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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) 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]
For the Transition period from
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COMMISSION FILE NO. 1-5627
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ITT CORPORATION
INCORPORATED IN THE STATE OF DELAWARE
13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1330 AVENUE OF THE AMERICAS, NEW YORK, NY 10019-5490
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (212) 258-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
CUMULATIVE PREFERRED STOCK, WITHOUT PAR VALUE,
$2.25 CONVERTIBLE SERIES N (ALSO REGISTERED ON PACIFIC 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) 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/
The aggregate market value of the Common and Cumulative Preferred
Stocks of the registrant held by non-affiliates of the registrant on January
31, 1995, was approximately $10.2 billion.
As of February 28, 1995, there were outstanding 105,565,410 shares of
Common Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 9, 1995, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
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PART 1 Business of ITT...................................................... 1
I 2 Properties........................................................... 16
3 Legal Proceedings.................................................... 17
4 Submission of Matters to a Vote of Security Holders.................. 18
* Executive Officers of ITT............................................ 18
PART 5 Market for ITT's Common Stock and Related Stockholder Matters........ 19
II 6 Selected Financial Data.............................................. 20
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 20
8 Financial Statements and Supplementary Data.......................... 34
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 34
PART 10 Directors and Executive Officers of ITT.............................. 34
III 11 Executive Compensation............................................... 34
12 Security Ownership of Certain Beneficial Owners and Management....... 34
13 Certain Relationships and Related Transactions....................... 34
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 34
IV
Signatures.................................................................. II-1
Exhibit Index............................................................... II-2
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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS OF ITT
ITT Corporation is a Delaware corporation, with World Headquarters at 1330
Avenue of the Americas, New York, NY 10019-5490. Until December 31, 1983, the
corporation was known as International Telephone and Telegraph Corporation. It
is the successor (since 1968) to a Maryland corporation incorporated in 1920.
Unless the context otherwise indicates, references herein to ITT Corporation
("ITT") include its subsidiaries.
ITT is a diversified global enterprise engaged, through its subsidiaries,
in three major business areas: Insurance, Industries and Hospitality,
Entertainment and Information Services. In addition, ITT owns approximately 6%
of the outstanding capital shares of Alcatel Alsthom, a French company which
owns, among other things, Alcatel N.V., the largest telecommunications equipment
manufacturer in the world. ITT has approximately 110,000 employees.
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BUSINESS SEGMENTS*
SALES AND REVENUES INCOME (LOSS)
------------------------------- -----------------------------
1994 1993 1992 1994 1993 1992
------- ------- ------- ------ ------- ------
(IN MILLIONS)
INSURANCE.......................................... $11,102 $10,338 $ 9,862 $ 811 $ 719 $ (513)
INDUSTRIES
Automotive....................................... 4,784 3,580 3,498 328 164 118
Defense & Electronics............................ 1,710 1,608 1,856 81 53 (73)
Fluid Technology................................. 1,125 1,030 1,070 99 95 67
HOSPITALITY, ENTERTAINMENT & INFORMATION SERVICES
Hospitality & Entertainment...................... 3,927 3,184 3,109 161 78 (28)
Communications & Information Services............ 833 800 817 155 162 170
------- ------- ------- ------ ------ ------
Ongoing Segments................................... 23,481 20,540 20,212 1,635 1,271 (259)
Alcatel N.V........................................ -- -- 97
Dispositions and Other............................. 139 589 748 (16) 17 (56)
------- ------- ------- ------ ------ ------
TOTAL SEGMENTS..................................... 23,620 21,129 20,960 1,619 1,288 (218)
Gain on sale of Alcatel N.V........................ -- -- 942
Interest, net...................................... (208) (147) (169)
Other.............................................. (170) (238) (196)
Income taxes....................................... (389) (242) (43)
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Income from Continuing Operations.................. 852 661 316
Discontinued Operations (after tax)................ 181 302 (576)
Extraordinary Item, net of tax benefit of $25...... -- (50) --
Cumulative Effect of Accounting Changes, net of tax
benefit of $8, $-- and $322...................... (11) -- (625)
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$23,620 $21,129 $20,960 $1,022 $ 913 $ (885)
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* Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Business Segment Information,
included in the Notes to Financial Statements, which include descriptions of
Business Segments.
INSURANCE
ITT companies write commercial property and casualty insurance, personal
automobile and homeowners coverages and a variety of life insurance plans. The
businesses in the Insurance segment may be generally categorized as (i) property
and casualty insurance operations and (ii) life insurance operations and, in
both instances, their related investment activities. ITT companies service the
United States, Canada and Western Europe and participate in the worldwide
reinsurance market. Companies include Hartford Fire Insurance Company and its
subsidiaries (referred to collectively as "ITT Hartford"). ITT Hartford is one
of the United States' oldest and largest international insurance organizations.
ITT Hartford is serviced in North America through its home office and 40
regional offices, and it is represented by approximately 6,000 independent
agents in North America. ITT Hartford operates in Western Europe through
independent brokers. It assumes reinsurance from other insurers and also cedes
reinsurance to other insurers or reinsurers in the world reinsurance market.
ITT's insurance operations are subject to regulation and supervision in the
states and other jurisdictions in which they are conducted, which may relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; restrictions on the size of risks which may be
insured under a single policy; approval of policy forms; periodic examinations
of the affairs of companies; and annual and other reports required to be filed
on the financial condition of companies or for other purposes.
Additional information with respect to ITT's property and casualty
insurance operations is set forth below under "Property and Casualty Insurance
Operations--Unpaid Claims and Claim Adjustment Expenses."
INDUSTRIES
Automotive. With approximately 35,000 employees in 76 facilities located
in eighteen countries, ITT supplies braking, electrical and structural systems
and components to automotive original equipment manufacturers worldwide. This
segment, one of the world's largest independent suppliers of such
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products, has expanded its customer base by introducing sophisticated,
high-technology products such as anti-lock brakes, traction control systems,
vehicle electrical components, fluid handling systems, precision die castings
and aftermarket products. The acquisition in 1994 of 80% ownership of the former
motors and actuators business of General Motors Corporation has expanded product
offerings and increased North American sales to 50% of total annual sales of
this segment.
Defense & Electronics. ITT companies in the defense sector of this
segment, with approximately 9,000 employees in 39 facilities located in 15
countries, design, produce and operate numerous types of tactical communications
equipment for the military, navigation and air traffic control systems for
civilian and military aircraft, air and battlefield surveillance radar and night
vision equipment. Some of these subsidiaries also provide upgrading, maintenance
and training services for the military and other customers. A substantial
portion of the work in the defense sector is performed for the United States
government under prime contracts and subcontracts, some of which by statute are
subject to profit limitations and all of which are subject to termination by the
government.
ITT companies in the electronics sector of this segment, with approximately
5,700 employees in 35 facilities located in 10 countries, operate in several
European countries, Japan and North America and produce a wide variety of
electronic connectors, switches, components and semiconductor devices which are
used in industrial, professional and telecommunications equipment as well as in
consumer appliances and automobiles. Night vision equipment is also produced for
the commercial and consumer markets.
Fluid Technology. This segment, having approximately 8,000 employees in 45
facilities located in 18 countries, manufactures fluid handling products, which
include a wide range of pumps and heat exchangers; controls and instrumentation
products, including high-technology instruments for control and monitoring of
fluids and energy conservation; and a broad range of valves. ITT is one of the
largest pump manufacturers in the world. Most of these operations are based in
North America and Western Europe. Principal customers are commercial and
industrial users, construction contractors, process industries, water and waste
water utilities, and original equipment manufacturers. Sales are made directly
and through independent distributors and representatives.
HOSPITALITY, ENTERTAINMENT AND INFORMATION SERVICES
Hospitality & Entertainment. ITT Sheraton Corporation is a worldwide
hospitality network of 425 owned, leased, managed and franchised properties in
64 countries, including hotels, casinos and inns owned and operated, or operated
under lease or management agreements, by ITT subsidiaries, or operated by
independent owners under license agreements with ITT subsidiaries. Approximately
58% of the rooms in the ITT Sheraton network are owned, leased or managed. ITT
Sheraton entered the U.S. gaming industry during 1993 with the acquisition of
the Desert Inn Properties in Las Vegas, Nevada, and in 1994 ITT Sheraton opened
the Sheraton Casino in Tunica County, Mississippi. In December 1994, ITT
Sheraton announced that a wholly owned subsidiary had been selected by the
government of Nova Scotia as the exclusive developer and operator of casinos in
Halifax and Sydney. (Reference is made to "Recent Developments" and to
"Governmental Regulation and Related Matters" below.)
Communications & Information Services. ITT subsidiaries are engaged in the
publication of telephone directories, including classified directory services
for telephone subscribers in numerous countries outside the United States, as
well as in Puerto Rico and the U.S. Virgin Islands. ITT Educational Services,
Inc., a subsidiary in the United States, operates technical colleges offering
postsecondary career education. On December 27, 1994, ITT completed an
underwritten public offering of approximately 17% of the common stock of ITT
Educational Services, Inc.
ALCATEL N.V.
In July 1992, ITT sold its 30% equity interest in Alcatel N.V., a
Netherlands company which is the largest telecommunications equipment
manufacturer in the world, to Alcatel Alsthom, a major French company which
owned the other 70% of Alcatel N.V. At the closing of the sale ITT received $1
billion in cash and 9.1 million capital shares of Alcatel Alsthom, recorded at
$806 million, which, at December 31, 1994, represented approximately 6% of the
outstanding capital shares of Alcatel Alsthom. In addition, ITT received a cash
payment of approximately $767 million in July 1993 and a cash payment of
approximately $817 million in July 1994. ITT will retain its equity interest in
Alcatel Alsthom until at least July 1997, unless Alcatel Alsthom and ITT agree
otherwise. Mr. Rand V. Araskog, Chairman, President and
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Chief Executive of ITT, is a member of the board of directors of Alcatel
Alsthom. Alcatel N.V. was formed in 1986, when ITT and Alcatel Alsthom, then
known as Compagnie Generale d'Electricite, transferred their respective
telecommunications operations to the joint venture company.
DISCONTINUED OPERATIONS
Effective on February 28, 1994, ITT completed the spin off of all the
outstanding common shares of its former forest products subsidiary, Rayonier
Inc. (formerly ITT Rayonier Incorporated) to the holders of record on February
24, 1994 of ITT common stock and ITT cumulative preferred stock, $2.25
convertible series N. The former ITT Rayonier has been reflected as a
"Discontinued Operation." Reference is made to "Notes to Financial
Statements -- Discontinued Operations" herein.
On September 16, 1994, ITT announced plans to seek offers for the purchase
of ITT Financial Corporation ("ITT Financial"), one of the largest independent
finance companies in the United States conducting commercial and consumer
finance, related insurance and other financial services including a mortgage
banking operation. On December 27, 1994, ITT announced the signing of agreements
to sell the Island Finance and Commercial Finance portions of ITT Financial for
approximately $3.7 billion and the acceptance of a bid for the sale of the
Equipment Finance, Small Business Finance and Real Estate Services of ITT
Financial for approximately $1.8 billion. It is anticipated that the remaining
portions of ITT Financial also will be sold during 1995. Although there can be
no assurances as to the amount ultimately received, ITT expects to realize in
excess of the book value of the assets sold. Existing debt of ITT Financial will
be assumed by ITT. ITT expects to repay an equivalent amount of debt with funds
available after the sale of the ITT Financial assets. ITT Financial has been
reflected as a "Discontinued Operation." Reference is made to "Notes to
Financial Statements -- Discontinued Operations" herein.
RECENT DEVELOPMENTS
In January 1995, a subsidiary of ITT acquired through a cash tender offer
approximately 92.9% of the outstanding shares of Caesars World, Inc., a Florida
corporation ("Caesars World"). Upon the merger of the ITT subsidiary into
Caesars World, effective March 2, 1995, Caesars World became a direct wholly
owned subsidiary of ITT. The cost of the transaction to ITT was approximately
$1.7 billion. Caesars World owns and operates three hotel/casinos in Las Vegas
and Stateline, Nevada and in Atlantic City, New Jersey and a number of
non-gaming resorts in the Pocono Mountains of Pennsylvania. In conjunction with
two other partners, Caesars World manages a casino owned by the Ontario
government in Windsor, Canada. For the fiscal year ended July 31, 1994, Caesars
World reported sales of $1.0 billion, net income of $78 million and operating
income before depreciation and amortization of $200 million.
In March 1995, ITT, in partnership with an indirect subsidiary of
Cablevision Systems Corporation, acquired Madison Square Garden Corporation
("MSG") for approximately $1 billion. MSG owns Madison Square Garden Arena,
Paramount Theater, the New York Knickerbockers Basketball Club, the New York
Rangers Hockey Club, and Madison Square Garden Network. For the fiscal year
ended December 31, 1994, MSG reported sales of $353 million and an operating
loss of $5 million.
OPERATIONS OUTSIDE THE UNITED STATES
In 1994, approximately one-third of the Corporation's consolidated sales
and revenues were made outside the United States. Of these, Western Europe
comprised 75%, the Asia Pacific region 10%, Canada 6%, and the balance made
elsewhere.
COMPETITION
Substantially all of ITT's operations are in highly competitive businesses,
although the nature of the competition varies among the business segments. A
number of large companies engaged in the manufacture and sale of similar lines
or products and the provision of similar services in most of the geographical
areas in which ITT companies sell their products or render services are included
in the competition, as are many small enterprises with only a few products or
services and operating in limited areas.
Insurance subsidiaries face strong competition in an industry where pricing
and service are important considerations. Technological innovation, quality and
reliability are primary factors in markets served by
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the Industries group. ITT's Hospitality operations compete mostly through
advertising and pricing. Gaming faces strong competition and competes through
advertising.
RESEARCH, DEVELOPMENT AND ENGINEERING, AND INTELLECTUAL PROPERTIES
Research, development and engineering activities of ITT are conducted in
laboratory and engineering facilities at most of its major manufacturing
subsidiaries. ITT believes that continued leadership in technology is essential
to its future, and most ITT funds dedicated to research and development are
applied to areas of high technology, such as aerospace, automotive braking and
electrical systems, semiconductors and electronic components.
ITT's research, development and engineering expenditures amounted to $396
million in 1994, $460 million in 1993, and $502 million in 1992, of which
approximately 50% was pursuant to customer contracts.
While ITT owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, it is believed that ITT's business, as a whole, is not
materially dependent upon any one intellectual property or related group of such
properties. ITT is licensed to use certain patents, technology and other
intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain patents, technology and other
intellectual property rights owned and controlled by ITT.
SERVICE CONTRACTS
ITT has contracts with certain of its operating subsidiaries under which it
furnishes them technical, engineering, traffic, insurance, administrative,
personnel, financial, accounting, purchasing and operating advice and
assistance, as well as other services. Where requested, specialized employees
are engaged for the account of the companies served. As compensation, such
subsidiaries pay ITT a percentage of their gross operating revenues. In
addition, reimbursement is sometimes made for the actual salaries and expenses
of specialized employees furnished.
Contracts are also in effect between ITT Manufacturing Enterprises, Inc.
("ITTME"), a wholly-owned indirect subsidiary of ITT, and certain subsidiaries
and associate companies of ITT under which ITTME, as part of ITT World
Headquarters, undertakes to cause to be furnished to such entities
manufacturing, sales, accounting, technical, intellectual property and personnel
advice and assistance; the results of research and development work, including
rights under patents; information with regard to sales and business methods and
technical, engineering and manufacturing matters; and other services. The
companies served pay an amount calculated as a percentage of their sales (less
intercompany purchases) for the manufacturing, sales, accounting, technical,
intellectual property and personnel advice and for other services furnished,
and/or as a pooling of funds for performing research and development. ITTME is
reimbursed for the cost of any special services rendered. The companies served
also agree to share certain patent rights and technical information.
GOVERNMENTAL REGULATION AND RELATED MATTERS
General. Ownership of ITT shares by "aliens" (to the United States) is
subject to limitation under the United States Communications Act of 1934, as
more fully described under "Restrictions on Alien Ownership" below, due to the
licenses of the United States Federal Communications Commission held by certain
of ITT's subsidiaries. In addition, a number of ITT's businesses are subject to
governmental regulation by law or through contractual arrangements. ITT
companies in the defense segment perform work under contracts with the United
States Department of Defense and similar agencies in certain other countries.
These contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations (requiring background
investigations for high-level security clearances) applicable to ITT executive
officers, and most of such contracts are subject to termination by the
respective governmental parties on various grounds. Sheraton hotels in the
United States are liquor retailers where permitted, licensed in each state where
they do such business, and in certain states are subject to statutes which
prohibit ITT Sheraton Corporation or its owner from being both a wholesaler and
retailer of alcoholic beverages. The technical colleges offering postsecondary
career education are
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extensively regulated by federal and state agencies. The numerous regulations to
which ITT's insurance operations are subject include licensing requirements and,
in certain states, requirements for governmental approval of changes of direct
or indirect ownership of such operations or solicitations of proxies for a
specified percentage of the voting power of such insurance operations or their
controlling parent.
Casino Gaming -- General. Historically, through ITT Sheraton Corporation
("Sheraton"), a wholly-owned subsidiary of ITT, ITT has owned and/or operated
casinos outside the United States; these include locations such as Egypt,
Australia, St. Maarten and Sweden. During 1993, ITT entered the casino gaming
business in the United States with its acquisition of the Desert Inn Hotel and
Casino in Las Vegas, Nevada. The Sheraton Desert Inn casino/hotel complex is
owned and operated by Sheraton Desert Inn Corporation ("SDI"), which is a
wholly-owned subsidiary of Sheraton Gaming Corporation ("SGC"), which is a
wholly-owned subsidiary of Sheraton (Sheraton, SGC and SDI are hereinafter
collectively referred to as the "Sheraton Desert Inn Companies"). In August,
1994, ITT expanded its domestic casino gaming operations with the opening of the
Sheraton Casino in Robinsonville, Mississippi; that casino is owned and operated
by Sheraton Tunica Corporation ("STC"), which is a wholly-owned subsidiary of
SDI. In October, 1994, ITT expanded its foreign casino gaming operations with
the opening of a casino in Lima, Peru at the Sheraton Lima Hotel & Towers, now
renamed the Sheraton Lima Hotel & Casino. On December 16, 1994, the Government
of the Province of Nova Scotia, Canada announced that Sheraton had been selected
as the developer for and operator of, on behalf of the Provincial Government,
the only two casinos to be permitted in the Province; these will be located in
the City of Halifax, the Provincial capital, and the City of Sydney, located in
the Cape Breton area of the Province.
On December 19, 1994, ITT and ITT Florida Enterprises, Inc. ("ITTFEI"), a
wholly-owned subsidiary of ITT, entered into an Agreement and Plan of Merger
with Caesars World, Inc. ("CWI"), a publicly traded Florida corporation, whereby
ITT would acquire CWI via a tender offer for all issued and outstanding shares
of CWI at a price of $67.50 per share; the aggregate purchase price under the
Agreement and Plan of Merger would be approximately $1.7 billion and the tender
offer, which was in effect between December 23, 1994 and January 24, 1995, was
successful, having received all initially required relevant gaming regulatory
approvals on January 23, 1995. ITT acquired the remaining equity interests in
CWI not acquired as part of the tender offer as a result of a merger between CWI
and ITTFEI; effective March 2, 1995, CWI, as the surviving corporation in the
merger, became a direct subsidiary of ITT. CWI currently owns and operates
casino/hotel complexes in both Las Vegas and Stateline, Nevada, as well as in
Atlantic City, New Jersey; CWI is also a one-third participant in the casino
operation located in the City of Windsor, Ontario, Canada, directly across from
Detroit, Michigan. CWI's casino gaming operations in Las Vegas, Nevada and
Stateline, Nevada are conducted by Desert Palace, Inc. ("DPI"), which is a
wholly-owned subsidiary of Caesars Palace Corporation ("CPC"), which is a
wholly-owned subsidiary of CWI (CWI, CPC and DPI are hereinafter collectively
referred to as the "Caesars Nevada Companies"); CWI's casino gaming operations
in Atlantic City, New Jersey are conducted by Boardwalk Regency Corporation
("BRC"), which is a wholly-owned subsidiary of Caesars New Jersey, Inc. ("CNJ"),
which is a wholly-owned subsidiary of CWI (as required by the context, CWI, CNJ
and BRC are hereinafter collectively referred to as the "Caesars New Jersey
Companies"). In addition, DPI owns all of the issued and outstanding capital
stock of Tele/Info, Inc. ("Tele/Info"), which is a Nevada licensed disseminator
of horse race simulcasts for the purpose of receiving and disseminating live
telecasts of horse racing information. For purposes of the New Jersey gaming
laws (see "New Jersey Casino Gaming Regulation" below), the CWI shares owned by
ITT are being held under a trust arrangement pending the qualification of ITT by
the New Jersey Casino Control Commission as a holding company of Caesars New
Jersey Companies.
Casino Gaming Regulation -- General. The ownership and/or operation of
casino gaming facilities in the United States are subject to extensive federal,
state and local regulations. On the federal level, in addition to all other
relevant federal regulation, ITT's casino gaming operations are specifically
subject to the compliance with the Gambling Devices Act of 1962, as amended, and
the Bank Secrecy Act, as amended; these govern the ownership, possession,
manufacture, distribution and transportation in interstate commerce of gaming
devices and the recording and reporting of currency transactions, respectively.
Due to its casino gaming operations in Nevada, ITT's Nevada casino gaming
operations -- at the Sheraton Desert Inn in Las Vegas, Caesars Palace in Las
Vegas, and Caesars Tahoe in Stateline -- are subject to the Nevada Gaming
Control Act (the "Nevada Act") and the licensing and regulatory control of the
Nevada Gaming Commission (the "Nevada Commission") and the Nevada State Gaming
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Control Board (the "Nevada Control Board"), as well as various local, county and
state regulatory agencies (hereinafter collectively referred to as the "Nevada
Gaming Authorities"). Due to its casino gaming operations in New Jersey, ITT's
New Jersey casino gaming operations -- at Caesars Atlantic City -- are subject
to the New Jersey Casino Control Act (the "New Jersey Act") and the licensing
and regulatory control of the New Jersey Casino Control Commission (the "New
Jersey Commission") and the New Jersey Department of Law & Public Safety,
Division of Gaming Enforcement (the "New Jersey DGE"), as well as various local,
county and state regulatory agencies (hereinafter collectively referred to as
the "New Jersey Gaming Authorities"). Due to its casino gaming operations in
Mississippi, ITT's Mississippi casino gaming operations -- at the Sheraton
Casino in Robinsonville, Mississippi -- are subject to the Mississippi Gaming
Control Act (the "Mississippi Act") and the licensing and regulatory control of
the Mississippi Gaming Commission (the "Mississippi Commission"), as well as
various local, county and state regulatory agencies (hereinafter collectively
referred to as the "Mississippi Gaming Authorities").
The casino gaming laws, regulations and supervisory procedures of Nevada,
New Jersey and Mississippi are extensive and reflect certain public policy
considerations as to (i) the integrity of casino gaming operations and its
participants, (ii) the need for strict governmental and regulatory control of
casino gaming operations, (iii) the creation of economic development, taxes and
employment, and (iv) foster and enhance the public confidence and trust in
casino gaming regulation and control. Changes to such laws, regulations and
supervisory procedures could have an adverse effect on ITT's casino gaming
operations.
Nevada Gaming Regulation. The ownership and/or operation of casino gaming
facilities in Nevada are subject to state and local regulation; Nevada's casino
gaming laws, regulations and supervisory procedures are extensive and reflect
certain broad declarations of public policy. In general, Nevada's gaming laws,
regulations and supervisory procedures seek to (i) prevent unsavory or
unsuitable persons from having any direct or indirect involvement with gaming at
any time or in any capacity, (ii) establish and maintain responsible accounting
practices and procedures, (iii) maintain effective control over the financial
practices of licensees, including establishing minimum procedures for internal
fiscal affairs and the safeguarding of assets and revenues, providing reliable
record-keeping, and making periodic reports to the applicable casino gaming
authority, (iv) prevent cheating and fraudulent practices, and (v) provide a
source of state and local revenues through taxation and licensing fees.
SDI, as the operator of the Sheraton Desert Inn, and DPI, as the operator
of Caesars Palace and Caesars Tahoe, are required to be licensed by the Nevada
Gaming Authorities. The casino gaming licenses are not transferable and must be
renewed periodically by the payment of casino gaming license fees and taxes. The
Nevada Commission requires that (i) SGC and Sheraton be registered as
intermediary companies of SDI and (ii) CPC be registered as an intermediary
company of DPI; the Nevada Commission also requires that ITT and CWI be
registered as publicly traded corporations. No person may become a stockholder
of, or receive any percentage of profits from, SDI or DPI without first
obtaining certain required licenses and approvals from the Nevada Gaming
Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with ITT, the Sheraton Desert
Inn Companies or the Caesars Nevada Companies in order to determine whether such
individual is suitable or should be licensed as a business associate of either
SDI or DPI. Officers, directors and key employees of each of SDI and DPI must be
individually licensed by, and changes in corporate positions must be reported
to, the Nevada Gaming Authorities; the Nevada Gaming Authorities may disapprove
a change in corporate position. Certain officers, directors and key employees of
ITT, Sheraton and SGC who are actively and directly involved in the gaming
activities of SDI may be required to be licensed or found suitable by the Nevada
Gaming Authorities; similarly, certain officers, directors and key employees of
ITT, CWI and CPC who are actively and directly involved in the gaming activities
of DPI may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. The applicant for licensing or
finding of suitability must pay all of the costs of the investigation.
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If the Nevada Gaming Authorities find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
ITT, the Sheraton Desert Inn Companies or the Caesars Nevada Companies, the
companies involved would be required to sever all relationships with such
person. In addition, the Nevada Gaming Authorities may require a registered
company or licensee to terminate the employment of any person who refuses to
file appropriate disclosures.
ITT, the Sheraton Desert Inn Companies and the Caesars Nevada Companies are
required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all loans, leases, sales of securities and similar
financing transactions by either SDI or DPI must be reported to or approved by
the Nevada Commission. Nevada law prohibits a corporation registered by the
Nevada Commission from making a public offering of its securities without the
prior approval of the Nevada Commission if any part of the proceeds of the
offering of the securities themselves are to be used either to (i) finance the
construction, acquisition or operation of gaming facilities in Nevada, or (ii)
retire or extend obligations incurred for one or more such purposes.
If it is determined that Nevada gaming laws were violated by SDI or DPI,
the gaming license each respectively holds could be limited, conditioned,
suspended or revoked. In addition, at the discretion of the Nevada Commission,
ITT, the Sheraton Desert Inn Companies and the persons involved could be subject
to substantial fines for each separate violation of the Nevada gaming laws by
the Sheraton Desert Inn; similarly, and also at the discretion of the Nevada
Commission, ITT, the Caesars Nevada Companies and the persons involved could be
subject to substantial fines for each separate violation of the Nevada gaming
laws by either Caesars Palace or Caesars Tahoe. Further, a supervisor could be
appointed by the Nevada Commission to operate either SDI's or DPI's respective
gaming property and, under certain circumstances, earnings generated during the
supervisor's appointment (except for the reasonable rental value of SDI's or
DPI's respective gaming property) could be forfeited to the State of Nevada. Any
suspension or revocation of either SDI's or DPI's license would have a
materially adverse effect on SDI or DPI, respectively.
The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of ITT's voting securities at any time.
Nevada law requires any person who acquires more than 5% of any class of ITT's
voting securities to report the acquisition to the Nevada Commission and such
person may be investigated and found suitable. Any person who becomes a
beneficial owner of more than 10% of any class of ITT's voting securities must
apply for a finding of suitability by the Nevada Commission within 30 days after
the Nevada Control Board Chairman mails a written notice requiring such filing,
and must pay the costs and fees incurred by the Nevada Control Board in
connection with the investigation. Under certain circumstances, an
"institutional investor," as such term is defined in the Nevada Act and
regulations, which acquires more than 10% but not more than 15% of ITT's voting
securities, may apply to the Nevada Commission for a waiver of such finding of
suitability requirements if such institutional investor holds the voting
securities for investment purposes only; an institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the Board of Directors
of ITT, any change in ITT's corporate charter, bylaws, management, policies or
operations of ITT or any of its casino gaming operations, or any other action
which the Nevada Commission finds to be inconsistent with holding ITT's voting
securities for investment purposes only. Notwithstanding the foregoing,
activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include (i) voting on all matters voted
on by stockholders, (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations, and (iii) such
other activities as the Nevada Commission may determine to be consistent with
such investment intent. If the stockholder who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information, including a list of beneficial holders.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
by the Chairman of the Nevada Control Board may be found unsuitable. Any holder
of any equity or debt security found unsuitable and who holds, directly or
indirectly, any beneficial ownership of ITT's debt or equity voting securities
beyond such period or periods of time as may be prescribed by the Nevada
Commission may be guilty of a gross misdemeanor. ITT
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could be subject to disciplinary action if, without the prior approval of the
Nevada Commission and after ITT receives notice that a person is unsuitable to
be an equity or debt security holder or to have any other relationship with ITT,
the Sheraton Desert Inn Companies or the Caesars Nevada Companies, ITT, the
Sheraton Desert Inn Companies, the Caesars Nevada Companies or any one of them
either (i) pays to the unsuitable person any dividend, interest or any
distribution whatsoever, (ii) recognizes any voting right by such unsuitable
person in connection with such securities, (iii) pays the unsuitable person
remuneration in any form, (iv) makes any payment to the unsuitable person by way
of principal, redemption, conversion, exchange, liquidation or similar
transaction, or (v) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his securities including, if necessary, the
immediate purchase of such securities for cash at fair market value.
Regulations of the Nevada Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements, or any form of
takeover without the prior approval of the Nevada Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Nevada Commission as to a variety of stringent standards prior to assuming
control of such corporation. The failure of a person to obtain such approval
prior to assuming control over the registered publicly traded corporation may
constitute grounds for finding such person unsuitable.
Regulations of the Nevada Commission also prohibit certain repurchases of
securities by registered publicly traded corporations without the prior approval
of the Nevada Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over
market price from certain holders of more than 3% of the outstanding securities
of the registered publicly traded corporation. The regulations of the Nevada
Commission also require prior approval for a "plan of recapitalization," as such
term is defined in the Nevada regulations; generally, a plan of recapitalization
is a plan proposed by the management of a registered publicly traded corporation
that contains recommended action in response to a proposed corporate acquisition
opposed by management of the corporation which acquisition itself would require
the prior approval of the Nevada Commission.
Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming operation outside
the State of Nevada is required to deposit with the Nevada Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Control Board of the Licensees'
participation in such foreign gaming; the revolving fund is subject to increase
or decrease in the discretion of the Nevada Commission. Once such revolving fund
is established, the Licensees may engage in gaming activities outside the State
of Nevada without seeking the approval of the Nevada Commission provided (i)
such activities are lawful in the jurisdiction where they are to be conducted
and (ii) the Licensees comply with certain reporting requirements imposed by the
Nevada Act. Licensees are subject to disciplinary action by the Nevada
Commission if they or any one of them (i) knowingly violates any laws of the
foreign jurisdiction pertaining to the foreign gaming operation, (ii) fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, (iii) engages in activities
that are harmful to the State of Nevada or its ability to collect gaming taxes
and fees, or (iv) employs a person in the foreign operation who has been denied
a license or finding of suitability in Nevada on the ground of personal
unsuitability.
New Jersey Casino Gaming Regulation. Casino gaming in New Jersey is
subject to strict compliance with the New Jersey Act, the strict supervision of
the New Jersey Commission and compliance with the regulations adopted by the New
Jersey Commission. The New Jersey gaming laws and regulations primarily concern
(a) the financial stability and character of casino operators, their employees,
their security holders and others financially interested in casino operations,
and (b) the operating methods -- including the rules of the games and credit
issuance procedures -- and the financial and accounting procedures used in
connection with casino operations. The New Jersey gaming laws and regulations
include detailed provisions concerning, among other things, (i) the type, manner
and number of applications and licenses required to conduct casino gaming and
ancillary activities, (ii) the licensing, regulation and curricula of gaming
schools, (iii) the establishment of minimum standards of accounting and internal
control, including the issuance and enforceability of casino credit, (iv) the
manufacture, sale, distribution and possession of gaming equipment, (v) the
rules of the games, (vi) the exclusion of
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undesirable persons, (vii) the use, regulation and reporting of junket
activities, (viii) the possession, sale and distribution of alcoholic beverages,
(ix) the regulation and licensing of suppliers to licensed casino operators, (x)
the conduct of entertainment within licensed casino facilities, (xi) equal
employment opportunity for employees of licensed casino operators, contractors
for casino facilities and the like, (xii) the payment of gross revenue taxes and
similar fees and expenses, (xiii) the conduct of casino simulcasting, and (xiv)
the imposition and discharge of casino reinvestment development obligations. A
number of these regulations require practices which are different from those in
many casinos elsewhere and some of them result in casino operating costs greater
than those in comparable facilities elsewhere. As a prerequisite to being
licensed, a New Jersey casino/hotel facility must meet certain facilities
requirements concerning, among other things, the size and number of guest rooms.
In order to operate Caesars Atlantic City, BRC must be licensed by the New
Jersey Commission, which has broad discretion with regard to the issuance,
renewal, revocation or suspension of licenses. A New Jersey casino license is
not transferable and must be renewed at designated periods of up to four years;
renewal is not automatic and involves an extensive review by the New Jersey DGE,
a report by the New Jersey DGE to the New Jersey Commission, an independent
intensive review by the New Jersey Commission, and the affirmative vote of at
least four of the five sitting Commissioners of the New Jersey Commission
sitting in a scheduled open public meeting. BRC's license to operate Caesars
Atlantic City was renewed on October 5, 1994 and expires on November 30, 1996.
Except for certain banking and lending institutions exempted under the New
Jersey Act, all financial backers, investors, mortgagees, debt holders,
landlords under leases relating to New Jersey casino/hotel facilities, all
lenders to BRC, all officers and directors of BRC and all employees who work at
Caesars Atlantic City have to be qualified, licensed, approved or registered by
or with the New Jersey Commission. In addition, all contracts and leases entered
into by BRC are subject to approval by the New Jersey Commission.
As a prerequisite to BRC holding a license, ITT, CWI and CNJ have to be
approved by the New Jersey Commission due to their corporate relationship to
BRC. Thus, any debt or equity security holder of ITT, CWI or CNJ will have to be
found qualified; the qualification requirement of any debt or equity security
holder of ITT may be waived based on an express finding by the New Jersey
Commission, with the consent of the Director of the New Jersey DGE, that the
security holder either (a)(i) is not significantly involved in the activities of
BRC, (ii) does not have the ability to control ITT, CWI, CNJ or BRC, and (iii)
does not have the ability to elect one or more members of the respective boards
of directors of ITT, CWI, CNJ or BRC, or (b) is an "institutional investor," as
such term is defined in the New Jersey Act and regulations; for purposes of the
former, the New Jersey Act presumes that any non-"institutional investor"
security holder who owns or beneficially holds 5% or more of the equity
securities of ITT has the ability to control ITT, CWI, CNJ or BRC, unless such
presumption is rebutted by clear and convincing evidence.
The New Jersey Act and regulations define an "institutional investor" as
(i) any retirement fund administered by a public agency for the exclusive
benefit of federal, state or local public employees, (ii) an investment company
registered under the Investment Company Act of 1940, (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency, (iv) a closed end investment trust, (v) a chartered
or licensed life insurance company or property and casualty insurance company,
(vi) banking or other licensed or chartered lending institutions, (vii) an
investment advisor registered under the Investment Advisors Act of 1940, or
(viii) such other persons as the New Jersey Commission may determine for reasons
consistent with the policies of the New Jersey Act. In the absence of a prima
facie showing by the Director of the DGE that there is any cause to believe that
such institutional investor may be found unqualified, upon application and for
good cause shown, an institutional investor holding either (a) less than 10% of
the equity securities of ITT or (b) ITT debt securities constituting less than
20% of the outstanding debt of ITT and less than 50% of the issue involved may
be granted a waiver of qualification as to such holdings if (i) such securities
are those of a publicly traded corporation, (ii) the institutional investor's
holdings of such securities were purchased for investment purposes only, and
(iii) upon request by the New Jersey Commission, the institutional investor
files with the New Jersey Commission a certified statement to the effect that
the institutional investor has no intention of influencing or affecting the
affairs of ITT, CWI, CNJ or BRC; notwithstanding
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the foregoing, the institutional investor is permitted to vote on matters put to
the vote of the outstanding security holders of ITT.
If an institutional investor who has been granted a waiver subsequently
determines to influence or affect the affairs of ITT, the institutional investor
must provide to the New Jersey Commission not less than 30 days prior notice of
such intent and the institutional investor must file with the New Jersey
Commission an application for qualification before taking any action that may
influence or affect the affairs of ITT; notwithstanding the foregoing, the
institutional investor is permitted to vote on matters put to the vote of the
outstanding security holders of ITT. If an institutional investor changes its
investment intent, or if the New Jersey Commission finds reasonable cause to
believe that the institutional investor may be found unqualified, no action
other than divestiture shall be taken by such institutional investor with
respect to its security holdings until there has been compliance with the
interim casino authorization provisions of the New Jersey Act, including the
execution of a trust agreement. ITT, CWI, CNJ and BRC are required to
immediately notify the New Jersey Commission and the New Jersey DGE of any
information about, or action of, an institutional investor holding its equity or
debt securities where such information or action may impact on the eligibility
of such institutional investor for a waiver. If the New Jersey Commission finds
an institutional investor unqualified or if the New Jersey Commission finds
that, by reason of the extent or nature of its holdings, an institutional
investor is in the position to exercise a substantial impact on the controlling
interests of BRC so that qualification of the institutional investor is
necessary to protect the public interest, the New Jersey Act vests in the New
Jersey Commission the power to take all necessary action to protect the public
interest, including the power to require that the institutional investor submit
to qualification and become qualified under the New Jersey Act.
An equity or debt security holder -- including institutional
investors -- of ITT, CWI, CNJ or BRC who is required to be found qualified by
the New Jersey Commission must submit an application for qualification within 30
days after being ordered to do so or divest all security holdings within 120
days after the New Jersey Commission determines such qualification is required.
The application for qualification must include a trust agreement by which the
security holder places its interest in ITT in trust with a trustee qualified by
the New Jersey Commission. If the security holder is ultimately found qualified,
the trust agreement is terminated. If the security holder is not found qualified
or withdraws its application for qualification prior to a determination on
qualification being made, the trustee will be empowered with all rights of
ownership pertaining to such security holder's ITT securities, including all
voting rights and the power to sell the securities; in any event, the
unqualified security holder will not be entitled to receive in exchange for its
ITT securities an amount in excess of the lower of (i) the actual cost the
security holder incurred in acquiring the securities or (ii) the value of such
securities calculated as if the investment had been made on the date the trust
became operative. By the same token, if the security holder is not found
qualified, it is unlawful for the security holder to (i) receive any dividends
or interest on such securities, (ii) exercise, directly or through any trustee
or nominee, any right conferred by such securities, or (iii) receive any
remuneration in any form from ITT, CWI, CNJ or BRC for services rendered or
otherwise.
Each officer, director, lender and certain other persons of ITT, CWI and
CNJ must be found qualified unless the New Jersey Commission, with the consent
of the Director of the New Jersey DGE, finds that such officer, director, lender
or other person of ITT, CWI or CNJ is not significantly involved in the affairs
of BRC and is thus waived from qualification. New Jersey law requires that an
officer or director of ITT, CWI or CNJ must apply for temporary qualification at
least 30 days before assuming any duties; such temporary qualification, if
granted by the New Jersey Commission, will be valid for a period not to exceed
the earlier of (i) nine consecutive calendar months or (ii) the effective date
of BRC's next casino license renewal.
The New Jersey Act requires that each of ITT, CWI, CNJ and BRC maintain
financial stability and capability. For purposes of these requirements, the New
Jersey Commission has adopted regulations defining "financial stability" as the
same applies to the licensed casino operation and has set forth certain
standards for determining compliance with the financial stability regulations.
Under the regulations of the New Jersey Commission, "financial stability" has
been defined as (i) the ability to assure the financial integrity of casino
operations by the maintenance of a casino bankroll or equivalent provisions
adequate to pay winning wagers to casino patrons when due, (ii) the ability to
meet ongoing operating expenses which are essential to the maintenance of
continuous and stable casino operations, (iii) the ability to pay, as and when
due, all local, state and federal taxes and any and all fees imposed by the New
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Jersey Act, (iv) the ability to make necessary capital and maintenance
expenditures in a timely manner which are adequate to insure maintenance of a
superior first class facility of exceptional quality as required by the New
Jersey Act, and (v) the ability to pay, exchange, refinance or extend debts,
including long-term and short-term principal and interest and capital lease
obligations, which will mature or otherwise come due and payable during either
the license term or within 12 months after the end of the license term or to
otherwise manage such debts and any default with respect to the debts. The New
Jersey Commission regulations provide that the financial stability standards
concerning casino bankroll, operating expenses and capital and maintenance
expenditures are met if the following is shown by clear and convincing evidence:
(i) casino bankroll -- the maintenance, on a daily basis, of a casino bankroll
at least equal to the average daily casino bankroll, calculated on a monthly
basis, for the corresponding month in the previous year, (ii) operating
expenses -- the demonstration of the ability to achieve positive gross operating
profit measured on an annual basis, and (iii) capital and maintenance
expenditures -- the demonstration that its capital and maintenance expenditures
over the five year period which includes the previous 36 calendar months and the
upcoming license period, average at least 5% of net revenue per annum. ITT
believes that, at current operating levels, BRC will have no difficulty in
complying with these requirements.
The New Jersey Commission has the authority to restrict or prohibit the
transfer of cash or the assumption of liabilities by BRC if such action will
adversely impact the financial stability of BRC and the prior approval of the
New Jersey Commission is required to incur indebtedness and guarantees of
affiliated indebtedness by BRC involving amounts greater than $25 million.
If it is determined that New Jersey gaming laws were violated by BRC, BRC
could be subject to fines or its casino license could be limited, conditioned,
suspended or revoked. In addition, if a security holder of ITT, CWI, CNJ or BRC
is found disqualified but does not dispose of the securities, the New Jersey
Commission is authorized to take any necessary action to protect the public
interest, including the suspension or revocation of the casino license; however,
the New Jersey Commission shall not take any action against ITT, CWI, CNJ or BRC
with respect to the continued ownership of the security interest by the
disqualified holder if the New Jersey Commission finds that (i) ITT has provided
in its corporate charter that any ITT securities are held subject to the
condition that, if a holder thereof is found to be disqualified by the New
Jersey Commission pursuant to the provisions of the New Jersey Act, such holder
shall dispose of his interest in ITT, (ii) ITT has made a good faith effort,
including the prosecution of all legal remedies, to comply with any order of the
New Jersey Commission requiring the divestiture of the security interest held by
the disqualified holder, and (iii) such disqualified holder does not have the
ability to control ITT, CWI, CNJ or BRC or to elect one or more members of the
boards of directors of ITT, CWI, CNJ or BRC. If BRC's license is revoked, not
renewed or suspended for a period in excess of 120 days, the New Jersey
Commission is empowered to appoint a conservator to operate, and to dispose of,
BRC's casino/hotel facilities. If a conservator operates the casino/hotel
facilities, payments to shareholders would be limited to a "fair return" on
their investment, with any excess going to the State of New Jersey. If a
conservator is appointed, the conservator's charges and expenses become a lien
against the property which is paramount to all prior and subsequent liens.
Mississippi Casino Gaming Regulation. The ownership and/or operation of
casino gaming facilities in Mississippi are similarly subject to extensive state
and local regulation. Gaming in Mississippi can be legally conducted only on
vessels of a certain minimum size either in navigable waters of counties
bordering the Mississippi River or in the waters of the State of Mississippi
which lie adjacent to the coastline of the three counties bordering the Gulf of
Mexico. STC possesses a license for the ownership and operation of the Sheraton
Casino in Robinsonville, Tunica County, Mississippi issued by the Mississippi
Commission pursuant to the Mississippi Act.
The Mississippi Act does not restrict the amount or percentage of space on
a vessel that may be utilized for casino gaming; the Mississippi Act also does
not limit the number of licenses that the Mississippi Commission can grant for a
particular area.
ITT and STC are required to submit detailed financial, operating and other
reports to the Mississippi Commission. Substantially all loans, leases, sales of
securities and similar financing transactions entered into by ITT or by STC must
be reported to or approved by the Mississippi Commission. ITT and STC are
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also required to periodically submit detailed financial and operating reports to
the Mississippi Commission and furnish any other information which the
Mississippi Commission may require.
Each of the directors, officers and certain key employees of ITT and STC
who are actively and directly engaged in the administration or supervision of
casino gaming in Mississippi, or who have any other significant involvement with
the activities of STC, must be found suitable therefor and may be required to be
licensed by the Mississippi Commission. A finding of suitability is comparable
to licensing, and both require the submission of detailed personal financial
information followed by a thorough investigation. An application for licensing
may be denied for any cause deemed reasonable by the Mississippi Commission.
Changes in licensed positions must be reported to the Mississippi Commission. In
addition to its authority to deny an application for a license, the Mississippi
Commission has the authority to disapprove a change in corporate position. If
the Mississippi Commission finds a director, officer or key employee of ITT or
STC unsuitable for licensing or unsuitable to continue having a relationship
with ITT or STC, ITT or STC, as the case may be, is required to suspend, dismiss
and sever all relationships with such person. ITT and STC have similar
obligations with regard to any person who fails or refuses to file appropriate
applications. Each gaming employee must obtain a work permit; the Mississippi
Commission may refuse to issue a work permit to a gaming employee (i) if the
employee has committed larceny, embezzlement or any other crime of moral
turpitude or knowingly violated the Mississippi Act or the regulations of the
Mississippi Commission, or (ii) for any other reasonable cause.
Mississippi gaming licenses are not transferable and must be renewed
periodically. The Mississippi Commission is empowered to deny, limit, condition,
revoke and/or suspend any license, finding of suitability or registration, and
to fine any person as it deems reasonable and in the public interest, subject to
the due process considerations of notice and an opportunity for a hearing. The
Mississippi Commission may fine any licensee or other person who is subject to
the Mississippi Act up to $100,000 for each violation of the Mississippi Act
which is the subject of an initial complaint and up to $250,000 for each
violation of the Mississippi Act which is the subject of any subsequent
complaint. The Mississippi Act provides for judicial review of certain decisions
of the Mississippi Commission; however, the filing for such judicial review does
not automatically stay the action taken by the Mississippi Commission pending
the court's review.
License fees and taxes, computed in various ways depending on the type of
casino gaming involved, are payable to the State of Mississippi and to the
counties and cities in which the gaming operations are located. Depending on the
particular fee or tax imposed, these fees and taxes are based on a percentage of
the gross gaming revenues received by the casino operation, the number of slot
machines operated by such casino, or the number of table games operated by such
casino. Moreover, several local governments have been authorized to impose
either additional gross fees on adjusted gross gaming revenues or,
alternatively, per person boarding fees and annual license fees based on the
number of gaming devices aboard the vessel. License fees paid to the State of
Mississippi are allowed as a credit against Mississippi state income taxes.
In all other material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada and New Jersey.
Windsor, Ontario Casino Gaming Regulation. CWI's unconsolidated one-third
owned Canadian corporation which operates the casino in Windsor, Ontario,
Canada, is required to comply with licensing requirements similar to Nevada and
New Jersey and is also subject to operational regulation by the Province of
Ontario.
Nova Scotia Casino Gaming Regulation. Sheraton's subsidiary, which will
both (i) own and operate the proposed casino in the City of Halifax, Nova Scotia
and (ii) operate the proposed casino in the City of Sydney, Nova Scotia, will be
required to comply with licensing requirements similar to the Province of
Ontario and will also be subject to operational regulation by the Province of
Nova Scotia.
Casino Gaming -- Related Provisions of the Certificate of
Incorporation. ITT's restated certificate of incorporation provides that (i)
all securities of ITT are subject to redemption by ITT to the extent necessary
to prevent the loss or to secure the reinstatement of any casino gaming license
held by ITT or any of its subsidiaries in any jurisdiction within or without the
United States of America, (ii) all securities of ITT are held subject to the
condition that if a holder thereof is found by a gaming authority in any such
jurisdiction to be disqualified or unsuitable pursuant to any gaming law, such
holder will be required to dispose of all ITT securities held by such holder,
and (iii) it will be unlawful for any such disqualified
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person to (a) receive payments of interest or dividends on any ITT securities,
(b) exercise, directly or indirectly, any rights conferred by any ITT
securities, or (c) receive any remuneration in any form, for services rendered
or otherwise, from the subsidiary that holds the gaming license in such
jurisdiction.
PROPERTY AND CASUALTY INSURANCE
OPERATIONS--UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Liabilities for unpaid claims and claim adjustment expenses as of December
31, 1994 and 1993 were $17.4 billion and $17.3 billion.
Liabilities for unpaid claims and claim adjustment expenses are based upon
individual case estimates for known claims, estimates of unreported claims and
estimates of future expenses to be incurred in the settlement of these
liabilities. Estimated loss and loss adjustment expense reserves are continually
reviewed as additional experience and other relevant data become available, and
reserve levels are adjusted accordingly. The natural uncertainties involved with
the reserving process have become increasingly unpredictable due to a number of
complex factors including social and economic trends and changes in the concept
of legal liability and damage awards. Accordingly, final claim settlements may
vary from the present estimates, particularly when those payments may not occur
until well into the future. Any adjustments to previously established reserves
would be reflected in net income for the period in which they are made. In the
judgment of management, all information currently available has been properly
considered and the reserves currently established for losses and loss adjustment
expenses, except for the asbestos-related and environmental claims, as discussed
below, are adequate to cover their eventual costs.
Claims asserting injuries from asbestos and asbestos-related products and
damages from environmental and related clean-up costs continue to be received.
With regard to these claims, deviations from past experience significantly
impact the ability of insurance companies to estimate the ultimate reserves for
unpaid losses and related settlement expenses. ITT finds that conventional
reserving techniques cannot estimate the ultimate cost of these claims because
of inadequate development patterns and inconsistent emerging legal doctrine. For
asbestos and environmental claims, unlike any other type of contractual claim,
there is almost no agreement or consistent precedent to determine what, if any,
coverage exists or which, if any, policy years and insurers may be liable.
Further uncertainty arises with environmental claims because claims are often
made under policies, the existence of which may be in dispute, the terms of
which may have changed over many years, which may or may not provide for legal
defense costs, and which may or may not contain pollution exclusion clauses that
may be absolute or allow for fortuitous events. Courts in different
jurisdictions have reached disparate conclusions on similar issues and in
certain situations have broadened the interpretation of policy coverage and
liability issues. If future social, economic or legal developments continue to
expand the original intent of policies and the scope of coverage, the need for
additional reserves may arise, adversely affecting future results. Due to the
uncertainties described above, a range of such reserve increases cannot be
meaningfully quantified.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties have been discounted to present value. The amount
of discount was approximately $397 million and $362 million as of December 31,
1994 and 1993 and the amortization of the discount had no material effect on net
income during 1994, 1993 and 1992.
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A reconciliation of liabilities for unpaid claims and claim adjustment
expenses for the last three years and a table depicting the historical
development of the liabilities for unpaid claims and claim adjustment expenses
follow:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1994 1993 1992
------- ------- -------
(IN MILLIONS)
Beginning Liabilities for Unpaid Claims and Claim Adjustment Expenses $17,284 $17,418 $16,034
Less Reinsurance Recoverables 5,339 5,633 5,476
------- ------- -------
11,945 11,785 10,558
------- ------- -------
Add Provision for Unpaid Claims and Claim Adjustment Expenses:
Current year 4,841 4,611 4,822
Prior years* 55 248 1,406
------- ------- -------
Total provision for unpaid claims and claim adjustment expenses 4,896 4,859 6,228
------- ------- -------
Less Payments:
Current year 1,891 1,856 1,927
Prior years 2,832 2,806 2,879
------- ------- -------
Total Payments 4,723 4,662 4,806
------- ------- -------
Foreign Currency Translation 65 (37) (195)
Cumulative Effect of Accounting Change** (65) -- --
------- ------- -------
Ending Liabilities for Unpaid Claims and Claim Adjustment Expenses Excluding
Reinsurance Recoverables 12,118 11,945 11,785
Add Reinsurance Recoverables 5,317 5,339 5,633
------- ------- -------
Ending Liabilities for Unpaid Claims and Claim Adjustment Expenses $17,435 $17,284 $17,418
======== ======== ========
Note: The liabilities for unpaid claims and claim adjustment expenses shown
above are greater than those reported in the domestic insurance
subsidiaries statutory filings by $1.8 billion for both 1994 and 1993,
respectively. These amounts are related to non-U.S. subsidiaries.
* Does not include the effects of foreign exchange adjustments which are
included in the table on the following page.
** Reflects a change in the method of discounting to present value certain
workers' compensation reserves, principally for permanently disabled
claimants. Refer to Notes to Consolidated Financial Statements for further
discussion of this accounting change.
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PROPERTY AND CASUALTY CLAIMS AND
CLAIM ADJUSTMENT EXPENSES LIABILITY DEVELOPMENT
(IN MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Liabilities for Unpaid
Claims and Claim
Adjustment Expenses
(Note 1)............. 4,287 4,868 5,903 7,262 8,168 8,666 9,366 9,796 11,103 11,441 11,623
Cumulative Paid Claims
and Claim Expenses
(Note 1):
One year later....... 1,393 1,607 1,808 2,089 2,296 2,545 2,789 2,879 2,806 2,832 --
Two years later...... 2,283 2,632 2,916 3,323 3,618 4,013 4,428 4,465 4,415 -- --
Three years later.... 2,953 3,356 3,683 4,187 4,577 5,132 5,511 5,605 -- -- --
Four years later..... 3,425 3,883 4,275 4,846 5,341 5,863 6,304 -- -- -- --
Five years later..... 3,808 4,308 4,743 5,392 5,872 6,435 -- -- -- -- --
Six years later...... 4,136 4,633 5,168 5,787 6,320 -- -- -- -- -- --
Seven years later.... 4,346 4,980 5,481 6,155 -- -- -- -- -- -- --
Eight years later.... 4,628 5,248 5,803 -- -- -- -- -- -- -- --
Nine years later..... 4,784 5,534 -- -- -- -- -- -- -- -- --
Ten years later...... 5,020 -- -- -- -- -- -- -- -- -- --
Liabilities Reestimated:
One year later....... 4,469 5,324 6,293 7,437 8,342 8,879 9,636 11,053 11,311 11,484 --
Two years later...... 4,860 5,558 6,422 7,619 8,432 9,052 10,780 11,202 11,354 -- --
Three years later.... 5,002 5,656 6,718 7,719 8,482 10,200 10,905 11,315 -- -- --
Four years later..... 5,074 6,100 6,885 7,827 9,645 10,342 11,151 -- -- -- --
Five years later..... 5,484 6,291 7,021 9,117 9,829 10,578 -- -- -- -- --
Six years later...... 5,653 6,456 8,504 9,287 10,068 -- -- -- -- -- --
Seven years later.... 5,767 8,015 8,652 9,521 -- -- -- -- -- -- --
Eight years later.... 7,177 8,157 8,878 -- -- -- -- -- -- -- --
Nine years later..... 7,280 8,363 -- -- -- -- -- -- -- -- --
Ten years later...... 7,500 -- -- -- -- -- -- -- -- -- --
Deficiency............. 3,213 3,495 2,975 2,259 1,900 1,912 1,785 1,519 251 43 --
NOTE:
(1) The above table excludes the liabilities and claim developments for
reinsurance coverage written for unrelated parties that fund ultimate net
aggregate loss run-offs since changes to those reserves do not illustrate
the manner in which those reserve estimates changed. Liabilities for unpaid
claims and claim adjustment expenses excluded were $629 million, $762
million, $682 million, $504 million and $495 million as of December 31,
1990, 1991, 1992, 1993 and 1994.
The liability for unpaid claims and claim adjustment expenses is shown net
of reinsurance recoverables on ceded reinsurance contracts. Presentation of
the above table to reflect liabilities on ceded reinsurance contracts is not
practicable.
Liabilities on all lines of insurance are monitored regularly and corrective
action is taken as required.
ITEM 2. PROPERTIES
Reference is made to "Business of ITT."
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ITEM 3. LEGAL PROCEEDINGS
Hartford Fire Insurance Company, a subsidiary of ITT, together with other
companies, associations and organizations involved in the business of property
and casualty insurance and reinsurance, was named as a defendant in a group of
lawsuits filed by Attorneys General of 20 states and by various private parties
in the United States District Court for the Northern District of California. All
of the suits, which were filed in 1988, 1990 and 1991, were based upon
allegations that the defendants violated federal and/or state antitrust laws by
reason of their activities in connection with the development of new standard
commercial general liability policy forms by the Insurance Services Office, an
industry organization. In June 1991, the Ninth Circuit U.S. Court of Appeals
reversed the United States District Court for the Northern District of
California which had granted summary judgment in September 1989 in favor of the
defendants. On June 28, 1993, the Supreme Court reversed the Ninth Circuit U.S.
Court of Appeals, holding that the domestic insurers, including ITT Hartford,
had not lost their McCarran-Ferguson Act exemption from the antitrust laws
generally, as a result of activities alleged in the complaints, but remanded the
case for further proceedings to determine if certain of those activities came
within the "boycott" exception to the McCarran-Ferguson Act exemption. On
October 3, 1994, ITT Hartford announced that it, along with the other 31
defendants, had settled this lawsuit. The settlement provides for a payment of
$36 million, the majority of which funds will be used to create a public entity
risk institute and national public risk database. It also calls for changes in
control of Insurance Services, Inc., a nationwide organization which develops
standardized policy language and compiles information insurers use to determine
their own insurance rates. The settlement agreement has been given preliminary
approval by the U.S. District Court for the Northern District of California.
Following notice of the settlement to all class members in the private actions a
hearing on final approval of the settlement will be held on March 29, 1995.
ITT and its former subsidiaries, Rayonier Inc. ("Rayonier") and Southern
Wood Piedmont Company ("SWP"), are named defendants in a lawsuit filed in 1991
in the U.S. District Court for the Southern District of Georgia, Ernest L.
Jordan, Sr. et al. v. Southern Wood Piedmont Company, et al., in which
plaintiffs allege property damage and personal injury based on alleged exposure
to toxic chemicals used by SWP in its former wood preserving operations, seek
certification as a class action, and ask for compensatory and punitive damages
in the amount of $700 million. Several other suits arising out of former wood
preserving operations of SWP also include ITT among the named defendants. Under
an agreement entered into by ITT and Rayonier in connection with the
distribution of Rayonier stock to ITT stockholders in February 1994, ITT is
entitled to be indemnified by Rayonier for any expenses or losses incurred by
ITT in connection with the aforementioned suits as well as in any other legal
proceedings arising out of Rayonier or SWP operations.
In approximately 30 current "Superfund Site" proceedings instituted by the
U.S. Environmental Protection Agency or similar state agencies a subsidiary or
division of ITT has been named a "potentially responsible party." In
approximately one-half of the proceedings the ITT company is considered a "de
minimis contributor." Other matters in the environmental area in which ITT and
its subsidiaries are involved (approximately another 70 items) relate to air,
ground and/or water contamination issues which are the subject of ongoing or
prospective remedial measures with any required approvals of federal or local
authorities, or, in the case of several of such matters, in connection with
which other private parties seek to impose upon an ITT company the financial
responsibility for costs or damages which allegedly have been or may be incurred
by such other parties. Asbestos-related and environmental claims received by
ITT's property and casualty insurance operations are separately discussed above
under "Business of ITT -- Property and Casualty Insurance Operations -- Unpaid
Claims and Claim Adjustment Expenses."
There are various other lawsuits pending against ITT and its subsidiaries,
some of which involve claims for substantial amounts. However, the ultimate
liability with respect to these lawsuits, including the legal proceedings
specifically described under this Item 3, is not considered material in relation
to the consolidated financial condition of ITT and its subsidiaries.
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ITEM 4.
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of ITT during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT
The following information is provided as to the executive officers of ITT.
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1995 POSITION AS AN OFFICER POSITION
---- ------------ -------- ----------------- ------------
Rand V. Araskog................... 63 Chairman, President and Chief Executive 1971 11/14/79
and Director
Robert A. Bowman.................. 39 Executive Vice President and Chief 1992 9/15/92
Financial Officer
Juan C. Cappello.................. 56 Senior Vice President, Director of 1981 12/11/84
Corporate Relations
Gerald C. Crotty.................. 43 Senior Vice President 1994 10/11/94
Jon F. Danski..................... 42 Senior Vice President and Controller 1993 10/18/93
D. Travis Engen................... 50 Executive Vice President 1987 1/30/91
Louis J. Giuliano................. 48 Senior Vice President 1988 6/11/91
Timothy D. Leuliette.............. 45 Senior Vice President 1991 9/21/91
Daniel F. Lundy................... 64 Senior Vice President, Director of Taxes 1976 9/ 7/82
Bertil T. Nilsson................. 62 Senior Vice President 1987 9/ 1/92
Ralph W. Pausig................... 60 Senior Vice President 1979 3/10/87
Ann N. Reese...................... 41 Senior Vice President and Treasurer 1987 9/ 1/92
Frank J. Schultz.................. 56 Senior Vice President 1992 6/ 9/92
Richard S. Ward................... 54 Executive Vice President and General 1984 5/17/94
Counsel
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT bearing at least substantially the same
responsibilities as those borne in their present offices, except that (i) Mr.
Bowman, prior to his election as Executive Vice President and Chief Financial
Officer, was Executive Vice President and Chief Financial Officer of ITT
Sheraton Corporation (1991) and Treasurer of the State of Michigan; (ii) Mr.
Crotty, prior to his election as Senior Vice President, was the Chairman,
President and Chief Operating Officer of ITT Consumer Financial Corporation
(1992), Vice President -- ITT and Executive Director -- Office of the Chairman
(1991), and Secretary to Governor Cuomo of the State of New York; (iii) Mr.
Danski, prior to his election as Senior Vice President and Controller, was Vice
President and General Auditor of RJR Nabisco; (iv) Mr. Engen, prior to his
election as Executive Vice President, was Senior Vice President of ITT and the
Chief Executive Officer of ITT Defense, Inc.; (v) Mr. Giuliano, prior to his
election as Senior Vice President, was Vice President of ITT and Vice President
and Director--Defense Operations of ITT Defense, Inc.; (vi) Mr. Leuliette, prior
to his election as Senior Vice President, was President and Chief Executive of
Siemens Automotive and Vice President of Siemens A.G.; (vii) Mr. Nilsson, prior
to his election as Senior Vice President, was Vice President of ITT and
President and Chief Operating Officer of ITT Fluid Technology Corporation (1991)
and Managing Director of ITT Flygt AB; (viii) Mrs. Reese, prior to her election
as Senior Vice President and Treasurer, was Vice President of ITT and Assistant
Treasurer; (ix) Mr. Schultz, prior to his election as Senior Vice President, was
Executive Vice President of Bank America Corp.; and (x) Mr. Ward, prior to his
election as Executive Vice President and General Counsel, was Senior Vice
President (1992) and Vice President and Associate General Counsel of ITT.
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PART II
ITEM 5. MARKET FOR ITT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITT COMMON STOCK -- MARKET PRICES AND DIVIDENDS (UNAUDITED)
1994 1993
-------------------- --------------------
HIGH LOW HIGH LOW
-------- ------- -------- --------
(IN DOLLARS)
Three Months Ended
March 31.................... $ 94.66 $80.25 $73.55 $62.65
June 30..................... 90.75 81.13 78.77 70.14
September 30................ 87.13 78.63 86.03 76.04
December 31................. 90.38 77.00 86.15 78.77
The above table reflects the range of market prices of ITT Common Stock
subsequent to the spin-off of Rayonier Inc. in February 1994, as reported in the
consolidated transaction reporting system of the New York Stock Exchange, the
principal market in which this security is traded, under the trading symbol
"ITT." Prices prior to the spin-off of Rayonier have been reduced to reflect the
value of Rayonier.
During the period from January 1, 1995 through February 28, 1995, the high
and low reported market prices of ITT Common Stock were $99.63 and $86.63,
respectively. The dividend declared in the first quarter of 1995 was $.495 per
common share. The dividends declared in each of the four quarters of 1994 were
$.495 per common share. The dividends declared in each of the four quarters of
1993 were also $.495 per common share. As noted above in Item 1 under
"Discontinued Operations," ITT also paid a special dividend on its common stock
and cumulative preferred stock, convertible series N, during the first quarter
of 1994 in the form of a distribution of all the outstanding common shares of
its former forest products subsidiary.
There were approximately 56,000 holders of record of ITT Common Stock on
February 28, 1995.
ITT Common Stock is listed on the following exchanges: Amsterdam, Antwerp,
Basel, Bern, Brussels, Frankfurt, Geneva, Lausanne, London, New York, Pacific,
Paris, Vienna and Zurich.
RESTRICTIONS ON ALIEN OWNERSHIP
Pursuant to the requirements of United States statutes, ITT limits stock
ownership by aliens (as used herein, the term "alien" includes the following and
their representatives: individuals who are not nationals of the United States,
partnerships unless a majority of the partners are such nationals and share in a
majority of its profits, foreign governments, entities created under the laws of
foreign governments, and entities controlled directly or indirectly by one or
more of such individuals, partnerships, governments or entities). The ITT
By-Laws provide that under no circumstances shall the amount of ITT stock owned
of record by aliens exceed 25% of the total outstanding. If and so long as the
stock records of ITT shall at any time disclose 25% alien ownership (i) no
transfers of shares of domestic record to aliens may be made and (ii) if it
shall be found that stock of domestic record is in fact held by or for the
account of an alien, the holder of such stock shall not be entitled to vote, to
receive dividends, or to have any other rights except the right to transfer the
stock to a citizen of the United States. At the close of business on January 31,
1995, approximately 6.3% of the outstanding stock of ITT was owned of record by
aliens. Assuming that all of the shares of ITT Common Stock issuable upon
conversion of securities initially issued to aliens, or issuable pursuant to
other existing commitments to aliens, had been issued at that date to aliens,
and that at that date all other securities then convertible into ITT stock were
owned by nationals of the United States and had also been converted in
accordance with their terms, such percentage would not have been significantly
different.
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ITEM 6. SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990
-------- ------- ------- ------- -------
(AS RESTATED AND IN MILLIONS EXCEPT PER SHARE)
RESULTS AND POSITION
Sales and Revenues......................................... $ 23,620 $21,129 $20,960 $19,510 $19,774
Income from Continuing Operations.......................... 852 661 316 618 848
Net Income (Loss).......................................... 1,022 913 (885) 749 923
Total Assets............................................... 100,854 87,198 77,364 60,577 53,213
Long-Term Debt............................................. 2,778 2,710 2,686 3,129 2,182
Stockholders Equity........................................ 5,459 7,650 7,247 8,721 8,164
Total Capitalization(a).................................... 13,527 11,811 11,794 13,201 12,087
========= ======== ======== ======== ========
EARNINGS (LOSS) PER SHARE
Income from Continuing Operations
Primary.................................................. $ 7.10 $ 5.22 $ 2.45 $ 4.77 $ 6.40
Fully Diluted............................................ $ 6.66 $ 4.95 $ 2.19 $ 4.50 $ 6.01
Net Income (Loss)
Primary.................................................. $ 8.57 $ 7.32 $ (7.93) $ 5.84 $ 7.00
Fully Diluted............................................ $ 8.02 $ 6.90 $ (6.90) $ 5.49 $ 6.56
========= ======== ======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE........................ $ 1.98 $ 1.98 $ 1.84 $ 1.72 $ 1.63
========= ======== ======== ======== ========
SIGNIFICANT RATIOS(A,B)
Return on Total Capital.................................... 10.3% 9.4% 0.1% 7.5% 9.1%
Return on Stockholders Equity.............................. 14.7% 12.3% (3.4)% 8.9% 11.6%
Debt to Total Capitalization With Insurance on an equity
basis.................................................... 41.1% 33.2% 36.8% 32.1% 30.0%
Fully Consolidated....................................... 47.4% 37.9% 41.5% 37.4% 35.9%
Book Value per Share....................................... $ 58.10 $ 58.94 $ 54.63 $ 65.52 $ 60.66
========= ======== ======== ======== ========
- ---------------
(a) Excluding the effects of unrealized gains or losses required under SFAS No.
115 and Discontinued Operations.
(b) Before the cumulative effect of accounting changes in 1992.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
The year 1994 was a milestone year which culminated in record earnings for
the Corporation as well as for its Insurance and Automotive businesses. At ITT
Hartford, 1994 marked the second consecutive year of record revenues and record
profits with improved results both in the life operations and the property and
casualty businesses. The worldwide combined ratio pertaining to ongoing property
and casualty operations improved to 102.8% in 1994 and to 100.7% in the fourth
quarter, markedly better than industry averages. At ITT Automotive, sales of
$4.8 billion and operating income of $328 had never previously been attained.
Over 12 million shares of the Corporation's common stock, or approximately 10%
of the shares outstanding at the beginning of the year, were repurchased in 1994
at an average price of $82.17 per share.
Actions aimed at strategically transforming the Corporation into three
industry-leading business groups continued in 1994 with the spin-off of Rayonier
Inc. which was completed in February. In March, the acquisition of the motors
and actuators business unit of General Motors for $374 added strong operating
margins and geographic balance to the Corporation's Automotive business segment.
Also in March, the Corporation announced plans to sell a portion of ITT
Educational Services, its provider of postsecondary technical education, through
an initial public offering. The sale was completed late in the year for
approximately 17% of the Company. ITT Educational Services is traded on the New
York Stock Exchange under the symbol "ESI."
A number of geographically strategic acquisitions in the Hospitality &
Entertainment segment were completed during the year which further enhance ITT
Sheraton's position as a premier hospitality organization. In April, the
acquisition of The Phoenician Golf and Tennis Resort in Scottsdale, Arizona and
the nearby Crescent business hotel in Phoenix was completed. These properties
add over 900 rooms to
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Sheraton's North American division and provide Sheraton with a strong and
high-profile presence in the American Southwest. Between June and October 1994,
the Corporation purchased approximately 70% of the shares of the Italian luxury
hotel chain, CIGA SpA for $523. CIGA, which owns or operates 33 properties
throughout Europe, includes such landmarks as the Danieli in Venice, the Palace
in Madrid, the Principe di Savoia in Milan and the Excelsior in Rome. In
October, the Corporation acquired the Park Grand Hotel and adjacent Tattersalls
Building in Sydney for $235, further strengthening Sheraton's presence in
eastern Australia.
Joint venture agreements in the Peoples Republic of China were signed by
each of the Corporation's manufactured products business segments during the
year that will allow the Corporation to share in one of the world's fastest
growing economies with a modest capital investment. ITT Automotive will produce
foundation brakes for the Chinese market in Shanghai while ITT Cannon, a unit of
ITT Defense & Electronics, has begun manufacturing connectors in Zhenjiang
province, also for the local market. ITT Flygt, a unit of Fluid Technology, will
produce pumps in a facility in Shenyang.
The Corporation, in a partnership with Cablevision Systems Corporation,
agreed in August to purchase Madison Square Garden Corporation (MSG) for
approximately $1 billion in cash. MSG includes the world renowned sports arena
and adjacent theater, the New York Knickerbockers basketball franchise, the New
York Rangers hockey franchise and the MSG cable television network. The
acquisition of MSG affords the Corporation entry into the sports entertainment
arena with instant brand recognition.
The Corporation's gaming operations were significantly strengthened with
the announcement in December of an offer to acquire Caesars World, Inc. for
approximately $1.7 billion. A cash tender offer for all outstanding shares of
Caesars was completed in January 1995. The preeminent name in gaming, Caesars
owns casino resorts in Las Vegas and Stateline, Nevada and in Atlantic City, New
Jersey as well as non-gaming resorts in Pennsylvania's Pocono Mountains. Caesars
is also a partner in a gaming venture in Windsor, Ontario.
Finally, the Corporation announced its intention in September to sell all
of the operations comprising its Finance business segment, primarily ITT
Financial Corporation. Agreements have been signed for sales of the assets of
two of the largest units within the segment for $3.7 billion in cash and a
preliminary agreement was signed for the sale of three additional units for $1.8
billion. Negotiations continue for sales of the remaining Finance businesses.
ITT Financial has been reflected as a "Discontinued Operation" for all periods
presented.
SALES, REVENUES AND INCOME
Worldwide sales and revenues were $23.6 billion in 1994 compared with a
restated $21.1 billion and $21.0 billion in 1993 and 1992, respectively. Sales
and revenues exclude those of the Finance segment which has been reflected as a
"Discontinued Operation" in all periods presented. The 12% increase in 1994
reflects improvements at each of the Corporation's ongoing business segments
with the largest increases at Insurance, Automotive, and Hospitality &
Entertainment. Sales and revenues were relatively flat in 1993 as the completion
of several major programs in the Defense business were offset with growth at
other segments, particularly Insurance.
Net income for 1994 was $1.022 billion or $8.02 per fully diluted share
compared with $913 or $6.90 per fully diluted share in 1993 and a net loss of
$885 or $6.90 per fully diluted share in 1992. The net loss in 1992 was due
primarily to several significant nonrecurring items and accounting changes in
that year. Primary earnings (loss) per share were $8.57 in 1994, $7.32 in 1993
and $(7.93) in 1992.
1994: Reported net income was adversely impacted by the net effect of three
accounting changes whose cumulative effect totaled $11 after tax or $.09 per
fully diluted share as of January 1, 1994. The Corporation adopted Statement of
Financial Accounting Standards ("SFAS") No. 115 and related pronouncements which
required adjustments to the fair value of mortgage-backed interest-only
securities through the statement of income. The cumulative effect of this
accounting change was a $36 after tax charge or $.29 per fully diluted share. In
an unrelated change, the basis for discounting certain workers compensation
liabilities in the Insurance segment was changed from an insurance
guideline-based method to the estimated risk-free rate of return to more
appropriately reflect current market conditions. The cumulative effect of this
accounting change was a benefit of $42 after tax or $.33 per fully diluted
21
23
share. Finally, the Corporation changed the accounting for certain marketing and
start-up costs at ITT Educational Services. Such costs, which were previously
deferred and amortized, are now expensed as incurred. The cumulative effect of
this accounting change was an after tax charge of $17 or $.13 per fully diluted
share.
Excess catastrophe losses at ITT Hartford totaling $40 after tax or $.31
per fully diluted share were due to the California earthquake and winter freezes
in the 1994 first quarter. In addition, portfolio gains in the year totaled $52
after tax or $.42 per fully diluted share. Excluding the aforementioned items
and the accounting changes, net income was $1.021 billion or $8.00 per fully
diluted share.
Net income in 1994 also included the results of the Corporation's
discontinued Finance segment and, for the two months prior to spin-off, the
discontinued Forest Products segment. Earnings from "Discontinued Operations"
totaled $181 or $1.45 per fully diluted share.
1993: A number of one-time items impacted net income in 1993 including a
$33 after tax or $.25 per fully diluted share provision, consisting primarily of
severance related expenses of a program which has increased the effectiveness
and productivity at ITT Headquarters and the headquarters of the business
segments. In addition, the year includes a $22 or $.17 per fully diluted share
favorable impact of changes in the United States tax law. Income in future
periods will be negatively impacted by the 1% increase in the U.S. Federal tax
rate. Further, the year was impacted by $19 after tax or $.15 per fully diluted
share for the accelerated write-off of capitalized development expenses at ITT
Sheraton; $7 or $.06 per fully diluted share for an after tax gain at ITT
Sheraton on the sale of its investment in Bally's Las Vegas; and, $10 after tax,
or $.08 per fully diluted share for an after tax gain on the sale of ITT
Components Distribution. The year also included prior period tax and associated
interest charges related to separate decisions by Canadian and California state
taxing authorities of $16 after tax or $.12 per fully diluted share and $10 or
$.08 per fully diluted share. Record catastrophe losses at ITT Hartford early in
the year negatively impacted earnings by $41 after tax or $.32 per fully diluted
share. The catastrophes included the World Trade Center bombing in New York and
excessive damage from storms in the Northeastern United States. Portfolio gains
at ITT Hartford in 1993 totaled $101 after tax or $.78 per fully diluted share.
Excluding the aforementioned items, net income was $892 or $6.73 per fully
diluted share.
Net income in 1993 also included $302 or $2.33 per fully diluted share from
the Corporation's discontinued Finance and Forest Product operations. Included
in the Finance operations was the favorable impact in 1993 of an after tax gain
of $63 or $.48 per fully diluted share from the sale of ITT Financial's domestic
unsecured consumer small loan portfolio. The year also included an extraordinary
charge of $50 after tax or $.38 per fully diluted share for the retirement of
related debt at ITT Financial.
1992: The net loss in 1992 included the effects of the Corporation's
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions", and SFAS No. 112, "Employers' Accounting for
Postemployment Benefits", which were recorded effective January 1, 1992 using
the immediate recognition method. These accounting changes resulted in a
cumulative catch-up adjustment of $625 after tax or $4.71 per fully diluted
share. These standards required accrual of postretirement and postemployment
health care and life insurance benefit costs during the years that an employee
provides services to the Corporation rather than on the pay-as-you-go basis
previously in effect. There was no cash flow impact of these accounting changes.
In July 1992, the Corporation completed the sale of its 30% stake in
Alcatel N.V. to its joint venture partner, Alcatel Alsthom, resulting in an
after tax gain of $622 or $4.71 per fully diluted share -- see "Alcatel N.V." in
Notes to Financial Statements. The Corporation also recorded several one-time
items during the year to realign and restructure certain businesses including:
-- A $594 after tax charge at ITT Hartford to fund expected loss
developments in surplus lines and reinsurance business at its Cameron & Colby
unit and $165 after tax for expected legal defense costs associated with
environmental-related claims. The total result was a charge of $759 or $5.75 per
fully diluted share.
-- A $34 after tax, or $.25 per fully diluted share provision to write down
hotel investments at ITT Sheraton, and a $33 after tax or $.25 per fully diluted
share charge for restructuring in the Components operations of ITT Defense &
Electronics.
22
24
Portfolio gains at ITT Hartford in 1992 totaled $292 after tax or $2.22 per
fully diluted share. Excess catastrophe losses at ITT Hartford in 1992
negatively impacted earnings by $131 after tax or $.99 per fully diluted share.
The catastrophes included Hurricanes Andrew and Iniki along with the Los Angeles
riots and the Chicago flood. Excluding the aforementioned items, the
Corporation's net loss was $217 or $1.88 per fully diluted share.
In addition, net losses from the Corporation's discontinued Finance and
Forest Products operations totaled $576 or $4.38 per fully diluted share due
principally to a $612 after tax charge or $4.66 per fully diluted share at ITT
Financial primarily to transform the consumer finance business by significantly
reducing its domestic unsecured consumer small loan business. As mentioned
previously, this business was sold in June 1993. "Discontinued Operations" also
included provisions and reserves of $115 after tax or $.87 per fully diluted
share to cover the loss on the disposal of assets and for closure expenses of
ITT Rayonier's Grays Harbor pulp and paper complex.
CASH FLOW
Operating income before depreciation and amortization was $2.1 billion in
1994, a 34% improvement over the $1.6 billion in 1993 and an 85% improvement
over the $1.1 billion generated in 1992 (before the non-cash charge at the
Cameron & Colby unit of ITT Hartford). A continuing focus on improving the
operating margins of the Corporation's business units is the primary contributor
to the results.
The Corporation reported cash of $1.4 billion from continuing operating
activities in 1994 (approximately 15% higher than in 1993 and 1992) and an
additional $.2 billion from discontinued operations. Cash generated from
discontinued operations was $.3 billion in 1993 and $.1 billion in 1992.
Additional funds totaling $.9 billion were generated on the collection of cash
from the sale of divested assets, most of which related to the final installment
from the 1992 Alcatel N.V. sale. Previous payments from that sale totaled $.8
billion in 1993 and $1.0 billion in 1992. In addition, investment life contracts
written at ITT Hartford provided $2.6 billion in 1994 compared with $1.7 billion
in 1993 and $1.6 billion in 1992.
These funds, along with the use of cash reserves and additional borrowings
totaling $2.1 billion in 1994, were reinvested in securities at ITT Hartford
($3.3 billion) and used to fund strategic acquisitions and capital additions
totaling $2.4 billion in the Corporation's other businesses, many of which were
discussed previously. In addition, cash was used to fund the repurchase of the
Corporation's common shares ($1.0 billion), the redemption of ITT Hartford
preferred stock ($.2 billion) and the payment of common and preferred dividends
($.3 billion).
Pursuant to the Corporation's current share repurchase program announced in
May 1992, 12.3 million common shares were repurchased in 1994 at an average
price of $82.17 per share for a total of $1.0 billion. In 1993, approximately
3.6 million common shares were repurchased at an average price of $86.52 per
share for a total of $310. Since the Corporation's stock repurchase programs
began in 1987, more than 52 million equivalent shares have been repurchased and
redeemed through year-end 1994 for approximately $3.3 billion. Dividend payments
were $280, $277 and $270 during 1994, 1993 and 1992, including $47 in 1994 and
$48 in both 1993 and 1992 related to the ESOP preferred stock.
Cash expenditures for plant, property and equipment were $727 in 1994, $486
in 1993 and $536 in 1992 and are expected to approximate $700 in 1995. The
increase in 1994 is largely the result of next generation anti-lock brake
technology at ITT Automotive and strategic investment in selected properties at
ITT Sheraton. Depreciation in 1994 was $519 compared with $444 in 1993 and $462
in 1992. Accumulated depreciation amounted to 39% of gross plant, property and
equipment at year-end 1994 and 47% at year-end 1993. Acquisitions in 1994
totaled $1.7 billion, the most significant of which included the motors and
actuators business of General Motors for $374, a 70 percent interest in the
Italian luxury hotel chain CIGA SpA for $523, The Phoenician and Crescent Hotel
in Arizona and the Park Grand Hotel and an adjacent office building in Sydney,
Australia. In 1993, the Desert Inn Properties in Las Vegas were acquired for
$160. In January 1995, the Corporation completed a cash tender offer for the
outstanding shares of Caesars World, Inc. for $1.7 billion and in March 1995,
the Corporation completed the acquisition of a 50% interest in MSG which
required initial funding of $610. Short-term financing was arranged for both
transactions which is expected to be repaid largely with proceeds from the sale
of Finance segment assets in 1995. See "Debt and Liquidity" for additional
discussion.
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Expenditures for research, development and engineering totaled $396 in
1994, $460 in 1993 and $502 in 1992, of which approximately 50% was pursuant to
customer contracts. The reduction is directly attributable to reduced customer
requirements in the Defense companies. Research, development and engineering
expenditures have funded numerous product developments such as anti-lock brake
and wiper systems, integrated circuits for multimedia applications and digital
television, as well as electronic countermeasures and tactical radio
communications technology.
BUSINESS SEGMENTS
Following is a discussion of important factors affecting the sales,
revenues and operating income of each Business Segment.
INSURANCE
1994 1993 1992
------- ------- ------
Revenues............................................................................ $11,102 $10,338 $9,862
Operating Income (Loss)............................................................. $ 811 $ 719 $ (513)
For the second consecutive year, revenues and operating income achieved
record levels. Revenues increased 7 percent despite lower portfolio gains than
in 1993. Portfolio gains included in revenues totaled $90, $155, and $443 in
1994, 1993 and 1992, respectively. Managing the returns on insurance investments
totaling $32.5 billion at December 31, 1994 and separate account assets totaling
$23.3 billion is an integral part of Insurance operations. Various strategies,
including the utilization of derivatives, are used to manage the associated
risks of these portfolios. The nature and extent of these strategies are
discussed in "Insurance Investment Operations."
Property and Casualty Insurance Operations
North American property and casualty underwriting revenues grew $279, or 5
percent, in 1994, compared with 3 percent in the prior year, reflecting
increased business volume in both personal and commercial lines of business.
International property and casualty underwriting revenues were up 4 percent over
1993, reflecting premium growth in the United Kingdom. Worldwide underwriting
results, which improved 32 percent over the prior year, represented the primary
source of operating income growth in the insurance segment. The worldwide
combined ratio was 104.0 in 1994 (102.8 when excluding Cameron & Colby), an
improvement from 107.3 in 1993 and 133.7 in 1992, reflecting a combination of
business growth, better market conditions in Europe, and effective cost
containment. The 1992 results reflect $900 of reserve strengthening for expected
loss developments in surplus lines and reinsurance at Cameron & Colby, $250 of
legal defense costs associated with environmental-related claims, and record
setting catastrophe losses. The improvements in 1994 were partially offset by a
drop in investment income for the second consecutive year, the result of lower
interest rates and declines in portfolio gains.
Life and Health Operations
Life operations continued to fuel the revenue growth at ITT Hartford,
contributing 33 percent of the segment revenues in 1994 compared with 29 percent
in 1993 and 24 percent in 1992. This increase, 20 percent in 1994, reflects the
continued dramatic improvement in account charge revenues from corporate-owned
life insurance (COLI) combined with sustained growth in individual life and
annuity lines of business. Operating income in the life operations contributed
31 percent of the insurance segment's results and reflects an average annual
growth rate of 22 percent since 1991. The assumption and reinsurance of both
COLI and annuity policies from Fidelity Bankers in 1993 and Mutual Benefit in
1992 contributed to the improvements in both revenues and operating income. In
1993, ITT Hartford initiated a transfer of a majority of its group medical and
dental benefits business to Massachusetts Mutual Life Insurance Company. The
transfer, which was completed in 1994, reflects the strategy to move away from
traditional medical health insurance.
Worldwide life and health deposit premiums on investment type products,
which are not reported as premiums or revenues, increased 24 percent compared
with 1993, excluding the impact of the annuity
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businesses assumed from Fidelity Bankers during 1993. This growth reflects the
continued expansion of ITT Hartford's variable annuity line of business.
A continuation of improving operating performance is expected in 1995.
Property and casualty underwriting results are expected to continue to be
enhanced by business development and cost containment strategies, while it is
anticipated that life operations will continue to grow, particularly in the area
of individual annuities.
AUTOMOTIVE
1994 1993 1992
------ ------ ------
Sales................................................................................. $4,784 $3,580 $3,498
Operating Income...................................................................... $ 328 $ 164 $ 118
Both sales and operating income achieved record levels in 1994. Sales
increased 34 percent, in part due to the acquisition of the motors and actuators
business unit of General Motors Corp. Excluding the effects of this acquisition,
sales improved 14 percent reflecting a higher market penetration of anti-lock
brake systems (ABS) in North America and Europe as well as increased vehicle
production. The acquisition of the motors and actuators business improved the
geographic balance of ITT Automotive's North American and European sales mix,
which is demonstrated by North American sales comprising 50 percent of the total
in 1994 compared with 43 percent in 1993 and 32 percent in 1992.
Operating income doubled in 1994 as a result of increased sales volume, the
acquisition of the motors and actuators business and continued cost reductions,
partially offset by lower sales prices and higher labor costs. Excluding the
acquisition, operating income increased 60 percent, largely the result of higher
volume. The benefits of cost reduction programs and the successful integration
of the motors and actuators business enabled ITT Automotive to improve operating
margins despite significant price concessions granted to customers. Increased
operating income in 1993 was largely the result of cost reduction efforts and
higher sales volume, partially offset by lower sales prices and higher labor
costs.
Operating income is expected to improve in 1995 from increased market
penetration, a full year of operations of the motors and actuators business, as
well as continued cost reduction efforts. ABS remains the largest product line
offered by ITT Automotive, comprising 26 percent, 30 percent and 27 percent of
total sales in 1994, 1993 and 1992, respectively.
DEFENSE & ELECTRONICS
1994 1993 1992
------ ------ ------
Sales................................................................................. $1,710 $1,608 $1,856
Operating Income (Loss)............................................................... $ 81 $ 53 $ (73)
During 1994, the Electronics companies achieved profitability for the first
time since 1989 and the Defense companies achieved growth in the international
defense market. Electronics' sales increased 10 percent in 1994 due to growth in
the connector and switch product lines following a decrease of 4 percent in
1993. Defense sales increased 3 percent in 1994 primarily due to increased
international defense radar and radio product sales. In 1993, Defense sales
decreased 18 percent as the impact of the completion of several major programs
and reduced government spending resulted in lower shipments and operations and
maintenance contract revenues declined. Sales and operating income have been
restated in all periods to reflect the divestiture of several small non-core
operating units in 1994. The operating results of these units are reflected in
"Dispositions and Other."
In 1994, the Electronics units achieved profitability through significant
operating margin improvements, particularly in the connector business. The 1993
operating income improvement reflected the impact of cost reductions and the
absence of a 1992 restructuring provision of $53. At the Defense units,
operating income declined in 1994 due to lower margin adjustments on mature
military programs, partly offset by higher sales volumes and the benefits of
cost reduction programs. Operating income improved in 1993 due to the continued
benefits of cost reductions and margin adjustments on mature military programs.
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Order backlog was $2.2, $2.2 and $2.3 billion at December 31, 1994, 1993
and 1992, respectively. New product development and the benefits of ongoing
restructuring actions should allow the company to continue profitable growth
into 1995.
FLUID TECHNOLOGY
1994 1993 1992
------ ------ ------
Sales............................................. $1,125 $1,030 $1,070
Operating Income.................................. $ 99 $ 95 $ 67
ITT Fluid Technology reported measured growth and solid operating results
in 1994. Sales increased over 9% in 1994, the first significant increase since
1990, the result of new product initiatives, global market development
activities, a strong North American heating season caused by severe winter
weather and generally strengthening economic conditions worldwide. The
acquisition of a German manufacturer of plastic-lined valves and pumps also
contributed to the increase. ITT Flygt, through an increase in market share, was
the primary contributor to ITT Fluid Technology's gains. The sales decrease in
1993 was due primarily to a stronger U.S. dollar versus many of the European
currencies in which Fluid Technology operates.
Operating income improved in 1994 despite intense competition and increases
in raw material costs. The improvement was achieved through higher sales volume,
price increases and benefits from cost reduction actions. In 1993, operating
income also benefited from cost reduction actions, including the consolidation
of facilities to reduce excess capacity. Customer-focused marketing and new
product programs together with a reduced cost structure, are expected to allow
Fluid Technology to continue its profitable growth during 1995.
HOSPITALITY & ENTERTAINMENT
1994 1993 1992
------ ------ ------
Sales and Revenue................................. $3,927 $3,184 $3,109
Operating Income (Loss)........................... $ 161 $ 78 $ (28)
In 1994, strategic acquisitions were coupled with global expansion in the
Hospitality & Entertainment segment. Sales and revenues increased in 1994 due to
full year results of the gaming operations, improved results in the North
American and Asia Pacific regions and acquisitions, such as CIGA SpA in Europe,
The Phoenician and Crescent hotels in Phoenix and the Park Grand in Sydney,
Australia. The increase in 1993 over 1992 was attributable to the North American
region and the impact of the Desert Inn acquired in November. ITT Sheraton has
continued enhancing its image by upgrading standards, renovating properties and
defranchising nonconforming properties. The ITT Sheraton system, excluding CIGA,
generated 31.6 million room nights in 1994, a 1.4 million room night increase
from 1993. In developing its gaming operations, the Corporation opened the
Sheraton Casino in Tunica County, Mississippi in August and was selected by the
government of Nova Scotia as the exclusive developer and operator (for 20 years)
of casinos in Halifax and Sydney.
Operating income in 1994 reflected the improvements in the North American
region, a full year contribution from the Sheraton Desert Inn and benefits from
cost reductions. Results include a $9 gain on the sale of a passive investment
as well as the write-down of certain underperforming assets of a similar amount.
In 1993, operating income reflected the accelerated write-off of capitalized
development expenses totaling $29 partly offset with an $11 gain on the sale of
an investment in Bally's Las Vegas operations.
Room rates of owned, managed and leased properties averaged $111.24,
$105.48, and $107.14 for 1994, 1993, and 1992, respectively, while occupancy
rates were 71.1%, 68.5%, and 66.4%. The 1994 average room rate and occupancy
rate increases reflect improvements in all regions, especially in North America
and Asia Pacific. The 1993 room rate reduction reflects the then stronger U.S.
dollar against numerous foreign currencies, particularly in Europe. Total
properties numbered 425 in 1994 compared with 407 and 426 in 1993 and 1992,
respectively, including franchised properties of 214, 230 and 252 in those
years.
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Operating income is expected to continue to improve in 1995 both from
existing hotels and from 1994 acquisitions. A primary focus of ITT Sheraton is
the successful and efficient integration of these acquisitions. The CIGA SpA
acquisition and new casino operations in Halifax and Sydney, Nova Scotia are
expected to be significant incremental income sources.
COMMUNICATIONS & INFORMATION SERVICES
1994 1993 1992
---- ---- ----
Sales and Revenues..................................... $833 $800 $817
Operating Income....................................... $155 $162 $170
The Communications & Information Services (COINS) business segment is
comprised of ITT World Directories, a leading publisher of "Yellow Pages"
directories primarily in European markets and ITT Educational Services, a
leading proprietary provider of technical postsecondary degree programs in the
United States.
ITT World Directories
In 1994, ITT World Directories prepared to compete as an independent
directory publisher in Belgium and began to compete in the Netherlands. Sales
and revenues approximated 1993 results when excluding the impacts of foreign
exchange. Operating income decreased due to the additional expenses of
publishing in competitive environments and the Corporation's share of the costs
for establishing a European directory in a joint venture with the Thomas
Publishing Company. Excluding these costs, operating income increased 7 percent.
When comparing 1993 with 1992 and excluding the effects of foreign exchange,
sales and revenues and operating income both increased 5 percent, reflecting
modest price increases coupled with reduced operating costs. ITT World
Directories continues a program of product diversification and geographic
expansion, as exemplified by the company's return to South Africa in 1994. The
most significant factor impacting operating performance in 1995 will relate to
competitive parameters in Belgium which are not yet fully known.
ITT Educational Services (ESI)
During 1994, the Corporation completed an initial public offering of
approximately 17 percent of ESI. ESI opened six new schools during the year,
raising the total number of ITT Technical Institutes to 54, and student census
reached 20,700. Sales and revenues increased 11 percent in 1994 and 1993,
reflecting, in both years, an increase in the number of schools and student
enrollment. When excluding the current year impact of a change in accounting for
marketing and start-up costs, operating income improved 33 percent in 1994, as a
result of cost reduction programs and an on-going expansion program. The
increase in operating income in 1993 of 14 percent was also the result of cost
reduction efforts and expansion. Operating results are expected to improve in
1995 due to additional school openings and a continuing expansion of curricula
and degree offerings.
ALCATEL N.V.
1994 1993 1992
---- ---- ----
Equity in Earnings of Alcatel N.V....................... $ -- $ -- $ 97
The Corporation sold its 30 percent interest in Alcatel N.V. to its joint
venture partner, Alcatel Alsthom in July 1992. Proceeds from the sale included
$1 billion in cash, two notes collected in July 1993 and 1994 totaling $1.6
billion (including interest) and 9.1 million shares in Alcatel Alsthom. The
shares have both a net book value and a fair market value of $.8 billion at
February 7, 1995. The Corporation recognized a pretax gain of $942 ($622 after
tax) in 1992 on the transaction.
DISPOSITIONS AND OTHER
Dispositions and Other includes the sales, operating results and the gain
or loss from sale or closedown of units other than "Discontinued Operations,"
along with the sales and operating results of other non-core businesses,
principally the Corporation's Community Development subsidiary. In 1994,
Dispositions and Other included the operating losses and loss on the sale of the
Corporation's
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Instruments operations along with a gain on the sale of approximately 17% of
ESI. In 1993, gains on the sale of ITT Components Distribution and ITT World
Directories United Kingdom operations were the most significant components. 1992
included provisions for the closedown of World Directories' unit in Turkey ($41
pretax offset with tax benefits of a similar amount included in "Income Taxes")
along with respective operating losses.
DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM
In February 1994, the Corporation completed its spin-off of Rayonier Inc.,
the Corporation's Forest Products segment with net assets of $607 to its common
and preferred shareholders. In September 1994, the Corporation announced its
plan to seek offers for the purchase of its Finance business segment,
principally ITT Financial Corporation. The Corporation believes it will realize
proceeds on the sale of ITT Financial that are in excess of the recorded value
of the net assets. The results of ITT Rayonier and ITT Financial Corporation are
reported as "Discontinued Operations" on a one-line after tax basis.
In 1994, the net income of the Finance segment totaled $169 or $1.36 per
fully diluted share and ITT Rayonier net income totaled $12 or $.09 per fully
diluted share for the two months prior to the spin-off. In 1993, Finance segment
net income totaled $249 or $1.92 per fully diluted share including a gain on the
sale of the domestic unsecured consumer small loan portfolio of $63 or $.48 per
fully diluted share. In conjunction with that sale, the Corporation retired
Finance segment debt at a premium resulting in an extraordinary loss of $50
after tax or $.38 per fully diluted share. ITT Rayonier net income totaled $53
or $.41 per fully diluted share in 1993.
Discontinued operations in 1992 included an after tax charge of $612 at ITT
Financial primarily to restructure its consumer finance business by reducing its
domestic unsecured consumer small loan business, which was sold in June 1993.
ITT Rayonier's 1992 results included an after tax provision of $115 for the loss
on the disposal and the estimated closure costs of its Grays Harbor pulp and
paper complex.
INTEREST, TAXES AND OTHER
Net interest expense in 1994 increased due to higher average debt levels,
the result of 1993 and 1994 acquisitions and share repurchases along with higher
average borrowing rates. Net interest expense in 1993 decreased compared with
1992 due to lower average debt levels and higher average cash invested. Net
interest expense is expected to increase materially in 1995 due to higher
average borrowing and rates.
Income taxes of $389 in 1994 were provided on pretax income of $1.3 billion
representing a 31 percent effective tax rate. Tax exempt interest earned on
invested assets at Insurance is the principal cause of a lower effective rate
than the U.S. statutory rate. The increase in the Corporation's effective tax
rate from 26 percent in 1993 is due primarily to the absence of several one-time
benefits, the largest of which related to a change in the U.S. Federal tax rate.
This benefit, $22 million, resulted from the remeasurement of the Corporation's
net deferred tax assets at 35 percent. "Discontinued Operations," "Extraordinary
Item" and "Cumulative Effect of Accounting Changes" are all presented on a net
of tax basis and accordingly, the associated taxes are not included in the
provision above. Income taxes paid in 1994, 1993 and 1992 were $646, $538 and
$234, respectively.
"Other" consists primarily of corporate expenses, minority equity and
non-operating income and expenses. "Other" expenses decreased in 1994 primarily
due to the absence of a 1993 provision of $50 pretax for estimated severance and
other costs associated with a program aimed at increasing the effectiveness and
productivity at the Corporation's headquarters locations. Similarly, this
provision is the cause of the increase of "Other" expenses in 1993. In addition,
ongoing headquarters administrative and general expenses were lower in 1994
compared with 1993 and in 1993 compared with 1992 partially reflecting the
positive effects of the cost reduction program.
DEBT AND LIQUIDITY
The Corporation's outstanding debt, with the Insurance segment reflected on
an equity basis and excluding discontinued operations, was 41% of total
capitalization at December 31, 1994 (before
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recognition of the unrealized loss on investment securities as required by SFAS
No. 115 beginning in 1994) compared with 33% at December 31, 1993 on the same
basis. The increase is reflected in borrowings which total $4.9 billion in 1994
compared with $3.5 billion in 1993. In addition, cash and cash equivalents of
$.6 billion at year-end 1994 are $.5 billion lower than the $1.1 billion at
year-end 1993. The Corporation anticipated higher leverage in 1994 as it made
strategic acquisitions and accelerated its share repurchases in the third and
fourth quarters when share prices were attractive. Insurance debt totaled $1.5
billion at December 31, 1994 and $1.0 billion at December 31, 1993. When fully
consolidating the Insurance segment, debt was 47% of total capitalization at
year-end 1994 compared with 38% at year-end 1993.
Effective January 1, 1994, the Corporation adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" which
requires investments to be reflected at fair value with the corresponding impact
reported as a separate component of Stockholders Equity in situations where
those investments are "available for sale," as defined. The accounting standard
does not allow for a corresponding fair value adjustment to the Corporation's
liabilities. Stockholders Equity can vary significantly between reporting
periods as market interest rates and other factors change. Accordingly, the
Corporation does not include unrealized gains or losses in its assessment of
debt to total capitalization.
Future debt needs can be met as required by traditional and emerging
channels. Certain subsidiaries are subject to restrictions on the transfer of
funds to the Corporation, but the restrictions have not affected the
Corporation's ability to meet its cash obligations, and no change in this
condition is anticipated. Overall, the Corporation's financial position remains
strong and flexible.
The Corporation increased its short-term borrowings by approximately $2.3
billion in February and March of 1995 with the acquisitions of Caesars World,
Inc. and 50% of Madison Square Garden Corporation. In addition, borrowings of
the discontinued Finance segment totaled $11.6 billion at December 31, 1994. In
January 1995, the holders of $3.4 billion of this Finance debt were asked to
consent to conform certain ITT Financial indenture provisions with those of the
Corporation which, after a proposed merger of ITT Financial into the
Corporation, will result in the Corporation becoming the obligor on these debt
issues. The solicitation was successfully completed on each of 31 separate
security issues. Proceeds from the ITT Financial sale are expected to be used to
repay a substantial portion of both the Finance debt and the Corporation's other
short-term debt outstanding at December 31, 1994 and incurred with the first
quarter 1995 acquisitions.
In February 1995, the Corporation also entered into two new revolving
credit agreements with terms ranging from one to five years with 68 domestic and
foreign banks providing aggregate credit commitments of $11 billion. These
commitments were made to the ITT parent company and certain of its subsidiaries
and are used to assure working capital needs and to support commercial paper.
Commercial paper borrowings totaled $2.4 billion at December 31, 1994, $.6
billion of which was issued by the insurance subsidiary. The Corporation's
insurance subsidiaries, and its foreign units usually meet their funding
requirements on a direct basis and, from time to time, are supplemented through
Corporate-established financing vehicles.
Stockholders equity decreased $.8 billion during 1994 excluding the SFAS
No. 115 impact mainly as the result of dividends ($0.3 billion), share
repurchases ($1.0 billion), and the spin-off of Rayonier Inc. ($0.6 billion)
partly offset by 1994 net income.
The Corporation operates in a multinational environment with minimal
exposures in hyper-inflationary countries. Thus, inflation has not had a
significant impact on the financial position of the Corporation or results of
its operations in recent periods, nor is it expected to do so in the near
future.
The Corporation uses derivative financial instruments extensively in its
life insurance operations as part of its risk management strategy as more fully
discussed in "Insurance Investment Operations." Derivative financial instruments
are also used to a much lesser degree in several other segments of the
Corporation. Interest rate risk relative to the Corporation's debt portfolios is
managed through interest rate swap agreements, primarily in the discontinued
Finance segment. The multinational operations of the Corporation also create
exposure to foreign currency fluctuation. Foreign currency risk relative to the
Corporation's net investment in a foreign country, foreign denominated debt or a
specific foreign
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denominated transaction is managed in part through currency swaps and forward
exchange contracts. Foreign currency transaction gains or losses were not
significant.
The Corporation is an end-user of derivatives and does not utilize them for
speculative purposes. The notional amounts of derivative contracts represent the
basis upon which pay and receive amounts are calculated and therefore are not
reflective of credit risk. Credit risk is limited to the amounts calculated to
be due or owed by the Corporation on such contracts. The Corporation expects to
continue to use interest rate swaps to reduce its cost of borrowing in the
future, although the divestment of ITT Financial will result in reduced activity
in the future.
INSURANCE INVESTMENT OPERATIONS
Insurance operations represent the Corporation's largest business segment
in terms of assets and revenues. At December 31, 1994, policy liabilities and
accruals totaled $34.3 billion (net of ceded reinsurance) which are backed by
$42.2 billion in total assets (including insurance investments of $32.5
billion). The insurance segment is managed in two distinct groups; property and
casualty operations and life operations. The investment portfolios of both the
property and casualty and the life operations are managed based on the
underlying characteristics and nature of their respective policy liabilities.
Investment management strategies differ significantly as do the nature of these
two businesses.
Property and Casualty Operations
Property and casualty policy liabilities totaled $14.8 billion (net of
ceded reinsurance) at December 31, 1994 which are backed by $20.2 billion in
total assets (including insurance investments of $14.1 billion). Property and
casualty investment strategies are developed based on a variety of factors
including business needs, duration, regulatory requirements and tax
considerations. The weighted average duration of the property and casualty
investments approximates four and one-half years while the weighted average
duration of the policy obligations approximates three years. There are generally
no guaranteed interest requirements related to property and casualty policy
liabilities. Investments are comprised primarily of intermediate fixed maturity
bonds and notes, taxable and non-taxable and corporate bonds. The
characteristics of these investments have generally not been altered through the
use of derivative financial instruments.
Life Operations -- Policy Liability Characteristics
Policy liabilities in the life operations totaled $19.5 billion (net of
ceded reinsurance) at December 31, 1994 which are backed by $22.0 billion in
total assets (including insurance investments of $18.4 billion). Matching of the
duration of life investments with respective policyholder obligations is an
explicit objective of the life management strategy. Policy liabilities in the
life operations, along with estimated duration periods can be summarized based
on investment needs in the following 5 categories at December 31, 1994 (in
billions):
ESTIMATED DURATION (YEARS)
BALANCE AT -------------------------------------
DECEMBER 31, LESS
DESCRIPTION 1994 THAN 1 1-5 6-10 OVER 10
----------- ------------ ------ ----- ---- -------
Fixed rate asset accumulation vehicles....................... $ 6.6 $1.3 $ 5.2 $ .1 $ --
Indexed asset accumulation vehicles.......................... .9 .5 .1 -- .3
Interest credited asset accumulation vehicles................ 9.4 .2 5.0 3.2 1.0
Long-term payout liabilities................................. 1.8 -- 1.1 .5 .2
Short-term payout liabilities................................ .8 .8 -- -- --
----- ---- ----- ---- ----
Total.................................................... $19.5 $2.8 $11.4 $3.8 $1.5
===== ==== ===== ==== ====
Fixed Rate Asset Accumulation Vehicles -- Products in this category require
the Company to pay a fixed rate for a certain period of time. The cash flows are
not interest sensitive because the products are written with a market value
adjustment, and the liabilities have protection against the early withdrawal of
funds through surrender charges. The primary risk associated with these products
is that the spread between investment return and credited rate is not sufficient
to earn the required return. Product examples include fixed rate guaranteed
investment contracts. Contract duration is reflected above and is
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dependent on the policyholder's choice of guarantee period. The weighted average
credited policyholder rate for these policyholder liabilities is 7.5 percent.
Indexed Asset Accumulation Vehicles -- Products in this category are
similar to the fixed rate asset accumulation vehicles, but require the Company
to pay a rate that is determined by an external index. The amount and/or timing
of cash flows will therefore vary based on the level of the particular index.
The risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk of changes in the index adversely
affecting profitability. The weighted average credited rate for these contracts
is 5.8 percent. Product examples include indexed guaranteed investment contracts
with an estimated duration of up to 2 years.
Interest Credited Asset Accumulation Vehicles -- Products in this category
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value, but are subject to
surrender charges for an initial period. The risks vary depending on the degree
of insurance element contained in the product. Product examples include
universal life contracts and fixed account of variable annuity contracts.
Liability duration is short to intermediate term and is reflected in the table
above. The average credited rate for these liabilities is 5.75 percent.
Long-Term Pay Out Liabilities -- Products in this category are long term in
nature and contain significant actuarial (mortality, morbidity) pricing risks.
The cash flows are not interest sensitive, but do vary based on the timing and
amount of benefit payments. The risks associated with these products are that
the benefits will exceed expected actuarial pricing and/or the investment return
is lower than assumed in pricing. Product examples include structured settlement
contracts, on-benefit annuities and long-term disability contracts. Contract
duration is generally 6 to 10 years but, at times, exceeds 30 years. Policy
liabilities under these contracts are not interest sensitive. Asset and
liability durations are matched with the cash flow characteristics of the
claims.
Short-Term Pay Out Liabilities -- These liabilities are short-term in
nature with a duration less than one year. Substantially all risks associated
with these products are determined by the non-investment contingencies such as
mortality or morbidity. Liquidity is of greater concern than the long-term
pay-out liabilities. Products include individual and group term contracts and
short-term disability contracts.
Separate Account Variable Products -- These represent products for which a
separate investment and liability account is maintained on behalf of the
policyholder who bears the investment risk subject, in certain cases, to minimum
guaranteed rates or account values. Investment strategy varies by fund choice,
as outlined in the prospectus or separate account plan of operations. Products
include variable annuities and variable life contracts. Separate account assets
and liabilities totaled $23.3 billion at December 31, 1994.
Life Operations -- Invested Asset Characteristics and Derivative Strategies to
Facilitate Asset-Liability Management
Invested assets in the life operations totaled $18.4 billion at December
31, 1994 and are comprised of asset-backed securities ($6.2 billion), bonds and
notes ($8.5 billion), inverse floating securities ($0.5 billion), and other
investments, primarily policy loans ($3.2 billion). The estimated maturities of
these fixed and variable rate investments, along with the respective yields at
December 31, 1994, are reflected below (in millions). Asset-backed securities
are distributed to maturity year based on the Corporation's estimate of the rate
of future prepayments of principal over the remaining life of the securities.
Expected maturities differ from contractual maturities reflecting borrower's
rights to call or prepay their obligations.
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33
1995 1996 1997 1998 1999 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------
ASSET BACKED SECURITIES
VARIABLE RATE*
Amortized Cost......................... $ 93 $ 141 $ 144 $ 109 $ 68 $ 452 $ 1,007
Market Value........................... $ 71 $ 166 $ 164 $ 129 $ 81 $ 310 $ 921
Taxable Equivalent Yield............... 6.93% 7.27% 6.99% 7.37% 7.66% 7.80% 7.47%
FIXED RATE
Amortized Cost......................... $ 768 $ 960 $ 548 $ 464 $ 816 $2,044 $ 5,600
Market Value........................... $ 772 $ 933 $ 519 $ 415 $ 757 $1,858 $ 5,254
Taxable Equivalent Yield............... 7.36% 6.89% 7.26% 7.12% 6.83% 7.20% 7.11%
BONDS AND NOTES
VARIABLE RATE*
Amortized Cost......................... $ 260 $ 130 $ 141 $ 25 $ 146 $ 373 $ 1,075
Market Value........................... $ 257 $ 126 $ 131 $ 25 $ 131 $ 320 $ 990
Taxable Equivalent Yield............... 6.79% 4.56% 5.40% 5.53% 6.41% 6.46% 6.15%
FIXED RATE
Amortized Cost......................... $1,272 $1,247 $1,143 $ 710 $ 903 $2,622 $ 7,897
Market Value........................... $1,256 $1,207 $1,093 $ 661 $ 820 $2,429 $ 7,466
Taxable Equivalent Yield............... 6.21% 6.06% 6.21% 6.21% 6.93% 7.17% 6.58%
INVERSE FLOATING
Amortized Cost......................... $ 14 $ 38 $ 56 $ 35 $ 40 $ 551 $ 734
Market Value........................... $ 14 $ 30 $ 43 $ 25 $ 25 $ 381 $ 518
Taxable Equivalent Yield............... 11.98% 7.73% 6.17% 8.32% 8.13% 7.50% 7.59%
TOTAL FIXED MATURITIES
Amortized Cost......................... $2,407 $2,516 $2,032 $1,343 $1,973 $6,042 $16,313
Market Value........................... $2,370 $2,462 $1,950 $1,255 $1,814 $5,298 $15,149
Taxable Equivalent Yield............... 6.71% 6.40% 6.50% 6.67% 6.90% 7.22% 6.84%
- ---------------
* Variable rate securities are instruments for which the coupon rates move
directly with an index rate. Included in the caption are the Company's
holdings of residuals which represent less than 1% of the Life operations
investment assets. Residuals, for which cost approximates market, have an
average life of 4.8 years and earn an average yield of 12.2%. Interest-only
securities, for which cost approximates market, have an average life of 7
years and earn an average yield of 10.7%.
In addition, other investments comprised primarily of policy loans, totaled
$3.2 billion at December 31, 1994. These loans, which carry a current weighted
average interest rate of 10%, are secured by the cash value of the life policy.
These loans do not mature in a conventional sense but expire in conjunction with
the supporting actuarial assumptions and developments.
Life investments are managed to conform with the various liability-driven
objectives discussed above. Derivatives play an important role in facilitating
the management of interest rate risk, in creating opportunities to develop asset
packages which efficiently fund product obligations, in hedging against
indexation risks which affect the value of certain liabilities, and in adjusting
broad investment risk characteristics when dictated by significant changes in
market risks. As an end user of derivatives, the Corporation uses a variety of
derivative financial instruments, including swaps, caps, floors and exchange
traded financial futures and options as a means of prudently hedging exposure to
price, foreign currency and/or interest rate risk on anticipated investment
purchases or existing assets and liabilities. The notional amounts of derivative
contracts represent the basis upon which pay and receive amounts are calculated
and are not reflective of credit risk. Credit risk is limited to the amounts
calculated to be due to the Corporation on such contracts. Payment obligations
between the Corporation and its counterparties are typically netted on a
quarterly basis. The Corporation has strict policies regarding the financial
stability and credit standing of its major counterparties and typically requires
credit enhancement requirements to further limit its credit risk. Notional
amounts pertaining to derivative financial instruments totaled $9.4 billion at
December 31, 1994 ($7.7 billion related to life investments and $1.7 billion on
the liabilities).
The following strategies are used to manage the aforementioned risks
associated with the Life obligations:
Anticipatory Hedging -- For certain liability types, the Company commits to
the price of the product in advance of the receipt of the associated premium or
deposit. To hedge the Company's expected cash
32
34
flows against adverse changes in market interest rates, the Company routinely
executes anticipatory hedges which immunize the Company against asset price
changes which would result from changes in market interest rates. Typically,
these hedges involve taking a long position in an interest rate future or swap
which has a duration equivalent to the anticipated investments, which in turn
approximate the duration of the associated liabilities. The notional amount of
derivatives used for anticipatory hedges totaled $1.1 billion at December 31,
1994.
Liability Risk Adjustments -- Several products obligate the Company to
credit a return to the contractholder which is indexed to a market rate.
Derivatives, typically in the form of swaps, are extensively used to convert the
specific liability indexation risk to a risk which is more common, such as a
fixed rate or a floating rate of LIBOR. By swapping the liability risk into a
more common asset risk, a broader array of assets may be effectively matched
against these liabilities. This strategy permits the customization of liability
indexation to meet customer objectives without the need to identify assets which
directly match each index. The notional amount of derivatives used for liability
risk adjustment totaled $1.7 billion at December 31, 1994.
Asset Hedges/Synthetic Asset Investments -- The selection of investment
risk characteristics is driven by the liability-specific needs of each
obligation. Investment needs may range from very short duration to very long
duration, from floating rate to fixed rate, from callable to non-callable. To
meet the obligations of life policyholders, investment managers consider a range
of available investment alternatives. In order to provide greater risk
diversification, the Company often invests in securities for which most, but not
all, of the desired investment characteristics are met. The Company may choose
to create a synthetic asset by combining two or more instruments to achieve the
desired investment characteristics. Many times, the unwanted risks can be
effectively managed through the use of derivatives. As an example,
currency-linked notes or inverse floating rate characteristics can be converted
to alternative fixed or floating rate notes with any currency or unwanted
interest risk eliminated or reduced. The choice of derivative instrument for
hedging depends upon the investment risk to be offset, the cost efficiency and
liquidity of the derivative instrument, as well as the ongoing need to review
the overall balance of asset and liability characteristics in the life
operations. The notional amount of derivatives used for hedges of physical or
synthetic assets totaled $3.0 billion at December 31, 1994.
Portfolio Duration Hedges -- The term "duration" refers to the degree of
change in the value or return of an asset (or group of assets) which results
from an external market change, such as a change in level of current interest
rates. As market conditions change, these duration characteristics sometimes
require adjustments in order to preserve the appropriate asset-liability
balance. As an example, a precipitous drop in interest rates may accelerate
mortgage prepayments and shorten the expected maturity of a portfolio of
mortgage securities. Duration hedges compensate for this risk by adjusting
average asset duration parameters. The notional amount of derivatives used for
duration hedges totaled $3.6 billion as of December 31, 1994.
The Corporation is committed to maintaining an effective risk management
discipline. Approved derivatives usage must support at least one of the
following objectives: to manage the risk to the operation arising from price,
interest rate and foreign currency volatility, to manage liquidity, and control
transaction costs. All investment activity in the Insurance operations is
subject to regular review and approval by the Insurance operation's Finance
Committee. Credit limits, diversification standards and review procedures for
all credit risk whether borrower, issuer, or counterparty have been established.
The life operations analyze the aggregate interest rate risk through the use of
a proprietary, multi-scenario cash flow projection model which encompasses all
liabilities and their associated investments, including derivatives.
33
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ITT
The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of ITT."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements and Schedules appearing on page
F-1 for a list of the financial statements and schedules filed as a part of
this report.
2. See Exhibit Index appearing on pages II-2 and II-3 for a list of
the exhibits filed or incorporated herein as a part of this report.
(b) On October 20, 1994, ITT filed a Form 8-K Current Report reporting
under Item 5 that it would seek offers to purchase its ITT Financial
Corporation subsidiary and would report the results for that company as
"Discontinued Operations." On December 15, 1994, ITT filed a Form 8-K
Current Report reporting under Item 5 certain clarifications and
expanded descriptions concerning accounting matters, including
insurance matters and derivative securities.
34
36
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
PAGE
-------
Report of Management.............................................................. F-2
Report of Independent Public Accountants.......................................... F-3
Consolidated Income for the three years ended December 31, 1994................... F-4
Consolidated Balance Sheet as of December 31, 1994 and 1993....................... F-5
Consolidated Cash Flow for the three years ended December 31, 1994................ F-6
Consolidated Retained Earnings for the three years ended December 31, 1994........ F-7
Consolidated Capital Stock and Surplus for the three years ended December 31, 1994 F-7
Cumulative Preferred Stock as of December 31, 1994 and 1993....................... F-7
Notes to Financial Statements..................................................... F-8-24
Business Segment Information...................................................... F-25
Geographical Information.......................................................... F-25
Quarterly Results for 1994 and 1993 (unaudited)................................... F-26
Export Sales (unaudited).......................................................... F-26
Valuation and Qualifying Accounts................................................. S-1
Supplementary Insurance Information............................................... S-2
Supplemental Information Concerning Property and Casualty Insurance Operations.... S-2
Reinsurance....................................................................... S-3
F-1
37
REPORT OF MANAGEMENT
The management of ITT Corporation 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.
ITT's financial statements are audited by Arthur Andersen LLP, independent
public accountants, elected by the shareholders. Management has made ITT'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.
ITT'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 Corporation'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.
ITT'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 ITT's employees. Management continually monitors the system of
internal controls for compliance. ITT'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 ITT'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.
The Audit Committee of the Board of Directors, composed of nonemployee
directors, meets periodically with management and with the independent public
accountants and internal auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities and to assure
their independent and free access to the Committee.
F-2
38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF ITT CORPORATION:
We have audited the financial statements of ITT Corporation (a Delaware
corporation) and subsidiaries as of December 31, 1994 and 1993, and for each of
the three years in the period ended December 31, 1994, as described in the
accompanying Index to Financial Statements and Schedules. These financial
statements and the schedules referred to below are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ITT Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to financial statements, the
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. The Corporation also changed effective January 1, 1994,
its method used to discount certain workers compensation liabilities and its
accounting method for certain marketing and start-up costs.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Financial Statements and Schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
New York, New York
February 2, 1995
F-3
39
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED INCOME
IN MILLIONS EXCEPT PER SHARE
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
------- ------- -------
RESULTS FOR YEAR
Sales and Revenues
Insurance........................................................................ $11,102 $10,338 $ 9,862
Products......................................................................... 7,647 6,529 6,762
Services......................................................................... 4,871 4,262 4,336
------- ------- -------
23,620 21,129 20,960
Costs and Expenses
Insurance........................................................................ 10,291 9,619 10,375
Products (including selling and general expenses of $606, $618 and $654)......... 7,148 6,213 6,656
Services (including selling and general expenses of $495, $444 and $481)......... 4,556 4,027 4,252
Other............................................................................ 120 206 158
------- ------- -------
1,505 1,064 (481)
Equity in earnings of Alcatel N.V.................................................. -- -- 97
Gain on sale of Alcatel N.V........................................................ -- -- 942
Interest expense (net of interest income of $129, $168 and $160)................... (208) (147) (169)
Miscellaneous income (expense), net................................................ (38) 13 (3)
------- ------- -------
1,259 930 386
Income taxes....................................................................... (389) (242) (43)
Minority equity.................................................................... (18) (27) (27)
------- ------- -------
Income from Continuing Operations.................................................. 852 661 316
Discontinued Operations, net of tax (expense) benefit of $(86), $(133) and $330.... 181 302 (576)
Extraordinary Item, net of tax benefit of $25...................................... -- (50) --
Cumulative Effect of Accounting Changes, net of tax benefit of $8 and $322......... (11) -- (625)
------- ------- -------
Net Income (Loss).................................................................. $ 1,022 $ 913 $ (885)
======= ======= =======
EARNINGS (LOSS) PER SHARE
Income from Continuing Operations
Primary.......................................................................... $ 7.10 $ 5.22 $ 2.45
Fully Diluted*................................................................... $ 6.66 $ 4.95 $ 2.19
Discontinued Operations
Primary.......................................................................... $ 1.57 $ 2.51 $ (4.92)
Fully Diluted*................................................................... $ 1.45 $ 2.33 $ (4.38)
Extraordinary Item
Primary.......................................................................... $ -- $ (.41) $ --
Fully Diluted.................................................................... $ -- $ (.38) $ --
Cumulative Effect of Accounting Changes
Primary.......................................................................... $ (.10) $ -- $ (5.46)
Fully Diluted*................................................................... $ (.09) $ -- $ (4.71)
Net Income (Loss)
Primary.......................................................................... $ 8.57 $ 7.32 $ (7.93)
Fully Diluted*................................................................... $ 8.02 $ 6.90 $ (6.90)
======= ======= =======
AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY........................................ 115 120 117
======= ======= =======
AVERAGE COMMON EQUIVALENT SHARES -- FULLY DILUTED.................................. 125 129 132
======= ======= =======
- ---------------
* The reported net loss in 1992 causes the calculation of the fully diluted loss
per share in 1992 to be anti-dilutive. In such a case, generally accepted
accounting principles suggest the fully diluted loss per share to be the same
as the primary loss per share; however, the Corporation has presented the
actual calculated amount in order that all calculations and comparisons with
previously reported and future amounts be on a consistent basis.
The accompanying notes to financial statements are an integral part of the
above statement.
F-4
40
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
IN MILLIONS EXCEPT FOR SHARES AND PER SHARE
DECEMBER 31,
----------------------
1994 1993
-------- -------
ASSETS
Cash and Cash Equivalents.................................................................. $ 568 $ 1,135
Receivables, net........................................................................... 4,779 5,011
Inventories................................................................................ 1,049 963
Insurance Investments...................................................................... 32,453 30,582
Reinsurance Recoverables................................................................... 12,220 11,577
Deferred Policy Acquisition Costs.......................................................... 2,525 2,024
Plant, Property and Equipment, net......................................................... 5,346 3,370
Other Assets............................................................................... 5,261 4,401
Assets of Discontinued Finance Operations.................................................. 13,398 11,498
Insurance Separate Account Assets.......................................................... 23,255 16,637
-------- -------
$100,854 $87,198
======== =======
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities --
Policy liabilities and accruals.......................................................... $ 45,620 $40,884
Insurance debt........................................................................... 1,498 963
Other debt (including ESOP of $562 and $603)............................................. 4,909 3,514
Accounts payable and accrued liabilities................................................. 3,523 3,361
Other liabilities........................................................................ 3,856 3,563
Liabilities of Discontinued Finance Operations........................................... 12,734 10,626
Insurance separate account liabilities................................................... 23,255 16,637
-------- -------
95,395 79,548
-------- -------
Stockholders Equity --
Cumulative preferred stock (aggregate liquidation value of $695 as of December 31,
1994).................................................................................. 655 673
Common stock: Authorized 200,000,000 shares, $1 par value
Outstanding 105,672,252 and 117,560,877.................................... 106 118
Deferred compensation -- ESOP............................................................ (562) (603)
Cumulative translation adjustments....................................................... (113) (206)
Unrealized gain (loss) on securities, net of tax......................................... (1,376) 80
Retained earnings........................................................................ 6,749 7,588
-------- -------
5,459 7,650
-------- -------
$100,854 $87,198
======== =======
The accompanying notes to financial statements are an integral part of the above
statement.
F-5
41
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED CASH FLOW
IN MILLIONS
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1993 1992
-------- -------- --------
OPERATING ACTIVITIES
Net Income (Loss).............................................................. $ 1,022 $ 913 $ (885)
Discontinued Operations........................................................ (181) (302) 576
Extraordinary Item............................................................. -- 50 --
Cumulative Effect of Accounting Changes........................................ 11 -- 625
-------- -------- --------
Income from Continuing Operations.......................................... 852 661 316
Adjustments to Income from Continuing Operations:
Depreciation and amortization................................................ 597 509 467
Provision for doubtful receivables........................................... 66 48 45
Gain on divestments -- pretax................................................ (9) (34) (916)
Gain on sale of portfolio securities -- pretax............................... (90) (155) (443)
Change in receivables, inventories, payables and accrued liabilities......... (139) 386 206
Accrued and deferred taxes................................................... (195) (288) (239)
Increase in liability for policy benefits and unpaid claims.................. 610 233 1,873
Increase in deferred policy acquisition costs................................ (484) (359) (235)
Decrease in reinsurance and other related assets............................. 241 244 107
Other, net................................................................... (69) (40) 5
-------- -------- --------
Cash from continuing operations................................................ 1,380 1,205 1,186
Cash from discontinued operations.............................................. 157 344 98
-------- -------- --------
Cash from operating activities............................................. 1,537 1,549 1,284
-------- -------- --------
INVESTING ACTIVITIES
Additions to plant, property and equipment..................................... (727) (486) (536)
Acquisitions................................................................... (1,667) (180) (26)
Proceeds from divestments...................................................... 872 900 1,077
Purchase of insurance investments.............................................. (18,962) (27,372) (22,278)
Sale and maturity of insurance investments..................................... 15,702 25,050 19,900
Other, net..................................................................... 7 7 (92)
-------- -------- --------
Cash used for investing activities......................................... (4,775) (2,081) (1,955)
-------- -------- --------
FINANCING ACTIVITIES
Short-term debt, net........................................................... 1,823 (324) 448
Long-term debt issued.......................................................... 273 341 48
Long-term debt repaid.......................................................... (547) (351) (394)
Investment life contracts, net................................................. 2,584 1,734 1,617
Repurchase of common stock..................................................... (1,016) (306) (105)
Redemption of subsidiary preferred stock....................................... (178) (29) --
Dividends paid................................................................. (280) (277) (270)
Other, net..................................................................... (12) 29 (125)
-------- -------- --------
Cash from financing activities............................................. 2,647 817 1,219
-------- -------- --------
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS.............................. 24 (26) (27)
-------- -------- --------
Increase (decrease) in Cash and Cash Equivalents............................... (567) 259 521
Cash and Cash Equivalents -- Beginning of Year................................. 1,135 876 355
-------- -------- --------
CASH AND CASH EQUIVALENTS -- END OF YEAR....................................... $ 568 $ 1,135 $ 876
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest..................................................................... $ 386 $ 339 $ 393
======== ======== ========
Income taxes................................................................. $ 646 $ 538 $ 234
======== ======== ========
The accompanying notes to financial statements are an integral part of the above
statement.
F-6
42
ITT CORPORATION AND SUBSIDIARIES
CONSOLIDATED RETAINED EARNINGS
IN MILLIONS EXCEPT PER SHARE
YEARS ENDED DECEMBER 31,
--------------------------------
1994 1993 1992
------ ------ ------
Balance -- Beginning of Year..................................................... $7,588 $7,058 $8,202
Net Income (Loss).............................................................. 1,022 913 (885)
Dividends declared -- Cumulative preferred stock, net of tax benefit........... (36) (36) (43)
Common stock -- $1.98, $1.98 and $1.84 per share............................. (228) (235) (216)
Common stock of ITT Rayonier................................................. (621) -- --
Repurchases of Common Stock.................................................. (976) (112) --
------ ------ ------
Balance -- End of Year........................................................... $6,749 $7,588 $7,058
====== ====== ======
CONSOLIDATED CAPITAL STOCK AND SURPLUS
IN MILLIONS EXCEPT FOR SHARES
CUMULATIVE
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------- CAPITAL
SHARES AMOUNT SHARES AMOUNT SURPLUS
---------- ------ ----------- ------ -------
Balance -- December 31, 1991....................... 14,714,099 $ 967 114,422,056 $114 $ 8
Redemption of ESOP Series preferred stock........ (111,859) (8) -- -- --
Stock incentive plans............................ -- -- 361,031 -- 16
Stock conversions................................ (3,647,710) (174) 5,940,563 6 168
Redemptions and repurchases...................... (1,059,777) (98) (1,664,518) (1) (116)
---------- ----- ----------- ---- -----
Balance -- December 31, 1992....................... 9,894,753 687 119,059,132 119 76
Redemption of ESOP Series preferred stock........ (175,964) (14) -- -- (2)
Stock incentive plans............................ -- -- 1,915,760 2 121
Stock conversions................................ (137,460) -- 173,993 -- --
Repurchases...................................... -- -- (3,588,008) (3) (195)
---------- ----- ----------- ---- -----
Balance -- December 31, 1993....................... 9,581,329 673 117,560,877 118 --
Redemption of ESOP Series preferred stock........ (179,555) (13) -- -- --
Stock conversions................................ (99,345) (5) 116,428 -- 5
Stock incentive plans............................ -- -- 283,463 -- 18
Repurchases...................................... -- -- (12,288,516) (12) (23)
---------- ----- ----------- ---- -----
Balance -- December 31, 1994....................... 9,302,429 $ 655 105,672,252 $106 $ --
========== ===== =========== ==== =====
CUMULATIVE PREFERRED STOCK
STATED VALUE IN MILLIONS
PER SHARE --
DECEMBER 31, 1994 1994 1993
------------------------- -------------------- --------------------
CONVERSION REDEMPTION STATED STATED
RATE PRICE SHARES VALUE SHARES VALUE
---------- ---------- ---------- ------ ---------- ------
2.25 Series N....................... 1.2660 $85.00 545,546 $ 2 581,535 $ 2
5.221 ESOP Series................... 1.1191 77.20 8,756,883 653 8,999,794 671
--------- ---- --------- ----
9,302,429 $655 9,581,329 $673
========= ==== ========= ====
The Corporation has authorized 50,000,000 shares of cumulative preferred
stock, without par value, which are issuable in series. The ESOP Series shares
are redeemable at $77.20 per share reduced annually through June 30, 1999 to
$74.59 per share.
Liquidation preference on shares outstanding is $34 per share for the
Series N and $77.20 per share for the ESOP Series.
The accompanying notes to financial statements are an integral part of the above
statements.
F-7
43
NOTES TO FINANCIAL STATEMENTS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
ACCOUNTING POLICIES
Consolidation Principles: The financial statements include the accounts of
all majority-owned subsidiaries. All significant intercompany transactions have
been eliminated.
Insurance Operations: Policy acquisition costs, representing commissions,
premium taxes and certain other underwriting costs of developing and
implementing new insurance programs, are deferred and amortized over the periods
benefited. Estimates of future revenues, including investment income, are
compared with estimates of future costs, including amortization of policy
acquisition costs, to determine if policies currently in force are expected to
result in a net loss. No revenue deficiencies have been determined in the
periods presented.
The liability for property and casualty claims includes amounts determined
by claim adjusters for reported losses and estimates for unreported claims based
on past experience. The ultimate loss with respect to asbestos and
environmental-related claims is particularly uncertain and cannot be estimated
using conventional reserving techniques due to inconsistencies in past
experience as discussed in "Commitments and Contingencies". Certain liabilities
for unpaid claims are discounted at an interest rate of 8.1% at December 31,
1994. Such liabilities relate to permanently disabled claimants, terminated
reinsurance treaties and certain reinsurance contracts that fund loss runoffs
for unrelated parties. The discount amounted to $432 and $362 as of December 31,
1994 and 1993. Unearned premiums are calculated principally by the application
of monthly pro rata fractions for the unexpired terms of policies in force.
The liability for future life insurance payments, excluding investment and
universal life-type contracts, is computed by the net level premium method,
based on estimated future investment yields, withdrawals, mortality and other
assumptions made at the time the policies are issued. The liability for
investment and universal life-type contracts is stated at policyholder account
values before surrender charges. Revenue on these contracts represents
policyholder charges. The cost of acquiring new business is recognized over the
term of the contracts in proportion to estimated gross profits.
The Consolidated Balance Sheet includes insurance separate account assets
and liabilities at market value. Separate account assets and liabilities
represent funds maintained in accounts of policyholders to meet specific
investment objectives in exchange for a management fee. Policyholders bear the
investment risk subject, in certain cases, to minimum guaranteed rates or
account values and investment income (including investment gains and losses)
accrues directly to policyholders. The assets of each account are segregated and
are not subject to claims that arise out of any other business of the
Corporation. Investment income (including investment gains and losses) on
insurance separate account assets are not reflected in the Consolidated Income
Statement. Separate account management fees, net of minimum guarantees, were
$256, $189 and $92 in 1994, 1993 and 1992.
The Corporation, primarily through its insurance operations, uses a variety
of derivative financial instruments, including swaps, caps, floors and exchange
traded financial futures and options as a means of hedging exposure to price,
foreign currency and/or interest rate risks. The Corporation and its
subsidiaries are end-users and do not utilize these instruments for speculative
purposes. See "Insurance Investments and Derivative Financial Instruments" for
relevant accounting policies and additional discussion.
Hotel Operations: As of December 31, 1994 the Corporation operates 143
hotels under long-term management agreements. These agreements effectively
convey to the Corporation the right to use the hotel properties in exchange for
payments to the properties' owners which are based primarily on the hotels'
profitability. Accordingly, the Corporation includes the operating results of
hotel properties under long-term management agreements in its consolidated
financial statements. Revenues related to these hotel properties were $2.6
billion, $2.4 billion and $2.3 billion for 1994, 1993 and 1992 and amounts
provided for payments to the property owners for the use of the hotel properties
were $.5 billion, $.4 billion and $.4 billion for 1994, 1993 and 1992.
F-8
44
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Cash and Cash Equivalents: The Corporation considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Inventories: Inventories are generally valued at the lower of cost
(first-in, first-out) or market. In manufacturing operations, a full absorption
procedure is employed using standard cost techniques. Revenue from long-term
contracts is recognized on the percentage-of-completion method. Expected losses
on long-term contracts and potential losses from obsolete and slow-moving
inventories are provided for in the current period.
Plant, Property and Equipment: Plant, property and equipment, including
capitalized interest applicable to major project expenditures, are recorded at
cost. The Corporation normally claims the maximum depreciation deduction
allowable for tax purposes. In general, for financial reporting purposes,
depreciation is provided on a straight-line basis over the useful economic lives
of the assets involved. Accumulated depreciation was $3,490 and $2,974 at
December 31, 1994 and 1993.
Revenue Recognition: Product sales are recognized upon shipment and
service revenue is recognized when the services have been rendered.
Research and Development: Research and development costs are expensed as
incurred. Such costs included in costs and expenses were $396, $460 and $502 in
1994, 1993 and 1992, respectively.
Earnings Per Share: Fully diluted earnings per share is based on the
weighted average of common stock equivalents and assumes conversion of
convertible preferred stock, including the ESOP Series. Net income applicable to
fully diluted earnings per share consists of reported net income or loss
adjusted for the amount, net of tax, the Corporation would be required to
contribute to the ESOP if the ESOP Series preferred shares were converted into
common stock.
Primary earnings per share is based, in 1994 and 1993, on the weighted
average of common and common equivalent shares outstanding, which include Series
N convertible preferred stock and stock options. In 1992, common equivalent
shares, which include Series K and N convertible preferred stock and stock
options, have not been considered since their effect is anti-dilutive. With
respect to options, it is assumed that proceeds received upon exercise will be
used to acquire common stock of the Corporation. In 1994 and 1993, net income
applicable to primary earnings per share consists of the reported net income
adjusted for dividend requirements on preferred stock not considered common
stock equivalents, net of the related tax benefits. In 1992, net income
applicable to primary earnings per share consists of reported net loss adjusted
for dividend requirements on all preferred stock series, net of the related tax
benefits.
Reclassifications: Certain amounts in the prior years financial statements
have been reclassified to conform with the current year presentation.
CHANGES IN ACCOUNTING PRINCIPLES
Changes Adopted in 1994: During the 1994 first quarter, the Corporation
adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The new standard requires, among other things, that securities be
classified as "held-to-maturity", "available for sale" or "trading" based on the
company's intentions with respect to the ultimate disposition of the security
and its ability to effect those intentions. The classification determines the
appropriate accounting carrying value (cost basis or fair value) and, in the
case of fair value, whether the adjustment impacts Stockholders Equity directly
or is reflected in the Statement of Income. Investments in equity securities had
previously been recorded at fair value with the corresponding impact included in
Stockholders Equity. Under SFAS No. 115, the Corporation's portfolios are
classified as "available for sale" and accordingly, investments are reflected at
fair value with the corresponding impact included as a component of Stockholders
Equity designated "Unrealized gain (loss) on securities, net of tax". At
December 31, 1994, the unrealized loss on securities, net of tax was $1.4
billion.
In adopting SFAS No. 115, the Corporation followed the guidelines of the
Emerging Issues Task Force (EITF) issue no. 93-18 which prescribes specific
accounting treatment with respect to mortgage-
F-9
45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
backed interest-only investments. EITF 93-18 reached the conclusion that the
measure of impairment of these instruments should be changed from undiscounted
cash flows to fair value. Accordingly, the amortized cost basis of such
instruments that were determined to have other-than-temporary impairment losses
at the time of initial adoption of SFAS No. 115 have been written down to fair
value and reflected as a cumulative effect of accounting change as of January 1,
1994. The writedown totaled $36 million after tax or $0.29 per fully diluted
share.
Also in the 1994 first quarter, the Corporation changed its method used to
discount long-term tabular workers compensation liabilities from a statutory
interest rate to an appropriate market interest rate. The market rate, which
approximated 7%, represents the rate of return the Corporation could receive on
risk-free investments with maturities comparable to those of the liabilities
being discounted. At December 31, 1993, those liabilities were discounted at 3
to 3 1/2% in accordance with statutory insurance guidelines. A $42 million after
tax or $0.33 per fully diluted share benefit was recorded as a cumulative effect
of accounting change in the accompanying Consolidated Income Statement.
During the 1994 fourth quarter, the Corporation changed its method of
accounting for certain marketing and start-up costs to expense such costs as
incurred effective January 1, 1994. Such costs related principally to student
recruitment at ITT Educational Services and had previously been deferred and
amortized. A charge of $17 million after tax or $0.13 per fully diluted share
has been recorded as a "Cumulative Effect of Accounting Change" in the
accompanying Consolidated Income Statement. The 1994 earnings impact of this
change in accounting was $5 after tax or $0.04 per fully diluted share.
Changes Adopted in 1992: Effective January 1, 1992, the Corporation
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions" and SFAS No. 112, "Employers' Accounting for Postemployment
Benefits", using the immediate recognition method. Accordingly, cumulative
adjustments (through December 31, 1991) of $580 after tax ($4.37 per fully
diluted share) and $45 after tax ($.34 per fully diluted share), respectively,
have been recognized at January 1, 1992.
The Corporation's cash flows were not impacted by these changes in
accounting principles.
ALCATEL N.V.
In July 1992, the Corporation sold its 30% equity interest in Alcatel N.V.
(Alcatel) to its joint venture partner, Alcatel Alsthom, resulting in a pretax
gain of $942 or $622 after tax ($4.71 per fully diluted share). The Corporation
received cash at the closing of $1 billion, two notes payable in 1993 and 1994
valued at $1.4 billion and 9.1 million shares of Alcatel Alsthom stock recorded
at $806. The Alcatel Alsthom stock, which is carried at cost, is included in
"Other Assets" in the accompanying Balance Sheet and has a value of $.8 billion
and $1.3 billion based on the quoted market prices at December 31, 1994 and
1993, respectively.
Equity in earnings of Alcatel in 1992 represent the Corporation's 30%
equity in after tax income of Alcatel, adjusted for amortization of the amount
by which the Corporation's investment exceeded its equity in the joint venture,
over periods not longer than 40 years.
RECEIVABLES
Receivables were $4,779 and $5,011 at December 31, 1994 and 1993, net of
allowances for doubtful accounts of $157 and $127 and included insurance
premiums receivable and agents' balances of $2,064 and $1,842, trade receivables
of $2,572 and $2,243 and other receivables of $300 and $1,053. Other receivables
in 1993 included notes receivable from the sale of Alcatel totaling $785, which
was collected during July 1994.
F-10
46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAX
Income tax data from continuing operations is as follows:
1994 1993 1992
------ ----- -----
Pretax income
U.S.................................................................................. $ 839 $ 641 $ 196
Foreign.............................................................................. 420 289 190
------ ----- -----
$1,259 $ 930 $ 386
------ ----- -----
Provision for income tax
Current
U.S. Federal....................................................................... $ 369 $ 390 $ 186
State and local.................................................................... 9 15 8
Foreign............................................................................ 201 130 76
------ ----- -----
579 535 270
------ ----- -----
Deferred
U.S. Federal....................................................................... (182) (263) (205)
Foreign and other.................................................................. (8) (30) (22)
------ ----- -----
(190) (293) (227)
------ ----- -----
$ 389 $ 242 $ 43
====== ====== ======
No provision was made for U.S. taxes payable on undistributed foreign
earnings amounting to approximately $1.1 billion since these amounts are
permanently reinvested.
Deferred income taxes represent the tax effect related to recording
revenues and expenses in different periods for financial reporting and tax
purposes. The December 31, 1994 and 1993 Balance Sheets include net U.S. Federal
deferred tax assets of $1,998 and $1,098, respectively (included in "Other
Assets"), and net foreign and other deferred tax liabilities of $180 and $198,
respectively (included in "Other Liabilities").
Deferred tax assets (liabilities), for which no valuation allowances have
been provided, include the following:
1994 1993
------------------- -------------------
U.S. FOREIGN U.S. FOREIGN
FEDERAL & OTHER FEDERAL & OTHER
------- ------- ------- -------
Unrealized (gain) loss on insurance investments........................ $ 645 $ 11 $ (22) $ (19)
Discounted insurance loss reserves..................................... 710 -- 672 --
Other insurance related items.......................................... 305 (72) 255 (60)
Employee benefits...................................................... 300 28 267 24
Reserve for bad debts.................................................. 41 -- 32 --
Accelerated depreciation............................................... (77) (178) (78) (156)
Installment sales...................................................... -- -- (108) --
Reserves and other..................................................... 74 31 80 13
------ ----- ------ -----
$1,998 $(180) $1,098 $(198)
====== ===== ====== =====
A reconciliation of the tax provision at the U.S. statutory rate to the
provision for income tax as reported is as follows:
1994 1993 1992
----- ----- -----
Tax provision at U.S. statutory rate..................................................... $ 441 $ 326 $ 131
Tax exempt interest...................................................................... (45) (25) (25)
Change in U.S. tax law................................................................... -- (32) --
Foreign tax rate differential............................................................ 3 (23) (39)
Other.................................................................................... (10) (4) (24)
----- ----- -----
Provision for income tax................................................................. $ 389 $ 242 $ 43
===== ===== =====
F-11
47
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEBT
Borrowings, as of December 31, excluding those included in "Liabilities of
Discontinued Finance Operations," consisted of:
INSURANCE OTHER
---------------- -----------------
1994 1993 1994 1993
------ ----- ------ ------
Commercial paper............................................................. $ 646 $250 $1,708 $ 268
Bank loans and other short-term.............................................. 230 110 483 536
Long-term.................................................................... 622 603 2,156 2,107
ESOP debt.................................................................... -- -- 562 603
------ ---- ------ ------
$1,498 $963 $4,909 $3,514
====== ==== ====== ======
The fair value of the Corporation's commercial paper and bank loans and
other short-term loans approximates carrying value. The weighted average
interest rate for commercial paper was 6.0% and 5.6% at December 31, 1994 and
1993, respectively for Insurance and 5.9% and 4.6% for Other. The weighted
average interest rate of bank loans and other short-term borrowings was 6.1% and
3.3% at December 31, 1994 and 1993, respectively, for Insurance and 6.0% and
7.0% for Other. Bank loans and other short-term debt are drawn down under lines
of credit, some of which extend for a fixed term of several years. As of
December 31, 1994, the Corporation had unused credit lines of $3.5 billion,
approximately 60% of which supports outstanding commercial paper. Separately,
the Corporation had unused credit lines of $4.6 billion for Finance,
substantially all of which supports outstanding commercial paper of the Finance
segment included in "Liabilities of Discontinued Finance Operations."
Long-term debt maturities and interest rate percentages at December 31
were:
BELOW 6.0- 7.0- 8.0- 9.0- OVER
6 6.99 7.99 8.99 9.99 10 TOTAL
----- ---- ---- ------ ---- ---- ------
1995................................................ $ 77 $ 27 $ -- $ -- $ 3 $ 74 $ 181
1996................................................ 206 26 227 384 3 -- 846
1997................................................ -- 78 -- 11 -- 112 201
1998................................................ -- 42 -- 300 -- 30 372
1999................................................ -- 16 59 28 -- -- 103
Thereafter.......................................... -- 240 267 300 400 14 1,221
---- ---- ---- ------ ---- ---- ------
Total -- 1994....................................... $283 $429 $553 $1,023 $406 $230 $2,924
==== ==== ==== ====== ==== ==== ======
Total -- 1993....................................... $619 $170 $434 $ 851 $577 $217 $2,868
==== ==== ==== ====== ==== ==== ======
The balances as of December 31, 1994 and 1993 exclude amortizable debt
discounts of $146 and $158, respectively.
The estimated fair value of long-term debt at December 31, 1994 and 1993 is
$2,869 and $3,071, based on discounted cash flows using the Corporation's
incremental borrowing rates for similar arrangements.
ESOP debt of $562 and $603 as of December 31, 1994 and 1993, respectively,
is included in the Consolidated Balance Sheet due to the Corporation's guarantee
of its repayment by the ESOP and is offset by a reduction in Stockholders Equity
as deferred compensation. The debt is at fixed rates ranging between 8.4% and
8.8% and matures in varying amounts through 2004. The fair value of ESOP debt at
December 31, 1994 and 1993 is $566 and $686 based on discounted cash flows using
incremental borrowing rates for similar arrangements. Interest and principal
repayments are funded by dividends on the ESOP Series preferred stock and Plan
contributions from the Corporation.
The Corporation enters into interest rate swap agreements with major
financial institutions to manage exposure from fluctuations in interest rates as
described in "Insurance Investments and Derivative Financial Instruments".
F-12
48
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CAPITAL STOCK
During 1994, 12,288,516 common shares were repurchased for $1.0 billion.
The excess over par value was charged to Capital Surplus to the extent available
and then to Retained Earnings. In 1993, 3,588,008 common shares were repurchased
for $310 and in 1992, 1,664,518 common shares were repurchased for $109. Also in
1992, the Corporation called for the redemption of all outstanding $4.00
Convertible Series K and $5.00 Convertible Series O Cumulative Preferred Stock
at $100 per share plus accrued dividends. Redemptions totaled $106, which
reduced common equivalent shares by an additional 1,562,559 shares with the
balance converted to 5,822,118 shares of common stock.
As of December 31, 1994, 21,144,994 shares of common stock were reserved in
connection with convertible preferred stock and incentive stock plans. In
addition, shares held in treasury totaled 39,475,756.
FOREIGN CURRENCY
Balance sheet accounts are translated at the exchange rates in effect at
each year end and income accounts are translated at the average rates of
exchange prevailing during the year. The national currencies of foreign
operations are generally the functional currencies. Cumulative translation
adjustments are adjusted for contracts that hedge the Corporation's foreign
investments, when the differential to be paid or received fluctuates with the
foreign exchange rate.
Translation adjustments recorded in a separate component of Stockholders
Equity were:
1994 1993 1992
----- ----- -----
Balance -- Beginning of year............................................................ $(206) $ (92) $ 107
Translation of foreign currency financial statements.................................. 110 (125) (226)
Hedges of net foreign investments..................................................... (17) 11 42
Sale or liquidation of investments.................................................... -- -- (15)
----- ----- -----
Balance -- End of year.................................................................. $(113) $(206) $ (92)
===== ===== =====
LEASES AND RENTALS
As of December 31, 1994, minimum rental commitments under operating leases
were $216, $186, $154, $123 and $102 for 1995, 1996, 1997, 1998 and 1999. For
the remaining years, such commitments amounted to $695, aggregating total
minimum lease payments of $1,476.
Rental expenses for operating leases were $256, $268 and $287 for 1994,
1993 and 1992, respectively.
MISCELLANEOUS INCOME (EXPENSE)
Miscellaneous income (expense) included the following:
1994 1993 1992
---- ---- ----
Gain on sale of 17% of common stock of Educational Services, Inc........................... $ 10 $ -- $--
Expenses of terminated gaming project...................................................... (16) -- --
Gain (loss) on disposition of businesses................................................... (16) 23 (1)
Other income (expense)..................................................................... (16) (10) (2)
---- ---- ----
$(38) $ 13 $(3)
==== ==== ===
EMPLOYEE BENEFIT PLANS
Pension Plans -- The Corporation and its subsidiaries sponsor numerous
pension plans. The plans are funded with trustees, except in some countries
outside the U.S. where funding is not required. The plans' assets are comprised
of a broad range of domestic and foreign securities, fixed income investments
and real estate.
F-13
49
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Total pension expenses were:
1994 1993 1992
----- ----- -----
Defined Benefit Plans
Service cost.......................................................................... $ 146 $ 123 $ 128
Interest cost......................................................................... 324 309 293
Return on assets...................................................................... (49) (574) (182)
Net amortization and deferral......................................................... (228) 294 (68)
----- ----- -----
Net periodic pension cost............................................................. 193 152 171
Other Pension Cost
Defined contribution (savings) plans.................................................. 44 42 41
Other................................................................................. 6 6 5
----- ----- -----
Total Pension Expense............................................................... $ 243 $ 200 $ 217
===== ===== =====
U.S. pension expenses included in the net periodic pension costs in the
table above were $115, $85 and $100 for 1994, 1993 and 1992.
The following table sets forth the funded status of the pension plans,
amounts recognized in the Corporation's Balance Sheet at December 31, 1994 and
1993, and the principal weighted average assumptions inherent in their
determination:
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------- --------------------
DOMESTIC FOREIGN DOMESTIC FOREIGN
-------- ------- -------- -------
Actuarial present value of benefit obligations --
Vested benefit obligation......................................... $2,693 $ 789 $2,862 $ 714
Accumulated benefit obligation.................................... $2,871 $ 823 $2,972 $ 745
====== ===== ====== =====
Projected benefit obligation........................................ $3,248 $ 939 $3,518 $ 902
Plan assets at fair value........................................... 3,039 356 3,172 380
------ ----- ------ -----
Projected benefit obligation (in excess of) plan assets............. (209) (583) (346) (522)
Unrecognized net (gain) loss........................................ 396 (41) 597 37
Unrecognized net obligation (asset)................................. (32) 35 (37) 34
------ ----- ------ -----
Pension asset (liability) recognized in the balance sheet........... $ 155 $(589) $ 214 $(451)
====== ===== ====== =====
Discount rate....................................................... 8.50% 8.27% 7.50% 7.71%
Rate of return on invested assets................................... 9.75% 8.54% 9.75% 8.27%
Salary increase assumption.......................................... 4.9% 4.6% 5.5% 5.6%
====== ===== ====== =====
For substantially all domestic plans, assets exceed accumulated benefits
and, for substantially all foreign plans, accumulated benefits exceed the
related assets.
Investment and Savings Plan -- The ITT Investment and Savings Plan for
Salaried Employees includes an Employee Stock Ownership Plan (ESOP) feature. In
1989, ITT sold to the ESOP 9,384,951 shares of a new series of Cumulative
preferred stock at a price of $74.5875 per share, which was financed through
borrowings by the ESOP guaranteed by ITT. Shares are allocated to participants
as a percent of each covered employee's salary and respective contribution. At
December 31, 1994, 2,544,514 shares were allocated to participants.
Postretirement Health and Life -- The Corporation and its subsidiaries
provide health care and life insurance benefits for certain eligible retired
employees. Effective January 1, 1992, the Corporation adopted SFAS No. 106,
using the immediate recognition method for all benefits accumulated to date.
The Corporation has prefunded a portion of the health care and life
insurance obligations through trust funds where such prefunding can be
accomplished on a tax effective basis. Postretirement health
F-14
50
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
care and life insurance benefits expense (excluding the cumulative catch-up
adjustment in 1992) was comprised of the following:
1994 1993 1992
---- ---- ----
Service cost............................................................................... $ 16 $ 11 $ 21
Interest cost.............................................................................. 52 50 62
Return on assets........................................................................... (2) (12) (10)
Net amortization and deferral.............................................................. (42) (27) (16)
---- ---- ----
Net periodic expense................................................................... $ 24 $ 22 $ 57
==== ==== ====
The following table sets forth the funded status of the postretirement
benefit plans other than pensions, amounts recognized in the Corporation's
Balance Sheet at December 31, 1994 and 1993 and the principal weighted average
assumptions inherent in their determination:
1994 1993
----- -----
Accumulated postretirement benefit obligation.................................................... $ 679 $ 688
Plan assets at fair value........................................................................ 191 169
----- -----
Accumulated postretirement benefit obligation (in excess of) plan assets......................... (488) (519)
Unrecognized net (gain)/loss..................................................................... (42) 40
Unrecognized past service liability.............................................................. (325) (350)
----- -----
Liability recognized in the balance sheet........................................................ $(855) $(829)
===== =====
Discount rate.................................................................................... 8.50% 7.50%
Rate of return on invested assets................................................................ 9.75% 9.75%
Ultimate health care trend rate.................................................................. 6.00% 6.00%
===== =====
The assumed rate of future increases in the per capita cost of health care
(the health care trend rate) was 11.0% for 1994, decreasing ratably to 6.0% in
the year 2001. Increasing the table of health care trend rates by one percent
per year would have the effect of increasing the accumulated postretirement
benefit obligation by $53 and the annual expense by $5. To the extent that the
actual experience differs from the inherent assumptions, the effect will be
amortized over the average future service of the covered active employees.
STOCK INCENTIVE PLANS
The Corporation's stock option incentive plans provide for the awarding of
options on common shares to employees, exercisable over ten-year periods.
Certain options become exercisable upon the attainment of specified market price
appreciation of the Corporation's common shares or at nine years after the date
of grant, while the remaining options become exercisable over a three-year
period commencing with the date of grant. The exercise price per share is the
fair market value on the date each option is granted.
F-15
51
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the activity in common shares subject to
options for the three years ended December 31, 1994:
OPTION PRICE SHARES
--------------- ------
January 1, 1992........................................................................ $23.00 - $61.13 4,077
Granted.............................................................................. $59.25 - $70.75 110
Exercised............................................................................ $23.00 - $60.63 (434)
Cancelled or expired................................................................. $44.38 - $51.00 (50)
------
December 31, 1992...................................................................... $31.00 - $70.75 3,703
Granted.............................................................................. $72.63 - $93.50 1,764
Exercised............................................................................ $31.00 - $66.75 (1,910)
Cancelled or expired................................................................. $44.38 - $55.25 (43)
------
December 31, 1993...................................................................... $32.38 - $93.50 3,514
Adjustment for Rayonier spin-off..................................................... 304
Granted.............................................................................. $81.13 - $91.14 2,212
Exercised............................................................................ $32.38 - $84.16 (260)
Cancelled or expired................................................................. $44.49 - $92.00 (182)
------
December 31, 1994...................................................................... $29.62 - $91.14 5,588
======
In March of 1994, the number and exercise price of all options outstanding
were adjusted to recognize the effect of the Rayonier spin-off. This adjustment
increased the number of shares and reduced the exercise price to reflect the
value of the Rayonier shares transferred to ITT's shareholders.
As of December 31, 1994 and 1993, options for 1,914,000 and 1,684,000
shares, respectively, were exercisable under the Corporation's incentive plans
and at year-end 1994, 212,000 shares were available for future grants. Effective
January 1, 1995, option shares available for future grants increased to
2,390,000 as a result of the allotment formula established in the 1994 Incentive
Stock Plan. The incentive stock plans also provide for the awarding of
restricted stock to employees which is subject to a restriction period and
cannot be sold, exchanged, pledged, or otherwise disposed of during that period.
During 1994, 31,500 of such shares were awarded with restriction periods ranging
from one to six years.
DISCONTINUED OPERATIONS
In December 1993, the Corporation announced plans to spin off ITT Rayonier,
the Corporation's wholly-owned Forest Products subsidiary, to ITT shareholders.
On February 28, 1994, all of the shares of common stock of ITT Rayonier
(approximately 29.6 million shares) were distributed to holders of ITT Common
Stock and holders of ITT Cumulative Preferred Stock, $2.25 Convertible Series N,
on the basis of one share of Rayonier Common Stock for every four shares of ITT
Common Stock held and one share of Rayonier Common Stock for every 3.1595 shares
of ITT Series N held. The net assets of ITT Rayonier, including total equity of
$607 and debt of $498, are included in Other Assets at December 31, 1993. Sales
totaled $147, $962, and $1,005 for the two months ended February 28, 1994 and
the years ended December 31, 1993 and 1992, respectively. Income (loss) from
Rayonier operations totaled $12, $53 and ($72) for the comparable periods.
In September 1994, the Corporation announced plans to seek offers for the
purchase of its Finance business segment, comprised primarily of its ITT
Financial Corporation subsidiary. Proceeds of the sale
F-16
52
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
are expected to exceed the carrying value of the net assets. Summarized
financial information is as follows:
1994 1993 1992
------- ------- ------
Income Statement Data:
Revenues...................................................................... $ 1,452 $ 1,633 $2,017
Operating Income (Loss)....................................................... $ 254 $ 357* $ (781)*
Income (Loss) from Finance Operations......................................... $ 169 $ 249* $ (504)*
Balance Sheet Data:
Total Assets.................................................................. $13,398 $11,498
Finance Debt.................................................................. $11,640 $ 9,463
Equity........................................................................ $ 664 $ 872
- ---------------
* 1993 includes a $95 pretax gain ($63 after tax) on the sale of the domestic
unsecured consumer small loan business. Proceeds from the sale were used to
retire fixed-rate debt resulting in an extraordinary loss of $50 after tax. In
1992, a pretax charge of $928 ($612 after tax) was recorded primarily to
strategically transform its consumer finance business.
In December 1994, the Corporation announced the signing of agreements to
sell two large units of ITT Financial for approximately $3.7 billion in cash. In
February 1995, a preliminary agreement was signed for the sale of three
additional businesses for $1.8 billion. Proceeds are expected to be used to
repay Finance Debt. The fair value of Finance Debt approximated the book value
at December 31, 1994 and was $9.8 billion at December 31, 1993.
In January 1995, the holders of $3.4 billion in ITT Financial term debt
consented to a merger of ITT Financial with the Corporation which will result in
the Corporation becoming the obligor on these debt issues.
In the Finance segment, interest rate swaps and other derivative
instruments are generally used in conjunction with debt obligations to hedge the
Corporation's exposure to interest rate changes. In all cases, counterparties
under these agreements are major financial institutions with the risk of non-
performance considered remote. The notional amount of dollar denominated
interest rate swaps that are hedging various categories of debt liabilities is
detailed in the following table:
CONVERT
PAY VARIABLE PAY FIXED VARIABLE INDEX TOTAL
CARRYING RECEIVE RECEIVE TO DIFFERENT NOTIONAL LATEST
VALUE FIXED VARIABLE VARIABLE INDEX AMOUNT MATURITY
-------- ------------ --------- -------------- -------- --------
Commercial paper.................. $ 4,457 $ -- $260 $205 $ 465 1998
Bank loans and short-term debt.... 1,864 42 -- 220 262 1999
Long-term debt.................... 5,319 1,170 -- 320 1,490 2011
------- ------ ---- ---- ------
Total finance debt................ $11,640 $1,212 $260 $745 $2,217
======= ====== ==== ==== ======
F-17
53
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the maturities of interest rate swaps
outstanding at December 31, 1994 and the related weighted average interest pay
rate or receive rate. The rates in the following table represent spot rates
(primarily 90-day LIBOR):
2000-
PAY FIXED/RECEIVE VARIABLE: 1995 1996 1997 1998 1999 2011 TOTAL
- -------------------------------------------------------- ---- ---- ---- ---- ---- ----- -----
Notional value.......................................... -- 260 -- -- -- -- 260
Weighted average receive rate........................... -- 5.02% -- -- -- -- 5.02%
Weighted average pay rate............................... -- 6.08% -- -- -- -- 6.08%
PAY VARIABLE/RECEIVE FIXED:
- --------------------------------------------------------
Notional value.......................................... 225 75 52 20 235 605 1,212
Weighted average receive rate........................... 6.96% 4.56% 6.18% 6.89% 6.92% 7.57 % 7.07%
Weighted average pay rate............................... 4.96% 4.06% 5.17% 4.99% 4.94% 4.96 % 4.91%
PAY A FLOATING RATE/RECEIVE A DIFFERENT FLOATING RATE:
- --------------------------------------------------------
Notional value.......................................... 170 25 335 60 155 -- 745
Weighted average receive rate........................... 3.66% 3.65% 5.01% 4.98% 5.97% -- 4.48%
Weighted average pay rate............................... 5.11% 4.50% 4.83% 4.51% 5.58% -- 5.04%
TOTAL NOTIONAL VALUE.................................... 395 360 387 80 390 605 2,217
TOTAL WEIGHTED AVERAGE --
RECEIVE RATE............................................ 5.54% 4.83% 5.17% 5.46% 6.54% 7.57 % 6.08%
PAY RATE................................................ 5.03% 5.59% 4.88% 4.63% 5.20% 4.96 % 5.09%
In addition, purchased interest rate caps with a notional principal amount
of $1.2 billion were in effect as of December 31, 1994. The caps are used to
mitigate the risk of rising interest rates on the Corporation's variable rate
obligations.
REINSURANCE
The Corporation's insurance operations cede insurance to other insurers to
limit its maximum loss. Such transfers do not relieve the originating insurers
of their primary liabilities. These operations also assume insurance from other
insurers. Failure of reinsurers to honor their obligation could result in losses
to the Corporation. The Corporation evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk. The effect of reinsurance
on property and casualty premiums written and earned is as follows:
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
- -------------------------------------------------------------------------------------- ------ ------ ------
Premiums Written:
Direct.............................................................................. $6,786 $6,751 $6,370
Assumed............................................................................. 782 683 618
Ceded............................................................................... (829) (986) (1,014)
------ ------ ------
Net................................................................................. $6,739 $6,448 $5,974
====== ====== ======
Premiums Earned:
Direct.............................................................................. $6,717 $6,597 $6,477
Assumed............................................................................. 746 735 805
Ceded............................................................................... (883) (994) (1,188)
------ ------ ------
Net................................................................................. $6,580 $6,338 $6,094
====== ====== ======
Reinsurance recoveries, which reduced loss and loss expenses incurred, were
$1.0 billion, $1.2 billion and $1.2 billion for the years ended December 31,
1994, 1993 and 1992.
Net retained premiums of the life operations were comprised of the
following:
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
- -------------------------------------------------------------------------------------- ------ ------ ------
Gross premiums........................................................................ $2,053 $1,789 $1,263
Reinsurance assumed................................................................... 336 225 162
Reinsurance ceded..................................................................... (216) (202) (86)
------ ------ ------
Net retained premiums............................................................... $2,173 $1,812 $1,339
====== ====== ======
F-18
54
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Life insurance recoveries, which reduced death and other benefits,
approximated $113, $114 and $38 for each of the years ended December 31, 1994,
1993 and 1992.
During 1992, the Corporation entered into an agreement with Mutual Benefit
Life Insurance Company in Rehabilitation ("Mutual Benefit") whereby it assumed a
block of contract obligations of Mutual Benefit individual corporate owned life
insurance (COLI) contracts. As part of this agreement, the Corporation received
$5.6 billion in cash and invested assets, $5.3 billion of which were COLI policy
loans. The Corporation coinsured approximately 84% of these contract obligations
back to Mutual Benefit and two other insurers. At December 31, 1994, the
Corporation has a reinsurance receivable from Mutual Benefit of $4.4 billion.
The risk of Mutual Benefit becoming insolvent is mitigated by the reinsurance
agreement's requirement that assets be kept in a security trust, with the
Corporation as the sole beneficiary. The Corporation has no other significant
reinsurance-related concentrations of credit risk.
Also in 1992, as a result of adverse loss developments in certain surplus
lines and reinsurance business, the Corporation's insurance operations recorded
a $900 pretax charge to fund expected loss developments in surplus lines and
reinsurance business and $250 pretax for expected legal defense costs associated
with environmental-related claims. The effect of these two charges was $759
after tax or $5.75 per fully diluted share.
POLICY LIABILITIES AND ACCRUALS
Policy liabilities and accruals at December 31 were:
1994 1993
------- -------
Future policy benefits, unpaid claims and claim adjustment expenses........................... $20,587 $19,983
Other policy claims and benefits payable...................................................... 22,308 18,364
Unearned premiums............................................................................. 2,725 2,537
------- -------
$45,620 $40,884
======= =======
At December 31, 1994 and 1993, the estimated fair value of Other Policy
Claims and Benefits Payable approximates the recorded amount and is based on the
present value of estimated future cash flows using current market rates for
similar arrangements.
Refer to the table in Item 1 page 15 where a reconciliation of liabilities
for unpaid claims and claim adjustment expenses is provided.
INSURANCE OPERATING COSTS AND EXPENSES
Insurance operating costs and expenses were:
1994 1993 1992
------- ------ -------
Benefits, claims and claim adjustment expenses...................................... $ 7,314 $6,808 $ 7,946
Amortization of deferred policy acquisition costs................................... 1,627 1,647 1,430
Interest expense.................................................................... 76 66 54
Other insurance expenses............................................................ 1,274 1,098 945
------- ------ -------
$10,291 $9,619 $10,375
======= ====== =======
INSURANCE INVESTMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation's Insurance subsidiaries maintain active investment
portfolios. Insurance investments are comprised primarily of fixed maturity
bonds and notes (most of which are guaranteed by various government and
government-sponsored agencies) and to a lesser extent, equity securities, policy
loans and other investments. Excluding U.S. government and government agency
investments, the Corporation is not exposed to any significant concentration
risk. The Corporation is not a trader in these securities as defined and,
accordingly, the investment portfolios are classified as available for sale in
accordance with SFAS No. 115 and at December 31, 1994, are carried at fair
value. Prior to the adoption
F-19
55
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of SFAS No. 115, insurance investments (except equity securities) were carried
at amortized cost. Insurance investments consisted of the following at December
31, 1994 and 1993:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1994 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ---------
Asset-backed securities, primarily U.S. government sponsored
agencies (excluding inverse floaters)...................... $ 9,089 $157 $ (701) $ 8,545
Bonds and notes
Federal, state and other governments....................... 8,037 20 (522) 7,535
Corporate.................................................. 6,780 44 (500) 6,324
Other...................................................... 2,352 2 (179) 2,175
Short-term investments....................................... 2,278 -- -- 2,278
Inverse floaters............................................. 818 5 (262) 561
------- ---- ------- -------
Fixed maturity investments................................. 29,354 $228 $(2,164) 27,418
==== =======
Policy loans................................................. 2,614 2,614
Equity securities............................................ 1,335 $118 $ (103) 1,350
==== =======
Other investments............................................ 1,071 1,071
------- -------
Total insurance investments.............................. $34,374 $32,453
======= =======
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1993 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ---------
Asset-backed securities, primarily U.S. government sponsored
agencies................................................... $10,181 $439 $(309) $10,311
Bonds and notes
Federal, state and other governments....................... 5,610 149 (44) 5,715
Corporate.................................................. 6,635 268 (60) 6,843
Other...................................................... 1,259 33 (10) 1,282
Short-term investments....................................... 3,185 -- -- 3,185
------- ---- ----- -------
Fixed maturity investments................................. 26,870 $889 $(423) 27,336
==== =====
Policy loans................................................. 1,402 1,402
Equity securities............................................ 1,183 $173 $ (54) 1,302
==== =====
Other investments............................................ 1,008 1,073
------- -------
Total insurance investments.............................. $30,463 $31,113
======= =======
Net investment income including realized gains is reflected in insurance
revenues and totaled $2,349, $2,188 and $2,429 for 1994, 1993 and 1992, net of
investment expenses of $96, $102 and $97. Total realized investment gains
(pretax) for 1994, 1993 and 1992 were $90, $155 and $443. Net pretax changes in
unrealized gains (losses) for fixed maturity and equity securities were $(2,460)
for 1994, $197 for 1993 and $(668) for 1992.
The estimated market value of fixed maturity investments at December 31,
1994 by estimated maturity is shown below. Maturities are reflected by contract
date except for asset-backed securities which are distributed to maturity year
based on the Corporation's estimate of the rate of future prepayments of
principal over the remaining life of the securities. Actual maturities will
differ from contractual and estimated maturities reflecting borrowers' rights to
call or prepay their obligations.
ESTIMATED
AMORTIZED FAIR
ESTIMATED MATURITY COST VALUE
------------------ --------- ---------
1995..................................................................................... $ 4,292 $ 4,248
1996-1999................................................................................ 12,414 11,835
2000-2004................................................................................ 9,310 8,481
Thereafter............................................................................... 3,338 2,854
------- -------
$29,354 $27,418
======= =======
F-20
56
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Corporation is an end-user of derivative financial instruments,
including swaps, caps, floors and exchange traded financial futures and options
as a means of prudently hedging exposure to price, foreign currency and/or
interest rate risk on anticipated investment purchases or existing assets and
liabilities. The notional amounts of derivative contracts represent the basis
upon which pay and receive amounts are calculated and are not reflective of
credit risk. Credit risk is limited to the amounts calculated to be due to the
Corporation on such contracts. Payment obligations between the Corporation and
its counterparties are typically netted on a quarterly basis. The Corporation
has policies regarding the financial stability and credit standing of its major
counterparties and typically requires credit enhancement provisions to further
limit its credit risk. A summary of insurance investments segregated by major
category along with the types of derivatives and their respective notional
amounts, are as follows as of December 31, 1994 (in millions):
AMOUNT HEDGED
(NOTIONAL AMOUNTS)
-----------------------------------------------------------------------
PURCHASED
ISSUED CAPS, INTEREST FOREIGN
CAPS, FLOORS, RATE CURRENCY TOTAL
CARRYING FLOORS COLLARS FUTURES SWAPS SWAPS NOTIONAL
INVESTMENTS VALUE (b) (c) (d) (e) (f) AMOUNT
- ----------- -------- ------ --------- ------- -------- -------- --------
Asset backed securities
(excluding inverse floaters)... $ 8,545 $1,511 $2,746 $ 78 $ 332 $ -- $4,667
Bonds and notes.................. 16,034 -- 83 98 349 222 752
Short-term investments........... 2,278 -- -- -- -- -- --
Policy loans..................... 2,614 -- -- -- -- -- --
Equity securities................ 1,350 -- -- -- -- -- --
Other investments................ 1,071 -- 3 15 13 55 86
Inverse floaters(a).............. 561 277 63 3 786 -- 1,129
Anticipatory..................... -- 209 210 710 -- 1,129
------- ------ ------ ---- ------ ---- ------
Total insurance investments...... $32,453 $1,788 $3,104 $404 $2,190 $277 $7,763
======= ====== ====== ==== ====== ==== ======
Derivative fair value(g)......... $ (41) $ 29 $ -- $ (124) $(18) $ (154)
====== ====== ==== ====== ==== ======
- ---------------
(a) Life operations own inverse floaters, which are variations of CMO's for
which the coupon rates move inversely with an index rate (i.e., LIBOR). The
risk to principal is considered negligible as the underlying collateral for
the securities is guaranteed or sponsored by government agencies. To
address the volatility risk created by the coupon variability, the
Corporation uses a variety of derivative instruments, primarily interest
rate swaps and issued floors.
(b) Comprised primarily of caps of $1,663 with a weighted average strike rate of
7.8% (ranging from 6.8% to 10.2%). Over 74% mature in 1997 and 1998. Issued
floors total $125 with a weighted average strike rate of 8.3% (ranging from
6.6% to 10.9%), and mature in 2004.
(c) Comprised of purchased floors ($2,056), purchased options and collars of
$644 and purchased caps of $404. The floors have a weighted average strike
price of 5.7% (ranging from 4.8% to 6.6%) and over 86% mature in 1997 and
1998. The options and collars generally mature in 1995 and 2002. The caps
have a weighted average strike price of 7.2% (ranging from 4.5% to 8.9%)
and over 66% mature in 1997 through 1999.
(d) Over 95% of futures contracts expire before December 31, 1995.
F-21
57
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(e) The following table summarizes the maturities of interest rate swaps
outstanding at December 31, 1994 and the related weighted average interest
pay rate or receive rate assuming current market conditions (in millions):
2000 AND LATEST
1995 1996 1997 1998 1999 THEREAFTER TOTAL MATURITY
---- ---- ---- ---- ---- ---------- ------ --------
PAY FIXED/RECEIVE VARIABLE
Notional value............... -- $ 15 $ 50 -- $446 $288 $ 799 2004
Weighted average pay rate.... -- 5.0% 7.2% -- 8.2% 7.9% 7.9%
Weighted average receive
rate....................... -- 6.4% 5.7% -- 7.5% 6.0% 6.8%
PAY VARIABLE/RECEIVE FIXED
Notional value............... $471 $ 70 $100 $25 $175 $125 $ 966 2002
Weighted average pay rate.... 5.1% 5.3% 5.5% 5.3% 5.4% 6.1% 5.4%
Weighted average receive
rate....................... 8.0% 7.1% 7.5% 4.0% 4.5% 6.9% 7.0%
PAY VARIABLE/
RECEIVE DIFFERENT VARIABLE
Notional value............... $105 $ 50 $ 18 $15 $ 5 $232 $ 425 2005
Weighted average pay rate.... 4.3% 6.4% 6.8% 6.2% -- 6.0% 5.7%
Weighted average receive
rate....................... 10.2% 6.3% 9.5% 6.4% -- 6.3% 7.4%
TOTAL INTEREST RATE SWAPS.... $576 $135 $168 $40 $626 $645 $2,190
TOTAL WEIGHTED AVERAGE PAY
RATE....................... 5.0% 5.7% 6.1% 5.6% 7.4% 6.9% 6.4%
TOTAL WEIGHTED AVERAGE
RECEIVE RATE............... 8.4% 6.7% 7.2% 4.9% 6.6% 6.3% 7.0%
(f) Includes 28 contracts in various currencies, expiring through 2002.
(g) The estimated fair value is the present value of the cash flows that would
result from the agreements being replaced at the year-end market rate for
the remaining term of the agreements. At December 31, 1993, fair value
approximated recorded amounts.
In addition to derivative financial instruments pertaining to the
investment portfolio, interest rate sensitivity related to certain liabilities
in the Life operations was altered primarily through interest rate swap
agreements. The notional amount of these agreements in which the Company
generally pays one variable rate in exchange for another, was $1.7 billion and
$1.3 billion at December 31, 1994 and 1993, respectively. The weighted average
pay rate is 6.2%, the weighted average receive rate is 6.6% at December 31,
1994, and these agreements mature at various times through 2004. An additional
$269 notional amount of interest rate swaps have been entered into related to
the insurance operation's variable rate debt.
Other Derivative Activity -- While derivatives are most significantly used
in Insurance operations, the Corporation also uses derivatives to a lesser
extent, to manage exposure from fluctuations in interest rates and foreign
currencies in its other business segments.
Interest rate swap agreements are in effect with major financial
institutions to manage exposure from fluctuations in interest rates on its
variable rate debt. The Corporation has entered into agreements with a notional
principal amount of $175 which require the Corporation to make fixed payments in
exchange for variable payments. The weighted average pay rate on these
agreements (which mature at various times through 1999) is 6.9% and the weighted
average receive rate is 5.7%. The estimated fair value of these swaps was $1 at
December 31, 1994 and was ($5) at December 31, 1993. Fair value represents the
estimated amount the Corporation would receive (pay) to terminate the swap
agreements based on current interest rates.
The Corporation also entered into purchased interest rate caps (notional
amount of $450) and interest rate collars (notional amount of $500) at December
31, 1994 to manage exposure on its variable rate obligations. These agreements
expire in 1996 and 1997.
The Corporation enters into foreign exchange contracts with major financial
institutions (currency swaps and forward exchange contracts) to reduce its
exposure to fluctuations in foreign currencies. These agreements are meant to
either hedge exchange exposure on the Corporation's net investment in a foreign
country or on the Corporation's foreign currency denominated debt and are
therefore of a long-term duration or are meant to hedge a specified transaction.
F-22
58
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The contractual amounts of these foreign exchange contracts at December 31,
1994 and 1993 totaled $1,093 and $966, respectively, and mature at varying dates
through 1997. Under these contracts, $724 relates to swaps (the Corporation is
the seller under $675 and the buyer under $49) and $369 relates to forward
exchange contracts (the Corporation is the seller under $36 and the buyer under
$333). Approximately $321 hedges Deutsche marks against Belgium francs, $250
hedges dollars against French francs while the balance principally hedges
dollars against other major European currencies. There is no significant
unrealized gain or loss on these contracts. The estimated fair value at December
31, 1994 and 1993 approximates the recorded amounts. The estimated fair value is
the present value of the change in cash flows that would result from the
agreements being replaced at the year-end market rate for the remaining term of
the agreements.
Accounting Policies for Derivative Financial Instruments
The Corporation's minimum threshold for hedge designation is 80%
correlation at inception of the asset-liability management strategy. The
Corporation's policy requires that the 80% correlation threshold be maintained.
If correlation falls below 80%, hedge accounting will be terminated. Gains or
losses on futures purchased in anticipation of the future receipt of product
cash flows are deferred and, at the time of the ultimate purchase, reflected as
a basis adjustment to the purchased asset. Gains or losses on futures used in
invested asset risk management are deferred and adjusted into the basis of the
hedged asset when the contract is closed. The basis adjustments are amortized
into investment income over the remaining asset life.
Open forward commitment contracts are marked to market through stockholders
equity. Such contracts are recorded at settlement by recording the purchase of
the specified securities at the previously committed price. Gains or losses
resulting from the termination of the forward commitment contracts before the
delivery of the securities are recognized immediately in the income statement as
a component of investment income.
The Corporation's accounting for interest rate swaps and purchased or
written caps, floors, and options used to manage risk is in accordance with the
concepts established in SFAS 80, "Accounting for Futures Contracts," the
American Institute of Certified Public Accountants Statement of Position 86-2,
"Accounting for Options" and various EITF pronouncements. Derivatives, used as
part of a risk management strategy, must be designated at inception as a hedge,
measured for effectiveness both at inception and on an ongoing basis.
Derivatives used to create a synthetic asset must meet synthetic accounting
criteria including designation at inception and consistency of terms between the
synthetic and the instrument being replicated. Synthetic instrument accounting,
consistent with industry practice, provides that the synthetic asset is
accounted for like the financial instrument it is intended to replicate.
Interest rate swaps and purchased or written caps, floors and options which fail
to meet risk management criteria are accounted for at fair value with the impact
reflected in the Statement of Income.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net payments are
recognized as an adjustment to income. Should the swap be terminated, the gains
or losses are adjusted into the basis of the asset or liability and amortized
over the remaining life. The basis of the underlying asset or liability is
adjusted to reflect changing market conditions such as prepayment experience.
Should the asset be sold or liability terminated, the gains or losses on the
terminated position are immediately recognized in earnings. Interest rate swaps
purchased in anticipation of an asset purchase ("anticipatory transaction") are
recognized consistent with the underlying asset components. That is, the
settlement component is recognized in the Income Statement while the change in
market value is recognized as an unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received
on issued cap or floor agreements (used for risk management), as well as the net
payments, are adjusted into the basis of the applicable asset and amortized over
the asset life. Gains or losses on termination of such positions are adjusted
into the basis of the asset or liability and amortized over the remaining asset
life.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS 52. Changes in the spot rate of instruments designated as
hedges of the net investment in a
F-23
59
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
foreign subsidiary are reflected in the cumulative translation adjustment
component of stockholders equity.
COMMITMENTS AND CONTINGENCIES
As described in "Accounting Policies," the Corporation's insurance
operations establishes insurance reserves which are estimates for both claims
which have been reported and estimates for unreported claims based on past
experience and also includes estimates of all expenses associated with
processing and settling these claims. With regard to asbestos and environmental
claims, deviations from past experience significantly impact the ability of
insurance companies to estimate the ultimate reserves for unpaid losses and
related settlement expenses. The Corporation finds that conventional reserving
techniques cannot estimate the ultimate cost of these claims because of
inadequate development patterns and inconsistent emerging legal doctrine. There
is virtually no agreement or consistent precedent to determine what, if any,
coverage exists or which, if any, policy years and insurers may be liable.
Further uncertainty arises with environmental claims because claims are often
made under policies, the existence of which may be in dispute, the terms of
which may have changed over many years, which may or may not provide for legal
defense costs, and which may or may not contain pollution exclusion clauses that
may be absolute or allow for fortuitous events. Courts in different
jurisdictions have reached disparate conclusions on similar issues and in
certain situations have broadened the interpretation of policy coverage and
liability issues. If future social, economic or legal developments continue to
expand the original intent of policies and the scope of coverage, the need for
additional reserves may arise, adversely affecting future results. Due to the
uncertainties described above, a range of such reserve increases cannot be
meaningfully quantified. In light of the extensive claim settlement process with
asbestos and environmental claims, involving comprehensive fact gathering,
subject matter expertise and extensive litigation, the Corporation has
established an environmental claims facility to aggressively defend itself
against unwarranted claims. Reserves for reported and unreported asbestos and
environmental claims were $1,191 and $1,179 for 1994 and 1993, respectively, net
of reinsurance on reported losses of $1,016 in 1994 and $974 in 1993.
Other than asbestos and environmental claims in the Insurance segment, the
Corporation and its subsidiaries are involved in various other legal actions
including those related to antitrust issues, government contracts and
non-insurance related environmental matters. Some of these actions include
claims for substantial sums. Reserves have been established when the outcome is
probable and can be reasonably estimated. While the ultimate result of these
legal actions and related claims cannot be determined, the Corporation does not
expect that they will have a material adverse effect on its consolidated
financial position.
SUBSEQUENT EVENT
In January 1995, the Corporation completed a cash tender offer for the
outstanding shares of Caesars World, Inc. for $1.7 billion.
F-24
60
BUSINESS SEGMENT INFORMATION*
GROSS PLANT
IDENTIFIABLE ASSETS ADDITIONS DEPRECIATION
------------------------------ -------------------- --------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
-------- ------- ------- ---- ---- ---- ---- ---- ----
(IN MILLIONS)
INSURANCE.............................. $ 76,891 $66,254 $54,360 $ 76 $ 61 $ 56 $ 77 $ 78 $ 69
INDUSTRIES
Automotive........................... 2,792 1,846 1,867 274 235 216 209 150 154
Defense & Electronics................ 995 856 933 94 61 82 91 93 96
Fluid Technology..................... 728 613 640 43 34 41 38 36 38
HOSPITALITY, ENTERTAINMENT &
INFORMATION SERVICES
Hospitality & Entertainment.......... 3,829 1,971 1,680 225 71 69 76 57 50
Communications & Information
Services........................... 378 371 450 14 15 13 15 14 14
Dispositions and Other................. 390 450 582 7 6 11 5 8 33
-------- ------- ------- ---- ---- ---- ---- ---- ----
TOTAL SEGMENTS......................... 86,003 72,361 60,512 733 483 488 511 436 454
Other.................................. 14,851 14,837 16,852 4 4 9 8 8 8
-------- ------- ------- ---- ---- ---- ---- ---- ----
$100,854 $87,198 $77,364 $737 $487 $497 $519 $444 $462
======== ======= ======= ==== ==== ==== ==== ==== ====
INSURANCE. The Insurance segment writes a broad range of life and property
and casualty insurance.
INDUSTRIES. Automotive, Defense & Electronics and Fluid Technology units
are engaged in the manufacture and sale of equipment for commercial, military
and process industries. Products include automotive equipment, accessories and
parts for the OEM and aftermarket, pumps, valves, electrical connectors,
components, integrated circuits and other semiconductors. Defense activities
include the development, manufacture, sale, installation, maintenance and
operation of military electronic and communications equipment, primarily for the
U.S. Government.
HOSPITALITY, ENTERTAINMENT & INFORMATION SERVICES. Hospitality &
Entertainment operates a worldwide network of hotels, resorts and casinos under
the Sheraton name. Communications & Information Services primarily publishes
telephone directories and provides educational services.
"Dispositions and Other" include the operating results and the gain or loss
from sale or closedown of units other than "Discontinued Operations," including
the Corporation's Instruments operations, ITT Components Distribution and World
Directories, U.K. and Turkey operations, along with sales and operating income
of other non-core businesses.
"Other" includes assets of Discontinued Finance Operations and corporate
assets. Intercompany sales, which are priced on an arm's-length basis and
eliminated in consolidation, are not material.
GEOGRAPHICAL INFORMATION -- TOTAL SEGMENTS
SALES AND REVENUES INCOME (LOSS) IDENTIFIABLE ASSETS
----------------------------- ------------------------- -----------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
------- ------- ------- ------ ------ ----- ------- ------- -------
(IN MILLIONS)
U.S........................ $15,835 $13,773 $13,125 $ 992 $ 810 $(622) $76,714 $65,091 $52,703
Western Europe............. 5,811 5,543 6,169 471 353 202 8,063 6,419 6,770
Canada and Other........... 1,974 1,813 1,666 156 125 105 1,226 851 1,039
Alcatel N.V................ -- -- 97 -- -- --
------- ------- ------- ------ ------ ----- ------- ------- -------
Total Segments............. $23,620 $21,129 $20,960 $1,619 $1,288 $(218) $86,003 $72,361 $60,512
======= ======= ======= ====== ====== ===== ======= ======= =======
- ---------------
* Refer to page 2 where Business Segment sales, revenues and income information
are provided.
"Income (Loss)" consists of the gross profit on sales and revenues less
operating expenses incurred.
F-25
61
QUARTERLY RESULTS
FOR 1994 AND 1993 (UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
MAR. 31* JUNE 30 SEPT. 30 DEC. 31 YEAR
-------- ------- -------- ------- -------
(IN MILLIONS EXCEPT PER SHARE)
1994
Sales and Revenues........................................ $5,209 $6,001 $5,674 $6,736 $23,620
Costs and Expenses........................................ $4,925 $5,606 $5,324 $6,260 $22,115
Income from Continuing Operations......................... $ 173 $ 226 $ 211 $ 242 $ 852
Net Income................................................ $ 202 $ 258 $ 257 $ 305 $ 1,022
Earnings Per Share --
Income Per Share from Continuing Operations
-- Primary.............................................. $ 1.39 $ 1.84 $ 1.75 $ 2.12 $ 7.10
-- Fully Diluted........................................ $ 1.31 $ 1.73 $ 1.64 $ 1.98 $ 6.66
Net Income
-- Primary.............................................. $ 1.63 $ 2.11 $ 2.14 $ 2.69 $ 8.57
-- Fully Diluted........................................ $ 1.54 $ 1.97 $ 2.01 $ 2.50 $ 8.02
1993
Sales and Revenues........................................ $4,945 $5,419 $5,166 $5,599 $21,129
Costs and Expenses........................................ $4,749 $5,107 $4,902 $5,307 $20,065
Income from Continuing Operations......................... $ 114 $ 185 $ 186 $ 176 $ 661
Net Income................................................ $ 175 $ 267 $ 252 $ 219 $ 913
Earnings Per Share --
Income Per Share from Continuing Operations
-- Primary.............................................. $ .86 $ 1.46 $ 1.49 $ 1.41 $ 5.22
-- Fully Diluted........................................ $ .83 $ 1.38 $ 1.41 $ 1.33 $ 4.95
Net Income
-- Primary.............................................. $ 1.37 $ 2.15 $ 2.03 $ 1.77 $ 7.32
-- Fully Diluted........................................ $ 1.30 $ 2.02 $ 1.91 $ 1.67 $ 6.90
- ---------------
* March 31, 1994 quarter restated for an accounting change related to the
accounting for certain marketing and start-up costs.
EXPORT SALES (UNAUDITED)
In serving its global markets, ITT generates significant export sales,
which benefit local economies. Sales of products (including intercompany)
manufactured in various countries for shipment to other countries consisted of
the following:
MANUFACTURING SALES
LOCATION DESTINATION 1994 1993 1992
------------- ----------- ------ ------ ------
(IN MILLIONS)
United States....................................... Canada $ 312 $ 177 $ 55
Other 127 105 100
------ ------ ------
439 282 155
------ ------ ------
Canada.............................................. United States 172 159 83
Other 10 5 11
------ ------ ------
182 164 94
------ ------ ------
Western Europe...................................... United States 98 63 55
Western Europe 838 664 750
Other 178 142 143
------ ------ ------
1,114 869 948
------ ------ ------
Other............................................... 13 11 5
------ ------ ------
$1,748 $1,326 $1,202
====== ====== ======
F-26
62
ITT CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(MILLIONS OF DOLLARS)
ADDITIONS (DEDUCTIONS)
------------------------------------------
CHARGED TO WRITE-OFFS/
BALANCE COSTS AND TRANSLATION PAYMENTS/ BALANCE
DESCRIPTION JANUARY 1 EXPENSES ADJUSTMENT OTHER DECEMBER 31
- ----------- --------- ---------- ----------- ----------- -----------
YEAR ENDED DECEMBER 31, 1994
Trade Receivables -- Allowance for doubtful
accounts................................. $ 127 $ 66 $ 4 $ (40) $ 157
Accumulated depreciation of plant, property
and equipment............................ 2,974 519 150 (153)(1) 3,490
YEAR ENDED DECEMBER 31, 1993
Trade Receivables -- Allowance for doubtful
accounts................................. $ 133 $ 48 $ (4) $ (50) $ 127
Accumulated depreciation of plant, property
and equipment............................ 2,831 444 (107) (194)(1) 2,974
YEAR ENDED DECEMBER 31, 1992
Trade Receivables -- Allowance for doubtful
accounts................................. $ 146 $ 45 $ (6) $ (52) $ 133
Accumulated depreciation of plant, property
and equipment............................ 2,686 462 (119) (198)(1) 2,831
- ---------------
Note:
(1) Principally retirements as well as companies sold during the year.
S-1
63
ITT CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(MILLIONS OF DOLLARS)
FUTURE
POLICY
BENEFITS, OTHER
UNPAID POLICY AMORTIZATION
DEFERRED CLAIMS AND CLAIMS OF DEFERRED
POLICY CLAIM AND NET POLICY
ACQUISITION ADJUSTMENT UNEARNED BENEFITS INSURANCE INVESTMENT ACQUISITION PREMIUMS
COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME(1) COSTS WRITTEN
----------- ---------- -------- -------- --------- ---------- ------------ --------
YEAR ENDED DECEMBER 31, 1994
Property and Casualty....... $ 608 $17,435 $2,680 $ -- $6,580 $ 914 $1,353 $6,739
Life and Health............. 1,917 3,152 45 22,308 2,173 1,435 274 --
------ ------- ------ ------- ------ ------ ------ ------
$2,525 $20,587 $2,725 $22,308 $8,753 $2,349 $1,627 $6,739
====== ======= ====== ======= ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1993
Property and Casualty....... $ 593 $17,284 $2,493 $ -- $6,338 $ 990 $1,300 $6,448
Life and Health............. 1,431 2,699 44 18,364 1,812 1,198 347 --
------ ------- ------ ------- ------ ------ ------ ------
$2,024 $19,983 $2,537 $18,364 $8,150 $2,188 $1,647 $6,448
====== ======= ====== ======= ====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1992
Property and Casualty....... $ 572 $17,418 $2,409 $ -- $6,094 $1,351 $1,269 $5,974
Life and Health............. 910 2,721 42 15,115 1,339 1,078 161 --
------ ------- ------ ------- ------ ------ ------ ------
$1,482 $20,139 $2,451 $15,115 $7,433 $2,429 $1,430 $5,974
====== ======= ====== ======= ====== ====== ====== ======
- ---------------
(1) Net investment income is allocated based on property and casualty and life
and health's share of investable funds.
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND
CASUALTY INSURANCE OPERATIONS
(MILLIONS OF DOLLARS)
CLAIMS AND CLAIM
ADJUSTMENT EXPENSE PAID CLAIMS
DISCOUNT INCURRED RELATED TO: & CLAIM
DEDUCTED FROM ----------------------------- ADJUSTMENT
YEARS ENDED DECEMBER 31, LIABILITIES(1) CURRENT YEARS PRIOR YEARS EXPENSES
- ------------------------ ------------- ------------- ----------- -----------
1994............................................................ $432 $4,841 $ 55 $4,723
1993............................................................ $362 $4,611 $ 248 $4,662
1992............................................................ $325 $4,822 $1,406 $4,806
- ---------------
(1) Reserves for permanently disabled claimants, terminated reinsurance treaties
and certain reinsurance contracts have been discounted using the rate of
return the corporation could receive on risk-free investments of 8.1% for
1994, and using interest rates ranging from 3% to 6% and 3% to 14% for 1993
and 1992, respectively.
S-2
64
ITT CORPORATION AND SUBSIDIARIES
REINSURANCE
(MILLIONS OF DOLLARS)
ASSUMED PERCENTAGE
CEDED FROM EARNED OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
YEAR ENDED DECEMBER 31, 1994
Life insurance in force....................... $246,138 $66,709 $33,090 $212,519 16%
======== ======= ======= ========
Premiums
Property and casualty insurance............. $ 6,717 $ 883 $ 746 $ 6,580 11%
Life insurance.............................. 1,422 151 197 1,468 13%
Accident and health insurance............... 631 65 139 705 20%
-------- ------- --------- --------
Total premiums............................ $ 8,770 $ 1,099 $ 1,082 $ 8,753 12%
======== ======= ======= ========
YEAR ENDED DECEMBER 31, 1993
Life insurance in force....................... $182,784 $54,106 $13,934 $142,612 10%
======== ======= ======= ========
Premiums
Property and casualty insurance............. $ 6,597 $ 994 $ 735 $ 6,338 12%
Life insurance.............................. 1,146 147 102 1,101 9%
Accident and health insurance............... 643 55 123 711 17%
-------- ------- ------- --------
Total premiums............................ $ 8,386 $ 1,196 $ 960 $ 8,150 12%
======== ======= ======= ========
YEAR ENDED DECEMBER 31, 1992
Life insurance in force....................... $126,447 $48,723 $45,142 $122,866 37%
======== ======= ======= ========
Premiums
Property and casualty insurance............. $ 6,477 $ 1,188 $ 805 $ 6,094 13%
Life insurance.............................. 690 61 26 655 4%
Accident and health insurance............... 573 25 136 684 20%
-------- --------- -------- --------
Total premiums............................ $ 7,740 $ 1,274 $ 967 $ 7,433 13%
======== ======= ======= ========
S-3
65
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, AND BY THE UNDERSIGNED IN THE
CAPACITY INDICATED.
ITT Corporation
By JON F. DANSKI
------------------------------------
JON F. DANSKI
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
March 15, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
RAND V. ARASKOG Chairman, President and Chief Executive and 3/7/95
- ---------------------------- Director
RAND V. ARASKOG
(PRINCIPAL EXECUTIVE
OFFICER)
ROBERT A. BOWMAN Executive Vice President and Chief Financial 3/7/95
- ---------------------------- Officer
ROBERT A. BOWMAN
(PRINCIPAL FINANCIAL
OFFICER)
SIGNATURE TITLE DATE SIGNATURE TITLE DATE
--------- ----- ---- --------- ----- ----
BETTE B. ANDERSON Director 3/7/95 HENRY GLUCK Director 3/7/95
- ----------------------- ----------------------
BETTE B. ANDERSON HENRY GLUCK
NOLAN D. ARCHIBALD Director 3/7/95 PAUL G. KIRK, JR. Director 3/7/95
- ----------------------- ----------------------
NOLAN D. ARCHIBALD PAUL G. KIRK, JR.
ROBERT A. BURNETT Director 3/7/95 EDWARD C. MEYER Director 3/7/95
- ----------------------- ----------------------
ROBERT A. BURNETT EDWARD C. MEYER
MICHEL DAVID-WEILL Director 3/7/95 BENJAMIN F. PAYTON Director 3/7/95
- ----------------------- ----------------------
MICHEL DAVID-WEILL BENJAMIN F. PAYTON
S. PARKER GILBERT Director 3/7/95 MARGITA E. WHITE Director 3/7/95
- ----------------------- ----------------------
S. PARKER GILBERT MARGITA E. WHITE
II-1
66
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
3(i) Restated Certificate of Incorporation............. Incorporated by reference to
ITT's Form 10-Q for the quarterly
period ended June 30, 1993.
(File No. 1-5627).
(ii) Certificate of Ownership and Merger, Merging ITT
Lester Industries, Inc. into ITT................ Filed herewith.
(iii) By-laws........................................... Incorporated by reference to
ITT's Form SE dated March 22,
1993 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1992 (File No. 1-5627).
4 Instruments defining the rights of security
holders, including indentures................... Not required to be filed. The
Registrant hereby agrees to file
with the Commission a copy of
any instrument defining the
rights of holders of long-term
debt of the Registrant and its
consolidated subsidiaries upon
request of the Commission.
9 Voting Trust Agreement............................ None.
10 Material contracts
(a) Stock Option Incentive Plan (1977).......... Incorporated by reference to
ITT's Registration Statement on
Form S-8 (Registration No.
33-5412).
(b) ITT Long-term Performance Plan
(as amended)................................ Incorporated by reference to
ITT's Form SE dated March 25,
1992 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1991 (File No. 1-5627).
(c) Incentive Bonus Plan........................ Incorporated by reference to
ITT's Form SE dated March 29,
1989 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1988 (File No. 1-5627).
(d) R. V. Araskog employment agreement.......... Incorporated by reference to
ITT's Form SE dated March 28,
1990 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1989 (File No. 1-5627).
(e) Form of Pension Plan for non-employee
members of the Board of Directors........... Incorporated by reference to
exhibits to ITT's Form 10-K for
the fiscal year ended December
31, 1980 (File No. 1-5627).
(f) Form of group life insurance plan for non-
employee members of the Board of Directors.. Incorporated by reference to
exhibits to ITT's Form 10-K for
the fiscal year ended December
31, 1983 (File No. 1-5627).
(g) ITT Corporation 1986 Incentive Stock Plan... Incorporated by reference to
ITT's Registration Statement on
Form S-8 (Registration No.
33-5412).
II-2
67
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
(h) Form of indemnification agreement with
directors.................................. Incorporated by reference to
ITT's Form SE dated March 28,
1988 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1987 (File No. 1-5627).
(i) ITT Senior Executive Severance Pay Plan.... Incorporated by reference to
ITT's Form SE dated August 12,
1991 (CIK No. 216228) relating
to ITT's Form 10-Q for the
quarterly period ended June 30,
1991 (File No. 1-5627).
(j) 1994 ITT Corporation Incentive Stock Plan.. Incorporated by reference to
ITT's Registration Statement on
Form S-8 (Registration No. 33-
53771).
(k) Support Agreement dated April 28, 1994 with
ITT Financial Corporation.................. Incorporated by reference to
ITT's Form 10-Q for the quarterly
period ended March 31, 1994
(File No. 1-5627).
(l) ITT Corporation Annual Performance-Based
Incentive Plan for Executive Officers...... Incorporated by reference to
pages 18-21 of ITT's Proxy
Statement dated March 28, 1994.
11 Statement re computation of per share earnings... Filed herewith.
12 Statement re computation of ratios............... Filed herewith.
13 Annual report to security holders, Form 10-Q or
quarterly report to security holders........... Not required to be filed.
16 Letter re change in certifying accountant........ None.
18 Letter re change in accounting principles........ None.
21 Subsidiaries of the Registrant................... Filed herewith.
22 Published report regarding matters submitted to
vote of security holders....................... Not required to be filed.
23 Consents of experts and counsel
Consent of Arthur Andersen LLP................. Filed herewith.
24 Power of attorney................................ None.
27 Financial data schedule.......................... Filed herewith.
28P Information from reports furnished to state
insurance regulatory authorities............... Incorporated by reference to
ITT's Form SE dated March 15,
1995 (CIK No. 216228) relating
to ITT's Form 10-K for the
fiscal year ended December 31,
1994 (File No. 1-5627).
99 Additional exhibits.............................. None.
II-3
1
EXHIBIT 3(II)
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
ITT LESTER INDUSTRIES, INC.
INTO
ITT CORPORATION
(PURSUANT TO SECTION 253 OF THE
GENERAL CORPORATION LAW OF DELAWARE)
ITT Corporation, a corporation incorporated on the 13th day of December,
1967, pursuant to the provisions of the General Corporation Law of the State of
Delaware does hereby certify that this corporation owns all the capital stock of
ITT Lester Industries, Inc., a corporation incorporated under the laws of the
state of Ohio, and that this corporation, by resolutions of its Board of
Directors duly adopted at a meeting held on the 8th day of March, 1994,
determined to merge into itself said ITT Lester Industries, Inc., which
resolutions are set forth below:
RESOLVED, that the Corporation shall merge into itself ITT Lester
Industries, Inc., an Ohio corporation and subsidiary of the Corporation,
such merger to be effective upon the date of filing of the appropriate
certificate with the Secretary of State of Delaware.
RESOLVED, that the Agreement of Merger between the Corporation and ITT
Lester Industries, Inc. is hereby approved, and that the proper officers of
the Corporation hereby are directed to do all acts and things whatsoever,
including, but not limited to, the execution and filing of all documents,
certificates, instruments and agreements which may be necessary or
appropriate to effectuate the merger of ITT Lester Industries, Inc. into
the Corporation.
In witness whereof, said corporation has caused this certificate to be
signed by its Vice President and attested by its Assistant Secretary, and its
corporate seal to be hereto affixed, the 28th day of March, 1994.
ITT Corporation
By: THOMAS K. WALKER
------------------------------------
Vice President
Attest: V. A. MAFFEO
--------------------------------
Assistant Secretary
1
EXHIBIT 11
ITT CORPORATION AND SUBSIDIARIES
CALCULATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE DATA)
1994 1993 1992
------ ----- ------
Primary Basis --
Net income (loss)................................................................ $1,022 $ 913 $ (885)
ESOP preferred dividends -- net of tax........................................... (34) (35) (34)
Dividend requirement on other preferred stock.................................... (1) (1) (10)
Preferred dividends on common stock equivalents.................................. 1 1 --
------ ----- ------
Net income (loss) applicable to primary earnings per share....................... $ 988 $ 878 $ (929)
====== ===== ======
Average common shares outstanding................................................ 114 118 117
Common shares issuable in respect to common stock equivalents.................... 1 2 --
------ ----- ------
Average common equivalent shares................................................. 115 120 117
====== ===== ======
Earnings Per Share
Continuing operations............................................................ $ 7.10 $5.22 $ 2.45
Discontinued operations.......................................................... 1.57 2.51 (4.92)
Extraordinary item............................................................... -- (.41) --
Cumulative effect of accounting changes.......................................... (.10) -- (5.46)
------ ----- ------
Net income (loss)................................................................ $ 8.57 $7.32 $(7.93)
====== ===== ======
Fully Diluted Basis(1) --
Net income (loss) applicable to primary earnings per share....................... $ 988 $ 878 $ (929)
ESOP preferred dividends -- net of tax........................................... 34 35 34
If converted ESOP expense adjustment -- net of tax benefit....................... (20) (22) (22)
Preferred dividends on other securities not considered common stock
equivalents.................................................................... -- -- 10
------ ----- ------
Net income (loss) applicable to fully diluted earnings per share................. $1,002 $ 891 $ (907)
====== ===== ======
Average common equivalent shares................................................. 115 120 117
Additional common shares issuable assuming full dilution......................... 10 9 15
------ ----- ------
Average common equivalent shares assuming full dilution.......................... 125 129 132
====== ===== ======
Earnings Per Share
Continuing operations............................................................ $ 6.66 $4.95 $ 2.19
Discontinued operations.......................................................... 1.45 2.33 (4.38)
Extraordinary item............................................................... -- (.38) --
Cumulative effect of accounting changes.......................................... (.09) -- (4.71)
------ ----- ------
Net income (loss)................................................................ $ 8.02 $6.90 $(6.90)
====== ===== ======
- ---------------
(1) The reported net loss in 1992 causes the calculation of the fully diluted
loss per share in 1992 to be anti-dilutive. In such a case, generally
accepted accounting principles suggest the fully diluted loss per share to
be the same as the primary loss per share; however, the Corporation has
presented the actual calculated amount in order that all calculations and
comparisons with previously reported and future amounts be on a consistent
basis.
Securities considered common stock equivalents include all convertible
preferred stocks (except for ESOP Series) in 1994 and 1993. With respect to
options, it is assumed that the proceeds received upon exercise are used to
acquire common stock of the Corporation. The dilutive nature of securities is
determined quarterly based on the forecast of annual earnings.
1
EXHIBIT 12
ITT CORPORATION AND SUBSIDIARIES
CALCULATION OF RATIOS OF EARNINGS TO TOTAL FIXED CHARGES
AND CALCULATION OF EARNINGS TO TOTAL FIXED CHARGES AND
PREFERRED DIVIDEND REQUIREMENTS OF ITT
(MILLIONS OF DOLLARS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ---- ------ ------
Earnings:
Income from continuing operations................................ $ 852 $ 661 $316 $ 618 $ 848
Add (deduct):
Adjustment for distributions in excess of (less than)
undistributed equity earnings and losses..................... 16 11 (10) (146) (129)
Income taxes................................................... 389 242 43 156 268
Minority equity in net income.................................. 18 27 27 32 39
Amortization of interest capitalized........................... 3 8 8 20 3
------ ------ ---- ------ ------
1,278 949 384 680 1,029
------ ------ ---- ------ ------
Fixed Charges:
Interest and other financial charges............................. 397 365 393 333 296
Interest factor attributable to rentals.......................... 83 89 96 92 88
------ ------ ---- ------ ------
480 454 489 425 384
------ ------ ---- ------ ------
Earnings, as adjusted, from continuing operations.................. $1,758 $1,403 $873 $1,105 $1,413
====== ====== ===== ====== ======
Fixed Charges:
Fixed charges above.............................................. $ 480 $ 454 $489 $ 425 $ 384
Dividends on preferred stock of subsidiaries included in minority
equity......................................................... 6 10 12 16 24
Interest capitalized............................................. 11 9 21 29 43
------ ------ ---- ------ ------
Total fixed charges............................................ 497 473 522 470 451
Dividends on preferred stock of ITT (pre-income tax basis)......... 48 49 59 75 77
------ ------ ---- ------ ------
Total fixed charges and preferred dividend requirements........ $ 545 $ 522 $581 $ 545 $ 528
====== ====== ==== ====== ======
Ratios:
Earnings, as adjusted, from continuing operations to total fixed
charges........................................................ 3.54 2.97 1.67 2.35 3.13
====== ====== ==== ====== ======
Earnings, as adjusted, from continuing operations to total fixed
charges and preferred dividend requirements of ITT............. 3.23 2.69 1.50 2.03 2.68
====== ====== ==== ====== ======
- ---------------
Notes:
a) The adjustment for distributions in excess of (less than) undistributed
equity earnings and losses represents the adjustment to income for
distributions in excess of (less than) undistributed earnings and losses of
companies in which at least 20% but less than 50% equity is owned.
b) The interest factor attributable to rentals was computed by calculating the
estimated present value of all long-term rental commitments and applying the
approximate weighted average interest rate inherent in the lease obligations
and adding thereto the interest element assumed in short-term cancelable and
contingent rentals excluded from the commitment data but included in rental
expense.
c) The dividend requirements on preferred stock of ITT have been determined by
adding to the total preferred dividends an allowance for income taxes,
calculated on the effective income tax rate.
1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
WHOLLY-OWNED DIRECT OR
INDIRECT SUBSIDIARIES OF ITT
CARRYING ON THE SAME
LINE OF BUSINESS
AS NAMED SUBSIDIARIES
PERCENTAGE ------------------------------
JURISDICTION OF VOTING OPERATING OPERATING IN
IN WHICH SECURITIES IN THE FOREIGN
NAME ORGANIZED PARENT OWNED UNITED STATES COUNTRIES
---- ------------- ------ ----------- ------------- ------------
ITT Corporation ("ITT").................. Delaware -- -- -- --
Caesars World, Inc. ................... Florida ITT 100 -- --
First State Insurance Company.......... Connecticut ITT 100 2 --
ITT Canada Limited ("Canada").......... Canada ITT 100 -- 1
ITT Industries of Canada Limited..... Canada Canada 100 -- --
ITT Communications and Information
Services, Inc. ...................... Delaware ITT 100 -- --
ITT Hartford Group, Inc. ("HGI")....... Delaware ITT 100 1 --
Hartford Fire Insurance Company
("Hartford")....................... Connecticut HGI 100 7 9
Hartford Accident & Indemnity
Company ("HAI").................. Connecticut Hartford 100 1 --
Hartford Life and Accident
Insurance Company ("HLAI")..... Connecticut HAI 100 1 --
Hartford Life Insurance Company
("HLIC")..................... Connecticut HLAI 100 1 --
ITT Hartford Life and Annuity
Insurance Company.......... Wisconsin HLIC 100 -- --
Hartford International Insurance
Company ("HIIC")................. Delaware Hartford 100 -- 3
Hartford International Insurance
Company SANV................... Belgium HIIC 100 -- --
London & Edinburgh Insurance
Group, Limited................. England HIIC 100 -- 3
Zwolsche Algemeene N.V. ......... Netherlands HIIC 100 -- 3
ITT Industries, Inc. ("ITTI")............ Delaware ITT 100 11 83
International Standard Electric
Corporation ("ISEC")................. Delaware ITTI 100 1 62
ITT Delaware Investments, Inc. ...... Delaware ISEC 100 -- --
ITT Flygt AB......................... Sweden ISEC 100 1 19
ITT Gesellschaft fur Beteiligungen
mbH ("ITTG")....................... Germany ISEC 99.5 -- 23
Deutsche ITT Handelsgesellschaft
mbH.............................. Germany ITTG 100 -- 4
ITT Automotive Europe GmbH......... Germany ITTG 100 -- 4
Transatlantische Beteiligungs AG... Germany ITTG 100 -- 3
ITT Industries Limited............... England ISEC 100 -- 20
ITT Industries (U.S.), Inc.
("ITTIUS")........................... Delaware ITTI 100 10 2
ITT Automotive, Inc.
("Automotive")..................... Delaware ITTIUS 100 2 --
ITT AES Enterprises, Inc. ("AES
Ent.")........................... Delaware Automotive 100 1 --
ITT Automotive Electrical
Systems, Inc. ................. Delaware AES Ent. 80 -- --
ITT Defense & Electronics, Inc.
("ITTD&E")......................... Delaware ITTIUS 100 7 2
ITT Cannon, Inc. .................. Delaware ITTD&E 100 -- --
ITT Defense, Inc. ................. Delaware ITTD&E 100 -- --
ITT Federal Services Corporation... Delaware ITTD&E 100 11 2
ITT Fluid Technology Corporation..... Delaware ITTIUS 100 1 --
ITT Manufacturing Enterprises, Inc. ... Delaware ITTI 100 -- 19
ITT Investment Holdings, Inc.
("ITTIH").............................. Delaware ITT 100 36 --
ITT Resource Development Corporation
("ITTRDC")........................... Delaware ITTIH 100 35 --
Carbon Industries, Inc. ............. West Virginia ITTRDC 100 14 --
ITT Community Development
Corporation........................ Delaware ITTRDC 100 21 --
ITT Sheraton Corporation................. Delaware ITT 100 88 87
ITT World Directories Enterprises, Inc.
("ITTWDE")............................. Delaware ITT 100 3 12
ITT World Directories, Inc. ........... Delaware ITTWDE 100 2 12
Note: The names of some consolidated wholly-owned subsidiaries of ITT carrying
on the same lines of business as other subsidiaries named above have been
omitted, the number of such omitted subsidiaries operating in the United
States and in foreign countries being shown. Also omitted from the list
are the names of other subsidiaries since, if considered in the aggregate
as a single subsidiary, they would not constitute a significant
subsidiary.
1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT CORPORATION:
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K, into the Corporation's previously
filed Registration Statements (i) on Form S-3 (File Nos. 33-37894 and 33-45756),
(ii) on Form S-4 (File No. 33-13982) and (iii) on Form S-8 (File Nos. 33-5412,
33-6004 and 33-53771).
ARTHUR ANDERSEN LLP
New York, New York
March 15, 1995
5
1,000,000
YEAR
DEC-31-1994
DEC-31-1994
0
0
0
0
1,049
0
0
0
0
0
2,718
0
0
0
0
0
7,647
12,518
7,148
0
0
0
208
0
0
0
181
0
0
0
0
0
CT
1,000,000
YEAR
DEC-31-1994
DEC-31-1994
100,854
106
0
655
4,698
100,854
23,620
389
852
181
0
(11)
1,022
8.57
8.02
7
1,000,000
YEAR
DEC-31-1994
DEC-31-1994
27,418
0
0
1,350
0
0
32,453
0
12,220
2,525
0
20,587
2,725
22,308
23,255
0
0
0
0
0
0
0
2,259
90
0
7,314
1,627
1,350
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
