<PAGE> 1
========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
COMMISSION FILE NUMBER 1-7437
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
----------
ITT FINANCIAL CORPORATION
INCORPORATED IN THE STATE OF DELAWARE 43-0815676
(I.R.S. Employer
Identification No.)
(Principal Executive Offices)
645 MARYVILLE CENTRE DRIVE
ST. LOUIS, MO. 63141-5832
TELEPHONE NUMBER: 314-542-3636
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
8 7/8% Senior Debentures Due 2003.................. Registered on
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
----------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X].
As of March 11, 1995, there were outstanding ten (10) shares of
common stock, par value $100 per share, of the registrant, all of which
are owned by ITT Corporation.
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<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
---- ----
<C> <C> <S> <C>
PART 1. Business............................................................................................. 1
I 2. Properties........................................................................................... 1
3. Legal Proceedings.................................................................................... 1
4. <F*>
PART 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 2
II 6. <F*>
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations<F**>.................................................................................. 2
8. Financial Statements and Supplementary Data.......................................................... 3
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................................ 3
PART 10. <F*>
III 11. <F*>
12. <F*>
13. <F*>
PART 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 4
IV
Signatures........................................................................................... 2-1
Exhibit Index........................................................................................ 2-2
Ratios of Earnings to Fixed Charges.................................................................. 2-3
Consent of Independent Public Accountants............................................................ 2-4
Financial Data Schedule.............................................................................. 2-5
<FN>
-----
<F*> Omitted pursuant to General Instruction J(2)(a) or (c) of Form 10-K.
<F**>Item prepared in accordance with General Instruction J(2)(a) of Form 10-K.
</TABLE>
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Management............................................... F-1
Report of Independent Public Accountants........................... F-2
Consolidated Income, Consolidated Retained Earnings (Deficit)
and Consolidated Capital Surplus for the three years ended
December 31, 1994................................................ F-3
Consolidated Balance Sheets as of December 31, 1994 and 1993....... F-4
Consolidated Cash Flows for the three years ended
December 31, 1994................................................ F-5
Consolidated Term Debt as of December 31, 1994 and 1993............ F-6
Notes to Financial Statements...................................... F-7
</TABLE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because either they are not applicable,
the required matter is not present, the amounts are insignificant or
immaterial, or the information has been otherwise supplied in the financial
statements or the notes thereto.
(i)
<PAGE> 3
PART I
ITEM 1. BUSINESS
THE COMPANY
ITT Financial Corporation ("Financial" or "Company") is a Delaware
corporation with headquarters at 645 Maryville Centre Drive, St. Louis,
Missouri 63141-5832. It is the successor by merger in 1974 to ITT Aetna
Corporation and ITT Thorp Corporation, both Delaware corporations
established in 1964 and 1968, respectively. All of the Company's
outstanding stock is owned directly by ITT Corporation, a Delaware
corporation ("ITT").
ASSETS HELD SUBJECT TO DISPOSITION
As previously announced by ITT, Financial has and expects to enter
into agreements to sell all or substantially all of its businesses
and/or assets to various purchasers during the first half of 1995:
1) Financial has agreed to sell its Island Finance operations located
in the Caribbean Basin for an amount to be determined at closing.
The operations include certain assets of Financial as well as the
capital stock of approximately 60 subsidiaries identified by local
variations of the name "Island Finance" which operate in the
Commonwealth of Puerto Rico, the U. S. Virgin Islands, the
Netherlands Antilles and Aruba. In addition, the transaction
includes the sale of the capital stock of subsidiaries bearing the
names "Financiera el Sol" in Panama and "Credisol" in Costa Rica.
2) Financial has entered into an agreement to sell its commercial
floorplan financing operations.
3) Financial has entered into a preliminary agreement to sell its
commercial installment lending operations and/or assets.
Further, Financial has commenced negotiations with potential
purchasers to sell some or all of its remaining businesses and/or
assets in 1995. As a result, Financial's businesses (inventory finance,
equipment finance and leasing, small business finance, commercial real
estate, consumer residential real estate lending, consumer lending in
the Caribbean Basin and insurance operations) have been aggregated and
are reflected in the financial statements as "Assets Held Subject to
Disposition."
In connection with the sale by Financial of its businesses and/or
assets, Financial plans to merge with and into ITT during the first
half of 1995. In January 1995, the holders of $3.4 billion in Financial
term debt were asked to consent to conform certain Financial indenture
provisions with those of ITT which, after the proposed merger of
Financial into ITT, will result in ITT becoming the obligor on these
debt issues.
ITEM 2. PROPERTIES
All space occupied by Financial is leased with lease periods
generally ranging from one to fifteen years.
ITEM 3. LEGAL PROCEEDINGS
Financial is plaintiff and defendant in numerous legal proceedings,
arising in the normal course of its business, which involve the
collection of accounts, the validity of liens and damage or loss claims
under various types of insurance. Proceedings in which the Company or
its subsidiaries are defendants often involve numerous allegations.
Several of these proceedings purport to be class actions alleging
improper consumer loan deferrals or the unauthorized sale of and/or the
involuntariness of the purchase of certain insurance products made
available by the Company to its consumer borrowers.
There are various other lawsuits pending against the Company and its
subsidiaries, some of which include claims for substantial amounts.
While no assurances can be made as to the ultimate outcome of any
particular action, management believes that meritorious defenses are
generally available and the aggregate liability, if any, likely to
result therefrom, will not have a material adverse effect on the
consolidated financial position or consolidated results of operations
of Financial.
1
<PAGE> 4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
All of Financial's stock is owned by ITT. There is no market for
Financial's common stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Prepared in accordance with General Instruction J(2)(a) of Form 10-K.)
Reference is made to the statement of Consolidated Income. Net income
remained high in 1994 at $159 million and was second only to 1993's net
income of $197 million, which was the highest in the Company's history.
These record levels of performance are a result of record volumes and
improved productivity.
During 1994, ITT Corporation ("ITT") made the decision to exit the
finance industry. See below and "Assets Held Subject to Disposition" in
the Notes to Financial Statements for further information.
A discussion of the changes in net income for 1994 compared with 1993
follows.
CONTINUING OPERATIONS
Income from affiliates increased in 1994 compared with 1993 primarily
due to interest on the notes receivable from ITT related to its
purchase from Financial of subordinated mortgage-backed securities and
Financial's transfer and assignment of Alcatel Alsthom stock to ITT.
See "Transactions with Affiliates" in the Notes to Financial Statements
for further information.
Investment income decreased 91% in 1994 compared with 1993 primarily
the result of the absence, in 1994, of revenues from mortgage-backed
securities purchased and sold during 1993.
Other income decreased 12% in 1994 compared with 1993 primarily due
to a reduction in the amount of the dividend declared and received on
Alcatel Alsthom stock.
Interest expense on Financial's debt decreased 4% in 1994 compared
with 1993. This decline was due to a reduction in average borrowings,
partially offset by higher interest rates.
DISCONTINUED OPERATIONS
Reference is made to Part I for a discussion of the Assets Held
Subject to Disposition.
The term "finance receivables" as used under this item includes
receivables relative to Financial's businesses which have been
aggregated and are reflected in the financial statements as "Assets
Held Subject to Disposition" (see above).
<TABLE>
An analysis of the decrease in net income from Discontinued
Operations for 1994 compared with 1993 follows (thousands of dollars):
<S> <C>
Net income increased (decreased) due to:
Change in finance charges and fees........................................................ $(242,511)
Change in interest expense................................................................ (46,692)
Change in insurance premiums.............................................................. (43,634)
Change in investment income............................................................... 51,409
Change in servicing and other income...................................................... 56,138
Change in operating expense............................................................... 152,162
Change in provision for credit losses..................................................... (34,944)
Change in insurance benefits.............................................................. 59,013
Gain on sale of consumer loans held for repositioning..................................... (95,000)
Change in applicable income tax........................................................... 38,871
---------
$(105,188)
=========
</TABLE>
2
<PAGE> 5
<TABLE>
Finance charges and fees were earned as follows:
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Finance Receivables...................................................... $867,074 $ 914,721
Consumer loans held for repositioning (sold June, 1993).................. - 194,864
-------- ----------
$867,074 $1,109,585
======== ==========
</TABLE>
As shown above, finance charges and fees decreased 22% in 1994
compared with 1993 mainly due to the sale in 1993 of the domestic
unsecured loan business. The slight decline in finance receivables
earnings was mainly due to asset securitizations and portfolio mix.
Interest expense increased 69% in 1994 compared with 1993 due to
higher average borrowings and higher interest rates.
Insurance premiums decreased 27% in 1994 compared with 1993 due
mainly to a lower number of captive policies in force as a result of
exiting the domestic unsecured loan business in 1993. However,
insurance benefits decreased 76% in 1994 compared with 1993 mainly as a
result of the reduction in captive insurance activities.
Investment income increased 28% in 1994 compared with 1993 due to a
higher level of investments and gains on investment securities,
partially offset by a lower portfolio yield primarily the result of a
change in portfolio mix. The increase in the level of investments and
the change in portfolio mix is primarily the result of the
securitization of consumer real estate receivables. The sale of
subordinated mortgage-backed securities to ITT in December, 1993, also
contributed to the change in the portfolio mix.
Servicing and other income increased by 52% in 1994 over 1993
primarily due to an increase in portfolio servicing activities
resulting from the securitization and sale of inventory finance
receivables with servicing retained, proceeds from the sale of
Financial's specialty insurance line of business and from the sale of
the Company's 15% equity interest in the group that purchased the
consumer loans held for repositioning, partially offset by the absence,
in 1994, of the temporary servicing fees relative to the consumer loans
sold.
The provision for credit losses increased by $35 million in 1994
compared with 1993 as a result of an increased loss provision of $52
million related to the California commercial real estate portfolio.
This increase reflects earthquake damage and other portfolio
deterioration. The loss provision for the rest of the portfolios was
down by $17 million.
Income tax decreased in 1994 compared with 1993 primarily due to a
decrease in pre-tax income.
CHANGE IN ACCOUNTING PRINCIPLE
Reference is made to "Investment Securities" in the Notes to
Financial Statements for a discussion of the change in accounting
principle.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
3
<PAGE> 6
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. See Index to Financial Statements and Financial Statement Schedules.
2. See Exhibit Index.
(B) REPORTS ON FORM 8-K.
The registrant filed the following report on Form 8-K during the
last quarter of the period covered by this annual report:
None
4
<PAGE> 7
REPORT OF MANAGEMENT
The management of ITT Financial Corporation ("Company") is
responsible for the preparation and integrity of the information
contained in the financial statements and other sections of the Annual
Report. The financial statements are prepared in accordance with
generally accepted accounting principles, and, where necessary, include
amounts that are based on management's informed judgments and
estimates. Other information in the Annual Report is consistent with
the financial statements.
The Company's financial statements are audited by Arthur Andersen
LLP, independent public accountants. Management has made the Company's
financial records and related data available to Arthur Andersen LLP,
and believes that the representations made to the independent public
accountants are valid and complete.
The Company's system of internal controls is a major element in
management's responsibility to provide a fair presentation of the
financial statements. The system includes both accounting controls and
the internal auditing program, which are designed to provide reasonable
assurance that the Company's assets are safeguarded, that transactions
are properly recorded and executed in accordance with management's
authorization, and that fraudulent financial reporting is prevented or
detected.
The Company's internal controls provide for the careful selection and
training of personnel and for appropriate divisions of responsibility.
The controls are documented in written codes of conduct, policies and
procedures that are communicated to the Company's employees. Management
continually monitors the system of internal controls for compliance.
The Company's internal auditors independently assess the effectiveness
of internal controls and make recommendations for improvement on a
regular basis. The independent public accountants also evaluate
internal controls and perform tests of procedures and accounting
records to enable them to express their opinion on the Company's
financial statements. They also make recommendations for improving
internal controls, policies and practices. Management takes appropriate
action in response to each recommendation from the internal auditors
and the independent public accountants.
F-1
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT FINANCIAL CORPORATION:
We have audited the accompanying consolidated balance sheets and
statements of consolidated term debt of ITT Financial Corporation (a
Delaware corporation and wholly-owned subsidiary of ITT Corporation)
and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of income, retained earnings (deficit), capital
surplus and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ITT
Financial Corporation and subsidiaries as of December 31, 1994 and
1993, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed in the accompanying notes to financial statements, ITT
Financial Corporation adopted new accounting standards promulgated by
the Financial Accounting Standards Board, changing its methods of
accounting, effective January 1, 1994, for certain investments in debt
and equity securities and, effective January 1, 1992, for
postretirement benefits other than pensions and postemployment
benefits.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
January 30, 1995.
F-2
<PAGE> 9
<TABLE>
CONSOLIDATED INCOME
===============================================================================================================================
<CAPTION>
(IN THOUSANDS)
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Income from affiliates....................................................... $ 23,998 $ 1,236 $ 1,412
Investment income............................................................ 701 7,748 59
Other income................................................................. 11,768 13,418 925
--------- --------- ---------
36,467 22,402 2,396
--------- --------- ---------
Expenses:
Interest expense............................................................. 505,713 528,001 632,710
Operating expense............................................................ 20,766 21,541 19,912
Special provision............................................................ - - 30,000
--------- --------- ---------
526,479 549,542 682,622
--------- --------- ---------
Loss from Continuing Operations Before Income Tax.............................. (490,012) (527,140) (680,226)
Income Tax Benefit............................................................. (171,504) (184,499) (231,277)
--------- --------- ---------
Net Loss from Continuing Operations............................................ (318,508) (342,641) (448,949)
Discontinued Operations, net of tax (benefit) of $247,932, $286,803 and
$(53,066)..................................................................... 483,811 588,999 (55,991)
Cumulative Effect of Accounting Changes, net of tax benefit of $3,633 and
$6,708........................................................................ (6,747) - (13,021)
Extraordinary Item-Provision for loss on retirement of debt, net of tax benefit
of $25,500.................................................................... - (49,500) -
--------- --------- ---------
Net Income (Loss).............................................................. $ 158,556 $ 196,858 $(517,961)
========= ========= =========
</TABLE>
<TABLE>
CONSOLIDATED RETAINED EARNINGS (DEFICIT)
===============================================================================================================================
<CAPTION>
(IN THOUSANDS)
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance-Beginning of Period.................................................... $ (42,667) $(239,525) $ 359,555
Add (Deduct):
Net income (loss)............................................................ 158,556 196,858 (517,961)
Dividends.................................................................... - - (81,119)
--------- --------- ---------
Balance-End of Period.......................................................... $ 115,889 $ (42,667) $(239,525)
========= ========= =========
</TABLE>
<TABLE>
CONSOLIDATED CAPITAL SURPLUS
===============================================================================================================================
<CAPTION>
(IN THOUSANDS)
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance-Beginning of Period.................................................... $1,099,854 $1,733,592 $1,072,522
Add (Deduct):
Capital Contributions........................................................ 309,383 56,500 661,070
Dividends.................................................................... (118,246) (690,238) -
---------- ---------- ----------
Balance-End of Period.......................................................... $1,290,991 $1,099,854 $1,733,592
========== ========== ==========
The accompanying notes to financial statements are an integral part of
the above statements.
</TABLE>
F-3
<PAGE> 10
<TABLE>
CONSOLIDATED BALANCE SHEETS
===============================================================================================================================
<CAPTION>
(IN THOUSANDS EXCEPT FOR SHARES AND PER SHARE)
December 31, 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Assets Held Subject to Disposition.............................................................. $8,585,177 $7,966,874
Due from Affiliates............................................................................. 970,744 359,207
Investment Securities........................................................................... 7,250 7,250
Other Assets.................................................................................... 11,561 346,226
---------- ----------
$9,574,732 $8,679,557
========== ==========
LIABILITIES AND STOCKHOLDER EQUITY
Commercial Paper and Other Debt................................................................. $4,457,524 $2,315,766
Term Debt (including current maturities of $1,426,716 and $1,533,400)........................... 3,750,032 4,957,456
Accounts Payable and Accrued Liabilities........................................................ 102,449 117,997
Due to Affiliates............................................................................... 107 214,635
Deferred Income Taxes........................................................................... 14,561 14,599
---------- ----------
Total Liabilities........................................................................... 8,324,673 7,620,453
---------- ----------
Stockholder Equity:
Common stock-Authorized 1,000 shares, $100 par value
Outstanding 10 shares held by ITT Corporation................................... 1 1
Captal surplus................................................................................ 1,290,991 1,099,854
Net unrealized gain (loss) on securities, net of tax.......................................... (156,822) 1,916
Retained earnings (deficit)................................................................... 115,889 (42,667)
---------- ----------
Total Stockholder Equity.................................................................... 1,250,059 1,059,104
---------- ----------
$9,574,732 $8,679,557
========== ==========
The accompanying notes to financial statements are an integral part of
the above statements.
</TABLE>
F-4
<PAGE> 11
<TABLE>
CONSOLIDATED CASH FLOWS
===============================================================================================================================
<CAPTION>
(IN THOUSANDS)
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)........................................................ $ 158,556 $ 196,858 $ (517,961)
Discontinued operations.................................................. (483,811) (588,999) 55,991
Cumulative effect of accounting changes.................................. 6,747 - 13,021
Extraordinary item....................................................... - 49,500 -
----------- ----------- -----------
Loss from continuing operations........................................ (318,508) (342,641) (448,949)
Adjustments to loss from continuing operations:
Depreciation and amortization.......................................... 4,574 2,938 2,659
Amortization of debt discount and premium, net......................... 2,345 (880) 3,688
Change in accrued and deferred income taxes............................ (171,504) 11,413 (10,253)
(Decrease) increase in accounts payable and accrued liabilities........ (15,548) (2,446) 12,786
(Gain) on investment securities........................................ - (4,993) -
----------- ----------- -----------
Net cash used for operating activities................................. (498,641) (336,609) (440,069)
----------- ----------- -----------
Investing Activities:
(Increase) decrease in assets held subject to disposition................ (394,916) 2,910,717 172,359
Investment securities purchased.......................................... - (200,734) (180,000)
Investment securities matured or sold.................................... - 385,727 -
(Increase) in other assets............................................... (705) (2,635) (2,034)
----------- ----------- -----------
Net cash provided from (used for) investing activities................. (395,621) 3,093,075 (9,675)
----------- ----------- -----------
Financing Activities:
Issuance of term debt.................................................... 45,000 1,596,100 1,274,250
Repayments of term debt.................................................. (1,254,769) (2,247,263) (1,008,455)
Increase (decrease) in commercial paper and other debt................... 2,141,758 (1,903,567) 237,365
Decrease (increase) in due from/to affiliates............................ 115,258 (3,114) 10,199
Capital contributions.................................................... 68,149 291,835 10,000
Dividends paid........................................................... (221,134) (490,457) (73,615)
----------- ----------- -----------
Net cash provided from (used for) financing activities................. 894,262 (2,756,466) 449,744
----------- ----------- -----------
Change in Cash............................................................. 0 0 0
Cash--beginning of year................................................... 0 0 0
----------- ----------- -----------
Cash--end of year......................................................... $ 0 $ 0 $ 0
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest............................................................... $ 528,290 $ 585,146 $ 632,719
=========== =========== ===========
Income tax (refund), net............................................... $ (41,199) $ (328,911) $ 895
=========== =========== ===========
The accompanying notes to financial statements are an integral part of
the above statements.
</TABLE>
F-5
<PAGE> 12
<TABLE>
CONSOLIDATED TERM DEBT
===============================================================================================================================
<CAPTION>
(IN THOUSANDS)
December 31,
-------------------------------------------------------------------------------------------------------------------------------
WEIGHTED
SENIOR<Fa> SUBORDINATED<Fa> AVERAGE
(1.14%-13.80%) (8.35%-9.88%) TOTAL RATE
-------------- --------------- ----- --------
<S> <C> <C> <C> <C>
Debt Maturities:
1995....................................... $1,426,716<Fc> $ - $1,426,716 7.10%
1996....................................... 168,160 75,000<Fd> 243,160 8.19%
1997....................................... 577,303<Fb><Fc> 297,500<Fd> 874,803 7.89%
1998....................................... 316,940<Fc> - 316,940 8.37%
1999....................................... 232,000 - 232,000 10.11%
2000-2048.................................. 616,300 149,101 765,401 10.10%
---------- -------- ----------
Total Term Debt-1994......................... $3,337,419 $521,601 $3,859,020<Fe><Ff><Fh>
========== ======== ==========
Total Term Debt-1993......................... $4,350,289 $718,500 $5,068,789<Fe><Ff><Fg>
========== ======== ==========
Weighted Average Rate:
1994....................................... 8.13% 8.88% 8.23%
==== ==== ====
1993....................................... 7.80% 8.35% 7.88%
==== ==== ====
<FN>
-----
Notes:
<Fa> Senior term debt is senior to all other term debt. Subordinated term debt is subordinate and junior to all other borrowings.
<Fb> Includes Floating Rate Debentures due August 25, 2048, repayable at the option of the holder on August 25, 1997 at 99.30% of
their principal amount and on each third anniversary thereafter at increasing prices. The rate of interest payable on each
Debenture is a variable rate, based on the monthly commercial paper rate. In addition, Financial shall have the option every
three years to elect to pay a fixed rate for a period of three years which shall be calculated based on the then current three
year U.S. Treasury security, as adjusted.
<Fc> Includes the following senior term debt redeemable at the holder's option:
8.88% Medium-Term Notes, Series B redeemable on May 18, 1995 and annually thereafter through May 18, 1999
Floating Rate Medium-Term Notes, Series F redeemable on July 19, 1995
Floating Rate Medium-Term Notes, Series F redeemable on September 13, 1995
8.875% Senior Debentures redeemable on June 1, 1995 or June 1, 2000 or June 1, 2005
8.50% Senior Debentures redeemable on October 15, 1995
8.875% Senior Debentures redeemable on June 15, 1997
8.55% Senior Debentures redeemable on June 15, 1998 or June 15, 2004
<Fd> Includes the following subordinated term debt redeemable at the holder's option:
8.75% Subordinated Debentures redeemable on March 1, 1996
8.85% Subordinated Debentures redeemable on July 15, 1997
<Fe> The balances as of December 31, 1994 and 1993 exclude net amortizable discount of $108,988 and $111,332, respectively. Original
issue discount and premium are amortized over the term of the issue by use of the interest method.
<Ff> See "Derivative Financial Instruments" in the accompanying notes to financial statements for further information regarding fair
value and derivative financial instruments.
<Fg> See "Extraordinary Item" in the accompanying notes to financial statements regarding the retirement of debt.
<Fh> In January 1995, the holders of $3.4 billion in Financial term debt were asked to consent to conform certain Financial
indenture provisions with those of ITT which, after the proposed merger of Financial into ITT, will result in ITT becoming the
obligor on these debt issues.
The accompanying notes to financial statements are an integral part of the above statements.
</TABLE>
F-6
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
ACCOUNTING POLICIES
Consolidation Principles: The consolidated financial statements include
the accounts of ITT Financial Corporation and its subsidiaries
("Financial" or "Company"), all of which are wholly-owned. Assets held
subject to disposition are reflected net of their related liabilities.
Certain 1993 and 1992 items have been reclassified to conform with the
1994 presentation.
Pension: All eligible salaried employees of Financial participate in
the Retirement Plan for Salaried Employees of ITT Corporation, which is
non-contributory. The cost of the plan to Financial is based on an
actuarial allocation and for the years ended December 31, 1994, 1993
and 1992 was $632,000, $387,000 and $453,000, respectively. No
allocation of the present value of accumulated plan benefits or assets
available for benefits has been made, as it is not readily
determinable.
In addition to pension benefits, ITT Corporation ("ITT") provides
health care and life insurance for certain retired employees of
Financial.
Effective January 1, 1992, ITT adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," using the
immediate recognition method. Accordingly, cumulative after-tax
adjustments (through December 31, 1991) of $9,569,000 and $3,452,000,
respectively, were allocated by ITT to Financial and recognized at
January 1, 1992. Except for the one-time cumulative adjustment, the
adoption of SFAS No. 112 was not material to the 1992 results of
operations.
ITT adopted certain changes to a number of its postretirement benefit
plans during 1992. The effect of these changes are reflected in the
determination of the expense reported for 1993 and 1992 and were not
significant.
In May 1993, the Financial Accounting Standards Board issued SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan," which was
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" in October 1994. These
standards require that impaired loans be measured based on the present
value of expected future cash flows, the loan's observable market price
or the fair value of the collateral if the loan is collateral
dependent. These statements must be adopted by Financial beginning
January 1, 1995. Management has determined that the initial impact of
adoption will not have a material impact on the Company's financial
condition and results of operations, based on the level of
nonperforming loans at December 31, 1994.
ASSETS HELD SUBJECT TO DISPOSITION
As previously announced by ITT, Financial has and expects to enter into
agreements to sell all or substantially all of its businesses and/or
assets to various purchasers during the first half of 1995:
1) Financial has agreed to sell its Island Finance operations located
in the Caribbean Basin for an amount to be determined at closing.
The operations include certain assets of Financial as well as the
capital stock of approximately 60 subsidiaries identified by local
variations of the name "Island Finance" which operate in the
Commonwealth of Puerto Rico, the U. S. Virgin Islands, the
Netherlands Antilles and Aruba. In addition, the transaction
includes the sale of the capital stock of subsidiaries bearing the
names "Financiera el Sol" in Panama and "Credisol" in Costa Rica.
2) Financial has entered into an agreement to sell its commercial
floorplan financing operations.
3) Financial has entered into a preliminary agreement to sell its
commercial installment lending operations and/or assets.
Further, Financial has commenced negotiations with potential purchasers
to sell some or all of its remaining businesses and/or assets in 1995.
As a result, Financial's businesses (inventory finance, equipment
finance and leasing, small business finance, commercial real estate,
consumer residential real estate lending, consumer lending in the
Caribbean Basin and insurance operations) have been aggregated and are
reflected in the financial statements as "Assets Held Subject to
Disposition."
In connection with the sale by Financial of its businesses and/or
assets, Financial plans to merge with and into ITT during the first
half of 1995. In January 1995, the holders of $3.4 billion in Financial
term debt were asked to consent to conform certain Financial indenture
provisions with those of ITT which, after the proposed merger of
Financial into ITT, will result in ITT becoming the obligor on these
debt issues.
<TABLE>
Summary financial information relative to those businesses aggregated
and reflected in the financial statements as "Assets Held Subject to
Disposition" is as follows:
<CAPTION>
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Finance Receivables (net of unearned income):
Consumer....................................... $ 3,271,544 $ 3,272,537 $ 2,868,227
Commercial..................................... 4,765,389 4,233,909 5,089,700
----------- ----------- -----------
Total Finance Receivables.................... 8,036,933 7,506,446 7,957,927
Reserve for Credit Losses...................... (230,046) (220,277) (270,014)
----------- ----------- -----------
Finance Receivables, net .................... 7,806,887 7,286,169 7,687,913
----------- ----------- -----------
Investment Securities............................ 4,458,373 3,090,192 2,802,730
Consumer Loans Held for Repositioning, net....... - - 1,564,116
Term Debt........................................ (1,568,508) (1,290,348) (371,112)
Deposits and Certificates........................ (526,955) (558,243) (713,725)
Insurance Policy and Claim Reserves.............. (196,994) (228,012) (300,080)
Other, net....................................... (1,387,626) (332,884) (201,515)
----------- ----------- -----------
Total............................................ $ 8,585,177 $ 7,966,874 $10,468,327
=========== =========== ===========
Revenues......................................... $ 1,388,620 $ 1,567,218 $ 1,997,914
Expenses......................................... 656,877 691,416 2,106,971
Income Tax (Benefit)............................. 247,932 286,803 (53,066)
----------- ----------- -----------
Net Income (Loss)................................ $ 483,811 $ 588,999 $ (55,991)
=========== =========== ===========
</TABLE>
On January 19, 1993, Financial announced a strategic plan to shift its
emphasis to secured lending and downsize unsecured lending.
F-7
<PAGE> 14
Notes to Financial Statements (Continued)
==========================================================================
Accordingly, Financial established reserves of $928,242,000 pre-tax
($612,219,000 after-tax) in the fourth quarter of 1992, including a
$693,000,000 provision to cover future unsecured consumer loan losses
from the run-off of its existing domestic portfolio; $103,000,000 for
repositioning, including consolidation of consumer loan offices; and a
$132,242,000 provision for anticipated losses in its commercial real
estate portfolio.
On June 3, 1993, Financial completed the sale of its domestic unsecured
consumer small loan portfolio. Accordingly, Financial recognized a pre-
tax gain of $95,000,000 in the second quarter of 1993, based on
recorded values as of the closing of the sale and certain costs and
restructuring expenses incurred by Financial as part of the
transaction.
TRANSACTIONS WITH AFFILIATES
On September 30, 1994, Financial transferred and assigned to ITT
4,808,267 shares of Alcatel Alsthom stock which had a book value at
that date of $425,735,000. In return, ITT executed a promissory note
payable on demand to Financial for a like amount. The note accrued
interest on a monthly basis at a rate per annum equal to LIBOR, as such
rate was changed from time to time, calculated on the basis of a year
of 365/366 days and actual days elapsed. The balance of the note
receivable from ITT at December 31, 1994 was $431,637,000 and is
included in Due from Affiliates on the balance sheet of Financial (see
"Retained Earnings and Capital Surplus" for further information).
In December, 1993, Financial sold to ITT $358,706,000 of subordinated
mortgage-backed securities. In return, ITT executed a promissory note
payable to Financial for a like amount. Principal payments are credited
monthly against the outstanding principal amount of the note equal to
the amount of cash actually received on behalf of ITT from the
securities. The note accrued interest on a monthly basis at the rate
per annum equal to the average of the daily 90 day LIBOR rate for the
month of calculation plus 50 basis points, both for the actual number
of days outstanding during the monthly interest period. The note
matures on December 31, 2003. At December 31, 1994, the balance of the
note receivable from ITT was $332,136,000 and is included in Due from
Affiliates on the balance sheet.
INVESTMENT SECURITIES
During the 1994 first quarter, Financial adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The new standard requires,
among other things, that securities be classified as "held-to-
maturity", "available-for-sale" or "trading" based on Financial's
intentions with respect to the ultimate disposition of the security and
its ability to effect those intentions. The classification determines
the appropriate accounting carrying value (cost basis or fair value)
and, in the case of fair value, whether the adjustment impacts
Stockholder Equity directly or is reflected in Consolidated Income.
Investments in equity securities had previously been recorded at fair
value with the corresponding impact included in Stockholder Equity.
Under SFAS No. 115, the portfolios included in "Assets Held Subject to
Disposition" are classified as "available-for-sale" and accordingly,
investments are reflected at fair value with the corresponding impact
included as a component of Stockholder Equity designated "Net
unrealized gain (loss) on securities, net of tax". At December 31,
1994, the unrealized loss on securities, net of tax, was $156,822,000.
In adopting SFAS No. 115, Emerging Issues Task Force ("EITF") Issue No.
93-18 prescribes specific accounting treatment with respect to
mortgage-backed interest-only investments. EITF No. 93-18 reached the
conclusion that the measure of impairment of these instruments should
be changed from undiscounted cash flows to fair value. Accordingly, the
amortized cost basis of such instruments that were determined to have
other-than-temporary impairment losses at the time of the initial
adoption of SFAS No. 115 have been written down to fair value and
reflected as a cumulative effect of accounting change as of January 1,
1994. The writedown totalled $6,747,000 after tax.
At December 31, 1994 and 1993, investment securities held by Financial
consisted entirely of certificates of deposit with maturities of less
than a year. The carrying amount of investment securities at December
31, 1994 and 1993 approximated fair value because of the short maturity
of these investments.
COMMERCIAL PAPER AND OTHER DEBT
<TABLE>
The following table sets forth information concerning Financial's
commercial paper and other debt and their related cost:
<CAPTION>
1994 1993
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
End of Period Borrowings:
Commercial paper................................................. $4,457,524 $2,008,766
Medium-term notes................................................ - 82,000
Other debt....................................................... - 225,000
---------- ----------
Total........................................................... $4,457,524 $2,315,766
========== ==========
Maximum Month-end Borrowings:
Commercial paper................................................. $4,457,524 $4,332,203
Medium-term notes................................................ 47,000 335,250
Other debt....................................................... 225,000 286,625
---------- ----------
Total........................................................... $4,729,524 $4,954,078
========== ==========
Daily Average Borrowings:
Commercial paper................................................. $3,654,109 $3,269,303
Medium-term notes................................................ 32,241 275,570
Other debt....................................................... 124,198 146,807
---------- ----------
Total........................................................... $3,810,548 $3,691,680
========== ==========
Weighted Average Interest Rates:
End of Period-
Commercial paper................................................. 5.89% 3.41%
Medium-term notes................................................ - 3.54
Other debt....................................................... - 3.43
Total........................................................... 5.89 3.42
During the Period<F*>-
Commercial paper................................................. 4.45% 3.39%
Medium-term notes................................................ 4.92 3.78
Other debt....................................................... 4.13 3.16
Total........................................................... 4.44 3.41
<FN>
-----
<F*>Computed by dividing the interest expense (including the impact of
interest rate exchange agreements) by the daily average debt
outstanding without giving effect to commitment fees. The weighted
average interest rates on total commercial paper, medium-term notes
and other debt, giving effect to interest exchange agreements
F-8
<PAGE> 15
and commitment fees for the years ended December 31, 1994 and 1993,
were 4.57% and 3.57%, respectively. The weighted average interest
rates during the period on commercial paper, without giving effect to
interest rate exchange agreements and commitment fees for the years
ended December 31, 1994 and 1993, were 4.41% and 3.17%, respectively.
</TABLE>
See "Derivative Financial Instruments" for further information
regarding fair value and derivative financial instruments.
In February, 1994, Financial and ITT replaced their credit lines
supporting commercial paper with $7 billion of credit lines with 65
domestic and foreign banks. Financial's lines were comprised of a
Three-Year Competitive Advance and Revolving Credit Facility Agreement
and a 364-Day Competitive Advance and Revolving Credit Facility
Agreement in the amounts of $1 billion and $3 billion, respectively.
The three-year agreement requires Financial to maintain stockholder
equity of not less than $750 million. Lines of credit were maintained
with various domestic and foreign banks amounting to $4,678,148,000 and
$3,386,732,000 at December 31, 1994 and 1993, respectively. Of such
amounts, $4,639,532,000 and $3,336,183,000 were unused at December 31,
1994 and 1993, respectively, of which $4,600,000,000 and
$3,315,000,000, respectively, supported commercial paper outstanding.
Approximately $1,000,000,000 of the lines of credit were under
irrevocable multi-year revolving credit agreements and approximately
$3,600,000,000 of the lines of credit were under irrevocable credit
agreements of one year or less. The remaining $78,148,000 may be
terminated by Financial or withdrawn by the banks at any time and are
generally supported by payment of annual commitment fees. Commitment
fees during 1994, 1993 and 1992 amounted to $4,862,000, $5,678,000 and
$4,476,000, respectively. Financial may be exposed to market risk in
the event of nonperformance by the banks on irrevocable lines of
credit. Because nonperformance by a significant number of banks is not
anticipated, the Company does not expect a material adverse effect on
its results of operations or financial position. Subsequent to December
31, 1994, ITT Corporation entered into revolving credit facilities
totaling $11 billion. A portion of these facilities, at least equal in
amount to Financial's commercial paper outstanding, is allocated to
Financial for the purpose of supporting commercial paper.
DERIVATIVE FINANCIAL INSTRUMENTS
Financial uses derivative financial instruments, primarily interest
rate swaps, as a part of an overall hedging program to manage
fluctuations in interest rates and preserve net interest margin. The
Company is an end-user and does not utilize derivative financial
instruments for speculative purposes.
The Company accrues the pay amounts and receive amounts related to each
interest rate swap with the net settlement amounts recorded as an
adjustment to interest expense. Premiums received or paid, including
initial and termination amounts where the liability remains
outstanding, are deferred, included in other assets, and are amortized
over the original term of the derivative contract as an adjustment to
interest expense. Where the liability and the derivative financial
instrument are terminated, the gain or loss on the derivative contract
is recognized immediately as an adjustment to interest expense.
An interest rate exchange agreement where by Financial pays the fixed
rate and receives the floating rate would relate to commercial paper or
floating rate term debt and thereby create a fixed rate funding. An
agreement where by Financial pays the floating rate and receives a
fixed rate would relate to fixed rate term debt and thereby create a
term floating rate funding. An agreement where Financial pays one index
rate and receives another index rate typically modifies commercial
paper or floating rate term debt to an index that is a better match to
the yield on assets. Interest rate caps are purchased to reduce the
impact of increases on floating rate debt during periods of rising
interest rates. These caps are generally identified with assets where
Financial's ability to increase the yield is by contract also limited.
------------------------------
<TABLE>
A summary of the maturities and the related weighted average interest
pay rates or receive rates of interest rate swaps outstanding at
December 31, 1994 is as follows:
<CAPTION>
2000-
1995 1996 1997 1998 1999 2011 TOTAL
---- ---- ---- ---- ---- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
PAY FIXED/RECEIVE VARIABLE:
Notional amount..................................... - $ 260 - - - - $ 260
Weighted average receive rate....................... - 5.02% - - - - 5.02%
Weighted average pay rate........................... - 6.08% - - - - 6.08%
PAY VARIABLE/RECEIVE FIXED:
Notional amount..................................... $ 225 $ 25 $ 20 $ 20 $ 225 $ 605 $1,120
Weighted average receive rate....................... 6.96% 4.83% 5.50% 6.89% 6.91% 7.57% 7.20%
Weighted average pay rate........................... 4.96% 5.08% 5.43% 4.99% 4.94% 4.96% 4.96%
PAY A VARIABLE RATE/RECEIVE A DIFFERENT VARIABLE
RATE:
Notional amount..................................... $ 170 $ 25 $ 160 $ 60 - - $ 415
Weighted average receive rate....................... 3.66% 3.65% 5.11% 4.98% - - 4.41%
Weighted average pay rate........................... 5.11% 5.05% 4.87% 4.51% - - 4.93%
Total notional amount............................... $ 395 $ 310 $ 180 $ 80 $ 225 $ 605 $1,795
Total weighted average receive rate................. 5.54% 4.89% 5.15% 5.46% 6.91% 7.57% 6.24%
Total weighted average pay rate..................... 5.03% 5.91% 4.93% 4.63% 4.94% 4.96% 5.12%
</TABLE>
F-9
<PAGE> 16
Notes to Financial Statements (Continued)
==========================================================================
In addition, a purchased interest rate cap with a notional principal
amount of $100,000,000 was in effect as of December 31, 1994. The cap
is used to mitigate the risk of rising interest rates on Financial's
variable rate obligations.
At December 31, 1994, Financial held no derivative financial
instruments as hedges for anticipated transactions.
<TABLE>
A summary of hedged liabilities and the related derivative financial
instruments at December 31, 1994 and 1993 is as follows:
<CAPTION>
1994 1993
---------------------------------------- ----------------------------------------
CARRYING NOTIONAL FAIR CARRYING NOTIONAL FAIR
VALUE AMOUNT VALUE VALUE AMOUNT VALUE
-------- -------- ----- -------- -------- -----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
DEBT
Commercial Paper and Other
Debt....................... $4,457,524 $4,457,524 $2,315,766 $2,315,778
Term Debt................... 3,750,032 3,821,763 4,957,456 5,406,723
---------- ---------- ---------- ----------
$8,207,556 $8,279,287 $7,273,222 $7,722,501
========== ========== ========== ==========
DERIVATIVE FINANCIAL
INSTRUMENTS
Interest Rate Exchange
Agreements
Commercial Paper.......... $ 465,000 $ 9,891 $ 592,500 $ (60,883)
Term Debt................. 1,330,380 (51,607) 825,000 65,064
---------- ---------- ---------- ----------
$1,795,380 $ (41,716) $1,417,500 $ 4,181
========== ========== ========== ==========
Foreign Exchange Hedge........ $ 36,000 $ 40,295 $ 36,000 $ 28,823
========== ========== ========== ==========
Interest Rate Cap
Commercial Paper............ $ 100,000 $ 40 $ 100,000 $ 11
========== ========== ========== ==========
</TABLE>
------------------------------
The carrying amount of commercial paper at December 31, 1994 and 1993
approximated fair value due to the short maturity of the instruments.
The average yield of the commercial paper outstanding at December 31,
1994 and 1993 approximated the current market rate for like maturities.
Fair value of term debt was determined by discounting the projected
cash flows using quoted market rates. Where quoted market rates were
not available, fair value of term debt was determined using estimated
interest rates at which Financial could issue similar debt with like
remaining maturities.
The notional amounts of derivative financial instruments do not
represent amounts exchanged by the parties and, thus, are not a measure
of Financial's exposure through its use of derivatives. The amounts
exchanged are determined by reference to the notional amount and the
other terms of the derivatives' contracts.
The fair value of derivative financial instruments generally reflects
the estimated amounts that the company would receive or (pay)
(excluding accrued interest) to terminate the contracts on the
reporting date, thereby taking into account the current unrealized
gains or losses of open contracts. Dealer quotations are available for
most of the Company's derivative financial instruments.
Financial is exposed to market risk in the event of nonperformance by
the counterparties. The Company has policies regarding financial
stability and credit standing of its major counterparties.
Nonperformance by the counterparties is not anticipated nor would it
have a material adverse effect on the results of operations or the
financial position of the Company.
INCOME TAX
The accounts of Financial and its United States subsidiaries are
included in the consolidated Federal income tax return of ITT. ITT's
policy is generally to allocate to Financial current tax benefits and
charges on the basis of statutory U.S. tax rates applied to Financial's
taxable income or loss included in the consolidated return.
<TABLE>
Income tax data from continuing operations is as follows:
<CAPTION>
Year Ended December 31, 1994 1993 1992
-------------------------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Pretax income (loss):
U.S. ................................................... $(503,993) $(539,482) $(680,889)
Foreign................................................. 13,981 12,342 663
--------- --------- ---------
$(490,012) $(527,140) $(680,226)
========= ========= =========
Provision (benefit) for Income Tax:
Current-
U.S. ................................................. $(171,466) $(195,912) $(220,889)
Deferred-
U.S. ................................................. (38) 11,413 (10,388)
-------- --------- ---------
Income Tax (Benefit)...................................... $(171,504) $(184,499) $(231,277)
========= ========= =========
</TABLE>
Deferred income tax assets and liabilities are the tax effect
related to recording revenues and expenses in different periods for
financial statements and tax purposes.
F-10
<PAGE> 17
<TABLE>
Deferred Tax liabilities include the following:
<CAPTION>
Year Ended December 31, 1994 1993
-------------------------------------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Original issue discount............................................ $16,382 $15,496
Other reserve items................................................ (1,073) (620)
Other items........................................................ (748) (277)
------- -------
$14,561 $14,599
======= =======
</TABLE>
No deferred tax liability has been recognized for the federal income
tax payable upon distribution of retained earnings of certain
subsidiaries, $227,505,000 at December 31, 1994, since Financial does
not anticipate a net tax obligation to be incurred on these earnings.
RETAINED EARNINGS AND CAPITAL SURPLUS
At December 31, 1994, Financial had a net capital contribution
receivable from ITT amounting to $136,837,000. The receivable from ITT
is included in Due from Affiliates on the balance sheet of Financial.
In December, 1993, Financial declared and accrued its fourth quarter
dividend to ITT in the amount of $207,285,000. The dividend payable is
included in Due to Affiliates on the December 31, 1993 balance sheet of
Financial. The dividend was paid to ITT in 1994.
Due to the reduction in retained earnings resulting from the fourth
quarter, 1992 reserve actions, Financial received from ITT a capital
contribution of $612,219,000, including 4,808,267 shares of Alcatel
Alsthom stock valued at $425,735,000 as of December 31, 1992. This
contribution was a receivable carried in Other Assets at year-end 1992,
and was received in the first quarter of 1993. The Alcatel Alsthom
stock is included in Other Assets on the December 31, 1993 balance
sheet of Financial.
Under the most restrictive of Financial's term agreement provisions
covering restricted payments, consolidated retained earnings and
capital surplus at December 31, 1994 aggregating $1,131,123,000 were
unrestricted as to the payment of dividends.
A support agreement between ITT and the Company was executed on
February 9, 1993, whereby ITT agreed to retain, directly or indirectly,
ownership of a majority of the shares of capital stock of the Company
having voting power for the election of directors and will assure that
the consolidated debt to equity ratio (excluding depository
institutions) of the Company at the end of each calendar quarter will
not exceed 6.75 to 1. The agreement also provides for ITT to make loans
to the Company on a subordinated basis up to $300,000,000 in the event
that the Company lacks sufficient cash, other liquid assets or credit
facilities to meet an obligation to pay principal of, or premium or
interest on any commercial paper or other short-term debt obligation
for money borrowed. Furthermore, the proceeds of any loan thereunder
may only be used by the Company to meet such payment obligations. Any
loan from ITT will be repayable upon demand anytime after the business
day following the 29th day after such loan was made, provided there is
no default in the payment by the Company of any indebtedness for money
borrowed. Interest on the outstanding amount of any loan shall be at
the fluctuating rate per annum equal to the announced prime rate of
Chase Manhattan Bank, N.A. In addition, the agreement provides for ITT
to assure that the Company will maintain unused committed bank lines of
credit to back up 100% of its outstanding commercial paper. The
agreement shall remain in full force and effect for so long as any debt
for borrowed money by the Company is outstanding unless terminated by
either party. Either party may terminate the agreement upon notice to
the other party of not less than 60 nor more than 90 days prior to such
termination, but in no event shall such termination be earlier than
July 31, 1994. This agreement superseded a similar agreement executed
on July 31, 1992.
Financial information pertaining to ITT is available in its periodic
reports filed with the Securities and Exchange Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934.
EXTRAORDINARY ITEM
In conjunction with the sale of the domestic unsecured consumer small
loan portfolio, Financial decided to retire a portion of its fixed rate
term debt. Fixed rate term debt was issued to finance this portfolio.
In anticipation of these retirements and the related premiums,
Financial recognized an extraordinary pre-tax loss at June 30, 1993, of
$75 million ($49.5 million after-tax). In an invitation dated July 26,
1993, as supplemented on August 5, 1993, Financial offered to purchase
between 25% and 35% of each of twelve series of securities aggregating
$1.9 billion in outstanding principal amount. As a result of the
invitation, Financial purchased, during the third quarter of 1993,
$528.3 million principal amount of securities with interest rates
ranging from 7% to 11%. The funds for the retirements were obtained
from operations and from the issuance of other debt.
COMMITMENTS AND CONTINGENCIES
<TABLE>
At December 31, 1994, Financial was obligated under long-term lease
contracts, principally for office rental, furniture and fixtures and
data processing equipment which expire on various dates. Minimum annual
rental commitments under noncancellable operating and capital leases
were as follows:
<CAPTION>
<S> <C>
1995....................................................... $ 4,469,000
1996....................................................... $ 4,464,000
1997....................................................... $ 4,464,000
1998....................................................... $ 4,349,000
1999....................................................... $ 3,725,000
2000 and after............................................. $36,099,000
</TABLE>
Rental expenses included in the statement of consolidated income for
the years ended December 31, 1994, 1993 and 1992 were $2,647,000,
$1,199,000 and $798,000, respectively.
Financial and its subsidiaries have been named as defendants and as
potential defendants in various lawsuits and threatened litigation
which include allegations regarding Financial's insurance sales
practices. After consideration of established reserves, management
believes that the outcome of such litigation, and other contingencies,
will have no material adverse impact on the Company's results of
operations or its financial position.
INDUSTRY INFORMATION
For purposes of segment reporting, management considers Financial to
operate in the finance industry.
F-11
<PAGE> 18
Notes to Financial Statements (Continued)
==========================================================================
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
Summarized unaudited quarterly financial data for 1994 and 1993 are as
follows:
<CAPTION>
THREE MONTHS ENDED,
-------------------------------------------------------------------------------------------------------
1994 1993
-------------------------------------------------- -------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------------------------------------------------- -------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 4,099 $ 4,838 $ 15,812 $ 11,718 $ 2,639 $ 6,149 $ 13,092 $ 522
======== ======== ======== ======== ======== ======== ======== ========
Expenses................ $118,764 $136,920 $132,043 $138,752 $153,107 $143,985 $129,999 $122,451
======== ======== ======== ======== ======== ======== ======== ========
Net Loss from Continuing
Operations............. $(74,532) $(85,854) $(75,550) $(82,572) $(97,804) $(89,594) $(75,989) $(79,254)
======== ======== ======== ======== ======== ======== ======== ========
Net Income.............. $ 20,452 $ 30,793 $ 45,237 $ 62,074 $ 43,355 $ 57,108 $ 57,910 $ 38,485
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
F-12
<PAGE> 19
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITT FINANCIAL CORPORATION
by TERENCE L. PAYNE
....................................
(Terence L. Payne)
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 31, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
FRANK J. SCHULTZ Chairman of the Board, President, 3/31/95
------------------------------------------------ Chief Executive Officer and Director
(Frank J. Schultz)
(PRINCIPAL EXECUTIVE OFFICER)
DAVID K. ZWIENER Executive Vice President, 3/31/95
------------------------------------------------ Treasurer, Chief Financial
(David K. Zwiener) Officer
(PRINCIPAL FINANCIAL OFFICER)
ROBERT A. BOWMAN Director 3/31/95
------------------------------------------------
(Robert A. Bowman)
RALPH W. PAUSIG Director 3/31/95
------------------------------------------------
(Ralph W. Pausig)
RICHARD S. WARD Director 3/31/95
------------------------------------------------
(Richard S. Ward)
</TABLE>
2-1
<PAGE> 20
<TABLE>
EXHIBIT INDEX
<CAPTION>
INCORPORATED BY REFERENCE TO
----------------------------
EXHIBIT NO. TITLE EXHIBIT/REGISTRATION NO.
----------- ----- ------------------------
<C> <S> <C>
2 - Plan of acquisition, reorganization, Not Applicable
arrangement, liquidation or succession
3(i) - Restated Certificate of Incorporation Exhibit 3.1 to Registrant's Form
8-K filed February 6, 1991 (File
No. 1-7437)
3(ii)- By-Laws Exhibit 3.2 to Registrant's Form
8-K filed February 6, 1991 (File
No. 1-7437)
4 - Instruments defining the rights of security holders, --
including indentures<F*>
9 - Voting trust agreement None
10 - Material contracts
(a) Support Agreement dated April 28, 1994 with ITT Corporation Exhibit 10 to Registrant's Form
8-K dated May 3, 1994 (File No.
1-7437)
11 - Statement re computation of per share earnings Not Applicable
12 - Statements re computation of ratios Filed herewith
13 - Annual report to security holders, Form 10-Q or Not Applicable
quarterly report to security holders
16 - Letter re change in certifying accountant Not Applicable
18 - Letter re changes in accounting principles Not Applicable
21 - Subsidiaries of the registrant<F**> --
22 - Published report regarding matters submitted to Not Applicable
vote of security holders
23 - Consents of experts and counsel Filed herewith
Opinions and Consents of independent public accountants
24 - Power of Attorney None
27 - Financial Data Schedule Filed herewith
28 - Information from reports furnished to state Not required to be filed
insurance regulatory authorities
99 - Additional exhibits None
<FN>
-----
<F*> Instruments defining rights of holders of Financial's long-term debt
(which are its only securities registered under Section 12 of the
Securities and Exchange Act of 1934) are not referred to herein
because the total amount of securities authorized under any such
individual instrument does not exceed 10% of the total assets of
Financial and its subsidiaries on a consolidated basis. Financial
will furnish a copy of any such instrument to the Commission upon
request.
<F**>Omitted pursuant to General Instruction J(2)(b) of Form 10-K.
</TABLE>
2-2
<PAGE> 1
EXHIBIT 12.
<TABLE>
ITT FINANCIAL CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net loss from Continuing Operations............ $(318,508) $(342,641) $(448,949) $(475,071) $(500,537)
Add income tax benefit......................... (171,504) (184,499) (231,277) (244,733) (257,852)
--------- --------- --------- --------- ---------
(490,012) (527,140) (680,226) (719,804) (758,389)
--------- --------- --------- --------- ---------
Add fixed charges:
Interest expense.............................. 505,713 528,001 632,710 714,694 750,894
Interest factor attributable to rentals<F*>... 380 203 160 211 247
--------- --------- --------- --------- ---------
506,093 528,204 632,870 714,905 751,141
--------- --------- --------- --------- ---------
Income (loss) from Continuing Operations, as
adjusted...................................... $ 16,081 $ 1,064 $ (47,356) $ (4,899) $ (7,248)
========= ========= ========= ========= =========
RATIOS:
Income (loss) from Continuing Operations, as
adjusted, to fixed charges<F**>............... 0.03 0.00 - - -
==== ==== === === ===
<FN>
-----
<F*> The interest factor attributable to rentals was computed by applying
to the estimated present value of all long-term rental commitments
the approximate weighted average interest rate inherent in the lease
obligations, and adding thereto the interest element assumed in
short-term cancellable rentals excluded from the commitment data but
included in rental expense.
<F**>Earnings for the years ended December 31, 1992, 1991 and 1990 were
insufficient to cover the fixed charges by $680,226, $719,804 and
$758,389, respectively, therefore, no ratio is presented for those
years.
</TABLE>
2-3
<PAGE> 1
EXHIBIT 23.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into ITT
Financial Corporation's previously filed S-3 Registration Statements
File No. 2-98360, File No. 33-23341, File No. 33-31957, File No.
33-42236 and File No. 33-62882.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 31, 1995
2-4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1994 FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 0
<SECURITIES> 7,250
<RECEIVABLES> 970,744
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,423
<DEPRECIATION> 1,551
<TOTAL-ASSETS> 9,574,732
<CURRENT-LIABILITIES> 0
<BONDS> 8,207,556
<COMMON> 1
0
0
<OTHER-SE> 1,250,058
<TOTAL-LIABILITY-AND-EQUITY> 9,574,732
<SALES> 0
<TOTAL-REVENUES> 36,467
<CGS> 0
<TOTAL-COSTS> 526,479
<OTHER-EXPENSES> 20,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 505,713
<INCOME-PRETAX> 490,012
<INCOME-TAX> 171,504
<INCOME-CONTINUING> 318,508
<DISCONTINUED> 483,811
<EXTRAORDINARY> 0
<CHANGES> 6,747
<NET-INCOME> 158,556
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
