) the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding voting shares
of the resident domestic corporation or (b) an affiliate or associate of the
resident domestic corporation and at any time within the five-year period
immediately before the date in question was the beneficial owner of 10% or more
of the voting power of the then outstanding shares of the resident domestic
corporation. The above provisions do not apply to corporations that so elect in
a charter amendment approved by a majority of the disinterested shares. Such a
charter amendment, however, would not become effective for 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. As noted above, ITT Industries' Articles of Incorporation do not exclude
ITT Industries from the restrictions imposed by such provisions.
RIGHTS, OPTIONS OR WARRANTS
Section 23-1-26-5 of the IBCL provides that a corporation, acting through
its board of directors, may create or issue rights, options or warrants for the
purchase of shares or other securities of the corporation or any successor in
interest of the corporation. The board of directors may determine the terms upon
which the rights, options or warrants are issued, their form and content and the
consideration for which the shares or other securities are to be issued. The
rights, options or warrants may be issued with or without consideration, and
may, but need not, be issued pro rata.
DIRECTORS' DUTIES
Section 23-1-35-1 of the IBCL 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.
PROVISIONS OF ITT INDUSTRIES ARTICLES OF INCORPORATION
AND BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the ITT Industries Articles of Incorporation and
By-laws may delay or make more difficult unsolicited acquisitions or changes of
control of ITT Industries. It is believed that such provisions will enable ITT
Industries to develop its business in a manner that will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by its
Board of Directors to be in the best interests of ITT Industries and its
shareholders. Such provisions could have the effect of discouraging third
parties from making proposals involving an unsolicited acquisition or change of
control of ITT Industries, although such proposals, if made, might be considered
desirable by a majority of ITT Industries' shareholders. Such provisions may
also have the effect of making it more difficult for third parties to cause the
replacement of the current management of ITT Industries without the concurrence
of the Board of Directors. These provisions include (i) the availability of
capital stock for issuance from time to time at the discretion of the Board of
222
<PAGE> 229
Directors (see "-- AUTHORIZED BUT UNISSUED CAPITAL STOCK"), (ii) prohibitions
against shareholders calling a special meeting of shareholders, (iii)
requirements for advance notice for raising business or making nominations at
shareholders' meetings and (iv) the ability of the Board of Directors to
increase the size of the board and to appoint directors to fill newly created
directorships. These four provisions are present in the Restated Certificate of
Incorporation or By-laws of ITT.
SPECIAL MEETINGS
The ITT Industries Articles of Incorporation and By-laws provide that
special meetings of the shareholders can be called only by the Chairman of the
Board of Directors or by a vote of the majority of the entire Board of
Directors. Furthermore, the By-laws of ITT Industries provide that only such
business as is specified in the notice of any such special meeting of the
shareholders may come before such meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws of ITT Industries establish an advance notice procedure for
shareholder proposals to be brought before an annual meeting of shareholders and
for nominations by shareholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of shareholders as has been
brought before the meeting by, or at the direction of, the Board of Directors,
or by a shareholder who has given to the Secretary of ITT Industries timely
written notice, in proper form, of the shareholder's intention to bring that
business before the meeting. The chairman of such meeting has the authority to
make such determinations. Only persons who are nominated by, or at the direction
of, the Board of Directors, or who are nominated by a shareholder who has given
timely written notice, in proper form, to the Secretary prior to a meeting at
which directors are to be elected will be eligible for election as directors of
ITT Industries.
To be timely, notice of business to be brought before an annual meeting or
nominations of candidates for election as directors at an annual meeting must be
received by the Secretary of ITT Industries not later than 90 days in advance of
the anniversary date of the immediately preceding annual meeting (or not more
than 10 days after the first public disclosure of the date of such annual
meeting, whichever is earlier). Similarly, notice of nominations to be brought
before a special meeting must be delivered to the Secretary no later than the
close of business on the seventh day following the day on which notice of the
date of the special meeting of shareholders was given.
The notice of any nomination for election as a director must set forth the
name and address of the shareholder who intends to make the nomination and of
the person or persons to be nominated; a representation that the shareholder is
a holder of record of stock of ITT Industries entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; such other information regarding
each nominee proposed by such shareholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the Board of Directors; and the consent of each nominee to
serve as a director if so elected.
NUMBER OF DIRECTORS; FILLING OF VACANCIES
The ITT Industries Articles of Incorporation and By-laws provide that newly
created directorships resulting from any increase in the authorized number of
directors (or any vacancy) may be filled by a vote of a majority of directors
then in office, subject to the requirement provided in the By-laws that the
majority of directors holding office immediately after such election must be
"independent directors" (as defined). Accordingly, the Board of Directors of ITT
Industries may be able to prevent any shareholder from obtaining majority
representation on the Board of Directors by increasing the size of the board and
filling the newly created directorships with its own nominees.
223
<PAGE> 230
COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW
ITT is incorporated in Delaware. However, because of the reasons set forth
above under "THE REINCORPORATION OF ITT -- REASONS FOR THE REINCORPORATION", ITT
Industries, following the Distribution and the Reincorporation, is to be
incorporated in Indiana. The IBCL differs from the Delaware General Corporation
Law (the "DGCL") in many respects. The following summary sets forth certain
differences that should be considered by shareholders. The following summary
does not purport to be a complete statement of the differences between the IBCL
and the DGCL, which are too numerous to list in their entirety.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Section 141(b) of the DGCL provides that the board of directors shall
consist of one or more members. The number of directors shall be fixed by, or in
the manner provided in, the by-laws, unless the certificate of incorporation
fixes the number of directors, in which case a change in the number of directors
shall be made only by amendment of the certificate. Pursuant to Section 141(d)
of the DGCL, the directors of any Delaware corporation may, by the certificate
of incorporation, by an initial by-law or by a by-law adopted by a vote of the
shareholders, be divided into one, two or three classes.
Section 23-1-33-3 of the IBCL provides that a board of directors must
consist of one or more individuals, with the number specified in or fixed in
accordance with the articles of incorporation or by-laws. Section 23-1-33-6 of
the IBCL provides that the articles of incorporation, or, if the articles of
incorporation so authorize, the by-laws, may provide for staggering the terms of
directors by dividing the total number of directors into either two or three
classes, with each class containing as closely as possible the same number of
directors. The ITT Industries Board of Directors will not be classified.
DUTIES OF DIRECTORS
Section 23-1-35-1 of the IBCL allows directors of a corporation to consider
a variety of nonshareholder interests in discharging their duties to the
corporation. See "-- INDIANA BUSINESS CORPORATION LAW". There is no
corresponding provision in the DGCL.
REMOVAL OF DIRECTORS
Section 141(k) of the DGCL provides that any director or the entire board
of directors may generally be removed with or without cause by a majority
shareholder vote. However, a director of a corporation with a classified board
of directors may be removed only for cause unless the certificate of
incorporation otherwise provides.
Under Section 23-1-33-8 of the IBCL, directors may be removed in any manner
provided in the articles of incorporation. In addition, unless the articles of
incorporation provide otherwise, the shareholders or directors may remove one or
more directors with or without cause. A director may be removed by the
shareholders, if they are otherwise authorized to do so, only at a meeting
called for that purpose, and such purpose must be stated in the notice of the
meeting. A director elected by a voting group of shareholders may be removed
only by that voting group.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under Section 223 of the DGCL, unless the certificate of incorporation or
the by-laws of a corporation provide otherwise, a majority vote of the directors
then in office may fill vacancies and newly created directorships, even if the
number of current directors is less than a quorum or only one director remains.
If the directors filling an open slot on the board constitute less than a
majority of the whole board (as measured before an increase in the size of the
board), the Delaware Court of Chancery may, upon application of shareholders
holding at least 10% of the outstanding voting shares, summarily order an
election to fill the open slot or replace directors chosen by the directors then
in office. Unless otherwise provided in the certificate of
224
<PAGE> 231
incorporation or by-laws, when one or more directors resign effective at a
future date, a majority of directors then in office, including those who have so
resigned, may vote to fill the vacancy.
Under Section 23-1-33-9 of the IBCL, unless the articles of incorporation
provide otherwise, if a vacancy occurs on the board of directors, including a
vacancy resulting from an increase in the number of directors, the remaining
directors, even if less than a quorum, may fill the vacancy by majority vote.
The ITT Industries Articles of Incorporation do not provide otherwise. If the
vacant office was held by a director elected by a voting group of shareholders,
only the holders of shares of that voting group may vote to fill the vacancy if
it is filled by shareholders. A vacancy that will occur at a specific later date
by reason of resignation of a director effective at a later date may be filled
before the vacancy occurs, but the new director may not take office until the
vacancy occurs.
LIMITATION ON DIRECTORS' LIABILITY
Section 102(b)(7) of the DGCL allows a corporation, through its certificate
of incorporation, to limit or eliminate the personal liability of directors to
the corporation and its shareholders for damages for breach of fiduciary duty.
However, this provision excludes any limitation on liability for (i) any breach
of the director's duty of loyalty to the corporation or its shareholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) wilful or negligent violation of the laws
governing the payment of dividends or the purchase or redemption of stock or
(iv) any transaction from which the director derives an improper personal
benefit.
Section 23-1-35-1 of the IBCL provides that a director is not liable for
any action taken as a director, or any failure to act, unless the director has
breached or failed to perform the duties of the director's office in compliance
with Section 23-1-35-1 and the breach or failure to perform constitutes willful
misconduct or recklessness. Subject to this standard, a director who votes or
assents to distributions in violation of Section 23-1-28-3 of the IBCL is
personally liable to the corporation for the amount of the illegal distribution
and is entitled to contribution from the other directors who voted for or
assented to such distribution and the shareholders who received the
distribution. The ITT Industries Articles of Incorporation limit the liability
of directors to the extent permissible under the IBCL. See "ITT INDUSTRIES
MANAGEMENT AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS".
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides that a corporation may indemnify any
person made a party or threatened to be made a party to any type of proceeding
(other than certain actions by or in right of the corporation) because he or she
is or was a director, officer, employee or agent of the corporation or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
proceeding if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation; or in a criminal proceeding, if he or she had no reasonable cause
to believe his or her conduct was unlawful. Expenses incurred by an officer or
director (or other employees or agents as deemed appropriate by the board of
directors) in defending civil or criminal proceedings may be paid by the
corporation in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by the
corporation. To indemnify a party, the corporation must determine that the party
met the applicable standards of conduct.
Section 23-1-37-8 and Section 23-1-37-13 of the IBCL provide that a
corporation may indemnify any individual made party to a proceeding (including a
proceeding by or in the right of the corporation) because the individual is or
was a director, officer, employee or agent of the corporation against liability
incurred in the proceeding if the individual acted in good faith and reasonably
believed (i) in the case of conduct in the individual's official capacity with
the corporation, that the individual's conduct was in the corporation's best
interests and (ii) in all other cases, that the individual's conduct was at
least not opposed to the corporation's best interests. In the case of any
criminal proceeding, the individual must have had either reasonable cause to
225
<PAGE> 232
believe the conduct was lawful or no reasonable cause to believe that it was
unlawful. The ITT Industries By-laws provide for the above indemnification of
directors and officers. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE
COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS". In
addition, Section 23-1-37-9 and Section 23-1-37-13 provide that a corporation,
unless limited by its articles of incorporation, must indemnify a director or
officer who was wholly successful in the defense of any proceeding to which the
director or officer was a party because the director or officer is or was a
director or officer of the corporation against reasonable expenses incurred by
the director or officer in connection with the proceeding. The ITT Industries
Articles of Incorporation do not limit the indemnification provided by the IBCL.
LOANS TO DIRECTORS
Section 143 of the DGCL allows a corporation to lend money to or guarantee
an obligation of an officer or employee, including one who acts as a director,
if the assistance is reasonably expected to benefit the corporation. Such
assistance may be provided without shareholder approval.
Pursuant to Section 23-1-35-3 of the IBCL, a corporation may not lend money
to or guarantee the obligation of a director of the corporation unless (i) the
loan is approved by a majority of the disinterested shares, (ii) the board of
directors determines that the loan or guarantee benefits the corporation and
either approves the specific loan or guarantee or a general plan authorizing
loans and guarantees or (iii) the loan or guarantee is authorized by a statute
regulating any special class of corporations.
DIVIDENDS
Subject to additional restrictions in a corporation's certificate of
incorporation, Section 170 of the DGCL allows the board of directors of a
Delaware corporation to pay dividends out of surplus or, if there is no surplus,
out of its net profits for the fiscal year in which the dividend is declared or
the preceding fiscal year.
Section 23-1-28-1 of the IBCL allows a board of directors to make
distributions to shareholders, unless otherwise provided in the articles of
incorporation. However, pursuant to Section 23-1-28-3 of the IBCL, no
distribution may be made if it would cause (i) the corporation to be unable to
pay its debts as they become due or (ii) the corporation's assets to be less
than the sum of its liabilities plus, except as otherwise specifically allowed
by the articles of incorporation, the amount that would be needed, if the
corporation were to be dissolved at the time of the distribution, to satisfy the
rights of preferential shareholders whose rights are superior to those receiving
the distribution.
ACTION BY SHAREHOLDERS THROUGH WRITTEN CONSENT
Under Section 228(a) of the DGCL, unless otherwise provided in a
corporation's certificate of incorporation, any action required to be taken at
an annual or special meeting of the shareholders may be taken in the absence of
a meeting, without prior notice and without a vote. Such action may be taken by
the written consent of shareholders in lieu of meeting setting forth the action
so taken and signed by the holders of outstanding stock representing the number
of shares necessary to take such action at a meeting at which all shares
entitled to vote were present and voted. ITT's Restricted Certificate of
Incorporation removes the right of shareholders to act by written consent.
Under Section 23-1-29-4 of the IBCL, any action required or permitted to be
taken at a meeting of shareholders may be taken without a meeting if a written
consent thereto is signed by all the shareholders entitled to vote on the
action.
SPECIAL MEETINGS OF SHAREHOLDERS
Under Section 211(d) of the DGCL, special meetings of shareholders may be
called by the board of directors and by such other person or persons as may be
authorized to do so by the corporation's certificate of incorporation or
by-laws.
Section 23-1-29-2 of the IBCL provides that a corporation with more than 50
shareholders must hold a special meeting of shareholders on demand of its board
of directors or the person or persons specifically
226
<PAGE> 233
authorized to do so by the articles of incorporation or by-laws. The ITT
Industries Articles of Incorporation and By-laws provide that only the Chairman
of the Board of Directors or the Board of Directors acting by majority vote may
call a special meeting. See "-- PROVISIONS OF ITT INDUSTRIES ARTICLES OF
INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL".
CUMULATIVE VOTING
Both Section 214 of the DGCL and Section 23-1-30-9 of the IBCL allow a
corporation to provide for cumulative voting in the certificate of incorporation
or the articles of incorporation. However, the ITT Industries Articles of
Incorporation do not provide for cumulative voting.
NECESSARY VOTE TO EFFECT MERGER (NOT INVOLVING INTERESTED SHAREHOLDER)
The DGCL requires a majority vote of the shares entitled to vote in order
to effectuate a merger between two Delaware corporations (Section 251(c)) or
between a Delaware corporation and a corporation organized under the laws of
another state (a "foreign corporation") (Section 252(c)). However, unless
required by the certificate of incorporation, Sections 251(f) and 252(e) do not
require a vote of the shareholders of a constituent corporation surviving the
merger if (i) the merger agreement does not amend that corporation's certificate
of incorporation, (ii) each share of that corporation's stock outstanding before
the effective date of the merger is identical to an outstanding or treasury
share of the surviving corporation after the merger and (iii) in the event the
merger plan provides for the issuance of common stock or securities convertible
into common stock by the surviving corporation, the common stock issued and the
common stock issuable upon conversion of the issued securities do not exceed 20%
of the shares outstanding immediately before the effective date of the merger.
Section 23-1-40-3 of the IBCL requires a majority vote of the shares
entitled to vote in order to effectuate a merger or exchange. However, the vote
of the shareholders of the surviving corporation on a plan of merger is not
required if (i) the articles of incorporation of the surviving corporation will
not differ from its articles before the merger, (ii) each shareholder of the
surviving corporation whose shares were outstanding immediately before the
effective date of the merger will hold the same proportionate number of shares
held by all such shareholders (except for shares of the surviving corporation
received solely as a result of the shareholder's proportionate shareholdings in
the other corporations party to the merger), with identical designations,
preferences, limitations and relative rights, immediately after the merger,
(iii) the number of voting shares outstanding immediately after the merger, plus
the number of voting shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise of rights
and warrants issued pursuant to the merger), will not exceed by more than 20%
the total number of voting shares of the surviving corporation outstanding
immediately before the merger and (iv) the number of participating shares
outstanding immediately after the merger, plus the number of participating
shares issuable as a result of the merger (either by the conversion of
securities issued pursuant to the merger or the exercise of rights and warrants
issued pursuant to the merger), will not exceed by more than 20% the total
number of participating shares of the surviving corporation outstanding
immediately before the merger.
BUSINESS COMBINATIONS INVOLVING INTERESTED SHAREHOLDERS
For a comparison of the provisions of the DGCL and the IBCL relating to
business combinations involving interested shareholders, see "DESCRIPTION OF ITT
HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW" and "-- INDIANA
BUSINESS CORPORATION LAW".
APPRAISAL RIGHTS; DISSENTERS' RIGHTS
Both Section 262 of the DGCL and Section 23-1-44-8 of the IBCL provide that
shareholders have the right, in some circumstances, to dissent from certain
corporate reorganizations and to instead demand payment of the fair cash value
of their shares. Under Section 262 of the DGCL, unless a corporation's
certificate of incorporation provides otherwise, dissenters do not have rights
of appraisal with respect to (i) a merger or consolidation by a corporation, the
shares of which are either listed on a national securities exchange
227
<PAGE> 234
or held by more than 2,000 shareholders, if the shareholders receive shares in
the surviving corporation, shares of another corporation that are publicly
listed or held by more than 2,000 shareholders, cash in lieu of fractional
shares or any combination of the above or (ii) shareholders of a corporation
surviving a merger if no vote of the shareholders of the surviving corporation
is required to approve the merger. Under Section 23-1-44-8 of the IBCL,
dissenters do not have rights of appraisal (i) with respect to shares of any
class or series of stock registered on a national securities exchange or traded
on the National Association of Securities Dealers, Inc. Automated Quotation
System Over-the-Counter Markets-National Market Issues or a similar market or
(ii) if they were not entitled to vote on the merger.
REDEEMABLE SHARES
Section 151(b) of the DGCL provides that the certificate of incorporation
or a resolution of the board of directors may make any class of stock subject to
redemption at the option of the corporation or the shareholders, or upon the
happening of a specified event, as long as at the time of redemption one class
of voting stock is not subject to redemption.
Section 23-1-25-1 of the IBCL provides that the articles of incorporation
of a corporation may authorize one or more classes of shares that are redeemable
or convertible as specified in the articles of incorporation, at the option of
the corporation, the shareholder or another person or upon the occurrence of a
designated event.
RIGHTS, WARRANTS OR OPTIONS
Under Section 157 of the DGCL, rights or options to purchase shares of any
class of stock may be authorized by a corporation's board of directors subject
to the provisions of the certificate of incorporation. The terms of such rights
or options must be fixed and stated in the certificate of incorporation or in a
resolution or resolutions adopted by the board of directors.
Under Section 23-1-26-5 of the IBCL, a corporation, acting through its
board of directors, may create or issue rights, options or warrants for the
purchase of shares or other securities of the corporation or any successor in
interest of the corporation. The board of directors may determine the terms upon
which the rights, options or warrants are issued, their form and content and the
consideration for which the shares or other securities are to be issued.
For a discussion of the ITT Industries Rights Plan, see "-- ITT INDUSTRIES
RIGHTS PLAN".
PREEMPTIVE RIGHTS
Under Section 102(b)(3) of the DGCL and Section 23-1-27-1 of the IBCL,
absent an express provision in a corporation's certificate of incorporation or
the articles of incorporation, a shareholder does not, by operation of law,
possess preemptive rights to subscribe to an additional issue of stock. The ITT
Industries Articles of Incorporation expressly deny shareholders any preemptive
rights.
AMENDMENT OF ARTICLES OF INCORPORATION AND BY-LAWS
Section 242 of the DGCL and Sections 23-1-38-3 and 23-1-38-4 of the IBCL
permit a corporation to amend its certificate of incorporation or articles of
incorporation in any respect provided the amendment contains only provisions
that would be lawful in an original certificate of incorporation or articles of
incorporation filed at the time of amendment. To amend a certificate of
incorporation or the articles of incorporation, the board must adopt a
resolution presenting the proposed amendment. In addition, a majority of the
shares entitled to vote, as well as a majority of shares of each class entitled
to vote, must approve the amendment to make it effective. When the substantial
rights of a class of shares will be affected by an amendment, the holders of
those shares are entitled to vote as a class even if the shares are non-voting
shares. When one or more series in a class of shares, and not the entire class,
will be adversely affected by an amendment, the affected series may vote as a
class. Under Section 242(b)(2) of the DGCL, the right to vote as a class may be
limited in certain circumstances. Any provision in the certificate of
incorporation which requires a greater vote than required by law cannot be
amended or repealed except by such greater vote.
228
<PAGE> 235
Section 242(c) of the DGCL provides that, in its resolution proposing an
amendment, the board may insert a provision allowing the board to abandon the
amendment, without concurrence by shareholders, after the amendment has received
shareholder approval but before its filing with the Secretary of State.
Section 109 of the DGCL provides that the power to amend the by-laws rests
with the stockholders entitled to vote, although the certificate of
incorporation may confer the power to amend the by-laws upon the board of
directors. Section 109 further provides that the fact that the certificate of
incorporation confers such power upon the board of directors neither limits nor
divests the stockholders of the power to amend the by-laws. Section 23-1-39-1 of
the IBCL, on the other hand, provides that, unless the articles of incorporation
provide otherwise, only the board of directors of a corporation may amend the
by-laws. The Articles of Incorporation and the By-laws of ITT Industries provide
that the By-laws may be amended by a majority vote of the entire Board of
Directors or by the affirmative vote of the holders of at least a majority of
the outstanding ITT Industries Common Stock.
INSPECTION OF BOOKS AND RECORDS
Section 220 of the DGCL entitles any shareholder of record of a
corporation, in person or by an agent, upon written demand under oath stating
the purpose thereof, to inspect during usual business hours, for any proper
purpose, the corporation's stock ledger, a list of its shareholders and its
other books and records, and to make copies or extracts therefrom. A proper
purpose means a purpose reasonably related to such person's interest as a
shareholder.
Section 23-1-52-2 of the IBCL entitles any shareholder of a corporation to
inspect and copy, during regular business hours, certain enumerated corporate
records if the shareholder gives the corporation at least five days' written
notice in advance. Certain records may be inspected only if the shareholder's
demand is made in good faith and for a proper purpose, the shareholder describes
with reasonable particularity the shareholder's purpose and the records to be
inspected are directly connected with the shareholder's purpose.
RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS
A restriction on ownership of ITT shares in respect of the gaming laws such
as that contained in the ITT Restated Certificate of Incorporation would not
apply to ITT Industries after the Distribution. Such a restriction would apply,
however, to ownership of New ITT shares. See "DESCRIPTION OF NEW ITT CAPITAL
STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS".
RESTRICTIONS ON ALIEN OWNERSHIP
It is currently expected that a restriction on ownership of ITT shares by
"aliens" (to the United States), such as that contained in the ITT By-laws,
would not apply to ITT Industries after the Distribution. Such a restriction may
apply, however, to ownership of New ITT shares. See "DESCRIPTION OF NEW ITT
CAPITAL STOCK -- RESTRICTIONS ON ALIEN OWNERSHIP".
DESCRIPTION OF NEW ITT CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that New ITT has
authority to issue under its Amended and Restated Articles of Incorporation is
250,000,000 shares of which 200,000,000 shares represent shares of New ITT
Common Stock and 50,000,000 shares represent shares of Preferred Stock (the "New
ITT Preferred Stock"). Based on 115,597,874 shares of ITT Common Stock
outstanding as of July 5, 1995, and 482,324 shares of ITT Series N Preferred
Stock (convertible into 610,622 shares of ITT Common Stock) (see "THE
DISTRIBUTION -- REDEMPTION OF SERIES N PREFERRED STOCK")) outstanding as of June
30, 1995, and a distribution ratio of one share of New ITT Common Stock for
every one share of ITT Common Stock, it is expected that approximately
116,208,496 shares of New ITT Common Stock will be distributed to holders of ITT
Common Stock on the Distribution Date.
229
<PAGE> 236
NEW ITT COMMON STOCK
Subject to any preferential rights of any New ITT Preferred Stock created
by the Board of Directors of New ITT, each outstanding share of New ITT Common
Stock will be entitled to such dividends, if any, as may be declared from time
to time by the Board of Directors of New ITT. See "DIVIDEND POLICY -- NEW ITT
DIVIDEND POLICY". Each outstanding share is entitled to one vote on all matters
submitted to a vote of shareholders. The New ITT Amended and Restated Articles
of Incorporation do not provide for cumulative voting rights; therefore, the
holders of a majority of the shares voting for the election of the Board of
Directors of New ITT can elect all the directors up for election, if they so
choose. In the event of liquidation, dissolution or winding up of New ITT,
holders of New ITT Common Stock are entitled to receive on a pro rata basis any
assets remaining after provision for payment of creditors and after payment of
any liquidation preferences to holders of New ITT Preferred Stock.
NEW ITT PREFERRED STOCK
The authorized Preferred Stock of New ITT is available for issuance from
time to time at the discretion of the New ITT Board of Directors without
shareholder approval. The New ITT Board of Directors has the authority to
prescribe for each series of New ITT Preferred Stock it establishes the number
of shares in that series, the number of votes (if any) to which such shares in
that series are entitled, the consideration for such shares in that series and
the designations, powers, preferences and relative, participating, optional or
other special rights, and such qualifications, limitations or restrictions of
the shares in that series. Depending upon the rights of such Preferred Stock,
the issuance of New ITT Preferred Stock could have an adverse effect on holders
of New ITT Common Stock by delaying or preventing a change in control of New
ITT, making removal of the present management of New ITT more difficult or
resulting in restrictions upon the payment of dividends and other distributions
to the holders of New ITT Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Nevada law does not require shareholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the New ITT Common Stock remained listed on the NYSE, require
shareholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of New ITT Common
Stock. These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital or to facilitate
corporate acquisitions.
One of the effects of the existence of unissued and unreserved New ITT
Common Stock and New ITT Preferred Stock may be to enable the Board of Directors
of New ITT to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of New ITT by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of New ITT's management and possibly deprive the
shareholders of opportunities to sell their shares of New ITT Common Stock at
prices higher than prevailing market prices. Such additional shares also could
be used to dilute the stock ownership of persons seeking to obtain control of
New ITT pursuant to the operation of the New ITT Rights Plan, which is discussed
below.
NEW ITT RIGHTS PLAN
NEW ITT RIGHTS
It is anticipated that the Board of Directors of New ITT will declare a
dividend of one right (the "New ITT Rights") for each outstanding share of New
ITT Common Stock. The New ITT Rights will be issued to the holders of record of
New ITT Common Stock outstanding on the New ITT Rights issuance date, and with
respect to New ITT Common Stock issued thereafter until the distribution date,
and, in certain circumstances, with respect to New ITT Common Stock issued after
the distribution date. Each New ITT Right, when it becomes exercisable, will
entitle the registered holder to purchase from New ITT one one-thousandth
(1/1000th) of a share of Preferred Stock of New ITT (the "New ITT Preferred
Shares") at a price (substantially above the expected current trading value for
New ITT) to be determined, subject to adjustment in certain circumstances. The
description and terms of the New ITT Rights will be set forth in a form of
230
<PAGE> 237
Rights Agreement (the "New ITT Rights Agreement") between New ITT and the Rights
Agent named therein. The terms of the New ITT Rights Agreement will be identical
to the terms of the ITT Industries Rights Plan, as described in "DESCRIPTION OF
ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", except such terms
will relate to the New ITT Rights. A copy of the New ITT Rights Agreement will
be filed as an exhibit to the Registration Statement of New ITT in respect of
the registration of the New ITT Common Stock under the Exchange Act. Unless the
context otherwise requires, references herein to the New ITT Common Stock
includes the related New ITT Rights.
CERTAIN EFFECTS OF THE NEW ITT RIGHTS PLAN
The New ITT Rights Plan is designed to protect shareholders of New ITT in
the event of unsolicited offers to acquire New ITT and other coercive takeover
tactics which, in the opinion of the Board of Directors of New ITT, could impair
its ability to represent shareholder interests. The provisions of the New ITT
Rights Plan may render an unsolicited takeover of New ITT more difficult or less
likely to occur or might prevent such a takeover, even though such takeover may
offer New ITT's shareholders the opportunity to sell their stock at a price
above the prevailing market rate and may be favored by a majority of the
shareholders of New ITT.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of New ITT authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
New ITT of any kind or class.
NEVADA GENERAL CORPORATION LAW
The terms of Chapter 78 of the Nevada Revised Statutes, entitled the Nevada
General Corporation Law (the "NGCL"), will apply to New ITT since it will be a
Nevada corporation. Under certain circumstances, the following selected
provisions of the NGCL may delay or make more difficult acquisitions or changes
of control of New ITT. The Amended and Restated Articles of Incorporation and
By-laws of New ITT will not exclude New ITT from such provisions of the NGCL.
Such provisions also may have the effect of preventing changes in the management
of New ITT. It is possible that such provisions could make it more difficult to
accomplish transactions which shareholders may otherwise deem to be in their
best interests.
CONTROL SHARE ACQUISITIONS
Pursuant to Sections 78.378 to 78.3793 of the NGCL, an "acquiring person"
who acquires a "controlling interest" in an "issuing corporation" may not
exercise voting rights on any "control shares" unless such voting rights are
conferred by a majority vote of the disinterested shareholders of the issuing
corporation at a special meeting of such shareholders held upon the request and
at the expense of the acquiring person. In the event that the control shares are
accorded full voting rights and the acquiring person acquires control shares
with a majority or more of all the voting power, any shareholder, other than the
acquiring person, who does not vote in favor of authorizing voting rights for
the control shares is entitled to demand payment for the fair value of his or
her shares, and the corporation must comply with the demand. For purposes of the
above provisions, "acquiring person" means (subject to certain exceptions) any
person who, individually or in association with others, acquires or offers to
acquire, directly or indirectly, a controlling interest in an issuing
corporation. "Controlling interest" means the ownership of outstanding voting
shares of an issuing corporation sufficient to enable the acquiring person,
individually or in association with others, directly or indirectly, to exercise
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, (iii) a majority or more of the voting power of the issuing
corporation in the election of directors, and voting rights must be conferred by
a majority of the disinterested shareholders as each threshold is reached and/or
exceeded. "Control Shares" means those outstanding voting shares of an issuing
corporation which an acquiring person acquires or offers to acquire in an
acquisition or within 90 days immediately preceding the date when the acquiring
person became an acquiring person. "Issuing corporation" means a corporation
which is organized in Nevada, has 200 or more shareholders, at least 100 of whom
are shareholders of record and residents of Nevada, and does business in Nevada
directly or through an affiliated corporation. The above provisions do not
231
<PAGE> 238
apply if the articles of incorporation or by-laws of the corporation in effect
on the 10th day following the acquisition of a controlling interest by an
acquiring person provide that said provisions do not apply. As noted above, New
ITT's Amended and Restated Articles of Incorporation and By-laws do not exclude
New ITT from the restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS
Sections 78.411 to 78.444 of the NGCL restrict the ability of a "resident
domestic corporation" to engage in any combination with an "interested
stockholder" for three years after the interested stockholder's date of
acquiring the shares that cause such stockholder to become an interested
stockholder unless the combination or the purchase of shares by the interested
stockholder on the interested stockholder's date of acquiring the shares that
cause such stockholder to become an interested stockholder is approved by the
board of directors of the resident domestic corporation before that date. If the
combination was not previously approved, the interested stockholder may effect a
combination after the three-year period only if such stockholder receives
approval from a majority of the disinterested shares or the offer meets certain
fair price criteria. For purposes of the above provisions, "resident domestic
corporation" means a Nevada public corporation that has 200 or more
shareholders. "Interested stockholder" means any person, other than the resident
domestic corporation or its subsidiaries, who is (a) the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the outstanding
voting shares of the resident domestic corporation or (b) an affiliate or
associate of the resident domestic corporation and at any time within three
years immediately before the date in question was the beneficial owner, directly
or indirectly, of 10% or more of the voting power of the then outstanding shares
of the resident domestic corporation. The above provisions do not apply to
corporations that so elect in a charter amendment approved by a majority of the
disinterested shares. Such a charter amendment, however, would not become
effective for 18 months after its passage and would apply only to stock
acquisitions occurring after its effective date. As noted above, New ITT's
Amended and Restated Articles of Incorporation do not exclude New ITT from the
restrictions imposed by such provisions.
RIGHTS AND OPTIONS
Section 78.200 of the NGCL provides that a corporation may create and
issue, whether in connection with the issue and sale of any shares of stock or
other securities of the corporation, rights or options for the purchase of
shares of stock of any class of the corporation, to be evidenced by such
instrument as is approved by the board of directors. The terms upon which, and
the price at which, any such shares may be purchased from the corporation upon
the exercise of any right or option must be fixed and stated in the articles of
incorporation or in a resolution adopted by the board of directors providing for
the creation and issuance of such rights and options, and, in every case, set
forth or incorporated by reference in the instrument evidencing the rights or
options.
DIRECTORS' DUTIES
Section 78-138 of the NGCL allows directors and officers, in exercising
their respective powers with a view to the interests of the corporation, to
consider the interests of the corporation's employees, suppliers, creditors and
customers; the economy of the state and the nation; the interests of the
community and of society and the long and short-term interests of the company
and its shareholders, including the possibility that these interests may be best
served by the continued independence of the corporation. Directors may resist a
change or potential change in control if the directors by a majority vote of a
quorum determine that the change or potential change is opposed to or not in the
best interest of the corporation upon consideration of the interests set forth
above or if the board has reasonable grounds to believe that, within a
reasonable time, the debt created as a result of the change in control would
cause the assets of the corporation or any successor to be less than the
liabilities or would render the corporation or any successor insolvent or would
lead to bankruptcy proceedings.
232
<PAGE> 239
PROVISIONS OF NEW ITT AMENDED AND RESTATED ARTICLES OF INCORPORATION
AND BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the New ITT Amended and Restated Articles of
Incorporation and By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of New ITT. It is believed that such
provisions will enable New ITT to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of New
ITT and its shareholders. Such provisions could have the effect of discouraging
third parties from making proposals involving an unsolicited acquisition or
change of control of New ITT, although such proposals, if made, might be
considered desirable by a majority of New ITT's shareholders. Such provisions
may also have the effect of making it more difficult for third parties to cause
the replacement of the current management of New ITT without the concurrence of
the Board of Directors. These provisions include (i) the availability of capital
stock for issuance from time to time at the discretion of the Board of Directors
(see "-- AUTHORIZED BUT UNISSUED CAPITAL STOCK"), (ii) prohibitions against
shareholders calling a special meeting of shareholders or acting by written
consent in lieu of a meeting, (iii) requirements for advance notice for raising
business or making nominations at shareholders' meetings and (iv) the ability of
the board of directors to increase the size of the board and to appoint
directors to fill newly created directorships. These four provisions are present
in the Restated Certificate of Incorporation or By-laws of ITT. It is also
currently expected that a restriction on ownership of New ITT shares by "aliens"
(to the United States), such as that contained in the ITT By-laws, would apply
to New ITT after the Distribution. See "-- RESTRICTION ON ALIEN OWNERSHIP."
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The New ITT Amended and Restated Articles of Incorporation and By-laws
provide that shareholder action can be taken only at an annual or special
meeting and cannot be taken by written consent in lieu of a meeting. The New ITT
Amended and Restated Articles of Incorporation and By-laws also provide that
special meetings of the shareholders can be called only by the Chairman of the
Board or by a vote of the majority of the entire Board of Directors.
Furthermore, the By-laws provide that only such business as is specified in the
notice of any such special meeting of the shareholders may come before such
meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws of New ITT establish an advance notice procedure for
shareholder proposals to be bought before an annual meeting of shareholders and
for nominations by shareholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of shareholders as has been
brought before the meeting by, or at the direction of, the Board of Directors,
or by a shareholder who has given to the Secretary of New ITT timely written
notice, in proper form, of the shareholder's intention to bring that business
before the meeting. The chairman of such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Board of Directors, or who are nominated by a shareholder who has given timely
written notice, in proper form, to the Secretary prior to a meeting at which
directors are to be elected will be eligible for election as directors of New
ITT.
To be timely, notice of business to be brought before an annual meeting or
nominations of candidates for election as directors at an annual meeting must be
received by the Secretary of New ITT not later than 90 days in advance of the
anniversary date for the immediately preceding annual meeting (or not more than
10 days after the first public disclosure of the date of such annual meeting,
whichever is earlier). Similarly, notice of nominations to be brought before a
special meeting must be delivered to the Secretary no later than the close of
business on the seventh day following the day on which notice of the date of the
special meeting of shareholders is given.
The notice of any nomination for election as a director must set forth the
name and address of the shareholder who intends to make the nomination and of
the person or persons to be nominated; a representation that the shareholder is
a holder of record of stock of New ITT entitled to vote at such meeting
233
<PAGE> 240
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; such other information regarding
each nominee proposed by such shareholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the Board of Directors; and the consent of each nominee to
serve as a director if so elected.
NUMBER OF DIRECTORS; FILLING OF VACANCIES
The New ITT Amended and Restated Articles of Incorporation and By-laws
provide that newly created directorships resulting from any increase in the
authorized number of directors (or any vacancy) may be filled by a vote of a
majority of directors then in office, subject to the requirement provided in the
By-laws that the majority of directors holding office immediately after such
election must be "independent directors" (as defined). Accordingly, the Board of
Directors of New ITT may be able to prevent any shareholder from obtaining
majority representation on the Board of Directors by increasing the size of the
board and filling the newly created directorships with its own nominees.
RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS
New ITT's Amended and Restated Articles of Incorporation provide that (i)
all securities of New ITT are subject to redemption by New ITT to the extent
necessary to prevent the loss or to secure the reinstatement of any casino
gaming license held by New ITT or any of its subsidiaries in any jurisdiction
within or without the United States of America, (ii) all securities of New ITT
are held subject to the condition that if a holder thereof is found by a gaming
authority in any such jurisdiction to be disqualified or unsuitable pursuant to
any gaming law, such holder will be required to dispose of all New ITT
securities held by such holder and (iii) it will be unlawful for any such
disqualified person to (a) receive payments of interest or dividends on any New
ITT securities, (b) exercise, directly or indirectly, any rights conferred by
any New ITT securities or (c) receive any remuneration in any form, for services
rendered or otherwise, from the subsidiary that holds the gaming license in such
jurisdiction.
RESTRICTIONS ON ALIEN OWNERSHIP
It is currently expected that a restriction on ownership of New ITT shares
by "aliens" (to the United States), such as that contained in the ITT By-laws,
would apply to New ITT after the Distribution. Such a provision would be
included in the By-laws of New ITT as a result of the requirements of certain
United States statutes that would be applicable to New ITT if it successfully
concludes its previously announced agreement to acquire through a partnership
television station WNYC-TV. In this provision of the By-laws New ITT would limit
stock ownership by "aliens" (as used herein, the term "alien" includes the
following and their representatives: individuals who are not nationals of the
United States, partnerships unless a majority of the partners are such nationals
and share in a majority of those profits, foreign governments, entities created
under the laws of foreign governments and entities controlled directly or
indirectly by one or more of such individuals, partnerships, governments or
entities). The New ITT By-laws would provide that under no circumstances shall
the amount of New ITT stock owned of record by aliens exceed 25% of the total
outstanding. If and so long as the stock records of New ITT shall at any time
disclose 25% alien ownership (i) no transfers of shares of domestic record to
aliens may be made and (ii) if it shall be found that stock of domestic record
is in fact held by or for the account of an alien, the holder of such stock
shall not be entitled to vote, to receive dividends, or to have any other rights
except the right to transfer the stock to a citizen of the United States.
COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND NEVADA LAW
ITT is incorporated in Delaware. However, because a large portion of its
operations are conducted in Nevada and because Nevada corporations enjoy greater
statutory protection against changes in control (see "-- NEVADA GENERAL
CORPORATION LAW"), New ITT, following the Distribution, will be incorporated in
Nevada. The NGCL differs from the DGCL in many respects. The following summary
sets forth certain
234
<PAGE> 241
differences that should be considered by shareholders. The following summary
does not purport to be a complete statement of the differences between the NGCL
and the DGCL, which are too numerous to list in their entirety.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Section 141(b) of the DGCL provides that the board of directors shall
consist of one or more members. The number of directors shall be fixed by, or in
the manner provided in, the by-laws, unless the certificate of incorporation
fixes the number of directors, in which case a change in the number of directors
shall be made only by amendment of the certificate. Pursuant to Section 141(d)
of the DGCL, the directors of any Delaware corporation may, by the certificate
of incorporation, by an initial by-law or by a by-law adopted by a vote of the
shareholders, be divided into one, two or three classes.
Section 78.115 of the NGCL provides that a corporation must have at least
one director and may provide in its articles of incorporation or its by-laws for
a fixed number of directors or a variable number of directors within a fixed
maximum and minimum and for the manner in which the number of directors may be
increased or decreased. Section 78.330 of the NGCL provides that the articles of
incorporation or the by-laws may provide for a classified board of directors,
but at least one-fourth of the directors must be elected annually. The New ITT
Board of Directors will not be classified.
DUTIES OF DIRECTORS
Section 78.138 of the NGCL allows directors and officers of a corporation
to consider a variety of nonshareholder interests in discharging their duties to
the corporation. See "-- NEVADA GENERAL CORPORATION LAW". There is no
corresponding provision in the DGCL.
REMOVAL OF DIRECTORS
Section 141(k) of the DGCL provides that any director or the entire board
of directors may generally be removed with or without cause by a majority
shareholder vote. However, a director of a corporation with a classified board
of directors may be removed only for cause unless the certificate of
incorporation otherwise provides.
Under Section 78.335 of the NGCL, directors may be removed from office by a
two-thirds shareholder vote, or by the vote of such larger percentage of shares
as may be provided in the articles of incorporation. A director elected by a
voting group, unless otherwise provided in the articles of incorporation, may
only be removed by a vote of two-thirds of the members of the group or by the
vote of such larger percentage of the group as may be provided in the articles
of incorporation for the removal of directors.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Under Section 223 of the DGCL, unless the certificate of incorporation or
the by-laws of a corporation provide otherwise, a majority vote of the directors
then in office may fill vacancies and newly created directorships, even if the
number of current directors is less than a quorum or only one director remains.
If the directors filling an open slot on the board constitute less than a
majority of the whole board (as measured before an increase in the size of the
board), the Delaware Court of Chancery may, upon application of shareholders
holding at least 10% of the outstanding voting shares, summarily order an
election to fill the open slots or replace directors chosen by the directors
then in office. Unless otherwise provided in the certificate of incorporation or
by-laws, when one or more directors resign effective at a future date, a
majority of directors then in office, including those who have so resigned, may
vote to fill the vacancy.
Similarly, under Section 78.335 of the NGCL, all vacancies, including those
caused by an increase in the number of directors, may be filled by a majority of
the remaining directors, though less than a quorum, unless the articles of
incorporation provide otherwise. The New ITT Articles of Incorporation do not
provide otherwise. If a director gives notice of his or her resignation to the
board of directors, to become effective at a
235
<PAGE> 242
future date, the board may fill the vacancy to take effect when the resignation
becomes effective, with the director so appointed to hold office during the
remainder of the term of office of the resigning director.
LIMITATION ON DIRECTORS' LIABILITY
Section 102(b)(7) of the DGCL allows a corporation, through its certificate
of incorporation, to limit or eliminate the personal liability of directors to
the corporation and its shareholders for monetary damages for breach of
fiduciary duty. However, this provision excludes any limitation on liability for
(i) any breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) wilful or negligent
violation of the laws governing the payment of dividends or the purchase or
redemption of stock or (iv) any transaction from which the director derives an
improper personal benefit.
Section 78.037 of the NGCL allows a corporation, through its articles of
incorporation, to limit or eliminate the personal liability of directors to the
corporation and its shareholders for damages for breach of fiduciary duty.
However, this provision excludes any limitation on liability for (i) acts or
omissions which involve intentional misconduct, fraud or a knowing violation of
law or (ii) the payment of distributions in violation of Section 78.300 of the
NGCL. The New ITT Amended and Restated Articles of Incorporation limit the
liability of directors in the above manner. See "NEW ITT MANAGEMENT AND
EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS".
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL and Section 78.751 of the NGCL both provide that a
corporation may indemnify any person made a party or threatened to be made a
party to any type of proceeding (other than certain actions by or in right of
the corporation) because he or she is or was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such proceeding if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation; or in a criminal proceeding, if he or she had no
reasonable cause to believe his or her conduct was unlawful. Expenses incurred
by an officer or director (or other employees or agents as deemed appropriate by
the board of directors) in defending civil or criminal proceedings may be paid
by the corporation in advance of the final disposition of such proceeding upon
receipt of an undertaking by or on behalf of such person to repay such amount if
it is ultimately determined that such person is not entitled to be indemnified
by the corporation. To indemnify a party, the corporation must determine that
the party met the applicable standards of conduct. The New ITT By-laws provide
for the above indemnification of directors and officers. See "NEW ITT MANAGEMENT
AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS".
LOANS TO DIRECTORS
Section 143 of the DGCL allows a corporation to lend money to or guarantee
an obligation of an officer or employee, including one who acts as a director,
if the assistance is reasonably expected to benefit the corporation. Such
assistance may be provided without shareholder approval. The NGCL contains no
corresponding provision.
DIVIDENDS
Subject to additional restrictions in a corporation's certificate of
incorporation, Section 170 of the DGCL allows the board of directors of a
Delaware corporation to pay dividends out of surplus or, if there is no surplus,
out of its net profits for the fiscal year in which the dividend is declared or
the preceding fiscal year.
Section 78.288 of the NGCL allows a board of directors to make
distributions to shareholders, unless otherwise provided in the articles of
incorporation. However, no distribution may be made if it would cause (i) the
corporation to be unable to pay its debts as they become due or (ii) except as
otherwise specifically allowed by the articles of incorporation, the
corporation's assets to be less than the sum of its liabilities plus the
236
<PAGE> 243
amount that would be needed, if the corporation were to be dissolved at the time
of the distribution, to satisfy the preferential shareholders whose rights are
superior to those receiving the distribution.
ACTION BY SHAREHOLDERS THROUGH WRITTEN CONSENT
Under Section 228(a) of the DGCL, unless otherwise provided in a
corporation's certificate of incorporation, any action required to be taken at
an annual or special meeting of the shareholders may be taken in the absence of
a meeting, without prior notice and without a vote. Such action may be taken by
the written consent of shareholders in lieu of a meeting setting forth the
action so taken and signed by the holders of outstanding stock representing the
number of shares necessary to take such action at a meeting at which all shares
entitled to vote were present and voted.
Under Section 78.320 of the NGCL, unless otherwise provided in a
corporation's articles of incorporation or by-laws, any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if a written consent thereto is signed by shareholders holding at least
a majority of the voting power, except that if a different proportion of voting
power is required for such an action at a meeting, then that proportion of
written consents is required. The New ITT Amended and Restated Articles of
Incorporation and By-laws prohibit shareholder action by written consent. See
"-- PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE
IN CONTROL".
SPECIAL MEETINGS OF SHAREHOLDERS
Under Section 211(d) of the DGCL, special meetings of shareholders may be
called by the board of directors and by such other person or persons as may be
authorized to do so by the corporation's certificate of incorporation or
by-laws. Under Section 78.310 of the NGCL, meetings may be held in the manner
provided by the by-laws of the corporation. The New ITT Amended and Restated
Articles of Incorporation and By-laws provide that only the Chairman of the
Board of Directors or the Board of Directors acting by majority vote may call a
special meeting. See "-- PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-
LAWS AFFECTING CHANGE IN CONTROL".
CUMULATIVE VOTING
Both Section 214 of the DGCL and Section 78.360 of the NGCL allow a
corporation to provide for cumulative voting in the certificate of incorporation
or the articles of incorporation. However, the New ITT Amended and Restated
Articles of Incorporation do not provide for cumulative voting.
NECESSARY VOTE TO EFFECT MERGER (NOT INVOLVING INTERESTED STOCKHOLDER)
The DGCL requires a majority vote of the shares entitled to vote in order
to effectuate a merger between two Delaware corporations (Section 251(c)) or
between a Delaware corporation and a corporation organized under the laws of
another state (a "foreign corporation") (Section 252(c)). However, unless
required by the certificate of incorporation, Sections 251(f) and 252(e) do not
require a vote of the shareholders of a constituent corporation surviving the
merger if (i) the merger agreement does not amend that corporation's certificate
of incorporation, (ii) each share of that corporation's stock outstanding before
the effective date of the merger is identical to an outstanding or treasury
share of the surviving corporation after the merger and (iii) in the event the
merger plan provides for the issuance of common stock or securities convertible
into common stock by the surviving corporation, the common stock issued and the
common stock issuable upon conversion of the issued securities do not exceed 20%
of the shares outstanding immediately before the effective date of the merger.
Section 78.453 of the NGCL requires a majority vote of the shares entitled
to vote in order to effect any merger. However, the articles of incorporation or
the board of directors may provide for a greater vote under some circumstances.
In addition, Section 78.454 of the NGCL provides that the vote of the
stockholders of the surviving corporation on a plan of merger is not required
under substantially the same conditions as are specified in Sections 251(f) and
252(e) of the DGCL.
237
<PAGE> 244
BUSINESS COMBINATIONS INVOLVING INTERESTED STOCKHOLDERS
For a comparison of the provisions of the DGCL and the NGCL relating to
business combinations involving interested stockholders, see "DESCRIPTION OF ITT
HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW" and "-- NEVADA
GENERAL CORPORATION LAW".
APPRAISAL RIGHTS; DISSENTERS' RIGHTS
Both Section 262 of the DGCL and Sections 78.481 and 78.482 of the NGCL
provide that shareholders have the right, in some circumstances, to dissent from
certain corporate reorganizations and to instead demand payment of the fair cash
value of their shares. Unless a corporation's certificate of incorporation
provides otherwise, dissenters do not have rights of appraisal with respect to
(i) a merger or consolidation by a corporation, the shares of which are either
listed on a national securities exchange, designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or held by more than 2,000 shareholders, if the
shareholders receive cash (in the case of the NGCL), shares in the surviving
corporation, shares of another corporation that are publicly listed or held by
more than 2,000 shareholders, cash in lieu of fractional shares or any
combination of the above or (ii) shareholders of a corporation surviving a
merger if no vote of the shareholders of the surviving corporation is required
to approve the merger.
REDEEMABLE SHARES
Section 151(b) of the DGCL provides that the certificate of incorporation
or a resolution of the board of directors may make any class of stock subject to
redemption at the option of the corporation or the shareholders or upon the
happening of a specified event, as long as at the time of redemption one class
of voting stock is not subject to redemption.
Section 78.196 of the NGCL provides that the articles of incorporation or a
resolution of the board of directors may authorize one or more classes of stock
that are redeemable or convertible at the option of the corporation, the
shareholders or another person or upon the occurrence of a designated event.
RIGHTS, WARRANTS OR OPTIONS
Under Section 157 of the DGCL, rights or options to purchase shares of any
class of stock may be authorized by a corporation's board of directors subject
to the provisions of the certificate of incorporation. The terms of such rights
or options must be fixed and stated in the certificate of incorporation or in a
resolution or resolutions adopted by the board of directors.
Under Section 78.200 of the NGCL, a corporation may create and issue rights
or options entitling the holders thereof to purchase from the corporation shares
of its stock of any class or classes. The terms of such rights or options must
be fixed and stated in the articles of incorporation or in a resolution or
resolutions adopted by the board of directors. For a discussion of the New ITT
Rights Plan, see " -- NEW ITT RIGHTS PLAN".
PREEMPTIVE RIGHTS
Under Section 102(b)(3) of the DGCL and Section 78.267 of the NGCL, absent
an express provision in a corporation's certificate of incorporation, a
shareholder does not, by operation of law, possess preemptive rights to
subscribe to an additional issue of stock. The New ITT Amended and Restated
Articles of Incorporation expressly deny shareholders any preemptive rights.
AMENDMENT OF ARTICLES OF INCORPORATION AND BY-LAWS
Section 242 of the DGCL and Sections 78.385 and 78.390 of the NGCL permit a
corporation to amend its certificate or articles of incorporation in any respect
provided the amendment contains only provisions that would be lawful in an
original certificate or articles of incorporation filed at the time of
amendment. To amend a certificate or articles of incorporation, the board must
adopt a resolution presenting the proposed
238
<PAGE> 245
amendment. In addition, a majority of the shares entitled to vote, as well as a
majority of shares by class of each class entitled to vote, must approve the
amendment to make it effective. When the substantial rights of a class of shares
will be affected by an amendment, the holders of those shares are entitled to
vote as a class even if the shares are non-voting shares. When only one or more
series in a class of shares, and not the entire class, will be adversely
affected by an amendment, only the affected series may vote as a class. Under
Section 242(b)(2) of the DGCL, the right to vote as a class may be limited in
certain circumstances. Any provision in the certificate or articles of
incorporation which requires a greater vote than required by law cannot be
amended or repealed except by such greater vote. Section 242(c) of the DGCL
provides that, in its resolution proposing an amendment, the board may insert a
provision allowing the board to abandon the amendment, without concurrence by
shareholders, after the amendment has received shareholder approval but before
its filing with the Secretary of State.
Section 109 of the DGCL provides that the power to amend the by-laws rests
with the stockholders entitled to vote, although the certificate of
incorporation may confer the power to amend the by-laws upon the board of
directors. Section 109 further provides that the fact that the certificate of
incorporation confers such power upon the board of directors neither limits nor
divests the stockholders of the power to amend the by-laws. Section 78.120 of
the NGCL, on the other hand, provides that, subject to the by-laws, if any,
adopted by the stockholders, the directors may make the by-laws of the
corporation. The Amended and Restated Articles of Incorporation and the By-laws
of New ITT provide that the By-laws may be amended by a majority vote of the
entire Board of Directors or by the affirmative vote of the holders of at least
a majority of the outstanding New ITT Common Stock.
INSPECTION OF BOOKS AND RECORDS
Section 220 of the DGCL entitles any shareholder of record of a
corporation, in person or by an agent, upon written demand under oath stating
the purpose thereof, to inspect during usual business hours, for any proper
purpose, the corporation's stock ledger, a list of its shareholders and its
other books and records, and to make copies or extracts therefrom. A proper
purpose means a purpose reasonably related to such person's interest as a
shareholder.
Section 78.105 of the NGCL entitles any person who has been a shareholder
of record of a corporation for at least six months, or any person holding or
representing at least 5% of its outstanding shares, upon at least five days'
written demand, to inspect, in person or by an agent, during usual business
hours, its stock ledger and to make extracts therefrom. However, pursuant to
Section 78.257 of the NGCL, only shareholders of record who own or represent at
least 15% of a corporation's shares have the right, upon at least five days'
written demand, to inspect, in person or by an agent, during normal business
hours, the books of account and financial records of the corporation, to make
extracts therefrom and to conduct an audit of such records.
DESCRIPTION OF ITT HARTFORD CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that ITT Hartford has
authority to issue under its Amended and Restated Certificate of Incorporation
is 250,000,000 shares of which 200,000,000 shares represent shares of ITT
Hartford Common Stock and 50,000,000 shares represent shares of Preferred Stock
(the "ITT Hartford Preferred Stock"). Based on 115,597,874 shares of ITT Common
Stock outstanding as of July 5, 1995, and 482,324 shares of ITT Series N
Preferred Stock (convertible into 610,622 shares of ITT Common Stock (see "THE
DISTRIBUTION -- REDEMPTION OF SERIES N PREFERRED STOCK")), and a distribution
ratio of one share of ITT Hartford Common Stock for every one share of ITT
Common Stock, it is expected that approximately 116,208,496 shares of ITT
Hartford Common Stock will be distributed to holders of ITT Common Stock on the
Distribution Date.
239
<PAGE> 246
ITT HARTFORD COMMON STOCK
Subject to any preferential rights of any ITT Hartford Preferred Stock
created by the Board of Directors of ITT Hartford, each outstanding share of ITT
Hartford Common Stock will be entitled to such dividends as may be declared from
time to time by the Board of Directors of ITT Hartford. See "DIVIDEND POLICY --
ITT HARTFORD DIVIDEND POLICY". Each outstanding share is entitled to one vote on
all matters submitted to a vote of shareholders. The ITT Hartford Amended and
Restated Certificate of Incorporation does not provide for cumulative voting
rights; therefore, the holders of a majority of the shares voting for the
election of the Board of Directors of ITT Hartford can elect all the directors
up for election, if they so choose. In the event of liquidation, dissolution or
winding up of ITT Hartford, holders of ITT Hartford Common Stock will be
entitled to receive on a pro rata basis any assets remaining after provision for
payment of creditors and after payment of any liquidation preferences to holders
of ITT Hartford Preferred Stock.
ITT HARTFORD PREFERRED STOCK
The authorized Preferred Stock of ITT Hartford is available for issuance
from time to time at the discretion of the ITT Hartford Board of Directors
without shareholder approval. The ITT Hartford Board of Directors has the
authority to prescribe for each series of ITT Hartford Preferred Stock it
establishes the number of shares in that series, the number of votes (if any) to
which such shares in that series are entitled, the consideration for such shares
in that series and the designations, powers, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions of the shares in that series. Depending upon the
rights of such Preferred Stock, the issuance of ITT Hartford Preferred Stock
could have an adverse effect on holders of ITT Hartford Common Stock by delaying
or preventing a change in control of ITT Hartford, making removal of the present
management of ITT Hartford more difficult or resulting in restrictions upon the
payment of dividends and other distributions to the holders of ITT Hartford
Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require shareholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the ITT Hartford Common Stock remained listed on the NYSE,
require shareholder approval of certain issuances that equal to or exceed 20% of
the then outstanding voting power or then outstanding number of shares of Common
Stock of ITT Hartford. These additional shares may be used for a variety of
corporate purposes, including future public offerings to raise additional
capital or to facilitate corporate acquisitions. ITT Hartford currently does not
have any plans to issue additional shares of ITT Hartford Common Stock or ITT
Hartford Preferred Stock.
One of the effects of the existence of unissued and unreserved ITT Hartford
Common Stock and ITT Hartford Preferred Stock may be to enable the Board of
Directors of ITT Hartford to issue shares to persons friendly to current
management, which issuance could render more difficult or discourage an attempt
to obtain control of ITT Hartford by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of ITT Hartford's
management and possibly deprive the shareholders of opportunities to sell their
shares of ITT Hartford Common Stock at prices higher than prevailing market
prices. Such additional shares also could be used to dilute the stock ownership
of persons seeking to obtain control of ITT Hartford pursuant to the operation
of the ITT Hartford Rights Plan, which is discussed below.
ITT HARTFORD RIGHTS PLAN
ITT HARTFORD RIGHTS
It is anticipated that the Board of Directors of ITT Hartford will declare
a dividend of one right (the "ITT Hartford Rights") for each outstanding share
of ITT Hartford Common Stock. The ITT Hartford Rights will be issued to the
holders of record of ITT Hartford Common Stock outstanding on the ITT Hartford
Rights issuance date and with respect to ITT Hartford Common Stock issued
thereafter until the distribution date, and, in certain circumstances, with
respect to ITT Hartford Common Stock issued after the distribution date. Each
ITT Hartford Right, when it becomes exercisable, will entitle the registered
holder to
240
<PAGE> 247
purchase from ITT Hartford one one-thousandth (1/1000th) of a share of Preferred
Stock of ITT Hartford (the "ITT Hartford Preferred Shares") at a price
(substantially above the expected current trading value for ITT Hartford) to be
determined, subject to adjustment in certain circumstances. The description and
terms of the ITT Hartford Rights will be set forth in a form of Rights Agreement
(the "ITT Hartford Rights Agreement") between ITT Hartford and the Rights Agent
named therein. The terms of the ITT Hartford Rights Agreement will be identical
to the terms of the ITT Industries Rights Plan, as described in "DESCRIPTION OF
ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN," except such terms
will relate to the ITT Hartford Rights. A copy of the ITT Hartford Rights
Agreement will be filed as an exhibit to the Registration Statement of ITT
Hartford in respect of the registration of ITT Hartford Common Stock under the
Exchange Act. Unless the context otherwise requires, references herein to the
ITT Hartford Common Stock include the related ITT Hartford Rights.
CERTAIN EFFECTS OF THE ITT HARTFORD RIGHTS PLAN
The ITT Hartford Rights Plan is designed to protect shareholders of ITT
Hartford in the event of unsolicited offers to acquire ITT Hartford and other
coercive takeover tactics which, in the opinion of the Board of Directors of ITT
Hartford, could impair its ability to represent shareholder interests. The
provisions of the ITT Hartford Rights Plan may render an unsolicited takeover of
ITT Hartford more difficult or less likely to occur or might prevent such a
takeover, even though such takeover may offer ITT Hartford's shareholders the
opportunity to sell their stock at a price above the prevailing market rate and
may be favored by a majority of the shareholders of ITT Hartford.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of ITT Hartford authorized at the time of
the Distribution will have any preemptive right to subscribe to any securities
of ITT Hartford of any kind or class.
DELAWARE GENERAL CORPORATION LAW
The terms of Section 203 of the DGCL apply to ITT Hartford since it is a
Delaware corporation. Pursuant to Section 203, with certain exceptions, a
Delaware corporation may not engage in any of a broad range of business
combinations, such as mergers, consolidations and sales of assets, with an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless (a) the transaction that results
in the person's becoming an interested stockholder or the business combination
is approved by the board of directors of the corporation before the person
becomes an interested stockholder, (b) upon consummation of the transaction
which results in the shareholder becoming an interested stockholder, the
interested stockholder owns 85% or more of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares owned by
persons who are directors and also officers and shares owned by certain employee
stock plans or (c) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by holders of at least two-thirds of the corporation's outstanding
voting stock, excluding shares owned by the interested stockholder, at a meeting
of shareholders. Under Section 203, an "interested stockholder" is defined as
any person, other than the corporation and any direct or indirect majority-owned
subsidiary, that is (a) the owner of 15% or more of the outstanding voting stock
of the corporation or (b) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
Section 203 does not apply to a corporation that so provides in an amendment to
its certificate of incorporation or by-laws passed by a majority of its
outstanding shares at any time. Such stockholder action does not become
effective for 12 months following its adoption and would not apply to persons
who were already interested stockholders at the time of the amendment. ITT
Hartford's Amended and Restated Certificate of Incorporation does not exclude
ITT Hartford from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period,
241
<PAGE> 248
although the shareholders may elect to exclude a corporation from the
restrictions imposed thereunder. The provisions of Section 203 may encourage
companies interested in acquiring ITT Hartford to negotiate in advance with ITT
Hartford's Board of Directors, because the shareholder approval requirement
would be avoided if a majority of the directors then in office approve either
the business combination or the transaction which results in the shareholder
becoming an interested shareholder. Such provisions also may have the effect of
preventing changes in the management of ITT Hartford. It is further possible
that such provisions could make it more difficult to accomplish transactions
which shareholders may otherwise deem to be in their best interests.
PROVISIONS OF ITT HARTFORD AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the ITT Hartford Amended and Restated Certificate of
Incorporation and By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of ITT Hartford. It is believed that such
provisions will enable ITT Hartford to develop its business in a manner that
will foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of ITT
Hartford and its shareholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of ITT Hartford, although such proposals, if
made, might be considered desirable by a majority of ITT Hartford's
shareholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of the current management
of ITT Hartford without the concurrence of the Board of Directors. These
provisions include (i) the availability of capital stock for issuance from time
to time at the discretion of the Board of Directors (see "-- AUTHORIZED BUT
UNISSUED CAPITAL STOCK"), (ii) prohibitions against shareholders calling a
special meeting of shareholders or acting by written consent in lieu of a
meeting (iii) requirements for advance notice for raising business or making
nominations at shareholders' meetings and (iv) the ability of the board of
directors to increase the size of the board and to appoint directors to fill
newly created directorships. These four provisions are present in the Restated
Certificate of Incorporation or By-laws of ITT.
NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The ITT Hartford Amended and Restated Certificate of Incorporation and
By-laws provide that shareholder action can be taken only at an annual or
special meeting and cannot be taken by written consent in lieu of a meeting. The
ITT Hartford Amended and Restated Certificate of Incorporation and By-laws also
provide that special meetings of the shareholders can be called only by the
Chairman of the Board of Directors or by a vote of the majority of the entire
Board of Directors. Furthermore, the By-laws of ITT Hartford provide that only
such business as is specified in the notice of any such special meeting of
shareholders may come before such meeting.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The By-laws of ITT Hartford establish an advance notice procedure for
shareholder proposals to be brought before an annual meeting of shareholders and
for nominations by shareholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of shareholders as has been
brought before the meeting by, or at the direction of, the Board of Directors,
or by a shareholder who has given to the Secretary of ITT Hartford timely
written notice, in proper form, of the shareholder's intention to bring that
business before the meeting. The chairman of such meeting has the authority to
make such determinations. Only persons who are nominated by, or at the direction
of, the Board of Directors, or who are nominated by a shareholder who has given
timely written notice, in proper form, to the Secretary prior to a meeting at
which directors are to be elected will be eligible for election as directors of
ITT Hartford.
To be timely, notice of business to be brought before an annual meeting or
nominations of candidates for election as directors at an annual meeting must be
received by the Secretary of ITT Hartford not later than 90 days in advance of
the anniversary date for the immediately preceding annual meeting (or not more
than
242
<PAGE> 249
10 days after the first public disclosure of the date of such annual meeting,
whichever is earlier). Similarly, notice of nominations to be brought before a
special meeting must be delivered to the Secretary no later than the close of
business on the seventh day following the day on which notice of the date of the
special meeting of shareholders is given.
The notice of any nomination for election as a director must set forth the
name and address of the shareholder who intends to make the nomination and of
the person or persons to be nominated; a representation that the shareholder is
a holder of record of stock of ITT Hartford entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; such other information regarding
each nominee proposed by such shareholder as would have been required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had each nominee been nominated, or intended
to be nominated, by the Board of Directors; and the consent of each nominee to
serve as a director if so elected.
NUMBER OF DIRECTORS; FILLING OF VACANCIES
The ITT Hartford Amended and Restated Certificate of Incorporation and
By-laws provide that newly created directorships resulting from any increase in
the authorized number of directors (or any vacancy) may be filled by a vote of a
majority of directors then in office, subject to the requirement provided in the
By-laws that the majority of directors holding office immediately after such
election must be "independent directors" (as defined). Accordingly, the Board of
Directors of ITT Hartford may be able to prevent any shareholder from obtaining
majority representation on the Board of Directors by increasing the size of the
board and filling the newly created directorships with its own nominees.
RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS
A restriction on ownership of ITT shares in respect of the gaming laws such
as that contained in the ITT Restated Certificate of Incorporation would not
apply to ITT Hartford after the Distribution. Such a restriction would apply,
however, to ownership of New ITT Shares. See "DESCRIPTION OF NEW ITT CAPITAL
STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS".
RESTRICTIONS ON ALIEN OWNERSHIP
It is currently expected that a restriction on ownership of ITT Hartford
shares by "aliens" (to the United States), such as that contained in the ITT
By-laws, would not apply to ITT Hartford after the Distribution. Such a
restriction may apply, however, to ownership of New ITT shares. See "DESCRIPTION
OF NEW ITT CAPITAL STOCK -- RESTRICTIONS ON ALIEN OWNERSHIP".
RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS
Although the Amended and Restated Certificate of Incorporation and By-laws
of ITT Hartford will not contain any provision restricting ownership as a result
of the application of various state insurance laws, such laws will be a
significant deterrent to any person interested in acquiring control of ITT
Hartford. See "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION -- REGULATION".
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent accountants, are acting as ITT's auditors
for the current fiscal year and will be auditors for each of ITT Industries, New
ITT and ITT Hartford after the Distribution. Representatives of Arthur Andersen
LLP will be present at the Special Meeting, with the opportunity to make a
statement if they desire to do so, and will be available to respond to
appropriate questions from shareholders.
243
<PAGE> 250
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Pursuant to Rule 14a-8 under the Exchange Act, shareholders of ITT may
present proper proposals for inclusion in ITT's proxy statement and for
consideration at its Annual Meeting of Shareholders by submitting their
proposals to ITT in a timely manner. In order to be so included for the 1996
Annual Meeting, shareholder proposals must be received by ITT no later than the
close of business on November 23, 1995, and must otherwise comply with the
requirements of Rule 14a-8.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by ITT with the Securities and Exchange
Commission (the "SEC") are incorporated herein by reference:
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
2. Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1995.
3. Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1995.
4. Current Report on Form 8-K dated February 6, 1995.
5. Current Report on Form 8-K/A dated March 31, 1995.
6. Current Report on Form 8-K/A2 dated June 8, 1995.
ITT will provide without charge to each person to whom a copy of this Proxy
Statement is delivered, on the telephone or written request of any such person,
by first class mail or other equally prompt means within one business day of
receipt of such request, a copy of any or all of the foregoing documents
incorporated herein by reference (other than any exhibits to such documents
which are not specifically incorporated herein by reference). Requests should be
directed to:
ITT Corporation
1330 Avenue of the Americas
New York, New York 10019-5490
Telephone No: 258-1750
Attention: Corporate Secretary.
All documents filed by ITT with the SEC pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date hereof and prior to the date of
the Special Meeting or any adjournment thereof shall be deemed to be
incorporated by reference herein.
Any statements contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
that also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall be deemed to constitute
a part hereof except as so modified or superseded.
AVAILABLE INFORMATION
ITT, ITT Hartford and ITT Educational are subject to the informational
requirements of the Exchange Act and the rules and regulations promulgated
thereunder and in accordance therewith file reports, proxy statements (in the
case of ITT and ITT Educational) and other information with the SEC. Reports,
proxy statements and other information filed by ITT, ITT Hartford and ITT
Educational may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC at Seven World Trade Center, Suite
1300, New York, New York 10048 and in the Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661. Copies of such information may be
obtained by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C 20549 at prescribed rates. Reports and other
information
244
<PAGE> 251
concerning ITT may also be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005, and the PSE, 301 Pine Street, San Francisco,
California 94104. Reports and other information concerning ITT Educational may
also be inspected at the offices of the NYSE.
New ITT and ITT Hartford will file with the SEC a Registration Statement on
Form 10 and Form 8-A, respectively, with respect to the shares of New ITT Common
Stock (and related New ITT Rights) and ITT Hartford Common Stock (and related
ITT Hartford Rights) to be received by the shareholders of ITT in the
Distribution. It is expected that New ITT and ITT Hartford will file with the
SEC a Registration Statement on Form 10 and Form 8-A, respectively, prior to the
Special Meeting and request effectiveness of such Registration Statements prior
to the Distribution Date. The respective Registration Statements and the
exhibits thereto, once filed by New ITT and ITT Hartford, may be inspected and
copied at the public reference facilities of the SEC listed above.
REPORTS OF NEW ITT AND ITT HARTFORD
After the Distribution, both New ITT and ITT Hartford will be required to
comply with the reporting requirements of the Exchange Act and, in accordance
therewith, to file reports, proxy statements and other information with the SEC.
After the Distribution, such reports, proxy statements and other
information may be inspected and copied at the public reference facilities of
the SEC listed above under "AVAILABLE INFORMATION" and obtained by mail from the
SEC as described above under "AVAILABLE INFORMATION". Application will be made
to list the shares of New ITT Common Stock (and related New ITT Rights) and ITT
Hartford Common Stock (and related ITT Hartford Rights) on the NYSE and, if and
when such shares of New ITT Common Stock (and related New ITT Rights) and ITT
Hartford Common Stock (and related ITT Hartford Rights), as applicable, commence
trading on the NYSE, such reports, proxy statements and other information will
be available for inspection at the offices of the NYSE listed above under
"AVAILABLE INFORMATION".
Additionally, each of New ITT and ITT Hartford intend to provide annual
reports, containing audited financial statements, to its shareholders in
connection with its annual meetings of shareholders.
245
<PAGE> 252
INDEX TO
FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITT INDUSTRIES, INC.
Report of Independent Public Accountants............................................. F-3
Consolidated Income for the Six Months Ended June 30, 1995 and 1994 and the Three
Years Ended December 31, 1994...................................................... F-4
Consolidated Balance Sheet as of June 30, 1995 and December 31, 1994 and 1993........ F-5
Consolidated Cash Flow for the Six Months Ended June 30, 1995 and 1994 and the Three
Years Ended December 31, 1994...................................................... F-6
Consolidated Retained Earnings for the Six Months Ended June 30, 1995 and Three Years
Ended December 31, 1994............................................................ F-7
Consolidated Capital Stock and Surplus for the Six Months Ended June 30, 1995 and the
Three Years Ended December 31, 1994................................................ F-7
Cumulative Preferred Stock as of December 31, 1994 and 1993.......................... F-8
Notes to Financial Statements........................................................ F-9
Business Segment Information......................................................... F-23
Geographical Information............................................................. F-24
Quarterly Results for 1994 and 1993.................................................. F-24
Export Sales......................................................................... F-25
ITT DESTINATIONS, INC.
Report of Independent Public Accountants............................................. F-26
Combined Income for the Six Months Ended June 30, 1995 and 1994 and the Three Years
Ended December 31, 1994............................................................ F-27
Combined Balance Sheet as of June 30, 1995 and December 31, 1994 and 1993............ F-28
Combined Cash Flow for the Six Months Ended June 30, 1995 and 1994 and the Three
Years Ended December 31, 1994...................................................... F-29
Investments and Advances from ITT Industries Inc. for the Six Months Ended June 30,
1995 and the Three Years Ended December 31, 1994................................... F-30
Notes to Financial Statements........................................................ F-31
Business Segment Information......................................................... F-41
Geographical Information and Quarterly Results for 1994 and 1993..................... F-42
ITT HARTFORD GROUP, INC.
Report of Independent Public Accountants............................................. F-43
Consolidated Income for the Six Months Ended June 30, 1995 and 1994 and the Three
Years Ended December 31, 1994...................................................... F-44
Consolidated Balance Sheet as of June 30, 1995 and December 31, 1994 and 1993........ F-45
Consolidated Cash Flow for the Six Months Ended June 30, 1995 and 1994 and the Three
Years Ended December 31, 1994...................................................... F-46
Consolidated Stockholder's Equity for the Six Months Ended June 30, 1995 and the
Three Years Ended December 31, 1994................................................ F-47
Notes to Financial Statements........................................................ F-48
Business Segment Information......................................................... F-64
Quarterly Results for 1994 and 1993.................................................. F-65
</TABLE>
F-1
<PAGE> 253
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CAESARS WORLD, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............................................. F-66
Consolidated Statements of Operations for the Three Years Ended July 31, 1994........ F-67
Consolidated Balance Sheets as of July 31, 1994 and 1993............................. F-68
Consolidated Statements of Shareholders' Equity for the Three Years Ended July 31,
1994............................................................................... F-69
Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1994........ F-70
Notes to Consolidated Financial Statements........................................... F-71
Selected Quarterly Financial Information (unaudited)................................. F-84
CIGA GROUP
Reports of Independent Public Accountants............................................ F-85
Balance Sheet as of December 31, 1994 and 1993....................................... F-89
Statement of Operations for the Two Years Ended December 31, 1994.................... F-93
Statement of Source and Application of Funds for the Year Ended December 31, 1994.... F-96
Notes to the Financial Statements.................................................... F-98
FINANCIAL STATEMENT SCHEDULES
Valuation and Qualifying Accounts -- ITT Industries, Inc............................. S-1
Valuation and Qualifying Accounts -- ITT Destinations, Inc........................... S-2
Supplementary Insurance Information.................................................. S-3
Supplemental Information Concerning Property and Casualty Insurance Operations....... S-3
Reinsurance.......................................................................... S-4
</TABLE>
F-2
<PAGE> 254
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-3
<PAGE> 255
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
IN MILLIONS EXCEPT PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales..................................... $4,585 $3,727 $7,758 $6,621 $6,845
Cost of Sales................................. 3,954 3,163 6,607 5,647 5,968
------ ------ ------ ------ ------
631 564 1,151 974 877
Selling, General and Administrative
Expenses.................................... 339 311 643 655 686
Service Charges from Affiliated Companies..... 44 35 73 59 62
Other Operating Expenses...................... 6 37 17 31 110
------ ------ ------ ------ ------
242 181 418 229 19
Equity in Earnings of Alcatel N.V............. -- -- -- -- 97
Gain on Sale of Alcatel N.V................... -- -- -- -- 942
Interest Expense.............................. (80) (63) (114) (153) (180)
Interest Income............................... 21 49 66 121 98
Miscellaneous Income (Expense), net........... (30) -- (21) 3 (10)
------ ------ ------ ------ ------
153 167 349 200 966
Income Tax Expense............................ (62) (69) (147) (65) (311)
------ ------ ------ ------ ------
Income from Continuing Operations............. 91 98 202 135 655
Discontinued Operations:
Operating Earnings, net of tax (benefit) of
$162, $160, $328, $310 and $(598)........ 346 373 831 828 (915)
Gain on Sale of Finance Operations, net of
tax of $264.............................. 403 -- -- -- --
Extraordinary Item, net of tax benefit of
$25......................................... -- -- -- (50) --
Cumulative Effect of Accounting Changes, net
of tax benefit of $8, $8 and $322........... -- (11) (11) -- (625)
------ ------ ------ ------ ------
Net Income (Loss)............................. $ 840 $ 460 $1,022 $ 913 $ (885)
====== ====== ====== ====== ======
EARNINGS (LOSS) PER SHARE*
Income from Continuing Operations
Primary..................................... $ .69 $ .68 $ 1.46 $ .83 $ 5.34
Fully Diluted............................... $ .69 $ .69 $ 1.46 $ .88 $ 4.77
Discontinued Operations
Primary..................................... $ 6.97 $ 3.16 $ 7.21 $ 6.90 $(7.81)
Fully Diluted............................... $ 6.39 $ 2.91 $ 6.65 $ 6.40 $(6.96)
Extraordinary Item
Primary..................................... -- -- -- $ (.41) --
Fully Diluted............................... -- -- -- $ (.38) --
Cumulative Effect of Accounting Changes
Primary..................................... -- $ (.10) $ (.10) -- $(5.46)
Fully Diluted............................... -- $ (.09) $ (.09) -- $(4.71)
Net Income (Loss)
Primary..................................... $ 7.66 $ 3.74 $ 8.57 $ 7.32 $(7.93)
Fully Diluted............................... $ 7.08 $ 3.51 $ 8.02 $ 6.90 $(6.90)
====== ====== ====== ====== ======
AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY... 107 119 115 120 117
====== ====== ====== ====== ======
AVERAGE COMMON EQUIVALENT SHARES -- FULLY
DILUTED..................................... 117 128 125 129 132
====== ====== ====== ====== ======
</TABLE>
- ---------------
* The net loss in 1992 causes the calculation of the loss per share in 1992 to
be anti-dilutive. In such a case, generally accepted accounting principles
suggest the fully diluted loss per share to be the same as the primary loss
per share; however, the Corporation has presented the actual calculated amount
in order that all calculations and comparisons with previously reported and
future amounts be on a consistent basis.
The accompanying notes to financial statements are an integral part of the above
statement.
F-4
<PAGE> 256
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
IN MILLIONS EXCEPT FOR SHARES AND PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1995 1994 1993
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 411 $ 322 $ 240
Receivables, net........................................ 1,433 1,138 1,661
Inventories............................................. 1,028 990 910
Other current assets.................................... 127 80 70
----------- ------- -------
Total current assets................................. 2,999 2,530 2,881
Plant, Property and Equipment, net........................ 2,199 2,114 1,733
Deferred U.S. Income Taxes................................ 145 161 37
Goodwill, net............................................. 360 365 73
Other Assets.............................................. 563 407 339
Net Assets of Discontinued Operations..................... 7,184 5,458 7,918
----------- ------- -------
13$,450... $11,035 $12,981
=========== ======= =======
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable........................................ $ 772 $ 774 $ 591
Accrued expenses........................................ 1,228 848 705
Notes payable and current maturities of long-term debt
(including ESOP of $541, $ -- , and $ -- )........... 1,502 928 977
----------- ------- -------
Total current liabilities............................ 3,502 2,550 2,273
Non-U.S. Unfunded Pension................................. 710 610 511
U.S. Unfunded Pension and Postretirement Costs............ 375 388 282
Long-term Debt (including ESOP of $ -- , $562 and $603)... 871 1,712 1,994
Deferred Income Taxes -- Foreign, State and Local......... 79 90 94
Other Liabilities......................................... 401 226 177
----------- ------- -------
5,938 5,576 5,331
----------- ------- -------
Stockholders Equity --
Cumulative preferred stock (aggregate liquidation value
of $695 as of December 31, 1994)..................... 648 655 673
Common stock: Authorized 200,000,000 shares, $1 par
value Outstanding 105,906,840, 105,672,252 and
117,560,877.......................................... 106 106 118
Deferred compensation -- ESOP........................... (541) (562) (603)
Cumulative translation adjustments...................... (14) (113) (206)
Unrealized (loss) gain on securities, net of tax........ (149) (1,376) 80
Retained earnings....................................... 7,462 6,749 7,588
----------- ------- -------
7,512 5,459 7,650
----------- ------- -------
$13,450 $11,035 $12,981
=========== ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-5
<PAGE> 257
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------
1995 1994 1994 1993 1992
-------- ------- ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)............................. $ 840 $ 460 $ 1,022 $ 913 $ (885)
Discontinued Operations:
Operating Earnings....................... (346) (373) (831) (828) 915
Gain on Sale of Finance Operations....... (403) -- -- -- --
Extraordinary Item............................ -- -- -- 50 --
Cumulative Effect of Accounting Changes....... -- 11 11 -- 625
----- ----- ------- ------- ------
Income from continuing operations... 91 98 202 135 655
Adjustments to income from continuing
operations:
Depreciation and amortization............... 209 185 373 323 315
Provision for doubtful receivables.......... 1 1 4 6 5
(Gain) loss on divestments -- pretax........ -- 1 2 (13) (950)
Change in receivables, inventories, payables
and accruals............................. (134) (199) (18) 83 81
Accrued and deferred taxes.................. 246 53 87 83 395
Other, net.................................. (18) 6 (13) 11 132
----- ----- ------- ------- ------
Cash from continuing operations............... 395 145 637 628 633
Cash (to) from discontinued operations........ (254) 763 1,152 (496) (903)
----- ----- ------- ------- ------
Cash from/(used for) operating
activities........................ 141 908 1,789 132 (270)
----- ----- ------- ------- ------
INVESTING ACTIVITIES
Additions to plant, property and equipment.... (165) (124) (407) (337) (351)
Proceeds from divestments..................... 11,655 14 853 862 1,028
Acquisitions.................................. (15) (374) (418) -- --
Other, net.................................... (2) (7) (15) 3 (1)
----- ----- ------- ------- ------
Cash from/(used for) investing
activities........................ 11,473 (491) 13 528 676
----- ----- ------- ------- ------
FINANCING ACTIVITIES
Short-term debt, net.......................... (28) (4) (66) 166 170
Long-term debt issued......................... -- -- -- 11 5
Long-term debt repaid......................... (18) (80) (381) (237) (75)
Repayment of Finance obligations.............. (11,382) -- -- -- --
Repurchase of common stock.................... (38) (74) (1,016) (306) (105)
Dividends paid................................ (130) (210) (280) (277) (270)
Other, net.................................... 18 (6) (5) 82 (98)
----- ----- ------- ------- ------
Cash (used for)/from financing
activities........................ (11,578) (374) (1,748) (561) (373)
----- ----- ------- ------- ------
EXCHANGE RATE EFFECT ON CASH AND CASH
EQUIVALENTS................................. 53 5 28 (8) (37)
----- ----- ------- ------- ------
Increase (decrease) in cash and cash
equivalents................................. 89 48 82 91 (4)
Cash and Cash Equivalents -- Beginning of
period...................................... 322 240 240 149 153
----- ----- ------- ------- ------
Cash and Cash Equivalents -- End of period.... $ 411 $ 288 $ 322 $ 240 $ 149
===== ===== ======= ======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest.................................... $ 47 $ 57 $ 112 $ 110 $ 139
===== ===== ======= ======= ======
Income Taxes................................ $ 7 $ 32 $ 243 $ 162 $ 174
===== ===== ======= ======= ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-6
<PAGE> 258
ITT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED RETAINED EARNINGS
IN MILLIONS EXCEPT PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 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).................................... 840 1,022 913 (885)
Dividends Declared --
Cumulative preferred stock, net of tax benefit.... (18) (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.......................... (5) (976) (112) --
------ ------ ------ ------
Balance -- End of Period............................... $7,462 $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... (94,522) (7) -- -- (3)
Stock conversions........................... (63,222) -- 80,015 -- --
Stock incentive plans....................... -- -- 531,775 -- 33
Repurchases................................. -- -- (377,202) -- (30)
---------- ---- ----------- ---- ----
Balance -- June 30, 1995...................... 9,144,685 $648 105,906,840 $106 $ --
========== ==== =========== ==== ====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statements.
F-7
<PAGE> 259
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. The ESOP Series shares
are redeemable at $77.20 per share reduced annually through June 30, 1999 to
$74.59 per share.
Liquidation preference on shares outstanding is $34 per share for the
Series N and $77.20 per share for the ESOP Series.
The accompanying notes to financial statements are an integral part of the above
statement.
F-8
<PAGE> 260
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
PLAN OF DISTRIBUTION
On June 12, 1995, the Board of Directors of ITT Corporation approved,
subject to final terms and shareholder approval, 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 Destination, Inc., a
wholly-owned subsidiary holding the Corporation's interests in hospitality,
entertainment and information services businesses ("New ITT") 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, New
ITT 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
New ITT 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, New ITT
and ITT Hartford are reported as Discontinued Operations. The net assets of New
ITT and ITT Hartford are included in Net Assets of Discontinued Operations in
the accompanying balance sheet. See Discontinued Operations for summarized
financial information of New ITT 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 New ITT. 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, New ITT and ITT Hartford after the Distribution and to
provide for orderly transition, the Corporation, New ITT 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 Proxy Statement.
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
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.
F-9
<PAGE> 261
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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
$46, $41 and $31 at June 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 June 30, 1995 and their results of
operations and cash flows for the six months ended June 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, 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
F-10
<PAGE> 262
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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 six months ended June 30, 1995 would
have been $7.16 (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 June 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 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
F-11
<PAGE> 263
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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 $.9 billion (unaudited), $.8 billion and $1.3 billion
based on the quoted market prices at June 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,
JUNE 30, -----------------
1995 1994 1993
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Trade................................................. $ 1,447 $1,148 $ 888
Alcatel Note.......................................... -- -- 785
Accrued for completed work............................ 23 26 21
Less -- reserves...................................... (37) (36) (33)
----------- ------ ------
$ 1,433 $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.
INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------
1995 1994 1993
----------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Finished goods......................................... $ 530 $ 452 $ 454
Work in process........................................ 491 480 508
Raw materials and supplies............................. 323 355 325
Less -- reserves....................................... (99) (97) (110)
-- progress payments.............................. (217) (200) (267)
----------- ----- -----
$ 1,028 $ 990 $ 910
========= ===== =====
</TABLE>
F-12
<PAGE> 264
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1995 1994 1993
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements............................... $ 112 $ 106 $ 93
Buildings and improvements.......................... 815 788 739
Machinery and equipment............................. 2,718 2,615 2,200
Construction work in progress....................... 344 262 164
Other............................................... 1,047 858 723
----------- ------- -------
5,036 4,629 3,919
Less -- accumulated depreciation and amortization... (2,837) (2,515) (2,186)
----------- ------- -------
$ 2,199 $ 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.
At June 30, 1995, (unaudited) notes payable and current maturities of long-term
debt increased by $574. The increase is the result of classifying the ESOP debt
($541) as current, due to the anticipated repayment of such debt in August, 1995
(see "Employee Benefit Plans" for information related to the ESOP.) Total debt
however decreased to approximately $2.4 billion from $2.6 billion at December
31, 1994.
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>
F-13
<PAGE> 265
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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 will be 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>
JUNE 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............................... 106 110 (125) (226)
Hedges of net foreign investments........... (7) (17) 11 42
Sale or liquidation of investments.......... -- -- -- (15)
----- ----- ----- -----
Balance -- End of Year........................ $ (14) $(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.
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.
F-14
<PAGE> 266
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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 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 will be used to
repay the debt associated with the ESOP, which totalled $541 (unaudited) at June
30, 1995. 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
New ITT 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
F-15
<PAGE> 267
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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.
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.
F-16
<PAGE> 268
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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-17
<PAGE> 269
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, 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).
F-18
<PAGE> 270
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
As part of the Distribution, stock options of the Corporation held by
employees of New ITT 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 New ITT and ITT Hartford shares transferred to the Corporation's
shareholders.
DISCONTINUED OPERATIONS
As further discussed in "Plan of Distribution," the assets and liabilities
of New ITT and ITT Hartford are included in Net Assets of Discontinued
Operations. Summarized financial information for New ITT and ITT Hartford is as
follows:
New ITT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................... $2,982 $2,116 $4,760 $4,169 $4,253
Operating Income............................ 265 128 292 142 34
Income Before Accounting Changes............ 53 37 74 39 2
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1995 1994 1993
----------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets................................................ $ 8,221 $5,012 $3,791
Debt........................................................ 835 631 187
Investments and Advances from ITT Industries................ 5,806 3,353 2,765
</TABLE>
ITT Hartford
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ------------------------------
1995 1994 1994 1993 1992
------ ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.................................. $5,919 $5,367 $11,102 $10,338 $9,862
Operating Income (Loss)................... 323 403 852 687 (501)
Income (Loss) Before Accounting Changes... 245 292 632 537 (274)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1995 1994 1993
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets.............................................. $86,831 $76,765 $66,179
Debt...................................................... 1,513 1,498 963
Equity.................................................... 4,807 3,184 4,012
</TABLE>
At June 30, 1995, net assets of discontinued operations have been reduced
by approximately $3.4 billion (unaudited) of the Corporation's debt which is
expected to be repaid prior to the Distribution and refinanced with new
borrowings. 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 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
F-19
<PAGE> 271
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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>
JUNE 30, DECEMBER 31,
------------- ----------------------------
1995 1994 1994 1993 1992
---- ---- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues....................................... $476 $692 $1,452 $1,633 $2,017
Operating Income (Loss)........................ 79 48 163 276 (888)*
Income (Loss) from Finance Operations.......... 48 32 113 199 (571)*
Gain on Sale, net of tax....................... 403 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1995 1994 1993
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets.............................................. $ 1,960 $13,398 $11,498
Finance Debt.............................................. 1,456 11,640 9,463
Equity.................................................... -- 664 872
</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 $11.7 billion (unaudited) of proceeds through June 30, 1995
from the sale of assets at ITT Financial. From July 1, 1995 through July 31,
1995, the Corporation completed additional sales of assets of ITT Financial
Corporation for $.3 billion (unaudited) in cash, and all of the 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-20
<PAGE> 272
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.
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.
F-21
<PAGE> 273
ITT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
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 Belgium 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.
SUBSEQUENT EVENT (UNAUDITED)
In July, 1995 ITT 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. Management expects to refinance these commercial paper
obligations through proceeds of new borrowings or issuances of indebtedness by
New ITT and ITT Industries, as applicable. These obligations or issuances could
be in the form of commercial paper borrowings, bank borrowings or public or
private financings or any combination of the foregoing. The tender offer
resulted in the Corporation paying a tender premium of approximately $300 after
tax ($460 pretax), which will be recorded as an extraordinary loss on the early
extinguishment of debt of approximately $300 after tax.
F-22
<PAGE> 274
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 ("TCS") systems, 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.
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.
F-23
<PAGE> 275
ITT INDUSTRIES, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION -- (CONTINUED)
"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
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>
F-24
<PAGE> 276
ITT INDUSTRIES, INC. AND SUBSIDIARIES
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-25
<PAGE> 277
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITT Corporation:
We have audited the combined financial statements of ITT Destinations, Inc.
(a Nevada corporation and a wholly-owned subsidiary of ITT Corporation), as
defined in the notes, 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 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
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of ITT Destinations,
Inc. 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, 1992,
for postretirement benefits other than pensions and postemployment benefits.
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-26
<PAGE> 278
ITT DESTINATIONS, INC.
COMBINED INCOME
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $2,982 $2,116 $4,760 $4,169 $4,253
Costs and Expenses:
Salaries, benefits and other operating...... 2,216 1,687 3,837 3,451 3,663
Selling, general and administrative, net of
service fee income of $52, $43, $88, $73
and $74.................................. 373 235 499 467 476
Depreciation and amortization............... 128 66 132 109 80
------ ------ ------ ------ ------
2,717 1,988 4,468 4,027 4,219
------ ------ ------ ------ ------
265 128 292 142 34
Interest Expense (net of interest income of
$13, $8, $16, $14 and $21).................. (157) (46) (131) (33) (20)
Miscellaneous Income (Expense), net........... 9 (8) (17) 10 7
------ ------ ------ ------ ------
117 74 144 119 21
Income Tax Expense............................ (55) (31) (58) (63) (4)
Minority Equity............................... (9) (6) (12) (17) (15)
------ ------ ------ ------ ------
Income before Cumulative Effect of Accounting
Changes..................................... 53 37 74 39 2
Cumulative Effect of Accounting Changes, net
of tax benefit of $23....................... -- -- -- -- (47)
------ ------ ------ ------ ------
Net Income (Loss)............................. $ 53 $ 37 $ 74 $ 39 $ (45)
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-27
<PAGE> 279
ITT DESTINATIONS, INC.
COMBINED BALANCE SHEET
IN MILLIONS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1995 1994 1993
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 384 $ 191 $ 834
Receivables, net............................................ 675 498 459
Inventories................................................. 91 59 53
Prepaid expenses and other.................................. 93 217 94
------ ------ ------
Total current assets..................................... 1,243 965 1,440
Plant, Property and Equipment, net............................ 3,954 2,882 1,358
Investments in Uncombined Affiliates.......................... 1,340 655 648
Goodwill, net................................................. 1,340 232 7
Notes Receivable, net......................................... 58 133 161
Other Assets.................................................. 286 145 177
------ ------ ------
$8,221 $5,012 $3,791
====== ====== ======
LIABILITIES AND INVESTMENTS AND ADVANCES FROM ITT INDUSTRIES, INC.
Current Liabilities:
Accounts payable............................................ $ 279 $ 72 $ 78
Accrued expenses............................................ 553 426 419
Notes payable and current maturities of long-term debt...... 168 31 18
Other current liabilities................................... 132 95 97
------ ------ ------
Total current liabilities................................ 1,132 624 612
Long-Term Debt................................................ 667 600 169
Deferred Income Taxes......................................... 85 39 50
Other Liabilities............................................. 287 192 174
Minority Interest............................................. 244 204 21
Investments and Advances from ITT Industries, Inc............. 5,806 3,353 2,765
------ ------ ------
$8,221 $5,012 $3,791
====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-28
<PAGE> 280
ITT DESTINATIONS, INC.
COMBINED CASH FLOW
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
--------------- -----------------------
1995 1994 1994 1993 1992
------- ----- ------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss)................................... $ 53 $ 37 $ 74 $ 39 $ (45)
Cumulative Effect of Accounting Changes............. -- -- -- -- 47
------- ----- ------- ----- -----
Income Before Accounting Changes.................. 53 37 74 39 2
Adjustments to income before accounting changes:
Depreciation and amortization..................... 128 66 132 109 80
Provision for doubtful receivables................ 25 19 37 26 65
Equity income, net of dividends received.......... 2 -- 16 15 10
(Gain) loss on divestments -- pretax.............. -- -- -- (19) 41
Change in receivables, inventories, payables and
accruals....................................... (6) (35) (42) 121 (66)
Accrued and deferred taxes........................ 20 -- 11 (52) (1)
Other, net........................................ 12 6 2 (53) 12
------- ----- ------- ----- -----
Cash from operating activities................. 234 93 230 186 143
------- ----- ------- ----- -----
INVESTING ACTIVITIES
Additions to plant, property and equipment.......... (246) (126) (453) (91) (83)
Proceeds from divestments........................... -- -- 18 41 2
Acquisitions, net of acquired cash of $145 in
1995.............................................. (2,169) (402) (1,038) (180) (26)
Other, net.......................................... (4) (3) 6 (99) (39)
------- ----- ------- ----- -----
Cash used for investing activities............. (2,419) (531) (1,467) (329) (146)
------- ----- ------- ----- -----
FINANCING ACTIVITIES
Short-term debt, net................................ (19) (4) 13 (19) 23
Long-term debt issued............................... 64 -- 260 -- 38
Long-term debt repaid............................... (129) (122) (124) (18) (28)
Change in investments and advances from ITT
Industries........................................ 2,459 (70) 457 428 496
Other, net.......................................... (2) 3 (11) (45) (7)
------- ----- ------- ----- -----
Cash from/(used for) financing activities...... 2,373 (193) 595 346 522
------- ----- ------- ----- -----
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS... 5 10 (1) (5) (6)
------- ----- ------- ----- -----
Increase (decrease) in cash and cash equivalents.... 193 (621) (643) 198 513
Cash and Cash Equivalents -- Beginning of Period.... 191 834 834 636 123
------- ----- ------- ----- -----
Cash and Cash Equivalents -- End of Period.......... $ 384 213 $ 191 $ 834 $ 636
======= ===== ======= ===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................... $ 167 $ 46 $ 119 $ 27 $ 26
======= ===== ======= ===== =====
Income Taxes................................... $ 28 $ 31 $ 117 $ 19 $ 38
======= ===== ======= ===== =====
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-29
<PAGE> 281
ITT DESTINATIONS, INC.
INVESTMENTS AND ADVANCES FROM ITT INDUSTRIES, INC.
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
ENDED ----------------------------
JUNE 30, 1994 1993 1992
1995 ------ ------ ------
----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Balance -- Beginning of Period....................... $3,353 $2,765 $2,313 $1,333
Net income (loss).................................. 53 74 39 (45)
Transfers from ITT Industries...................... 2,439 549 431 1,010
Translation of financial statements................ (39) (35) (18) 15
------ ------ ------ ------
Balance -- End of Period............................. $5,806 $3,353 $2,765 $2,313
====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-30
<PAGE> 282
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
BASIS OF PRESENTATION
In June, 1995, the Board of Directors of ITT Industries, Inc. ("ITT
Industries" or the "Corporation"), formerly ITT Corporation, approved, subject
to final terms and shareholder approval, the distribution (the "Distribution")
to holders of the Corporation's common stock of all outstanding shares of common
stock of ITT Destinations, Inc. (to be renamed ITT Corporation and herein after
referred to as New ITT or the "Company") on a pro rata basis. Under the proposed
plan, New ITT will become a publicly traded company that will include the
hospitality, entertainment and information services businesses of the former ITT
Corporation. For purposes of these financial statements, all references to New
ITT shall include companies, assets and liabilities related to the hospitality,
entertainment and information services businesses that will be transferred to
New ITT prior to the Distribution.
These financial statements present the financial position, results of
operations and cash flows of New ITT as if it were a separate entity for all
periods presented. The Corporation's historical basis in the assets and
liabilities of New ITT has been carried over. All material intercompany
transactions and balances between New ITT and its affiliates have been
eliminated. Changes in Investments and Advances from ITT Industries represent
the net income of New ITT plus the net change in cash transferred between New
ITT and ITT Industries.
New ITT includes many of the corporate functions of the Corporation and has
provided the Corporation centralized systems for cash management, legal,
accounting, tax and insurance services. New ITT charges fees for these services
to the Corporation and its affiliates (see "Transactions with Affiliates"). The
net cost to New ITT of providing these services, after allocation to the
Corporation and its affiliates is $39, $56 and $65 for 1994, 1993 and 1992,
respectively. In the opinion of management, the Corporation's methods for
allocating costs are believed to be reasonable. However, the net cost of these
services to New ITT are not necessarily indicative of the costs that would have
been incurred if New ITT had been operated as an unaffiliated entity. It is not
practicable to estimate those costs on a stand-alone basis.
For purposes of governing certain of the ongoing relationships between New
ITT and the Corporation after the Distribution and to provide for orderly
transition, New ITT and the Corporation 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 Proxy Statement.
ACCOUNTING POLICIES
Revenue Recognition: Generally, revenues are recognized when the services
have been rendered. The following is a description of the composition of
revenues for each of the Company's segments:
Hotel Operations: At December 31, 1994 the Company operated 143 hotels
under long-term management agreements. These agreements effectively convey to
the Company the right to use the hotel properties in exchange for payments to
the property owners which are based primarily on the hotels' profitability.
Accordingly, the Company includes the operating results of hotel properties
under long-term management agreements in its combined financial statements.
Revenues related to these hotel properties were $2.6 billion, $2.4 billion and
$2.3 billion for 1994, 1993 and 1992 and amounts provided for payments to the
property owners for the use of the hotel properties were $.5 billion, $.4
billion and $.4 billion for 1994, 1993 and 1992.
Gaming Operations: Casino revenues represent the net win from gaming wins
and losses. Revenues exclude the retail value of rooms, food, beverage,
entertainment and other promotional allowances provided on a complimentary basis
to customers. The estimated retail value of these promotional allowances was $58
for the period ended June 30, 1995 (unaudited) and $17 for the year ended
December 31, 1994. The estimated
F-31
<PAGE> 283
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
cost of such promotional allowances was $25 (unaudited) and $11, respectively,
and have been included in costs and expenses.
Revenues and costs and expenses of the Gaming operations are comprised of
the following for the six months ended June 30, 1995 and the year ended December
31, 1994:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
-------------------- --------------------
COSTS AND COSTS AND
REVENUES EXPENSES REVENUES EXPENSES
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gaming.................................................... $461 $ 241 $165 $ 75
Rooms..................................................... 45 14 28 12
Food and beverage......................................... 48 41 22 23
Other operations.......................................... 40 25 12 16
Selling, general and administrative....................... -- 104 -- 37
Depreciation and amortization............................. -- 42 -- 7
Provision for doubtful accounts........................... -- 53 -- 48
---- ---- ---- ----
Total........................................... $594 $ 520 $227 $ 218
==== ==== ==== ====
</TABLE>
Information Services Operations: Revenues for the Directories unit of
Information Services are comprised of the total value of advertising contracts
sold by the Company. Costs and expenses include remuneration and franchise fees
paid to telephone authorities in places where the Company operates as a
publisher of directories or operates as an agent. Such amounts were $.22
billion, $.36 billion and $.47 billion for 1994, 1993 and 1992, respectively.
Tuition revenue at ITT Educational Services is recorded on a straight-line
basis over the length of the applicable course. If a student discontinues
training, the revenue related to the remainder of that quarter is recorded with
the amount of refund resulting from the application of federal, state, or
accreditation requirements recorded as an expense.
Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories: Inventories, comprised principally of hotel and gaming
supplies, are generally valued at the lower of cost (first-in, first-out) or
market and potential losses from obsolete and slow-moving inventories are
provided for in the current period.
Plant, Property and Equipment: Plant, property and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Company normally claims the maximum depreciation deduction allowable
for tax purposes. In general, for financial reporting purposes, depreciation is
provided on a straight-line basis over the useful economic lives of the assets
involved as follows: Buildings and improvements -- 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.
Derivative Financial Instruments: The Company uses derivative financial
instruments, including foreign currency forward contracts and/or swaps, as a
means of hedging exposure to foreign currency risks. The Company and its
affiliates are end-users and do not utilize these instruments for speculative
purposes. The Company has strict policies regarding financial stability and
credit standing of its major counterparties.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52. Changes in the spot rate of instruments designated
as hedges of the net investment in a foreign subsidiary are reflected in
Investments and Advances from ITT Industries, Inc.
F-32
<PAGE> 284
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
Foreign Currency: Balance sheet accounts are translated at the exchange
rates 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
foreign operations are generally the functional currencies. Gains and (losses)
from foreign currency transactions are reported currently in costs and expenses
and were $(1), $1 and $(7) for the years ended December 31, 1994, 1993 and 1992,
respectively.
Income Tax: New ITT and its affiliates are included in the consolidated
U.S. Federal tax return of ITT Industries, Inc. and remit to (receive from) ITT
Industries, Inc. an income tax provision (benefit) computed in accordance with a
tax sharing arrangement. This arrangement, which may be periodically modified,
generally requires that the Company determines its tax provision (benefit) as if
it were filing a separate U.S. Federal income tax return. However, the agreement
allows the Company to record benefits of certain tax attributes utilizable on
the ITT Industries consolidated tax return, which may not have been available on
a separate company basis.
Affiliate Stock Issuance: The Company recognizes gains (losses) on sales
of affiliate stock. For the year ended December 31, 1994, Miscellaneous Income
(Expense), net includes a gain of $10, pretax, from the sale of 17% of common
stock of ITT Educational Services, Inc.
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
$20, $6 and $3 at June 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.
Interim Period Financial Statements: The unaudited combined financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
and its affiliates at June 30, 1995 and their results of operations and cash
flows for the six months ended June 30, 1995 and 1994. Interim results are not
necessarily indicative of full year performance.
CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1992, the Company 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 $39 after tax and $8 after tax, respectively, have been recognized at
January 1, 1992.
The Company's cash flows were not impacted by these changes in accounting
principles.
TRANSACTIONS WITH AFFILIATES
New ITT includes many of the corporate functions of the Corporation and has
provided the Corporation and other affiliates certain centralized systems (see
"Basis of Presentation"). New ITT receives fees for such services which ranges
between 0.5% and 1% of net sales of the affiliate. Service fee income is
recorded in costs and expenses as earned.
Interest expense was charged to the Company on the portion of its
Investments and Advances from ITT Industries, Inc. which is deemed debt.
Interest expense is charged at 8% and totaled $62, $23, $69, $6 and $8 for the
six months ended June 30, 1995 and 1994 (unaudited), and the years 1994, 1993
and 1992, respectively.
New ITT is one of the several affiliates participating in the ITT Salaried
Retirement Plan as well as health care and life insurance programs for salaried
employees and retirees sponsored by ITT Industries (see "Employee Benefit
Plans").
F-33
<PAGE> 285
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
Employees of the Company participate in ITT stock option incentive plans
which provide for the award 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 ITT common stock or at nine
years after the date of grant, while certain 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 Company expects to establish similar plans for its employees after
the Distribution, whereby options in the ITT Industries plan will be converted
into options in the New ITT plan based upon a formula.
ACQUISITIONS
On January 30, 1995, the Company completed a cash tender offer for the
outstanding shares of Caesars World, Inc. ("Caesars") for approximately $1.76
billion (including expenses directly attributable to the acquisition of
approximately $10). The acquisition was accounted for using the purchase method.
Accordingly, the purchase price was allocated to assets based on their estimated
fair values. The purchase price, including assumed liabilities of $450, exceeded
the fair value of assets acquired by approximately $1.1 billion. Caesars results
of operations are included in Combined Income from the date of acquisition.
On March 10, 1995, the Company in a joint venture with Rainbow Programming
Holdings, Inc., a subsidiary of Cablevision, Inc., completed the acquisition of
the businesses comprising Madison Square Garden (MSG) for approximately $1
billion. The acquisition was funded by equity contributions from the venture
partners of approximately $720 and the remainder was financed through bank debt.
The Company's initial investment ($610) is reported using the equity method as
the Company's venture partner is expected to increase its equity investment to
50%. The Company's share of the results of MSG are included in Combined Income
from the date of acquisition.
During 1994, the Company completed several acquisitions in the Hotel
operations. The acquisitions were accounted for using the purchase method. The
purchase price of each acquisition was allocated to assets based on their
estimated fair values. The aggregate purchase price, including assumed
liabilities of $400, exceeded the fair value of assets acquired by approximately
$200. The results of operations of these acquisitions are included in Combined
Income from the dates of their respective acquisitions.
The following unaudited pro forma summary presents information as if the
acquisitions had occurred at the beginning of the respective periods:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------
1995 1994 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues............................................ $3,064 $2,761 $5,961 $5,603
Net income (loss)....................................... 47 (6) 8 (19)
====== ====== ====== ======
</TABLE>
The pro forma information is not necessarily indicative of the results that
would have occurred had the acquisitions taken place at the beginning of the
respective periods.
RECEIVABLES
Current receivables of $498 and $459 at December 31, 1994 and 1993,
including current maturities of notes receivable, are reported net of allowances
for doubtful accounts of $55 and $38.
Notes receivable of $133 and $161 at December 31, 1994 and 1993, are net of
allowances for doubtful accounts of $78 and $76, exclude current maturities of
$126 and $120 and approximate fair value.
F-34
<PAGE> 286
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following major components:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------
1995 1994 1993
--------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements................................... $ 1,214 $ 598 $ 315
Buildings and improvements.............................. 2,201 2,095 906
Machinery, furniture, fixtures and equipment............ 714 505 353
Construction work in process............................ 206 1 26
Other................................................... 169 164 111
--------- ------ ------
4,504 3,363 1,711
Less accumulated depreciation and amortization.......... (550) (481) (353)
--------- ------ ------
$ 3,954 $2,882 $1,358
======= ====== ======
</TABLE>
INVESTMENTS IN UNCOMBINED AFFILIATES
Investments in uncombined affiliates consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------
1995 1994 1993
----------- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Equity in Madison Square Garden.......................... $ 615 $ -- $ --
Equity in and advances to other 20-50% owned companies... 236 164 192
Alcatel Alsthom at cost.................................. 426 426 426
Other investments at cost................................ 63 65 30
----------- ---- ----
$ 1,340 $655 $648
========= ==== ====
</TABLE>
Equity in earnings (loss) of uncombined affiliates accounted for on the
equity basis was $2, and $ -- for the six months ended June 30, 1995 and 1994
(unaudited) and $ --, $(5) and $(12) in 1994, 1993 and 1992 respectively. At
December 31, 1994 and 1993, the market value of the restricted Alcatel Alsthom
stock was approximately $410 and $690, respectively, based on the quoted market
prices.
Prior to the Distribution, an additional $380 of Alcatel Alsthom stock will
be transferred to the Company from an affiliate.
F-35
<PAGE> 287
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
INCOME TAX
Income tax data is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- -----
<S> <C> <C> <C>
Pretax income (loss)
U.S....................................................... $(23) $ (34) $(164)
Foreign................................................... 167 153 185
---- ----- -----
$144.. $ 119 $ 21
==== ===== =====
Provision for income tax *
Current
U.S. Federal........................................... $ 36 $ (80) $ (30)
State and local........................................ 6 6 4
Foreign................................................ 73 85 77
---- ----- -----
115 11 51
---- ----- -----
Deferred
U.S. Federal.............................................. (54) 73 (41)
Foreign and other......................................... (3) (21) (6)
---- ----- -----
(57) 52 (47)
---- ----- -----
$ 58 $ 63 $ 4
==== ===== =====
</TABLE>
* The provision for income taxes has been computed in accordance with a tax
sharing agreement between New ITT and ITT Industries, Inc. that generally
requires that such provision be computed as if the enterprise were a stand
alone entity. The primary exception to the stand alone computation relates to
the utilization of foreign tax credits. The agreement allows for the
realization of such credits since they have been utilized by ITT Industries in
the consolidated tax return.
No provision was made for U.S. taxes payable on undistributed foreign
earnings amounting to approximately $158 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 liabilities of $10 and $24, respectively and net foreign and other
deferred tax liabilities of $29 and $26.
Deferred tax assets (liabilities) include the following:
<TABLE>
<CAPTION>
1994 1993
------------------- -------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL & OTHER FEDERAL & OTHER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Employee benefits................................. $ 49 $ -- $ 46 $ (3)
Reserve for bad debts............................. 11 -- 7 --
Accelerated depreciation.......................... (66) (11) (61) (13)
Other............................................. (4) (18) (16) (10)
------- ----- -- ----- -- ----- --
$ (10) $ (29) $ (24) $ (26)
======= ======= ======= =======
</TABLE>
F-36
<PAGE> 288
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE 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............................ $50 $42 $ 7
Tax on repatriation of foreign earnings......................... 3 22 26
Tax basis differential on companies sold........................ -- -- (22)
Foreign tax rate differential................................... (1) (1) (5)
U.S. state and local income taxes............................... 4 4 3
Other........................................................... 2 (4) (5)
--- --- ---
Provision for income tax........................................ $58 $63 $ 4
=== === ===
</TABLE>
DEBT
As of December 31, debt consisted of:
<TABLE>
<CAPTION>
1994 1993
----- -----
<S> <C> <C>
Bank loans and other short-term....................................... $ 28 $ 14
Long-term............................................................. 603 173
---- ----
$ 631 $ 187
==== ====
</TABLE>
The fair value of the Company's bank loans and other short-term loans
approximates carrying value. The weighted average interest rate for bank loans
and other short-term borrowings was 8.26% and 9.40% at December 31, 1994 and
1993, respectively. The estimated fair value of long-term debt at December 31,
1994 and 1993 is $605 and $172, based on discounted cash flows using the
Company'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 Company had unused credit lines of $56.
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
DESCRIPTION 1994 1993
---------------------------------------------------------------------- ---- ----
<S> <C> <C>
6.54%-10.14% Domestic Mortgage Loans Due 1998-2001.................... $149 $165
6.6%-8% Foreign Loans Due 1995-2004................................... 448 --
Other................................................................. 6 8
---- ----
Total................................................................. 603 173
Less current maturities............................................... 3 4
---- ----
$600 $169
==== ====
</TABLE>
The aggregate maturities of long-term debt are $3 in 1995, $236 in 1996,
$61 in 1997, $29 in 1998, $60 in 1999, and $214 thereafter. Assets pledged to
secure indebtedness (including mortgage loans) amounted to approximately $290 as
of December 31, 1994.
EMPLOYEE BENEFIT PLANS
Pension Plans -- The Company and its affiliates sponsor numerous pension
plans. The plans are funded with trustees, except in some countries outside the
U.S. where funding is not required. The plans' assets are comprised of a broad
range of domestic and foreign securities, fixed income investments and real
estate. The Company and certain of its affiliates also participate in the ITT
Salaried Retirement Plan.
F-37
<PAGE> 289
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
Total pension expenses were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ---
<S> <C> <C> <C>
Defined Benefit Plans
Service cost......................................................... $ 14 $ 11 $12
Interest cost........................................................ 16 15 13
Return on assets..................................................... (1) (27) (8)
Net amortization and deferral........................................ (14) 13 (3)
---- ---- ---
Net periodic pension cost............................................ 15 12 14
Other Pension Cost
Allocated cost of ITT Salaried Retirement Plan....................... 9 6 7
Defined contribution (savings) plans................................. 5 5 5
Other................................................................ 3 3 2
---- ---- ---
Total Pension Expense............................................. $ 32 $ 26 $28
==== ==== ===
</TABLE>
U.S. pension expenses included in the net periodic pension costs in the
table above were $19, $14 and $17 for 1994, 1993 and 1992.
The following table sets forth the funded status of the Company's pension
plans, amounts recognized in the Company's Balance Sheet at December 31, 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........................... $101 $ 43 $101 $ 38
Accumulated benefit obligation...................... $112 $ 48 $114 $ 41
==== ==== ==== ====
Projected benefit obligation.......................... $141 $ 65 $154 $ 57
Plan assets at fair value............................. 133 64 130 56
---- ---- ---- ----
Projected benefit obligation (in excess of) plan
assets.............................................. (8) (1) (24) (1)
Unrecognized net (gain)/loss.......................... 8 (1) 26 (5)
Unrecognized net obligation/(asset)................... (3) 4 (2) 4
---- ---- ---- ----
Pension asset (liability) recognized in the balance
sheet............................................... $ (3) $ 2 $ -- $ (2)
==== ==== ==== ====
Discount rate......................................... 8.50% 7.38% 7.50% 7.27%
Rate of return on invested assets..................... 9.75% 7.69% 9.75% 7.68%
Salary increase assumption............................ 6.10% 5.38% 7.20% 5.62%
==== ==== ==== ====
</TABLE>
For substantially all domestic and foreign plans, assets exceed accumulated
benefits.
Investment and Savings Plan -- Employees of the Company have participated
in the Corporation's Investment and Savings Plans. Company contributions to the
plan are determined annually and are based on contributions of participating
employees. The cost of this plan charged to the Company was $5 in 1994, 1993 and
1992. As part of the Distribution, New ITT will establish a similar plan.
Employees of New ITT with balances in the Corporation's plan will be allowed to
transfer their balances to the New ITT plan.
Postretirement Health and Life -- The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
Effective January 1, 1992, the Company adopted SFAS No. 106, using the immediate
recognition method for all benefits accumulated to date.
F-38
<PAGE> 290
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. Postretirement health care and life insurance benefits
expense (excluding the cumulative catch-up adjustment in 1992) was comprised of
the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................... $ 1 $ 1 $ 1
Interest cost................................................... 2 3 3
Return on assets................................................ -- -- --
Net amortization and deferral................................... (1 ) (1 ) --
Allocated from ITT Retirement Benefit Plan...................... 1 1 1
--
--- ---
Net periodic expense.................................. $ 3 $ 4 $ 5
=== === ==
</TABLE>
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Company'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......................... $ 30 $ 43
Plan assets at fair value............................................. 7 4
---- ----
Accumulated postretirement benefit obligation (in excess of) plan
assets.............................................................. $(23) $(39)
Unrecognized net (gain)............................................... (14) (1)
Unrecognized past service liability................................... (5) (5)
---- ----
Liability recognized in the balance sheet............................. $(42) $(45)
==== ====
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 1% per year
would have the effect of increasing the accumulated postretirement benefit
obligation by $7 and the annual expense by $1. To the extent that the actual
experience differs from the inherent assumptions, the effect will be amortized
over the average future service of the covered active employees.
LEASES AND RENTALS
As of December 31, 1994, minimum rental commitments under operating leases
were $53, $47, $40, $37 and $34 for 1995, 1996, 1997, 1998 and 1999. For the
remaining years, such commitments amounted to $295, aggregating total minimum
lease payments of $506.
Rental expenses for operating leases were $76, $83 and $87 for 1994, 1993
and 1992, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company has entered into two foreign currency swaps with a major
financial institution to hedge exchange exposure on the Company's net investment
in a foreign country.
The contractual amounts of these foreign currency swaps at December 31,
1994 and 1993 totaled $250 and $200, respectively, and mature in 1997. The
entire amount hedges dollars against French francs. There is no significant
unrealized gain or loss on these contracts. The estimated fair value at December
31, 1994 and
F-39
<PAGE> 291
ITT DESTINATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
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 Company and its affiliates are involved in various legal matters
including those related to environmental matters. Some of these actions include
claims for substantial sums. Reserves have been established when the outcome is
probable and can be reasonably estimated. While the ultimate result of claims
and litigation cannot be determined, the Company does not expect that these
matters will have a material adverse effect on their combined results of
operations, financial position or cash flow.
F-40
<PAGE> 292
ITT DESTINATIONS, INC.
BUSINESS SEGMENT INFORMATION
(IN MILLIONS)
<TABLE>
<CAPTION>
REVENUES OPERATING INCOME (LOSS)
---------------------------- -----------------------
1994 1993 1992 1994 1993 1992
------ ------ ------ ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Hotels.................................. $3,700 $3,160 $3,109 $152 $ 87 $(28)
Gaming.................................. 227 24 -- 9 (9) --
Information Services.................... 833 800 817 155 162 170
Dispositions and Other.................. -- 185 327 1 8 (50)
------ ------ ------ ---- ----- ----
Total Segments.......................... 4,760 4,169 4,253 317 248 92
Other................................... -- -- -- (25) (106) (58)
------ ------ ------ ---- ----- ----
$4,760 $4,169 $4,253 $292 $ 142 $ 34
====== ====== ====== ==== ===== ====
</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>
Hotels............................... $3,484 $1,754 $1,664 $328 $62 $69 $ 70 $56 $50
Gaming............................... 345 217 16 108 9 -- 6 1 --
Information Services................. 378 371 449 14 15 13 15 14 14
Dispositions and Other............... (17) 7 43 -- -- 2 -- -- 5
------ ------ ------ ---- --- --- ---- --- ---
Total Segments....................... 4,190 2,349 2,172 450 86 84 91 71 69
Other................................ 822 1,442 1,203 4 4 7 8 8 8
------ ------ ------ ---- --- --- ---- --- ---
$5,012 $3,791 $3,375 $454 $90 $91 $ 99 $79 $77
====== ====== ====== ==== === === ==== === ===
</TABLE>
Hotels: Operates a worldwide network of hotels and resorts under the
Sheraton name, including the hotels and resorts in the ITT Sheraton Luxury
Collection.
Gaming: Includes the casino operations of ITT Sheraton Gaming Corporation
and effective January 31, 1995, includes the newly acquired operations of
Caesars World, Inc. Caesars World owns and operates three hotel/casinos in Las
Vegas and Stateline, Nevada and in Atlantic City, New Jersey and a number of
non-gaming resorts in the Pocono Mountains of Pennsylvania. In conjunction with
two other partners, Caesars World manages a casino owned by the Ontario
government in Windsor, Canada.
Information Services: Engages in the publication of telephone directories,
including classified directory services for telephone subscribers in numerous
countries outside the United States, as well as in Puerto Rico and the U.S.
Virgin Islands and in providing postsecondary career education in the U.S.
"Dispositions and Other" includes the operating results of units including
World Directories, U.K. and Turkey operations.
"Operating Income (Loss)" consists of the gross profit on revenues less
operating expenses incurred. "Other" includes nonoperating income, corporate
expenses and minority equity. Intercompany sales, which are priced on an
arm's-length basis and eliminated in consolidation, are not material.
F-41
<PAGE> 293
ITT DESTINATIONS, INC.
GEOGRAPHICAL INFORMATION -- TOTAL SEGMENTS
(IN MILLIONS)
<TABLE>
<CAPTION>
OPERATING INCOME
REVENUES (LOSS) IDENTIFIABLE ASSETS
------------------------ ------------------ ------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------ ------ ------ ---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. ........................ $2,139 $1,723 $1,626 $ 75 $ 21 $(68) $2,249 $1,694 $1,221
Western Europe............... 1,203 1,154 1,389 135 157 100 1,311 353 491
Canada and Other............. 1,418 1,292 1,238 107 70 60 630 302 460
------ ------ ------ ---- ---- ---- ------ ------ ------
Total Segments............... $4,760 $4,169 $4,253 $317 $248 $ 92 $4,190 $2,349 $2,172
====== ====== ====== ==== ==== ==== ====== ====== ======
</TABLE>
QUARTERLY RESULTS FOR 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C>
1994
Revenues...................................... $ 876 $ 1,240 $1,108 $ 1,536 $4,760
Costs and Expenses............................ $ 848 $ 1,140 $1,046 $ 1,434 $4,468
Net Income.................................... $ 8 $ 29 $ 22 $ 15 $ 74
1993
Revenues...................................... $ 793 $ 1,156 $1,035 $ 1,185 $4,169
Costs and Expenses............................ $ 780 $ 1,112 $ 999 $ 1,136 $4,027
Net Income.................................... $ -- $ 9 $ 8 $ 22 $ 39
</TABLE>
F-42
<PAGE> 294
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ITT Corporation:
We have audited the consolidated financial statements of ITT Hartford
Group, Inc. (a Delaware 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 schedules referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and schedules 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 Hartford Group, Inc. 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 Company also changed, effective January 1, 1994, its method used
to discount long-term tabular workers' compensation liabilities.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules of ITT Hartford Group, Inc.
listed in the Index to Financial Statements and Schedules are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state 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
Hartford, CT
June 13, 1995
F-43
<PAGE> 295
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED DECEMBER 31,
JUNE 30,
--------------- ------------------------
1995 1994 1994 1993 1992
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues --
Property and casualty insurance, net of increase
(decrease) in unearned premium of $64, $62, $159,
$110 and $(120).................................. $3,410 $3,250 $6,580 $6,338 $6,094
Life insurance...................................... 1,278 1,032 2,173 1,812 1,340
Net investment income............................... 1,183 1,023 2,259 2,033 1,985
Net realized capital gains.......................... 48 62 90 155 443
------ ------ ------ ------ ------
5,919 5,367 11,102 10,338 9,862
------ ------ ------ ------ ------
Costs and Expenses --
Benefits, claims and claim adjustment expenses:
Property and casualty............................ 2,648 2,451 4,896 4,859 6,228
Life............................................. 1,202 995 2,418 1,948 1,717
Amortization of deferred policy acquisition costs... 813 801 1,627 1,647 1,430
Other expenses...................................... 933 717 1,309 1,197 988
------ ------ ------ ------ ------
5,596 4,964 10,250 9,651 10,363
------ ------ ------ ------ ------
323 403 852 687 (501)
Income Tax Expense (Benefit).......................... 76 107 214 140 (239)
Dividend on Subsidiary Preferred Stock................ (2) (4) (6) (10) (12)
------ ------ ------ ------ ------
Income (Loss) before Cumulative Effect of Accounting
Changes............................................. 245 292 632 537 (274)
Cumulative Effect of Accounting Changes, net of tax
expense (benefit) of $--, $7, $7, $-- and $(195).... -- 12 12 -- (379)
------ ------ ------ ------ ------
Net Income (Loss)..................................... $ 245 $ 304 $ 644 $ 537 $ (653)
====== ====== ====== ====== ======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-44
<PAGE> 296
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
IN MILLIONS EXCEPT FOR SHARES AND PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1995 1994 1993
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Investments --
Fixed maturities, available for sale, at fair value in
1995 and 1994 and at amortized cost in 1993............ $26,413 $27,418 $26,870
Equity securities, at fair value.......................... 1,306 1,350 1,302
Policy loans, at cost..................................... 3,677 2,614 1,402
Other investments, at cost................................ 4,696 1,071 1,008
------- ------- -------
Total investments...................................... 36,092 32,453 30,582
Cash........................................................ 112 55 61
Premiums Receivable and Agents' Balances.................... 2,085 1,996 1,788
Reinsurance Recoverables.................................... 12,346 12,220 11,577
Deferred Policy Acquisition Costs........................... 2,784 2,525 2,024
Deferred Income Tax......................................... 1,322 1,729 995
Other Assets................................................ 2,610 2,532 2,515
Separate Account Assets..................................... 29,480 23,255 16,637
------- ------- -------
$86,831 $76,765 $66,179
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities --
Future policy benefits, unpaid claims and claim adjustment
expenses:
Property and casualty.................................. $17,535 $17,435 $17,284
Life................................................... 3,519 3,152 2,699
Other policy claims and benefits payable.................. 23,728 22,308 18,364
Unearned premiums......................................... 2,821 2,725 2,537
Short-term debt........................................... 915 902 384
Long-term debt............................................ 598 596 579
Other liabilities (including subsidiary preferred stock of
$86, $86 and $263)..................................... 3,428 3,208 3,683
Separate account liabilities.............................. 29,480 23,255 16,637
------- ------- -------
82,024 73,581 62,167
------- ------- -------
Stockholder's Equity --
Common stock -- authorized, issued and outstanding 1
share,
$1 par value........................................... -- -- --
Capital surplus........................................... 1,610 1,357 1,357
Cumulative translation adjustments........................ 79 24 (28)
Unrealized gain (loss) on securities, net of tax.......... (149) (1,219) 78
Retained earnings......................................... 3,267 3,022 2,605
------- ------- -------
4,807 3,184 4,012
------- ------- -------
$86,831 $76,765 $66,179
======= ======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-45
<PAGE> 297
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------
1995 1994 1994 1993 1992
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (Loss).......................... $ 245 $ 304 $ 644 $ 537 $ (653)
Cumulative effect of accounting changes.... -- (12) (12) -- 379
------- ------- -------- -------- --------
Income (loss) before accounting
changes............................. 245 292 632 537 (274)
Adjustments to income (loss) before
accounting changes:
Depreciation and amortization............ 38 27 80 77 72
Gain on sale of securities............... (48) (57) (90) (155) (443)
Change in receivables, payables and
accruals............................... (167) (39) (67) 320 40
Accrued and deferred taxes............... (177) (77) (125) (126) (325)
Increase in liabilities for future policy
benefits and unpaid claims and claim
adjustment expenses.................... 462 223 610 233 1,873
Increase in deferred policy acquisition
costs.................................. (245) (203) (484) (359) (235)
Decrease in reinsurance and other related
assets................................. 253 160 241 244 107
Other, net............................... 32 (76) 27 36 1
------- ------- -------- -------- --------
Cash from operating activities......... 393 250 824 807 816
------- ------- -------- -------- --------
INVESTING ACTIVITIES
Purchase of investments.................... (6,372) (13,493) (18,962) (27,372) (22,278)
Sale and maturity of investments........... 4,957 12,037 15,702 25,050 19,900
Additions to plant, property and
equipment................................ (38) (29) (76) (61) (55)
Other, net................................. -- -- -- 119 36
------- ------- -------- -------- --------
Cash used for investing activities..... (1,453) (1,485) (3,336) (2,264) (2,397)
------- ------- -------- -------- --------
FINANCING ACTIVITIES
Short-term debt, net....................... 12 414 516 (85) (112)
Long-term debt issued...................... -- -- 13 5 --
Investment and advances (to) from ITT
Industries............................... 145 (255) (427) (190) 116
Net receipts from investment and universal
life-type contracts credited to
policyholder accounts.................... 971 1,247 2,584 1,734 1,617
Redemption of subsidiary preferred stock... -- (164) (178) (29) --
Other, net................................. (1) -- -- (10) (16)
------- ------- -------- -------- --------
Cash from financing activities......... 1,127 1,242 2,508 1,425 1,605
------- ------- -------- -------- --------
EXCHANGE RATE EFFECT ON CASH............... (10) (1) (2) 2 (12)
------- ------- -------- -------- --------
Increase (Decrease) in Cash................ 57 6 (6) (30) 12
Cash -- Beginning of Period................ 55 61 61 91 79
------- ------- -------- -------- --------
Cash -- End of Period...................... $ 112 $ 67 $ 55 $ 61 $ 91
======= ======= ======== ======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest................................. $ 48 $ 34 $ 74 $ 57 $ 72
======= ======= ======== ======== ========
Income Taxes............................. $ 150 $ 187 $ 317 $ 383 $ 57
======= ======= ======== ======== ========
Supplemental Schedule of Noncash Financing
Activities:
Capital Contribution..................... $ 183 $ -- $ -- $ -- $ 380
======= ======= ======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of the above
statement.
F-46
<PAGE> 298
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON CUMULATIVE TOTAL
COMMON CAPITAL SECURITIES TRANSLATION RETAINED STOCKHOLDER'S
STOCK SURPLUS NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------ ------- ---------- ----------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1991........... $ -- $ 677 $ (21) $ 81 $3,079 $ 3,816
Net loss............................. -- -- -- -- (653) (653)
Dividends declared on common stock... -- -- -- -- (136) (136)
Change in unrealized gain on
securities,
net of tax......................... -- -- 48 -- -- 48
Translation adjustments.............. -- -- -- (76) -- (76)
Capital contributions................ -- 680 -- -- -- 680
---- ------ ------- ---- ------ -------
BALANCE, DECEMBER 31, 1992........... -- 1,357 27 5 2,290 3,679
Net income........................... -- -- -- -- 537 537
Dividends declared on common stock... -- -- -- -- (222) (222)
Change in unrealized gain on
securities,
net of tax......................... -- -- 51 -- -- 51
Translation adjustments.............. -- -- -- (33) -- (33)
---- ------ ------- ---- ------ -------
BALANCE, DECEMBER 31, 1993........... -- 1,357 78 (28) 2,605 4,012
Net income........................... -- -- -- -- 644 644
Dividends declared on common stock... -- -- -- -- (227) (227)
Change in unrealized loss on
securities,
net of tax*........................ -- -- (1,297) -- -- (1,297)
Translation adjustments.............. -- -- -- 52 -- 52
---- ------ ------- ---- ------ -------
BALANCE, DECEMBER 31, 1994........... -- 1,357 (1,219) 24 3,022 3,184
(unaudited)
Net income........................... -- -- -- -- 245 245
Change in unrealized loss on
securities,
net of tax......................... -- -- 1,070 -- -- 1,070
Translation adjustments.............. -- -- -- 55 -- 55
Capital Contributions................ -- 253 -- -- -- 253
---- ------ ------- ---- ------ -------
BALANCE, JUNE 30, 1995............... $ -- $ 1,610 $ (149) $ 79 $3,267 $ 4,807
==== ====== ======= ==== ====== =======
</TABLE>
(*) The 1994 change in unrealized loss on securities, net of tax, includes a
gain of $303 due to the adoption of SFAS No. 115 as discussed in the Notes
to Financial Statements.
The accompanying notes to financial statements are an integral part of the above
statement.
F-47
<PAGE> 299
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
BASIS OF PRESENTATION
In June 1995, the Board of Directors of ITT Industries, Inc. (the
"Corporation"), formerly ITT Corporation ("ITT"), approved, subject to final
terms and conditions and shareholder approval, the distribution (the
"Distribution") to holders of the Corporation's common stock of all outstanding
shares of common stock of ITT Hartford Group, Inc. (ITT Hartford or the
"Company") on a pro rata basis. Under the proposed plan, ITT Hartford will
become a publicly traded company that will include the insurance businesses of
the former ITT Corporation. For purposes of these financial statements, all
references to ITT Hartford includes companies, assets and liabilities related to
First State Insurance Company and its subsidiaries and Fencourt Reinsurance
Company, Ltd., which will be transferred to ITT Hartford prior to the
Distribution.
These financial statements present the financial position, results of
operations and cash flows of ITT Hartford as if it were a separate entity for
all periods presented. The Corporation's historical basis in the assets and
liabilities of certain companies that were previously not a part of ITT Hartford
has been carried over and included in the accompanying financial statements as
if such companies had been transferred as of December 31, 1991, for all periods
presented, in a manner similar to pooling of interest accounting. All material
intercompany transactions and balances between ITT Hartford, its subsidiaries
and affiliates have been eliminated. The impact of the addition of these
companies and the adjustment of income tax reserves and provisions to reflect
the termination of the old tax sharing arrangement between the Corporation and
ITT Hartford was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Total Assets..................................... $4,427 $4,909 $5,181
Stockholder's Equity............................. 249 313 290
Revenues......................................... 145 272 260
Income Before Income Tax Expense................. 75 5 75
Net Income....................................... 55 44 91
</TABLE>
ITT Hartford has utilized certain of the Corporation's centralized general
and administrative functions, including legal, accounting, tax and insurance
services. Fees for these services approximate .2 percent of written premiums. In
the opinion of management, the Corporation's methods for allocating costs are
believed to be reasonable. However, such costs are not necessarily indicative of
the costs that would have been incurred if ITT Hartford had performed these
functions. Subsequent to the Distribution, the Company will perform these
functions and management believes the services can be replaced at comparable
costs.
For purposes of governing certain of the ongoing relationships between ITT
Hartford and the Corporation after the Distribution and to provide for orderly
transition, ITT Hartford and the Corporation will enter into various agreements
including a Distribution Agreement, Employee Benefits Services and Liability
Agreement, Tax Allocation Agreement and the Intellectual Property Transfer and
License Agreements. Summaries of these agreements are set forth elsewhere in
this Proxy Statement.
ACCOUNTING POLICIES
Property and Casualty Insurance Companies: Policy acquisition costs,
representing commissions, premium taxes and certain other underwriting expenses,
are deferred and amortized over policy terms. Estimates of future revenues,
including investment income and tax benefits, are compared to estimates of
future costs, including amortization of policy acquisition costs, to determine
if business currently in force is expected to result in a net loss. No revenue
deficiencies have been determined in the periods presented.
The liability for property and casualty claims includes amounts determined
by claim adjusters for reported losses and estimates for unreported claims based
on past experience.
F-48
<PAGE> 300
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Life Insurance Companies: Life insurance revenues are comprised of life
insurance premiums which are recognized when due from policyholders, accident
and health premiums which are recognized when earned and policyholder charges on
universal life-type and investment contracts are deferred and amortized in
proportion to premium revenue. For universal life-type insurance and investment
products, acquisition costs are being amortized generally in proportion to the
present value of expected gross profits from surrender charges, investment,
mortality and expense margins. The retrospective deposit method is used in
accounting for universal life-type and other contract types where the premium
payment pattern is irregular or surrender charges are a significant source of
profit. The prospective deposit method is used where investment margins are the
primary source of profit.
Liabilities for future policy benefits are computed by the net level
premium method using interest assumptions ranging from 3% to 11% and withdrawal,
mortality and morbidity assumptions appropriate at the time the policies were
issued. Health reserves are stated at amounts determined by estimates on
individual cases and estimates of unreported claims based on past experience.
Liabilities for universal life-type and investment contracts are stated at
policyholder account values before surrender charges.
Separate account assets and liabilities represent amounts for which
investment income and investment gains and loses generally accrue directly to
the policyholders for certain single premium, interest sensitive and variable
annuity products. Each fund has specific investment objectives and the assets
and liabilities are carried at market value.
Foreign Currency Translation: Foreign currency translation gains and
losses are reflected in stockholder's equity. Balance sheet accounts are
translated at the exchange rates in effect at each year end and income statement
accounts are translated at the average rates of exchange prevailing during the
year. The national currencies of the foreign companies are generally their
functional currencies. Cumulative translation adjustments are adjusted for
contracts that hedge the Company's foreign investments, when the differential to
be paid or received fluctuates with the exchange rate.
Investments: Investments in fixed maturities include bonds, redeemable
preferred stock and commercial paper which are carried at fair value with the
after-tax difference from cost reflected in stockholder's equity. While ITT
Hartford has the ability and intent to hold all fixed maturity securities until
maturity, at times, due to factors such as changes in interest rates or tax
laws, portfolio activity occurs. These trades are motivated by the need to
position investment portfolios optimally in reaction to movements in capital
markets or distribution of policyholder liabilities. Real estate is carried at
cost less accumulated depreciation. When an other-than-temporary reduction in
the value of publicly traded securities or real estate occurs, the decrease is
reported as a realized loss and the carrying value is adjusted accordingly.
Equity securities, which include common and non-redeemable preferred stocks are
carried at fair value with the after-tax difference from cost reflected in
stockholders equity. Realized investment gains and losses, after deducting life
and pension policyholders' share, are reported as a component of revenue and are
determined on a specific identification basis.
Income Tax: ITT Hartford is included in the consolidated federal tax
return of ITT Industries and remits to (receives from) ITT Industries an income
tax provision (benefit) computed in accordance with a tax sharing arrangement.
This arrangement, which may be periodically modified, generally requires that
the Company determine its tax provision (benefit) as if it were filing a
separate U.S. Federal income tax return. The tax provision (benefit) recorded in
the accompanying Consolidated Income Statements would not have been materially
different on a stand-alone basis.
Interim Period Financial Statements: The unaudited consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
at June 30, 1995 and its results of operations and cash flows for the six months
ended June 30, 1995 and 1994. Interim results are not necessarily indicative of
full year performance.
F-49
<PAGE> 301
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Derivative Financial Instruments: The Company uses a variety of derivative
financial instruments as part of an overall risk management strategy. These
instruments, including swaps, caps, collars and exchange traded financial
futures, are used as a means of hedging exposure to price, foreign currency
and/or interest rate risk on planned investment purchases or existing assets and
liabilities. The Company does not hold or issue derivative financial instruments
for trading purposes.
The Company's minimum threshold for hedge designation is 80% correlation at
inception of the asset-liability management strategy. The Company's policy
requires that the 80% correlation threshold be maintained. If correlation falls
below 80%, hedge accounting will be terminated. Gains or losses on futures
purchased in anticipation of the future receipt of product cash flows are
deferred and, at the time of the ultimate purchase, reflected as a basis
adjustment to the purchased asset. Gains or losses on futures used in invested
asset risk management are deferred and adjusted into the basis of the hedged
asset when the contract is closed. The basis adjustments are amortized into net
investment income over the remaining asset life.
Open forward commitment contracts are marked to market through
stockholder's equity. Such contracts are recorded at settlement by recording the
purchase of the specified securities at the previously committed price. Gains or
losses resulting from the termination of the forward commitment contracts before
the delivery of the securities are recognized immediately in the consolidated
income statement as a component of net investment income.
The Company's accounting for interest rate swaps and purchased or written
caps, floors, and options used to manage risk is in accordance with the concepts
established in SFAS No. 80, "Accounting for Futures Contracts", the American
Institute of Certified Public Accountants Statement of Position 86-2,
"Accounting for Options" and various Emerging Issues Task Force ("EITF")
pronouncements. Derivatives, used as part of a risk management strategy, must be
designated at inception as a hedge, measured for effectiveness both at inception
and on an ongoing basis. Derivatives used to create a synthetic asset must meet
synthetic accounting criteria including designation at inception and consistency
of terms between the synthetic and the instrument being replicated. Synthetic
instrument accounting, consistent with industry practice, provides that the
synthetic asset is accounted for like the financial instrument it is intended to
replicate. Interest rate swaps and purchased or written caps, floors and options
which fail to meet risk management criteria are accounted for at fair value with
the impact reflected in the Consolidated Statements of Income.
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, the gains
or losses are adjusted into the basis of the asset or liability and amortized
over the remaining life. The basis of the underlying asset or liability is
adjusted to reflect changing market conditions such as prepayment experience.
Should the asset be sold or liability terminated, the gains or losses on the
terminated position are immediately recognized in earnings. Interest rate swaps
purchased in anticipation of an asset purchase ("anticipatory transaction") are
recognized consistent with the underlying asset components. That is, the
settlement component is recognized in the Consolidated Income Statement while
the change in market value is recognized as an unrealized gain or loss as a
component of stockholder's equity.
Premiums paid on purchased floor or cap agreements and the premium received
on issued cap or floor agreements (used for risk management), as well as the net
payments, are adjusted into the basis of the applicable asset and amortized over
the asset life. Gains or losses on termination of such positions are adjusted
into the basis of the asset or liability and amortized over the remaining asset
life.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 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 stockholder's equity.
F-50
<PAGE> 302
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CHANGES IN ACCOUNTING PRINCIPLES
Changes Adopted in 1994: Effective January 1, 1994, the Company 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
Company's intentions with respect to the ultimate disposition of the security
and its ability to effect 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 Stockholder's Equity directly
or is reflected in the Consolidated Statement of Income. Investments in equity
securities had previously been recorded at fair value with the corresponding
impact included in Stockholder's Equity. Under SFAS No. 115, the Company's
portfolios are classified as "available for sale" and, accordingly, investments
are reflected at fair value with the corresponding impact included as a
component of Stockholder's Equity designated "Unrealized gain (loss) on
securities, net of tax". At December 31, 1994, the unrealized loss on
securities, net of tax, was $1.2 billion.
In adopting SFAS No. 115, the Company followed the guidelines of the 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 $30 after tax.
Effective January 1, 1994, the Company changed its method used to discount
long-term tabular workers compensation liabilities from a statutory interest
rate to an appropriate market interest rate. The market rate, which approximated
7%, represents the rate of return the Company 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
benefit was recorded as a cumulative effect of accounting change in the
accompanying Consolidated Income.
Changes Adopted in 1992: Effective January 1, 1992, the Company 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 $358 after tax and $21 after tax, respectively,
have been recognized at January 1, 1992.
The Company's cash flows were not impacted by these changes in accounting
principles.
TRANSACTIONS WITH AFFILIATES
ITT Hartford has utilized certain centralized general and administrative
functions of the Corporation (see "Basis of Presentation") and is charged a fee
for such services. The fees charged totaled $8 and $7 for the periods ended June
30, 1995 and 1994, respectively (unaudited) and $15, $14 and $12 in 1994, 1993
and 1992, respectively, and have been included in other expenses.
The Company's employees participate in the ITT stock option incentive
plans, which provide for the award 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 ITT common stock or at nine
years after the date of grant, while certain 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 Company expects to establish similar plans for its employees after
the Distribution, whereby options in the ITT Industries plan will be converted
into options in the ITT Hartford plan based upon a formula.
F-51
<PAGE> 303
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAX
Income tax data before accounting changes is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1994 1993 1992
---- ----- -----
<S> <C> <C> <C>
Pretax income (loss)
U.S....................................................... $763 $ 646 $(474)
Foreign................................................... 89 41 (27)
---- ----- -----
$852 $ 687 $(501)
==== ===== =====
Provision (benefit) for income tax
Current
U.S. Federal........................................... $227 $ 377 $ 40
Foreign................................................ 45 13 (2)
---- ----- -----
272 390 38
---- ----- -----
Deferred
U.S. Federal........................................... (65) (254) (271)
Foreign and other...................................... 7 4 (6)
---- ----- -----
(58) (250) (277)
---- ----- -----
$214 $ 140 $(239)
==== ===== =====
</TABLE>
The provision for income taxes has been computed in accordance with a tax
sharing agreement between ITT Hartford and ITT that generally requires that such
provision be computed as if the Company were a stand alone entity. The primary
exception to the stand alone computation relates to the utilization of foreign
tax credits. The agreement allows for the realization of such credits since they
have been utilized by ITT Industries in the consolidated tax return. In all
years presented, the provision for income taxes would not have been
substantially different on a stand alone basis.
The current U.S. Federal income tax provision represents the amount of
taxes remitted to ITT Industries. At December 31, 1994, no provision was made
for U.S. Federal taxes payable on undistributed foreign earnings amounting to
approximately $317 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
return purposes. The December 31, 1994 and 1993 Balance Sheets included net U.S.
Federal deferred tax assets of $1,729 and $995, respectively, and net foreign
and other deferred tax liabilities of $61 and $78, respectively (included in
"Other Liabilities").
F-52
<PAGE> 304
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, included the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
--------------------- ---------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL AND OTHER FEDERAL AND OTHER
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Unrealized (gain) loss on investments........ $ 645 $ 11 $ (22) $ (19)
Discounted loss reserves..................... 710 -- 672 --
Other insurance related items................ (25) (77) 86 (51)
Employee benefits............................ 143 (5) 144 (2)
Reserve for bad debts........................ 28 -- 23 --
Accelerated depreciation..................... 15 -- 12 --
Other........................................ 213 10 80 (6)
------- ------- ----- -- ----- --
$ 1,729 $ (61) $ 995 $ (78)
======= ======= ======= =======
</TABLE>
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 (benefit) at U.S. Federal statutory rate....... $298 $240 $(170)
Tax exempt interest.......................................... (45) (25) (25)
Change in U.S. tax law....................................... -- (28) --
Foreign tax rate differential................................ (10) (3) (1)
Other........................................................ (29) (44) (43)
---- ---- -----
Provision (benefit) for income tax........................... $214 $140 $(239)
==== ==== =====
</TABLE>
DEBT
Borrowings, as of December 31, consisted of:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Commercial paper............................................ $ 646 $249
Bank loans and other short-term............................. 230 110
Long-term................................................... 622 604
------ ----
$1,498 $963
====== ====
</TABLE>
The fair value of the Company's commercial paper and bank loans and other
short-term loans approximates carrying value. The weighted average interest rate
for commercial paper was 6.0% and 5.6% at December 31, 1994 and 1993. The
weighted average interest rate of bank loans and other short-term borrowings was
6.1% and 3.3% at December 31, 1994 and 1993, respectively. Bank loans and other
short-term debt are drawn down under lines of credit, which were made to ITT
Industries and certain of its subsidiaries, including ITT Hartford. ITT Hartford
uses these commitments to support its commercial paper program.
F-53
<PAGE> 305
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt maturities and interest rate percentages at December 31 were:
<TABLE>
<CAPTION>
BELOW 6.0- 7.0- 8.0-
6 6.99 7.99 8.99 TOTAL
----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
1995.......................................... $ -- $ 26 $ -- $ -- $ 26
1996.......................................... -- 26 100 -- 126
1997.......................................... -- 23 -- -- 23
1998.......................................... -- 31 -- 200 231
1999.......................................... -- 16 -- -- 16
Thereafter.................................... -- -- -- 200 200
----- ---- ---- ---- -----
Total -- 1994................................. $ -- $122 $100 $400 $ 622
----- ---- ---- ---- -----
Total -- 1993................................. $ 79 $ 25 $100 $400 $ 604
===== ==== ==== ==== =====
</TABLE>
The estimated fair value of long-term debt at December 31, 1994 and 1993
was $614 and $655, based on discounted cash flows using the Company's
incremental borrowing rates for similar arrangements.
The Company enters into interest rate swap agreements with major financial
institutions to manage exposure from fluctuations in interest rates as described
in "Investments and Derivative Financial Instruments".
STATUTORY NET INCOME, SURPLUS AND DIVIDEND RESTRICTION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
STATUTORY NET INCOME:
Property and casualty.................................... $ 452 $ 306 $ 203
Life and health.......................................... 85 81 145
------ ------ ------
$ 537 $ 387 $ 348
====== ====== ======
STATUTORY SURPLUS:
Property and casualty.................................... $2,123 $2,480 $2,249
Life and health.......................................... 1,180 1,025 878
------ ------ ------
$3,303 $3,505 $3,127
====== ====== ======
</TABLE>
A significant percentage of the statutory surplus is permanently reinvested or
is subject to various state and foreign government regulatory restrictions or
other agreements which limit the payment of dividends without prior approval.
The total amount of statutory dividends which may be paid by The Hartford and
First State in 1995 without prior approval is estimated to be approximately
$320.
LEASES AND RENTALS
As of December 31, 1994, minimum rental commitments under operating leases
were $82, $73, $57, $47 and $43 for 1995, 1996, 1997, 1998 and 1999. For the
remaining years, such commitments amounted to $308, aggregating total minimum
lease payments of $610.
Rental expenses for operating leases were $106, $109 and $125 for 1994,
1993 and 1992, respectively.
EMPLOYEE BENEFIT PLANS
Pension Plans: The Company sponsors numerous pension plans. The plans are
funded with trustees, except in some countries outside the U.S. where funding is
not required. The plans' assets are comprised of a
F-54
<PAGE> 306
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
broad range of domestic and foreign securities, fixed income investments and
real estate. Certain of the Company's employees participate in the ITT Salaried
Retirement Plan.
Total pension expenses were:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
<S> <C> <C> <C>
Defined Benefit Plans
Service cost............................................... $ 54 $ 39 $ 43
Interest cost.............................................. 90 82 78
Return on assets........................................... (4) (132) (46)
Net amortization and deferral.............................. (84) 46 (32)
--- ---- ---
Net periodic pension cost.................................. 56 35 43
Other Pension Cost
Allocated cost of ITT Salaried Retirement Plan............. 1 1 1
Defined contribution (savings) plans....................... 19 18 17
--- ---- ---
Total Pension Expense.............................. $ 76 $ 54 $ 61
=== ==== ===
</TABLE>
U.S. pension expenses included in the net periodic pension costs in the
table above were $46, $29 and $35 for 1994, 1993 and 1992, respectively.
The following table sets forth the funded status of the pension plans,
amounts recognized in the Company's Balance Sheet at December 31, 1994 and 1993,
and the principal weighted average assumptions inherent in their determination.
International plans represent an immaterial percentage of total pension assets,
liabilities and expense and, for reporting purposes, are combined with domestic
plans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations --
Vested benefit obligation........................................ $ 825 $ 909
Accumulated benefit obligation................................... $ 904 $ 913
====== ======
Projected benefit obligation....................................... $1,131 $1,209
Plan assets at fair value.......................................... 1,075 1,092
------ ------
Projected benefit obligation in excess of plan assets.............. (56) (117)
Unrecognized net loss.............................................. 178 260
Unrecognized prior service cost.................................... 4 5
------ ------
Pension asset recognized in the balance sheet...................... $ 126 $ 148
====== ======
Discount rate...................................................... 8.50% 7.50%
Rate of return on invested assets.................................. 9.75% 9.75%
Salary increase assumption......................................... 5.00% 5.00%
====== ======
</TABLE>
Investment and Savings Plan: Employees of the Company have participated in
the Corporation's Investment and Savings Plan. Company contributions to the plan
are determined annually and are based on contributions of participating
employees. The cost of this plan charged to the Company was $19, $18 and $17 in
1994, 1993 and 1992, respectively. As part of the Distribution, ITT Hartford
will establish a similar plan. Employees of ITT Hartford with balances in the
Corporation's plan will be allowed to transfer their balances to the ITT
Hartford plan.
Postretirement Health and Life: The Company and its subsidiaries provide
health care and life insurance benefits for certain eligible retired employees.
A substantial portion of the employees may become eligible for these benefits
upon retirement. Effective January 1, 1992, the Company adopted SFAS No. 106,
F-55
<PAGE> 307
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
using the immediate recognition method for all benefits accumulated to date. As
of January 1, 1992, the health care benefit plans required nominal contributions
by retirees. In June 1992, the Company amended its plans effective January 1,
1993, whereby the Company's contribution for health care benefits will depend
upon the retiree's date of retirement and years of service. In addition, the
plan amendments increased deductibles and set a defined dollar cap which limits
average Company contributions. The effect of these changes has been reflected in
the determination of the expense reported for 1994, 1993 and 1992 as reported
below.
The Company has prefunded a portion of the health care and life insurance
obligations through trust funds where such prefunding can be accomplished on a
tax effective basis. Postretirement health care and life insurance benefits
expense (excluding the cumulative catch-up adjustment in 1992) was comprised of
the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................. $ 7 $ 6 $ 13
Interest cost................................................. 20 19 30
Return on assets.............................................. (4) (3) (1)
Net amortization and deferral................................. (23) (23) (14)
--- --- ---
Net periodic expense (benefit)................................ $ -- $ (1) $ 28
=== === ===
</TABLE>
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Company'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....................... $ 257 $ 264
Plan assets at fair value (primarily U.S. stocks and bonds)......... 63 49
----- -----
Accumulated postretirement benefit obligation (in excess of) plan
assets............................................................ (194) (215)
Unrecognized net (gain) loss........................................ (1) 19
Unrecognized past service liability................................. (279) (302)
----- -----
Liability recognized in the balance sheet........................... $(474) $(498)
===== =====
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 $13 and the annual expense by $1. 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.
REINSURANCE
The Company cedes insurance to other insurers to limit its maximum loss.
Such transfers do not relieve the originating insurers of their primary
liabilities. These operations also assume insurance from other insurers. Failure
of reinsurers to honor their obligation could result in losses to the Company.
The Company evaluates
F-56
<PAGE> 308
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the financial condition of its reinsurers and monitors concentrations of credit
risk. The effect of reinsurance on property and casualty premiums written and
earned was as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
PREMIUMS WRITTEN:
Direct................................................. $6,786 $6,751 $6,370
Assumed................................................ 782 683 618
Ceded.................................................. (829) (986) (1,014)
------ ------ ------
Net.................................................... $6,739 $6,448 $5,974
====== ====== ======
PREMIUMS EARNED:
Direct................................................. $6,717 $6,597 $6,477
Assumed................................................ 746 735 805
Ceded.................................................. (883) (994) (1,188)
------ ------ ------
Net.................................................... $6,580 $6,338 $6,094
====== ====== ======
</TABLE>
Reinsurance recoveries, which reduced loss and loss expenses incurred, were
$1.0 billion, $1.2 billion and $1.2 billion for the years ended December 31,
1994, 1993 and 1992, respectively.
Net retained life premiums of the operations were comprised of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Gross Premiums........................................... $2,053 $1,789 $1,263
Reinsurance Assumed...................................... 336 225 163
Reinsurance Ceded........................................ (216) (202) (86)
------ ------ ------
Net Retained Premiums.......................... $2,173 $1,812 $1,340
====== ====== ======
</TABLE>
Life insurance recoveries, which reduced death and other benefits,
approximated $113, $114 and $38 for each of the years ended December 31, 1994,
1993 and 1992, respectively.
During 1992, the Company entered into an agreement with Mutual Benefit Life
Insurance Company in Rehabilitation ("Mutual Benefit") whereby it assumed a
block of contract obligations of Mutual Benefit's individual corporate owned
life insurance (COLI) contracts. As part of this agreement, the Company received
$5.6 billion in cash and invested assets, $5.3 billion of which were COLI policy
loans. The Company coinsured approximately 84% of these contract obligations
back to Mutual Benefit and two other insurers. At December 31, 1994, the Company
had a reinsurance receivable from Mutual Benefit of $4.4 billion. The risk of
Mutual Benefit becoming insolvent is mitigated by the reinsurance agreement's
requirement that assets be kept in a security trust, with the Company as the
sole beneficiary. The Company had no other significant reinsurance-related
concentrations of credit risk.
On June 15, 1993, ITT Hartford assumed and reinsured the annuity, life and
accident and sickness insurance policies of Fidelity Bankers Life Insurance
Company in Receivership for Conservation of Rehabilitation ("Fidelity Bankers"),
with account values of $3.2 billion. ITT Hartford received cash and investment
grade assets to assume insurance and annuity contract obligations. Substantially
all of these contracts were placed in the separate accounts.
Also in 1992, as a result of adverse loss developments in certain excess
and surplus lines and reinsurance business, the Company recorded a $900 pretax
charge to fund expected loss developments in surplus lines and
F-57
<PAGE> 309
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reinsurance business and $250 pretax for expected legal defense costs associated
with environmental-related claims. The effect of these two charges was $759
after tax.
POLICY LIABILITIES AND ACCRUALS
Policy liabilities and accruals at December 31 were:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Future policy benefits, unpaid claims and claim adjustment
expenses....................................................... $20,587 $19,983
Other policy claims and benefits payable......................... 22,308 18,364
Unearned premiums................................................ 2,725 2,537
------- -------
$45,620 $40,884
======= =======
</TABLE>
At December 31, 1994 and 1993, the estimated fair values of other policy
claims and benefits payable, excluding corporate owned life insurance and
universal life insurance contracts totalling $9.3 billion and $7.2 billion,
respectively, were approximately $12.4 billion and $11.4 billion, respectively,
and were based on the present value of estimated future cash flows using current
market rates for similar arrangements.
Refer to table included in "BUSINESS OF ITT HARTFORD AFTER THE
DISTRIBUTION" where a reconciliation of the liabilities for unpaid claims and
claim adjustment expenses is provided.
INVESTMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
Investments are comprised primarily of fixed maturity bonds and notes (most
of which are guaranteed by various government and government-sponsored agencies)
and to a lesser extent, equity securities, policy loans and other investments.
Excluding U.S. government and government agency investments, the Company is not
exposed to any significant concentration risk. The Company is not a trader in
these securities as defined and, accordingly, the investment portfolios are
classified as available for sale in accordance with SFAS No. 115 and at December
31, 1994, were carried at fair value. Prior to the adoption of SFAS No. 115,
investments (except equity securities) were carried at amortized cost.
Investments consisted of the following at December 31, 1994 and 1993:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1994 COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Asset-backed securities, primarily U.S.
government sponsored agencies (excluding
inverse floaters)............................. $ 9,089 $157 $ (701) $ 8,545
Bonds and Notes
Federal, state and other governments.......... 8,037 20 (522) 7,535
Corporate..................................... 6,780 44 (500) 6,324
Other......................................... 2,352 2 (179) 2,175
Short-term Investments.......................... 2,278 -- -- 2,278
Inverse Floaters................................ 818 5 (262) 561
------- ---- ------- -------
Fixed Maturity Investments.................... 29,354 $228 $ (2,164) 27,418
==== =======
Policy Loans.................................... 2,614 2,614
Equity Securities............................... 1,335 $118 $ (103) 1,350
==== =======
Other Investments............................... 1,071 1,071
------- -------
Total Investments..................... $34,374 $ 32,453
======= =======
</TABLE>
F-58
<PAGE> 310
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
1993 COST GAINS LOSSES FAIR VALUE
- ------------------------------------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Asset-backed securities, primarily U.S.
government sponsored agencies................. $10,181 $439 $ (309) $ 10,311
Bonds and Notes
Federal, state and other governments.......... 5,610 149 (44) 5,715
Corporate..................................... 6,635 268 (60) 6,843
Other......................................... 1,259 33 (10) 1,282
Short-term investments.......................... 3,185 -- -- 3,185
------- ---- ------- -------
Fixed Maturity Investments.................... 26,870 $889 $ (423) 27,336
==== =======
Policy Loans.................................... 1,402 1,402
Equity Securities............................... 1,183 $173 $ (54) 1,302
==== =======
Other Investments............................... 1,008 1,073
------- -------
Total Investments..................... $30,463 $ 31,113
======= =======
</TABLE>
Sales of fixed maturities excluding short-term fixed maturities for the
years ended December 31, 1994, 1993 and 1992 resulted in proceeds of $10.2
billion, $18.3 billion and $17.2 billion, gross gains of $193, $492 and $687 and
gross losses of $212, $430 and $187, respectively. Sales of equity securities
and other investments for the year ended December 31, 1994 resulted in proceeds
of $1.7 billion, gross gains of $135 and gross losses of $52.
The amortized cost and estimated fair value of fixed maturity investments
at December 31, 1994 by estimated maturity is shown below. Maturities are
reflected by contract date except for asset-backed securities which are
distributed to maturity year based on the Company's estimate of the rate of
future prepayments of principal over the remaining life of the securities.
Actual maturities may differ from contractual and estimated maturities
reflecting borrowers' rights to call or prepay their obligations.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
ESTIMATED MATURITY COST FAIR VALUE
--------------------------------------------------------------- --------- ----------
<S> <C> <C>
1995........................................................... $ 4,292 $ 4,248
1996-1999...................................................... 12,414 11,835
2000-2004...................................................... 9,310 8,481
Thereafter..................................................... 3,338 2,854
------- -------
$29,354 $ 27,418
======= =======
</TABLE>
Fair value of financial investments not disclosed elsewhere as of December 31,
1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Other Assets
Restricted Stock -- Alcatel Alsthom Stock........ $380 $367 $380 $611
</TABLE>
F-59
<PAGE> 311
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Components of investment income and gains (losses) were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-----------------------------
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
COMPONENTS OF NET INVESTMENT INCOME:
Interest income............................................... $ 2,167 $1,946 $1,996
Real estate income............................................ 62 58 48
Dividends from unaffiliated companies......................... 47 39 22
Other investment income....................................... 79 92 16
------- ------ ------
Gross investment income....................................... 2,355 2,135 2,082
Less: Investment expenses..................................... 96 102 97
------- ------ ------
Net investment income......................................... $ 2,259 $2,033 $1,985
======= ====== ======
COMPONENTS OF NET REALIZED GAINS (LOSSES):
Fixed maturities.............................................. $ (19) $ 62 $ 500
Equity securities............................................. 83 66 (26)
Real estate and other......................................... 26 42 (16)
Less: Increase in liability to policyholders for realized
gains...................................................... -- 15 15
------- ------ ------
Net realized gains............................................ $ 90 $ 155 $ 443
======= ====== ======
UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES:
Gross unrealized gains........................................ $ 118 $ 177 $ 85
Gross unrealized losses....................................... (103) (58) (45)
------- ------ ------
Net unrealized gains.......................................... 15 119 40
Deferred income tax expense................................... 5 41 13
------- ------ ------
Net unrealized gains after tax................................ 10 78 27
Balance beginning of year..................................... 78 27 (21)
------- ------ ------
Change in unrealized investment gains (losses)................ $ (68) $ 51 $ 48
======= ====== ======
UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES:
Gross unrealized gains........................................ $ 228 $ 889 $ 781
Gross unrealized losses....................................... (2,164) (423) (432)
Unrealized losses credited to policyholders................... 46 -- --
------- ------ ------
Net unrealized gains (losses)................................. (1,890) 466 349
Tax effect at applicable statutory rates...................... (661) 163 119
------- ------ ------
Net unrealized gains (losses) after tax....................... (1,229) 303 230
Balance beginning of year..................................... 303 230 718
------- ------ ------
Change in unrealized investment gains (losses)................ $(1,532) $ 73 $ (488)
======= ====== ======
</TABLE>
The Company is an end-user of derivative financial instruments, including
swaps, caps, floors and exchange traded financial futures and options as a means
of prudently hedging exposure to price, foreign currency and/or interest rate
risk on anticipated investment purchases or existing assets and liabilities.
Approved derivatives usage must support at least one of the following
objectives: to manage risk to the operations arising from price, interest rate
and foreign currency volatility, to manage liquidity or to control transaction
costs. The notional amounts of derivative contracts represent the basis upon
which pay and receive amounts are calculated and are not reflective of credit
risk. Credit risk is limited to the amounts calculated to be due to the Company
on such contracts. Payment obligations between the Company and its
counterparties are typically netted on a quarterly basis. The Company has
policies regarding the financial stability and credit standing of its major
counterparties and typically requires credit enhancement provisions to further
limit its
F-60
<PAGE> 312
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
credit risk. A summary of investments segregated by major category, along with
the types of derivatives and their respective notional amounts, are as follows
as of December 31, 1994 (in millions):
<TABLE>
<CAPTION>
AMOUNT HEDGED (NOTIONAL AMOUNTS)
------------------------------------------------------------------------------
PURCHASED
ISSUED CAPS, INTEREST FOREIGN
CAPS, FLOORS, RATE CURRENCY TOTAL
CARRYING FLOORS COLLARS FUTURES SWAPS SWAPS NOTIONAL
ASSETS HEDGED VALUE (B) (C) (D) (E) (E) AMOUNT
- --------------------------------------- -------- ------ --------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Backed Securities (Excluding
Inverse Floaters and Anticipatory)... $ 8,545 $1,511 $ 2,746 $ 78 $ 332 $ -- $4,667
Bonds and Notes........................ 16,034 -- 83 98 349 222 752
Short-Term Investments................. 2,278 -- -- -- -- -- --
Policy Loans........................... 2,614 -- -- -- -- -- --
Equity Securities...................... 1,350 -- -- -- -- -- --
Other Investments...................... 1,071 -- 3 15 13 55 86
Inverse Floaters (a)................... 561 277 63 3 786 -- 1,129
Anticipatory........................... -- -- 209 210 710 -- 1,129
------- ------ ------ ---- ------ ------ ----
Total Investments...................... $32,453 $1,788 $ 3,104 $ 404 $2,190 $277 $7,763
======= ====== ====== ==== ====== ====== ====
Derivative Fair Value (f).............. $ (41) $ 29 $ -- $ (124) $(18) $ (154)
====== ====== ==== ====== ====== ====
</TABLE>
- ---------------
(a) Life operations own inverse floaters, which are variations of
collateralized mortgage obligations (CMO's) for which the coupon rates move
inversely with an index rate (e.g., LIBOR). The risk to principal is
considered negligible as the underlying collateral for the securities is
guaranteed or sponsored by government agencies. To address the volatility
risk created by the coupon variability, the Company uses a variety of
derivative instruments, primarily interest rate swaps and issued floors.
(b) Comprised primarily of caps of $1,663 with a weighted average strike rate
of 7.8% (ranging from 6.8% to 10.2%). Over 74% mature in 1997 and 1998.
Issued floors total $125 with a weighted average strike rate of 8.3%
(ranging from 6.6% to 10.9%) and mature in 2004.
(c) Comprised of purchased floors of $2,056, purchased options and collars of
$644 and purchased caps of $404. The floors have a weighted average strike
price of 5.7% (ranging from 4.8% to 6.6%) and over 86% mature in 1997 and
1998. The options and collars generally mature in 1995 and 2002. The caps
have a weighted average strike price of 7.2% (ranging from 4.5% to 8.9%)
and over 66% mature in 1997 through 1999.
(d) Over 95% of futures contracts expire before December 31, 1995.
(e) Includes 28 contracts in various currencies, expiring through 2002.
(f) The estimated fair value is the present value of the cash flows that would
result from the agreements being replaced at the year-end market rate for
the remaining term of the agreements. At December 31, 1994, fair value
approximated recorded amounts.
F-61
<PAGE> 313
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(g) 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 assuming current market conditions (in millions):
<TABLE>
<CAPTION>
2000 AND LATEST
1995 1996 1997 1998 1999 THEREAFTER TOTAL MATURITY
---- ---- ---- ---- ---- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE
Notional Value............................ -- $ 15 $ 50 -- $446 $288 $ 799 2004
Weighted Avg. Pay Rate.................... -- 5.0% 7.2% -- 8.2% 7.9% 7.9%
Weighted Avg. Receive Rate................ -- 6.4% 5.7% -- 7.5% 6.0% 6.8%
PAY VARIABLE/RECEIVE FIXED
Notional Value............................ $471 $ 70 $100 $25 $175 $125 $ 966 2002
Weighted Avg. Pay Rate.................... 5.1% 5.3% 5.5% 5.3 % 5.4% 6.1% 5.4%
Weighted Avg. Receive Rate................ 8.0% 7.1% 7.5% 4.0 % 4.5% 6.9% 7.0%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional Value............................ $105 $ 50 $ 18 $15 $ 5 $232 $ 425 2005
Weighted Avg. Pay Rate.................... 4.3% 6.4% 6.8% 6.2 % -- 6.0% 5.7%
Weighted Avg. Receive Rate................ 10.2% 6.3% 9.5% 6.4 % -- 6.3% 7.4%
TOTAL INTEREST RATE SWAPS................. $576 $135 $168 $40 $626 $645 $2,190
TOTAL WEIGHTED AVG. PAY RATE.............. 5.0% 5.7% 6.1% 5.6 % 7.4% 6.9% 6.4%
TOTAL WEIGHTED AVG. RECEIVE RATE.......... 8.4% 6.7% 7.2% 4.9 % 6.6% 6.3% 7.0%
</TABLE>
In addition to derivative financial instruments pertaining to the
investment portfolio, interest rate sensitivity related to certain liabilities
in the Life operations was altered primarily through interest rate swap
agreements. The notional amount of these agreements, in which the Company
generally pays one variable rate in exchange for another, was $1.7 billion and
$1.3 billion at December 31, 1994 and 1993, respectively. The weighted average
pay rate is 6.2%, the weighted average receive rate is 6.6% at December 31,
1994, and these agreements mature at various times through 2004. At December 31,
1994, an additional $269 notional amount of interest rate swaps have been
entered into related to the Company's variable rate debt.
SEPARATE ACCOUNTS
The Company maintained separate account assets and liabilities totaling
$23.3 billion at December 31, 1994 which are reported at fair value. Separate
account assets are segregated from other investments and are not subject to
claims that arise out of any other business of ITT Hartford. Investment income
and gains and losses of separate accounts generally accrue directly to the
policyholder. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $15.3 billion, wherein the
policyholder assumes the investment risk, and guaranteed separate accounts
totaling $8.0 billion wherein ITT contractually guarantees either a minimum
return or account value to the policy holder. Investment income (including
investment gains and losses) on separate account assets are not reflected in the
Consolidated Statements of Income. Separate account management fees, net of
minimum guarantees, were $256, $189 and $92 in 1994, 1993 and 1992,
respectively.
Guaranteed separate accounts include modified guaranteed individual annuity
and life insurance and universal life contracts. These contracts, with a
weighted average guaranteed interest rate of 6.4%, were supported by assets
totaling $8.0 billion, comprised primarily of fixed maturity investments at
December 31, 1994. Risk of disintermediation associated with early withdrawals
on individual annuity contracts is minimized with graded surrender charge and
market value adjustment provisions.
F-62
<PAGE> 314
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMITMENTS AND CONTINGENCIES
Regulatory: Proposition 103 is a voter initiative adopted in California in
1988 which, among other things, mandated a rollback of premium charges for the
year commencing on November 8, 1988. The California Supreme Court subsequently
ruled that the rollback need not be made if the insurer required higher rates in
order to earn a fair rate of return. In November 1994, the California Insurance
Commissioner (the "Commissioner") issued ITT Hartford an order pursuant to
Proposition 103 to pay premium refunds under 1989 insurance policies with
interest accruing from May 1989. The Commissioner alleged that the rates charged
by ITT Hartford during 1989 in California were in excess of those allowed by
Proposition 103 as modified by the California Supreme Court and that ITT
Hartford's refund obligation was $95 plus interest. In December 1994, ITT
Hartford responded to the Commissioner with the assertion that ITT Hartford did
not have a rollback obligation. In May 1995, the newly-elected Commissioner
announced that the Insurance Department had determined that ITT Hartford did not
have a rollback obligation. A California consumer group exercised its statutory
right on June 22, 1995 to request a hearing to examine the validity of the
Insurance Department's most recent determination that ITT Hartford does not have
a rollback obligation. The Commissioner granted this request and it appears that
such a hearing will be held in September or October 1995.
Asbestos and Environmental Claims: ITT Hartford establishes reserves which
are estimates for both claims that have been reported and those that have been
incurred but not reported and include estimates of all expenses associated with
processing and settling these claims. Estimating the ultimate cost of future
claims and claim adjustment expenses is an uncertain and complex process. This
estimation process is based on the assumption that past developments are an
appropriate predictor of future events and involves a variety of actuarial and
scientific techniques that analyze experience, trends and other relevant
factors.
With regard to asbestos and environmental claims, deviations from past
experience significantly impact the ability of insurance companies to estimate
the ultimate reserves for unpaid losses and related settlement expenses. ITT
Hartford finds that conventional reserving techniques cannot estimate the
ultimate cost of these claims because of inadequate development patterns and
inconsistent emerging legal doctrine. There is virtually no agreement or
consistent precedent to determine what, if any, coverage exists or which, if
any, policy years and insurers may be liable. Further uncertainty arises with
environmental claims because claims are often made under policies, the existence
of which may be in dispute, the terms of which may have changed over many years,
which may or may not provide for legal defense costs, and which may or may not
contain environmental exclusion clauses that may be absolute or allow for
fortuitous events. Courts in different jurisdictions have reached disparate
conclusions on similar issues and in certain situations have broadened the
interpretation of policy coverage and liability issues. In light of the
resulting extensive settlement process with asbestos and environmental claims,
involving comprehensive fact gathering, subject matter expertise and intensive
litigation, ITT Hartford has established an environmental claims facility to
aggressively defend itself against unwarranted claims.
The reserve for both reported and unreported asbestos and environmental
claims, including reserves for expected legal defense costs was $1,191 and
$1,179 at December 31, 1994 and 1993, respectively, net of reinsurance on
reported losses of $969 and $937, respectively. If future social, economic or
legal developments expand the original intent of policies and the scope of
coverage, the need for additional reserves may arise, adversely affecting future
results. Due to the uncertainties described above, a range of such reserve
increases, if any, cannot be meaningfully quantified.
Litigation: ITT Hartford is involved in various legal actions, some of
which involve claims for a substantial amount. In the opinion of management, the
ultimate liability with respect to such lawsuits is not expected to be material
to the consolidated financial position, results of operations or cash flow of
ITT Hartford.
F-63
<PAGE> 315
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
BUSINESS SEGMENT INFORMATION
IN MILLIONS
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Property and Casualty......................................... $ 7,493 $ 7,328 $ 7,446
Life.......................................................... 3,609 3,010 2,416
------- ------- -------
$11,102 $10,338 $ 9,862
======= ======= =======
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT), DIVIDENDS
ON SUBSIDIARY PREFERRED STOCK, AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES:
Property and Casualty......................................... $ 606 $ 466 $ (671)
Life.......................................................... 246 221 170
------- ------- -------
$ 852 $ 687 $ (501)
======= ======= =======
IDENTIFIABLE ASSETS:
Property and Casualty......................................... $25,557 $25,764 $25,437
Life.......................................................... 51,208 40,415 28,743
------- ------- -------
$76,765 $66,179 $54,180
======= ======= =======
GEOGRAPHICAL SEGMENT INFORMATION:
REVENUES:
North America................................................. $ 9,696 $ 8,975 $ 8,590
Western Europe and Other...................................... 1,406 1,363 1,272
------- ------- -------
$11,102 $10,338 $ 9,862
======= ======= =======
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT), DIVIDENDS
ON SUBSIDIARY PREFERRED STOCK, AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGES:
North America................................................. $ 728 $ 631 $ (461)
Western Europe and Other...................................... 124 56 (40)
------- ------- -------
$ 852 $ 687 $ (501)
======= ======= =======
IDENTIFIABLE ASSETS:
North America................................................. $72,176 $62,225 $50,439
Western Europe and Other...................................... 4,589 3,954 3,741
------- ------- -------
$76,765 $66,179 $54,180
======= ======= =======
</TABLE>
Income (loss) before income tax expense (benefit), dividends on subsidiary
preferred stock and cumulative effect of accounting changes attributable to
North American operations accounted for approximately 85%, 92% and 92% of the
total for 1994, 1993, and 1992, respectively.
Identifiable assets in North America amounted to approximately 94%, 94% and
93% of total identifiable assets as of December 31, 1994, 1993 and 1992,
respectively.
F-64
<PAGE> 316
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
QUARTERLY RESULTS
FOR 1994 AND 1993 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- ------- -------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1994
Revenues.................................... $2,642 $ 2,725 $2,703 $ 3,032 $11,102
Costs and Expenses.......................... $2,444 $ 2,520 $2,463 $ 2,823 $10,250
Income Before Cumulative Effect of
Accounting Changes........................ $ 135 $ 157 $ 182 $ 158 $ 632
Net Income.................................. $ 147 $ 157 $ 182 $ 158 $ 644
1993
Revenues.................................... $2,592 $ 2,515 $2,630 $ 2,601 $10,338
Costs and Expenses.......................... $2,435 $ 2,329 $2,453 $ 2,434 $ 9,651
Net Income.................................. $ 112 $ 139 $ 156 $ 130 $ 537
</TABLE>
F-65
<PAGE> 317
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Directors of Caesars World, Inc.:
We have audited the accompanying consolidated balance sheets of Caesars
World, Inc. (a Florida corporation) and subsidiaries as of July 31, 1994 and
1993, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended July 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Caesars World, Inc. and
subsidiaries as of July 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1994, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
August 23, 1994
F-66
<PAGE> 318
CAESARS WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JULY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue
Casino.................................................. $ 792,584 $772,061 $734,766
Rooms................................................... 69,766 70,035 67,768
Food and beverage....................................... 81,856 77,563 73,989
Earnings of unconsolidated affiliate.................... 1,958 -- --
Other income............................................ 69,602 63,800 56,775
---------- -------- --------
1,015,766 983,459 933,298
---------- -------- --------
Costs and expenses
Casino.................................................. 437,645 410,805 381,869
Rooms................................................... 20,377 20,413 19,932
Food and beverage....................................... 61,438 58,043 54,697
Other operating expenses................................ 41,182 39,373 38,051
Selling, general and administrative..................... 187,597 185,096 173,131
Depreciation and amortization........................... 55,857 54,574 57,681
Provision for doubtful accounts......................... 67,165 56,044 48,048
---------- -------- --------
871,261 824,348 773,409
---------- -------- --------
Operating income................................ 144,505 159,111 159,889
Dividend and interest income.............................. 3,345 1,748 989
Interest expense, net of amounts capitalized.............. (19,295) (26,883) (43,518)
---------- -------- --------
Income before income taxes and extraordinary loss......... 128,555 133,976 117,360
Income taxes.............................................. 50,194 50,761 44,652
Extraordinary loss, net of income tax benefit............. -- -- (6,703)
---------- -------- --------
Net income........................................... $ 78,361 $ 83,215 $ 66,005
========= ======== ========
Net income per common share
Income before extraordinary loss........................ $ 3.19 $ 3.40 $ 3.01
Extraordinary loss...................................... -- -- (.28)
---------- -------- --------
Net income........................................... $ 3.19 $ 3.40 $ 2.73
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-67
<PAGE> 319
CAESARS WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 1994 AND 1993
ASSETS
<TABLE>
<CAPTION>
1994 1993
---------- ----------
(IN THOUSANDS EXCEPT
SHARES AUTHORIZED AND
OUTSTANDING)
<S> <C> <C>
Current assets
Cash.............................................................. $ 44,283 $ 41,116
Cash equivalent investments....................................... 99,216 67,500
Receivables, net.................................................. 71,341 66,041
Inventories....................................................... 12,986 11,364
Deferred income taxes............................................. 37,120 42,748
Prepaid expenses and other........................................ 11,895 12,366
---------- ----------
Total current assets...................................... 276,841 241,135
Property and equipment, net......................................... 626,740 616,393
Excess cost of investments over net assets acquired................. 52,671 52,916
Investments in and advances to unconsolidated affiliates............ 12,393 --
Other assets........................................................ 49,376 45,275
---------- ----------
$1,018,021 $ 955,719
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt.............................. $ 27,778 $ 28,344
Accounts payable and accrued expenses............................. 132,337 127,754
Income taxes...................................................... 19,186 9,361
---------- ----------
Total current liabilities................................. 179,301 165,459
Long-term debt, net of current maturities........................... 212,556 243,024
Other liabilities, including deferred income taxes of $20,015 and
$29,282........................................................... 69,297 74,346
Commitments and contingencies
Shareholders' equity
Common stock, $.10 par value; 50,000,000 shares authorized;
24,872,862 and 24,619,631 shares outstanding................... 2,620 2,590
Additional paid-in capital........................................ 128,028 117,399
Common stock in treasury.......................................... (32,695) (30,358)
Deferred compensation............................................. (18,852) (16,146)
Retained earnings................................................. 477,766 399,405
---------- ----------
Total shareholders' equity................................ 556,867 472,890
---------- ----------
$1,018,021 $ 955,719
========= =========
</TABLE>
See notes to consolidated financial statements.
F-68
<PAGE> 320
CAESARS WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JULY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL COMMON
SHARES PAID-IN STOCK IN DEFERRED RETAINED
OUTSTANDING AMOUNT CAPITAL TREASURY COMPENSATION EARNINGS TOTAL
----------- ------ ---------- -------- ------------ -------- --------
(IN THOUSANDS EXCEPT SHARES OUTSTANDING)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE JULY 31, 1991............ 23,966,295 $2,516 $ 99,703 $(27,034) $(12,190) $250,185 $313,180
Stock options exercised........ 189,547 20 2,474 -- -- -- 2,494
Issuance of restricted stock
grants...................... 206,900 21 6,122 -- (6,143) -- --
Amortization of deferred
compensation................ -- -- -- -- 5,120 -- 5,120
Common stock purchased and held
in treasury................. (54,718) -- -- (1,986) -- -- (1,986)
Other.......................... (13,084) (2) (507) -- 344 -- (165)
Net income..................... -- -- -- -- -- 66,005 66,005
---------- ------ -------- -------- -------- -------- --------
BALANCE JULY 31, 1992............ 24,294,940 2,555 107,792 (29,020) (12,869) 316,190 384,648
Stock options exercised........ 71,378 7 1,139 -- -- -- 1,146
Issuance of restricted stock
grants...................... 197,700 20 8,444 -- (8,464) -- --
Amortization of deferred
compensation................ -- -- -- -- 5,081 -- 5,081
Common stock purchased and held
in treasury................. (34,243) -- -- (1,338) -- -- (1,338)
Other.......................... 89,856 8 24 -- 106 -- 138
Net income..................... -- -- -- -- -- 83,215 83,215
---------- ------ -------- -------- -------- -------- --------
BALANCE JULY 31, 1993............ 24,619,631 2,590 117,399 (30,358) (16,146) 399,405 472,890
Stock options exercised........ 51,267 5 854 -- -- -- 859
Issuance of restricted stock
grants...................... 199,781 20 10,195 -- (10,215) -- --
Amortization of deferred
compensation................ -- -- -- -- 6,522 -- 6,522
Common stock purchased and held
in treasury................. (44,048) -- -- (2,337) -- -- (2,337)
Other.......................... 46,231 5 (420) -- 987 -- 572
Net income..................... -- -- -- -- -- 78,361 78,361
---------- ------ -------- -------- -------- -------- --------
BALANCE JULY 31, 1994............ 24,872,862 $2,620 $ 128,028 $(32,695) $(18,852) $477,766 $556,867
========== ====== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-69
<PAGE> 321
CAESARS WORLD, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JULY 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 78,361 $ 83,215 $ 66,005
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization......................... 55,857 54,574 57,681
Deferred income taxes................................. (3,578) 3,062 (9,183)
Extraordinary loss.................................... -- -- 6,703
Amortization of deferred compensation and other,
net................................................. 7,791 6,538 5,337
Changes in assets and liabilities due to operating
activities:
Receivables, net...................................... (5,300) (3,047) (10,147)
Other, net............................................ 3,005 (5,666) 1,249
-------- -------- --------
Net cash provided by operating activities........ 136,136 138,676 117,645
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...................... (65,366) (40,795) (41,700)
Other, net............................................... (2,763) (3,425) (1,992)
-------- -------- --------
Net cash used for investing activities........... (68,129) (44,220) (43,692)
-------- -------- --------
Cash flows from financing activities:
Reductions in debt and obligations under capital
leases................................................ (32,898) (309,906) (62,615)
Issuance of 8 7/8% Senior Subordinated Notes............. -- 150,000 --
Increase in long-term bank borrowings.................... -- 125,000 --
Purchase and retirement of common stock.................. (2,337) (1,338) (1,986)
Debt issuance costs...................................... -- (3,301) --
Issuance of common stock and other, net.................. 2,111 1,369 2,454
-------- -------- --------
Net cash used for financing activities........... (33,124) (38,176) (62,147)
-------- -------- --------
Increase in cash and cash equivalent investments........... 34,883 56,280 11,806
Cash and cash equivalent investments at the beginning
of the period............................................ 108,616 52,336 40,530
-------- -------- --------
Cash and cash equivalent investments at the end of the
period................................................... $143,499 $108,616 $ 52,336
======== ======== ========
Supplemental cash flow disclosures
Interest paid, net of amount capitalized................. $ 19,209 $ 30,268 $ 42,919
======== ======== ========
Federal and state income taxes paid, net of refunds...... $ 43,444 $ 53,435 $ 48,292
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-70
<PAGE> 322
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Caesars
World, Inc. (the Company) and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Investments in
unconsolidated affiliates are stated at cost adjusted by equity in undistributed
earnings. Certain reclassifications have been made to prior years' amounts to
conform with the 1994 presentation.
The excess cost of investments over net assets acquired subsequent to 1969
is being amortized over 40 years. The excess cost over net assets acquired
includes $43,971,000 relating to the purchase of Caesars Palace in 1969 which is
believed to have continuing value and, accordingly, is not being amortized.
CASINO REVENUE AND PROMOTIONAL ALLOWANCES
Casino revenue represents the net win from gaming wins and losses. Revenue
excludes the retail value of rooms, food, beverage, entertainment and other
promotional allowances provided on a complimentary basis to customers. The
estimated retail value of these promotional allowances was $117,760,000;
$106,613,000 and $103,727,000 for the years ended July 31, 1994, 1993 and 1992,
respectively. The estimated costs of such promotional allowances have been
classified primarily as casino costs and expenses as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
(IN THOUSANDS)
Rooms................................................. $16,857 $14,502 $13,298
Food and beverage..................................... 58,661 54,520 53,374
Other operating expenses.............................. 11,446 10,105 9,036
------- ------- -------
$86,964 $79,127 $75,708
======= ======= =======
</TABLE>
CASH EQUIVALENT INVESTMENTS
There were no significant realized or unrealized gains or losses from cash
equivalent investments during the years ended July 31, 1994, 1993 and 1992. Cash
equivalent investments were stated at cost and consisted of commercial paper and
other short-term instruments with maturities of less than three months at the
date of purchase. The cost of these investments approximates market value. It is
the Company's policy to limit the amount of its credit exposure with any one
company and investments are made only in investment instruments of companies
having high credit ratings.
INVENTORIES
Inventories are stated at the lower of cost or market, determined
principally on the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and include interest on funds
borrowed to finance construction. Capitalized interest was $105,000; $37,000 and
$32,000 in fiscal 1994, 1993 and 1992, respectively. Depreciation and
amortization are provided for on the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements..................................... 5 to 40 years
Leasehold improvements......................................... 3 to 40 years
Furniture, fixtures and equipment.............................. 2 to 10 years
Property under capital leases.................................. 5 to 20 years
</TABLE>
F-71
<PAGE> 323
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance charges are expensed as
incurred. The cost and related accumulated depreciation applicable to assets
retired are removed from the accounts and the gain or loss on disposition is
recognized in income.
AMORTIZATION OF LOAN COSTS
Debt discount and loan issuance costs in connection with long-term debt are
capitalized and amortized to expense during the period the debt is outstanding.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Deferred income taxes are provided for timing differences between book
and tax recognition of revenues and expenses. The income tax benefit realized
upon exercise of non-qualified stock options and early disposition of incentive
stock options is credited to additional paid-in capital.
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993,
contained a corporate tax rate increase from 34 to 35 percent retroactive to
January 1, 1993. In accordance with generally accepted accounting principles,
the retroactive effect of this change was recognized in the first quarter of
fiscal 1994 and approximated $700,000.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109 (SFAS 109) on accounting for income taxes. The
Company adopted the accounting and disclosure rules prescribed by SFAS 109 in
the first quarter of fiscal 1994. The Company elected to adopt SFAS 109 by
recognizing a cumulative adjustment which did not have a material effect on the
Company's financial position or results of operations.
POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for
Postemployment Benefits," which requires accrual accounting for benefits offered
to employees after employment, but before retirement. The adoption of SFAS 112
did not have significant impact on the Company's financial position or results
of operations.
NET INCOME PER COMMON SHARE
Net income per common share is based upon the weighted average number of
common stock and common stock equivalents outstanding which were 24,567,000;
24,475,000 and 24,167,000 for the years ended July 31, 1994, 1993 and 1992,
respectively.
F-72
<PAGE> 324
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. RECEIVABLES
ACCOUNTS RECEIVABLE
Components of receivables were as follows:
<TABLE>
<CAPTION>
AT JULY 31
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts and notes receivable
Casino............................................... $107,061 $ 94,890
Hotel................................................ 4,283 4,401
Other................................................ 5,258 3,521
-------- --------
116,602 102,812
Less allowance for doubtful accounts................... 45,261 36,771
-------- --------
$ 71,341 $ 66,041
======== ========
</TABLE>
At July 31, 1994, approximately 61 percent of the Company's casino
receivables were from customers whose primary residence is outside the United
States with no significant concentration in any one foreign country.
CONTINGENT RECEIVABLE
In 1993, the Company announced it had entered into a management operating
agreement with one of the bidders for a casino development in New Orleans. In
August 1993, the bid was awarded to another operator and the Company's
participation in the project ended. Pursuant to a settlement agreement with the
Company's former co-venturer in the New Orleans project, the Company is to
receive $5,000,000 for the Company's expenses and pre-development services
contingent upon the co-venturer obtaining financing to construct a casino
development in New Orleans in association with the successful bidder for the
project. The Company is unable to predict the timing or probability of
collecting this settlement.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AT JULY 31
-------------------------
1994 1993
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land................................................ $ 76,582 $ 76,470
Buildings and improvements.......................... 584,064 562,815
Leasehold improvements.............................. 86,138 80,550
Furniture, fixtures and equipment................... 258,807 284,574
Construction in progress............................ 22,369 5,933
Property under capital leases....................... 22,267 22,699
---------- ----------
1,050,227 1,033,041
Less accumulated depreciation and amortization...... 423,487 416,648
---------- ----------
$ 626,740 $ 616,393
========== ==========
</TABLE>
NOTE 4. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
In December 1993 a newly-formed corporation, Windsor Casino, Limited (WCL),
owned equally by the Company, Circus Circus Enterprises, Inc. and a subsidiary
of Hilton Hotels Corporation, was selected by the
F-73
<PAGE> 325
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
government of Ontario, Canada, to develop and operate the province's first
casino, in the city of Windsor. In May 1994, a 50,000-square-foot interim casino
was opened in Windsor. The interim casino is owned by the government of Ontario
and operated by WCL. WCL receives 2.75 percent of gross operating revenue and 5
percent of net operating margins (as defined in the management agreement) of the
interim casino. Cash advances of $14,591,000 were made by each shareholder of
WCL, including the Company, prior to June 1994 of which $4,531,000 had been
repaid to each shareholder at July 31, 1994. During the second quarter of fiscal
1995, WCL is expected to borrow from a syndicate of banks, using a portion of
the funds to repay the remaining outstanding cash advances made to WCL by its
three shareholders. Each of the WCL shareholders, including the Company, is
expected to guarantee one-third of these bank borrowings. The WCL bank loan is
expected to be repaid from cash generated from operations.
The permanent facility to be built in Windsor is in the planning stage and
is expected to include a 75,000-square-foot casino, a 300-room hotel, food and
beverage outlets and other amenities. This complex is expected to be open in
fiscal 1997 and will be built on a 13-acre site in downtown Windsor in view of
the Detroit, Michigan skyline. The estimated cost of this complex is
$300,000,000 of which a portion will be advanced by each of the shareholders of
WCL, including the Company.
The Company continues to explore gaming and expansion opportunities in the
United States and internationally. At July 31, 1994, two other refundable
advances had been made for expansion projects which are in preliminary
development stages. All costs and expenses incurred to explore expansion
opportunities for the Company are charged to general and administrative expenses
until it is determined the project will be developed.
NOTE 5. SHORT-TERM BANK BORROWINGS
Since August 1992, the Company has had no outstanding short-term bank
borrowings (see Note 7). During fiscal 1992 the Company's short-term borrowings
under a $10,000,000 unsecured bank revolving credit facility totaled $7,200,000
and the interest rate was 3 7/8 percent at July 31, 1992. The average
outstanding borrowings during fiscal 1992 were $7,200,000, computed by using the
daily balances, and the weighted average interest rate was 5.4 percent, computed
by dividing short-term interest expense by the average short-term debt
outstanding. The maximum borrowings outstanding at any month-end during fiscal
1992 totaled $7,200,000.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AT JULY 31
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable....................................... $ 47,052 $ 46,804
Accrued interest....................................... 6,327 6,540
Accrued progressive slot machine jackpots.............. 6,359 5,458
Accrued salaries, wages and employee benefits.......... 24,171 24,199
Short-term portion of capital lease obligations
payable.............................................. 1,046 1,919
Other accrued expenses................................. 47,382 42,834
-------- --------
$132,337 $127,754
======== ========
</TABLE>
F-74
<PAGE> 326
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
AT JULY 31
---------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Amounts due under Bank Loan agreement, at floating
rates approximating prime or an alternative
negotiated rate which at July 31, 1994, was
approximately 5.48 percent........................... $ 90,334 $118,111
Senior subordinated notes, due August 15, 2002, at
8 7/8 percent payable semi-annually in February and
August............................................... 150,000 150,000
Mortgages payable bearing interest at rates between 8
and 9 3/4 percent, secured by property, retired in
1994................................................. -- 3,257
-------- --------
240,334 271,368
Less current maturities................................ 27,778 28,344
-------- --------
$212,556 $243,024
======== ========
</TABLE>
In August 1992 the Company entered into a $275,000,000 unsecured credit
facility (Bank Loan) with a syndicate of banks. This facility consists of a
$125,000,000 Term Loan which had an outstanding balance of $83,334,000 and
$111,111,000, at July 31, 1994 and 1993, respectively. The facility also
includes a $150,000,000 Revolver which had a $7,000,000 outstanding balance at
July 31, 1994 and 1993. The Term Loan is payable in equal installments of
$13,889,000 on September 30 and March 31 each year until final payment is made
on March 31, 1997, and interest is payable quarterly or earlier.
The proceeds from the Term Loan were used for the retirement of certain
debt that was outstanding at July 31, 1992. In August 1992, $7,000,000 of the
revolving portion of the facility was utilized to replace the outstanding
portion of a short-term bank credit line of a subsidiary. Although the revolving
credit facility is utilized for working capital and general corporate purposes,
it is classified as long-term due to its maturity on October 31, 1997. At July
31, 1994, a provision of the Bank Loan agreement restricted the Company from
making cash dividends in excess of $196,604,000. The Company incurs commitment
fees of 5/16 to 1/2 percent on the unused portion of the credit facilities and
the interest rate fluctuates depending upon the Company's financial leverage and
the selection of one of the borrowing rate alternatives available at the option
of the Company, one of which approximates the bank's prime rate. The fair value
of the borrowings under the Bank Loan approximates the carrying amount of the
debt.
On August 15, 1992, the Company issued $150,000,000 of 8 7/8 percent Senior
Subordinated Notes (the Notes) that mature in 2002. The Notes are subordinated
to all senior indebtedness (as defined in the Indenture), which includes the
indebtedness under the Bank Loan agreement, are effectively subordinated to
liabilities of the Company's subsidiaries and are senior in the right of payment
to other subordinated indebtedness. The Notes are redeemable at the Company's
option, in whole or in part, beginning August 15, 1997, at a premium price of
103.27 percent, declining annually to par at August 15, 2000, and thereafter.
The original issue discount and costs are being amortized over the term of the
Notes. At July 31, 1994, the estimated fair value of the Notes was approximately
$147,750,000, based on the quoted market trading price.
The proceeds from the Notes and cash available from operations together
with $115,000,000 of the Term Loan were used on October 1, 1992, to retire the
$241,200,000 of principal outstanding plus the accrued interest thereon and a
redemption premium of 2.25 percent of the principal amount. In December 1992 the
outstanding principal on one of the mortgages payable which was secured by
property in Las Vegas was retired. The retirement of the above described debt
prior to its maturity resulted in an extraordinary charge, net of income tax
benefit, in July 1992 of $6,703,000.
F-75
<PAGE> 327
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to August 1992 the Company had a $250,000,000 unsecured credit
facility with a syndicate of banks. The facility consisted of a $100,000,000
term loan with an outstanding balance at July 31, 1992, of $25,000,000 and a
$150,000,000 revolving credit facility with no outstanding amount.
The Bank Loan agreement and the Notes, as well as the previous loan
agreements covering 1992, contain covenants, among others, that require the
maintenance of certain financial ratios and include restrictions on the Company
and its subsidiaries with respect to additional debt, dividends, stock
repurchases, sales of certain assets, investments and capital expenditures,
mergers, consolidations and similar transactions, liens, acquisitions,
disposition of property, and prepayment of other debt. Cross default clauses
provide that the default under either the Notes or the Bank Loan agreement may
result in the acceleration of the other. The loss or suspension of a gaming
license which has a potential $15,000,000 charge to operations of the Company
and is determined by the banks to be materially adverse to the bank's investment
would constitute a default under the Bank Loan agreement. Also, the bank
agreement requires guarantees by specified subsidiaries of the Company.
The annual maturities of long-term debt as of July 31, 1994, follow:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31 (IN THOUSANDS)
----------------------------------------------- --------------
<S> <C>
1995........................................... $ 27,778
1996........................................... 27,778
1997........................................... 27,778
1998........................................... 7,000
1999........................................... --
Thereafter..................................... 150,000
--------
$240,334
========
</TABLE>
NOTE 8. INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................. $47,604 $40,217 $43,727
State............................................... 6,168 7,482 6,656
Deferred.............................................. (3,578) 3,062 (9,183)
------- ------- -------
$50,194 $50,761 $41,200
======= ======= =======
</TABLE>
The provision (benefit) for income taxes is included in the financial
statements as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before extraordinary loss...................... $50,194 $50,761 $44,652
Extraordinary loss.................................... -- -- (3,452)
------- ------- -------
$50,194 $50,761 $41,200
======= ======= =======
</TABLE>
F-76
<PAGE> 328
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for deferred income taxes represents temporary
differences in the recognition of revenue and expenses for tax and financial
statement purposes. The tax effects of these differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Depreciation.......................................... $(1,127) $ 418 $ (592)
Provision for doubtful accounts....................... (2,809) 3,023 268
Accrued liabilities................................... 461 (2,992) (4,636)
Extraordinary loss on early extinguishment of debt.... -- 3,452 (3,452)
Other, net............................................ (103) (839) (771)
------- ------- -------
$(3,578) $ 3,062 $(9,183)
======= ======= =======
</TABLE>
The income tax effects of temporary differences between financial and
income tax reporting that gave rise to deferred income tax assets and
liabilities at July 31, 1994, under the provisions of SFAS No. 109, were as
follows:
<TABLE>
<CAPTION>
ASSETS LIABILITIES TOTAL
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current deferred income taxes
Bad debt reserves................................. $17,601 $ -- $ 17,601
Accrued expenses.................................. 13,619 -- 13,619
Other............................................. 5,900 -- 5,900
------- -------- --------
$37,120 $ -- $ 37,120
======= ======== ========
Non-current deferred income taxes
Depreciation...................................... $ -- $(38,137) $(38,137)
Deferred compensation............................. 3,943 -- 3,943
Accrued expenses.................................. 11,291 -- 11,291
Other............................................. 5,223 (2,335) 2,888
------- -------- --------
$20,457 $(40,472) $(20,015)
======= ======== ========
</TABLE>
The provision for income taxes differed from the amount computed at the
statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
-------------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes at statutory rate................ $44,995 $45,552 $36,450
State income taxes, net of federal benefit............ 4,078 4,972 4,060
Other, net............................................ 1,121 237 690
------- ------- -------
$50,194 $50,761 $41,200
======= ======= =======
</TABLE>
The Internal Revenue Service has examined the Company's federal
consolidated income tax returns through fiscal 1988 and is currently examining
the returns for fiscal 1989 through 1992.
NOTE 9. LEASES
The Company and its subsidiaries lease land, buildings and equipment under
noncancelable lease agreements with primary terms which expire at various dates
through 2076. The leases generally provide that the Company pay the taxes,
insurance and maintenance expenses related to the leased assets. Major leased
F-77
<PAGE> 329
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assets, which have been capitalized, include land in Atlantic City unrelated to
current operations, and the land and buildings of two of the Company's Pocono
resorts.
In January 1992 the Company exercised a $6,500,000 purchase option for a
land lease upon which a portion of the Caesars Atlantic City hotel is located.
The lease required payments of $247,000 in fiscal 1992, prior to the exercise of
the option.
Caesars Atlantic City also owns approximately 1.2 acres and leases
approximately six acres of property in Atlantic City, including an entire block
of Boardwalk frontage which may be suitable for development of a casino/hotel.
The capitalized lease expires in 2076 and requires annual payments of $875,000;
the property may be purchased for $13,000,000. The purchase option price will
increase by $500,000 in August 1997 and another $500,000 every 10 years
thereafter.
Two of the Company's resorts in the Pocono mountains of Pennsylvania are
operated under leases whose initial 20-year-lease terms expire on January 31,
1995. The leases include purchase options at the fair market value of the lease
properties excluding personal property, goodwill and other intangibles. The
Company currently anticipates exercising the purchase options to acquire the
properties in fiscal 1995. The fair market value purchase price will be
determined by an independent appraisal. The Company also maintains a letter of
credit ($2,865,000 at July 31, 1994) under an agreement with the New Jersey
Casino Control Commission for the payment of the remaining future lease rentals
on the two leases.
The Caesars Tahoe land and building are leased pursuant to an operating
lease which expires in 2004 and is renewable for two additional 25-year periods.
The lease provides for a minimum rent of $2,606,000 for fiscal 1995, increasing
by $75,000 per year in each subsequent year, and for percentage rent of 20
percent of the casino/hotel's net profit (as therein defined). Additionally, the
lease required payments to discharge the lessor's obligations of a mortgage loan
and the final payment was made by the Company in fiscal 1994. The aggregate
fixed lease payments, including amounts paid on the mortgage note, are amortized
on a straight-line basis over the remaining initial lease term. At July 31,
1994, there was $11,165,000 of prepaid rent included in "Other Assets" related
to this lease accounting.
Future minimum lease payments for all leases at July 31, 1994, are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
--------- -------
(IN THOUSANDS)
YEAR ENDING JULY 31
----------------------------------------------------------------
<S> <C> <C>
1995............................................................ $ 5,264 $ 1,963
1996............................................................ 4,172 898
1997............................................................ 3,692 898
1998............................................................ 3,662 948
1999............................................................ 3,694 948
Thereafter...................................................... 18,584 84,385
------- -------
Total minimum lease payments.................................... $39,068 90,040
=======
Less amount representing interest............................... 79,587
-------
Present value of minimum lease payments......................... 10,453
Less current maturities of obligations under capital leases..... 1,046
-------
Long-term obligations under capital leases...................... $ 9,407
=======
</TABLE>
F-78
<PAGE> 330
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense was comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
---------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals under lease obligations................... $10,084 $10,688 $10,177
Contingent rentals under operating and capital leases..... 566 562 76
------- ------- -------
$10,650 $11,250 $10,253
======= ======= =======
</TABLE>
NOTE 10. CAPITAL STOCK, STOCK OPTIONS AND INCENTIVES
The authorized capital stock of the Company consists of 1,000,000 shares of
$1 par value preferred stock and 50,000,000 shares of 10 cents par value common
stock. No preferred stock has been issued. Common stock outstanding was net of
1,343,951; 1,299,903 and 1,265,660 treasury shares at July 31, 1994, 1993 and
1992, respectively. The Company has designated 250,000 shares of the authorized
preferred stock as constituting Series A Junior Participating Preferred Stock
for purposes of the Shareholders' Rights Plan described below. Upon issuance,
each share of such preferred stock will have a $2 dividend (subject to
adjustment in certain cases) which will be payable prior to any dividends on
common stock. Each share will have 200 votes and shall vote as a class with
common stock (with special voting provisions to apply in the event of a dividend
default).
In January 1989 the Board of Directors of the Company authorized a
Shareholders' Rights Plan and declared a dividend of one right for each share of
common stock. The rights may only become exercisable under certain circumstances
involving actual or potential acquisitions of the Company's common stock by a
specified person or affiliated group. If the rights become exercisable and are
not redeemed by the Company, the holder may be entitled to purchase or receive
upon exercise, depending on the circumstances, units consisting of one
two-hundredth of a share of the Company's $1 par value Series A Junior
Participating Preferred Stock at a price of $125 per share (subject to
adjustment), shares of the Company's common stock or other assets with a value
equal to twice the exercise price, or shares of the common stock of the acquirer
at one-half the then market price. The rights expire in January 1999 unless they
are exercised or redeemed. Until certain specified dates, the Company may redeem
the rights at one cent per share. Rights owned by certain specified shareholders
may be void. The provisions concerning the rights are set forth in a Rights
Agreement between the Company and the Rights Agent.
The Company has a long-term stock incentive program (the Program) which
authorizes the issuance of various stock incentives to officers and key
employees, including options, stock appreciation rights, and stock bonuses in
the form of restricted stock grants or contingent shares. At July 31, 1994, 123
employees were participating in the Program. Under the terms of the Program, as
amended by the shareholders in December 1988 and November 1990, 2,655,126 shares
of common stock may be used for awards, of which 391,088 were unissued at July
31, 1994. Employee stock options under the Program expire after 10 years and
usually become exercisable either in four or five equal annual installments
commencing one year after the date of grant or in one installment one year after
the date of grant. Under the terms of such options, adjustments will be made for
changes resulting from stock dividends, stock splits and similar changes.
Exercisability of such options is on a cumulative basis. Employee stock options
for 244,953 shares were exercisable as of July 31, 1994. The Audit and
Compensation Committee of the Board of Directors may accelerate exercisability
of stock options at its discretion including, without limitation, acceleration
due to the occurrence of certain specified contingencies.
As of July 31, 1994, there were outstanding unvested grants of restricted
stock in the amount of 751,429 shares held among 72 employees (including 13
officers) which will vest in fiscal years as follows: 152,115 in 1995; 214,871
in 1996; 192,166 in 1997; 127,507 in 1998 and 64,770 in 1999. Contingent
incentive shares
F-79
<PAGE> 331
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
totaling 90,174 shares (net of forfeitures) granted to 41 employees (including
nine officers) principally in December 1989 were outstanding at July 31, 1994.
These shares vest in fiscal years as follows: 89,340 in 1995 and 834 in 1996.
The restricted stock grants and contingent incentive share grants become fully
vested in the event of a change in control (as defined). As to officers, sale of
the contingent incentive shares is restricted for two years following vesting
subject to certain contingencies. Deferred compensation equivalent to the market
value on the date of grant was charged to shareholders' equity and is being
amortized over the respective vesting periods. The amount amortized was
$5,840,000; $4,997,000 and $4,956,000 in fiscal 1994, 1993 and 1992,
respectively. During fiscal 1994, 180,183 shares of such awards vested.
A non-employee directors' plan (the Plan) authorizes the issuance of
options on 100,000 shares of common stock to non-employee directors, of which
options covering 40,000 shares were unissued at July 31, 1994. Options for
4,000; 11,000 and 22,000 shares were exercised in fiscal 1994, 1993 and 1992,
respectively. The 23,000 options outstanding at July 31, 1994, were all
exercisable and include 3,000 granted at a price of $32.13; 5,000 granted at a
price of $15.19; 5,000 granted at a price of $28.19; 5,000 granted at a price of
$39.38; and 5,000 granted at a price of $51.13. All stock options granted under
the Plan become exercisable six months after grant and expire five years from
the date of grant. Persons eligible under the Plan are not eligible for awards
under the Program. Option prices under the Plan equal the fair market value of
the stock on the date of grant. Grant or exercise of stock options under the
Plan or the Program does not result in a charge to earnings.
Prior to 1990, unlimited stock appreciation rights were granted to certain
officers of the Company. As a result of changes in the market price of the
common stock subsequent to the date of grant, the Company recorded a credit of
$265,000 in fiscal 1994 and incurred charges of $1,838,000 and $429,000 in 1993
and 1992, respectively. During fiscal 1994, an officer exercised a tandem
unlimited stock appreciation right with respect to a stock option for 30,000
shares, realizing $427,000 of taxable income, and the related stock option was
terminated. At July 31, 1994, there were 145,000 unlimited stock appreciation
rights outstanding to three officers. As of July 31, 1994, three officers and
five non-employee directors had been granted 46,125 limited stock appreciation
rights. These limited stock appreciation rights were issued in tandem with stock
options and are only exercisable in the event of certain specified changes in
the ownership of the Company. Surrender of the related option (or portion
thereof) on exercise of the right, generally entitles the optionee or holder to
receive in cash the difference between the exercise price of the outstanding
option and the higher of the stock market price for the 60 days prior to
exercise or the tender or exchange offer price with respect to the Company's
common shares. Future exercisability of the limited stock appreciation rights
will result in a charge to earnings based upon the value of such rights when
they become exercisable.
F-80
<PAGE> 332
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee and director stock option activity during the three-year period
ended July 31, 1994, was as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE
RANGE
-----------------
SHARES FROM TO
-------- ------ ------
<S> <C> <C> <C>
Outstanding at July 31, 1991........................... 705,276 $10.69 $32.13
Granted.............................................. 23,800 28.19 29.69
Exercised............................................ (189,547) 10.69 24.44
Expired or cancelled................................. (11,840) 13.25 32.13
--------
Outstanding at July 31, 1992........................... 527,689 11.63 32.13
Granted.............................................. 88,500 29.63 42.81
Exercised............................................ (71,378) 11.63 32.13
Expired or cancelled................................. (6,220) 13.25 29.69
--------
Outstanding at July 31, 1993........................... 538,591 13.25 42.81
Granted.............................................. 157,300 39.06 51.13
Exercised............................................ (51,267) 13.25 42.81
Expired or cancelled................................. (67,460) 13.25 51.13
--------
Outstanding at July 31, 1994........................... 577,164 13.25 51.13
========
</TABLE>
The above chart does not include a non-qualified option, with a ten-year
vesting period, granted on January 19, 1994, to a third party at a price of
$55.50 in return for services to be rendered. This option vests in three equal
annual installments beginning January 19, 1995.
The number of shares covered by options which are scheduled to become
exercisable during the next five fiscal years are as follows: 127,854 in both
1995 and 1996; 81,023 in 1997; 43,250 in 1998; and 29,230 in 1999.
NOTE 11. PENSION PLANS
The Company has defined benefit pension plans covering any officer or other
employee designated as a key executive of the Company and its subsidiaries. The
benefits are based on years of service (not to exceed 30) and the employee's
highest five years of compensation during the last 10 years of employment. The
Company has funded the vested benefits of certain current employees by making
contributions to revocable trusts. Income earned by the trusts accrues to the
benefit of the Company. At July 31, 1994, the amount in these revocable trusts
was $12,756,000 and is recorded in "Other Assets." Such trusts shall become
irrevocable in the event of a change of control (as defined).
F-81
<PAGE> 333
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the plans' status and amounts recognized in the
Company's financial statements:
<TABLE>
<CAPTION>
AT JULY 31
-------------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefit
obligation of $16,180,000 and $14,628,000, respectively..... $16,794 $15,382
======= ========
Accrued pension liability consists of the following:
Projected benefit obligation for service rendered to date in
excess of plan assets....................................... $21,982 $20,161
Unrecognized net loss from past experience and effects of changes
in assumptions................................................. (2,090) (2,904)
Unrecognized net obligation to be recognized over 15 years....... (963) (1,082)
------- --------
$18,929 $16,175
======= ========
</TABLE>
The net pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
----------------------------
1994 1993 1992
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -- benefits earned during the period........ $1,612 $1,702 $1,403
Interest cost on projected benefit obligation............ 1,590 1,319 1,117
Net amortization......................................... 180 143 119
------ ------ ------
$3,382 $3,164 $2,639
====== ====== ======
</TABLE>
At July 31, 1994 and 1993, the weighted average discount rate used in
determining the actuarial present value of the projected benefit obligation and
the rate of increase in future compensation levels used in such calculations
were 8 and 6 percent, respectively.
The Company's Individual Retirement Account Plan which was generally
available to all full-time employees who had at least one year of service and
were not covered under any qualified retirement plan terminated as of December
31, 1993. The expense of this plan was $828,000, $2,148,000 and $2,014,000 in
fiscal 1994, 1993 and 1992, respectively.
Effective January 1, 1994, the Company adopted a 401(k) retirement plan
covering substantially all of its non-union employees. The plan provides for the
Company to contribute 1 percent of certain compensation for eligible employees
who may also contribute up to 4 percent of their base compensation to this plan
and their contributions are matched by the Company in an amount equal to 50
percent of each employee's contribution. Employees may also contribute an
additional 8 percent of base compensation to the plan, with certain limitations,
which is not matched by the Company. The Company's matching contributions for
fiscal 1994 were $3,121,000.
In addition to the Company's plans described above, union employees are
covered by various multi-employer pension plans. The Company charged to expense
approximately $3,534,000, $3,402,000 and $3,005,000 in fiscal 1994, 1993 and
1992, respectively, for such plans. For the union sponsored plans, information
is not available from the plans' sponsors to permit the Company to determine its
share of unfunded vested benefits, if any.
F-82
<PAGE> 334
CAESARS WORLD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has severance agreements with 19 employees (including 11
officers) which grant these employees the right to receive up to two times their
annual salary and bonus, plus continuation of certain benefits, and acceleration
of certain stock options and restricted grants subject to certain maximums under
tax law, if there is a change in control of the Company (as defined) and a
termination (as defined) of such employees within three years thereafter. The
maximum contingent liability for salary and incentive compensation under these
agreements is approximately $10,520,000. In addition, insurance benefits, car
allowances and nonqualified pension plan accrue for up to two years. The Company
also has entered into employment agreements with eight employees which expire at
various dates through July 31, 1997. The aggregate commitment for future
salaries, excluding bonuses, under these employment agreements is approximately
$3,428,000. The Company also has entered into severance and employment
agreements with two officers which contain continual self-renewing terms of five
years and three years, respectively, subject to the option of the Company to
terminate this self-renewing provision. In addition, these agreements provide
these officers the option to terminate their contractual obligations in the
event of a change in control or a material breach by the Company. If such change
of control had occurred on July 31, 1994, the aggregate maximum contingent
liability under these agreements would have been approximately $24,314,000. See
Note 10 as to acceleration of contingent and restricted stock grants in the
event of a change in control.
F-83
<PAGE> 335
CAESARS WORLD, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-----------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fiscal 1994(a)
Revenue.................................. $269,083 $257,981 $237,244 $251,458 $1,015,766
Operating income......................... 50,602 39,656 22,876 31,371 144,505
Income before income taxes............... 46,420 35,707 18,939 27,489 128,555
Income taxes............................. 18,572 13,747 7,291 10,584 50,194
Net income............................... 27,848 21,960 11,648 16,905 78,361
-------- -------- -------- -------- ----------
Net income per common share(b)... $ 1.14 $ .90 $ .47 $ .69 $ 3.19
-------- -------- -------- -------- ----------
Fiscal 1993(a)
Revenue.................................. $232,562 $264,473 $224,409 $262,015 $ 983,459
Operating income......................... 33,708 46,844 32,574 45,985 159,111
Income before income taxes............... 24,140 41,173 27,475 41,188 133,976
Income taxes............................. 9,173 15,646 10,440 15,502 50,761
Net income............................... 14,967 25,527 17,035 25,686 83,215
-------- -------- -------- -------- ----------
Net income per common share...... $ .62 $ 1.05 $ .69 $ 1.04 $ 3.40
-------- -------- -------- -------- ----------
</TABLE>
- ---------------
(a) There were no dividends paid in fiscal 1994 or 1993.
(b) Net income per share calculations for each quarter are based on the weighted
average number of common stock and common stock equivalents outstanding
during the respective quarters; accordingly, the sum of the quarters does
not equal the full-year income per share for 1994.
F-84
<PAGE> 336
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Ciga SpA
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994
AUDIT CERTIFICATE IN ACCORDANCE WITH ARTICLE 4 DPR MARCH 31, 1975 N(++) 136
We have audited the consolidated financial statements of Ciga Group for the
year ended December 31, 1994. We also verified that the Directors' report agrees
with the consolidated financial statements.
Our examination was carried out in accordance with the principles and
criteria for the audit of accounts recommended by the National Commission for
Companies and the Stock Exchange (CONSOB) and we carried out such tests as we
considered necessary for the purpose of the mandate we received. The auditing
procedures applied are substantially identical to those required under auditing
standards generally accepted in the United States of America. The financial
statements of the subsidiary Ciga Hotels AG - Wien and the associated company
Imperial Hotels Austria AG - Wien, which reflect total assets constituting 4 per
cent of the consolidated assets and sales revenues constituting 13 per cent of
consolidated revenues, have been audited by other auditors who gave to us the
related reports. Our opinion, expressed herein, insofar as it relates to the
accounts of those companies included in the consolidated financial statements is
based also on the audit performed by other auditors. For the opinion on the
prior year consolidated financial statements, which are presented for
comparative purposes as required by law, reference should be made to our audit
certificate issued on June 8, 1994.
In our opinion, the consolidated financial statements as a whole have been
properly prepared and give a true and fair view of the group's financial
position and the consolidated results of its operations in conformity with
Italian law governing consolidated financial statements. Therefore we issue this
certificate to the consolidated financial statements of the Ciga Group for the
year ended December 31, 1994.
Our audit certificate on the consolidated financial statements for the year
ended December 31, 1993 disclosed certain uncertainties mainly relating to two
issues of which the evolution and the effect on the present financial
statements, disclosed in the Director's Report and in the Notes to the
consolidated financial statements, are set out here below:
(a) Loans granted in the past to Interprogramme Holding, the former indirect
parent company of Ciga SpA, and to a trust company for the acquisition of a
control investment in Lampsa SA, owner of Hotel Grande Bretagne in Athens,
included in the consolidated financial statements for a net amount of Lire
51,428 million.
In 1994 the Group has acquired a 52.8 per cent interest in the above
mentioned Lampsa company in order to recover such loans. The transaction has
resulted in a loss on receivables of Lire 34.9 billion as described in the
Directors' Report and in the Notes to the financial statements.
(b) Tourist and real estate development project ("Costa Smeralda" project) of
the subsidiary Ciga Immobiliare Sardegna SpA (CIS). With reference to such
project Directors have provided for a reserve for risks of Lire 50 billion
in the 1994 financial statements of Ciga Immobiliare SpA (holding company of
CIS) and in the 1994 Group consolidated financial statements.
F-85
<PAGE> 337
The reasons for such provision and the significant uncertainties and risks
associated with the Costa Smeralda project are described in the Notes to the
financial statements.
PRICE WATERHOUSE
/s/ DINO MARTINAZZOLI
--------------------------------------
Dino Martinazzoli
(Partner)
Milan, June 9, 1995
"THIS REPORT REPRESENTS A FREE TRANSLATION FROM THE ORIGINAL WHICH WAS ISSUED IN
ITALIAN IN ACCORDANCE WITH ITALIAN PRACTICE."
F-86
<PAGE> 338
OPINION
As there are no objections we hereby award the unabbreviated
ANNUAL FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
of the
IMPERIAL HOTELS AUSTRIA AKTIENGESELLSCHAFT,
VIENNA
an unqualified opinion in accordance with sec.274 Par. 1 of the Austrian
Commercial Code:
"According to our due audit, the accounting and financial statements of the
company (not presented separately herein) comply with legal regulations. The
financial statements convey a true and fair view of the company's assets,
financial, and earnings positions in conformity with generally accepted
accounting principles. The management report agrees with the annual financial
statements."
Vienna, March 28, 1995
KPMG AUSTRIA
WIRTSCHAFTSPRUFUNGS-GESELLSCHAFT MBH
<TABLE>
<S> <C>
Dkfm. Hruschka ppa. Bitterman
Certified Public Accountant Certified Auditor and Tax Accountant
</TABLE>
(German original signed)
F-87
<PAGE> 339
OPINION
(ACCORDING TO PAR. 274 OF THE AUSTRIAN COMMERCIAL CODE)
CIGA HOTELS AKTIENGESELLSCHAFT, VIENNA
According to our due audit, the accounting and financial statements (not
presented separately herein) comply with legal regulations. The financial
statements give a true and fair view of the Company's assets, financial and
earnings position in conformity with generally accepted accounting principles.
The status report corresponds to the financial statements.
Vienna, May 5, 1995
AUDITOR TREUHAND GMBH
Wirtschaftsprufungs und
Steuerberatungsgesellschaft
Dr. Gunter CERHA Dr. Sylvia
KRIEGER
Certified Public Accountants
(German original signed)
F-88
<PAGE> 340
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET AT DECEMBER 31
<TABLE>
<CAPTION>
1994 1993
--------- ---------
MILLIONS OF LIRA
<S> <C> <C>
ASSETS
SUBSCRIBED CAPITAL UNPAID............................................. -- --
--------- ---------
FIXED ASSETS
Intangible fixed assets
Start-up and share issuance costs..................................... 8,942 1,645
Concessions, licences, trademarks and similar rights.................. 2,466 1,916
Other intangible fixed assets......................................... 19,921 21,944
--------- ---------
Total intangible fixed assets............................... 31,329 25,505
--------- ---------
Tangible fixed assets
Land and buildings.................................................... 943,522 932,150
Plant and equipment................................................... 69,760 75,878
Furniture and fixtures................................................ 66,197 76,084
Linen and tableware................................................... 7,283 8,105
Transport vehicles.................................................... 1,477 1,930
Leasehold improvements and construction on public land under
concession.......................................................... 14,387 15,010
Construction-in-progress and payments on account...................... 1,342 2,117
--------- ---------
1,103,968 1,111,274
Undeveloped land designated for construction.......................... 143,328 167,671
--------- ---------
Total tangible fixed assets................................. 1,247,296 1,278,945
--------- ---------
Long term financial assets
Investments in
- - subsidiaries........................................................ 3,222 80
- - affiliated companies................................................ 65,387 62,783
- - other enterprises................................................... 1,345 2,517
--------- ---------
Total investments........................................... 69,954 65,380
--------- ---------
Loans receivable from
- - subsidiaries........................................................ 5,000 --
- - others.............................................................. 6,337 60,382
--------- ---------
Total loans................................................. 11,337 60,382
--------- ---------
Total long term financial assets............................ 81,291 125,762
--------- ---------
TOTAL FIXED ASSETS.......................................... 1,359,916 1,430,212
========= =========
</TABLE>
F-89
<PAGE> 341
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET AT DECEMBER 31
<TABLE>
<CAPTION>
1994 1993
--------- ---------
MILLIONS OF LIRA
<S> <C> <C>
ASSETS
CURRENT ASSETS
Inventory
Food and beverage..................................................... 3,077 2,893
Consumables........................................................... 3,946 3,580
Developed properties held for resale.................................. 43,592 20,765
--------- ---------
Total Inventory............................................. 50,615 27,238
--------- ---------
Accounts receivable
Trade debtors......................................................... 52,597 49,061
Subsidiaries and affiliated companies
- - Short term.......................................................... 9,082 4,525
- - Medium to long term................................................. 856 582
Other
- - Short term.......................................................... 43,919 47,950
- - Medium to long term................................................. 6,618 --
--------- ---------
Total accounts receivable................................... 113,072 102,118
--------- ---------
Current financial assets
Short term investments................................................ -- 69
--------- ---------
Cash at bank and on hand
Bank and postal deposits.............................................. 150,181 27,288
Cash.................................................................. 1,733 1,390
--------- ---------
Total cash in bank and on hand.............................. 151,914 28,678
--------- ---------
TOTAL CURRENT ASSETS........................................ 315,601 158,103
--------- ---------
Prepaid expenses and accrued Income
Other prepaid expenses and accrued Income............................. 2,481 2,714
--------- ---------
TOTAL ASSETS................................................ 1,677,998 1,591,029
========= =========
</TABLE>
F-90
<PAGE> 342
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET AT DECEMBER 31
<TABLE>
<CAPTION>
1994 1993
--------- ---------
MILLIONS OF LIRA
<S> <C> <C>
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
Share capital......................................................... 1,075,342 185,250
Share premium reserve................................................. 20,022 152,039
Fixed assets revaluation reserve...................................... -- 1,600
Legal reserve......................................................... -- 32,896
Other reserves:
- - Gain arising from spin-offs......................................... -- 127,874
- - Reserve for dividend changes........................................ -- 21,103
- - Opening retained earnings (deficit) of consolidated subsidiaries.... (23,755) (33,681)
Opening retained earnings (deficit) of the holding company............ (11,572) (233,616)
Loss for the year..................................................... (224,227) (200,053)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY OF THE GROUP..................... 835,810 53,412
--------- ---------
SHARE CAPITAL AND RESERVES OF MINORITY INTEREST....................... 41,911 16,152
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.................................. 877,721 69,564
--------- ---------
RESERVE FOR CONTINGENT LIABILITIES AND CHARGES
- - Reserve for taxes payable........................................... 17,240 11,689
- - Other............................................................... 136,405 27,392
--------- ---------
TOTAL RESERVE FOR CONTINGENT LIABILITIES AND CHARGES........ 153,645 39,081
--------- ---------
RESERVE FOR EMPLOYEES' TERMINATION INDEMNITY.......................... 42,241 39,477
--------- ---------
LIABILITIES
Convertible bonds..................................................... 57,960 57,960
Bank loans
- - Short term.......................................................... 263,303 993,613
- - Medium to long term................................................. 59,313 70,893
Advances.............................................................. 10,052 9,526
Accounts payable -- trade
- - Short term.......................................................... 57,359 105,874
- - Medium to long term................................................. -- 8,798
Due to subsidiaries and affiliated companies.......................... 16,459 471
Due to parent company................................................. -- 51,828
Taxes payable......................................................... 23,728 23,497
Social securities..................................................... 7,889 10,257
Other liabilities..................................................... 86,920 86,318
--------- ---------
TOTAL LIABILITIES........................................... 582,983 1,419,035
========= =========
</TABLE>
F-91
<PAGE> 343
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET AT DECEMBER 31
<TABLE>
<CAPTION>
1994 1993
---------- ----------
MILLIONS OF LIRA
<S> <C> <C>
SHAREHOLDERS' EQUITY AND LIABILITIES
ACCRUED LIABILITIES AND DEFERRED INCOME
Deferred revenues..................................................... 14,843 14,266
Other accruals and deferred income.................................... 6,565 9,606
---------- ----------
TOTAL ACCRUED LIABILITIES AND DEFERRED
REVENUE................................................... 21,408 23,872
---------- ----------
TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES.................. 1,677,998 1,591,029
======== ========
MEMORANDUM ACCOUNTS
A) GUARANTEES GIVEN
Written guarantees given to banks in favour of subsidiaries........... 9,746 38,782
Written guarantees given in favour of tax authorities................. 28,779 65,244
Other guarantees given to third parties............................... 4,223 4,223
Receivable given as guarantee in favour of the Parent Company......... -- 51,513
Real estate mortgage given to banks................................... 173,933 168,959
Total risk of demand repayment on long term loans..................... -- 7,134
Notes given in guarantee.............................................. 9,670 9,670
Other memorandum accounts............................................. -- 96
---------- ----------
226,351 345,621
======== ========
B) GUARANTEES RECEIVED
Written guarantees received from banks in our favor................... 7,666 --
---------- ----------
</TABLE>
F-92
<PAGE> 344
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C>
PRODUCTION VALUE
Revenues................................................ 535,051 466,517
Increase in fixed assets from internal work............. 816 --
Other income............................................ 21,219 17,289
------- -------
TOTAL PRODUCTION VALUE........................ 557,086 483,806
------- -------
PRODUCTION COSTS
Consumables............................................. 69,323 60,421
Services................................................ 133,281 119,568
Use of third party assets............................... 16,661 18,115
Personnel costs:
- - salaries and wages.................................... 178,305 166,811
- - social security contributions......................... 60,277 55,328
- - provision for employees' termination pay.............. 7,639 8,302
- - other personnel costs................................. 7,634 253,855 6,898 237,339
------- -------
Depreciation, amortization and write-downs:
- - Amortization of intangible fixed assets............... 5,996 5,347
- - Depreciation of tangible fixed assets................. 54,457 54,383
- - Write-downs of fixed assets........................... 7,130 --
- - Provision for bad debts............................... 5,703 73,286 3,885 63,615
------- -------
Change in inventory balance............................. 1,893 9,595
Provision for contingent liabilities and charges........ 6,341 --
Other charges........................................... 38,055 24,056
------- -------
TOTAL PRODUCTION COSTS........................ 592,695 532,709
------- -------
DIFFERENCE BETWEEN PRODUCTION VALUE AND PRODUCTION
COSTS................................................. (35,609) (48,903)
======= =======
</TABLE>
F-93
<PAGE> 345
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
1994 1993
------------------- ---------------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C>
FINANCIAL INCOME AND EXPENSES
- - Other financial income:
- Interest income on loans receivable from:
- subsidiaries.............................. 1,128 --
- others.................................... 3,214 4,342 7,171 7,171
------- --------
- Miscellaneous income:
- interest income from others............... -- 20,344 -- 10,610
- - Interest expense and other financial expenses:
- on loans from parent company................. -- -- (5,777) --
- other........................................ -- (79,137) (161,488) (167,265)
------- -------- --------
TOTAL NET FINANCIAL EXPENSES............ (54,451) (149,484)
------- --------
ADJUSTMENTS TO THE VALUE OF
FINANCIAL ASSETS
Write-downs of:
- - investments..................................... (1,915) (123)
- - long term financial assets...................... (40,456) (42,371) (6,098) (6,221)
------- ------- -------- --------
TOTAL ADJUSTMENTS TO THE FACE VALUE OF
FINANCIAL ASSETS...................... (42,371) (6,221)
======= ========
</TABLE>
F-94
<PAGE> 346
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
1994 1993
--------------------- --------------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C>
EXTRAORDINARY GAINS AND LOSSES
Gains
Gains on sale of assets.......................... 9,479 --
Other............................................ 9,455 18,934 17,159 17,159
-------- -------
Losses
Loss on sales of assets.......................... (355)
Extraordinary accruals for contingent liabilities
and charges.................................... (106,262) (6,100)
Other............................................ (12,201) (118,818) (18,775) (24,875)
-------- -------- ------- --------
TOTAL NET EXTRAORDINARY
LOSSES............................... (99,884) (7,716)
-------- --------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST
LOSS........................................... (232,315) (212,324)
Income taxes..................................... (2,761) (1,373)
-------- --------
LOSS FOR THE YEAR................................ (235,076) (213,697)
Minority interest loss........................... 10,849 13,644
-------- --------
LOSS FOR THE YEAR OF THE GROUP................... (224,227) (200,053)
======== ========
</TABLE>
F-95
<PAGE> 347
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF SOURCE AND APPLICATION OF FUNDS
<TABLE>
<CAPTION>
MILLIONS OF LIRA
----------------
<S> <C>
Sources of working capital:
Increase in share capital and share premium reserve of the parent company
Ciga SpA................................................................... 1,003,644
Decrease in medium and long-term receivables during the year................. 13,589
Transfer from undeveloped land designated for construction to "inventory".... 27,045
Net book value of disposals.................................................. 5,522
Increase in share capital and reserves of minority interest.................. 29,958
Translation effect of financial statements in foreign currencies and other
minor changes.............................................................. 2,981
----------------
Total sources...................................................... 1,082,739
----------------
Applications of working capital:
Loss for the year before minority interest in the results of subsidiaries.... 235,076
Credits/(debits) charged to profit and loss account which do not affect net
working capital:
Depreciation and amortization................................................ (54,290)
Provisions for contingent liabilities and charges............................ (106,262)
Provision to employees' termination indemnity................................ (7,639)
Provision to reserves for taxes payable...................................... (5,551)
Write-downs of investments................................................... (1,915)
Write-downs of long term financial assets.................................... (40,456)
Write-downs of fixed assets.................................................. (7,130)
Other provisions............................................................. (1,977)
----------------
Net working capital used in operations....................................... 9,856
Additions to fixed assets and increase in deferred charges................... 23,458
Payment of employees' termination indemnity.................................. 6,292
Decrease in long term debts.................................................. 20,378
Increase in medium and long-term receivables included in current assets...... 6,892
Increase in entitled land.................................................... 2,702
Total fixed assets arising from changes in consolidation area................ 32,596
Increase in fixed assets arising from effect of financial statements in
foreign currencies and other minor changes................................. 11,327
Other minor variations....................................................... 682
----------------
Total applications................................................. 114,228
----------------
Increase in net working capital.............................................. 968,511
=============
</TABLE>
F-96
<PAGE> 348
CIGA GROUP
1994 CONSOLIDATED FINANCIAL STATEMENTS
INCREASES/(DECREASES) IN COMPONENTS OF NET WORKING CAPITAL
<TABLE>
<CAPTION>
MILLIONS OF LIRA
----------------
<S> <C>
CURRENT ASSETS:
Inventories.................................................................... 23,377
Receivables (excepted medium and long term receivables)........................ 4,062
Financial assets which are not fixed assets.................................... (69)
Cash and banks................................................................. 123,236
Accrued income and prepaid expenses............................................ (233)
----------------
150,373
CURRENT LIABILITIES:
Payables to banks.............................................................. (730,310)
Advances....................................................................... 526
Accounts payable -- trade...................................................... (48,515)
Due to subsidiaries and affiliated companies................................... 15,988
Due to parent company.......................................................... (51,828)
Taxes payable.................................................................. 231
Social securities.............................................................. (2,368)
Other liabilities.............................................................. 602
Deferred revenues and other accruals and deferred.............................. (2,464)
----------------
(818,138)
----------------
Increase in net working capital................................................ 968,511
(1) is comprised of the following:
Inclusion of medium and long items due to the first consolidation of Lampsa
SA:
- Intangible fixed assets................................................. 114
- Tangible fixed assets................................................... 33,525
- Reserve for employees' termination indemnity............................ (1,686)
- Share capital and reserve of minority interests......................... (6,650)
Changes relating to non-consolidated of the financial statements of the
subsidiary companies in liquidation:
- Tangible fixed assets................................................... (528)
- Investments............................................................. 3,084
- Loans receivable........................................................ 5,000
- Reserve for employees' termination indemnity............................ (263)
----------------
32,596
----------------
</TABLE>
F-97
<PAGE> 349
CIGA GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
NOTES TO THE FINANCIAL STATEMENTS
FORM AND CONTENTS OF THE CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 1994 have been
prepared by the Board of Directors of Ciga SpA according to the new regulation
brought in by law decree n() 127 of April 9, 1991 which follows the European
community directive of June 13, 1983, known as the "seventh directive". In order
to permit comparison with the consolidated financial statements as of December
31, 1993, the 1993 financial statement balances have been reclassified to
conform with the presentation required by law decree n() 127 of April 9, 1991,
without changing total assets, liabilities, net equity and results from
operations. These notes to the financial statements contain information required
by article 38 and other dispositions of the said law.
Ciga SpA and its subsidiaries operate mainly in the tourism and hotel
industry sector.
The financial statements of the Italian subsidiaries included in the
consolidation are those prepared by the Board of Directors and approved by the
shareholders. The financial statements used for consolidation purposes in the
case of foreign subsidiaries do not differ substantially from those prepared to
meet local requirements; they have been adjusted in accordance with the Group's
accounting principles, which are in line with those recommended by the IASC
(International Accounting Standard Committee) and new Italian Civil law.
The consolidated financial statements comprise the financial statements of
Ciga SpA, the Group's holding company, and those of the Group's Italian and
foreign subsidiaries (the Ciga Group or the Group) in which Ciga SpA has
dominant direct or indirect influence.
The Group's minority interest in Imperial Hotel Austria AG is expressed in
the accompanying balance sheet on the basis of the equity method, while Imperial
Hotels' statement of operations has been consolidated on a line-by-line basis.
This method is used because the hotels owned by Imperial Hotels Austria AG are
managed by the Group in accordance with a contract by which the operating
results of Imperial Hotels Austria AG, net of the annual rental fee, belong to
the Group.
Companies included in the consolidation and interest held by the Group are
listed in Annex 1.
During 1994, the following changes have occurred in the Group consolidation
area:
- Since July 1, 1994, the Group has acquired a 52.8 percent interest in the
Greek company Lampsa SA, which is the owner of Hotel Grande Bretagne in
Athens, a hotel already managed by the Group, in exchange for loans as
described below.
- Some of the minor Italian and foreign companies, not operating and in
liquidation, have been substantially reflected in the consolidated
financial statements as of December 31, 1994 on the basis of the equity
method (which is not significantly different from the share value net of
liquidation), while as of December 31, 1993 they were consolidated on a
line-by-line basis.
- At the end of 1994, four foreign non-operating companies were closed
without significant effects on the consolidated financial statements.
The effect of the above on the consolidation are explained in the statement
of changes in financial position.
At December 31, 1994, the assets and liabilities of consolidated companies
operating outside Italy amounted to approximately Lira 742 billion and Lira 592
billion, respectively. These companies' revenues for 1994 amounted to
approximately Lira 223 billion.
F-98
<PAGE> 350
CIGA GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING PRINCIPLES
The accounting principles used in the preparation of the consolidated
financial statements are described below.
These accounting principles have been applied, where not differently
indicated, consistently with the prior year.
CONSOLIDATION PRINCIPLES
Consolidation principles are as follows:
a. The assets and liabilities of Group companies are consolidated on a
line-by-line basis, eliminating the carrying value of the investment
against the related equity accounts of the subsidiaries.
b. The difference between the purchase cost of the investments and the
book value of the Shareholders' equity at the time of acquisition has been
allocated since the first consolidation to the subsidiaries' assets up to
their current fair value at that date. The remaining unallocated
difference, if any, is still charged directly to consolidated Shareholders'
equity.
c. All intercompany balances and transactions (receivables, payables,
revenues and expenses, profits and losses) are eliminated.
d. Minority interests in the equity of consolidated subsidiaries and
the related share of income or loss for the year are separately disclosed.
e. Balance sheet items from financial statements expressed in
currencies other than Italian lira have been translated into Italian lira
at year-end exchange rates; differences arising from the translation of
opening equity accounts at the exchange rates in force at year-end as
compared with those obtained at the end of the previous year have been
charged/credited to Shareholders' equity. Profit and loss items have been
translated at the average exchange rates for the year; differences arising
from the use of average exchange rates instead of the rate in force at
year-end have also been reflected in the consolidated Shareholders' equity.
INTANGIBLE ASSETS
Intangible assets which are considered to have a benefit which exceeds one
year are carried at cost and amortized over their estimated useful life using a
straight-line method, as described in the note to the related item.
FIXED ASSETS
Fixed assets are recorded at purchase cost or at their transfer value
(where necessary) to reflect the higher value recognized at the time of
acquisition. The net book value of fixed assets include certain monetary
revaluations to a maximum of fair market value accounted for in accordance with
current legal provisions.
Ordinary maintenance and repair expenses relating to hotels, whether owned
or leased, are charged against operations in the year in which the expense is
incurred. Costs relating to rebuilding, renovation and upgrading of hotels have
been capitalized and are amortized over their expected useful life. Costs
relating to improvements made to leased premises are amortized over the period
of the related lease contract. Interest expenses incurred as a result of
extension and rebuilding work on hotels are capitalized for the duration of
construction work.
F-99
<PAGE> 351
CIGA GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
The depreciation rates used for the various fixed asset categories,
calculated to reflect the expected useful life of the assets, are as follows:
PERCENTAGE
<TABLE>
<S> <C>
Buildings...................................................................... 1.5
Plant and equipment............................................................ 8 - 12
Furniture and fixtures......................................................... 10 - 20
Tableware...................................................................... 25
Linen.......................................................................... 40
Transport vehicles............................................................. 10 - 25
Construction on public land under concession................................... 1 - 3
</TABLE>
These rates have been applied consistently over the years, except in the
case of buildings, which were depreciated at the rate of 3 percent from 1985 to
1990. Construction on public land under concession is also subject to financial
amortization for the duration of the concession agreement.
UNDEVELOPED LAND DESIGNATED FOR CONSTRUCTION
This land which comprises approximately 2,400 hectares of land in the Costa
Smeralda area in Sardinia is recorded at the carrying value in the related
subsidiaries' books adjusted to reflect the higher value recognized at the time
of acquisition of the investment (1990) based on an independent appraisal. As
far as the risks related to the real estate development project are concerned,
as described below, a dedicated provision has been recorded.
INVESTMENTS
Investments are carried at cost, or in accordance with the equity method,
as indicated in the note to the related item.
INVENTORIES
Food, beverage and consumables are stated at the average purchase cost.
Developed properties held for resale comprise entitled land, apartments,
villas and commercial premises destined for sale. Commercial premises have been
temporarily let to third parties. Real estate items built before December 31,
1990 are recorded at their book value adjusted to reflect the higher price paid,
within the limits of a surveyor's report. Other building operations are valued
at construction cost, including the cost of land, urbanization, planning and
fiscal charges, and any directly attributable financial charges which are
considered part of the construction cost until building work is completed.
Income from the sale of properties is recorded when title passes to the
purchaser. Deposits received from purchasers when the preliminary contract is
signed are recorded as "advances". Properties are classified as current assets
although it is not possible to determine if all the properties will be sold
within the following year.
RECEIVABLES AND PAYABLES
Trade and other receivables are recorded at their estimated realizable
value. Payables are shown at their face value.
F-100
<PAGE> 352
CIGA GROUP
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1994
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
PREPAYMENTS, ACCRUED INCOME, ACCRUED LIABILITIES AND DEFERRED REVENUES
These items include expenses and income attributable to two or more years,
in accordance with accrual accounting.
RESERVES FOR CONTINGENT LIABILITIES AND CHARGES
Reserves for contingent liabilities and charges have been accrued to cover
probable or certain losses, of which at the year end it is not possible to
determine the amount or timing. Accruals are estimated using all available
information.
RESERVE FOR EMPLOYEES' TERMINATION INDEMNITIES
The reserve reflects the Group's liability to all its employees in
conformity with current legislation and collective labour contracts.
INCOME TAXES
Income taxes payable are accrued on the basis of a reasonable estimate of
the income tax liability, considering possible tax-exemptions. Deferred taxes
relating to certain timing differences between the financial statements used for
consolidation and those submitted to tax authorities, have been recorded.
The tax benefit of tax loss carryforwards will be recognized when they are
realized.
REVENUES AND EXPENSES
Revenues and expenses are recorded on the accrual basis.
FOREIGN CURRENCY OPERATIONS
Foreign currency operations are recorded at the exchange rate on the date
of the transaction. Receivables and payables denominated in foreign currencies
are translated at year-end exchange rates and the effect of differences are
recorded in the profit and loss account.
TRANSACTIONS WITH THE PARENT COMPANY
The term "parent company" used in the financial statements at December 31,
1993 relates to Fimpar SpA which, on that date, was the parent company of Ciga
SpA. After the subscription of the Ciga SpA share capital increase, as decided
by the shareholders' meeting of February 15, 1994, Fimpar SpA ceased to be the
parent company of the Ciga Group, and presently it does not appear as one of
Ciga SpA's shareholders.
The term "related companies" at December 31, 1993 relates to companies held
directly or indirectly by the former majority shareholder H.H. The Aga Khan.
Currently, the parent company of Ciga SpA is Sheraton International, Inc.
("Sheraton") an affiliate of ITT Corporation ("ITT"). As of December 31, 1994
there were no significant transactions between the Ciga Group's companies and
Sheraton International, Inc.
ADDITIONAL INFORMATION
The statement of changes in net equity, the statement of source and
application of funds and the reconciliation of shareholders' equity and results
of operations from Ciga SpA to the consolidated financial statements of Ciga SpA
have been presented, in addition to the financial statements, as required by
present law.
F-101
<PAGE> 353
COMMENTS ON SIGNIFICANT COMPONENTS OF THE BALANCE SHEET
ASSETS
FIXED ASSETS
INTANGIBLE FIXED ASSETS
An analysis of the change in intangible fixed assets by category is
described below:
<TABLE>
<CAPTION>
BALANCE AT MOVEMENT IN THE YEAR BALANCE AT
DECEMBER 31, --------------------------------------- DECEMBER 31,
1993 INCREASE AMORTIZATIONS EXCHANGE 1994
------------ -------- ------------- -------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C> <C>
Start-up and share issuance costs
Initial cost..................... 6,746 10,285 -- 9 17,040
Amortizations.................... (5,101) -- (2,990) (7) (8,098)
------ ------ ------ --- -------
Net book value................... 1,645 10,285 (2,990) 2 8,942
------ ------ ------ --- -------
Concessions, licences, trademarks
and similar rights
Initial costs.................... 4,150 757 -- 37 4,944
Amortizations.................... (2,234) -- (224) (20) (2,478)
------ ------ ------ --- -------
Net book value................... 1,916 757 (224) 17 2,466
------ ------ ------ --- -------
Other intangible fixed assets
Initial costs.................... 30,579 316 -- 479 31,374
Amortizations.................... (8,635) -- (2,782) (36) (11,453)
------ ------ ------ --- -------
Net book value................... 21,944 316 (2,782) 443 19,921
------ ------ ------ --- -------
Total, net............. 25,505 11,358 (5,996) 462 31,329
====== ====== ====== === =======
</TABLE>
Start-up and share issuance costs include primarily incorporation costs,
costs relating to increase in share capital and costs of feasibility studies and
planning of new projects. The increase in the year is due primarily to taxes of
Lira 9,510 million incurred to register the increase in share capital of the
parent company. These costs are amortized over five years.
The item "concessions, licences, trademarks and similar rights" includes
primarily costs for the purchase of software which are generally amortized over
five years and rights to use state properties, which are amortized throughout
the period of the concession.
The component "other intangible fixed assets" includes a net amount of Lira
14,953 million representing management fees to the year 2019 for a Spanish
hotel. This item is being amortized on a straight-line basis throughout the
contractual period. The component also includes Lira 4,347 million costs for
improvements to third parties' properties net of amortizations. These costs are
amortized over five years.
F-102
<PAGE> 354
TANGIBLE FIXED ASSETS
The composition and change over the prior year is described below:
<TABLE>
<CAPTION>
MOVEMENT IN THE YEAR
BALANCE AT ------------------------------------------------------- BALANCE AT
DECEMBER 31, OTHER DECEMBER 31,
1993 INCREASE DECREASE DEPRECIATION EXCHANGE CHANGES 1994
------------ -------- -------- ------------ -------- ------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C> <C> <C> <C>
Land and buildings
Cost......................... 1,059,574 2,280 (5,423) -- 7,158 34,067 1,097,656
Accumulated depreciation and
write down................... (127,349) -- 882 (17,888) (631) (9,148) (154,134)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 932,225 2,280 (4,541) (17,888) 6,527 24,919 943,522
--------- ------ ------ ------ ----- ------- ---------
Plant and equipment
Cost......................... 142,041 3,822 (429) -- 961 2,505 148,900
Accumulated depreciation....... (64,471) -- 106 (12,941) 207 (2,041) (79,140)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 77,570 3,822 (323) (12,941) 1,168 464 69,760
--------- ------ ------ ------ ----- ------- ---------
Furniture and fixtures
Cost......................... 153,953 4,203 (1,298) -- 1,731 4,718 163,307
Accumulated depreciation....... (79,561) -- 671 (12,882) (1,276) (4,062) (97,110)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 74,392 4,203 (627) (12,882) 455 656 66,197
--------- ------ ------ ------ ----- ------- ---------
Linen and tableware
Cost......................... 19,367 2,120 -- -- 46 -- 21,533
Accumulated depreciation....... (11,262) -- -- (3,071) 83 -- (14,250)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 8,105 2,120 -- (3,071) 129 -- 7,283
--------- ------ ------ ------ ----- ------- ---------
Transport vehicles
Cost......................... 3,450 308 (313) -- (116) 81 3,410
Accumulated depreciation....... (1,520) -- 282 (739) 59 (15) (1,933)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 1,930 308 (31) (739) (57) 66 1,477
--------- ------ ------ ------ ----- ------- ---------
Leasehold improvements and
construction on public land
under concession
Cost......................... 21,168 181 -- -- -- (288) 21,061
Accumulated depreciation....... (6,158) -- -- (773) -- 257 (6,674)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 15,010 181 -- (773) -- (31) 14,387
--------- ------ ------ ------ ----- ------- ---------
Construction-in-progress....... 2,042 (700) -- -- -- -- 1,342
--------- ------ ------ ------ ----- ------- ---------
Total Cost..................... 1,401,595 12,214 (7,463) -- 9,780 41,083 1,457,209
Accumulated depreciation....... (290,321) -- 1,941 (48,294) (1,558) (15,009) (353,241)
--------- ------ ------ ------ ----- ------- ---------
Net book value................. 1,111,274 12,214 (5,522) (48,294) 8,222 26,074 1,103,968
========= ====== ====== ====== ===== ======= =========
</TABLE>
The decrease in fixed assets is primarily attributable to the sale of
Residence Palazzo del Giglio of Lira 2,176 million and another building in
Venice of Lira 1,344 million.
The column "other changes" includes primarily the effect of consolidating
for the first time Lampsa SA, owner of the Hotel Grande Bretagne in Athens and
the write-down of the value of Hotel Jerez de la Frontera in Spain by Lira 7,130
million to its estimated realizable value, because management intends to sell
the hotel.
Part of the fixed assets value relate to property and equipment that the
parent company transferred to its Italian subsidiaries in 1981 in a spin-off
transaction. The gain resulting from the spin-off amounted to some Lira 217,000
million. As of December 31, 1994 this gain has been amortized through
depreciation and disposals for approximately Lira 86,000 million.
F-103
<PAGE> 355
The land and buildings of the Group's Italian subsidiaries were revalued in
1983, 1990 and 1991 in accordance with specific Italian laws for a total of Lire
181,000 million. As of December 31, 1994 monetary revaluations have been
reversed through depreciation and disposal of assets for approximately Lire
23,000 million.
Some of the hotel buildings are mortgaged as loan guarantees. Furthermore,
certain of the real estate assets belonging to Group companies have been
subjected as security for credits it claims. Such liens are in the course of
cancellation.
LONG TERM FINANCIAL ASSETS
INVESTMENTS
The composition and changes compared to the prior year are described below:
<TABLE>
<CAPTION>
BALANCE DECEMBER 31,
1993 MOVEMENT IN THE YEAR
-------------------------- -------------------------------------- NET VALUE AT
ORIGINAL WRITE- NET WRITE-UPS INCREASE DECEMBER 31,
COST DOWNS VALUE (WRITE-DOWNS) (DECREASE) EXCHANGE 1994
-------- ------ ------ ------------- ----------- -------- -------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C> <C> <C> <C>
Subsidiaries.................... 81 (1) 80 79 3,017 46 3,222
-------- ------ ------ ------------- ----------- -------- -------------
Affiliated companies:
Imperial Hotels
Austria AG...................... 62,783 -- 62,783 -- -- 2,604 65,387
-------- ------ ------ ------------- ----------- -------- -------------
Other companies:
Hosteleria Asturiana 1,952 -- 1,952 (1,220) -- 38 770
Other minor interest............ 565 -- 565 -- 10 -- 575
-------- ------ ------ ------------- ----------- -------- -------------
2,517 -- 2,517 (1,220) 10 38 1,345
-------- ------ ------ ------------- ----------- -------- -------------
Total.................. 65,381 (1) 65,380 (1,141) 3,027 2,688 69,954
======= ====== ====== ============ =========== ========= =============
</TABLE>
The increase in investments in subsidiaries is due to the fact that some
companies that are being wound-up are reported using the equity method in the
current year whereas in the prior year they were consolidated on a line-by-line
basis. Accumulated loans in excess of the value of investments, if any, is
provided in the "reserve for contingent liabilities and charges".
The investment in Imperial Hotels Austria AG, of which the Group has a 47.4
percent interest, is reported in the consolidated Balance Sheet using the equity
method.
The hotels owned by Imperial Hotels Austria AG are managed by the Group on
the basis of a contract expiring in 2012. The contract provides that the
investee company's operating results belong to the Group and therefore the
statement of operations of Imperial Hotels Austria AG has been consolidated on a
line-by-line basis. As of December 31, 1994, the assets and liabilities of
Imperial Hotels Austria AG amounted to Lira 104 billion and Lira 24 billion,
respectively. At December 31, 1994 the Group's short-term receivables from
Imperial Hotels Austria AG stood at Lira 1,743 million and medium-term
receivables at Lira 856 million, while payables stood at Lira 7,397 million.
Hosteleria Asturiana SA is the owner of the Hotel de la Reconquista in
Oviedo, which was managed by a Group subsidiary, Ciga Management Espana SA
through March 1993. Management intends to dispose of this investment (equal to
11 percent of the share capital) and therefore the investment is recorded at its
net realizable value.
Other minority investments in companies with little economic importance are
recorded at cost in the financial statements.
The parent company has written, in favor of bank creditors, a pledge on the
shares of the subsidiaries Ciga Immobiliare SpA, Ciga Service SpA, Ciga Resort
Srl and Landia NV. Such pledges are in the process of being cancelled.
F-104
<PAGE> 356
LONG TERM FINANCIAL ASSETS
LOANS RECEIVABLE
The composition of loans and the change compared to the prior year is
described below:
<TABLE>
<CAPTION>
INCREASE
BALANCE AT (DECREASE) BALANCE AT
DECEMBER 31, 1993 IN THE YEAR DECEMBER 31, 1994
------------------ ----------- ------------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Subsidiaries...................................... -- 5,000 5,000
---------- ----------- ----------
Other
Loans with respect to the acquisition of Lampsa
SA.............................................. 71,876 (71,876) --
Other loans....................................... 13,168 (804) 12,364
Security deposits................................. 1,786 543 2,329
---------- ----------- ----------
86,830 (72,137) 14,693
---------- ----------- ----------
Less: Valuation allowance......................... (26,448) 18,092 (8,356)
---------- ----------- ----------
60,382 (54,045) 6,337
---------- ----------- ----------
Total................................... 60,382 (49,045) 11,337
============== ======== ==============
</TABLE>
The increase in loans to subsidiaries is a result of the change in method
of recording investments in subsidiaries intended to be wound-up from
line-by-line consolidation as of December 31, 1993 to the equity method in the
current year.
As described in the notes to the financial statements of the previous year,
as of December 31, 1993 the Group had loans of Lira 71,876 million to the parent
of Fimpar, the prior parent of Ciga SpA, and a third party. These loans related
to the acquisition of an interest in Lampsa SA by said parties. In reference to
such loans the Group accrued in prior years a provision of Lira 20,448 million
for bad debts to reflect the estimated value of such guarantees representing the
majority of the company owing Hotel Grande Bretagne.
The loans were secured by the 52.8 percent ownership in Lampsa SA purchased
with the loans. When the loans were not repaid when due, in 1994, the Group
succeeded in the 52.8 percent ownership of Lampsa SA.
Effective July 1, 1994 such investment in Lampsa SA was reported using the
line-by-line consolidation method. The fair market value of Lampsa SA has been
determined by a specific independent appraisal value on Hotel Grande Bretagne.
Due to the significant planned capital investment required for the Hotel Grande
Bretagne and the depressed market conditions, the appraisal value has been
determined to be less in value by Lira 34,860 million compared to the net
recorded value of the loans. Such loss on receivables is reported in the
statement of operations for the current year under write-downs of long-term
financial assets.
CURRENT ASSETS
INVENTORY
An explanation of the change compared to the previous year is described
below:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------- ----------------- -------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Food and beverage...................................... 2,893 184 3,077
Consumables............................................ 3,580 366 3,946
------ ------ ------
6,473 550 7,023
Developed properties held for resale................... 20,765 22,827 43,592
------ ------ ------
27,238 23,377 50,615
====== ====== ======
</TABLE>
F-105
<PAGE> 357
At December 31, 1994, the developed properties held for resale were
comprised of the following:
<TABLE>
<CAPTION>
MILLIONS OF LIRA
<S> <C>
Entitled land.......................................................... 27,045
Apartments, residential and commercial real estate..................... 11,669
Other real estate...................................................... 4,878
------
43,592
======
</TABLE>
As of December 31, 1993 entitled lands were included in "land designated
for construction" and classified as fixed assets. Since entitled lands are
available for sale, it has been considered correct to classify them as
"inventory", even if the possible sales may not be finalized within the next
year.
ACCOUNTS RECEIVABLE
TRADE DEBTORS
The changes by category are explained as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------- ----------- -------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Accounts receivable -- trade................. 58,541 4,130 62,671
Less: Allowance for doubtful accounts........ (9,480) (594) (10,074)
------ ----- -------
Net.......................................... 49,061 3,536 52,597
====== ===== =======
</TABLE>
The increase in accounts receivable compared to the previous year is
basically related to the increase in revenues compared to the previous year.
ACCOUNTS RECEIVABLE FROM SUBSIDIARIES AND AFFILIATES
These receivables as of December 31, 1994 are comprised of the following:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER DECEMBER
31, CHANGE FROM 31,
1993 PRIOR YEAR 1994
----------- ----------- -----------
MILLIONS OF LIRA
<S> <C> <C> <C>
Short term:
- Subsidiaries:................................ 916 6,423 7,339
----- ------ -----
- Affiliates:
Imperial Hotels Austria AG................... 3,609 (1,866) 1,743
----- ------ -----
Total................................ 4,525 4,557 9,082
===== ====== =====
Medium to long-term:
- Affiliates:
Imperial Hotels Austria AG................... 582 274 856
===== ====== =====
</TABLE>
Medium to long-term receivables from Imperial Hotels Austria AG in
accordance with a management agreement will not be paid within one year, and
therefore have been discounted to their present value.
The increase in trade accounts receivable from subsidiaries is primarily
attributable to the fact that some investments in wound-up companies were not
consolidated as in the prior year because they were recorded in the current year
using the equity method.
F-106
<PAGE> 358
OTHER RECEIVABLES
The balance is comprised of the following:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGES FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ -------------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Short-term:
VAT receivable.................................. 6,962 2,240 9,202
Other receivables from Government............... 27,204 (1,673) 25,531
Advances to suppliers........................... 294 498 792
Receivable from social security................. 244 (161) 83
Receivables from Abbot Fields SA................ 6,059 -- 6,059
Receivables from Resort Development and Finance
Corporation BV................................ 2,666 -- 2,666
Other receivables............................... 12,035 (3,806) 8,229
------ ------ ------
Total................................. 55,464 (2,902) 52,562
Less: Allowance for doubtful accounts........... (7,514) (1,129) (8,643)
------ ------ ------
Total................................. 47,950 (4,031) 43,919
====== ====== ======
Medium to long-term............................. -- 6,618 6,618
====== ====== ======
</TABLE>
The receivable from Abbot Fields SA relates to a gain which arose in 1992
following the signing of an agreement at the end of 1991 to sell Ciga SpA's
investment in Ciga International SpA, the owner of the Hotel Maurice in Paris.
In view of the uncertainties surrounding the realization of this gain, a similar
sum has prudently been allocated in prior years to the reserve for doubtful
accounts. In the first months of 1995 such receivables were written-off in
connection with a mutual waiver of outstanding claims.
The item "other receivables" include Lira 861 million for accrued interests
on the loan allocated to Abbot Fields International SpA, which have been as well
written-off, without any loss, in the first month of year 1995. "Other
receivables" also includes Lira 2,076 million for standing accounts receivable
from companies in which the Group holds a minority share.
"Other medium to long-term receivables" is comprised of a receivable for
the proceeds on the sale of Residence Palazzo del Giglio. The sales agreement
specifies that the amount will not be paid in the short-term and therefore the
receivable has been discounted to its present value.
SHAREHOLDERS' EQUITY AND LIABILITIES
SHAREHOLDERS' EQUITY
The changes in the components of shareholders' equity and the
reconciliation of shareholders' equity and results of operations from Ciga SpA's
statutory financial statements to the consolidated financial statements as of
December 31, 1994 are provided in Annex.
SHARE CAPITAL
The share capital of Ciga SpA at December 31, 1994, subscribed and paid up,
amounted to Lira 1,075,342 million and is comprised as follows: 1,040,884,970
common shares with a par value of Lira 1,000 each and 34,456,717 savings shares
with a par value of Lira 1,000 each.
As a result of a special meeting of shareholders on February 15, 1994,
share capital was reduced by Lira 93,530 million to cover accumulated losses
through December 30, 1993 and subsequently increased by Lira 983,622 million
with the issuance of 983,621,570 common shares.
F-107
<PAGE> 359
SHARE PREMIUM RESERVE
During the year, share premium reserve was written-down to nil for
accumulated losses as noted above. Subsequently, share premium reserve increased
by Lira 20,022 million which represented proceeds on the sale of option rights
on not subscribed share capital.
FIXED ASSET REVALUATION RESERVE, LEGAL RESERVE, RESERVE FOR GAINS ON SPIN-OFF,
RESERVE FOR DIVIDEND CHANGES
These reserves have been written-down to nil for losses as a result of the
special meeting of shareholders discussed in the components above.
OPENING RETAINED EARNINGS (DEFICIT)
Represent residual accumulated losses to the beginning of the current year.
MINORITY INTEREST
At December 31, 1994 the shareholders' equity of minority interest is
relating to:
<TABLE>
<CAPTION>
%
------
<S> <C>
Ciga Immobiliare Sardegna SpA and subsidiaries....................... 49.00
Nacional Hotelaere SA................................................ 17.51
Ciga International Hotel Corporation................................. 4.74
Lampsa SA............................................................ 47.20
</TABLE>
RESERVES FOR CONTINGENT LIABILITIES AND CHARGES
The composition and the movements of these reserves are as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGES FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ ------------ ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
For taxation:
- Deferred taxes............................. 5,085 (35) 5,050
- Other...................................... 6,604 5,586 12,190
------ ------- -------
Total.............................. 11,689 5,551 17,240
====== ======= =======
For other contingent liabilities and charges:
- Reserve for risks on to the development
project in
Costa Smeralda........................... -- 50,000 50,000
- Reserve for hotel restructuring costs...... -- 21,800 21,800
- Reserve for company reorganization and
restructuring............................ -- 24,662 24,662
- Reserve for premium payment on convertible
bond..................................... 1,782 1,116 2,898
- Reserve for exchange fluctuations.......... 7,967 711 8,678
- Reserve for restoration of state
property................................... 1,890 402 2,292
- Reserve for entitlement costs.............. 2,029 (163) 1,866
- Reserve for investments write-downs........ 707 1,661 2,368
- Reserve for other liabilities.............. 13,017 8,824 21,841
------ ------- -------
27,392 109,013 136,405
====== ======= =======
</TABLE>
The reserve for deferred taxation has been accrued as a result of certain
timing differences between the financial statements used for consolidation and
those submitted to tax authorities.
F-108
<PAGE> 360
The other reserves for taxation include provisions for future tax charges
costs expected to arise from ongoing litigations with the fiscal authorities.
During 1994 the Group has accrued a reserve for risks of Lira 50,000
million to reflect the objective uncertainties relating to the realization of
the development project in the Costa Smeralda area and, therefore, the risks
connected to this project.
The investment in Ciga Immobiliare Sardegna has been purchased in 1990 and
has generated since, up to 1994, significant losses (some Lira 65,000 million),
as a result of the forced inactivity caused by the restrictions imposed by
regional laws to real estate developments in the seaside areas.
Although the negotiations with local authorities have recently developed in
favor of a resumption of the real estate activity in Costa Smeralda, significant
uncertainties remain about the real possibility to realize the original project.
Taking as well into account that authorizations and permits will not be
obtained for a long time, and further studies, investigations and analysis will
be necessary, it is reasonable to believe that the real estate development
project will not begin in the near future and that the company will therefore
continue to incur further costs of a presumably significant amount.
In view of the above mentioned risks, the Group's management considering
also the results of independent studies on the assets of CIS and its
subsidiaries, has decided to accrue a reserve for risks prudentially determined
in Lire 50,000 million.
The "reserve for hotel restructuring" has been accrued during the year to
account for the costs already planned for renovating two Italian hotels.
Renovations are necessary to keep the carrying value of the two hotels in line
with their net recoverable value.
The "reserve for company reorganization and restructuring" has been wholly
accrued during the year to cover expected costs for the restructuring and
reorganization of the main Group's operating company, which will result in a
reduction in the number of employees.
A reserve for the 5 percent "premium payment on convertible bonds" has
prudently been accrued to face the possible liability which might arise on
December 31, 1995, date of the convertible bond redemption, for bonds that will
not be converted into shares at that date. The surcharge is accrued
proportionately over the life of the bonds.
The "reserve for exchange fluctuations" has been accrued to align to the
year end exchange rate the debt of a consolidated Italian company for an ECU
middle-term loan.
The "reserve for the restoration of state property" has been accrued to
cover required maintenance works of harbors managed by the Group in the Costa
Smeralda area to be incurred upon expiration of the public dominion licences.
The "reserve for entitlement costs" has been accrued to cover the cost of
infrastructures on entitled land required in the Costa Smeralda area.
The "reserve for investments write-downs" has been accrued to account for
the excesses of losses incurred by some non-consolidated subsidiaries with
respect to their carrying value.
"Reserves for other liabilities" include provisions for legal disputes and
other potential liabilities associated with hotel operations.
F-109
<PAGE> 361
RESERVE FOR EMPLOYEES' TERMINATION INDEMNITY
The movement of the reserve during the year is as follows:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
1993 ACCRUALS PAYMENTS 1994
------------ -------- -------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C> <C>
Provision for employees' termination pay.... 39,477 7,639 (4,875) 42,241
====== ===== ===== ======
</TABLE>
LIABILITIES
CONVERTIBLE BONDS
The Convertible Bond Loan (1988-1995) issued by Ciga SpA originally
comprised 120,554,973 bonds, each valued at Lira 1,000, at an interest rate of 9
percent per annum, repayable in full by December 31, 1995. Starting from
December 1990, the bonds have been convertible into Ciga SpA common shares
according to a variable ratio which is set for each conversion period on the
basis of a share price calculated as 90 percent of the average settlement price
of the ordinary shares on the Milan Stock Exchange during the previous quarter,
with a minimum of Lira 3,300 at December 31, 1994. As of December 31, 1994, the
number of bonds remaining unconverted stood at 57,960,339. The Group is entitled
to reimburse bonds in advance, starting from 1991, with payment of a premium of
up to 5 percent of the nominal value of the bonds. The premium is due in any
case when the loan matures. In consideration of the possibility of further
conversions, the shareholders of Ciga SpA have resolved to increase share
capital through an issue of 6,669,775 shares with a nominal value of Lira 1,000,
which will be used for the loan conversion.
SHORT TERM BANK LOANS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ ------------ ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Overdrafts.................................... 602,812 (463,834) 138,978
Advances...................................... 369,049 (255,720) 113,329
Current portion of secured loans.............. 21,752 (10,756) 10,996
------- --------- -------
993,613 (730,310) 263,303
======= ========= =======
</TABLE>
The current portion of secured loans include an amount denominated in
foreign currency of 1,524,017 ECU.
The net financial position has improved as of December 31, 1994, due mainly
to the increase in share capital of the holding company, subscribed and paid up
during the year.
MEDIUM AND LONG TERM BANK BORROWINGS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, INCREASE DECEMBER 31,
1993 (DECREASE) 1994
------------ ----------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Secured loans................................... 70,893 (11,580) 59,313
====== ======== ======
</TABLE>
Secured loans include a residual amount denominated in foreign currency of
17,656,820 ECU. The effect of the translation at year-end exchange rate is
reflected in the reserve for exchange fluctuations.
The repayment of long term loans outstanding at December 31, 1994 will be
made in semi-annual installments.
F-110
<PAGE> 362
The repayment plan of the long term portion of loans is the following:
<TABLE>
<CAPTION>
YEAR MILLIONS OF LIRA
--------------------------------------------------------------- ----------------
<S> <C>
1996........................................................... 7.337
1997........................................................... 7.363
1998........................................................... 7.821
1999........................................................... 7.604
2000........................................................... 8.024
2001 and subsequently.......................................... 21.164
------
Total................................................ 59.313
======
</TABLE>
The interest rates accrued on such loans are variable and as of December
31, 1994 the weighted-average rate was 13 percent.
TRADE PAYABLES
The decrease in trade payables of Lira 57.313 million, is primarily due to
the payment of overdue trade payables relating to refurbishment and enlargement
works on hotel buildings carried out in recent years. These payments were made
possible through proceeds from the increase in the holding company's share
capital.
Trade payables at December 31, 1994 include a payable for rentals relating
to Hotel Maurice in Paris due to Abbot Fields International SpA of Lira 7,040
million. Following the agreement between the Group and the Abbot Fields Group in
the first months of 1995, such payables have been written-off.
DUE TO SUBSIDIARIES AND AFFILIATED COMPANIES
As of December 31, 1994, these liabilities include the following items:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ ------------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Subsidiaries................................. 377 8,685 9,062
--- ------ ------
Affiliated companies:
Imperial Hotels Austria AG................... 94 7,303 7,397
--- ------ ------
Total.............................. 471 15,988 16,459
=== ====== ======
</TABLE>
The increase in accounts payable to subsidiaries is primarily attributable
to the fact that some investments in wound-up companies were not consolidated as
in the previous year because they were recorded in the current year using the
equity method.
DUE TO THE PARENT COMPANY
The amount recorded at December 31, 1993 primarily comprised of two loans
plus accrued interests, from the parent company at the time, Fimpar SpA.
These loans have been repaid to Fimpar SpA during 1994. Following the
subscription of the Ciga SpA capital increase, as declared by the shareholders'
meeting of February 15, 1994, Fimpar SpA ceased to be the parent company of the
Ciga Group and, currently, does not appear to be one of Ciga SpA's shareholders.
F-111
<PAGE> 363
TAXES PAYABLE
The composition of this item and the changes from prior year are the
following:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ ----------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Accrued income taxes.......................... 1,000 1,891 2,891
Withholding taxes............................. 4,864 720 5,584
Payables for taxation on fixed assets......... 4,189 (282) 3,907
Payables for tax on net equity................ 1,150 5,923 7,073
Other taxes................................... 12,294 (8,021) 4,273
------ ------ ------
23,497 231 23,728
====== ====== ======
</TABLE>
Ciga SpA and its Italian subsidiaries have settled all tax years to the end
of 1988.
The Group's management is of the opinion that the settlement of open tax
years will not give rise to significant liabilities for the Group, also because
of the large losses reported in recent years.
As of December 31, 1994 the amount of the tax losses available to
subsidiaries, based on income tax returns for the years through to 1993, and on
estimates of the losses for tax purposes for the year 1994, is approximately
Lira 836 billion.
The tax losses expire in the following years:
<TABLE>
<CAPTION>
MILLIONS OF LIRA
----------------
<S> <C>
1995........................................... 29
1996........................................... 88
1997........................................... 310
1998........................................... 247
1999 (estimate)................................ 162
</TABLE>
SOCIAL SECURITIES
This item refers to payables for social security contributions charged on
both the company and the employees at the year end with respect to December
wages.
OTHER LIABILITIES
The other liabilities reflected in the financial statements include the
following:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, CHANGE FROM DECEMBER 31,
1993 PRIOR YEAR 1994
------------ ----------- ------------
MILLIONS OF LIRA
<S> <C> <C> <C>
Payroll expenses and related social
contributions............................... 21,446 4,211 25,657
Payables to shareholders and bond holders..... 16,682 (12,082) 4,600
Other liabilities............................. 48,190 8,473 56,663
------ ------- ------
86,318 602 86,920
====== ======= ======
</TABLE>
Payables to shareholders and bond holders have been reduced because of the
payment of the interests accrued during former years on the convertible bond
loan; such payment was made possible by the increase in the parent company's
share capital.
Other payables include the following:
- The residual payable of Lira 38,812 million to Resort Development and
Finance Corporation BV, relating to a 51 percent investment in Ciga
Immobiliare Sardegna SpA. The payable was due on
F-112
<PAGE> 364
June 30, 1993 and during the year it has been increased by the accrued
interests resulting from the delayed payment. Resort Development and
Finance Corporation BV is held by the former principal shareholder of the
Group. Negotiations are still taking place with the counterpart to define
pending issues, as described in the Director's Report.
- Other payables due to companies related to the former principal
shareholder of Lira 4,088 million.
- Payables for interest expense of Lira 982 million.
- Payables for leases of Lira 1,069 million.
ACCRUED LIABILITIES AND DEFERRED REVENUES
DEFERRED REVENUES
Revenues obtained from the sale of berthing rights of the marina
constructed on public land and managed by a Group's company are recognized over
the concession period. The balance includes the portion of revenues collected,
relating to future years.
INCOME STATEMENT
PRODUCTION VALUE
REVENUES
Revenue by activity and geographical area are described below:
<TABLE>
<CAPTION>
REVENUES BY ACTIVITY 1994 1993
----------------------------------------------------------------- -------- --------
MILLIONS OF LIRA
<S> <C> <C>
Hotels and Resort................................................ 525,529 456,553
Real estate activity............................................. 9,522 9,964
-------- --------
535,051 466,517
======= =======
</TABLE>
<TABLE>
<CAPTION>
REVENUES BY GEOGRAPHICAL AREA 1994 1993
----------------------------------------------------------------- -------- --------
MILLIONS OF LIRA
<S> <C> <C>
Italy............................................................ 323,639 280,057
Spain............................................................ 84,144 76,605
Austria.......................................................... 65,787 69,598
France........................................................... 31,517 24,215
Holland.......................................................... 17,283 16,042
Greece........................................................... 12,681 --
-------- --------
535,051 466,517
======= =======
</TABLE>
The increase in revenues as of December 31, 1994 compared with the previous
year is due to a significant improvement in hotel management, particularly in
Italy, and to the inclusion since July 1, 1994 of operating results of the Greek
company Lampsa SA.
F-113
<PAGE> 365
OTHER INCOME
The item is composed as follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
MILLIONS OF LIRA
<S> <C> <C>
Leases............................................................. 6,390 6,973
Sale of advertising spaces......................................... 1,177 1,179
Gain on sale of assets............................................. 1,094 713
Sundry revenues.................................................... 12,558 8,424
------- -------
21,219 17,289
====== ======
</TABLE>
Gains on the sale of assets relate to ordinary sales made during the year.
Sundry revenues relate mainly to costs recovered, commissions and revenues
relating to prior years.
PRODUCTION COSTS
CONSUMABLES
This item is essentially comprised of expenses for food and beverages
purchased by the hotels managed by the Group.
SERVICES
Service costs include primarily G&A expenses, marketing and maintenance
expenses.
Service costs increased from Lira 120 billion in 1993 to Lira 133 billion
in 1994, primarily due to higher commissions on hotel booking and legal fees
associated with the capital increase.
The total amount of fees for directors and statutory auditors of the
holding company, including the appointment in the Group subsidiaries are of Lira
172 million and of Lira 295 million.
Directors who are employed by ITT or its subsidiaries do not receive fees
for their services as Directors.
USE OF THIRD PARTY ASSETS
Leasing costs include Lira 10,177 million for rental of leased hotel
building, Lira 1,778 million for the rental of head and branch offices and Lira
4,706 million for various rental costs.
As of December 31, 1994 the Group's Italian companies managed nineteen
owned hotels and managed an additional two hotels leased from third parties. The
lease contracts stipulate a fixed minimum rental, and in certain cases are
susceptible to increases in relation to a fixed percentage of annual revenues.
The two contracts in force at December 31, 1994 expire in 1998 and 2006.
The Spanish companies manage two hotels owned by the Group and an
additional four hotels under management contracts expiring between 1998 and
2028.
The Austrian subsidiary, Ciga Hotels AG has a contract with Imperial Hotels
Austria AG Vienna, expiring in 2012, by which the Ciga Group is responsible for
the management of three hotels owned by Imperial in return for an annual fee of
Austrian Schillings 15,300,000 (Lira 2,140 million) subject to review every
three years.
The Hotel Maurice in Paris, owned by Abbot Fields International SpA, is
managed by the Group pursuant to an agreement with the owner following the
expiration of the previous management contract in December 1993. Under such
agreement, the Group continues to manage the Maurice on a month-to-month basis
terminable by either party. In the early months of 1995, the Group and the owner
entered into an agreement by which they settled many of their prior disputes and
affirmed the month-to-month nature of the Group's management.
F-114
<PAGE> 366
The obligation for the next five years for hotel rental fees is as follows
(the rental fee for Hotel Maurice, because of the standing uncertainties, has
been included only in 1995):
<TABLE>
<CAPTION>
MILLIONS
OF LIRA
--------
<S> <C>
1995................................................................ 8,930
1996................................................................ 6,062
1997................................................................ 6,202
1998................................................................ 6,348
1999................................................................ 6,403
</TABLE>
PERSONNEL COSTS
The composition of such costs is already provided in the statement of
operations.
The average number of the Group's employees is as follows:
<TABLE>
<CAPTION>
NUMBER
---------------
1994 1993
----- -----
<S> <C> <C>
Managers..................................................... 46 50
Employees and workers........................................ 3,699 3,805
----- -----
3,745 3,855
===== =====
</TABLE>
DEPRECIATION, AMORTIZATION AND WRITE-DOWNS
The devaluation of tangible assets reflected in the December 31, 1994
statement of operations, relate to Hotel Jerez de la Frontera, owned by a
Spanish consolidated company. The cost of this hotel, which is to be sold, has
been written-down to its net realizable value.
PROVISION FOR CONTINGENT LIABILITIES AND CHARGES
This item covers potential tax and other liabilities.
OTHER CHARGES
Other charges increased from Lira 24 billion in 1993 to Lira 38 billion in
1994 primarily due to the increase in the tax on net equity of the holding
company.
FINANCIAL INCOME AND EXPENSES
OTHER FINANCIAL INCOME
Interest income on loans receivable include:
<TABLE>
<CAPTION>
1994 1993
------- -------
MILLIONS OF LIRA
<S> <C> <C>
Interests accrued on loans receivable from subsidiaries.... 1,128 --
Interests accrued on loans receivable from other debtors... 3,214 7,171
------- -------
4,342 7,171
====== ======
</TABLE>
F-115
<PAGE> 367
Interests on loans receivable from other debtors include interests accrued
until June 30, 1994 on loans provided by the Group to Interprogramme Holding SA
and to Weinveste BV.
MISCELLANEOUS INCOME INCLUDES:
<TABLE>
<CAPTION>
1994 1993
------- -------
MILLIONS OF LIRA
<S> <C> <C>
Interest accrued on bank deposits and other accounts
receivable............................................... 14,773 9,542
Foreign exchange gains..................................... 5,571 1,068
------- -------
20,344 10,610
====== ======
</TABLE>
INTEREST AND OTHER FINANCIAL EXPENSES
This item includes:
<TABLE>
<CAPTION>
1994 1993
------- -------
MILLIONS OF LIRA
<S> <C> <C>
Interest to parent companies............................... -- 5,777
====== ======
</TABLE>
Interest and other expenses towards others:
<TABLE>
<S> <C> <C>
- Interest on short term bank borrowings and other
interests............................................... 56,980 126,732
- Interest on medium and long term bank borrowing......... 13,928 17,680
- Interest due to bond holders............................ 5,216 5,217
- Foreign exchange losses................................. 1,430 8,966
- Provision for foreign exchange fluctuation.............. 1,583 2,893
------- --------
79,137 161,488
====== =======
</TABLE>
ADJUSTMENTS TO THE VALUE OF FINANCIAL ASSETS
WRITE-DOWNS
Total write-downs include the following:
<TABLE>
<CAPTION>
1994 1993
------- ------
MILLIONS OF LIRA
<S> <C> <C>
Write-downs in investments in subsidiaries.................. 695 123
Write-downs in investments in other enterprises............. 1,220 --
Write-downs in long-term financial assets................... 40,456 6,098
------- ------
42,371 6,221
====== =====
</TABLE>
The write-downs in long-term financial assets for the year 1994 include the
following:
- The loss of Lira 34,860 million on loans provided to a former related
company and a third party relating to the investment in Lampsa SA; such
investment has been received by the Group in exchange for the loans owing
from the said parties.
- A provision of Lira 3,240 million made in the first half of 1994 against
the loans provided by the Ciga Group as disclosed above.
- A further provision of Lira 2,356 million made against loans to companies
in liquidation held by Resort Development and Finance Corporation BV.
EXTRAORDINARY GAINS AND LOSSES
Extraordinary gains include:
- Gains on sale of assets for Lira 1,228 million, relating primarily to the
sale of "Villa Morosini" in Venice Lido. The gain on sale of the
"Residence Palazzo del Giglio" of Lira 9,602 million, has been
F-116
<PAGE> 368
accounted for net of Lira 1,369 million, which is the adjustment to the
receivable to record it at its discounted value because of the long-term
payment schedule specified in the contract.
- Other income include primarily incomes relating to previous years.
Extraordinary losses include:
- Losses on sale of assets
- Extraordinary accruals for contingent liabilities and charges including:
(a) a provision of Lira 50,000 million for standing uncertainties
relating to the development project in Costa Smeralda;
(b) a provision of Lira 26,462 million, of which Lira 1,800 million
was utilized before December 31, 1994. This provision relates to
contingent liabilities estimated for the reorganization of some of the
Group's companies;
(c) an accrual of Lira 21,800 million to the Reserve for
restructuring costs of two Italian hotels;
(d) a provision of Lira 8,000 million for costs from other
potential charges in hotel operation.
- Other losses include costs and taxes related to previous years.
RECONCILIATION OF SHAREHOLDERS' EQUITY AND RESULTS OF OPERATIONS FROM CIGA SPA'S
STATUTORY FINANCIAL STATEMENTS TO THE CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SHAREHOLDERS' LOSS FOR
EQUITY THE YEAR
------------- --------
MILLIONS OF LIRA
<S> <C> <C>
Balance per CIGA SpA's in statutory financial statements as of
December 31, 1994.................................................. 849,634 (234,157)
Goodwill arising from the acquisition of foreign companies which are
charged directly to shareholders' equity, net of accumulated
amortization....................................................... (28,980) 5,198
The value of "Ciga" trademark used by foreign affiliated companies
which is eliminated in the consolidated financial statements, net
of accumulated amortization........................................ (12,500) 2,500
Further differences between the value of shareholders' equity of
subsidiaries reported for consolidation purposes and the value in
the subsidiaries' financial statements............................. 27,656(*) 2,232
------------- --------
Balance per consolidated financial statements as of December 31,
1994............................................................... 835,810 (224,227)
========== ========
</TABLE>
- ---------------
(*) relates primarily to the revaluation of fixed assets permitted by law in
1990.
EXPLANATORY ADDED FOR TRANSLATION INTO ENGLISH
The consolidated financial statements have been translated into English
from the original Italian version. The statements have been prepared following
accounting principles which are acceptable in Italy but which may differ in
certain respects from the accounting principles adopted in other countries.
F-117
<PAGE> 369
RECONCILIATION OF SHAREHOLDERS' EQUITY AND NET INCOME/(LOSS) OF THE YEAR
TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE UNITED
STATES OF AMERICA (UNAUDITED)
(AMOUNTS IN BILLIONS OF LIRE)
The consolidated financial statements of the Ciga Group are prepared in
accordance with the accounting principles and practices generally accepted in
Italy, which differ in certain respects from the accounting principles generally
accepted in the United States of America (US GAAP).
The more significant adjustments necessary to adhere to US GAAP for the
Ciga Group standing alone are the following:
<TABLE>
<CAPTION>
1993 1994
------------------------------ ------------------------------
SHAREHOLDERS' SHAREHOLDERS'
EQUITY OF EQUITY OF
NET THE GROUP NET THE GROUP
INCOME/(LOSS) AT 31 DECEMBER INCOME/(LOSS) AT 31 DECEMBER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
As per local GAAP......................... (200.1) 53.4 (224.2) 835.8
(A) Elimination of revaluation of fixed
assets and related depreciation....... 2.5 (163.9) 3.2 (160.7)
(B) Elimination of assets write-up on
spin-off net of related
depreciation.......................... 2.8 (135.4) 4.4 (131.0)
(C) Goodwill adjustment................... (5.2) 28.5 (5.2) 23.3
(D) Write-off of intangible assets
Start-up and share issuance costs.... 1.3 (1.7) 3.0 (8.9)
----- ----- ----- -----
As per US GAAP............................ (198.7) (219.1) (218.8) 558.5
===== ===== ===== =====
</TABLE>
COMMENTS ON THE ABOVE DIFFERENCES BETWEEN THE CIGA GROUP'S ACCOUNTING POLICIES
AND US GAAP
(A) ELIMINATION OF REVALUATION OF FIXED ASSETS
Ciga Group revalued certain properties, plant and equipment to amounts in
excess of historical cost, as permitted by law (law 72/83). Revaluations were
added to shareholders' equity and the revalued assets are depreciated over their
remaining useful life. Moreover, in 1991, Italian legislation (law 413/91)
introduced the obligatory revaluation of industrial and civil land and buildings
using coefficients as set forth by the law.
The depreciation expense on such revaluations is tax deductible.
US GAAP does not permit the revaluation of fixed assets.
(B) ELIMINATION OF ASSETS WRITE UP ON SPIN OFF
It relates to the write-up of assets (mainly buildings) resulting from the
spin off which occurred in 1981 when the parent company transferred certain
properties and equipments to its new formed Italian subsidiaries.
(C) GOODWILL ADJUSTMENT
It relates to the goodwill paid on acquisitions prior to 1991 which have
been written off directly against Ciga Group's equity as, at that time,
permitted by local GAAP.
The current Ciga Group's accounting policy states the amortization on a
straight line basis over a period of ten years, a policy which is also in
conformity with US GAAP.
(D) WRITE-OFF OF INTANGIBLE ASSETS
This write-off concerns primarily incorporation costs and costs relating to
increase in share capital which under Italian legislation can be deferred and
amortized over five years and under US GAAP would be expensed as incurred or
deducted directly from the capital increase funds provided.
(E) TAX EFFECT ON DEFERRED TAXES
No adjustment is recognized for the tax effects on the above adjustments,
other than temporary differences and on the significant prior years losses
carried forward as it would result in a net deferred tax asset to be offset by a
corresponding tax allowance.
F-118
<PAGE> 370
ITT INDUSTRIES, INC.
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.
S-1
<PAGE> 371
ITT DESTINATIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
MILLIONS OF DOLLARS
<TABLE>
<CAPTION>
ADDITIONS (DEDUCTIONS)
--------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATION PAYMENTS/ BALANCE
JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
DESCRIPTION
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for
doubtful accounts....................... $ 38 $ 31 $ 3 $ (17) $ 55
Notes Receivable -- Allowance for doubtful
accounts................................ 76 6 -- (4) 78
Accumulated depreciation of plant,
property and equipment.................. 353 99 -- 29(2) 481
YEAR ENDED DECEMBER 31, 1993
Trade Receivables -- Allowance for
doubtful accounts....................... $ 52 $ 21 $ (3) $ (32) $ 38
Notes Receivable -- Allowance for doubtful
accounts................................ 72 5 -- (1) 76
Accumulated depreciation of plant,
property and equipment.................. 323 79 (10) (39)(1) 353
YEAR ENDED DECEMBER 31, 1992
Trade Receivables -- Allowance for
doubtful accounts....................... $ 56 $ 29 $ (3) $ (30) $ 52
Notes Receivable -- Allowance for doubtful
accounts................................ 37 36 -- (1) 72
Accumulated depreciation of plant,
property and equipment.................. 277 77 (6) (25)(1) 323
</TABLE>
- ---------------
(1) Principally retirements as well as companies sold during the year.
(2) Primarily reflects the consolidation of properties previously accounted for
on the equity method.
S-2
<PAGE> 372
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
MILLIONS OF DOLLARS
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS, OTHER
UNPAID POLICY AMORTIZATION
DEFERRED CLAIMS AND CLAIMS OF DEFERRED
POLICY CLAIM AND NET POLICY
ACQUISITION ADJUSTMENT UNEARNED BENEFITS INSURANCE INVESTMENT ACQUISITION PREMIUMS
COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME(1) COSTS WRITTEN
----------- ----------- --------- -------- --------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Property and Casualty..... $ 608 $17,435 $ 2,680 $ -- $ 6,580 $ 913 $ 1,353 $6,739
Life and Health........... 1,917 3,152 45 22,308 2,173 1,436 274 --
----------- ----------- --------- -------- --------- ---------- ------ -------
$ 2,525 $20,587 $ 2,725 $ 22,308 $ 8,753 $2,349 $ 1,627 $6,739
========== ============ ========== ======= ======== ========= ============= ========
YEAR ENDED DECEMBER 31, 1993
Property and Casualty..... $ 593 $17,284 $ 2,493 $ -- $ 6,338 $ 990 $ 1,300 $6,448
Life and Health........... 1,431 2,699 44 18,364 1,812 1,198 347 --
----------- ----------- --------- -------- --------- ---------- ------ -------
$ 2,024 $19,983 $ 2,537 $ 18,364 $ 8,150 $2,188 $ 1,647 $6,448
========== ============ ========== ======= ======== ========= ============= ========
YEAR ENDED DECEMBER 31, 1992
Property and Casualty..... $ 572 $17,418 $ 2,409 $ -- $ 6,094 $1,352 $ 1,269 $5,974
Life and Health........... 910 2,721 42 15,115 1,340 1,076 161 --
----------- ----------- --------- -------- --------- ---------- ------ -------
$ 1,482 $20,139 $ 2,451 $ 15,115 $ 7,434 $2,428 $ 1,430 $5,974
========== ============ ========== ======= ======== ========= ============= ========
</TABLE>
- ---------------
(1) Net investment income is allocated based on property and casualty and life
and health's share of investable funds.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND
CASUALTY INSURANCE OPERATIONS
MILLIONS OF DOLLARS
<TABLE>
<CAPTION>
CLAIMS AND CLAIM
ADJUSTMENT EXPENSE
INCURRED RELATED TO: PAID CLAIMS
DISCOUNT -------------------- & CLAIM
DEDUCTED FROM CURRENT PRIOR ADJUSTMENT
YEARS ENDED DECEMBER 31, LIABILITIES(1) YEARS YEARS EXPENSES
--------------------------------------- -------------- ------- ------ -----------
<S> <C> <C> <C> <C>
1994................................... $432 $ 4,841 $ 55 $ 4,723
1993................................... $362 $ 4,611 $ 248 $ 4,662
1992................................... $325 $ 4,822 $1,406 $ 4,806
</TABLE>
- ---------------
(1) Reserves for permanently disabled claimants, terminated reinsurance treaties
and certain reinsurance contracts have been discounted using the rate of
return the Company could receive on risk-free investments of 8.1% for 1994,
and using interest rates ranging from 3% to 6% and 3% to 14% for 1993 and
1992, respectively.
S-3
<PAGE> 373
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
REINSURANCE
MILLIONS OF DOLLARS
<TABLE>
<CAPTION>
PERCENTAGE
OF
CEDED TO ASSUMED EARNED AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Life insurance in force.................... $246,138 $66,709 $ 33,090 $212,519 16%
======== ======= ======= ========
Premiums
Property and casualty insurance......... $ 6,717 $ 883 $ 746 $ 6,580 11%
Life insurance.......................... 1,422 151 197 1,468 13%
Accident and health insurance........... 631 65 139 705 20%
-------- ------- ------- --------
Total premiums..................... $ 8,770 $ 1,099 $ 1,082 $ 8,753 12%
======== ======= ======= ========
YEAR ENDED DECEMBER 31, 1993
Life insurance in force.................... $182,784 $54,106 $ 13,934 $142,612 10%
======== ======= ======= ========
Premiums
Property and casualty insurance......... $ 6,597 $ 994 $ 735 $ 6,338 12%
Life insurance.......................... 1,146 147 102 1,101 9%
Accident and health insurance........... 643 55 123 711 17%
-------- ------- ------- --------
Total premiums..................... $ 8,386 $ 1,196 $ 960 $ 8,150 12%
======== ======= ======= ========
YEAR ENDED DECEMBER 31, 1992
Life insurance in force.................... $126,447 $48,723 $ 45,142 $122,866 37%
======== ======= ======= ========
Premiums
Property and casualty insurance......... $ 6,477 $ 1,188 $ 805 $ 6,094 13%
Life insurance.......................... 690 61 27 656 4%
Accident and health insurance........... 573 25 136 684 20%
-------- ------- ------- --------
Total premiums..................... $ 7,740 $ 1,274 $ 968 $ 7,434 13%
======== ======= ======= ========
</TABLE>
S-4
<PAGE> 374
ANNEX A
AGREEMENT AND PLAN OF MERGER BETWEEN ITT AND ITT INDIANA
AGREEMENT AND PLAN OF MERGER dated as of August , 1995, between ITT
CORPORATION, a Delaware corporation ("ITT"), and ITT INDIANA, INC., an Indiana
corporation and a wholly owned subsidiary of ITT ("ITT Indiana").
WHEREAS ITT has authorized capital stock consisting of (a) 200,000,000
shares of Common Stock, par value $1 per share ("ITT Common Stock"), of which
shares were issued and outstanding and shares were held in the
treasury of ITT as of August , 1995, and (b) 50,000,000 shares of Preferred
Stock, without par value, of which none are issued and outstanding;
WHEREAS ITT Indiana has authorized capital stock consisting of (a)
200,000,000 shares of Common Stock, par value $1 per share ("ITT Indiana Common
Stock" and after the Effective Time of the Merger, as defined below, "Surviving
Corporation Common Stock"), of which shares are issued and outstanding and
held by ITT, and (b) 50,000,000 shares of Preferred Stock, without par value, of
which none are issued and outstanding; and
WHEREAS ITT and ITT Indiana desire that ITT merge with and into ITT Indiana
and that ITT Indiana shall continue as the surviving corporation in such merger,
upon the terms and subject to the conditions herein set forth and in accordance
with the laws of the State of Delaware and the laws of the State of Indiana.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
MERGER
SECTION 1.01. Merger. Subject to the terms and conditions of this
Agreement, ITT shall be merged (the "Merger") with and into ITT Indiana in
accordance with the General Corporation Law of the State of Delaware (the
"DGCL") and the Business Corporation Law of the State of Indiana (the "IBCL"),
the separate existence of ITT shall cease and ITT Indiana shall be the surviving
corporation (hereinafter sometimes referred to as the "Surviving Corporation")
and continue its corporate existence under the laws of the State of Indiana. The
Surviving Corporation shall succeed, insofar as permitted by law, to all the
rights, assets, liabilities and obligations of ITT (including, without
limitation, as contemplated by Article IV).
SECTION 1.02. Effective Time of the Merger. The Merger shall become
effective as of the date and time (the "Effective Time of the Merger") the
following actions are completed: (a) this Agreement or an appropriate
certificate of merger is filed with the Secretary of State of the State of
Delaware in accordance with the DGCL and (b) appropriate articles of merger are
filed with the Secretary of State of the State of Indiana in accordance with the
IBCL.
SECTION 1.03. Further Assurances. From time to time, as and when required
by the Surviving Corporation or by its successors or assigns, there shall be
executed and delivered on behalf of ITT such deeds and other instruments, and
there shall be taken or caused to be taken by it all such further and other
action, as shall be appropriate, advisable or necessary in order to vest,
perfect or confirm, of record or otherwise, in the Surviving Corporation the
title to and possession of all property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of ITT, and otherwise to carry out
the purpose of this Agreement, and the officers and directors of the Surviving
Corporation are fully authorized in the name and on behalf of ITT or otherwise,
to take any and all such action and to execute and deliver any and all such
deeds and other instruments.
A-1
<PAGE> 375
ARTICLE II
NAME, ARTICLES OF INCORPORATION,
BY-LAWS, DIRECTORS AND
OFFICERS OF THE SURVIVING CORPORATION
SECTION 2.01. Name of Surviving Corporation. The name of the Surviving
Corporation shall be ITT Industries, Inc.
SECTION 2.02. Articles of Incorporation. At the Effective Time of the
Merger, Article First of the Articles of Incorporation of ITT Indiana shall be
amended to read in its entirety as follows:
The name of the corporation is ITT Industries, Inc.
The Articles of Incorporation of ITT Indiana in effect immediately prior to
the Effective Time of the Merger, as so amended, shall be the Articles of
Incorporation of the Surviving Corporation after the Effective Time of the
Merger until further amended thereafter as provided therein or by law.
SECTION 2.03. By-laws. The By-laws of ITT Indiana in effect at the
Effective Time of the Merger shall be the By-laws of the Surviving Corporation
after the Effective Time of the Merger until amended thereafter as provided
therein or by law.
SECTION 2.04. Directors and Officers. The directors and officers of ITT
at the Effective Time of the Merger shall continue to be the directors and
officers, respectively, of the Surviving Corporation after the Effective Time of
the Merger until expiration of their current terms as such, or prior
resignation, removal or death, subject to the Articles of Incorporation and
By-laws of the Surviving Corporation.
ARTICLE III
CONVERSION AND EXCHANGE OF STOCK
SECTION 3.01. Conversion. At the Effective Time of the Merger, each of
the following transactions shall be deemed to occur simultaneously:
(a) Each share of ITT Common Stock issued and outstanding or held in
the treasury of ITT immediately prior to the Effective Time of the Merger
shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and become one validly issued, fully paid
and nonassessable share of Surviving Corporation Common Stock.
(b) Each share of ITT Indiana Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger and held by ITT shall
be cancelled without any consideration being issued or paid therefor.
SECTION 3.02. Exchange. (a) After the Effective Time of the Merger, each
certificate theretofore representing issued and outstanding shares of ITT Common
Stock shall represent the same number of shares of Surviving Corporation Common
Stock.
(b) At any time on or after the Effective Time of the Merger, any holder of
certificates theretofore evidencing ownership of shares of ITT Common Stock will
be entitled, upon surrender of such certificates to the transfer agent of the
Surviving Corporation, to receive in exchange therefor one or more new stock
certificates evidencing ownership of the number of shares of Surviving
Corporation Common Stock into which the ITT Common Stock shall have been
converted in the Merger. If any certificate representing shares of Surviving
Corporation Common Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it shall be a
condition of the issuance therefor that the certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange shall pay to the transfer agent any transfer or other
taxes required by reason of the issuance of a certificate representing shares of
Surviving Corporation Common Stock in any name other than that of the registered
holder of the certificate surrendered, or otherwise required, or shall establish
to the satisfaction of the transfer agent that such tax has been paid or is not
payable.
A-2
<PAGE> 376
(c) As soon as reasonably practicable after the Effective Time of the
Merger, the transfer agent for Surviving Corporation shall mail to each holder
of record of a certificate or certificates of Surviving Corporation Common Stock
(i) a letter of transmittal (which shall be in such form as Surviving
Corporation may specify) and (ii) instructions for use in effecting an exchange
of certificates contemplated by paragraph (b) of this Section 3.02 and the
distribution of certificates contemplated by the distribution by ITT of shares
of common stock of ITT Destinations, Inc. and ITT Hartford Group, Inc. to
shareholders of ITT.
(d) Fractional Shares. Certificates or scrip representing fractional
shares of Surviving Corporation Common Stock shall be issued upon the surrender
for exchange of Certificates to the extent necessary.
ARTICLE IV
EMPLOYEE STOCK, EMPLOYEE BENEFIT, INCENTIVE COMPENSATION
AND DIVIDEND REINVESTMENT PLANS
At the Effective Time of the Merger, each employee stock plan, employee
benefit plan, incentive compensation plan and dividend reinvestment plan to
which ITT is then a party shall be assumed by, and continue to be the plan of,
the Surviving Corporation. To the extent any employee stock plan, employee
benefit plan, incentive compensation plan or dividend reinvestment plan of ITT
or any of its subsidiaries provides for the issuance or purchase of, or
otherwise relates to, ITT Common Stock, after the Effective Time of the Merger
such plan shall be deemed to provide for the issuance or purchase of, or
otherwise relate to, Surviving Corporation Common Stock.
ARTICLE V
CONDITIONS
Consummation of the Merger is subject to the satisfaction at or prior to
the Effective Time of the Merger of the following conditions:
SECTION 5.01. Stockholder Approval. This Agreement and the Merger shall
have been adopted and approved by the vote of the majority of the shares of ITT
Common Stock outstanding on the record date fixed for determining the
stockholders of ITT entitled to vote thereon. This Agreement and the Merger
shall also have been adopted and approved by ITT as the holder of all the
outstanding shares of ITT Indiana Common Stock prior to the Effective Time of
the Merger.
SECTION 5.02. Listing. The shares of Surviving Corporation Common Stock
to be issued in the Merger, or reserved for issuance immediately after the
Effective Time of the Merger, shall have been approved for listing, subject to
official notice of issuance, by the NYSE.
SECTION 5.03. Distribution. The distribution by ITT of all the
outstanding shares of common stock of (a) ITT Destinations, Inc., and (b) ITT
Hartford Group, Inc., each wholly owned subsidiaries of ITT, shall have
occurred.
SECTION 5.04. Tax Opinion. ITT shall have received an opinion from its
legal counsel, with respect to the tax consequences of the Merger, in form and
substance satisfactory to ITT.
ARTICLE VI
APPOINTMENT OF AGENT FOR SERVICE OF PROCESS
Pursuant to Section 252(d) of the DGCL, the Surviving Corporation
irrevocably appoints the Secretary of State of Delaware to accept service of
process in any proceeding for enforcement of any obligation of ITT, as well as
for enforcement of any obligation of the Surviving Corporation arising from the
Merger. The Delaware Secretary of State shall mail a copy of such process to ITT
Industries c/o ITT Automotive, Inc. 3000 University Drive, Auburn Hills,
Michigan 48326.
A-3
<PAGE> 377
ARTICLE VII
GENERAL
SECTION 7.01. Termination and Abandonment. At any time prior to the
consummation of the Merger, this Agreement may be terminated and the Merger
abandoned by the Board of Directors of ITT.
SECTION 7.02. Amendment. This Agreement may be amended at any time prior
to the Effective Time of the Merger with the mutual consent of the Boards of
Directors of ITT and ITT Indiana; provided, however, that this Agreement may not
be amended after it has been adopted by the stockholders of ITT in any manner
not permitted under applicable law.
SECTION 7.03. Headings. The headings set forth herein are inserted for
convenience of reference only and are not intended to be part of, or to affect
the meaning or interpretation of, this Agreement.
SECTION 7.04. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, and all of which, when
taken together, shall constitute one and the same instrument.
SECTION 7.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, except to the
extent the laws of the State of Indiana shall mandatorily apply to the Merger.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf and attested by its officers hereunto duly authorized,
all as of the day and year first above written.
ITT CORPORATION,
by
------------------------------------
Name:
Title:
Attest:
- ---------------------------------------------------------
Name:
Title: Secretary
ITT INDIANA, INC.,
by
------------------------------------
Name:
Title:
Attest:
- ---------------------------------------------------------
Name:
Title: Secretary
A-4
<PAGE> 378
CERTIFICATES
The undersigned, Secretary of ITT CORPORATION, a Delaware corporation,
hereby certifies, pursuant to Section 252(c) of the General Corporation Law of
the State of Delaware, that the foregoing Agreement and Plan of Merger to which
this Certificate is attached, after having been first duly signed on behalf of
ITT CORPORATION by its and attested to by its Secretary, was duly
submitted to the stockholders of ITT CORPORATION at a meeting thereof called for
the purpose of considering and acting upon said Agreement and Plan of Merger,
held after due notice on , 1995, and at said meeting said Agreement and
Plan of Merger was adopted by the stockholders of ITT CORPORATION in accordance
with the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has executed this Certificate on the
day of , 1995.
--------------------------------------
Secretary
The undersigned, Secretary of ITT INDIANA, INC., an Indiana corporation,
hereby certifies, pursuant to Section 252(c) of the General Corporation Law of
the State of Delaware, that the foregoing Agreement and Plan of Merger to which
this Certificate is attached, after having been first duly signed on behalf of
ITT INDIANA, INC. by its and attested to by its Secretary, was
duly submitted to the sole stockholder of ITT INDIANA, INC. at a meeting thereof
called for the purpose of considering and acting upon said Agreement and Plan of
Merger, held on , 1995, and that at said meeting said Agreement and
Plan of Merger was adopted by the sole stockholder of ITT INDIANA, INC. in
accordance with the Business Corporation Law of the State of Indiana.
IN WITNESS WHEREOF, the undersigned has executed this Certificate on the
day of , 1995.
--------------------------------------
Secretary
A-5
<PAGE> 379
ANNEX B
ARTICLES OF INCORPORATION
OF
ITT INDIANA, INC.
The undersigned, for the purpose of forming a corporation, pursuant to and
by virtue of the Indiana Business Corporation Law, hereby adopts and
acknowledges the following Articles of Incorporation.
ARTICLE FIRST
The name of the corporation is ITT Indiana, Inc. (the "Corporation").
ARTICLE SECOND
The address of the registered office of the Corporation in the State of
Indiana is One North Capitol Avenue, Suite 1180, Indianapolis, Indiana 46204.
The name of the registered agent of the Corporation at such address is The
Corporation Trust Company.
ARTICLE THIRD
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Indiana Business Corporation
Law.
ARTICLE FOURTH
(a) The aggregate number of shares of stock that the Corporation shall have
authority to issue is 250,000,000 shares, consisting of 200,000,000 shares
designated "Common Stock" and 50,000,000 shares designated "Preferred Stock".
The shares of Common Stock shall have a par value of $1 per share, and the
shares of Preferred Stock shall not have any par or stated value, except that,
solely for the purpose of any statute or regulation imposing any fee or tax
based upon the capitalization of the Corporation, the shares of Preferred Stock
shall be deemed to have a par value of $.01 per share.
(b) The Board of Directors of the Corporation shall have the full authority
permitted by law, at any time and from time to time, to divide the authorized
and unissued shares of Preferred Stock into classes or series, or both, and to
determine the following provisions, designations, powers, preferences and
relative, participating, optional and other special rights and the
qualifications, limitations or restrictions thereof for shares of any such class
or series of Preferred Stock:
(1) the designation of such class or series, the number of shares to
constitute such class or series and the stated or liquidation value
thereof;
(2) whether the shares of such class or series shall have voting
rights, in addition to any voting rights provided by law, and, if so, the
terms of such voting rights;
(3) the dividends, if any, payable on such class or series, whether
any such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of
the same class;
(4) whether the shares of such class or series shall be subject to
redemption at the election of the Corporation and/or the holders of such
class or series and, if so, the times, price and other conditions of such
redemption, including securities or other property payable upon any such
redemption, if any;
B-1
<PAGE> 380
(5) the amount or amounts, if any, payable upon shares of such class
or series upon, and the rights of the holders of such class or series in,
the voluntary or involuntary liquidation, dissolution or winding up, or any
distribution of the assets, of the Corporation; provided that in no event
shall the amount or amounts, if any, exceed $100 per share plus accrued
dividends in the case of involuntary liquidation, dissolution or winding
up;
(6) whether the shares of such class or series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such class or series for retirement
or other corporate purposes and the terms and provisions relative to the
operation thereof;
(7) whether the shares of such class or series shall be convertible
into, or exchangeable for, shares of stock of any other class or any other
series of the same class or any securities, whether or not issued by the
Corporation, and, if so, the price or prices or the rate or rates of
conversion or exchange and the method, if any, of adjusting the same, and
any other terms and conditions of conversion or exchange;
(8) the limitations and restrictions, if any, to be effective while
any shares of such class or series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, the Common Stock or
shares of stock of any other class or any other series of the same class;
(9) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional shares
of stock, including additional shares of such class or series or of any
other series of the same class or of any other class;
(10) the ranking (be it pari passu, junior or senior) of each class or
series vis-a-vis any other class or series of any class of Preferred Stock
as to the payment of dividends, the distribution of assets and all other
matters; and
(11) any other powers, preferences and relative, participating,
optional and other special rights and any qualifications, limitations or
restrictions thereof, insofar as they are not inconsistent with the
provisions of these Articles of Incorporation, to the full extent permitted
in accordance with the laws of the State of Indiana.
(c) Such divisions and determinations may be accomplished by an amendment
to this ARTICLE FOURTH, which amendment may be made solely by action of the
Board of Directors, which shall have the full authority permitted by law to make
such divisions and determinations.
(d) The powers, preferences and relative, participating, optional and other
special rights of each class or series of Preferred Stock and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other classes or series at any time outstanding; provided
that each series of a class is given a distinguishing designation and that all
shares of a series have powers, preferences and relative, participating,
optional and other special rights and the qualifications, limitations or
restrictions thereof identical with those of other shares of the same series
and, except to the extent otherwise provided in the description of the series,
with those other series of the same class.
(e) Holders of shares of Preferred Stock shall be entitled to receive, when
and as declared by the Board of Directors, out of funds legally available for
the payment thereof, dividends at the rates fixed by the Board of Directors for
the respective series before any dividends shall be declared and paid, or set
aside for payment, on shares of Common Stock with respect to the same dividend
period. Nothing in this ARTICLE FOURTH shall limit the power of the Board of
Directors to create a series of Preferred Stock with dividends the rate of which
is calculated by reference to, and the payment of which is concurrent with,
dividends on shares of Common Stock.
(f) In the event of the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, holders of shares of each series of Preferred
Stock will be entitled to receive the amount fixed for such series upon any such
event (not in excess of $100 per share in the case of involuntary liquidation,
dissolution or winding up) plus, in the case of any series on which dividends
will have been determined by the Board of
B-2
<PAGE> 381
Directors to be cumulative, an amount equal to all dividends accumulated and
unpaid thereon to the date of final distribution whether or not earned or
declared before any distribution shall be paid, or set aside for payment, to
holders of Common Stock. If the assets of the Corporation are not sufficient to
pay such amounts in full, holders of all shares of Preferred Stock will
participate in the distribution of assets ratably in proportion to the full
amounts to which they are entitled or in such order or priority, if any, as will
have been fixed in the resolution or resolutions providing for the issue of the
series of Preferred Stock. Neither the merger nor consolidation of the
Corporation into or with any other corporation, nor a sale, transfer or lease of
all or part of its assets, will be deemed a liquidation, dissolution or winding
up of the Corporation within the meaning of this paragraph except to the extent
specifically provided for herein. Nothing in this ARTICLE FOURTH shall limit the
power of the Board of Directors to create a series of Preferred Stock for which
the amount to be distributed upon any liquidation, dissolution or winding up of
the Corporation is calculated by reference to, and the payment of which is
concurrent with, the amount to be distributed to the holders of shares of Common
Stock.
(g) The Corporation, at the option of the Board of Directors, may redeem
all or part of the shares of any series of Preferred Stock on the terms and
conditions fixed for such series.
(h) Except as otherwise required by law, as otherwise provided herein or as
otherwise determined by the Board of Directors as to the shares of any series of
Preferred Stock prior to the issuance of any such shares, the holders of
Preferred Stock shall have no voting rights and shall not be entitled to any
notice of meetings of shareholders.
(i) Each holder of shares of Common Stock shall be entitled to one vote for
each share of Common Stock held of record on all matters on which the holders of
shares of Common Stock are entitled to vote. Subject to the provisions of
applicable law and any certificate of designation providing for the issuance of
any series of Preferred Stock, the holders of outstanding shares of Common Stock
shall have and possess the exclusive right to notice of shareholders' meetings
and the exclusive power to vote. No shareholder will be permitted to cumulate
votes at any election of directors.
(j) Subject to all the rights of the Preferred Stock, the holders of the
Common Stock shall be entitled to receive, when, as and if declared by the Board
of Directors, out of funds legally available for the payment thereof, dividends
payable in cash, stock or otherwise. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, and after the
holders of the Preferred Stock of each series shall have been paid in full in
cash the amounts to which they respectively shall be entitled or a sum
sufficient for such payment in full shall have been set aside, the remaining net
assets of the Corporation shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and interests, to the
exclusion of the holders of the Preferred Stock.
ARTICLE FIFTH
(a) Special meetings of shareholders of the Corporation may be called only
by the Chairman of the Board of Directors or by a majority vote of the entire
Board of Directors.
(b) Shareholders of the Corporation shall not have any preemptive rights to
subscribe for additional issues of stock of the Corporation except as may be
agreed from time to time by the Corporation and any such shareholder.
(c) Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation, if any, shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of shareholders, an election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
terms of the applicable resolution or resolutions of the Board of Directors
adopted pursuant to ARTICLE FOURTH of these Articles of Incorporation.
B-3
<PAGE> 382
ARTICLE SIXTH
To the fullest extent permitted by applicable law as then in effect, no
director or officer shall be personally liable to the Corporation or any of its
shareholders for damages for breach of fiduciary duty as a director or officer,
except for liability (a) for breach of duty if such breach constitutes wilful
misconduct or recklessness or (b) for the payment of distributions to
shareholders in violation of Section 23-1-28-3 of the Indiana Business
Corporation Law. Any repeal or modification of this ARTICLE SIXTH by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director or officer of the Corporation existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
ARTICLE SEVENTH
The holders of the capital stock of the Corporation shall not be personally
liable for the payment of the Corporation's debts and the private property of
the holders of the capital stock of the Corporation shall not be subject to the
payment of debts of the Corporation to any extent whatsoever.
ARTICLE EIGHTH
Subject to any express provision of the laws of the State of Indiana, these
Articles of Incorporation or the By-laws of the Corporation, the By-laws of the
Corporation may from time to time be supplemented, amended or repealed, or new
By-laws may be adopted, by the Board of Directors at any regular or special
meeting of the Board of Directors, if such supplement, amendment, repeal or
adoption is approved by a majority of the entire Board of Directors. Subject to
any express provision of the laws of the State of Indiana, these Articles of
Incorporation or the By-laws of the Corporation, the By-laws of the Corporation
may from time to time be supplemented, amended or repealed, or new By-laws may
be adopted, by the shareholders at any regular or special meeting of the
shareholders at which a quorum is present, if such supplement, amendment, repeal
or adoption is approved by the affirmative vote of the holders of at least a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in an election of directors.
ARTICLE NINTH
The Corporation reserves the right to supplement, amend or repeal any
provision contained in these Articles of Incorporation, in the manner now or
hereafter prescribed by the laws of the State of Indiana, and all rights
conferred on shareholders herein are granted subject to this reservation.
ARTICLE TENTH
The name and address of the incorporator signing these Articles of
Incorporation is:
<TABLE>
<CAPTION>
NAME ADDRESS
---------------------------------------- ----------------------------------------
<S> <C>
</TABLE>
IN WITNESS WHEREOF, I have executed these Articles of Incorporation this
day of , 1995.
--------------------------------------
Name:
Title:
B-4
<PAGE> 383
ANNEX C
BY-LAWS
OF
ITT INDIANA, INC.
(AN INDIANA CORPORATION, THE "CORPORATION")
(ADOPTED , 1995)
1. SHAREHOLDERS.
1.1 Place of Shareholders' Meetings. All meetings of the shareholders of
the Corporation shall be held at such place or places, within or outside the
state of Indiana, as may be fixed by the Corporation's Board of Directors (the
"Board", and each member thereof a "Director") from time to time or as shall be
specified in the respective notices thereof.
1.2 Day and Time of Annual Meetings of Shareholders. An annual meeting of
shareholders shall be held at such place (within or outside the state of
Indiana), date and hour as shall be determined by the Board and designated in
the notice thereof.
1.3 Purposes of Annual Meetings. (a) At each annual meeting, the
shareholders shall elect the members of the Board for the succeeding year. At
any such annual meeting any business properly brought before the meeting may be
transacted.
(b) To be properly brought before an annual meeting, business must be
(i) specified in the notice of the meeting (or any supplement thereto) given by
or at the direction of the Board, (ii) otherwise properly brought before the
meeting by or at the direction of the Board or (iii) otherwise properly brought
before the meeting by a shareholder. For business to be properly brought before
an annual meeting by a shareholder, the shareholder must have given written
notice thereof, either by personal delivery or by United States mail, postage
prepaid, to the Secretary, not later than 90 days in advance of the anniversary
date of the immediately preceding annual meeting (or not more than ten days
after the first public disclosure, which may include any public filing with the
Securities and Exchange Commission, of the Originally Scheduled Date of the
annual meeting, whichever is earlier). Any such notice shall set forth as to
each matter the shareholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting and in the event that
such business includes a proposal to amend either the Articles of Incorporation
or By-laws of the Corporation, the language of the proposed amendment, (ii) the
name and address of the shareholder proposing such business, (iii) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to propose such business, and (iv) any material interest
of the shareholder in such business. No business shall be conducted at an annual
meeting of shareholders except in accordance with this Section 1.3(b), and the
chairman of any annual meeting of shareholders may refuse to permit any business
to be brought before an annual meeting without compliance with the foregoing
procedures. For purposes of this Section 1.3(b), the "Originally Scheduled Date"
of any meeting of shareholders shall be the date first publicly disclosed on
which such meeting is scheduled to occur regardless of whether such meeting is
continued or adjourned and regardless of whether any subsequent notice is given
for such meeting or the record date of such meeting is changed.
1.4 Special Meetings of Shareholders. Except as otherwise expressly
required by applicable law, special meetings of the shareholders or of any class
or series entitled to vote may be called for any purpose or purposes by the
Chairman or by a majority vote of the entire Board, to be held at such place
(within or outside the state of Indiana), date and hour as shall be determined
by the Board and designated in the notice thereof. Only such business as is
specified in the notice of any special meeting of the shareholders shall come
before such meeting.
C-1
<PAGE> 384
1.5 Notice of Meetings of Shareholders. Except as otherwise expressly
required or permitted by applicable law, not less than ten days nor more than
sixty days before the date of every shareholders' meeting the Secretary shall
give to each shareholder of record entitled to vote at such meeting written
notice stating the place, day and time of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Except
as provided in Section 1.6(d) or as otherwise expressly required by applicable
law, notice of any adjourned meeting of shareholders need not be given if the
time and place thereof are announced at the meeting at which the adjournment is
taken. Any notice, if mailed, shall be deemed to be given when deposited in the
United States mail, postage prepaid, addressed to the shareholder at the address
for notices to such shareholder as it appears on the records of the Corporation.
1.6 Quorum of Shareholders. (a) Unless otherwise expressly required by
applicable law, at any meeting of the shareholders, the presence in person or by
proxy of shareholders entitled to cast a majority of votes thereat shall
constitute a quorum. Shares of the Corporation's stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in an election of the directors of such other corporation is held by the
Corporation, shall neither be counted for the purpose of determining the
presence of a quorum nor entitled to vote at any meeting of the shareholders.
(b) At any meeting of the shareholders at which a quorum shall be present,
a majority of those present in person or by proxy may adjourn the meeting from
time to time without notice other than announcement at the meeting. In the
absence of a quorum, the officer presiding thereat shall have power to adjourn
the meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting other than announcement at the meeting shall not be required
to be given, except as provided in Section 1.6(d) below and except where
expressly required by applicable law.
(c) At any adjourned meeting at which a quorum shall be present, any
business may be transacted which might have been transacted at the meeting
originally called, but only those shareholders entitled to vote at the meeting
as originally noticed shall be entitled to vote at any adjournment or
adjournments thereof unless a new record date is fixed by the Board.
(d) If an adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given in the manner specified in Section 1.5(a)
to each shareholder of record entitled to vote at the meeting.
1.7 Chairman and Secretary of Meeting. The Chairman or, in his or her
absence, another officer of the Corporation designated by the Chairman, shall
preside at meetings of the shareholders. The Secretary shall act as secretary of
the meeting, or in the absence of the Secretary, an Assistant Secretary shall so
act, or if neither is present, then the presiding officer may appoint a person
to act as secretary of the meeting.
1.8 Voting by Shareholders. (a) Except as otherwise expressly required by
applicable law, at every meeting of the shareholders each shareholder shall be
entitled to the number of votes specified in the Articles of Incorporation, in
person or by proxy, for each share of stock standing in his or her name on the
books of the Corporation on the date fixed pursuant to the provisions of Section
5.6 of these By-laws as the record date for the determination of the
shareholders who shall be entitled to receive notice of and to vote at such
meeting.
(b) When a quorum is present at any meeting of the shareholders, all
questions shall be decided by the vote of a majority in voting power of the
shareholders present in person or by proxy and entitled to vote at such meeting,
unless a question is one upon which by express provision of law, the Articles of
Incorporation or these By-laws, a different vote is required, in which case such
express provision shall govern and control the decision of such question.
(c) Except as required by applicable law, the vote at any meeting of
shareholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot, each ballot shall be signed by the
shareholder voting, or by his or her proxy, if there be such proxy, and shall
state the number of shares voted.
C-2
<PAGE> 385
1.9 Proxies. Any shareholder entitled to vote at any meeting of
shareholders may vote either in person or by his or her attorney-in-fact. Every
proxy shall be in writing and shall be subscribed by the shareholder or his or
her duly authorized attorney-in-fact, but need not be dated, sealed, witnessed
or acknowledged.
1.10 Inspectors. (a) The election of Directors and any other vote by
ballot at any meeting of the shareholders shall be supervised by at least two
inspectors. Such inspectors may be appointed by the Chairman before or at the
meeting. If the Chairman shall not have so appointed such inspectors or if one
or both inspectors so appointed shall refuse to serve or shall not be present,
such appointment shall be made by the officer presiding at the meeting. Each
inspector, before entering upon the discharge of his or her duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability.
(b) The inspectors shall (i) ascertain the number of shares of the
Corporation outstanding and the voting power of each, (ii) determine the shares
represented at any meeting of shareholders and the validity of the proxies and
ballots, (iii) count all proxies and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares represented at the meeting, and their count of all proxies and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors.
1.11 List of Shareholders. (a) At least ten days before every meeting of
shareholders, the Treasurer shall cause to be prepared and made a complete list
of the shareholders entitled to vote at the meeting, arranged in alphabetical
order by voting group, if any, and showing the address of each shareholder and
the number of shares registered in the name of each shareholder.
(b) During ordinary business hours for a period of at least ten days prior
to the meeting, such list shall be open to examination by any shareholder for
any purpose germane to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the Corporation's principal office.
(c) The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and it may be inspected by any
shareholder who is present.
(d) The stock ledger shall be the only evidence as to who are the
shareholders entitled to examine the stock ledger, the list required by this
Section 1.11 or the books of the Corporation, or to vote in person or by proxy
at any meeting of shareholders.
1.12 Confidential Voting. (a) Proxies and ballots that identify the votes
of specific shareholders shall be kept in confidence by the tabulators and the
inspectors of election unless (i) there is an opposing solicitation with respect
to the election or removal of Directors, (ii) disclosure is required by
applicable law, (iii) a shareholder expressly requests or otherwise authorizes
disclosure, or (iv) the Corporation concludes in good faith that a bona fide
dispute exists as to the authenticity of one or more proxies, ballots or votes,
or as to the accuracy of any tabulation of such proxies, ballots or votes.
(b) The tabulators and inspectors of election and any authorized agents or
other persons engaged in the receipt, count and tabulation of proxies and
ballots shall be advised of this By-law and instructed to comply herewith.
(c) The inspectors of election shall certify, to the best of their
knowledge based on due inquiry, that proxies and ballots have been kept in
confidence as required by this Section 1.12.
2. DIRECTORS.
2.1 Powers of Directors. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
the powers of the Corporation except such as are by applicable law, the Articles
of Incorporation or these By-laws required to be exercised or performed by the
shareholders.
C-3
<PAGE> 386
2.2 Number, Method of Election, Terms of Office of Directors. The number
of Directors which shall constitute the whole Board shall be such as from time
to time shall be determined by resolution adopted by a majority of the entire
Board, but the number shall not be less than three nor more than twenty-five,
provided that the tenure of a Director shall not be affected by any decrease in
the number of Directors so made by the Board. Each Director shall hold office
until the next annual meeting of shareholders and until his or her successor is
elected and qualified or until his or her earlier death, retirement, resignation
or removal. Directors need not be shareholders of the Corporation or citizens of
the United States of America.
Nominations of persons for election as Directors may be made by the Board
or by any shareholder entitled to vote for the election of Directors. Any
shareholder entitled to vote for the election of Directors may nominate a person
or persons for election as Directors only if written notice of such
shareholder's intent to make such nomination is given in accordance with the
procedures for bringing business before the meeting set forth in Section 1.3(b)
of these By-laws, either by personal delivery or by United States mail, postage
prepaid, to the Secretary not later than (i) with respect to an election to be
held at an annual meeting of shareholders, 90 days in advance of the anniversary
date of the immediately preceding annual meeting (or not more than ten days
after the first public disclosure, which may include any public filing with the
Securities and Exchange Commission, of the Originally Scheduled Date of the
annual meeting, whichever is earlier) and (ii) with respect to an election to be
held at a special meeting of shareholders for the election of Directors, the
close of business on the seventh day following the date on which notice of such
meeting is first given to shareholders. Each such notice shall set forth: (a)
the name and address of the shareholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
shareholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (d) such other
information regarding each nominee proposed by such shareholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board; and (e) the consent of each nominee
to serve as a Director if so elected. The chairman of any meeting of
shareholders to elect Directors and the Board may refuse to acknowledge the
nomination of any person not made in compliance with the foregoing procedure.
For purposes of this Section 2.2, the "Originally Scheduled Date" of any meeting
of shareholders shall be the date first publicly disclosed on which such meeting
is scheduled to occur regardless of whether such meeting is continued or
adjourned and regardless of whether any subsequent notice is given for such
meeting or the record date of such meeting is changed.
At each meeting of the shareholders for the election of Directors at which
a quorum is present, the persons receiving the greatest number of votes, up to
the number of Directors to be elected, shall be the Directors.
2.3 Vacancies on Board. (a) Any Director may resign from office at any
time by delivering a written resignation to the Chairman or the Secretary. The
resignation will take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
(b) Any vacancy and any newly created Directorship resulting from any
increase in the authorized number of Directors may be filled by vote of a
majority of the Directors then in office, though less than a quorum, and any
Director so chosen shall hold office until the next annual election of Directors
by the shareholders and until a successor is duly elected and qualified or until
his or her earlier death, retirement, resignation or removal. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by applicable law.
2.4 Meetings of the Board. (a) The Board may hold its meetings, both
regular and special, either within or outside the state of Indiana, at such
places as from time to time may be determined by the Board or as may be
designated in the respective notices or waivers of notice thereof.
C-4
<PAGE> 387
(b) Regular meetings of the Board shall be held at such times and at such
places as from time to time shall be determined by the Board.
(c) The first meeting of each newly elected Board shall be held as soon as
practicable after the annual meeting of the shareholders and shall be for the
election of officers and the transaction of such other business as may come
before it.
(d) Special meetings of the Board shall be held whenever called by
direction of the Chairman or at the request of Directors constituting one-third
of the number of Directors then in office.
(e) Members of the Board or any Committee of the Board may participate in a
meeting of the Board or Committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
(f) The Secretary shall give notice to each Director of any meeting of the
Board by mailing the same at least two days before the meeting or by
telegraphing or delivering the same not later than the day before the meeting.
Such notice need not include a statement of the business to be transacted at, or
the purpose of, any such meeting. Any and all business may be transacted at any
meeting of the Board. No notice of any adjourned meeting need be given. No
notice to or waiver by any Director shall be required with respect to any
meeting at which the Director is present.
2.5 Quorum and Action. Except as otherwise expressly required by
applicable law, the Articles of Incorporation or these By-laws, at any meeting
of the Board, the presence of at least one-third of the entire Board shall
constitute a quorum for the transaction of business; but if there shall be less
than a quorum at any meeting of the Board, a majority of those present may
adjourn the meeting from time to time. Unless otherwise provided by applicable
law, the Articles of Incorporation or these By-laws, the vote of a majority of
the Directors present (and not abstaining) at any meeting at which a quorum is
present shall be necessary for the approval and adoption of any resolution or
the approval of any act of the Board.
2.6 Presiding Officer and Secretary of Meeting. The Chairman or, in the
absence of the Chairman, a member of the Board selected by the members present,
shall preside at meetings of the Board. The Secretary shall act as secretary of
the meeting, but in the Secretary's absence the presiding officer may appoint a
secretary of the meeting.
2.7 Action by Consent without Meeting. Any action required or permitted
to be taken at any meeting of the Board or of any Committee thereof may be taken
without a meeting if all members of the Board or Committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board or Committee.
2.8 Standing Committees. By resolution adopted by a majority of the
entire Board, the Board shall elect, from among its members, individuals to
serve on the Standing Committees established by this Section 2.8. Each Standing
Committee shall be comprised of such number of Directors, not less than three,
as shall be elected to such Committee, provided that no officer or employee of
the Corporation shall be eligible to serve on the Audit, Compensation and
Personnel or Nominating Committees. Each Committee shall keep a record of all
its proceedings and report the same to the Board. One-third of the members of a
Committee, but not less than two, shall constitute a quorum, and the act of a
majority of the members of a Committee present at any meeting at which a quorum
is present shall be the act of the Committee. Each Standing Committee shall meet
at the call of its chairman or any two of its members. The chairmen of the
various Committees shall preside, when present, at all meetings of such
Committees, and shall have such powers and perform such duties as the Board may
from time to time prescribe. The Standing Committees of the Board, and functions
of each, are as follows:
(a) Compensation and Personnel Committee. The Compensation and Personnel
Committee shall exercise the power of oversight of the compensation and benefits
of the employees of the Corporation, and shall be charged with evaluating
management performance, and establishing executive compensation. This Committee
shall have access to its own independent outside compensation counsel and shall
consist of a
C-5
<PAGE> 388
majority of independent directors. For purposes of this Section 2.8(a),
"independent director" shall mean a Director who: (i) has not been employed by
the Corporation in an executive capacity within the past five years; (ii) is
not, and is not affiliated with a company or firm that is, an advisor or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; and (vi) is not a
familial relative of any person described by Clauses (i) through (v). This
By-law shall not be amended or repealed except by a majority of the voting power
of the shareholders present in person or by proxy and entitled to vote at any
meeting at which a quorum is present.
(b) Audit Committee. The Audit Committee shall select independent auditors
for the Corporation, determine the scope of audits to be performed by such
auditors, review audit results and internal accounting procedures and policies,
review the fees paid to the Corporation's independent auditors, and review and
approve the audited financial statements of the Corporation and the annual
reports to shareholders. The Audit Committee shall also review expense accounts
for senior executives.
(c) Capital Committee. The Capital Committee shall have the responsibility
for maximizing the effective utilization of the assets of the Corporation and
its subsidiaries and reviewing capital expenditures and appropriations.
(d) Corporate Responsibility Committee. The Corporate Responsibility
Committee shall review and define social responsibilities and shall review and
consider major claims and litigation and legal, regulatory, intellectual
property and related governmental policy matters affecting the Corporation and
its subsidiaries. The Corporate Responsibility Committee shall also review and
approve management policies and programs relating to compliance with legal and
regulatory requirements, business ethics and environmental matters.
(e) Nominating Committee. The Nominating Committee shall make
recommendations as to the organization, size and composition of the Board and
Committees thereof, select candidates for election to the Board and the
Committees thereof, and consider the qualifications, compensation and retirement
of Directors.
2.9 Other Committees. By resolution passed by a majority of the entire
Board, the Board may also appoint from among its members such other Committees,
Standing or otherwise, as it may from time to time deem desirable and may
delegate to such Committees such powers of the Board as it may consider
appropriate, consistent with applicable law, the Articles of Incorporation and
these By-laws.
2.10 Compensation of Directors. Unless otherwise restricted by the
Articles of Incorporation or these By-laws, Directors shall receive for their
services on the Board or any Committee thereof such compensation and benefits,
including the granting of options, together with expenses, if any, as the Board
may from time to time determine. The Directors may be paid a fixed sum for
attendance at each meeting of the Board or Committee thereof and/or a stated
annual sum as a Director, together with expenses, if any, of attendance at each
meeting of the Board or Committee thereof. Nothing herein contained shall be
construed to preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor.
2.11 Independent Directors. (a) Independence of Nominees for Election as
Directors at the Annual Meeting. The persons nominated by the Board for
election as Directors at any annual meeting of the shareholders of the
Corporation shall include a sufficient number of persons who have been, on the
date of their nomination, determined by the Board to be eligible to be
classified as independent directors such that if all such nominees are elected,
the majority of all Directors holding office would be independent directors.
(b) Directors Elected to Fill Vacancies on the Board. If the Board elects
Directors between annual meetings of shareholders to fill vacancies or newly
created Directorships, the majority of all Directors holding office immediately
after such elections shall be independent directors.
(c) Definition of Independent Director. For purposes of this Section 2.11,
"independent director" shall mean a Director who: (i) has not been employed by
the Corporation in an executive capacity within the past five years; (ii) is
not, and is not affiliated with a company or a firm that is, an adviser or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no
C-6
<PAGE> 389
personal services contract(s) with the Corporation; (v) is not affiliated with a
tax-exempt entity that receives significant contributions from the Corporation;
(vi) is not a familial relative of any person described by Clauses (i) through
(v); and (vii) is free of any other relationship which would interfere with the
exercise of independent judgment by such Director.
3. OFFICERS.
3.1 Officers, Titles, Elections, Terms. (a) The Board may from time to
time elect a Chairman, a Vice Chairman, a President, one or more Executive Vice
Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a
Chief Financial Officer, a Controller, a Treasurer, a Secretary, a General
Counsel, one or more Assistant Controllers, one or more Assistant Treasurers,
one or more Assistant Secretaries, and one or more Associate or Assistant
General Counsels, to serve at the pleasure of the Board or otherwise as shall be
specified by the Board at the time of such election and until their successors
are elected and qualified or until their earlier death, retirement, resignation
or removal.
(b) The Board may elect or appoint at any time such other officers or
agents with such duties as it may deem necessary or desirable. Such other
officers or agents shall serve at the pleasure of the Board or otherwise as
shall be specified by the Board at the time of such election or appointment and,
in the case of such other officers, until their successors are elected and
qualify or until their earlier death, retirement, resignation or removal. Each
such officer or agent shall have such authority and shall perform such duties as
may be provided herein or as the Board may prescribe. The Board may from time to
time authorize any officer or agent to appoint and remove any other such officer
or agent and to prescribe such person's authority and duties.
(c) No person may be elected or appointed an officer who is not a citizen
of the United States of America if such election or appointment is prohibited by
applicable law or regulation.
(d) Any vacancy in any office may be filled for the unexpired portion of
the term by the Board. Each officer elected or appointed during the year shall
hold office until the next annual meeting of the Board at which officers are
regularly elected or appointed and until his or her successor is elected or
appointed and qualify or until his or her earlier death, retirement, resignation
or removal.
(e) Any officer or agent elected or appointed by the Board may be removed
at any time by the affirmative vote of a majority of the entire Board.
(f) Any officer may resign from office at any time. Such resignation shall
be made in writing and given to the President or the Secretary. Any such
resignation shall take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
3.2 General Powers of Officers. Except as may be otherwise provided by
applicable law or in Article 6 or Article 7 of these By-laws, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, any Chief Financial Officer, the General Counsel,
the Controller, the Treasurer and the Secretary, or any of them, may (i) execute
and deliver in the name of the Corporation, in the name of any Division of the
Corporation or in both names any agreement, contract, instrument, power of
attorney or other document pertaining to the business or affairs of the
Corporation or any Division of the Corporation, including without limitation
agreements or contracts with any government or governmental department, agency
or instrumentality, and (ii) delegate to any employee or agent the power to
execute and deliver any such agreement, contract, instrument, power of attorney
or other document.
3.3 Powers and Duties of the Chairman. The Chairman shall be the Chief
Executive of the Corporation and shall report directly to the Board. Except in
such instances as the Board may confer powers in particular transactions upon
any other officer, and subject to the control and direction of the Board, the
Chairman shall manage and direct the business and affairs of the Corporation and
shall communicate to the Board and any Committee thereof reports, proposals and
recommendations for their respective consideration or action. He or she may do
and perform all acts on behalf of the Corporation and shall preside at meetings
of the Board and the shareholders.
C-7
<PAGE> 390
3.4 Powers and Duties of a Vice Chairman. A Vice Chairman shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws, and in the event of the
absence, incapacity or inability to act of the Chairman, then any Vice Chairman
shall perform the duties and exercise the powers of the Chairman.
3.5 Powers and Duties of the President. The President shall have such
powers and perform such duties as the Board or the Chairman may from time to
time prescribe or as may be prescribed in these By-laws.
3.6 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents
and Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice
Presidents shall have such powers and perform such duties as the Board or the
Chairman may from time to time prescribe or as may be prescribed in these
By-laws.
3.7 Powers and Duties of a Chief Financial Officer. A Chief Financial
Officer shall have such powers and perform such duties as the Board, the
Chairman or any Vice Chairman may from time to time prescribe or as may be
prescribed in these By-laws.
3.8 Powers and Duties of the Controller and Assistant Controllers. (a)
The Controller shall be responsible for the maintenance of adequate accounting
records of all assets, liabilities, capital and transactions of the Corporation.
The Controller shall prepare and render such balance sheets, income statements,
budgets and other financial statements and reports as the Board or the Chairman
may require, and shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Controller.
(b) Each Assistant Controller shall perform such duties as from time to
time may be assigned by the Controller or by the Board. In the event of the
absence, incapacity or inability to act of the Controller, then any Assistant
Controller may perform any of the duties and may exercise any of the powers of
the Controller.
3.9 Powers and Duties of the Treasurer and Assistant Treasurers. (a) The
Treasurer shall have the care and custody of all the funds and securities of the
Corporation except as may be otherwise ordered by the Board, and shall cause
such funds (i) to be invested or reinvested from time to time for the benefit of
the Corporation as may be designated by the Board, the Chairman, any Vice
Chairman, the President, any Chief Financial Officer or the Treasurer or (ii) to
be deposited to the credit of the Corporation in such banks or depositories as
may be designated by the Board, the Chairman, any Vice Chairman, the President,
any Chief Financial Officer or the Treasurer, and shall cause such securities to
be placed in safekeeping in such manner as may be designated by the Board, the
Chairman, any Vice Chairman, the President, any Chief Financial Officer or the
Treasurer.
(b) The Treasurer shall cause to be prepared and maintained (i) at the
office of the Corporation, a stock ledger containing the names and addresses of
all shareholders and the number of shares of each class and series held by each
and (ii) the list of shareholders for each meeting of the shareholders as
required by Section 1.11 of these By-laws. The Treasurer shall be responsible
for the custody of all stock books and of all unissued stock certificates.
(c) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, any Chief Financial Officer or the Treasurer may
endorse in the name and on behalf of the Corporation all instruments for the
payment of money, bills of lading, warehouse receipts, insurance policies and
other commercial documents requiring such endorsement.
(d) The Treasurer, any Assistant Treasurer or such other person or persons
as may be designated for such purpose by the Board, the Chairman, any Vice
Chairman, the President, any Chief Financial Officer or the Treasurer (i) may
sign all receipts and vouchers for payments made to the Corporation, (ii) shall
render a statement of the cash account of the Corporation to the Board as often
as it shall require the same; and (iii) shall enter regularly in books to be
kept for that purpose full and accurate account of all moneys received and paid
on account of the Corporation and of all securities received and delivered by
the Corporation.
C-8
<PAGE> 391
(e) The Treasurer shall perform such other duties as may be prescribed or
assigned pursuant to these By-laws and all other acts incident to the position
of Treasurer. Each Assistant Treasurer shall perform such duties as may from
time to time be assigned by the Treasurer or by the Board. In the event of the
absence, incapacity or inability to act of the Treasurer, then any Assistant
Treasurer may perform any of the duties and may exercise any of the powers of
the Treasurer.
3.10 Powers and Duties of the Secretary and Assistant Secretaries. (a)
The Secretary shall keep the minutes of all proceedings of the shareholders, the
Board and the Committees of the Board. The Secretary shall attend to the giving
and serving of all notices of the Corporation, in accordance with the provisions
of these By-laws and as required by applicable law. The Secretary shall be the
custodian of the seal of the Corporation. The Secretary shall affix or cause to
be affixed the seal of the Corporation to such contracts, instruments and other
documents requiring the seal of the Corporation, and when so affixed may attest
the same and shall perform such other duties as may be prescribed or assigned
pursuant to these By-laws and all other acts incident to the position of
Secretary.
(b) Each Assistant Secretary shall perform such duties as may from time to
time be assigned by the Secretary or by the Board. In the event of the absence,
incapacity or inability to act of the Secretary, then any Assistant Secretary
may perform any of the duties and may exercise any of the powers of the
Secretary.
4. INDEMNIFICATION.
4.1(a) Right to Indemnification. The Corporation, to the fullest extent
permitted by applicable law as then in effect, shall indemnify any person who is
or was a Director or officer of the Corporation and who is or was involved in
any manner (including, without limitation, as a party or a witness) or is
threatened to be made so involved in any threatened, pending or completed
investigation, claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative (including, without limitation, any action, suit
or proceeding by or in the right of the Corporation to procure a judgment in its
favor) (a "Proceeding") by reason of the fact that such person is or was a
Director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee, fiduciary or
agent of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) (a
"Covered Entity"), against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such Proceeding; provided, however, that the foregoing
shall not apply to a Director or officer of the Corporation with respect to a
Proceeding that was commenced by such Director or officer prior to a Change in
Control (as defined in Section 4.4(e)(i) of this Article 4). Any Director or
officer of the Corporation entitled to indemnification as provided in this
Section 4.1(a) is hereinafter called an "Indemnitee". Any right of an Indemnitee
to indemnification shall be a contract right and shall include the right to
receive, prior to the conclusion of any Proceeding, payment of any expenses
incurred by the Indemnitee in connection with such Proceeding, consistent with
the provisions of applicable law as then in effect and the other provisions of
this Article 4.
(b) Effect of Amendments. Neither the amendment or repeal of, nor the
adoption of a provision inconsistent with, any provision of this Article 4
(including, without limitation, this Section 4.1(b)) shall adversely affect the
rights of any Director or officer under this Article 4 (i) with respect to any
Proceeding commenced or threatened prior to such amendment, repeal or adoption
of an inconsistent provision or (ii) after the occurrence of a Change in
Control, with respect to any Proceeding arising out of any action or omission
occurring prior to such amendment, repeal or adoption of an inconsistent
provision, in either case without the written consent of such Director or
officer.
4.2 Insurance, Contracts and Funding. The Corporation may purchase and
maintain insurance to protect itself and any indemnified person against any
expenses, judgments, fines and amounts paid in settlement as specified in
Section 4.1(a) or Section 4.5 of this Article 4 or incurred by any indemnified
person in connection with any Proceeding referred to in such Sections, to the
fullest extent permitted by applicable law as then in effect. The Corporation
may enter into contracts with any Director, officer, employee or agent of the
Corporation or any director, officer, employee, fiduciary or agent of any
Covered Entity in furtherance of the provisions of this Article 4 and may create
a trust fund or use other means (including, without limitation, a
C-9
<PAGE> 392
letter of credit) to ensure the payment of such amounts as may be necessary to
effect indemnification as provided in this Article 4.
4.3 Indemnification; Not Exclusive Right. The right of indemnification
provided in this Article 4 shall not be exclusive of any other rights to which
any indemnified person may otherwise be entitled, and the provisions of this
Article 4 shall inure to the benefit of the heirs and legal representatives of
any indemnified person under this Article 4 and shall be applicable to
Proceedings commenced or continuing after the adoption of this Article 4,
whether arising from acts or omissions occurring before or after such adoption.
4.4 Advancement of Expenses; Procedures; Presumptions and Effect of
Certain Proceedings; Remedies. In furtherance, but not in limitation, of the
foregoing provisions, the following procedures, presumptions and remedies shall
apply with respect to the advancement of expenses and the right to
indemnification under this Article 4:
(a) Advancement of Expenses. All reasonable expenses incurred by or on
behalf of the Indemnitee in connection with any Proceeding shall be advanced to
the Indemnitee by the Corporation within 20 days after the receipt by the
Corporation of a statement or statements from the Indemnitee requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Any such statement or statements shall
reasonably evidence the expenses incurred by the Indemnitee and shall include
any written affirmation or undertaking required by applicable law in effect at
the time of such advance.
(b) Procedures for Determination of Entitlement to Indemnification. (i) To
obtain indemnification under this Article 4, an Indemnitee shall submit to the
Secretary of the Corporation a written request, including such documentation and
information as is reasonably available to the Indemnitee and reasonably
necessary to determine whether and to what extent the Indemnitee is entitled to
indemnification (the "Supporting Documentation"). The determination of the
Indemnitee's entitlement to indemnification shall be made not later than 60 days
after receipt by the Corporation of the written request for indemnification
together with the Supporting Documentation. The Secretary of the Corporation
shall, promptly upon receipt of such a request for indemnification, advise the
Board in writing that the Indemnitee has requested indemnification.
(ii) The Indemnitee's entitlement to indemnification under this Article 4
shall be determined in one of the following ways: (A) by a majority vote of the
Disinterested Directors (as hereinafter defined), if they constitute a quorum of
the Board; (B) by a written opinion of Independent Counsel as hereinafter
defined) if (x) a Change in Control (as hereinafter defined) shall have occurred
and the Indemnitee so requests or (y) a quorum of the Board consisting of
Disinterested Directors is not obtainable or, even if obtainable, a majority of
such Disinterested Directors so directs; (C) by the shareholders of the
Corporation (but only if a majority of the Disinterested Directors, if they
constitute a quorum of the Board, presents the issue of entitlement to
indemnification to the shareholders for their determination); or (D) as provided
in Section 4.4(c) of this Article 4.
(iii) In the event the determination of entitlement to indemnification is
to be made by Independent Counsel pursuant to Section 4.4(b)(ii), a majority of
the Disinterested Directors shall select the Independent Counsel, but only an
Independent Counsel to which the Indemnitee does not reasonably object;
provided, however, that if a Change in Control shall have occurred, the
Indemnitee shall select such Independent Counsel, but only an Independent
Counsel to which a majority of the Disinterested Directors does not reasonably
object.
(c) Presumptions and Effect of Certain Proceedings. Except as otherwise
expressly provided in this Article 4, if a Change in Control shall have
occurred, the Indemnitee shall be presumed to be entitled to indemnification
under this Article 4 (with respect to actions or failures to act occurring prior
to such Change in Control) upon submission of a request for indemnification
together with the Supporting Documentation in accordance with Section 4.4(b) of
this Article 4, and thereafter the Corporation shall have the burden of proof to
overcome that presumption in reaching a contrary determination. In any event, if
the person or persons empowered under Section 4.4(b) of this Article 4 to
determine entitlement to indemnification shall not have been appointed or shall
not have made a determination within 60 days after receipt by the Corporation of
the request therefor together with the Supporting Documentation, the Indemnitee
shall be deemed to be, and
C-10
<PAGE> 393
shall be, entitled to indemnification unless (A) the Indemnitee misrepresented
or failed to disclose a material fact in making the request for indemnification
or in the Supporting Documentation or (B) such indemnification is prohibited by
law. The termination of any Proceeding described in Section 4.1 of this Article
4, or of any claim, issue or matter therein, by judgment, order, settlement or
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, adversely affect the right of the Indemnitee to indemnification or
create a presumption that the Indemnitee did not act in good faith and in a
manner which the Indemnitee reasonably believed to be in or not opposed to the
best interests of the Corporation or, with respect to any criminal Proceeding,
that the Indemnitee had reasonable cause to believe that his or her conduct was
unlawful.
(d) Remedies of Indemnitee. (i) In the event that a determination is made
pursuant to Section 4.4(b) of this Article 4 that the Indemnitee is not entitled
to indemnification under this Article 4, (A) the Indemnitee shall be entitled to
seek an adjudication of his or her entitlement to such indemnification either,
at the Indemnitee's sole option, in (x) an appropriate court of the state of
Indiana or any other court of competent jurisdiction or (y) an arbitration to be
conducted by a single arbitrator pursuant to the rules of the American
Arbitration Association; (B) any such judicial proceeding or arbitration shall
be de novo and the Indemnitee shall not be prejudiced by reason of such adverse
determination; and (C) if a Change in Control shall have occurred, in any such
judicial proceeding or arbitration the Corporation shall have the burden of
proving that the Indemnitee is not entitled to indemnification under this
Article 4 (with respect to actions or failures to act occurring prior to such
Change in Control).
(ii) If a determination shall have been made or deemed to have been made,
pursuant to Section 4.4(b) or (c) of this Article 4, that the Indemnitee is
entitled to indemnification, the Corporation shall be obligated to pay the
amounts constituting such indemnification within five days after such
determination has been made or deemed to have been made and shall be
conclusively bound by such determination unless (A) the Indemnitee
misrepresented or failed to disclose a material fact in making the request for
indemnification or in the Supporting Documentation or (B) such indemnification
is prohibited by law. In the event that (x) advancement of expenses is not
timely made pursuant to Section 4.4(a) of this Article 4 or (y) payment of
indemnification is not made within five days after a determination of
entitlement to indemnification has been made or deemed to have been made
pursuant to Section 4.4(b) or (c) of this Article 4, the Indemnitee shall be
entitled to seek judicial enforcement of the Corporation's obligation to pay to
the Indemnitee such advancement of expenses or indemnification. Notwithstanding
the foregoing, the Corporation may bring an action, in an appropriate court in
the state of Indiana or any other court of competent jurisdiction, contesting
the right of the Indemnitee to receive indemnification hereunder due to the
occurrence of an event described in Subclause (A) or (B) of this Clause (ii) (a
"Disqualifying Event"); provided, however, that in any such action the
Corporation shall have the burden of proving the occurrence of such
Disqualifying Event.
(iii) The Corporation shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 4.4(d) that the
procedures and presumptions of this Article 4 are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Corporation is bound by all the provisions of this Article 4.
(iv) In the event that the Indemnitee, pursuant to this Section 4.4(d),
seeks a judicial adjudication of or an award in arbitration to enforce his or
her rights under, or to recover damages for breach of, this Article 4, the
Indemnitee shall be entitled to recover from the Corporation, and shall be
indemnified by the Corporation against, any expenses actually and reasonably
incurred by the Indemnitee if the Indemnitee prevails in such judicial
adjudication or arbitration. If it shall be determined in such judicial
adjudication or arbitration that the Indemnitee is entitled to receive part but
not all of the indemnification or advancement of expenses sought, the expenses
incurred by the Indemnitee in connection with such judicial adjudication or
arbitration shall be prorated accordingly.
(e) Definitions. For purposes of this Article 4:
(i) "Change in Control" means a change in control of the Corporation of a
nature that would be required to be reported in response to Item 6(e) (or any
successor provision) of Schedule 14A of Regulation 14A (or any amendment or
successor provision thereto) promulgated under the Securities Exchange Act of
1934 (the
C-11
<PAGE> 394
"Act"), whether or not the Corporation is then subject to such reporting
requirement; provided that, without limitation, such a change in control shall
be deemed to have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of the
Corporation representing 20% or more of the voting power of all outstanding
shares of stock of the Corporation entitled to vote generally in an election of
Directors without the prior approval of at least two-thirds of the members of
the Board in office immediately prior to such acquisition; (B) the Corporation
is a party to any merger or consolidation in which the Corporation is not the
continuing or surviving corporation or pursuant to which shares of the
Corporation's common stock would be converted into cash, securities or other
property, other than a merger of the Corporation in which the holders of the
Corporation's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, (C) there is a sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
the assets of the Corporation, or liquidation or dissolution of the Corporation;
(D) the Corporation is a party to a merger, consolidation, sale of assets or
other reorganization, or a proxy contest, as a consequence of which members of
the Board in office immediately prior to such transaction or event constitute
less than a majority of the Board thereafter; or (E) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board (including for this purpose any new Director whose election or
nomination for election by the shareholders was approved by a vote of at least
two-thirds of the Directors then still in office who were Directors at the
beginning of such period) cease for any reason to constitute at least a majority
of the Board.
(ii) "Disinterested Director" means a Director who is not or was not a
party to the proceeding in respect of which indemnification is sought by the
Indemnitee.
(iii) "Independent Counsel" means a law firm or a member of a law firm that
neither presently is, nor in the past five years has been, retained to
represent: (a) the Corporation or the Indemnitee in any matter material to
either such party or (b) any other party to the Proceeding giving rise to a
claim for indemnification under this Article 4. Notwithstanding the foregoing,
the term "Independent Counsel" shall not include any person who, under
applicable standards of professional conduct, would have a conflict of interest
in representing either the Corporation or the Indemnitee in an action to
determine the Indemnitee's rights under this Article 4.
4.5 Indemnification of Employees and Agents. Notwithstanding any other
provision of this Article 4, the Corporation, to the fullest extent permitted by
applicable law as then in effect, may indemnify any person other than a Director
or officer of the Corporation who is or was an employee or agent of the
Corporation and who is or was involved in any manner (including, without
limitation, as a party or a witness) or is threatened to be made so involved in
any threatened, pending or completed Proceeding by reasons of the fact that such
person is or was an employee or agent of the Corporation or, at the request of
the Corporation, a director, officer, employee, fiduciary or agent of a Covered
Entity against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such Proceeding. The Corporation may also advance expenses
incurred by such employee, fiduciary or agent in connection with any such
Proceeding, consistent with the provisions of applicable law as then in effect.
4.6 Severability. If any of this Article 4 shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (i) the validity, legality
and enforceability of the remaining provisions of this Article 4 (including,
without limitation, all portions of any Section of this Article 4 containing any
such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall not in any way be affected
or impaired thereby; and (ii) to the fullest extent possible, the provisions of
this Article 4 (including, without limitation, all portions of any Section of
this Article 4 containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
be construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
C-12
<PAGE> 395
5. CAPITAL STOCK.
5.1 Stock Certificates. (a) Every holder of stock in the Corporation
shall be entitled to have a certificate certifying the number of shares owned by
him or her in the Corporation and designating the class and series of stock to
which such shares belong, which certificate shall otherwise be in such form as
the Board shall prescribe and as provided in Section 5.1(d). Each such
certificate shall be signed by, or in the name of, the Corporation by the
Chairman or any Vice Chairman or the President or any Vice President, and by the
Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary.
(b) If such certificate is countersigned by a transfer agent other than the
Corporation or its employee, or by a registrar other than the Corporation or its
employee, the signatures of the officers of the Corporation may be facsimiles,
and, if permitted by applicable law, any other signature on the certificate may
be a facsimile.
(c) In case any officer who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer at the date of issue.
(d) Certificates of stock shall be issued in such form not inconsistent
with the Articles of Incorporation. They shall be numbered and registered in the
order in which they are issued. No certificate shall be issued until fully paid.
(e) All certificates surrendered to the Corporation shall be cancelled
(other than treasury shares) with the date of cancellation and shall be retained
by the Treasurer, together with the powers of attorney to transfer and the
assignments of the shares represented by such certificates, for such period of
time as such officer shall designate.
5.2 Record Ownership. A record of the name of the person, firm or
corporation and address of such holder of each certificate, the number of shares
of each class or series represented thereby and the date of issue thereof shall
be made on the Corporation's books. The Corporation shall be entitled to treat
the holder of record of any share of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or other claim to or
interest in any share on the part of any person, whether or not it shall have
express or other notice thereof, except as required by applicable law.
5.3 Transfer of Record Ownership. Transfers of stock shall be made on the
books of the Corporation only by direction of the person named in the
certificate or such person's attorney, lawfully constituted in writing, and only
upon the surrender of the certificate therefor and a written assignment of the
shares evidenced thereby. Whenever any transfer of stock shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer if, when the certificates are presented to the Corporation for
transfer, both the transferor and transferee request the Corporation to do so.
5.4 Lost, Stolen or Destroyed Certificates. Certificates representing
shares of the stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed in such manner and on
such terms and conditions as the Board from time to time may authorize in
accordance with applicable law.
5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The
Corporation shall maintain one or more transfer offices or agencies where stock
of the Corporation shall be transferable. The Corporation shall also maintain
one or more registry offices where such stock shall be registered. The Board may
make such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of stock certificates in accordance with applicable
law.
5.6 Fixing Record Date for Determination of Shareholders of Record. (a)
The Board may fix, in advance, a date as the record date for the purpose of
determining the shareholders entitled to notice of, or to vote at, any meeting
of the shareholders or any adjournment thereof, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board, and which record date shall not be more than sixty days nor less than
ten days before the date of a meeting of the shareholders. If no record date is
fixed by the Board, the record date for determining the shareholders entitled to
notice of or to vote at a shareholders' meeting shall be at the close of
business on the day next preceding the day on which notice is
C-13
<PAGE> 396
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of shareholders
of record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting; provided, however, that the Board may
fix a new record date for the adjourned meeting and shall fix a new record date
if such adjourned meeting is more than 120 days after the date of the original
meeting.
(b) The Board may fix, in advance, a date as the record date for the
purpose of determining the shareholders entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or in order to make a determination of the shareholders for the purpose of any
other lawful action, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall not be more than sixty calendar days prior to such action. If no record
date is fixed by the Board, the record date for determining the shareholders for
any such purpose shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
6. SECURITIES HELD BY THE CORPORATION.
6.1 Voting. Unless the Board shall otherwise order, the Chairman, any
Vice Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, any Chief Financial Officer, the Controller, the
Treasurer or the Secretary shall have full power and authority, on behalf of the
Corporation, to attend, act and vote at any meeting of the shareholders of any
corporation in which the Corporation may hold stock and at such meeting to
exercise any or all rights and powers incident to the ownership of such stock,
and to execute on behalf of the Corporation a proxy or proxies empowering
another or others to act as aforesaid. The Board from time to time may confer
like powers upon any other person or persons.
6.2 General Authorization to Transfer Securities Held by the
Corporation. (a) Any of the following officers, to wit: the Chairman, any Vice
Chairman, the President, any Executive Vice President, any Senior Vice
President, any Vice President, any Chief Financial Officer, the Controller, the
Treasurer, any Assistant Controller, any Assistant Treasurer, and each of them,
hereby is authorized and empowered to transfer, convert, endorse, sell, assign,
set over and deliver any and all shares of stock, bonds, debentures, notes,
subscription warrants, stock purchase warrants, evidences of indebtedness, or
other securities now or hereafter standing in the name of or owned by the
Corporation, and to make, execute and deliver any and all written instruments of
assignment and transfer necessary or proper to effectuate the authority hereby
conferred.
(b) Whenever there shall be annexed to any instrument of assignment and
transfer executed pursuant to and in accordance with the foregoing Section
6.2(a), a certificate of the Secretary or any Assistant Secretary in office at
the date of such certificate setting forth the provisions hereof and stating
that they are in full force and effect and setting forth the names of persons
who are then officers of the corporation, all persons to whom such instrument
and annexed certificate shall thereafter come shall be entitled, without further
inquiry or investigation and regardless of the date of such certificate, to
assume and to act in reliance upon the assumption that (i) the shares of stock
or other securities named in such instrument were theretofore duly and properly
transferred, endorsed, sold, assigned, set over and delivered by the
Corporation, and (ii) with respect to such securities, the authority of these
provisions of these By-laws and of such officers is still in full force and
effect.
7. DEPOSITARIES AND SIGNATORIES.
7.1 Depositaries. The Chairman, any Vice Chairman, the President, any
Chief Financial Officer, and the Treasurer are each authorized to designate
depositaries for the funds of the Corporation deposited in its name or that of a
Division of the Corporation, or both, and the signatories with respect thereto
in each case, and from time to time, to change such depositaries and
signatories, with the same force and effect as if each such depositary and the
signatories with respect thereto and changes therein had been specifically
designated or authorized by the Board; and each depositary designated by the
Board or by the Chairman, any Vice Chairman, the President, any Chief Financial
Officer, or the Treasurer shall be entitled to rely upon the certificate of the
Secretary or any Assistant Secretary of the Corporation or of a Division of the
Corporation
C-14
<PAGE> 397
setting forth the fact of such designation and of the appointment of the
officers of the Corporation or of the Division or of both or of other persons
who are to be signatories with respect to the withdrawal of funds deposited with
such depositary, or from time to time the fact of any change in any depositary
or in the signatories with respect thereto.
7.2 Signatories. Unless otherwise designated by the Board or by the
Chairman, any Vice Chairman, the President, any Chief Financial Officer or the
Treasurer, all notes, drafts, checks, acceptances, orders for the payment of
money and all other negotiable instruments obligating the Corporation for the
payment of money shall be (a) signed by the Treasurer or any Assistant Treasurer
and (b) countersigned by the Controller or any Assistant Controller, or (c)
either signed or countersigned by the Chairman, any Vice Chairman, the
President, any Executive Vice President, any Senior Vice President or any Vice
President in lieu of either the officers designated in Clause (a) or the
officers designated in Clause (b) of this Section 7.2.
8. SEAL.
The seal of the Corporation shall be in such form and shall have such
content as the Board shall from time to time determine.
9. FISCAL YEAR.
The fiscal year of the Corporation shall end on December 31 in each year,
or on such other date as the Board shall determine.
10. WAIVER OF OR DISPENSING WITH NOTICE.
(a) Whenever any notice of the time, place or purpose of any meeting of the
shareholders is required to be given by applicable law, the Articles of
Incorporation or these By-laws, a written waiver of notice, signed by a
shareholder entitled to notice of a shareholders' meeting, whether by telegraph,
cable or other form of recorded communication, whether signed before or after
the time set for a given meeting, shall be deemed equivalent to notice of such
meeting. Attendance of a shareholder in person or by proxy at a shareholders'
meeting shall constitute a waiver of notice to such shareholder of such meeting,
except when the shareholder attends the meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting was not lawfully called or convened.
(b) Whenever any notice of the time or place of any meeting of the Board or
Committee of the Board is required to be given by applicable law, the Articles
of Incorporation or these By-laws, a written waiver of notice signed by a
Director, whether by telegraph, cable or other form of recorded communication,
whether signed before or after the time set for a given meeting, shall be deemed
equivalent to notice of such meeting. Attendance of a Director at a meeting
shall constitute a waiver of notice to such Director of such meeting.
(c) No notice need be given to any person with whom communication is made
unlawful by any law of the United States or any rule, regulation, proclamation
or executive order issued under any such law.
11. POLITICAL NONPARTISANSHIP OF THE CORPORATION.
The Corporation shall not make, directly or indirectly, any contributions
or expenditures in connection with the election of any candidate for federal,
state or local political office, or any committee campaigning for such a
candidate, except to the extent necessary to permit in the United States the
expenditure of corporate assets for the payment of expenses for establishing,
registering and administering any political action committee and of soliciting
contributions thereto, all as may be authorized by federal or state laws.
12. AMENDMENT OF BY-LAWS.
Except as otherwise provided in Section 2.8(a) of these By-laws, these
By-laws, or any of them, may from time to time be supplemented, amended or
repealed, or new By-laws may be adopted, by the Board at any regular or special
meeting of the Board, if such supplement, amendment, repeal or adoption is
approved by a majority of the entire Board. These By-laws, or any of them, may
from time to time be supplemented,
C-15
<PAGE> 398
amended or repealed, or new By-laws may be adopted, by the shareholders at any
regular or special meeting of the shareholders at which a quorum is present, if
such supplement, amendment, repeal or adoption is approved by the affirmative
vote of the holders of at least a majority of the voting power of all
outstanding shares of stock of the Corporation entitled to vote generally in an
election of directors.
13. OFFICES AND AGENT
(a) Registered Office and Agent. The registered office of the Corporation
in the State of Indiana shall be One North Capitol Avenue, Suite 1180,
Indianapolis, Indiana 46204. The name of the registered agent is The Corporation
Trust Company. Such registered agent has a business office identical with such
registered office.
(b) Other Offices. The Corporation may also have offices at other places,
either within or outside the State of Indiana, as the Board of Directors may
from time to time determine or as the business of the Corporation may require.
C-16
<PAGE> 399
ANNEX D
1995 ITT DESTINATIONS, INC. INCENTIVE STOCK PLAN
The following is the text of the 1995 ITT Destinations, Inc. Incentive
Stock Plan:
1. PURPOSE
The purpose of the 1995 ITT Destinations, Inc. Incentive Stock Plan is to
motivate and reward superior performance on the part of employees of ITT
Destinations, Inc. and its subsidiaries ("ITT Destinations") and to thereby
attract and retain employees of superior ability. In addition, the Plan is
intended to further opportunities for stock ownership by such employees in order
to increase their proprietary interest in ITT Destinations, Inc. and, as a
result, their interest in the success of the Company. Awards will be made, in
the discretion of the Committee, to Key Employees (including officers and
directors who are also employees) whose responsibilities and decisions directly
affect the performance of any Participating Company and its subsidiaries. Such
incentive awards may consist of stock options, stock appreciation rights payable
in stock or cash, performance shares, restricted stock or any combination of the
foregoing, as the Committee may determine.
2. DEFINITIONS
When used herein, the following terms shall have the following meanings:
"Acceleration Event" means the occurrence of an event defined in Section 9
of the Plan.
"Act" means the Securities Exchange Act of 1934.
"Annual Limit" means the maximum number of shares of Stock for which Awards
may be granted under the Plan in each Plan Year as provided in Section 3 of the
Plan.
"Award" means an award granted to any Key Employee in accordance with the
provisions of the Plan in the form of Options, Rights, Performance Shares or
Restricted Stock, or any combination of the foregoing.
"Award Agreement" means the written agreement evidencing each Award granted
to a Key Employee under the Plan.
"Beneficiary" means the beneficiary or beneficiaries designated pursuant to
Section 10 to receive the amount, if any, payable under the Plan upon the death
of a Key Employee.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
"Committee" means the Compensation and Personnel Committee of the Board or
such other committee as may be designated by the Board to administer the Plan.
"Company" means ITT Destinations, Inc. and its successors and assigns.
"Fair Market Value", unless otherwise indicated in the provisions of this
Plan, means, as of any date, the composite closing price for one share of Stock
on the New York Stock Exchange or, if no sales of Stock have taken place on such
date, the composite closing price on the most recent date on which selling
prices were quoted, the determination to be made in the discretion of the
Committee.
"Incentive Stock Option" means a stock option qualified under Section 422
of the Code.
"Key Employee" means an employee (including any officer or director who is
also an employee) of any Participating Company whose responsibilities and
decisions, in the judgment of the Committee, directly affect the performance of
the Company and its subsidiaries.
D-1
<PAGE> 400
"Limited Stock Appreciation Right" means a stock appreciation right which
shall become exercisable automatically upon the occurrence of an Acceleration
Event as described in Section 9 of the Plan.
"Option" means an option awarded under Section 5 of the Plan to purchase
Stock of the Company, which option may be an Incentive Stock Option or a
non-qualified stock option.
"Participating Company" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options only,
"Participating Company" means the Company or any corporation which at the time
such Option is granted qualifies as a "subsidiary" of the Company under Section
425(f) of the Code.
"Performance Share" means a performance share awarded under Section 6 of
the Plan.
"Plan" means the 1995 ITT Destinations, Inc. Incentive Stock Plan, as the
same may be amended, administered or interpreted from time to time.
"Plan Year" means the calendar year.
"Retirement" means eligibility to receive immediate retirement benefits
under a Participating Company pension plan.
"Restricted Stock" means Stock awarded under Section 7 of the Plan subject
to such restrictions as the Committee deems appropriate or desirable.
"Right" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"Stock" means the common stock ($1 par value) of the Company.
"Total Disability" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
3. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Stock which may be awarded under the Plan
in any Plan Year shall be subject to an annual limit. The maximum number of
shares of Stock for which Awards may be granted under the Plan in each Plan Year
shall be 1.5 percent (1.5%) of the total of the issued and outstanding shares of
ITT Destinations, Inc. Common Stock and Treasury Stock as reported in the Annual
Report on Form 10-K of the Company for the fiscal year ending immediately prior
to any Plan Year. Any unused portion of the Annual Limit for any Plan Year shall
be carried forward and be made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
(5,000,000) shares of ITT Destinations, Inc. Common Stock be cumulatively
available for Awards of incentive stock options under the Plan, and provided
further, that no more than twenty percent (20%) of the total number of shares on
a cumulative basis shall be available for restricted stock and performance
shares Awards. For any Plan Year, no individual employee may receive an Award of
stock options for more than the lesser of (i) ten percent (10%) of the Annual
Limit on available shares applicable to that Plan Year and (ii) 500,000 shares;
except that, for the Plan Year that follows the Distribution Date, each
individual employee may receive in addition to the foregoing limit that number
of stock options equal to the lesser of (x) 2,600,000 and (y) the number of
substitute stock options required to replace ITT stock options surrendered by
such employee in connection with the spin-off by ITT of the shares of ITT
Destinations to ITT shareholders.
Subject to the above limitations, shares of ITT Destinations, Inc. Common
Stock to be issued under the Plan may be made available from the authorized but
unissued shares, or shares held by the Company in treasury or from shares
purchased in the open market.
For the purpose of computing the total number of shares of Stock available
for Awards under the Plan, there shall be counted against the foregoing
limitations the number of shares of Stock which equal the value of
D-2
<PAGE> 401
performance share Awards, in each case determined as at the dates on which such
Awards are granted. If any Awards under the Plan are forfeited, terminated,
expire unexercised, are settled in cash in lieu of Stock or are exchanged for
other Awards, the shares of Stock which were theretofore subject to such Awards
shall again be available for Awards under the Plan to the extent of such
forfeiture or expiration of such Awards. Further, any shares that are exchanged
(either actually or constructively) by optionees as full or partial payment to
the Company of the purchase price of shares being acquired through the exercise
of a stock option granted under the Plan may be available for subsequent Awards,
provided however, that such shares may be awarded only to those participants who
are not directors or executive officers (as that term is defined in the rules
and regulations under Section 16 of the Act).
4. GRANT OF AWARDS AND AWARD AGREEMENTS
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards are to be granted; (ii) determine the form or forms of
Award to be granted to any Key Employee; (iii) determine the amount or number of
shares of Stock subject to each Award; and (iv) determine the terms and
conditions of each Award.
(b) Each Award granted under the Plan shall be evidenced by a written Award
Agreement. Such agreement shall be subject to and incorporate the express terms
and conditions, if any, required under the Plan or required by the Committee.
5. STOCK OPTIONS AND RIGHTS
(a) With respect to Options and Rights, the Committee shall (i) authorize
the granting of Incentive Stock Options, non-qualified stock options, or a
combination of Incentive Stock Options and non-qualified stock options; (ii)
authorize the granting of Rights which may be granted in connection with all or
part of any Option granted under this Plan, either concurrently with the grant
of the Option or at any time thereafter during the term of the Option; (iii)
determine the number of shares of Stock subject to each Option or the number of
shares of Stock that shall be used to determine the value of a Right; and (iv)
determine the time or times when and the manner in which each Option or Right
shall be exercisable and the duration of the exercise period.
(b) Any option issued hereunder which is intended to qualify as an
Incentive Stock Option shall be subject to such limitations or requirements as
may be necessary for the purposes of Section 422 of the Code or any regulations
and rulings thereunder to the extent and in such form as determined by the
Committee in its discretion.
(c) Rights may be granted only to Key Employees who may be considered
directors or officers of the Company for purposes of Section 16 of the Act.
(d) The exercise period for a non-qualified stock option and any related
Right shall not exceed ten years and two days from the date of grant, and the
exercise period for an Incentive Stock Option and any related Right shall not
exceed ten years from the date of grant.
(e) The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value of
one share of Stock on the date the Option is granted.
(f) No part of any Option or Right may be exercised until the Key Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments; provided, however, the period during which a Right is exercisable
shall commence no earlier than six months following the date the Option or Right
is granted.
(g) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for
D-3
<PAGE> 402
tendering Stock as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Stock to exercise an Option as it
deems appropriate.
(h) Unless Section 9 shall provide otherwise, Rights granted to a director
or officer shall terminate when such person ceases to be considered a director
or officer of the Company subject to Section 16 of the Act.
(i) In case of termination of employment, the following provisions shall
apply:
(A) If a Key Employee who has been granted an Option shall die before
such Option has expired, his or her Option may be exercised in full by the
person or persons to whom the Key Employee's rights under the Option pass
by will, or if no such person has such right, by his or her executors or
administrators, at any time, or from time to time, within five years after
the date of the Key Employee's death or within such other period, and
subject to such terms and conditions as the Committee may specify, but not
later than the expiration date specified in Section 5(d) above.
(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she
may exercise his or her Options in full at any time, or from time to time,
within five years after the date of the termination of his or her
employment or within such other period, and subject to such terms and
conditions as the Committee may specify, but not later than the expiration
date specified in Section 5(d) above. Any such Options not fully
exercisable immediately prior to such optionee's retirement shall become
fully exercisable upon such retirement unless the Committee, in its sole
discretion, shall otherwise determine.
(C) Except as provided in Section 9, if the Key Employee shall
voluntarily resign before eligibility for Retirement or he or she is
terminated for cause as determined by the Committee, the Options or Rights
shall be cancelled coincident with the effective date of the termination of
employment.
(D) If the Key Employee's employment terminates for any other reason,
he or she may exercise his or her Options, to the extent that he or she
shall have been entitled to do so at the date of the termination of his or
her employment, at any time, or from time to time, within three months
after the date of the termination of his or her employment or within such
other period, and subject to such terms and conditions as the Committee may
specify, but not later than the expiration date specified in Section 5(d)
above.
(j) No Option or Right granted under the Plan shall be transferable other
than by will or by the laws of descent and distribution. During the lifetime of
the optionee, an Option or Right shall be exercisable only by the Key Employee
to whom the Option or Right is granted (or his or her estate or designated
beneficiary).
(k) With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an "incentive stock option" within
the meaning of Section 422 of the Code.
(l) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall be entitled,
subject to such terms and conditions the Committee may specify, to receive
upon exercise thereof all or a portion of the excess of (A) the Fair Market
Value of a specified number of shares of Stock at the time of exercise, as
determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(e), be less than the Fair Market Value of such
specified number of shares of Stock at the time the Right is granted. Upon
exercise of a Right, payment of such excess shall be made as the Committee
shall specify in cash, the issuance or transfer to the Key Employee of
whole shares of Stock with a Fair Market Value at such time equal to any
excess, or a combination of cash and shares of Stock with a combined Fair
Market Value at such time equal to any such excess, all as determined by
the Committee. The Company will not issue a fractional share of Stock and,
if a fractional share would otherwise be issuable, the Company shall pay
cash equal to the Fair Market Value of the fractional share of Stock at
such time.
(ii) For the purposes of Subsection (i) of this Section 5(l), in the
case of any such Right or portion thereof, other than a Right related to an
Incentive Stock Option, exercised for cash during a "window
D-4
<PAGE> 403
period" specified by Rule 16b-3 under the Act, the Fair Market Value of the
Stock at the time of such exercise shall be the highest composite daily
closing price of the Stock during such window period.
(iii) In the event of the exercise of such Right, the Company's
obligation in respect of any related Option or such portion thereof will be
discharged by payment of the Right so exercised.
6. PERFORMANCE SHARES
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards of Performance Shares are to be made, (ii) determine
the Performance Period (the "Performance Period") and Performance Objectives
(the "Performance Objectives") applicable to such Awards, (iii) determine the
form of settlement of a Performance Share and (iv) generally determine the terms
and conditions of each such Award. At any date, each Performance Share shall
have a value equal to the Fair Market Value of a share of Stock at such date;
provided that the Committee may limit the aggregate amount payable upon the
settlement of any Award. The maximum award for any individual employee in any
given year shall be 100,000 Performance Shares.
(b) The Committee shall determine a Performance Period of not less than two
nor more than five years. Performance Periods may overlap and Key Employees may
participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
(c) The Committee shall determine the Performance Objectives of Awards of
Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be based upon one or more
of the following objective criteria, as the Committee deems appropriate:
earnings per share, return on equity, cash flow or total shareholder return of
ITT Destinations, Inc. If during the course of a Performance Period there shall
occur significant events which the Committee expects to have a substantial
effect on the applicable Performance Objectives during such period, the
Committee may revise such Performance Objectives.
(d) At the beginning of a Performance Period, the Committee shall determine
for each Key Employee or group of Key Employees the number of Performance Shares
or the percentage of Performance Shares which shall be paid to the Key Employee
or member of the group of Key Employees if the applicable Performance Objectives
are met in whole or in part.
(e) If a Key Employee terminates service with all Participating Companies
during a Performance Period because of death, Total Disability, Retirement, or
under other circumstances where the Committee in its sole discretion finds that
a waiver would be in the best interests of the Company, that Key Employee may,
as determined by the Committee, be entitled to payment in settlement of such
Performance Shares at the end of the Performance Period based upon the extent to
which the Performance Objectives were satisfied at the end of such period and
prorated for the portion of the Performance Period during which the Key Employee
was employed by any Participating Company; provided, however, the Committee may
provide for an earlier payment in settlement of such Performance Shares in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable. If a Key Employee terminates service with all Participating Companies
during a Performance Period for any other reason, then such Key Employee shall
not be entitled to any Award with respect to that Performance Period unless the
Committee shall otherwise determine.
(f) Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash either as a lump sum payment
or in annual installments, all as the Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
7. RESTRICTED STOCK
(a) Restricted Stock shall be subject to a restriction period (after which
restrictions will lapse) which shall mean a period commencing on the date the
Award is granted and ending on such date as the Committee shall determine (the
"Restriction Period"). The Committee may provide for the lapse of restrictions
in
D-5
<PAGE> 404
installments where deemed appropriate and it may also require the achievement of
predetermined performance objectives in order for such shares to vest.
(b) Except when the Committee determines otherwise pursuant to Section
7(d), if a Key Employee terminates employment with all Participating Companies
for any reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the Key
Employee and shall be reacquired by the Company.
(c) Except as otherwise provided in this Section 7, no shares of Restricted
Stock received by a Key Employee shall be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of during the Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of
special circumstances, the Committee may, in its sole discretion when it finds
that a waiver would be in the best interests of the Company, elect to waive any
or all remaining restrictions with respect to such Key Employee's Restricted
Stock.
(e) The Committee may require, under such terms and conditions as it deems
appropriate or desirable, that the certificates for Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any Award of Restricted Stock that the Key Employee shall have delivered a stock
power endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from exchanging
any shares of Restricted Stock subject to the restrictions contained herein for
any other shares of Stock that are similarly restricted.
(g) Subject to Section 7(e) and Section 8, each Key Employee entitled to
receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
Employee, and shall bear an appropriate legend reciting the terms, conditions
and restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.
8. CERTIFICATES FOR AWARDS OF STOCK
(a) The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to (i) the listing of such shares on any stock
exchange on which the Stock may then be listed and (ii) the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body which the Company shall, in its
sole discretion, determine to be necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
(c) Except for the restrictions on Restricted Stock under Section 7, each
Key Employee who receives Stock in settlement of an Award of Stock, shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the shares and receive dividends and other distributions. No Key
Employee awarded an Option, a Right or Performance Share shall have any right as
a shareholder with respect to any shares covered by his or her Option, Right or
Performance Share prior to the date of issuance to him or her of a certificate
or certificates for such shares.
9. ACCELERATION EVENTS
(a) For the purposes of this Plan, an Acceleration Event shall occur if (i)
a report on Schedule 13D shall be filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Act disclosing that any person
(within the meaning of Section 13(d) of the Act), other than the Company or a
subsidiary of the Company or any employee benefit plan sponsored by the Company
or a subsidiary of the Company, is the
D-6
<PAGE> 405
beneficial owner directly or indirectly of twenty percent or more of the
outstanding Stock of the Company; (ii) any person (within the meaning of Section
13(d) of the Act), other than the Company or a subsidiary of the Company or any
employee benefit plan sponsored by the Company or a subsidiary of the Company,
shall purchase shares pursuant to a tender offer or exchange offer to acquire
any Stock of the Company (or securities convertible into Stock) for cash,
securities or any other consideration, provided that after consummation of the
offer, the person in question is the beneficial owner (as such term is defined
in Rule 13d-3 under the Act), directly or indirectly, of fifteen percent or more
of the outstanding Stock of the Company (calculated as provided in paragraph (d)
of Rule 13d-3 under the Act in the case of rights to acquire Stock); (iii) the
stockholders of the Company shall approve (A) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which shares of Stock of the Company would be converted into cash,
securities or other property, other than a merger of the Company in which
holders of Stock of the Company immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger as immediately before, or (B) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all the assets of the Company; or (iv) there shall have been a
change in a majority of the members of the Board within a 12-month period unless
the election or nomination for election by the Company's stockholders of each
new director during such 12-month period was approved by the vote of two-thirds
of the directors then still in office who were directors at the beginning of
such 12-month period.
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall become
immediately exercisable in full for the aggregate number of shares covered
thereby and all related Rights shall also become exercisable upon the
occurrence of an Acceleration Event described in this Section 9 and shall
continue to be exercisable in full for cash for a period of 60 calendar
days beginning on the date that such Acceleration Event occurs and ending
on the 60th calendar day following that date; provided, however, that (A)
no Right shall become exercisable earlier than six months following the
date the Right is granted, and (B) no Option or Right shall be exercisable
beyond the expiration date of its original term.
(ii) Options and Rights shall not terminate and shall continue to be
fully exercisable for a period of seven months following the occurrence of
an Acceleration Event in the case of an employee who is terminated other
than for just cause or who voluntarily terminates his employment because he
in good faith believes that as a result of such Acceleration Event he is
unable effectively to discharge his present duties or the duties of the
position he occupied just prior to the occurrence of such Acceleration
Event. For purposes of Section 9 only, termination shall be for "just
cause" only if such termination is based on fraud, misappropriation or
embezzlement on the part of the employee which results in a final
conviction of a felony. Under no circumstances, however, shall any Option
or Right be exercised beyond the expiration date of its original term.
(iii) Any Right or portion thereof may be exercised for cash within
the 60-calendar-day period following the occurrence of an Acceleration
Event with settlement, except in the case of a Right related to an
Incentive Stock Option, based on the "Formula Price" which shall be the
highest of (A) the highest composite daily closing price of the Stock
during the period beginning on the 60th calendar day prior to the date on
which the Right is exercised and ending on the date such Right is
exercised, (B) the highest gross price paid for the Stock during the same
period of time, as reported in a report on Schedule 13D filed with the
Securities and Exchange Commission or (C) the highest gross price paid or
to be paid for a share of Stock (whether by way of exchange, conversion,
distribution upon merger, liquidation or otherwise) in any of the
transactions set forth in this Section 9 as constituting an Acceleration
Event.
(iv) Upon the occurrence of an Acceleration Event, Limited Stock
Appreciation Rights shall automatically be granted as to any Option with
respect to which Rights are not then outstanding; provided, however, that
Limited Stock Appreciation Rights shall be provided at the time of grant of
any Incentive Stock Option subject to exercisability upon the occurrence of
an Acceleration Event. Limited Stock Appreciation Rights shall entitle the
holder thereof, upon exercise of such rights and surrender of
D-7
<PAGE> 406
the related Option or any portion thereof, to receive, without payment to
the Company (except for applicable withholding taxes), an amount in cash
equal to the excess, if any, of the Formula Price as that term is defined
in Section 9 over the option price of the Stock as provided in such Option;
provided that in the case of the exercise of any such Limited Stock
Appreciation Right or portion thereof related to an Incentive Stock Option,
the Fair Market Value of the Stock at the time of such exercise shall be
substituted for the Formula Price. Each such Limited Stock Appreciation
Right shall be exercisable only during the period beginning on the first
business day following the occurrence of such Acceleration Event and ending
on the 60th day following such date and only to the same extent the related
Option is exercisable. In the case of persons who are considered directors
or officers of the Company for purposes of Section 16 of the Act, Limited
Stock Appreciation Rights shall not be so exercisable until they have been
outstanding for at least six months. Upon exercise of a Limited Stock
Appreciation Right and surrender of the related Option, or portion thereof,
such Option, to the extent surrendered, shall not thereafter be
exercisable.
(v) The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 7 shall lapse upon the occurrence of an Acceleration
Event and the Company shall issue stock certificates without a restrictive
legend. Key Employees holding Restricted Stock on the date of an
Acceleration Event may tender such Restricted Stock to the Company which
shall pay the Formula Price as that term is defined in Section 9; provided,
such Restricted Stock must be tendered to the Company within 60 calendar
days of the Acceleration Event.
(vi) If an Acceleration Event occurs during the course of a
Performance Period applicable to an Award of Performance Shares pursuant to
Section 6, then the Key Employee shall be deemed to have satisfied the
Performance Objectives and settlement of such Performance Shares shall be
based on the Formula Price, as defined in this Section 9.
10. BENEFICIARY
(a) Each Key Employee shall file with the Company a written designation of
one or more persons as the Beneficiary who shall be entitled to receive the
Award, if any, payable under the Plan upon his or her death. A Key Employee may
from time to time revoke or change his or her Beneficiary designation without
the consent of any prior Beneficiary by filing a new designation with the
Company. The last such designation received by the Company shall be controlling;
provided, however, that no designation, or change or revocation thereof, shall
be effective unless received by the Company prior to the Key Employee's death,
and in no event shall it be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's death, or if no designated Beneficiary survives the Key Employee or
if such designation conflicts with law, the Key Employee's estate shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. If the Committee is in doubt as to the right of any person to receive
such Award, the Company may retain such Award, without liability for any
interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Company therefor.
11. ADMINISTRATION OF THE PLAN
(a) Each member of the Committee shall be both a member of the Board and a
"disinterested person" within the meaning of Rule 16b-3 under the Act or
successor rule or regulation. No member of the Committee shall be, or shall have
been, eligible to receive an Award under the Plan or any other plan maintained
by any Participating Company to acquire stock, stock options, stock appreciation
rights, performance shares or restricted stock of a Participating Company at any
time within the one year immediately preceding the member's appointment to the
Committee.
(b) All decisions, determinations or actions of the Committee made or taken
pursuant to grants of authority under the Plan shall be made or taken in the
sole discretion of the Committee and shall be final, conclusive and binding on
all persons for all purposes.
D-8
<PAGE> 407
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Key Employees, whether or not such Key
Employees are similarly situated.
(e) The Committee may, in its sole discretion, delegate such of its powers
as it deems appropriate to the chief executive officer or other members of
senior management, except that Awards to executive officers shall be made solely
by the Committee and subject to compliance with Rule 16b-3 of the Act.
(f) If an Acceleration Event has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. AMENDMENT, EXTENSION OR TERMINATION
The Board may, at any time, amend or terminate the Plan and, specifically,
may make such modifications to the Plan as it deems necessary to avoid the
application of Section 162(m) of the Code and the Treasury regulations issued
thereunder. However, no amendment shall, without approval by a majority of the
Company's stockholders, (a) alter the group of persons eligible to participate
in the Plan, (b) except as provided in Section 13 increase the maximum number of
shares of Stock which are available for Awards under the Plan, (c) materially
increase the benefits accruing to participants under the Plan or (d) extend the
period during which awards may be granted beyond December 31, 2005. If an
Acceleration Event has occurred, no amendment or termination shall impair the
rights of any person with respect to a prior Award.
13. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK
"In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the Committee may make such adjustment in the Stock subject
to Awards, including Stock subject to purchase by an Option, or the terms,
conditions or restrictions on Stock or Awards, including the price payable upon
the exercise of such Option and the number of shares subject to restricted stock
awards, as the Committee deems equitable.
14. SUBSTITUTE AWARDS
The Committee shall be authorized to issue substitute ITT Destinations,
Inc. stock options and related rights to those key employees of Participating
Companies who surrender options to acquire stock in ITT Corporation. The
Committee may make a determination as to the exercise price and number of such
substitute options as it may determine in order to preserve the economic value
of the surrendered ITT options and related rights in the aggregate amount not to
exceed 16,500,000 shares. Subject to this limitation, shares of New ITT Common
Stock to be issued upon the exercise of substitute stock options may be made
available from authorized but unissued shares or from treasury or shares held by
ITT Destinations, Inc. in shares purchased in the open market.
The maximum number of substitute ITT Destinations stock options and related
rights that may be granted to an individual employee is 2,600,000 or such lower
number as may be necessary to preserve the economic value of the surrendered ITT
options and related rights by any such individual employee.
The terms and conditions of each substitute stock award, including, without
limitation, the expiration date of the option, the time or times when, and the
manner in which, each substitute option shall be
D-9
<PAGE> 408
exercisable, the duration of the exercise period, the method of exercise,
settlement and payment, and the rules in the event of termination, shall be the
same as those of the surrendered ITT award.
The Committee shall also be authorized to issue substitute grants of ITT
Destinations, Inc. Restricted Stock to replace shares of ITT restricted stock
surrendered by employees of Participating Companies. Such substitute shares
shall be subject to the same terms and conditions as the surrendered shares of
ITT restricted stock, including, without limitation, the restriction period of
such ITT shares.
15. MISCELLANEOUS
(a) Except as provided in Section 9, nothing in this Plan or any Award
granted hereunder shall confer upon any employee any right to continue in the
employ of any Participating Company or interfere in any way with the right of
any Participating Company to terminate his or her employment at any time. No
Award payable under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company. All payments to be made hereunder shall be paid from the general
funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
provided in Section 7(e) with respect to Restricted Stock.
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL
The effective date of the Plan shall be January 1, 1996. No Award shall be
granted under this Plan after the Plan's termination date. The Plan's
termination date shall be December 31, 2005. The Plan will continue in effect
for existing Awards as long as any such Award is outstanding.
D-10
<PAGE> 409
ANNEX E
1995 ITT HARTFORD INCENTIVE STOCK PLAN
The following is the text of the 1995 ITT Hartford Incentive Stock Plan:
1. PURPOSE
The purpose of the 1995 ITT Hartford Incentive Stock Plan is to motivate
and reward superior performance on the part of employees of ITT Hartford Group,
Inc. and its subsidiaries ("ITT Hartford") and to thereby attract and retain
employees of superior ability. In addition, the Plan is intended to further
opportunities for stock ownership by such employees in order to increase their
proprietary interest in ITT Hartford and, as a result, their interest in the
success of the Company. Awards will be made, in the discretion of the Committee,
to Key Employees (including officers and directors who are also employees) whose
responsibilities and decisions directly affect the performance of any
Participating Company and its subsidiaries. Such incentive awards may consist of
stock options, stock appreciation rights payable in stock or cash, performance
shares, restricted stock or any combination of the foregoing, as the Committee
may determine.
2. DEFINITIONS
When used herein, the following terms shall have the following meanings:
"Acceleration Event" means the occurrence of an event defined in Section 9
of the Plan.
"Act" means the Securities Exchange Act of 1934.
"Annual Limit" means the maximum number of shares of Stock for which Awards
may be granted under the Plan in each Plan Year as provided in Section 3 of the
Plan.
"Award" means an award granted to any Key Employee in accordance with the
provisions of the Plan in the form of Options, Rights, Performance Shares or
Restricted Stock, or any combination of the foregoing.
"Award Agreement" means the written agreement evidencing each Award granted
to a Key Employee under the Plan.
"Beneficiary" means the beneficiary or beneficiaries designated pursuant to
Section 10 to receive the amount, if any, payable under the Plan upon the death
of a Key Employee.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
"Committee" means the Compensation and Personnel Committee of the Board or
such other committee as may be designated by the Board to administer the Plan.
"Company" means ITT Hartford and its successors and assigns.
"Fair Market Value", unless otherwise indicated in the provisions of this
Plan, means, as of any date, the composite closing price for one share of Stock
on the New York Stock Exchange or, if no sales of Stock have taken place on such
date, the composite closing price on the most recent date on which selling
prices were quoted, the determination to be made in the discretion of the
Committee.
"Incentive Stock Option" means a stock option qualified under Section 422
of the Code.
"Key Employee" means an employee (including any officer or director who is
also an employee) of any Participating Company whose responsibilities and
decisions, in the judgment of the Committee, directly affect the performance of
the Company and its subsidiaries.
E-1
<PAGE> 410
"Limited Stock Appreciation Right" means a stock appreciation right which
shall become exercisable automatically upon the occurrence of an Acceleration
Event as described in Section 9 of the Plan.
"Option" means an option awarded under Section 5 of the Plan to purchase
Stock of the Company, which option may be an Incentive Stock Option or a
non-qualified stock option.
"Participating Company" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options only,
"Participating Company" means the Company or any corporation which at the time
such Option is granted qualifies as a "subsidiary" of the Company under Section
425(f) of the Code.
"Performance Share" means a performance share awarded under Section 6 of
the Plan.
"Plan" means the 1995 ITT Hartford Incentive Stock Plan, as the same may be
amended, administered or interpreted from time to time.
"Plan Year" means the calendar year.
"Retirement" means eligibility to receive immediate retirement benefits
under a Participating Company pension plan.
"Restricted Stock" means Stock awarded under Section 7 of the Plan subject
to such restrictions as the Committee deems appropriate or desirable.
"Right" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"Stock" means the common stock ($1 par value) of the Company.
"Total Disability" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
3. SHARES SUBJECT TO THE PLAN
The aggregate number of shares of Stock which may be awarded under the Plan
in any Plan Year shall be subject to an annual limit. The maximum number of
shares of Stock for which Awards may be granted under the Plan in each Plan Year
shall be 1.5 percent (1.5%) of the total of the issued and outstanding shares of
ITT Hartford Common Stock and Treasury Stock as reported in the Annual Report on
Form 10-K of the Company for the fiscal year ending immediately prior to any
Plan Year. Any unused portion of the Annual Limit for any Plan Year shall be
carried forward and be made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
(5,000,000) shares of ITT Hartford Common Stock be cumulatively available for
Awards of incentive stock options under the Plan, and provided further, that no
more than twenty percent (20%) of the total number of shares on a cumulative
basis shall be available for restricted stock and performance shares Awards. For
any Plan Year, no individual employee may receive an Award of stock options for
more than the lesser of (i) ten percent (10%) of the Annual Limit on available
shares applicable to that Plan Year and (ii) 500,000 shares; except that, for
the Plan Year that follows the Distribution Date, each individual employee may
receive in addition to the foregoing limit a number of substitute stock options
equal to the lesser of (x) 525,000 and (y) the number of stock options required
to replace ITT stock options surrendered by such employee in connection with the
spin-off by ITT of the shares of ITT Hartford to ITT shareholders.
Subject to the above limitations, shares of ITT Hartford Common Stock to be
issued under the Plan may be made available from the authorized but unissued
shares, or shares held by the Company in treasury or from shares purchased in
the open market.
For the purpose of computing the total number of shares of Stock available
for Awards under the Plan, there shall be counted against the foregoing
limitations the number of shares of Stock which equal the value of
E-2
<PAGE> 411
performance share Awards, in each case determined as at the dates on which such
Awards are granted. If any Awards under the Plan are forfeited, terminated,
expire unexercised, are settled in cash in lieu of Stock or are exchanged for
other Awards, the shares of Stock which were theretofore subject to such Awards
shall again be available for Awards under the Plan to the extent of such
forfeiture or expiration of such Awards. Further, any shares that are exchanged
(either actually or constructively) by optionees as full or partial payment to
the Company of the purchase price of shares being acquired through the exercise
of a stock option granted under the Plan may be available for subsequent Awards,
provided however, that such shares may be awarded only to those participants who
are not directors or executive officers (as that term is defined in the rules
and regulations under Section 16 of the Act).
4. GRANT OF AWARDS AND AWARD AGREEMENTS
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards are to be granted; (ii) determine the form or forms of
Award to be granted to any Key Employee; (iii) determine the amount or number of
shares of Stock subject to each Award; and (iv) determine the terms and
conditions of each Award.
(b) Each Award granted under the Plan shall be evidenced by a written Award
Agreement. Such agreement shall be subject to and incorporate the express terms
and conditions, if any, required under the Plan or required by the Committee.
5. STOCK OPTIONS AND RIGHTS
(a) With respect to Options and Rights, the Committee shall (i) authorize
the granting of Incentive Stock Options, non-qualified stock options, or a
combination of Incentive Stock Options and non-qualified stock options; (ii)
authorize the granting of Rights which may be granted in connection with all or
part of any Option granted under this Plan, either concurrently with the grant
of the Option or at any time thereafter during the term of the Option; (iii)
determine the number of shares of Stock subject to each Option or the number of
shares of Stock that shall be used to determine the value of a Right; and (iv)
determine the time or times when and the manner in which each Option or Right
shall be exercisable and the duration of the exercise period.
(b) Any option issued hereunder which is intended to qualify as an
Incentive Stock Option shall be subject to such limitations or requirements as
may be necessary for the purposes of Section 422 of the Code or any regulations
and rulings thereunder to the extent and in such form as determined by the
Committee in its discretion.
(c) Rights may be granted only to Key Employees who may be considered
directors or officers of the Company for purposes of Section 16 of the Act.
(d) The exercise period for a non-qualified stock option and any related
Right shall not exceed ten years and two days from the date of grant, and the
exercise period for an Incentive Stock Option and any related Right shall not
exceed ten years from the date of grant.
(e) The Option price per share shall be determined by the Committee at the
time any Option is granted and shall be not less than the Fair Market Value of
one share of Stock on the date the Option is granted.
(f) No part of any Option or Right may be exercised until the Key Employee
who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments; provided, however, the period during which a Right is exercisable
shall commence no earlier than six months following the date the Option or Right
is granted.
(g) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for
E-3
<PAGE> 412
tendering Stock as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Stock to exercise an Option as it
deems appropriate.
(h) Unless Section 9 shall provide otherwise, Rights granted to a director
or officer shall terminate when such person ceases to be considered a director
or officer of the Company subject to Section 16 of the Act.
(i) In case of termination of employment, the following provisions shall
apply:
(A) If a Key Employee who has been granted an Option shall die before
such Option has expired, his or her Option may be exercised in full by the
person or persons to whom the Key Employee's rights under the Option pass
by will, or if no such person has such right, by his or her executors or
administrators, at any time, or from time to time, within five years after
the date of the Key Employee's death or within such other period, and
subject to such terms and conditions as the Committee may specify, but not
later than the expiration date specified in Section 5(d) above.
(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she
may exercise his or her Options in full at any time, or from time to time,
within five years after the date of the termination of his or her
employment or within such other period, and subject to such terms and
conditions as the Committee may specify, but not later than the expiration
date specified in Section 5(d) above. Any such Options not fully
exercisable immediately prior to such optionee's retirement shall become
fully exercisable upon such retirement unless the Committee, in its sole
discretion, shall otherwise determine.
(C) Except as provided in Section 9, if the Key Employee shall
voluntarily resign before eligibility for Retirement or he or she is
terminated for cause as determined by the Committee, the Options or Rights
shall be cancelled coincident with the effective date of the termination of
employment.
(D) If the Key Employee's employment terminates for any other reason,
he or she may exercise his or her Options, to the extent that he or she
shall have been entitled to do so at the date of the termination of his or
her employment, at any time, or from time to time, within three months
after the date of the termination of his or her employment or within such
other period, and subject to such terms and conditions as the Committee may
specify, but not later than the expiration date specified in Section 5(d)
above.
(j) No Option or Right granted under the Plan shall be transferable other
than by will or by the laws of descent and distribution. During the lifetime of
the optionee, an Option or Right shall be exercisable only by the Key Employee
to whom the Option or Right is granted (or his or her estate or designated
beneficiary).
(k) With respect to an Incentive Stock Option, the Committee shall specify
such terms and provisions as the Committee may determine to be necessary or
desirable in order to qualify such Option as an "incentive stock option" within
the meaning of Section 422 of the Code.
(l) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall be entitled,
subject to such terms and conditions the Committee may specify, to receive
upon exercise thereof all or a portion of the excess of (A) the Fair Market
Value of a specified number of shares of Stock at the time of exercise, as
determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(e), be less than the Fair Market Value of such
specified number of shares of Stock at the time the Right is granted. Upon
exercise of a Right, payment of such excess shall be made as the Committee
shall specify in cash, the issuance or transfer to the Key Employee of
whole shares of Stock with a Fair Market Value at such time equal to any
excess, or a combination of cash and shares of Stock with a combined Fair
Market Value at such time equal to any such excess, all as determined by
the Committee. The Company will not issue a fractional share of Stock and,
if a fractional share would otherwise be issuable, the Company shall pay
cash equal to the Fair Market Value of the fractional share of Stock at
such time.
(ii) For the purposes of Subsection (i) of this Section 5(l), in the
case of any such Right or portion thereof, other than a Right related to an
Incentive Stock Option, exercised for cash during a "window
E-4
<PAGE> 413
period" specified by Rule 16b-3 under the Act, the Fair Market Value of the
Stock at the time of such exercise shall be the highest composite daily
closing price of the Stock during such window period.
(iii) In the event of the exercise of such Right, the Company's
obligation in respect of any related Option or such portion thereof will be
discharged by payment of the Right so exercised.
6. PERFORMANCE SHARES
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards of Performance Shares are to be made, (ii) determine
the Performance Period (the "Performance Period") and Performance Objectives
(the "Performance Objectives") applicable to such Awards, (iii) determine the
form of settlement of a Performance Share and (iv) generally determine the terms
and conditions of each such Award. At any date, each Performance Share shall
have a value equal to the Fair Market Value of a share of Stock at such date;
provided that the Committee may limit the aggregate amount payable upon the
settlement of any Award. The maximum award for any individual employee in any
given year shall be 100,000 Performance Shares.
(b) The Committee shall determine a Performance Period or Periods of not
less than two years. Performance Periods may overlap and Key Employees may
participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
(c) The Committee shall determine the Performance Objectives of Awards of
Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be related to at least
one of the following criteria, which may be (i) determined solely by reference
to the performance of ITT Hartford, any subsidiary or affiliate of ITT Hartford
or any division or unit of any of the foregoing or (ii) based on comparative
performance of any one or more of the foregoing relative to other entities:
earnings per share, return on equity, cash flow, return on total capital, return
on assets, economic value added, increase in surplus, reductions in operating
expenses, increases in operating margins, earnings before income taxes and
depreciation or total shareholder return of ITT Hartford. If during the course
of a Performance Period there shall occur significant events which the Committee
expects to have a substantial effect on the applicable Performance Objectives
during such period, the Committee may revise such Performance Objectives.
(d) At the beginning of a Performance Period, the Committee shall determine
for each Key Employee or group of Key Employees the number of Performance Shares
or the percentage of Performance Shares which shall be paid to the Key Employee
or member of the group of Key Employees if the applicable Performance Objectives
are met in whole or in part.
(e) If a Key Employee terminates service with all Participating Companies
during a Performance Period because of death, Total Disability, Retirement, or
under other circumstances where the Committee in its sole discretion finds that
a waiver would be in the best interests of the Company, that Key Employee may,
as determined by the Committee, be entitled to payment in settlement of such
Performance Shares at the end of the Performance Period based upon the extent to
which the Performance Objectives were satisfied at the end of such period and
prorated for the portion of the Performance Period during which the Key Employee
was employed by any Participating Company; provided, however, the Committee may
provide for an earlier payment in settlement of such Performance Shares in such
amount and under such terms and conditions as the Committee deems appropriate or
desirable. If a Key Employee terminates service with all Participating Companies
during a Performance Period for any other reason, then such Key Employee shall
not be entitled to any Award with respect to that Performance Period unless the
Committee shall otherwise determine.
(f) Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash either as a lump sum payment
or in annual installments, all as the Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
E-5
<PAGE> 414
7. RESTRICTED STOCK
(a) Restricted Stock shall be subject to a restriction period (after which
restrictions will lapse) which shall mean a period commencing on the date the
Award is granted and ending on such date as the Committee shall determine (the
"Restriction Period"). The Committee may provide for the lapse of restrictions
in installments where deemed appropriate and it may also require the achievement
of predetermined performance objectives in order for such shares to vest.
(b) Except when the Committee determines otherwise pursuant to Section
7(d), if a Key Employee terminates employment with all Participating Companies
for any reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the Key
Employee and shall be reacquired by the Company.
(c) Except as otherwise provided in this Section 7, no shares of Restricted
Stock received by a Key Employee shall be sold, exchanged, transferred, pledged,
hypothecated or otherwise disposed of during the Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of
special circumstances, the Committee may, in its sole discretion when it finds
that a waiver would be in the best interests of the Company, elect to waive any
or all remaining restrictions with respect to such Key Employee's Restricted
Stock.
(e) The Committee may require, under such terms and conditions as it deems
appropriate or desirable, that the certificates for Stock delivered under the
Plan may be held in custody by a bank or other institution, or that the Company
may itself hold such shares in custody until the Restriction Period expires or
until restrictions thereon otherwise lapse, and may require, as a condition of
any Award of Restricted Stock that the Key Employee shall have delivered a stock
power endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from exchanging
any shares of Restricted Stock subject to the restrictions contained herein for
any other shares of Stock that are similarly restricted.
(g) Subject to Section 7(e) and Section 8, each Key Employee entitled to
receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
Employee, and shall bear an appropriate legend reciting the terms, conditions
and restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.
8. CERTIFICATES FOR AWARDS OF STOCK
(a) The Company shall not be required to issue or deliver any certificates
for shares of Stock prior to (i) the listing of such shares on any stock
exchange on which the Stock may then be listed and (ii) the completion of any
registration or qualification of such shares under any federal or state law, or
any ruling or regulation of any government body which the Company shall, in its
sole discretion, determine to be necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
(c) Except for the restrictions on Restricted Stock under Section 7, each
Key Employee who receives Stock in settlement of an Award of Stock, shall have
all of the rights of a shareholder with respect to such shares, including the
right to vote the shares and receive dividends and other distributions. No Key
Employee awarded an Option, a Right or Performance Share shall have any right as
a shareholder with respect to any shares covered by his or her Option, Right or
Performance Share prior to the date of issuance to him or her of a certificate
or certificates for such shares.
E-6
<PAGE> 415
9. ACCELERATION EVENTS
(a) For the purposes of this Plan, an Acceleration Event shall occur if (i)
a report on Schedule 13D shall be filed with the Securities and Exchange
Commission pursuant to Section 13(d) of the Act disclosing that any person
(within the meaning of Section 13(d) of the Act), other than the Company or a
subsidiary of the Company or any employee benefit plan sponsored by the Company
or a subsidiary of the Company, is the beneficial owner directly or indirectly
of twenty percent or more of the outstanding Stock of the Company; (ii) any
person (within the meaning of Section 13(d) of the Act), other than the Company
or a subsidiary of the Company or any employee benefit plan sponsored by the
Company or a subsidiary of the Company, shall purchase shares pursuant to a
tender offer or exchange offer to acquire any Stock of the Company (or
securities convertible into Stock) for cash, securities or any other
consideration, provided that after consummation of the offer, the person in
question is the beneficial owner (as such term is defined in Rule 13d-3 under
the Act), directly or indirectly, of fifteen percent or more of the outstanding
Stock of the Company (calculated as provided in paragraph (d) of Rule 13d-3
under the Act in the case of rights to acquire Stock); (iii) the stockholders of
the Company shall approve (A) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or pursuant to
which shares of Stock of the Company would be converted into cash, securities or
other property, other than a merger of the Company in which holders of Stock of
the Company immediately prior to the merger have the same proportionate
ownership of common stock of the surviving corporation immediately after the
merger as immediately before, or (B) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all the assets of the Company; or (iv) there shall have been a change in a
majority of the members of the Board within a 12-month period unless the
election or nomination for election by the Company's stockholders of each new
director during such 12-month period was approved by the vote of two-thirds of
the directors then still in office who were directors at the beginning of such
12-month period.
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall become
immediately exercisable in full for the aggregate number of shares covered
thereby and all related Rights shall also become exercisable upon the
occurrence of an Acceleration Event described in this Section 9 and shall
continue to be exercisable in full for cash for a period of 60 calendar
days beginning on the date that such Acceleration Event occurs and ending
on the 60th calendar day following that date; provided, however, that (A)
no Right shall become exercisable earlier than six months following the
date the Right is granted, and (B) no Option or Right shall be exercisable
beyond the expiration date of its original term.
(ii) Options and Rights shall not terminate and shall continue to be
fully exercisable for a period of seven months following the occurrence of
an Acceleration Event in the case of an employee who is terminated other
than for just cause or who voluntarily terminates his employment because he
in good faith believes that as a result of such Acceleration Event he is
unable effectively to discharge his present duties or the duties of the
position he occupied just prior to the occurrence of such Acceleration
Event. For purposes of Section 9 only, termination shall be for "just
cause" only if such termination is based on fraud, misappropriation or
embezzlement on the part of the employee which results in a final
conviction of a felony. Under no circumstances, however, shall any Option
or Right be exercised beyond the expiration date of its original term.
(iii) Any Right or portion thereof may be exercised for cash within
the 60-calendar-day period following the occurrence of an Acceleration
Event with settlement, except in the case of a Right related to an
Incentive Stock Option, based on the "Formula Price" which shall be the
highest of (A) the highest composite daily closing price of the Stock
during the period beginning on the 60th calendar day prior to the date on
which the Right is exercised and ending on the date such Right is
exercised, (B) the highest gross price paid for the Stock during the same
period of time, as reported in a report on Schedule 13D filed with the
Securities and Exchange Commission or (C) the highest gross price paid or
to be paid for a share of Stock (whether by way of exchange, conversion,
distribution upon merger, liquidation or otherwise) in any of the
transactions set forth in this Section 9 as constituting an Acceleration
Event.
E-7
<PAGE> 416
(iv) Upon the occurrence of an Acceleration Event, Limited Stock
Appreciation Rights shall automatically be granted as to any Option with
respect to which Rights are not then outstanding; provided, however, that
Limited Stock Appreciation Rights shall be provided at the time of grant of
any Incentive Stock Option subject to exercisability upon the occurrence of
an Acceleration Event. Limited Stock Appreciation Rights shall entitle the
holder thereof, upon exercise of such rights and surrender of the related
Option or any portion thereof, to receive, without payment to the Company
(except for applicable withholding taxes), an amount in cash equal to the
excess, if any, of the Formula Price as that term is defined in Section 9
over the option price of the Stock as provided in such Option; provided
that in the case of the exercise of any such Limited Stock Appreciation
Right or portion thereof related to an Incentive Stock Option, the Fair
Market Value of the Stock at the time of such exercise shall be substituted
for the Formula Price. Each such Limited Stock Appreciation Right shall be
exercisable only during the period beginning on the first business day
following the occurrence of such Acceleration Event and ending on the 60th
day following such date and only to the same extent the related Option is
exercisable. In the case of persons who are considered directors or
officers of the Company for purposes of Section 16 of the Act, Limited
Stock Appreciation Rights shall not be so exercisable until they have been
outstanding for at least six months. Upon exercise of a Limited Stock
Appreciation Right and surrender of the related Option, or portion thereof,
such Option, to the extent surrendered, shall not thereafter be
exercisable.
(v) The restrictions applicable to Awards of Restricted Stock issued
pursuant to Section 7 shall lapse upon the occurrence of an Acceleration
Event and the Company shall issue stock certificates without a restrictive
legend. Key Employees holding Restricted Stock on the date of an
Acceleration Event may tender such Restricted Stock to the Company which
shall pay the Formula Price as that term is defined in Section 9; provided,
such Restricted Stock must be tendered to the Company within 60 calendar
days of the Acceleration Event.
(vi) If an Acceleration Event occurs during the course of a
Performance Period applicable to an Award of Performance Shares pursuant to
Section 6, then the Key Employee shall be deemed to have satisfied the
Performance Objectives and settlement of such Performance Shares shall be
based on the Formula Price, as defined in this Section 9.
10. BENEFICIARY
(a) Each Key Employee shall file with the Company a written designation of
one or more persons as the Beneficiary who shall be entitled to receive the
Award, if any, payable under the Plan upon his or her death. A Key Employee may
from time to time revoke or change his or her Beneficiary designation without
the consent of any prior Beneficiary by filing a new designation with the
Company. The last such designation received by the Company shall be controlling;
provided, however, that no designation, or change or revocation thereof, shall
be effective unless received by the Company prior to the Key Employee's death,
and in no event shall it be effective as of a date prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's death, or if no designated Beneficiary survives the Key Employee or
if such designation conflicts with law, the Key Employee's estate shall be
entitled to receive the Award, if any, payable under the Plan upon his or her
death. If the Committee is in doubt as to the right of any person to receive
such Award, the Company may retain such Award, without liability for any
interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate jurisdiction and such
payment shall be a complete discharge of the liability of the Company therefor.
11. ADMINISTRATION OF THE PLAN
(a) Each member of the Committee shall be both a member of the Board and a
"disinterested person" within the meaning of Rule 16b-3 under the Act or
successor rule or regulation. No member of the Committee shall be, or shall have
been, eligible to receive an Award under the Plan or any other plan maintained
by any Participating Company to acquire stock, stock options, stock appreciation
rights,
E-8
<PAGE> 417
performance shares or restricted stock of a Participating Company at any time
within the one year immediately preceding the member's appointment to the
Committee.
(b) All decisions, determinations or actions of the Committee made or taken
pursuant to grants of authority under the Plan shall be made or taken in the
sole discretion of the Committee and shall be final, conclusive and binding on
all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not be
uniform and may be made selectively among Key Employees, whether or not such Key
Employees are similarly situated.
(e) The Committee may, in its sole discretion, delegate such of its powers
as it deems appropriate to the chief executive officer or other members of
senior management, except that Awards to executive officers shall be made solely
by the Committee and subject to compliance with Rule 16b-3 of the Act.
(f) If an Acceleration Event has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. AMENDMENT, EXTENSION OR TERMINATION
The Board may, at any time, amend or terminate the Plan and, specifically,
may make such modifications to the Plan as it deems necessary to avoid the
application of Section 162(m) of the Code and the Treasury regulations issued
thereunder. However, no amendment shall, without approval by a majority of the
Company's stockholders, (a) alter the group of persons eligible to participate
in the Plan, (b) except as provided in Section 13 increase the maximum number of
shares of Stock which are available for Awards under the Plan, (c) materially
increase the benefits accruing to participants under the Plan or (d) extend the
period during which awards may be granted beyond December 31, 2005. If an
Acceleration Event has occurred, no amendment or termination shall impair the
rights of any person with respect to a prior Award.
13. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the Committee may make such adjustment in the Stock subject
to Awards, including Stock subject to purchase by an Option, or the terms,
conditions or restrictions on Stock or Awards, including the price payable upon
the exercise of such Option and the number of shares subject to restricted stock
awards, as the Committee deems equitable.
14. SUBSTITUTE AWARDS
The Committee shall be authorized to issue substitute ITT Hartford stock
options and related rights to those key employees of Participating Companies who
surrender options to acquire stock in ITT Corporation. The Committee may make a
determination as to the exercise price and number of such substitute options as
it may determine in order to preserve the economic value of the surrendered ITT
options and related rights in the aggregate amount not to exceed 8,000,000
shares. Subject to this limitation, shares of ITT Hartford Common Stock to be
issued upon the exercise of substitute stock options may be made available from
authorized but unissued shares or shares held by ITT Hartford in treasury or
from shares purchased in the open market.
E-9
<PAGE> 418
The maximum number of substitute ITT Hartford stock options and related
rights that may be granted to any individual employee is 525,000 or such lower
number as may be necessary to preserve the economic value of surrendered ITT
options and related rights by any such individual employee.
The terms and conditions of each substitute stock award, including, without
limitation, the expiration date of the option, the time or times when, and the
manner in which, each substitute option shall be exercisable, the duration of
the exercise period, the method of exercise, settlement and payment, and the
rules in the event of termination, shall be the same as those of the surrendered
ITT award.
The Committee shall also be authorized to issue substitute grants of ITT
Hartford Restricted Stock to replace shares of ITT restricted stock surrendered
by employees of Participating Companies. Such substitute shares shall be subject
to the same terms and conditions as the surrendered shares of ITT restricted
stock, including, without limitation, the restriction period of such ITT shares.
15. MISCELLANEOUS
(a) Except as provided in Section 9, nothing in this Plan or any Award
granted hereunder shall confer upon any employee any right to continue in the
employ of any Participating Company or interfere in any way with the right of
any Participating Company to terminate his or her employment at any time. No
Award payable under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company. All payments to be made hereunder shall be paid from the general
funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
provided in Section 7(e) with respect to Restricted Stock.
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a matter
of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL
The effective date of the Plan shall be January 1, 1996. No Award shall be
granted under this Plan after the Plan's termination date. The Plan's
termination date shall be December 31, 2005. The Plan will continue in effect
for existing Awards as long as any such Award is outstanding.
E-10
<PAGE> 419
ANNEX F
ARTICLE 7 OF THE RESTATED CERTIFICATE OF
INCORPORATION OF ITT CORPORATION
Article 7 of the Restated Certificate of Incorporation of ITT reads as
follows:
In order to enable the Corporation and any Subsidiary (as hereinafter
defined) to secure and maintain in good standing all licenses, franchises and
other regulatory approvals issued by Gaming Authorities (as hereinafter defined)
which are necessary for the lawful operation of gaming and related businesses
now or hereafter engaged in by the Corporation or any Subsidiary within or
without The United States of America, which licenses, franchises, or other
regulatory approvals are conditioned upon some or all of the holders of the
Corporation's stock possessing prescribed qualifications (the "Gaming
Licenses"), and in order to insure that the business of the Corporation and its
Subsidiaries will be carried on in compliance with the laws and regulations
governing the conduct of gaming and related businesses (the "Gaming Laws"), the
following provisions are made and shall apply for so long as the Corporation is
subject to Gaming Laws:
(A) Securities (as hereinafter defined) of the Corporation shall be
subject to redemption by the oration, pursuant to Section 15(b) of the
General Corporation Law of Delaware or any other applicable provision of
law, to the extent necessary to prevent the loss or to secure the
reinstatement of any Gaming License held by the Corporation or any
Subsidiary.
(B) Securities of the Corporation shall be held subject to the
condition that if a holder thereof is found by a Gaming Authority to be
disqualified or unsuitable pursuant to any Gaming Law (a "Disqualified
Holder"), such holder shall dispose of all of the Corporation's Securities
held by such holder within the 120 day period (the "Disposition Period")
commencing on the date (the "Notice Date") upon which the Corporation shall
have received notice from a Gaming Authority of the holder's
disqualification (the "Disqualification Notice"). Promptly following its
receipt of a Disqualification Notice, the Corporation shall cause such
Disqualification Notice to be delivered to the Disqualified Holder named
therein by personal delivery, by mailing it to the address shown on the
Corporation's books and records, or through the use of any other reasonable
means. Failure of the Corporation to provide such Disqualification Notice
to a Disqualified Holder after making reasonable efforts to do so shall not
preclude the Corporation from exercising its rights.
(C) If any Disqualified Holder fails to dispose of the Corporation's
Securities within the Disposition Period, the Corporation may redeem such
Securities at the lesser of (i) the lowest closing sale price of such
securities on any trading day during the Disposition Period or (ii) such
Disqualified Holder's original purchase price.
(D) Commencing on the Notice Date, it shall be unlawful for a
Disqualified Holder to:
(1) receive payments of dividends or interest upon any Securities
of the Corporation held by such Disqualified Holder;
(2) exercise, directly or indirectly, any right conferred by the
Corporation's Securities upon the holders thereof; or
(3) receive any remuneration in any form, for services rendered or
otherwise, from the Subsidiary of the Corporation that holds a Gaming
License.
(E) The Board of Directors shall have the power to determine, on the
basis of information known to the Board after reasonable inquiry, all
questions arising under this Article 7 including, without limitation, (i)
whether a person is a Disqualified Holder, (ii) whether a Disqualified
Holder has disposed of Securities pursuant to Section B of this Article 7
and (iii) the amount of Securities held directly or indirectly by any
person. Any such determination shall be binding and conclusive on all such
persons.
(F) The Corporation shall be entitled to injunctive relief in any
court of competent jurisdiction to enforce the provisions of this Article
7, and each holder of Securities of the Corporation will be deemed to
F-1
<PAGE> 420
have acknowledged by acquiring or retaining Securities of the Corporation
that failure to comply with this Article 7 will expose the Corporation to
irreparable injury for which there is no adequate remedy at law and that
the Corporation is entitled to injunctive relief to enforce the provisions
of this Article 7.
(G) A Disqualified Holder shall indemnify the Corporation and its
Subsidiaries for any and all direct and indirect costs, including
attorney's fees, incurred by the Corporation as a result of such holder's
continuing ownership of or failure to divest the Securities.
(H) The following definitions shall apply with respect to this Article
7:
(1) The term "Gaming Authorities" includes all governmental
authorities within or without The United States of America which issue
or grant any license, franchise or regulatory approval necessary or
appropriate for the lawful operation of gaming and related businesses.
With respect to Atlantic City, New Jersey, the term "Gaming Authorities"
shall include without limitation, the New Jersey Casino Control
Commission, the division of Gaming Enforcement or their respective
successors; and with respect to the state of Nevada, the term Gaming
Authorities shall include, without limitation, the Nevada Gaming
Commission, the Nevada State Gaming Control Board or their respective
successors.
(2) The term "Securities" means any instrument evidencing a direct
or indirect beneficial ownership or creditor interest in the
Corporation, including but not limited to, Common Stock, Preferred
Stock; bonds; mortgages; debentures; security agreements; notes;
warrants; options and rights.
(3) The term "Subsidiary" (a) in matters relating to Gaming Laws
outside of New Jersey, means (i) a corporation, more than 50% (fifty
percent) of the outstanding voting securities of which the Corporation
or a Subsidiary of the Corporation owns or has the power to vote; or
(ii) a firm, association, partnership, trust or other form of business
organization, not a natural person, of which the Corporation or a
Subsidiary of the Corporation owns or has the power to vote a majority
interest, or (b) in matters relating to Gaming Laws of New Jersey, shall
have the definition set forth in N.J.S.A. 5:12-47.
A comparable provision will be included in the Certificate of Incorporation
of New ITT after the Distribution. See "DESCRIPTION OF NEW ITT CAPITAL
STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS".
F-2
<PAGE> 421
ANNEX G
ITT 1996 RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY
1.1 PURPOSE
The purpose of the ITT Industries, Inc. 1996 Restricted Stock Plan for
Non-Employee Directors (the "Plan") is to attract and retain persons of ability
as directors of the Company and to provide them with a closer identity with the
interests of the Company's stockholders by paying the Annual Retainer in common
stock of the Company.
1.2 ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee
of the Board of Directors (hereinafter referred to as the "Committee"). The
Committee shall have the responsibility of interpreting the Plan and
establishing and amending such rules and regulations necessary or appropriate
for the administration of the Plan. All interpretations of the Plan or any
Restricted Stock awards issued under it shall be final and binding upon all
persons having an interest in the Plan. No member of the Committee shall be
liable for any action or determination taken or made in good faith with respect
to this Plan or any award granted hereunder.
1.3 ELIGIBILITY
Directors of the Company who are not employees of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
1.4 STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be granted under the Plan shall
be [100,000] shares of common stock of the Company (the "Stock").
(b) If any Restricted Stock is forfeited by a Director in accordance with
the provisions of Section 2.2(c), such shares of Restricted Stock shall be
restored to the total number of shares available for grant pursuant to the Plan.
(c) Upon the grant of a Restricted Stock award the Company may distribute
newly issued shares or treasury shares.
ARTICLE II -- RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS
Restricted Stock awards shall be made automatically on the date of the
Annual Meeting of Stockholders, to each Director elected at the meeting or
continuing in office following the meeting. The award shall equal the number of
whole shares arrived at by dividing the Annual Retainer that is in effect for
the calendar year within which the award date falls, by the Fair Market Value of
the Company's common stock. Fractional shares shall be paid in cash.
(a) "Annual Retainer" shall mean the amount that is payable to a Director
for service on the Board of Directors during the calendar year. Annual Retainer
shall not include fees paid for attendance at any Board or Committee meeting nor
any fee for chairing a Committee of the Board.
(b) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's common stock on the date of the Annual Meeting, as
reported by the New York Stock Exchange Composite Tape.
G-1
<PAGE> 422
2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
(a) Written Agreement -- Each Restricted Stock award shall be evidenced by
a written agreement delivered to the Director in such form as the Committee
shall prescribe. Such agreement shall include the restrictions described under
Section 2.2(c) and any other restrictions and conditions on the shares as the
Committee deems appropriate.
(b) Shares held in Escrow -- The Restricted Stock subject to such award
shall be registered in the name of the Director and held in escrow by the
Committee until the restrictions on such shares lapse as described below.
(c) Restrictions -- Restricted Stock granted to a Director may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of, except by
will or the laws of descent and distribution, prior to the earliest of the
following dates:
(1) The fifth anniversary of the date of grant.
(2) Retirement from the Board at age 72.
(3) "Change in Control" of the Company. A "Change in Control" shall be
deemed to have occurred if:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing that
any person (within the meaning of Section 13(d) of the Act), other than
the Company or a subsidiary of the Company or any employee benefit plan
sponsored by the Company or a subsidiary of the Company, is the
beneficial owner directly or indirectly of twenty percent or more of the
outstanding Stock of the Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company,
shall purchase shares pursuant to a tender offer or exchange offer to
acquire any Stock of the Company (or securities convertible into Stock)
for cash, securities or any other consideration, provided that after
consummation of the offer, the person in question is the beneficial
owner (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of fifteen percent or more of the outstanding Stock of the
Company (calculated as provided in paragraph (d) of Rule 13d-3 under the
Act in the case of rights to acquire Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock
of the Company would be converted into cash, securities or other
property, other than a merger of the Company in which holders of Stock
of the Company immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger as immediately before, or (B) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the
Company; or
(iv) there shall have been a change in a majority of the members of
the Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such
12-month period.
(4) Death of the Director.
(5) Disability of the Director.
(6) Resignation by the Director under cases of special circumstances
and the Committee, in its sole discretion, consents to waive any remaining
restrictions.
G-2
<PAGE> 423
(d) Dividends and Voting Rights -- The Director shall, subject to Section
2.2(c), possess all incidents of ownership of the shares of Restricted Stock
including the right to receive dividends with respect to such shares and to vote
such shares.
(e) The Company shall deliver to the Director, or the beneficiary of such
Director, if applicable, all of the shares of stock that were awarded to the
Director as Restricted Stock, within 30 days following the lapse of restrictions
as described under Section 2.2(c). If the Director discontinues serving on the
Board prior to the date upon which restrictions lapse as described under Section
2.2(c), such Director's Restricted Stock will be forfeited by the Director and
transferred to and reacquired by the Company at no cost to the Company.
ARTICLE III -- GENERAL PROVISIONS
3.1 AUTHORITY
Appropriate officers of the Company designated by the Committee are
authorized to execute Restricted Stock agreements, and amendments thereto, in
the name of the Company, as directed from time to time by the Committee.
3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up, or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the number and kind of shares which thereafter may be
granted under the Plan and the number of shares of Restricted Stock awarded
pursuant to Section 2.1 with respect to which all restrictions have not lapsed,
shall be appropriately adjusted consistent with such change in such manner as
the Board in its discretion may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, Directors
participating in the Plan. Any fractional shares resulting from such adjustments
shall be eliminated.
3.3 RIGHTS OF DIRECTORS
The Plan shall not be deemed to create any obligation on the part of the
Board to nominate any Director for reelection by the Company's stockholders or
to retain any Director at any particular rate of compensation. The Company shall
not be obligated to issue stock pursuant to an award of Restricted Stock for
which the restrictions hereunder have lapsed if such issuance would constitute a
violation of any applicable law. Except as provided herein, no Director shall
have any rights as a stockholder with respect to any shares of Restricted Stock
awarded to him.
3.4 BENEFICIARY
A Director may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. In the event of the death of a
Director, his beneficiary shall have the right to receive the shares of
Restricted Stock awarded pursuant to the Plan. If no designated beneficiary
survives the Director, the executor or administrator of the Director's estate
shall be deemed to be the Director's beneficiary.
3.5 LAWS AND REGULATIONS
The Committee shall have the right to condition any issuance of shares to
any Director hereunder on such Director's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the Committee
shall deem necessary or advisable as a result of any applicable law or
regulation. The Committee may postpone the delivery of stock following the lapse
of restrictions with respect to awards of Restricted Stock for such time as the
Committee in its discretion may deem necessary, in order to permit the Company
with reasonable diligence (i) to effect or maintain registration of the Plan, or
the shares issuable upon the lapse of certain restrictions respecting awards of
Restricted stock, under the Securities Act of 1933, as amended, or the
securities laws of any applicable jurisdiction, or (ii) to determine that such
shares and Plan
G-3
<PAGE> 424
are exempt from such registration; the Company shall not be obligated by virtue
of any Restricted Stock agreement or any provision of the Plan to recognize the
lapse of certain restrictions respecting awards of Restricted Stock or issue
shares in violation of said Act or of the law of the government having
jurisdiction thereof.
3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any action which would
cause the Plan to no longer comply with Rule 16b-3 of the General Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as amended,
or any successor rule or other regulatory requirement.
No amendment, suspension or discontinuance of the Plan shall impair a
Director's right under a Restricted Stock award previously granted to him
without his comment.
3.7 GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of New York.
3.8 EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall be effective upon the Distribution Date subject to the
approval of the Plan by the stockholders of the Company, and shall terminate on
December 31, 2005 provided that grants of Restricted Stock made prior to the
termination of the Plan may vest following such termination in accordance with
their terms.
G-4
<PAGE> 425
ANNEX H
ITT DESTINATIONS, INC. 1996 RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY
1.1 PURPOSE
The purpose of the ITT Industries, Inc. 1996 Restricted Stock Plan for
Non-Employee Directors (the "Plan") is to attract and retain persons of ability
as directors of the Company and to provide them with a closer identity with the
interests of the Company's stockholders by paying the Annual Retainer in common
stock of the Company.
1.2 ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee
of the Board of Directors (hereinafter referred to as the "Committee"). The
Committee shall have the responsibility of interpreting the Plan and
establishing and amending such rules and regulations necessary or appropriate
for the administration of the Plan. All interpretations of the Plan or any
Restricted Stock awards issued under it shall be final and binding upon all
persons having an interest in the Plan. No member of the Committee shall be
liable for any action or determination taken or made in good faith with respect
to this Plan or any award granted hereunder.
1.3 ELIGIBILITY
Directors of the Company who are not employees of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
1.4 STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be granted under the Plan shall
be [100,000] shares of common stock of the Company (the "Stock").
(b) If any Restricted Stock is forfeited by a Director in accordance with
the provisions of Section 2.2(c), such shares of Restricted Stock shall be
restored to the total number of shares available for grant pursuant to the Plan.
(c) Upon the grant of a Restricted Stock award the Company may distribute
newly issued shares or treasury shares.
ARTICLE II -- RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS
Restricted Stock awards shall be made automatically on the date of the
Annual Meeting of Stockholders, to each Director elected at the meeting or
continuing in office following the meeting. The award shall equal the number of
whole shares arrived at by dividing the Annual Retainer that is in effect for
the calendar year within which the award date falls, by the Fair Market Value of
the Company's common stock. Fractional shares shall be paid in cash.
(a) "Annual Retainer" shall mean the amount that is payable to a Director
for service on the Board of Directors during the calendar year. Annual Retainer
shall not include fees paid for attendance at any Board or Committee meeting nor
any fee for chairing a Committee of the Board.
(b) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's common stock on the date of the Annual Meeting, as
reported by the New York Stock Exchange Composite Tape.
H-1
<PAGE> 426
2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
(a) Written Agreement -- Each Restricted Stock award shall be evidenced by
a written agreement delivered to the Director in such form as the Committee
shall prescribe. Such agreement shall include the restrictions described under
Section 2.2(c) and any other restrictions and conditions on the shares as the
Committee deems appropriate.
(b) Shares held in Escrow -- The Restricted Stock subject to such award
shall be registered in the name of the Director and held in escrow by the
Committee until the restrictions on such shares lapse as described below.
(c) Restrictions -- Restricted Stock granted to a Director may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of, except by
will or the laws of descent and distribution, prior to the earliest of the
following dates:
(1) The fifth anniversary of the date of grant.
(2) Retirement from the Board at age 72.
(3) "Change in Control" of the Company. A "Change in Control" shall be
deemed to have occurred if:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing that
any person (within the meaning of Section 13(d) of the Act), other than
the Company or a subsidiary of the Company or any employee benefit plan
sponsored by the Company or a subsidiary of the Company, is the
beneficial owner directly or indirectly of twenty percent or more of the
outstanding Stock of the Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company,
shall purchase shares pursuant to a tender offer or exchange offer to
acquire any Stock of the Company (or securities convertible into Stock)
for cash, securities or any other consideration, provided that after
consummation of the offer, the person in question is the beneficial
owner (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of fifteen percent or more of the outstanding Stock of the
Company (calculated as provided in paragraph (d) of Rule 13d-3 under the
Act in the case of rights to acquire Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock
of the Company would be converted into cash, securities or other
property, other than a merger of the Company in which holders of Stock
of the Company immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger as immediately before, or (B) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the
Company; or
(iv) there shall have been a change in a majority of the members of
the Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such
12-month period.
(4) Death of the Director.
(5) Disability of the Director.
(6) Resignation by the Director under cases of special circumstances
and the Committee, in its sole discretion, consents to waive any remaining
restrictions.
H-2
<PAGE> 427
(d) Dividends and Voting Rights -- The Director shall, subject to Section
2.2(c), possess all incidents of ownership of the shares of Restricted Stock
including the right to receive dividends with respect to such shares and to vote
such shares.
(e) The Company shall deliver to the Director, or the beneficiary of such
Director, if applicable, all of the shares of stock that were awarded to the
Director as Restricted Stock, within 30 days following the lapse of restrictions
as described under Section 2.2(c). If the Director discontinues serving on the
Board prior to the date upon which restrictions lapse as described under Section
2.2(c), such Director's Restricted Stock will be forfeited by the Director and
transferred to and reacquired by the Company at no cost to the Company.
ARTICLE III -- GENERAL PROVISIONS
3.1 AUTHORITY
Appropriate officers of the Company designated by the Committee are
authorized to execute Restricted Stock agreements, and amendments thereto, in
the name of the Company, as directed from time to time by the Committee.
3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up, or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the number and kind of shares which thereafter may be
granted under the Plan and the number of shares of Restricted Stock awarded
pursuant to Section 2.1 with respect to which all restrictions have not lapsed,
shall be appropriately adjusted consistent with such change in such manner as
the Board in its discretion may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, Directors
participating in the Plan. Any fractional shares resulting from such adjustments
shall be eliminated.
3.3 RIGHTS OF DIRECTORS
The Plan shall not be deemed to create any obligation on the part of the
Board to nominate any Director for reelection by the Company's stockholders or
to retain any Director at any particular rate of compensation. The Company shall
not be obligated to issue stock pursuant to an award of Restricted Stock for
which the restrictions hereunder have lapsed if such issuance would constitute a
violation of any applicable law. Except as provided herein, no Director shall
have any rights as a stockholder with respect to any shares of Restricted Stock
awarded to him.
3.4 BENEFICIARY
A Director may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. In the event of the death of a
Director, his beneficiary shall have the right to receive the shares of
Restricted Stock awarded pursuant to the Plan. If no designated beneficiary
survives the Director, the executor or administrator of the Director's estate
shall be deemed to be the Director's beneficiary.
3.5 LAWS AND REGULATIONS
The Committee shall have the right to condition any issuance of shares to
any Director hereunder on such Director's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the Committee
shall deem necessary or advisable as a result of any applicable law or
regulation. The Committee may postpone the delivery of stock following the lapse
of restrictions with respect to awards of Restricted Stock for such time as the
Committee in its discretion may deem necessary, in order to permit the Company
with reasonable diligence (i) to effect or maintain registration of the Plan, or
the shares issuable upon the lapse of certain restrictions respecting awards of
Restricted stock, under the Securities Act of 1933, as amended, or the
securities laws of any applicable jurisdiction, or (ii) to determine that such
shares and Plan
H-3
<PAGE> 428
are exempt from such registration; the Company shall not be obligated by virtue
of any Restricted Stock agreement or any provision of the Plan to recognize the
lapse of certain restrictions respecting awards of Restricted Stock or issue
shares in violation of said Act or of the law of the government having
jurisdiction thereof.
3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any action which would
cause the Plan to no longer comply with Rule 16b-3 of the General Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as amended,
or any successor rule or other regulatory requirement.
No amendment, suspension or discontinuance of the Plan shall impair a
Director's right under a Restricted Stock award previously granted to him
without his comment.
3.7 GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of New York.
3.8 EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall be effective upon the Distribution Date subject to the
approval of the Plan by the stockholders of the Company, and shall terminate on
December 31, 2005 provided that grants of Restricted Stock made prior to the
termination of the Plan may vest following such termination in accordance with
their terms.
H-4
<PAGE> 429
ANNEX I
ITT HARTFORD GROUP, INC. 1996 RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY
1.1 PURPOSE
The purpose of the ITT Industries, Inc. 1996 Restricted Stock Plan for
Non-Employee Directors (the "Plan") is to attract and retain persons of ability
as directors of the Company and to provide them with a closer identity with the
interests of the Company's stockholders by paying the Annual Retainer in common
stock of the Company.
1.2 ADMINISTRATION
The Plan shall be administered by the Compensation and Personnel Committee
of the Board of Directors (hereinafter referred to as the "Committee"). The
Committee shall have the responsibility of interpreting the Plan and
establishing and amending such rules and regulations necessary or appropriate
for the administration of the Plan. All interpretations of the Plan or any
Restricted Stock awards issued under it shall be final and binding upon all
persons having an interest in the Plan. No member of the Committee shall be
liable for any action or determination taken or made in good faith with respect
to this Plan or any award granted hereunder.
1.3 ELIGIBILITY
Directors of the Company who are not employees of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
1.4 STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be granted under the Plan shall
be [100,000] shares of common stock of the Company (the "Stock").
(b) If any Restricted Stock is forfeited by a Director in accordance with
the provisions of Section 2.2(c), such shares of Restricted Stock shall be
restored to the total number of shares available for grant pursuant to the Plan.
(c) Upon the grant of a Restricted Stock award the Company may distribute
newly issued shares or treasury shares.
ARTICLE II -- RESTRICTED STOCK
2.1 RESTRICTED STOCK AWARDS
Restricted Stock awards shall be made automatically on the date of the
Annual Meeting of Stockholders, to each Director elected at the meeting or
continuing in office following the meeting. The award shall equal the number of
whole shares arrived at by dividing the Annual Retainer that is in effect for
the calendar year within which the award date falls, by the Fair Market Value of
the Company's common stock. Fractional shares shall be paid in cash.
(a) "Annual Retainer" shall mean the amount that is payable to a Director
for service on the Board of Directors during the calendar year. Annual Retainer
shall not include fees paid for attendance at any Board or Committee meeting nor
any fee for chairing a Committee of the Board.
(b) "Fair Market Value" shall mean the average of the high and low prices
per share of the Company's common stock on the date of the Annual Meeting, as
reported by the New York Stock Exchange Composite Tape.
I-1
<PAGE> 430
2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS
(a) Written Agreement -- Each Restricted Stock award shall be evidenced by
a written agreement delivered to the Director in such form as the Committee
shall prescribe. Such agreement shall include the restrictions described under
Section 2.2(c) and any other restrictions and conditions on the shares as the
Committee deems appropriate.
(b) Shares held in Escrow -- The Restricted Stock subject to such award
shall be registered in the name of the Director and held in escrow by the
Committee until the restrictions on such shares lapse as described below.
(c) Restrictions -- Restricted Stock granted to a Director may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of, except by
will or the laws of descent and distribution, prior to the earliest of the
following dates:
(1) The fifth anniversary of the date of grant.
(2) Retirement from the Board at age 72.
(3) "Change in Control" of the Company. A "Change in Control" shall be
deemed to have occurred if:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing that
any person (within the meaning of Section 13(d) of the Act), other than
the Company or a subsidiary of the Company or any employee benefit plan
sponsored by the Company or a subsidiary of the Company, is the
beneficial owner directly or indirectly of twenty percent or more of the
outstanding Stock of the Company;
(ii) any person (within the meaning of Section 13(d) of the Act),
other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company,
shall purchase shares pursuant to a tender offer or exchange offer to
acquire any Stock of the Company (or securities convertible into Stock)
for cash, securities or any other consideration, provided that after
consummation of the offer, the person in question is the beneficial
owner (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of fifteen percent or more of the outstanding Stock of the
Company (calculated as provided in paragraph (d) of Rule 13d-3 under the
Act in the case of rights to acquire Stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of Stock
of the Company would be converted into cash, securities or other
property, other than a merger of the Company in which holders of Stock
of the Company immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger as immediately before, or (B) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the
Company; or
(iv) there shall have been a change in a majority of the members of
the Board within a 12-month period unless the election or nomination for
election by the Company's stockholders of each new director during such
12-month period was approved by the vote of two-thirds of the directors
then still in office who were directors at the beginning of such
12-month period.
(4) Death of the Director.
(5) Disability of the Director.
(6) Resignation by the Director under cases of special circumstances
and the Committee, in its sole discretion, consents to waive any remaining
restrictions.
I-2
<PAGE> 431
(d) Dividends and Voting Rights -- The Director shall, subject to Section
2.2(c), possess all incidents of ownership of the shares of Restricted Stock
including the right to receive dividends with respect to such shares and to vote
such shares.
(e) The Company shall deliver to the Director, or the beneficiary of such
Director, if applicable, all of the shares of stock that were awarded to the
Director as Restricted Stock, within 30 days following the lapse of restrictions
as described under Section 2.2(c). If the Director discontinues serving on the
Board prior to the date upon which restrictions lapse as described under Section
2.2(c), such Director's Restricted Stock will be forfeited by the Director and
transferred to and reacquired by the Company at no cost to the Company.
ARTICLE III -- GENERAL PROVISIONS
3.1 AUTHORITY
Appropriate officers of the Company designated by the Committee are
authorized to execute Restricted Stock agreements, and amendments thereto, in
the name of the Company, as directed from time to time by the Committee.
3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up, or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the number and kind of shares which thereafter may be
granted under the Plan and the number of shares of Restricted Stock awarded
pursuant to Section 2.1 with respect to which all restrictions have not lapsed,
shall be appropriately adjusted consistent with such change in such manner as
the Board in its discretion may deem equitable to prevent substantial dilution
or enlargement of the rights granted to, or available for, Directors
participating in the Plan. Any fractional shares resulting from such adjustments
shall be eliminated.
3.3 RIGHTS OF DIRECTORS
The Plan shall not be deemed to create any obligation on the part of the
Board to nominate any Director for reelection by the Company's stockholders or
to retain any Director at any particular rate of compensation. The Company shall
not be obligated to issue stock pursuant to an award of Restricted Stock for
which the restrictions hereunder have lapsed if such issuance would constitute a
violation of any applicable law. Except as provided herein, no Director shall
have any rights as a stockholder with respect to any shares of Restricted Stock
awarded to him.
3.4 BENEFICIARY
A Director may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. In the event of the death of a
Director, his beneficiary shall have the right to receive the shares of
Restricted Stock awarded pursuant to the Plan. If no designated beneficiary
survives the Director, the executor or administrator of the Director's estate
shall be deemed to be the Director's beneficiary.
3.5 LAWS AND REGULATIONS
The Committee shall have the right to condition any issuance of shares to
any Director hereunder on such Director's undertaking in writing to comply with
such restrictions on the subsequent disposition of such shares as the Committee
shall deem necessary or advisable as a result of any applicable law or
regulation. The Committee may postpone the delivery of stock following the lapse
of restrictions with respect to awards of Restricted Stock for such time as the
Committee in its discretion may deem necessary, in order to permit the Company
with reasonable diligence (i) to effect or maintain registration of the Plan, or
the shares issuable upon the lapse of certain restrictions respecting awards of
Restricted stock, under the Securities Act of 1933, as amended, or the
securities laws of any applicable jurisdiction, or (ii) to determine that such
shares and Plan
I-3
<PAGE> 432
are exempt from such registration; the Company shall not be obligated by virtue
of any Restricted Stock agreement or any provision of the Plan to recognize the
lapse of certain restrictions respecting awards of Restricted Stock or issue
shares in violation of said Act or of the law of the government having
jurisdiction thereof.
3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN
The Board may from time to time amend, suspend or discontinue the Plan,
provided that the Board may not, without the approval of the holders of a
majority of the outstanding shares entitled to vote, take any action which would
cause the Plan to no longer comply with Rule 16b-3 of the General Rules and
Regulations promulgated under the Securities Exchange Act of 1934, as amended,
or any successor rule or other regulatory requirement.
No amendment, suspension or discontinuance of the Plan shall impair a
Director's right under a Restricted Stock award previously granted to him
without his comment.
3.7 GOVERNING LAW
This Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Connecticut.
3.8 EFFECTIVE DATE AND DURATION OF THE PLAN
This Plan shall be effective upon the Distribution Date subject to the
approval of the Plan by the stockholders of the Company, and shall terminate on
December 31, 2005 provided that grants of Restricted Stock made prior to the
termination of the Plan may vest following such termination in accordance with
their terms.
I-4
<PAGE> 433
ITT CORPORATION INC.
1330 AVENUE OF THE AMERICAS
NEW YORK, NY 10019-5490
PROXY SOLICITED BY BOARD OF DIRECTORS FOR SPECIAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Gwenn L. Carr or Walter F. Diehl, Jr., or
Richard S. Ward, as Proxy, each with power to appoint his or her substitute and
hereby authorizes each of them at the Special Meeting of Shareholders of ITT
Corporation to be held at [ ] A.M. on [ ], 1995 in [ ] and at any
adjournments thereof to vote all shares of ITT common stock, including all
shares held in the ITT Dividend Reinvestment and Common Stock Purchase Plan,
which the undersigned could vote if personally present as designated on the
reverse side of this proxy and confers discretionary authority upon each such
proxy to vote upon any other matter properly brought before the meeting.
Please specify your choices by marking the appropriate boxes on the reverse
side of this proxy. The shares represented by this proxy will be voted as
designated by you on the reverse side, or if no designation is made will be
voted for items 1, 2, 3, 4, 5, 6 and 7.
A PROXY CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS PROXY.
<PAGE> 434
PLEASE MARK YOUR CHOICE LIKE THIS /X/ IN DARK INK AND SIGN AND DATE BELOW.
DIRECTORS RECOMMEND A VOTE FOR ITEMS 1-7
(1) To approve the distribution of all the outstanding shares of common stock of
New ITT and ITT Hartford.
/ / FOR / / AGAINST / / ABSTAIN
(2) To approve and adopt the agreement and plan of merger in connection with the
reincorporation of ITT from Delaware to Indiana.
/ / FOR / / AGAINST / / ABSTAIN
(3) To approve amendments to the ITT 1977 Stock Option Incentive Plan and ITT
1986 Stock Plan.
/ / FOR / / AGAINST / / ABSTAIN
(4) To approve the New ITT 1995 Incentive Stock Plan.
/ / FOR / / AGAINST / / ABSTAIN
(5) To approve the ITT Hartford 1995 Incentive Stock Plan.
/ / FOR / / AGAINST / / ABSTAIN
(6) To approve the ITT 1996 Restricted Stock Plan for Non-Employee Directors
/ / FOR / / AGAINST / / ABSTAIN
(7) To approve the amendments to the Restated Certificate of Incorporation of
ITT.
/ / FOR / / AGAINST / / ABSTAIN
/ / Mark this box if you want to receive an admission card.
Signature Date , 1995
------------------------- ----------
Note: Please add your title if you are signing as attorney,
administrator, executor, guardian, trustee or in any other
representative capacity.
ITT SPECIAL MEETING INFORMATION
Record Date: [ ], 1995 Meeting Date: [ ], 1995
[ ][ ]M
Meeting Site:
[ ]
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
YOUR VOTE IS IMPORTANT TO ITT CORPORATION, PLEASE VOTE YOUR PROXY
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
