SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
Schedule 14D-1
Tender Offer Statement
(Amendment No. 22)
Pursuant to
Section 14(d)(1) of the Securities Exchange Act of 1934
_______________________
ITT CORPORATION
(Name of Subject Company)
HILTON HOTELS CORPORATION
HLT CORPORATION
(Bidders)
COMMON STOCK, NO PAR VALUE
(Title of Class of Securities)
450912100
(CUSIP Number of Class of Securities)
MATTHEW J. HART
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
HILTON HOTELS CORPORATION
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210
(310) 278-4321
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications on Behalf of Bidders)
WITH A COPY TO:
STEVEN A. ROSENBLUM
WACHTELL, LIPTON, ROSEN & KATZ
51 WEST 52ND STREET
NEW YORK, NEW YORK 10019
TELEPHONE: (212) 403-1000<PAGE>
This Statement amends and supplements the Tender Of-
fer Statement on Schedule 14D-1 filed with the Securities and
Exchange Commission on January 31, 1997, as previously amended
(the "Schedule 14D-1"), relating to the offer by HLT Corpora-
tion, a Delaware corporation (the "Purchaser") and a wholly
owned subsidiary of Hilton Hotels Corporation, a Delaware cor-
poration ("Parent"), to purchase (i) 61,145,475 shares of Com-
mon Stock, no par value (the "Common Stock"), of ITT Corpora-
tion, a Nevada corporation (the "Company"), or such greater
number of shares of Common Stock which, when added to the num-
ber of shares of Common Stock owned by the Purchaser and its
affiliates, constitutes a majority of the total number of
shares of Common Stock outstanding on a fully diluted basis as
of the expiration of the Offer, and (ii) unless and until val-
idly redeemed by the Board of Directors of the Company, the
Series A Participating Cumulative Preferred Stock Purchase
Rights (the "Rights") associated therewith, upon the terms and
subject to the conditions set forth in the Offer to Purchase,
dated January 31, 1997 (the "Offer to Purchase"), and in the
related Letter of Transmittal, at a purchase price of $55 per
share (and associated Right), net to the tendering stockholder
in cash, without interest thereon. Capitalized terms used and
not defined herein shall have the meanings assigned such terms
in the Offer to Purchase and the Schedule 14D-1.
ITEM 10. ADDITIONAL INFORMATION.
On July 16, 1997, the Company filed a complaint in
the U.S. District Court for the District of Nevada (the "Com-
pany Complaint") seeking, among other relief, a declaratory
judgment that the Company Board did not act outside its powers
or fail to exercise its powers in good faith and with a view to
the interests of the Company in approving the "Comprehensive
Plan" (as described in the Company's Schedule 14D-9). The full
text of the Company Complaint is filed herewith as Exhibit
(g)(22) and is incorporated herein by reference.
The Company also filed a motion with the court seek-
ing a speedy hearing on the claims. On July 31, 1997, Parent
filed a response to the motion, stating its intention to file
counterclaims on the ground that the "Comprehensive Plan" vio-
lates applicable law, seeking declaratory and injunctive relief
against, among other things, consummation of the "Comprehensive
Plan."<PAGE>
On August 5, 1997, Parent filed its answer and coun-
terclaims to the Company Complaint (the "Counterclaims"). The
Counterclaims seek, among other things, an order (i)
prohibiting the implementation of the "Comprehensive Plan,"
(ii) requiring the Company to put the Comprehensive Plan to a
stockholder vote, and (iii) declaring that the Company's Board
of Directors has acted on an uniformed basis and outside its
powers and has exercised its powers in bad faith with a view to
advancing its own interests and the interests of Company
management rather than the interests of the corporation and its
shareholders. The full text of the Counterclaims is filed
herewith as Exhibit (g)(23) and is incorporated herein by
reference.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
(g)(22) Company Complaint, dated July 16, 1997.
(g)(23) Answer and Counterclaims to Company Complaint,
dated August 5, 1997.
-2-<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and be-
lief, I certify that the information set forth in this state-
ment is true, complete and correct.
Dated: August 5, 1997
HILTON HOTELS CORPORATION
By: /s/ Matthew J. Hart
Name: Matthew J. Hart
Title: Executive Vice President
and Chief Financial Officer
-3-<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and be-
lief, I certify that the information set forth in this state-
ment is true, complete and correct.
Dated: August 5, 1997
HLT CORPORATION
By: /s/ Arthur M. Goldberg
Name: Arthur M. Goldberg
Title: President
-4-<PAGE>
EXHIBIT INDEX
Exhibit Description
(g)(22) Company Complaint, dated July 16, 1997.
(g)(23) Answer and Counterclaims to Company Complaint,
dated August 5, 1997.
Exhibit (g)(22)
THOMAS F. KUMMER
VON S. HEINZ
KUMMER KAEMPFER BONNER & RENSHAW
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
(702) 792-7000
RORY O. MILLSON
SANDRA C. GOLDSTEIN
CRAVATH, SWAINE & MOORE
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
Attorneys for Plaintiffs
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, BETTE B. AN- )
DERSON, RAND V. ARASKOG, NOLAN )
D. ARCHIBALD, ROBERT A. BOWMAN, )
ROBERT A. BURNETT, PAUL G. KIRK,)
JR., EDWARD C. MEYER, BENJAMIN ) Case No.
F. PAYTON, VIN WEBER, MARGITA E.) CV-S-97-00893-DWH (RLH)
WHITE, and KENDRICK R. WILSON, )
III, )
)
Plaintiffs, )
)
vs. )
)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Defendants. )
)
- --------------------------------
<PAGE>
COMPLAINT FOR DECLARATORY RELIEF
Plaintiffs, by their attorneys, allege upon knowledge
with respect to themselves and their own acts, and upon
information and belief as to all other matters, as follows:
Nature of the Action
1. On July 15, 1997, the ITT Board of Directors (the "Board") approved
a comprehensive plan involving the spinoff of ITT's three
distinct businesses, together with repurchases of equity and debt
(the "Plan"). The Board believes that the Plan is in the best
interests of ITT, its stockholders and other concerned
constituencies. The Board believes that there are compelling
business justifications for the Plan without regard to Hilton's
tender offer, and further that the existence of Hilton's
inqdequate and coercive bid makes the Plan even more important
for ITT's stockholders and other constituencies.
2. Despite the merits of the Plan, given Hilton's litigation record to
date, Hilton is likely to challenge its implementation. Since
implementation of the Plan is intended to be completed by
September, ITT now seeks declaratory relief. Parties
<PAGE>
3. Plaintiff ITT Corporation ("ITT") is a Nevada corporation with
its principal executive offices in New York, New York.
4. Plaintiffs Bette B. Anderson, Rand V. Araskog, Nolan D.
Archibald, Robert A. Bowman, Robert A. Burnett, Paul G. Kirk,
Jr., Edward C. Meyer, Benjamin F. Payton, Vin Weber, Margita E.
White, and Kendrick R. Wilson, III are directors of ITT. None of
these directors is a citizen of the State of Delaware or the
State of California.
5. Defendant Hilton Hotels Corporation (collectively with defendant
HLT Corporation, "Hilton") is a Delaware corporation with its
principal executive offices in Beverly Hills, California.
6. Defendant HLT Corporation is a Delaware corporation with its
principal place of business in Beverly Hills, California. HLT is
a wholly-owned subsidiary of Hilton.
Jurisdiction and Venue
7. This Court has jurisdiction over this action pursuant to 28
U.S.C. ss. 1332(a). The amount in controversy is in excess of
$75,000.
8. Venue is proper in the unofficial Southern Division of this
District under 28 U.S.C. ss. 1391(a) and (c) and LR 1A 8-1.
Hilton's Tender Offer
<PAGE>
9. On January 27, 1997, Hilton announced a tender offer for 50.1%
of the common stock of ITT at a price of $55 per share, and
proposed a stock merger for the rest. Hilton also announced its
intention to solicit proxies to replace the ITT Board with
nominees committed to the proposed merger.
10. On February 11, 1997, and again on July 15, 1997, ITT's Board
unanimously determined that Hilton's offer is inadequate and not
in the best interests of ITT, its stockholders and other
concerned constituencies. The Board considered the following
factors, among others, in reaching this determination.
11. ITT's financial advisors, Goldman Sachs & Co. and Lazard Freres &
Co. LLC, studied the offer and determined that it was inadequate.
The stock market confirms the inadequacy of the offer. ITT's
stock has traded above the offer price every day since Hilton's
announcement. Moreover, as of June 27, 1997, only about 1% of the
outstanding shares had been tendered to Hilton. Indeed, Hilton
has never argued--either in the prior litigation relating to its
offer or to ITT stockholders--that its offer is adequate. On the
contrary, Hilton has stated publicly that it knows it must revise
its offer before stockholders will take it seriously.
<PAGE>
12. Hilton's proposal is also subject to continuing uncertainties
as to (1) the value of the proposal, including the value of the
consideration to be received by ITT's stockholders in the
proposed merger, (2) the financing for the proposed transaction,
and (3) whether Hilton will obtain the necessary regulatory
approvals in connection with the proposed transaction.
13. In addition, there are uncertainties about Hilton's plans for
ITT. For example, Hilton has stated that, if the proposed merger
is completed, it intends to sell or license the Sheraton brand
name to HFS Incorporated ("HFS"), a franchisor of low-end hotel
and motel brands. Not only have existing Sheraton franchisees
objected to this potential diminution in value of the Sheraton
brand name and management expertise, but a number have, in fact,
required "change-of-control" provisions that are intended to be
triggered by a Hilton acquisition.
14. Similarly, the Board believes that consummation of Hilton's
proposed transaction would result in a change in control of ITT's
educational services subsidiary ("ITT Educational") which, if not
approved, could result in the suspension of access to certain
federal financial aid for ITT Educational and its students and
could result in the loss of accreditation for individual ITT
Technical Institutes.
<PAGE>
ITT's Long-Term Strategic Plan
15. Since its creation in 1995, ITT has had a long-term strategy of
building stockholder value by focusing on its core businesses.
16. In 1994, ITT's predecessor company ("Old ITT") spun off its
forestry products subsidiary to create an independent company.
Similarly, in 1995, Old ITT was separated into ITT, ITT
Industries, Inc. (comprising Old ITT's man ufacturing businesses)
and ITT Hartford Group, Inc. (comprising Old ITT's insurance
business) to enable each of the resulting companies to focus on
its core businesses. Moreover, in line with this strategy, ITT
subsequently began seeking to spin off or sell those assets which
did not form part of its core businesses.
17. ITT has continued to pursue this strategy in the face of Hilton's
inadequate bid. ITT has refined the strategy to focus on hotels
and gaming and is pursuing means of enhancing the value of the
company within that focus. ITT has taken a number of actions in
1997 pursuant to its long-term strategic plan.
18. ITT has delivered value through transactions such as (1) the sale
of ITT's interest in Madison Square Garden, (2) the sale of ITT's
interest in Alcatel Alsthom, and (3) the sale of ITT's interest in
WBIS+, a New York television station. Each of these transactions was
<PAGE>
accretive, and at prices higher than outsiders had anticipated;
indeed, the Madison Square Garden sale resulted in ITT nearly
doubling its investment in two years.
19. ITT has implemented a significant restructuring of its World
Headquarters operations, reducing headcount by 65% and reducing
annual expenses.
20. Since January 1, 1997, ITT has acquired three hotels and signed
or acquired 55 franchise agreements and management contracts in
15 different countries, totalling more than 15,000 rooms. ITT has
also entered into a long-term strategic alliance with FelCor
Suites Hotels, Inc. ("FelCor") pursuant to which FelCor acquired
five of ITT's hotels and ITT retained long-term contracts to
manage such hotels. This alliance will increase the profitability
of ITT's hotel business.
21. Hilton has publicly expressed approval of ITT's refined strategic
plan and the actions taken by the Board pursuant to that plan.
Hilton has even claimed in this Court that ITT's refined
strategic plan is Hilton's plan.
The Plan
22. On July 15, 1997, the ITT Board approved a comprehensive
plan designed to enhance the value of ITT to its
stockholders and promote the interests of ITT's other
constituencies. The Plan involves:
<PAGE>
-- the separation of ITT into three distinct, publicly owned
companies focused on (a) hotels and gaming; (b) telephone
directories publishing; and (c) post-secondary technical
education;
-- the repurchase of up to 30 million shares (approximately 25%
of the outstanding shares) at a price of $70 per share; and
-- the repurchase of all of ITT's publicly held debt
securities.
23. The Board--of which nine of the 11 members are outside
directors--deliberated on the Plan in detail. The Board received
advice from outside advisors and management regarding: (a)
financial and strategic aspects of the Hilton offer; (b)
financial and strategic aspects of the Plan; (c) the impact that
the Hilton offer would have on the interests of ITT's employees,
creditors and customers, the economy of Nevada and the nation,
the interests of the communities in which ITT operates and of
society, and the long-term and short-term interests of ITT and
its stockholders; (d) the impact that the Plan would have on the
interests of ITT's employees, creditors and customers, the
economy of Nevada and the nation, the interests of the
communities in which ITT operates and of society, and the
long-term and short-term interests of ITT and its stockholders;
and (e) governance issues.
24. After receiving this advice, the Board concluded that
implementation of the Plan would be in the best interests of the
corporation, its stockholders and other concerned
<PAGE>
constituencies. The Board has anticipated since before Hilton
began its bid that ITT's telephone directories business and
educational services business would be separated from ITT's core
hotels and gaming activities. The Board believes that the
business justifications for the Plan are compelling even without
regard to the Hilton bid, and intends to pursue the Plan even if
Hilton withdraws its bid.
25. The Board believes that the Spinoff will be beneficial to each of
ITT's existing businesses. The Spinoff is consistent with ITT's
long-term strategic plan prior to the Hilton bid. The Spinoff
will separate businesses with distinct financial, investment and
operating characteristics so that each business can adopt and
implement appropriately tailored and specific plans. In this
manner, the Spinoff will result in increased strategic focus for
each of ITT's three distinct businesses and a flattening of
organizational structures. The Spinoff will also allow for the
implementation of narrowly tailored incentive compensation plans
and enhanced market understanding and valuations of these
businesses.
26. The Board concluded that the Spinoff is preferable to the
transactions contemplated by Hilton for several reasons. First,
the Board believes that the Spinoff, and
<PAGE>
successful implementation by the three new entities created by
the Spinoff of their respective long-term strategic plans, will
produce greater value than Hilton's proposed transaction. Second,
employee disruption following the Spinoff will be significantly
less than the disruption that would be created by a hostile
transaction, such as Hilton's proposed transaction. Third, the
Spinoff will offer substantial tax advantages that Hilton could
not duplicate. As compared to a sale of its telephone directories
and educational services businesses, the Spinoff will save ITT
(and thus its stockholders) in excess of $500 million in federal
taxes. Fourth, the Spinoff will protect the interests of hotel
owners with whom Sheraton has management contracts and Sheraton
franchisees by enhancing the ongoing value of the Sheraton brand
name, whereas the Hilton offer will not. Indeed, a number of
Sheraton owners and franchisees have expressed concern that, if
the Hilton bid succeeds, Hilton may reflag many of the well-known
Sheraton properties under the Hilton name (thereby diminishing
the value of the Sheraton brand), and that HFS, which, as a
franchise company, has no experience actually managing hotels,
and which caters to an economy and mid-scale clientele rather
than the upscale and business segment to which Sheraton caters,
will take over Sheraton's
<PAGE>
management contracts. Fifth, the Spinoff should protect the
interests of ITT's Technical Institutes and their students. A
spinoff of ITT Educational should not constitute a change of
control and therefore should not involve any risk of loss of
accreditation and access to financial aid. By contrast, the Board
believes that Hilton's proposed transaction would constitute a
change of control under the Regulations of the Department of
Education which, if not approved, would make ITT Educational's
Institutes ineligible to continue participating in federal
financial aid programs and leave students without federal
financial aid. Sixth, the Spinoff will maintain the existing
number of independent competitors in the hotel and gaming
business, both locally and nationally. This should provide more
societal benefits than a Hilton acquisition.
27. The Board believes that the Equity Repurchase will provide
stockholders who wish to sell a portion of their shares with an
opportunity to do so at a premium to recent market prices--and at
a considerable premium to the Hilton offer. It will provide
stockholders who wish to increase their proportionate investment
in ITT's three businesses with an opportunity to do so without
incurring taxes by not participating in the Equity Repurchase. It
will also afford stockholders an opportunity to dispose
<PAGE>
of shares without the usual transaction costs associated with a
market sale.
28. The Board believes that the Debt Repurchase will facilitate the
allocation of ITT's indebtedness between ITT's hotels and gaming
business and its telephone directories business in a manner that
is appropriate for the credit capacity and capitalization
requirements of each entity. ITT's approach to this allocation
will protect the interests of ITT's bondholders and facilitate
access to the debt capital markets by the newly independent
companies on terms appropriate for their respective businesses.
By contrast, the Hilton offer, especially in light of certain
prior transactions, does not provide protection for bondholder
interests.
29. The Board approved certain standard governance mechanisms (the
"governance mechanisms") for Destinations after the Spinoff.
These governance mechanisms are substantively identical to
existing governance mechanisms of ITT, with the exception that
Destinations' Articles of Incorporation will contain a provision
for a classified board of directors and certain ancillary
provisions.
30. Classification of directors is expressly authorized by Nevada law
(see NRS 78.330(2)), as well as the laws of many other states.
Moreover, classification of directors is common. Approximately
292 of the 500 companies
<PAGE>
comprising the Standard & Poor's 500 Stock Price Index, and 29 of
the top 50 companies on Fortune Magazine's 1997 "Most Admired
Companies" list, have classified boards. Classified boards are
especially common in the hotel and gaming industry. Thus, 17 of
the 25 largest hotel and gaming companies (including Hilton and
Marriott) have classified boards. In addition, numerous companies
have adopted classified boards in connection with a spinoff. When
Old ITT's forestry products subsidiary was spun off in 1994, the
charter of the new company included a classified board. And 52 of
the 69 spinoffs with assets over $200 million that have been
effected since 1992 have had classified boards. In 17 of these
cases, the parent company did not have a classified board.
31. Classified boards provide important benefits. A classified board
will ensure that, at any given time, a majority of directors have
experience in the business, competitive affairs and regulatory
environment of Destinations' hotel and gaming business. This
continuity and stability of management will be important in
ensuring that Destinations' strategic plan is implemented in the
manner that will best serve the interests of Destinations'
stockholders and other constituencies, and that the stockholders
and other constituencies reap the full benefit of steps already
taken under the strategic
<PAGE>
plan, including substantial recent capital expenditures. A
classified board will also give the board time to review a
takeover proposal and study appropriate alternatives, and
enhance the board's ability to resist an abusive takeover attempt
or to negotiate a fair price and appropriate protections for
other stockholders.
32. Although a classified board may under certain circumstances
delay hostile takeover bids, neither the classified board nor any
other aspect of the Plan will preclude successful completion of a
hostile acquisition. Stockholders will still have the power to
propose and elect their own nominees for each class of directors,
and in that manner change the board's composition. The
Destinations board will be fully accountable to stockholders.
Immediate Threat Of Suit
33. Despite the merits of the Plan, Hilton is likely to sue to
prevent its implementation.
34. Hilton has already taken action in this Court on four separate
occasions in connection with its offer. First, Hilton tried to
enjoin ITT from increasing the size of its board, when ITT had
not indicated any intention to do so. Second, Hilton tried to
obtain a temporary restraining order enjoining ITT from
commencing suit in another jurisdiction, which, again, ITT had
not indicated
<PAGE>
any intention to do. Third, Hilton moved to compel ITT to hold
its annual meeting in May, despite the fact that, because of
Hilton's delay in bringing this claim, the relief it sought could
not have been granted, and despite its chief executive officer's
public concession on the timing of the meeting. Fourth, Hilton
amended its complaint to add a claim relating to change in
control provisions in ITT's contracts with the owners of some of
its managed hotels, despite the fact that one of these owners has
told Hilton that the owners, not ITT, insisted on the inclusion
of that provision because of their concerns about Hilton's plans
for Sheraton. In light of these prior claims, another challenge
now seems inevitable.
35. Pursuant to the Plan, the equity tender offer is scheduled to
commence promptly, and the debt tender offer and the
distributions required to effectuate the Spinoff are currently
scheduled to take place in September.
COUNT ONE
(Declaratory Relief)
36. Plaintiffs repeat and reallege each of the allegations set forth
in paragraphs 1 through 35 hereof as if fully set forth herein.
37. As part of its overall strategy to stampede ITT's stockholders
into accepting its tender offer, there is a
<PAGE>
real and immediate threat that Hilton will allege that the Plan
violates the Board's fiduciary duties.
38. In approving the Plan, the Board acted within its general powers
to manage the corporation.
39. The Board exercised its powers in good faith and with a view to
the interests of the corporation.
40. The Board properly relied in part on the advice of its outside
professional advisors with respect to matters within their
professional expertise and competence.
41. The Board concluded in good faith that implementation of the Plan
would be in the best interests of the corporation, including the
interests of the corporation's employees, suppliers, creditors
and customers, the economy of the state and nation, the interests
of the community and of society, and the long-term as well as
short-term interests of the corporation and its stockholders.
42. The Plan is not intended to, and will not, disenfranchise ITT's
stockholders or preclude successful completion of a hostile
acquisition. It is intended to enhance the value of the
corporation and ensure that, if completed, an acquisition will be
on terms more favorable to the corporation, its stockholders and
other concerned constituencies.
<PAGE>
43. By reason of the foregoing, an actual controversy exists between
plaintiffs and Hilton regarding whether the Plan is within the
powers of the Board and whether it comports with the Board's
fiduciary duties.
44. Plaintiffs seek a declaration that Hilton cannot show that the
Board acted outside its powers or failed to exercise its powers
in good faith and with a view to the interests of the
corporation.
COUNT TWO
(Declaratory Relief)
45. Plaintiffs repeat and reallege each of the allegations set forth
in paragraphs 1 through 44 as if fully set forth herein.
46. Any claim that the Plan violates the Board's fiduciary duties
belongs to ITT and must be asserted derivatively.
47. Hilton's interests as a would-be acquiror are antagonistic to the
interests of ITT's other stockholders and Hilton is therefore not
a proper derivative plaintiff.
48. By reason of the foregoing, an actual controversy exists between
plaintiffs and Hilton regarding whether Hilton has standing to
pursue an injunction against the Plan based on an alleged breach
of fiduciary duty.
49. Plaintiffs seek a declaration that Hilton has no such standing.
<PAGE>
WHEREFORE, plaintiffs seek judgment:
(a) Declaring that Hilton cannot show that the Board acted
outside its powers or failed to exercise its powers in good faith and
with a view to the interests of the corporation;
(b) Declaring that any claim that the Plan violates the Board's
fiduciary duties must be asserted derivatively, that Hilton is not a
proper derivative plaintiff, and that Hilton does not have standing to
pursue an injunction against the Plan based on an alleged breach of
fiduciary duty; and
(c) Granting plaintiffs such other and further relief as the
Court may deem just and proper.
DATED this 16th day of July, 1997.
KUMMER KAEMPFER BONNER & RENSHAW,
By:/s/ Von S. Heinz
---------------------
THOMAS F. KUMMER
VON S. HEINZ
Seventh Floor
3800 Howard Hughes Parkway
Las Vegas, Nevada 89109
(702) 792-7000
RORY O. MILLSON
SANDRA C. GOLDSTEIN
CRAVATH, SWAINE & MOORE
825 Eighth Avenue
New York, NY 10019
(212) 474-1000
Attorneys for Plaintiffs
<PAGE>
CERTIFICATE OF SERVICE
Pursuant to Fed. R. Civ. P. 5(b), I hereby certify that service of the
foregoing COMPLAINT FOR DECLARATORY RELIEF was made this date by
delivering by hand a true copy of the same to the following:
Steve Morris
Kristina Pickering
SCHRECK MORRIS
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, NV 89101
and by delivering by facsimile this date and by overnight mail a true
copy of the same to the following:
Bernard W. Nussbaum
Eric M. Roth
Marc Wolinsky
Scott L. Black
WACHTELL, LIPTON, ROSEN & KATZ
51 West 52nd Street
New York, NY 10019
DATED this 16th day of July, 1997.
/s/ Carol Ann Slater
- --------------------
An Employee of Kummer Kaempfer
Bonner & Renshaw
<PAGE>
Exhibit (g)(23)
SCHRECK MORRIS
STEVE MORRIS
M. KRISTINA PICKERING
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 474-9400
WACHTELL, LIPTON, ROSEN & KATZ
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants-Counterclaimants
HILTON HOTELS CORPORATION and HLT CORPORATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEVADA
ITT CORPORATION, et al., )
)
Plaintiffs, ) CV-S-97-00893-DWH (RLH)
)
-vs- )
)
HILTON HOTELS CORPORATION ) ANSWER AND COUNTERCLAIMS
and HLT CORPORATION, )
)
Defendants. )
)
- ----------------------------------------)
HILTON HOTELS CORPORATION and )
HLT CORPORATION, )
)
Counterclaimants, )
)
-vs- )
)
ITT CORPORATION, BETTE B. )
ANDERSON, RAND V. ARASKOG, )
NOLAN D. ARCHIBALD, ROBERT A. )
BOWMAN, ROBERT A. BURNETT, )
PAUL G. KIRK, JR., EDWARD C. )
MEYER, BENJAMIN F. PAYTON, )
VIN WEBER and MARGITA E. WHITE, )
)
Counterclaim Defendants. )
________________________________________)<PAGE>
Defendants Hilton Hotels Corporation ("Hilton") and
HLT Corporation (collectively, "defendants"), by their undersigned
attorneys, make the following responses to the allegations of the
Complaint for Declaratory Relief (the "Complaint") filed on July 16,
1997:
1. Defendants deny the allegations of Paragraph 1
of the Complaint, except admit that the ITT Board of Directors has
approved a so-called Comprehensive Plan involving the spin-off of
ITT businesses and the repurchase of equity and debt.
2. Defendants deny the allegations of Paragraph 2
of the Complaint, except admit that Hilton is likely to challenge
and, by its Counterclaims, is challenging ITT's implementation of
its Comprehensive Plan, and that ITT is seeking declaratory relief.
3. Defendants admit the allegations of Paragraph 3
of the Complaint.
4. Defendants admit the allegations of Paragraph 4
of the Complaint.
5. Defendants admit the allegations of Paragraph 5
of the Complaint.
6. Defendants admit the allegations of Paragraph 6
of the Complaint.
7. Defendants admit the allegations of Paragraph 7
of the Complaint.
8. Defendants admit the allegations of Paragraph 8
of the Complaint.
9. Defendants admit the allegations of Paragraph 9
of the Complaint.
-2-<PAGE>
10. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 10 of the Complaint.
11. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
the first sentence of Paragraph 11 of the Complaint, admit that
ITT's stock has traded above the offer price every day since
Hilton's announcement and that, as of June 27, 1997, approximately
1.3 million ITT shares had been tendered to Hilton, and deny the
remaining allegations of the paragraph.
12. Defendants deny the allegations of Paragraph 12
of the Complaint.
13. Defendants deny the allegations of Paragraph 13
of the Complaint, except admit that Hilton has stated that, if its
proposed merger with ITT is completed, it may sell or license the
Sheraton brand name to HFS Incorporated ("HFS"), and deny knowledge
or information sufficient to form a belief as to the truth of the
allegations of the last sentence of the paragraph.
14. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 14 of the Complaint.
15. Defendants deny the allegations of Paragraph 15
of the Complaint.
16. Defendants admit the allegations of the first
and second sentences of Paragraph 16 of the Complaint and deny
knowledge or information sufficient to form a belief as to the truth
of the remaining allegations of the paragraph.
-3-<PAGE>
17. Defendants deny the allegations of Paragraph 17
of the Complaint.
18. Defendants deny the allegations of the first
sentence of Paragraph 18 of the Complaint, and deny knowledge or
information sufficient to form a belief as to the truth of the
remaining allegations of the paragraph.
19. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 19 of the Complaint.
20. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 20 of the Complaint, except to admit that FelCor acquired
five of ITT's hotels and ITT entered into contracts to manage such
hotels.
21. Defendants deny the allegations of Paragraph 21
of the Complaint, except admit that ITT has adopted portions of
Hilton's plan for ITT.
22. Defendants deny the allegations of Paragraph 22
of the Complaint, except admit that the elements of the
Comprehensive Plan include the matters alleged in the second
sentence of that paragraph.
23. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 23 of the Complaint, except admit that 9 of the 11 members
of the ITT Board are not officers of the corporation.
24. Defendants deny the allegations of Paragraph 24
of the Complaint and aver that the ITT Board has acted on an
uninformed basis and in bad faith.
-4-<PAGE>
25. Defendants deny the allegations of Paragraph 25
of the Complaint and aver that the ITT Board has acted on an
uninformed basis and in bad faith.
26. Defendants deny the allegations of Paragraph 26
of the Complaint, except deny knowledge or information as to whether
any Sheraton owners and franchisees have expressed concern that
Hilton may reflag Sheraton properties under the Hilton name or that
HFS will take over Sheraton's management contracts, and aver that
the ITT Board has acted on an unin-
formed basis and in bad faith.
27. Defendants deny knowledge or information as to
what the Board "believes" regarding the Equity Repurchase and deny
the remaining allegations of Paragraph 27 of the Complaint.
28. Defendants deny knowledge or information as to
what the Board "believes" regarding the Debt Repurchase and deny the
remaining allegations of Paragraph 28 of the Complaint.
29. Defendants deny knowledge or information
sufficient to form a belief as to the truth of the allegations of
Paragraph 29 of the Complaint and aver that the corporate
"governance mechanisms" that the ITT Board reportedly has approved,
including the provision for a classified board of directors,
represent an unreasonable response to the Hilton offer and are
designed and intended to entrench the current directors and officers
of ITT and frustrate the shareholders' exercise of their corporate
franchise, and that the "governance mechanisms" were adopted in bad
faith and on an uninformed basis.
-5-<PAGE>
30. Defendants state that no response is required
to the first sentence of Paragraph 30 of the Complaint since said
sentence states a legal conclusion; and deny knowledge or
information sufficient to form a belief as to the truth of the
allegations of the second, third, fourth, fifth, sixth, seventh and
eighth sentences of that paragraph, except admit that Hilton's
charter has a classified board provision (which was adopted by
shareholder vote) and that when Old ITT's forestry products
subsidiary was spun off in 1994, the charter of the new company
included a classified board provision (which was adopted by
shareholder vote).
31. Defendants deny the allegations of Paragraph 31
of the Complaint and aver that the "classified board" reportedly
adopted by ITT for Destinations represents an unreasonable response
to the Hilton offer and is designed and intended to entrench the
current directors and officers of ITT and frustrate the
shareholders' exercise of their corporate franchise and that the
"classified board" provision was adopted in bad faith and on an
uninformed basis.
32. Defendants deny the allegations of Paragraph 32
of the Complaint.
33. Defendants admit the allegation in Paragraph 33
of the Complaint that there is an immediate controversy between
Hilton and ITT concerning the legality of plaintiffs' actions and
deny the allegation concerning the "merits of the Plan".
34. Defendants deny the allegations of the first
sentence of Paragraph 34 of the Complaint, except admit that
defendants have moved for injunctive relief on three separate
-6-<PAGE>
occasions in the action entitled Hilton Hotels Corp. v. ITT Corp.,
CV-S-97-00095-PMP (RLH), and have amended and supple-
mented their complaint in that action, and refer the Court to the
pleadings defendants have filed in that action for the contents
thereof.
35. Defendants admit the allegations of Paragraph
35 of the Complaint.
COUNT ONE
(Declaratory Relief)
36. Defendants repeat and reallege their responses
to each of the allegations of Paragraphs 1 through 35 of the
Complaint.
37. Defendants admit that they allege that the Plan
violates the Board's fiduciary duties and deny the remaining
allegations of Paragraph 37 of the Complaint.
38. Defendants deny the allegations of Paragraph 38
of the Complaint.
39. Defendants deny the allegations of Paragraph 39
of the Complaint.
40. Defendants deny the allegations of Paragraph 40
of the Complaint.
41. Defendants deny the allegations of Paragraph 41
of the Complaint.
42. Defendants deny the allegations of Paragraph 42
of the Complaint.
-7-<PAGE>
43. Defendants admit the allegation of Paragraph 43
of the Complaint that an actual controversy exists between ITT and
Hilton.
44. Defendants admit the allegation of Paragraph 44
of the Complaint that plaintiffs seek declaratory relief and aver
that the ITT Board has acted outside its powers, has breached its
fiduciary duty to ITT shareholders, has unlawfully impeded the
shareholders' exercise of their corporate franchise, and has acted
on an uninformed basis and in bad faith.
COUNT TWO
(Declaratory Relief)
45. Defendants repeat and reallege their answers to
each of the allegations of Paragraphs 1 through 44 of the Complaint.
46. Defendants deny the allegations of Paragraph 46
of the Complaint.
47. Defendants deny the allegations of Paragraph 47
of the Complaint.
48. Defendants admit the allegation of Paragraph 48
of the Complaint that an actual controversy exists between ITT and
Hilton.
49. Defendants admit the allegations of Paragraph
49 of the Complaint that plaintiffs seek declaratory relief and aver
that Hilton has standing to challenge the unlawful actions of ITT
and its incumbent directors.
-8-<PAGE>
FIRST AFFIRMATIVE DEFENSE
50. The Complaint fails to state a claim upon which
relief can be granted.
SECOND AFFIRMATIVE DEFENSE
51. Plaintiffs' claims for relief are barred by the
doctrine of unclean hands.
THIRD AFFIRMATIVE DEFENSE
52. Plaintiffs' claims for relief are barred by the
doctrine of estoppel.
COUNTERCLAIMS
Defendants and counterclaimants Hilton Hotels
Corporation ("Hilton") and HLT Corporation ("HLT"), for their
counterclaims against plaintiffs ITT Corporation ("ITT"), Bette B.
Anderson, Rand V. Araskog, Nolan D. Archibald, Robert A. Bowman,
Robert A. Burnett, Paul G. Kirk, Jr., Edward C. Meyer, Benjamin F.
Payton, Vin Weber and Margita E. White, allege upon knowledge with
respect to their own acts and upon information and belief as to all
other matters, as follows:
NATURE OF THE COUNTERCLAIMS
1. On January 31, 1997, Hilton commenced a tender
offer for the stock of plaintiff ITT Corporation ("ITT") at $55 per
share. Hilton also announced its intention to conduct a proxy
contest at ITT's 1997 Annual Meeting so as to give ITT shareholders
the opportunity to decide for themselves whether they want ITT to
pursue a transaction with Hilton or remain independent. These
counterclaims are brought for injunctive and declaratory relief to
redress a wrongful course of conduct
-9-<PAGE>
by the ITT Board of Directors. That course of conduct is designed
to deprive ITT shareholders of the opportunity to receive the
benefits of Hilton's tender offer and proposed second-step merger.
It is also designed to eliminate the ability of ITT's shareholders
to meaningfully exercise their corporate franchise -- to prevent
them from exercising their basic right to turn incumbent directors
out of office if they so desire.
2. The ITT Board's wrongful course of conduct cul-
minated in a July 16, 1997 announcement of the Board's adoption of a
"Comprehensive Plan." Under the Plan, ITT intends to split itself
into three separate, publicly owned companies through spin-offs of
its "core" hotel and gaming business as well as its technical school
business. After the spin-offs are complete, the sole remaining
business of the present ITT Corporation will be telephone directory
publishing, and effective control of that corporation will be sold
to a leveraged buy-out firm.
3. ITT has publicly denied that the Board's
adoption of the Comprehensive Plan was prompted by Hilton's tender
offer and has, instead, touted the Plan as a means to "sharpen ITT's
strategic focus and enhance shareholder value." These statements
are false. Were it not for Hilton's tender offer, the ITT Board
would not have adopted the Comprehensive Plan, and the Plan was not
adopted to "enhance shareholder value." Rather, the Plan is an
elaborate entrenchment scheme designed to (i) deprive ITT
shareholders of their fundamental right to decide for themselves who
shall govern their corporation and
-10-<PAGE>
what its future should be; (ii) prevent Hilton at all costs from
acquiring control of ITT; and (iii) maximize the job security of
ITT's senior management. Thus:
(a) The Comprehensive Plan will not be put to a
vote of the ITT shareholders, unlike the 1995
spin-off that resulted in the creation of the
current ITT. Instead, having already delayed
its Annual Meeting for six months until November
1997, ITT is racing to consummate the Plan by late
September 1997. The incumbent ITT directors are
thus manipulating the voting machinery to deprive
their shareholders of any meaningful opportunity,
before the Plan is consummated, to choose between
the two competing proposals and the slates of
nominees supporting them.
(b) The Comprehensive Plan is structured to prevent
ITT's shareholders from voting to transfer control
of ITT's "core" hotel and gaming assets to Hilton
even after the Plan's consummation. ITT
Destinations, Inc. ("Destinations"), the new
company formed to hold ITT's hotel and gaming
assets, will be armed with every conceivable
takeover defense. Most significantly, unlike ITT's
articles of incorporation, Destinations' articles
of incorporation will include a "staggered board"
provision whereby only one-third of the directors
will stand for election each year. If the spin-off
of Destinations is accomplished,
-11-<PAGE>
ITT will have effected a de facto amendment of its
articles of incorporation without a shareholder
vote, and Destinations' shareholders will not have
the ability to replace a majority of the
Destinations directors with Hilton's nominees at
the new company's next annual meeting.
(c) The Comprehensive Plan also threatens to saddle ITT
and its shareholders with a massive tax liability.
While ITT claims that the spin-offs will be tax-
free transactions, it has decided not to obtain an
IRS ruling because such a ruling cannot be obtained
before the November 1997 deadline for holding ITT's
Annual Meeting. ITT plans instead to rely solely
upon a tax opinion letter from the same law firm
that has been providing it with advice in defending
against the Hilton takeover. If this opinion turns
out to be wrong, ITT will be exposed to a $1.4
billion tax liability and ITT's shareholders will
be exposed to an additional $1.4 billion tax
liability. Even if that opinion turns out to be
correct, the Comprehensive Plan deliberately
imposes a potentially massive tax-related barrier
to Hilton's acquisition of Destinations. Under
existing federal tax laws and recently passed tax
legislation, even if the spin-off of Destinations
is tax-free, Hilton's acquisition of Destinations
after the spin-off could make the
-12-<PAGE>
spin-off taxable, resulting in the incurrence of
billions of dollars in tax liability. By virtue of
these factors, among others, the Plan is an
unlawfully preclusive response to Hilton's offer.
For these and other reasons detailed below, the Comprehensive Plan
constitutes (i) an unlawful manipulation of the corporate
electoral machinery, (ii) an illegal attempt to amend ITT's articles
of incorporation without a shareholder vote, and (iii) an
unreasonable response to any "threat" allegedly posed by Hilton's
tender offer.
4. The adoption of the Comprehensive Plan also
constitutes an impermissible attempt to deprive ITT shareholders of
the maximum value attainable for their shares. Before authorizing a
break-up of ITT and the sale of a controlling interest in the
company, it was incumbent upon the ITT Board of Directors to seek to
obtain the highest value reasonably obtainable for shareholders. In
pursuing this objective, the ITT Board was obligated to obtain all
material information reasonably available to them. The ITT Board of
Directors has failed to perform these duties. Hilton has repeatedly
stated that it would consider raising its bid if given access to
non-public information. It has requested the opportunity to meet
with ITT to discuss the terms of its bid. The ITT Board has never
responded to Hilton and never sought to ascertain what Hilton's
highest price was. The ITT Board has tried to justify its rejection
of the Hilton bid and its support for the Comprehensive Plan by
pointing to certain "issues" purportedly raised
-13-<PAGE>
by Hilton's bid. But the Board has never requested any information
from Hilton pertaining to any of these supposed "issues". Rather,
the ITT Board has acted to entrench ITT's current management, even
if it means trampling on the shareholders' right to control the
destiny of their company by voting the incumbent directors out of
office.
JURISDICTION AND VENUE
5. This Court has jurisdiction over these Counter-
claims pursuant to 28 U.S.C. Sections 1331, 1332(a) and 1337 and 15
U.S.C. Section 78aa. The amount in controversy is in excess of
$75,000, exclusive of interest and costs.
6. Venue is proper in the unofficial Southern
Division of this District pursuant to 28 U.S.C. Section 1391, 15
U.S.C. Section 78aa and LR IA 8- 1.
THE PARTIES
7. Hilton is a Delaware corporation with its prin-
cipal executive offices in Beverly Hills, California. Hilton
is a leading owner and operator of full-service hotels and
gaming properties located in gateway cities, urban and
suburban centers and resort areas throughout the United States
and in selected international cities. Hilton is the
beneficial owner of over 315,000 ITT shares.
8. HLT is a Delaware corporation with its
principal place of business in Beverly Hills, California.
HLT, a wholly-owned subsidiary of Hilton organized in
connection with Hilton's tender offer and the proposed merger,
is the record and beneficial owner of 100 shares of ITT stock.
-14-<PAGE>
9. ITT is a Nevada corporation with its principal
executive offices in New York, New York. ITT is engaged,
through subsidiaries, in the hospitality, gaming, telephone
directories publishing and post-secondary technical education
businesses.
10. Rand V. Araskog is Chairman of the Board and
Chief Executive Officer of ITT and a citizen of the State of
New York.
11. Robert A. Bowman is ITT's President and Chief
Operating Officer and a member of the ITT Board of Directors.
Bowman is a citizen of the State of New York.
12. Bette B. Anderson, Nolan D. Archibald, Robert
A. Burnett, Paul G. Kirk, Jr., Edward C. Meyer, Benjamin F.
Payton, Vin Weber, and Margita E. White, are directors of ITT.
None of these directors is a citizen of the State of Delaware
or the State of California.
Hilton's Tender Offer
13. In the last quarter of 1996, Hilton contacted
one of ITT's principal financial advisers to determine whether
ITT would be interested in pursuing a business combination
with Hilton. The ITT adviser reported back that ITT had no
interest in pursuing such a combination.
14. On January 27, 1997, Hilton announced its
intention to commence a tender offer pursuant to which Hilton
is seeking to acquire 50.1% of the outstanding shares of ITT
stock at $55 per share. Hilton's announcement stated that its
offer was based solely on public information and that a review
of ITT's non-public information could result in an even higher
-15-<PAGE>
bid. Hilton formally commenced its tender offer on January
31. Upon consummation of the tender offer, Hilton intends to
acquire the remaining shares of ITT in a second-step merger in
which ITT shareholders will receive $55 in Hilton stock for
each ITT share that they own.
15. Hilton's January 27 announcement made clear
that, while ITT is a diversified conglomerate, Hilton's inter-
est in ITT focused on its hotel and gaming assets. Thus, in
the January 27 announcement, Hilton stated that it believed
that the "combination of ITT and Hilton would bring together
two of the world's leading lodging companies as well as two
premier gaming businesses" and that "ITT's owned full-service
hotel portfolio, along with its major gaming presence in Las
Vegas, Atlantic City and other jurisdictions, fits perfectly
with [Hilton's] stated growth objectives." Hilton's announce-
ment added that, if it acquired control of ITT, it would
"carefully review" ITT's remaining businesses and that "the
monetization of [those] nonstrategic assets, and a focus on
the company's core business lines" would "create even more
value for the shareholders of the combined companies."
16. ITT has a number of anti-takeover provisions in
place, including its Shareholder Rights Plan, better known as
a "poison pill." In the event that a third-party like Hilton
acquires 15% or more of ITT's shares, the "poison pill"
enables all ITT shareholders other than the third-party to
purchase ITT preferred shares at a 50% discount from market
value. ITT's former corporate parent has publicly acknowl-
edged that the "poison pill" "may render an unsolicited
takeover of [ITT] more
-16-<PAGE>
difficult or less likely to occur or might prevent such a takeover,
even though such takeover may offer [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
[ITT]."
17. ITT also has the anti-takeover protections of
Nevada Rev. Statutes Sections 78.378 et seq. (the "Control Share Ac-
quisition Statute") and Nevada Rev. Statutes Sections 78.411 et seq.
(the "Business Combination Statute"). ITT's former corporate
parent has publicly acknowledged that the Control Share Acqui-
sition and Business Combination Statutes "may delay or make
more difficult acquisitions or changes of control of [ITT]",
"may have the effect of preventing changes in the management
of [ITT]" and "could make it more difficult to accomplish
transactions which [ITT] shareholders may otherwise deem to be
in their best interests."
18. The Hilton tender offer and second-step merger
cannot be consummated unless the ITT Board removes or makes
inapplicable ITT's various anti-takeover devices, including
its "poison pill" and the provisions of the Control Share
Acquisition Statute and the Business Combination Statute.
Accordingly, Hilton has conditioned its tender offer upon
these takeover defenses being removed or otherwise rendered
inapplicable to the Hilton offer by the ITT Board.
19. Because the ITT Board of Directors has the
power to remove these impediments and permit ITT's shareholders to
decide for themselves whether they want to accept Hilton's tender
offer, Hilton has coupled its tender offer with a proxy
-17-<PAGE>
contest to replace ITT's incumbent Board. On February 11, 1997, in
accordance with the requirements of Section 2.2 of ITT's by-laws,
Hilton gave notice to ITT of its intention to nominate a slate of
candidates for election as directors to the ITT board at the 1997
annual meeting and its intention to present a resolution urging the
Board to arrange a sale of the company to Hilton or any higher
bidder. On March 21, 1997, Hilton cleared its proxy materials with
the SEC and began soliciting proxies from ITT's shareholders. The
Hilton slate is committed, subject to its fiduciary duties, to
remove the obstacles to consummation of Hilton's proposed tender
offer and merger.
The ITT Board Rejects the
Hilton Bid and Begins the
Liquidation of ITT
20. The ITT Board of Directors formally rejected
Hilton's offer on February 11, 1997. Despite the superior value
offered by Hilton -- reflected in the 29% premium to the market
value of ITT stock immediately prior to the announcement of the
offer -- the ITT Board determined that the tender offer was
"inadequate and not in the best interests of [ITT]." The Board's
rejection of the Hilton offer was hasty and ill-informed. While the
Board attempted to justify its rejection of the offer by citing
"uncertainties as to the actual value" of the Hilton securities to
be offered in the proposed second-step merger and the "lack of
sufficient disclosure in Hilton's tender offer," the ITT Board did
not ask Hilton to provide any additional information. Moreover,
although Hilton had stated that a review of ITT's non-public
information could result in
-18-<PAGE>
an even higher offer, the ITT Board did not give Hilton the
opportunity to review any such information. Since February 11, the
ITT Board has rejected Hilton's repeated requests to meet with ITT
to negotiate its bid and has actively sought to place obstacles in
front of the bid.
21. Rather than removing the impediments to
Hilton's bid or accepting Hilton's invitation to negotiate,
the ITT Board of Directors authorized management to engage in
a series of transactions which collectively amount to an
abandonment of ITT's long-term strategy and a break-up of the
company. Commencing on February 14, 1997, ITT embarked on a
number of transactions designed to dispose of assets outside
of its "core" hotel and casino businesses. These transactions
included the sale of ITT's 7.5 million shares of Alcatel
Alsthom for approximately $830 million, the sale of ITT's 50%
interest in Madison Square Garden arena cable network and re-
lated sports franchises for approximately $650 million, and
the sale of its interest in WBIS+, a New York television sta-
tion, for $128.8 million.
22. On or about April 11, 1997, ITT filed its 1996
Annual Report with the SEC. The cover of ITT's Annual Report,
stated in large, bold print -- "Fellow Shareholders: The
issue is creating shareholder value." Inside the Annual
Report, plaintiff Araskog's letter to shareholders stated that
the ITT Board had "recognized the need to monetize or
otherwise realize the value of [ITT's] non-core assets in a
more accelerated fashion than management had originally
planned," but that the company would be "focusing on lodging
and gaming, and creating
-19-<PAGE>
value for [its] shareholders." Shortly after the Annual Report was
filed, however, the Senior Vice President of ITT in charge of its
hotel business was quoted in a hotel trade journal as follows: "The
battle with Hilton, currently 'at the bottom of the first inning . .
. is not a question of higher price. Losing this thing is not an
option. . . . We're going to win this. I intend to retire
from ITT Sheraton eight years from now at age 65. We are committed
to that.'" Recent actions by ITT confirm that defendants are not
focused on "creating shareholder value" and that it is "not a
question of price"; indeed, defendants have now embarked on a scheme
to make ITT takeover-proof even at the cost of destroying
shareholder value and violating shareholder democracy.
ITT's Disposition of "Core" Assets
23. Seeking to drive Hilton away, in the spring of
1997, ITT embarked upon a scheme to dispose of ITT's "core"
hotel assets in a fashion that threatens to preclude Hilton or
any other potential bidder from acquiring control of ITT with-
out the consent of the incumbent ITT board. On May 19, 1997,
ITT and FelCor Suites Hotels, Inc. ("FelCor"), a Dallas-based
real estate investment trust, announced the creation of a
"long term strategic alliance" beginning with an agreement in
principle for FelCor to purchase five hotels from ITT for $200
million. The proposed transaction called for ITT to receive
additional consideration in the form of a management contract
which allows ITT to manage the hotels for a period of 20
years. The proposed management agreement would include a
change of control penalty provision entitling FelCor to
terminate ITT's
-20-<PAGE>
right to manage the hotels -- and terminate its obligation to pay
management fees to ITT -- in the event of a change of control of ITT
that is not approved by the incumbent directors. The existence of
this provision was concealed by ITT when it announced the agreement
in principle with FelCor.
24. On June 3, 1997, The Wall Street Journal re-
ported that, according to "people familiar with decisions,"
ITT is entertaining bids for several of its "crown jewel"
hotels, while "demanding that purchasers of the marquee
properties sign management contracts with ITT" including
change of control penalty provisions. The Journal article
quoted ITT sources as saying that the company is now willing
to sell any of its hotels for "the right price and if they can
retain a management contract." The article also quoted an ITT
spokesman to the effect that an "overwhelming majority" of the
58 hotels that ITT has added to its roster of managed hotels
this year could legally switch their contracts to other
companies if ITT were taken over. A noted hotel consultant
characterized the change of control penalty provisions as an
"esoteric and kind of powerful" anti-takeover provision. A
follow-up article in the June 4, 1997 issue of The Wall Street
Journal reported that ITT's strategy was to sell "its most
prized hotels" and thereby transform itself into "primarily a
hotel-management company."
25. In two separate letters to the ITT Board of Di-
rectors dated June 2 and June 9, Hilton's President and Chief
Executive Officer, Stephen F. Bollenbach, objected to ITT's
placement of change of control provisions in the FelCor and
other management contracts, as well as its threatened sale of
-21-<PAGE>
"crown jewel" properties on similar terms. Mr. Bollenbach ad-
vised the ITT Board that Hilton was a "ready, willing and able
buyer for ITT's core assets," that Hilton could offer more for
those assets than any other qualified purchaser, and that Hil-
ton would not require any change of control penalty provisions
in any management contract with ITT.
26. Without responding to either of Mr.
Bollenbach's letters, ITT entered into definitive agreements
with FelCor and proceeded to close the transaction. Under its
management agreement with ITT, FelCor's affiliate has the
option to terminate the management contract 30 days after a
"Change of Control" -- defined as (i) the acquisition of more
than 35% of ITT's voting stock within two years after a tender
offer or proxy solicitation by the acquiror if the tender
offer or proxy solicitation was not approved by a majority of
the ITT directors in office at the time it was commenced, or
(ii) the election of a majority of the ITT Board of Directors
pursuant to a solicitation of proxies from ITT shareholders if
the solicitation was not approved by a majority of the ITT
directors in office at the time it was commenced.
27. The change of control penalty provisions do not
serve any legitimate purpose of FelCor or other potential pur-
chasers of ITT assets. Indeed, FelCor's right of termination
arises only if the incumbent ITT Board permits it to arise.
It arises only if control of ITT is transferred without
approval by a majority of the incumbent directors; in such in-
stance, FelCor has a right to terminate its management
contract even if the acquiror is a world-class operator of
hotels, such as
-22-<PAGE>
Hilton. But if ITT's incumbent Board decides to sell control of the
company to a wholly incompetent hotel operator, FelCor has no right
to terminate as a result.
28. The change of control penalty provisions in
ITT's proposed management agreements are a "poison pill" de-
signed to destroy the value of ITT to Hilton or any other un-
wanted acquiror of ITT. They are an entrenchment device that
would operate to destroy the value of key ITT assets in the
hands of anyone other than the incumbent management and Board
or an acquiror who meets their approval. The change of
control penalty provisions are also designed to serve the
illegitimate purpose of deterring Hilton and other ITT
shareholders from freely exercising their right to vote out
the incumbent directors in a proxy contest. Victory in any
such proxy fight (i.e., replacement of a majority of ITT's
directors) would carry a potentially enormous cost to ITT and
its shareholders -- the termination of the management
contracts by the hotel owners and the resultant loss of
millions of dollars in management fees by ITT.
29. ITT continues to dispose of "core" assets and
to enter into change of control penalty provisions designed to
deter Hilton and entrench ITT's management. On August 3,
1997, ITT announced that it was disposing of 50 percent of
both the Desert Inn Resort and Casino in Las Vegas and 34
acres of adjacent property (the "Desert Inn transaction").
ITT has thus entered into an agreement in principle with Davis
Gaming, L.L.C., a company owned by Marvin Davis, providing
that ownership of the Desert Inn and adjacent property will be
sold to a
-23-<PAGE>
joint venture owned 50 percent by Davis Gaming and 50 percent by ITT
(the "Desert Inn Agreement"). According to the announcement, ITT
will receive $250 million for the 50 percent interest being acquired
by Davis Gaming.
30. As part of the Desert Inn transaction, ITT will
manage the Desert Inn for ten years with an option to extend
the management agreement for another ten years and, should the
joint venture build a new hotel and casino on the adjacent
parcel, ITT will manage that as well. The announcement makes
clear that the management agreement will include a change of
control penalty provision "similar" to that entered into with
"other parties," i.e., FelCor.
31. In its August 3, 1997 announcement, ITT stated
that the Desert Inn Agreement contemplates completion of the
transaction by November 1, 1997. This timing is no accident.
It is intended to enable ITT to consummate the Desert Inn
transaction, including implementation of the change in control
penalty provision, prior to the ITT Annual Meeting and
election of directors. This effort to deprive the ITT share-
holders of free choice -- to penalize them if they should vote
to oust the incumbent directors -- is another manipulation of
shareholder voting rights in line with the course of conduct
of ITT and its directors since Hilton announced its offer.
The ITT Board Fails to
Schedule the Annual Meeting
32. ITT held last year's annual meeting on May 14,
1996. This was in keeping with a practice -- begun by ITT's
corporate predecessor at least 20 years ago -- of holding its
-24-<PAGE>
annual meetings in May. When ITT's Board of Directors failed
to take steps to hold this year's annual meeting in May,
Hilton moved for a preliminary injunction requiring the Board
to do so. In opposing Hilton's motion, ITT told this Court
that the Board's purpose in delaying the Annual Meeting was to
give ITT shareholders the time to make "a more informed
decision as to the real value of both ITT and the Hilton
Transaction."
33. At the oral argument on Hilton's motion for a
preliminary injunction, counsel for ITT asserted that under
NRS 78.345 ITT "can in effect have until November 14th, 1997
to have an annual meeting." In its April 21, 1997 order
denying Hilton's motion for a preliminary injunction, this
Court concluded that "subject to the right of a board of
directors to specify a shorter period, annual meetings for
Nevada corporations are contemplated to occur no later than
eighteen months after the last such meeting." While ITT has
recently stated that it "expect[s] to hold [its] 1997 annual
shareholder meeting[] in November," and that all of its
incumbent directors "will stand for election in November", the
Board has yet to fix the meeting date.
The ITT Board Adopts
the Comprehensive Plan
34. On July 16, 1997, ITT announced that at a meet-
ing held the previous day, its Board of Directors reassessed
Hilton's tender offer in light of developments since February
11 and "unanimously reaffirmed its conclusion" that Hilton's
offer was "inadequate and not in the best interests of [ITT]."
-25-<PAGE>
At the same time, ITT announced that its Board had unanimously
approved the adoption of the Comprehensive Plan.
35. The Comprehensive Plan consists of several
major elements. The first major element involves the spin-off
of two of ITT's three remaining businesses (the "Spin-offs").
All of ITT's "core" hotel and gaming assets will be placed in
a newly formed Nevada subsidiary, Destinations. Subject to
the satisfaction of various conditions, including the approval
of gaming authorities in several states, ITT intends to
distribute as a stock dividend to its shareholders all of
Destinations common stock and all of ITT's shares in its
83.3%-owned technical school subsidiary, ITT Educational
Services, Inc. ("ESI"). Following the Spin-offs, ITT's sole
remaining business will be telephone directories publishing,
and ITT will seek to change its name to ITT Information
Services, Inc. ("ISI").
36. A second major element of the Comprehensive
Plan involves ITT's repurchase through a cash tender offer of
up to 30 million shares of its common stock (approximately
25.7% of its outstanding shares) at a price of $70 per share,
or a total of $2.1 billion (the "Equity Tender Offer"). ITT
commenced the Equity Tender Offer on July 17, 1997. ITT has
conditioned the Equity Tender Offer on, among other things,
obtaining the requisite regulatory approvals and financing.
37. A third major element of the Comprehensive Plan
is the allocation of ITT's indebtedness between Destinations
and ISI. (ITT claims that, for regulatory reasons, ESI cannot
-26-<PAGE>
incur significant indebtedness.) To facilitate this alloca-
tion, ITT intends to commence a tender offer for all $2.0 bil-
lion of its publicly held debt securities and to repay certain
other indebtedness (the "Debt Tender Offer").
38. ITT has stated that it intends, subject to re-
ceipt of necessary approvals, to consummate the Spin-offs, the
Equity Tender Offer and the Debt Tender Offer substantially
concurrently in late September 1997. In order to finance
these transactions, ISI and Destinations will be required to
incur massive amounts of new debt. According to ITT's own
public filings, Destinations will be responsible for at least
$4.2 billion in indebtedness (representing approximately 63%
of its total capitalization on a pro forma basis as of June
30, 1997), and ISI will be responsible for approximately
$1.265 billion in indebtedness. ITT has acknowledged in its
public filings that if the Comprehensive Plan is consummated,
both Destinations and ISI will be "significantly leveraged."
ITT has also stated that the "high degree of leverage" at Des-
tinations and ISI "could have important consequences for
stockholders," including (i) impairing each company's ability
to obtain additional financing on favorable terms in the fu-
ture, (ii) reducing funds available for purposes other than
debt service, (iii) subjecting each company to restrictive
covenants with respect to a number of corporate activities,
(iv) placing each company at a competitive disadvantage, and
(v) hindering each company's ability to adjust to market
conditions and making it more vulnerable in the event of a
downturn in general economic conditions or in its business.
-27-<PAGE>
39. A fourth major element of the Comprehensive
Plan is the sale of effective control of post Spin-off ITT to
an entity affiliated with the leveraged buy-out firm of
Clayton, Dubilier & Rice, Inc. ("CDR") pursuant to a de-
finitive agreement approved by the ITT Board at its July 15,
1997 Board meeting (the "CDR Sale Agreement"). Following the
Spin-offs, a CDR affiliate will purchase approximately 32.9%
of the outstanding common stock of ITT and warrants to
purchase shares representing an additional 13.7% of its shares
for aggregate consideration of $225 million. The warrants
will have a ten-year term and permit CDR to buy ITT common
stock directly from ITT at a 50% premium to CDR's initial
purchase price. The CDR Sale Agreement, if consummated, would
give CDR effective control of ITT in that, among other things:
(a) CDR would be the single largest shareholder of the company
whether or not it exercises its warrants; (b) CDR would have
the contractual right to designate five members of ITT's 11-
member Board of Directors; and (c) by virtue of special super-
majority voting provisions in the CDR Sale Agreement, CDR's
designees on the ITT Board would have the power to block (i)
any issuance by ITT of equity securities (other than certain
issuances pursuant to employee option or incentive plans);
(ii) any merger, consolidation, recapitalization, liquidation
or similar extraordinary corporate transaction by ITT; or
(iii) any amendment or modification of ITT's charter or by-
laws.
40. While ITT has reserved the contractual right to
terminate the CDR Sale Agreement in the event that the ITT
Board determines not to go forward with the Spin-offs, that
-28-<PAGE>
right of termination carries a hefty price tag -- the payment
of a $25 million "termination fee" (reduced to $15 million if
ITT enters into a merger agreement with Hilton) as well as
CDR's "reasonable expenses" up to a maximum of $4 million.
These termination fee provisions were designed, among other
things, to make ITT less attractive to other bidders,
including Hilton, by increasing the cost of making a competing
bid.
The Comprehensive Plan is an
Unlawful Entrenchment Device
41. In its press release announcing the Comprehen-
sive Plan, in presentations to stock analysts and in
interviews with the financial media, ITT and its agents have
endeavored to portray the Comprehensive Plan as a "plan to
create shareholder value." As is evident from the timing,
structure and terms of the Plan, it is better understood as a
plan to entrench ITT's incumbent management.
A. ITT Will Not Let Its Shareholders
Vote on the Comprehensive Plan
42. ITT intends to consummate the Comprehensive
Plan without putting it to a shareholder vote. Subject to its
receipt of regulatory approval for the Comprehensive Plan, ITT
intends to consummate the Spin-offs, the Equity Tender Offer
and the Debt Tender Offer in late September 1997. Because ITT
has deliberately delayed its 1997 Annual Meeting of Sharehold-
ers until November, ITT's intent is to deprive its
shareholders the opportunity to express their collective view
of these transactions before they occur.
43. This intended timetable for the implementation
of the Comprehensive Plan is entirely of ITT's making. On
-29-<PAGE>
April 21, 1997, this Court denied Hilton's motion for a pre-
liminary injunction requiring ITT to hold its 1997 Annual
Meeting in May 1997 and, in that context, preliminarily ruled
that ITT is not required under Nevada law to hold its 1997
Annual Meeting until November 1997. Based on ITT's
representations that "with additional time the stockholders
will be able to make a more informed decision as to the real
value of both ITT and the Hilton Transaction", the Court also
concluded that Hilton had failed to demonstrate that ITT's
directors had breached any fiduciary duty to shareholders by
failing to schedule the Annual Meeting in May. ITT is now
using this Court's ruling as a vehicle for avoiding any
shareholder vote on the Comprehensive Plan or on the election
of ITT's Board before the Plan is consummated. ITT will not
let its shareholders vote on the Plan, or on the election of
directors before the Plan is implemented, for fear that the
ITT shareholders would reject the Plan, and the incumbent
directors who have adopted it, in favor of nominees who
support a negotiated merger with Hilton.
44. ITT's refusal to submit the Comprehensive Plan
to a vote of its shareholders is in stark contrast to ITT's
past practice. The current ITT is itself the product of a
massive spin-off. In 1995, the company formerly known as ITT
Corporation split itself into three public companies -- the
current ITT, the company now known as ITT Industries, Inc. (an
industrial manufacturer) and the company now known as Hartford
Financial Services Group (an insurance company). The former
-30-<PAGE>
ITT (led by the same management team as the current ITT) sub-
mitted the 1995 spin-off plan to a shareholder vote because,
as it acknowledged at the time, of its "importance to . . .
shareholders." The Comprehensive Plan is no less important to
ITT's current shareholders -- not only because of its dramatic
effect on the financial structure of the company, but also
because of its impact on Hilton's bid. But rather than risk
defeat in a shareholder vote, the ITT Board has decided to
"cram down" the Comprehensive Plan before the shareholders can
decide who they want to run their company.
B. The ITT Board Inserts a "Staggered Board"
Provision in the Destinations Charter
45. Despite the fact that hotels and gaming are
ITT's "core business," the Comprehensive Plan calls for the
spin-off of that business and the retention of its telephone
directories publishing business, and not vice versa. ITT's
primary purpose for structuring the Spin-offs in this fashion
is to entrench the management team that will run the hotel and
gaming business -- the business that Hilton has stated it is
interested in acquiring -- by placing it in a new company
(Destinations) that is bristling with takeover defenses.
46. If the Spin-off of Destinations is consummated,
the Comprehensive Plan envisions that plaintiff Araskog, ITT's
Chairman and Chief Executive Officer, and plaintiff Bowman,
ITT's President and Chief Operating Officer, will hold the
same positions at Destinations. It is also contemplated that
the other senior members of the ITT hotel and casino
management
-31-<PAGE>
team, including Daniel P. Weadock, Senior Vice President-Hotels, and
Peter G. Boynton, Senior Vice President-Gaming, will have the same
roles at Destinations. Moreover, Destinations' Board of Directors
will be comprised of the existing ITT directors. In recognition
that the "real ITT" is wherever Mr. Araskog and his hotel and casino
management team are at the helm, following the Spin-offs,
Destinations intends to change its name to "ITT Corporation."
Indeed, for accounting purposes, ITT treats the transaction as a
spin-off of the telephone directories business, not a spin-off of
Destinations.
47. Several features of the Comprehensive Plan are
designed to ensure that neither Hilton nor any other potential
bidder will ever threaten the incumbency of Mr. Araskog and
his management team again. Like ITT, Destinations will have
the takeover protections of the Control Share Acquisition
Statute, the Business Combination Statute and a Shareholder
Rights Plan. In its SEC filing pertaining to the Spin-off,
Destinations acknowledges that these defenses may have the
effect of preventing a change of control at Destinations even
if it is favored by a majority of the company's shareholders.
The ITT Board will also give Destinations a particularly
potent defense that ITT itself does not have -- a "staggered
board."
48. Destinations' Articles of Incorporation will
provide that its 11-member Board of Directors will be divided
into three classes as nearly equal in number as possible, each
of which will serve for three years with one class being
elected each year. Moreover, the Articles of Incorporation
will contain provisions prohibiting stockholders from calling a
-32-<PAGE>
special meeting or acting by written consent. As a result,
at least two annual meetings of stockholders would be required
for the stockholders to change a majority of the members of
the Destinations Board.
49. The import of the "staggered board" provisions
in the Destinations charter is that, once the Spin-offs are
consummated, ITT shareholders (i.e., the new Destinations
shareholders) will be unable to decide for themselves whether
to facilitate the sale of the company to Hilton by replacing a
majority of the Destinations directors with Hilton's nominees
at the company's next annual meeting. Thus, even if Hilton
successfully waged a proxy contest at Destinations' first
annual meeting, the Hilton nominees would be in the minority
on the Board and could not themselves redeem the "poison pill"
or remove the other barriers to a Hilton acquisition. Should
the incumbents decide not to hold Destinations' second annual
meeting until 18 months have passed (in accordance with this
Court's interpretation of NRS 78.345), Hilton and ITT's other
shareholders would not be able to change a majority of the
members of the Destinations Board until May 1999. And
plaintiff Araskog, who was last elected to the Board in May
1996, would not have to stand for re-election by the
shareholders until the year 2000.
50. ITT has sought to justify its inclusion of
"staggered board" provisions in the Destinations charter on
the grounds that many other companies, including several hotel
and gaming companies, have "staggered boards." Under
applicable law, however, companies amending their charter to
provide for a
-33-<PAGE>
"staggered board" -- which represents an important limitation on the
shareholders' ability to exercise their franchise -- do so through a
shareholder vote. By contrast, ITT is attempting to amend its
charter not through a shareholder vote, but through the vote of the
very directors who would be the direct beneficiaries of the proposed
amendment.
C. The Comprehensive Plan Contains
a "Tax Poison Pill"
51. The Comprehensive Plan further serves to en-
trench ITT's management because any acquiror of ITT or
Destinations after the Spin-offs would be forced to swallow a
"tax poison pill."
52. In an SEC filing pertaining to the
Comprehensive Plan, the ITT Board has sought to justify its
support for the Plan on the grounds that the Spin-off will be
tax-free to ITT and its shareholders. Thus, ITT's Board has
stated that "[o]nly [ITT] as an independent entity can
consummate such a [tax-free] transaction immediately", whereas
an acquiror of ITT in a transaction that is taxable in whole
or in part "would be unable to undertake a tax-free spin-off
of [ITT] assets for a period of five years."
53. When companies undertake a spin-off of the na-
ture and magnitude contemplated by ITT, they typically seek a
ruling in advance from the IRS in an effort to obtain some as-
surance prior to consummation that the requirements for tax-
free treatment have been met. As a former IRS commissioner,
Donald R. Alexander, recently told the Bloomberg news
service: "People don't normally do a spin-off without the
assurance of
-34-<PAGE>
an IRS ruling. Probably they are doing it here simply because they
have to rush the transaction." Indeed, the former ITT Corporation
(now ITT Industries, Inc.) conditioned its 1995 spin-off of the
current ITT on the receipt of a formal IRS ruling that the
distribution would be tax free.
54. ITT has stated that it has not sought an IRS
ruling in connection with the Spin-offs and that it will not
do so. ITT will not seek an IRS ruling because it typically
takes four to six months to obtain one, and ITT management is
desperate to consummate the Spin-offs before the Annual
Meeting, which must be held in November 1997.
55. In lieu of an IRS ruling, the ITT Board has
stated that it will rely on a legal opinion from its takeover
defense counsel to the effect that the Spin-offs will qualify
as tax-free transactions under Section 355 of the Internal
Revenue Code. Given the magnitude of the Spin-offs, it is
virtually certain that these transactions will be audited by
the IRS after they are completed. In an SEC filing,
Destinations acknowledges that if the Spin-offs are
consummated and the IRS ultimately disagrees with the legal
opinion of ITT's counsel, ITT, ESI and Destinations would
incur aggregate tax liability (which under law is the several
liability of all three corporations) of $1.4 billion.
Approximately 90%, or $1.25 billion, of this liability will be
allocated to Destinations under contractual "tax sharing"
arrangements. Destinations concedes that this huge tax
liability "would have a material adverse effect on the fi-
nancial position, results of operations and cash flows of each
of ITT and [Destinations]." This is an
-35-<PAGE>
understatement -- the corporate tax liability would render
Destinations virtually insolvent. The risk that ITT or Destinations
would incur liability of this magnitude serves as a powerful
deterrent to any acquisition of these companies once the Spin-offs
are effected. Moreover, if the IRS concludes that the Spin-offs
are not entitled to tax-free treatment, ITT's shareholders would be
subject to an additional tax liability of $1.4 billion. The risk
that ITT's shareholders might incur this gargantuan liability if the
Spin-offs are consummated makes the Board's decision not to follow
the prudent course of seeking an IRS ruling and submitting the
Comprehensive Plan to a shareholder vote particularly unreasonable.
56. Even if the IRS were ultimately to conclude
that the Spin-offs qualify for tax-free treatment under
Section 355 of the Internal Revenue Code, the Comprehensive
Plan imposes yet another potentially massive tax-related
deterrent to Hilton's acquisition of Destinations. ITT's own
public filings with respect to the Spin-offs state that: (i)
under current tax law, if the IRS were to integrate the Spin-
off of Destinations and Hilton's acquisition of the stock of
either ITT or Destinations, the Spin-off of Destinations would
result in taxable gain for ITT and its shareholders; and (ii)
under proposed legislation recently passed by Congress, ITT
would recognize taxable gain in connection with the Spin-off
of Destinations if 50% or more of Destinations stock were
acquired and such acquisition and the Destinations Spin-off
were deemed part of a plan. Since Destinations has agreed to
pay 90% of the tax liability ITT incurs as a result of the
Spin-offs, Hilton's
-36-<PAGE>
acquisition of Destinations after the Spin-offs could result in
Destinations' incurrence of billions of dollars in tax liability --
another major deterrent to Hilton's acquisition of Destinations.
The ITT Board Lacks a Good
Faith Basis for Adopting
the Comprehensive Plan
57. ITT launched the Comprehensive Plan with a bar-
rage of publicity in which it trumpeted a number of ostensible
rationales for adopting the Plan. These rationales are window
dressing, created to obscure the Board's real purpose -- en-
trenching ITT management. Thus:
(a) ITT has stated that it adopted the Com-
prehensive Plan as "another step in
[ITT's] refinement of its strategic plan
to focus on hotels and gaming and
explore and exploit opportunities to
enhance the value of [ITT] within that
focus." In fact, not once before the
Hilton offer was commenced did ITT tell
its shareholders that its strategy was
to (i) sell assets purchased only a year
or two after they were acquired (i.e.,
sale of Madison Square Garden and WBIS+
television station); (ii) shift from
being an owner/operator of hotels to
being a hotel management company with
management contracts terminable upon a
change of control;
-37-<PAGE>
(iii) spin off its hotel and casino assets and
leverage the spun-off company to turn it into a
"junk bond" rated company; or (iv) break up
into three more pieces only two years after its
last spin-off.
(b) ITT claims that the Comprehensive Plan
is "intended to enhance the value of the
ongoing investment of stockholders."
But, as noted above, the Comprehensive
Plan creates a risk that ITT and its
stockholders will be saddled with enor-
mous tax liability in the event that the
IRS determines that it is not entitled
to tax-free treatment, a risk that could
be avoided entirely if ITT followed the
ordinary and prudent course of seeking
an IRS ruling.
(c) ITT asserts that the Comprehensive Plan
will further the interests of its
employees because the "displacement to
employees of [ITT] that would be
expected to occur following consummation
of a hostile acquisition such as the
Hilton Transaction is expected to be
significantly greater than any
disruption caused by the Distributions."
ITT conveniently ignores the fact that
it has already fired 65% of its
headquarters staff in response to
-38-<PAGE>
Hilton's bid and that, after the Spin-
offs are complete, ITT and Destinations
intend to "continue to search for ad-
ditional opportunities to rationalize
the organization and administration of
[their] businesses" -- a euphemism for
firing more employees.
(d) ITT contends that the Comprehensive Plan
will further the interests of its credi-
tors. As noted above, however, in order
to finance the Equity Tender Offer and
the Debt Tender Offer, Destinations and
ISI will be required to trash their bal-
ance sheets by incurring billions of
dollars in new debt. Holders of ITT's
public debt securities who fail to
tender into the Debt Tender Offer will
find that their investment grade paper
has been transformed into risky junk
bonds.
(e) ITT maintains that the Comprehensive
Plan "will allow [ITT] to eliminate at
least one tier of corporate-level
administration" -- the implication being
that the Plan will result in greater
efficiencies. This is nonsense. As a
result of the Spin-offs, where there is
today one company, there will soon be
three. Corporate functions that used to
be performed
-39-<PAGE>
by ITT for each of its subsidiaries will have to be
replicated at each of Destinations, ESI and ISI,
resulting in more, not less, overhead.
ITT's Misleading Disclosures
Regarding the Comprehensive Plan
58. In its desperation to portray the Comprehensive
Plan as beneficial to ITT's shareholders, ITT has made selec-
tive disclosure of wildly unrealistic projections regarding
the future performance of its gaming business. ITT has
deliberately disseminated these extremely aggressive
projections in the hope that the stock market would assign a
greater value to the stock of Destinations (and the
Comprehensive Plan generally) than ITT's actual performance
warrants.
59. The performance of ITT's gaming operations dur-
ing 1997 has been disappointing. On July 16, 1997, ITT re-
ported second quarter 1997 earnings before interest, taxes,
depreciation and amortization ("EBITDA") for its gaming opera-
tions of only $67 million, as compared with $78 million in the
second quarter 1996. ITT attributed this decline to signifi-
cant construction activity at its Caesars casinos in Las Vegas
and Atlantic City. That construction is continuing and is not
expected to be completed until at least year end 1997.
60. The construction at the Caesars properties in
Las Vegas and Atlantic City is not the only factor negatively
impacting ITT's casino business. The Las Vegas and Atlantic
City markets are intensely competitive; many industry
observers believe that the Las Vegas market is already
overbuilt; and
-40-<PAGE>
several of ITT's principal competitors are expanding existing
facilities or are soon to open mammoth new facilities (such as the
3000-room, $1.45 billion Bellagio casino scheduled to open in
September 1998, and Hilton's $760 million, 3,200-room Paris casino
scheduled to open in late 1998).
61. Notwithstanding this difficult environment for
ITT's gaming operations, at a July 16, 1997 presentation to
stock analysts on the Comprehensive Plan, ITT forecast that,
in comparison to expected gaming EBITDA for full year 1997 of
$270 million, in 1998 it would achieve gaming EBITDA of $440
million -- a $170 million, or 63 percent, improvement in one
year. ITT's forecasts were both oral and written, and its
written forecasts were not accompanied by any cautionary
statements identifying important factors that could cause
ITT's actual results to differ materially from the projected
results and which have not been made generally available to
ITT shareholders. ITT's forecasts lacked any reasonable basis
in fact and were materially false and misleading. Thus:
(a) ITT told the analysts that at Caesars
Palace in Las Vegas, it expects EBITDA
to increase from $115 million in 1997 to
$180 million in 1998 -- a 56 percent
jump. Most of the projected improvement
($50 million of the $65 million) was at-
tributed to an increase in the number of
-41-<PAGE>
overnight guests as ITT is currently
constructing a new tower at the Caesars
Palace property. This portion of the
projection is predicated on the
assumption that Caesars' operating
margins will improve over current
levels. This is an unreasonable
assumption. Among other factors, when
Bellagio and Paris open their facilities
in 1998, Caesars' operating margins are
likely to decline significantly as its
marketing costs will increase in a more
competitive environment. The remaining
$15 million improvement is attributed to
"incremental foot traffic" from the
Bellagio and the Forum Two shops -- a
retail arcade adjacent to the Caesars
Palace property that will open to the
public in September 1998. A more
realistic assumption is that the opening
of the new Bellagio (in close proximity
to the older Caesars property) will draw
business from Caesars, not bring
business to it. The projection is also
unreasonable because it assumes that
current levels of foot traffic from the
existing Forum One shopping arcade will
remain unchanged; a more reasonable as-
sumption is that the opening of Forum Two
-42-<PAGE>
will "cannibalize" some of the
retail activity at Forum One and that
the foot traffic from Forum One into the
Caesar's Palace casino will decrease.
(b) ITT told the analysts that at Caesars
Atlantic City, EBITDA would increase
from $118 million in 1997 to $165
million in 1998 -- a 39.8 percent leap
-- because of an ongoing expansion
project at that property. This, too, is
an unrealistic assumption. Among other
things, the Atlantic City construction
project will not be completed until mid-
1998, thus undercutting the notion that
an additional $47 million in EBITDA will
be realized that year.
(c) ITT also told the analysts that a new
riverboat casino in Harrison County,
Indiana would generate $70 million in
1998 EBITDA (of which ITT's ownership
share would be some $50 million). This
projection is unrealistic; indeed, only
a handful of the riverboat casinos in
the United States generate annual EBITDA
of $70 million. Moreover, the timetable
for the potential opening of the casino
makes it extremely unlikely that ITT can
achieve this level of EBITDA during
1998.
-43-<PAGE>
ITT has not yet obtained a permit
from the Army Corps of Engineers to
build the facilities that would let it
dock the riverboat on the Ohio River.
Even if the permit is obtained, the
docking facilities will not be completed
until the summer of 1998. Parking
facilities and food outlets -- which are
critical to the success of any riverboat
casino -- will not be completed until
June 1998 and September 1998 respec-
tively. And the hotel adjacent to the
riverboat will not be completed until
December 1998.
FIRST COUNTERCLAIM
62. Hilton repeats and realleges each of the al-
legations set forth in paragraphs 1 through 61 hereof as if
fully set forth at length herein.
63. In April 1997, ITT represented to this Court
that the Board's purpose in delaying the Annual Meeting was to
give ITT shareholders the time to make "a more informed deci-
sion as to the real value of both ITT and the Hilton Transac-
tion." That representation has been proven to be false. In-
stead, ITT and the incumbent directors have used, and are
threatening to use, the delay in ITT's annual meeting to
develop a plan to disenfranchise shareholders and assure that
the incumbent directors and current management of ITT retain
their positions, regardless of the will of the shareholders.
-44-<PAGE>
64. As hereinabove alleged, ITT: (a) has entered
into management contracts, and has threatened to enter into
additional management contracts, containing change of control
penalty provisions that are triggered by the replacement of a
majority of the incumbent ITT directors; (b) attempted to im-
pose the Comprehensive Plan without a shareholder vote;
(c) refused to hold the Annual Meeting until after the Compre-
hensive Plan has been implemented; (d) threatened to classify
its Board of Directors without a shareholder vote so as to
prevent the immediate removal of the entire Board; and
(e) threatened to saddle ITT, Destinations and ITT
shareholders with a $2.8 billion "tax poison pill." These
actions have been taken for the primary purpose of impeding
the effective exercise of the stockholder franchise in
connection with the election of directors.
65. Hilton is being, or will be, irreparably
injured by plaintiffs' conduct and has no adequate remedy at
law.
SECOND COUNTERCLAIM
66. Hilton repeats and realleges each of the al-
legations set forth in paragraphs 1 through 61 hereof as if
fully set forth herein.
67. The pursuit of the Comprehensive Plan, the Fel-
Cor transaction, the Desert Inn transaction, the threatened
disposition of "crown jewel" hotels and other core assets sub-
ject to management contracts containing change of control pen-
alty provisions, and the insertion of such provisions in ITT's
management contracts for hotels that ITT currently manages but
does not own, constitute unreasonable responses by the ITT
-45-<PAGE>
Board of Directors to Hilton's tender offer. The cost of
these responses to ITT, and the impact on the ability of ITT
shareholders to determine the future of their company through
the election of directors, is disproportionately large in
relation to any "threat" allegedly posed to ITT by Hilton's
tender offer. The ITT directors have thereby breached, and
are threatening to continue to breach, their fiduciary duties
to ITT shareholders.
68. The change of control penalty provisions are a
draconian response to Hilton's bid because they are designed
to make ITT takeover-proof. If Hilton or any other non-
approved bidder acquires control of ITT, and the change of
control penalty is triggered, ITT and its shareholders stand
to lose millions of dollars of value and receive nothing in
return.
69. The change of control penalty provisions are a
preclusive and coercive response to Hilton's bid, particularly
in view of the ITT Board's delay in calling the Annual
Meeting. Because the ITT Board has refused to call a meeting,
ITT shareholders cannot assert their right to vote out the
incumbent directors before the change of control provisions
are put into place. And once such provisions are in place,
the ability of ITT shareholders to vote the incumbents out
will be severely impeded because the provisions impose a
potentially enormous cost to ITT if the ITT shareholders vote
to replace a majority of the incumbent directors.
70. The Comprehensive Plan is a draconian response
to Hilton's bid. The "tax poison pill" provisions of the Plan
threaten to create billions of dollars in tax liability to ITT
-46-<PAGE>
and its shareholders, and the leverage that ITT will be re-
quired to incur to finance the Plan will seriously impair the
ability of ITT and Destinations to compete. Certain of these
risks could be reduced by delaying the Spin-offs until an IRS
ruling is obtained or by structuring the Spin-offs such that
the hotel and casino assets are retained by ITT and the tele-
phone directories business is spun off. Neither of those al-
ternatives was adopted by the ITT Board because doing so would
have given the ITT shareholders a meaningful opportunity to
vote a majority of the incumbent directors out of office -- an
unacceptable result to directors bent on entrenchment.
71. The Comprehensive Plan is a preclusive and
coercive response to Hilton's bid as well. ITT has refused to
permit its shareholders to vote on the Comprehensive Plan and
intends to implement the Comprehensive Plan before the Annual
Meeting is held. And once the Plan is in place, by virtue of
the "tax poison pill" provisions, ITT will have succeeded in
imposing potentially massive tax barriers to an acquisition of
Destinations or ISI by Hilton. Moreover, by virtue of the
"staggered board" provisions of the Plan, ITT shareholders
will be precluded from removing a majority of the Destinations
directors at the next annual meeting. By precluding ITT
shareholders from choosing to sell the company and remove the
incumbent directors -- and by keeping in place the ITT poison
pill which effectively prevents Hilton from accepting shares
tendered by ITT shareholders in advance of any annual meeting
-- the ITT Board is coercing the shareholders into accepting
the alternative course it has chosen for them.
-47-<PAGE>
72. Hilton is being, or will be, irreparably harmed
by plaintiffs' conduct and has no adequate remedy at law.
THIRD COUNTERCLAIM
73. Plaintiffs repeat and reallege each of the al-
legations set forth in paragraphs 1 through 61 hereof as if
fully set forth at length herein.
74. The Comprehensive Plan, the FelCor
transactions, the Desert Inn transaction, and the threatened
crown jewel dispositions and other asset dispositions
announced or pursued by ITT in response to Hilton's tender
offer reflect the ITT Board's abandonment of the company's
long-term strategy and constitute a break-up of ITT. In this
context, the Board's fiduciary duty is to seek to obtain the
best available terms for ITT's shareholders and not to favor
one potential acquiror over another or one type of financial
alternative over another. In pursuing this objective, the ITT
directors have a duty to inform themselves, prior to making
business decisions, of all material information reasonably
available to them. The ITT directors have not sought to
obtain the best available terms for ITT shareholders and have
not properly informed themselves. They have thereby breached,
and are continuing to breach, their fiduciary duties to ITT
shareholders.
75. Hilton is being, or will be, irreparably
injured by plaintiffs' conduct and has no adequate remedy at
law.
FOURTH COUNTERCLAIM
76. Hilton repeats and realleges each of the al-
legations set forth in paragraphs 1 through 61 hereof as if
fully set forth at length herein.
-48-<PAGE>
77. The members of the ITT Board of Directors have
acted in bad faith and in breach of their duty of loyalty to
the shareholders of ITT by placing their own personal inter-
ests and the interests of ITT management ahead of the
interests of ITT stockholders.
78. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
FIFTH COUNTERCLAIM
79. Hilton repeats and realleges each of the
allegations set forth in paragraphs 1 through 61 hereof as if
fully set forth herein.
80. Under Nevada law, once a corporation has issued
stock, it may not amend its articles of incorporation without
the approval of its shareholders.
81. ITT is threatening to violate this requirement
by spinning off its "core" assets into a subsidiary -- to be
run by the same senior management team and Board of Directors
and under the same corporate name -- and, without a
shareholder vote, adopting articles of incorporation for the
subsidiary that contains a "staggered board" provision.
82. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
SIXTH COUNTERCLAIM
83. Hilton repeats and realleges each of the al-
legations set forth in paragraphs 1 through 61 hereof as if
fully set forth herein.
84. Under Nevada law, ITT may not engage in a sale
of all or substantially all of its property and assets without
-49-<PAGE>
the approval of the holders of a majority of its voting stock
at a meeting of the shareholders called for that purpose.
85. ITT is threatening to sell all or substantially
all of its property and assets without the required
shareholder vote.
86. Hilton is being, or will be, irreparably
injured by plaintiffs' conduct and has no adequate remedy at
law.
SEVENTH COUNTERCLAIM
87. Hilton repeats and realleges each of the
allegations set forth in paragraphs 1 through 61 hereof as if
fully set forth herein.
88. In connection with a tender offer for its own
shares and the ITT shareholders' purchases and sales of ITT
shares, ITT has made material misstatements of material fact
and has made material omissions of fact necessary in order to
make the statements made, in the light of the circumstances
under which they were made, not misleading, in that, among
other things:
(a) ITT has disseminated unrealistic projec-
tions, made without any reasonable basis
in fact, to the investment community;
(b) ITT has failed to include realistic pro-
jections in its Equity Tender Offer and
other SEC filings relating to the Compre-
hensive Plan;
(c) ITT has misrepresented its purposes for
adopting the Comprehensive Plan.
-50-<PAGE>
89. ITT has made these material misstatements and
omissions with the deliberate intent to mislead its stockhold-
ers and the investing public generally about the value and
true purposes of the Comprehensive Plan.
90. By reason of the foregoing, ITT has violated
Sections 10(b) and 13(e) of the Securities Exchange Act of
1934 and the rules and regulations thereunder. The members of
ITT's Board of Directors are controlling persons of ITT under
Section 20(a) of the Securities Exchange Act and are liable
for ITT's violations thereof.
91. Hilton is, or will be, irreparably injured by
plaintiffs' conduct and has no adequate remedy at law.
WHEREFORE, Hilton seeks judgment:
(a) Dismissing the Complaint with prejudice;
(b) Declaring that the ITT Board has unlawfully in-
terfered with the ITT shareholders' exercise of their
corporate franchise;
(c) Enjoining counterclaim defendants from taking
any steps to implement the Comprehensive Plan before ITT's
1997 Annual Meeting is held;
(d) Requiring counterclaim defendants to put the
Comprehensive Plan to a vote of the ITT shareholders;
(e) Enjoining counterclaim defendants from taking
any steps to implement the Comprehensive Plan;
(f) Declaring that the ITT Board has acted on an
uninformed basis and outside its powers and has exercised its
-51-<PAGE>
powers in bad faith and with a view to advancing its own
interests and the interests of ITT management rather than the
interests of the corporation and its shareholders;
(g) Declaring that the Comprehensive Plan consti-
tutes an unreasonable response to the Hilton offer;
(h) Declaring that the Comprehensive Plan, together
with the other actions taken by ITT in response to the Hilton
offer, constitute an abandonment of ITT's long-term strategy
and a break-up of ITT and that, accordingly, the ITT Board's
fiduciary duty is to seek to obtain the best available terms
for ITT's shareholders and not favor one potential acquiror
over another or one type of financial alternative over
another;
(i) Declaring that Hilton has standing to claim
that the Comprehensive Plan violates the Board's fiduciary
duties and that Hilton has standing to pursue an injunction
against the Plan;
(j) Enjoining counterclaim defendants from
inserting in the Destinations articles of incorporation any
provision designed to impede a takeover bid by Hilton,
including a provision for a "staggered board", and enjoining
Destinations from adopting a Shareholder Rights Plan;
(k) Enjoining counterclaim defendants from refusing
to redeem the rights issued to ITT's shareholders under the
Shareholder Rights Plan and refusing to make the provisions of
the Nevada Control Share Acquisition and Business Combination
Statutes inapplicable to Hilton's tender offer for ITT stock;
(l) Requiring counterclaim defendants to conduct a
fair and open auction of ITT;
-52-<PAGE>
(m) Enjoining counterclaim defendants from entering
into any further disposition of ITT's assets unless they con-
duct a fair and open auction for such assets in which Hilton
can participate on an equal basis with all other potential
purchasers;
(n) Enjoining counterclaim defendants from selling
any further assets of ITT without the approval of ITT share-
holders, as required by Nevada law;
(o) Rescinding the FelCor transaction or any other
disposition of hotel or casino assets by ITT;
(p) Invalidating the change of control penalty pro-
visions in ITT's management agreement with FelCor;
(q) Rescinding the Desert Inn Agreement and enjoin-
ing counterclaim defendants from taking any further steps in
furtherance of the Desert Inn transaction;
(r) Enjoining counterclaim defendants from entering
into any agreements containing change of control penalty
provisions with purchasers of ITT's assets or with the owners
of hotels managed by ITT;
(s) Enjoining the individual counterclaim
defendants from engaging in any further actions aimed at en-
trenching themselves in office in violation of the fiduciary
duties owed by counterclaim defendants to the ITT
shareholders;
(t) Awarding Hilton damages against counterclaim
defendants in an amount to be determined at trial, as well as
counterclaim defendants' costs of suit, including reasonable
attorneys' fees; and
-53-<PAGE>
(u) Granting Hilton such other and further relief
as the Court may deem just and proper.
Dated: August 5, 1997
Las Vegas, Nevada
SCHRECK MORRIS
By: /s/
_________________________
STEVE MORRIS
KRISTINA PICKERING
MATTHEW MCCAUGHEY
1200 Bank of America Plaza
300 South Fourth Street
Las Vegas, Nevada 89101
(702) 474-9400
WACHTELL, LIPTON, ROSEN & KATZ
BERNARD W. NUSSBAUM
KENNETH B. FORREST
ERIC M. ROTH
MARC WOLINSKY
51 West 52nd Street
New York, New York 10019
(212) 403-1000
Attorneys for Defendants
and Counterclaimants
HILTON HOTELS CORPORATION
and HLT CORPORATION
-54-
