1
 
                            SCHEDULE 14A INFORMATION
 
          PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
 
Filed by the Registrant /X/
 
Filed by a Party other than the Registrant / /
 
Check the appropriate box:

  
/X/  Preliminary Proxy Statement
/ /  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
     / /  Definitive Proxy Statement
     / /  Definitive Additional Materials
     / /  Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
ITT Corporation - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): / / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A. / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). /X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: Common Stock, without par value, of ITT Destinations, Inc. and Common Stock, without par value, of ITT Hartford Group, Inc. --------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: 116,151,428 shares of ITT Destinations, Inc. and 116,151,428 shares of ITT Hartford Group, Inc. --------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): The fee is equal to one-fiftieth of one percent of the book value of the Common Stock of ITT Destinations, Inc. and Common Stock of ITT Hartford Group, Inc. The aggregate book value of such Common Stock at March 31, 1995 was $5.858 billion. -------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: Not Applicable --------------------------------------------------------------------- (5) Total fee paid: $1,171,600 --------------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: --------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: --------------------------------------------------------------------- (3) Filing Party: --------------------------------------------------------------------- (4) Date Filed: --------------------------------------------------------------------- 2 [Logo] ITT CORPORATION PRELIMINARY PROXY MATERIALS, SUBJECT TO COMPLETION JUNE 15, 1995 3 PRELIMINARY PROXY STATEMENT DATED JUNE 15, 1995, SUBJECT TO COMPLETION [ ], 1995 [LETTERHEAD OF ITT] Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of ITT Corporation to be held at [ ] A.M. on [ ], [ ], 1995, at [ ]. At the Special Meeting, you will be asked to consider and vote upon a group of separate but related proposals to divide ITT into its three separate business areas: (i) Insurance, (ii) Industries and (iii) Hospitality, Entertainment and Information Services. These important proposals provide for the proposed distribution to ITT's shareholders of all the shares of common stock of ITT Destinations, Inc. ("ITT Destinations" or "New ITT"), which is a wholly owned subsidiary of ITT, and all the shares of common stock of ITT Hartford Group, Inc. ("ITT Hartford"), which is also a wholly owned subsidiary of ITT. The distribution would separate ITT into three publicly owned companies. In addition, as part of the distribution, ITT would change its name to ITT Industries, Inc. and ITT Destinations would change its name to ITT Corporation. In connection with the distribution, ITT (which is now a Delaware corporation) also proposes to reincorporate in Indiana. After the distribution, ITT Industries would continue to conduct the automotive, defense and electronics, and fluid technology businesses of ITT. ITT Destinations, renamed as ITT Corporation, would continue to conduct the hospitality, entertainment and information services businesses of ITT. ITT Hartford would continue to conduct the insurance businesses of ITT. In the distribution, holders of ITT Common Stock would receive one share of New ITT Common Stock for every one share of ITT Common Stock held and one share of ITT Hartford Common Stock for every one share of ITT Common Stock held. The Board of Directors of ITT believes that the distribution should increase the value of the investment of ITT's shareholders. The distribution should decrease the cost of financing the expansion of the Industries and Hospitality, Entertainment and Information Services businesses of ITT. The management of each of ITT Industries, New ITT and ITT Hartford will be able to concentrate its attention and financial resources wholly on its respective operations. Each of ITT Industries, New ITT and ITT Hartford should also be able to rationalize its organizational structure as a result of the distribution. Moreover, debt and equity investors should be able better to evaluate the financial performance of each company and its strategies, enhancing the likelihood that each will achieve appropriate market recognition. The Board of Directors of ITT has unanimously approved the proposals to be presented at the Special Meeting and unanimously recommends that shareholders vote FOR each of the proposals. The effectiveness of each of the proposals is conditioned upon approval of all the proposals by ITT shareholders. If any of the proposals is not approved, the Board of Directors of ITT will reevaluate its intention to effect the distribution. After such review, the Board could determine to revise the terms of the distribution, effect the distribution essentially as proposed or as revised despite such lack of approval or abandon the distribution. The proposals are more fully described in the accompanying proxy statement, which you should carefully review. IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING, WHETHER OR NOT YOU ARE ABLE TO ATTEND PERSONALLY. YOU ARE, THEREFORE, URGED TO SIGN, DATE AND MAIL THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE AS PROMPTLY AS POSSIBLE. Sincerely, Rand V. Araskog Chairman, President & Chief Executive 4 [LETTERHEAD OF ITT] NOTICE OF SPECIAL MEETING OF SHAREHOLDERS [ ], 1995 NOTICE IS HEREBY GIVEN that a Special Meeting of the Shareholders of ITT Corporation, a Delaware corporation ("ITT"), will be held at [ ] on [ ], [ ], 1995, at [ ] A.M., local time, for the following purposes: 1. To consider and vote upon six separate but related proposals (collectively, the "Distribution Proposals") described in the accompanying Proxy Statement providing for: Proposal One: Approval of the distribution by ITT of all the outstanding shares of common stock of ITT Destinations, Inc., a wholly owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or "New ITT"), and of all the outstanding shares of common stock of ITT Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware corporation ("ITT Hartford"), on the basis described in the attached Proxy Statement, and the related agreements to be entered into in connection therewith (collectively, the "Distribution"); Proposal Two: Approval and adoption of an Agreement and Plan of Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed Indiana corporation and a wholly owned subsidiary of ITT, providing for the reincorporation of ITT in Indiana pursuant to a statutory merger of ITT into ITT Indiana, to be effective only if the Distribution occurs; Proposal Three: Approval of the treatment, in connection with the Distribution, of employee stock options, related stock appreciation rights and restricted stock granted under the ITT 1977 Stock Option Incentive Plan and ITT 1986 Incentive Stock Plan and related amendments to such plans; Proposal Four: Approval of the adoption by New ITT of the New ITT 1995 Incentive Stock Plan, to be effective only following the Distribution; Proposal Five: Approval of the adoption by ITT Hartford of the ITT Hartford 1995 Incentive Stock Plan, to be effective only following the Distribution; and Proposal Six: Approval of the amendment of the Restated Certificate of Incorporation of ITT to change the name of ITT to ITT Industries, Inc. and remove the article of the Restated Certificate of Incorporation in respect of ITT's gaming licenses, in each case only if the Distribution occurs. 2. To transact such other business as may properly come before the Special Meeting. Pursuant to the By-laws of ITT, the Board of Directors of ITT has fixed the close of business on [ ], 1995, as the record date for the determination of shareholders entitled to notice of, and to vote at, the Special Meeting or any adjournment thereof. Only shareholders of record at the close of business on that date will be entitled to notice of, and to vote at, the Special Meeting. ALL SHAREHOLDERS ARE INVITED TO ATTEND THE SPECIAL MEETING IN PERSON, BUT EVEN IF YOU EXPECT TO BE PRESENT AT THE SPECIAL MEETING, YOU ARE REQUESTED TO MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE POSTAGE-PAID ENVELOPE PROVIDED TO ENSURE YOUR REPRESENTATION. ANY PERSON WHO HAS EXECUTED A PROXY AND IS PRESENT AT THE SPECIAL MEETING MAY VOTE IN PERSON INSTEAD OF BY PROXY, THEREBY CANCELLING ANY PROXY PREVIOUSLY GIVEN. ONLY SHAREHOLDERS OF RECORD (OR THOSE HOLDING A PROXY OF A SHAREHOLDER OF RECORD ENTITLED TO VOTE) WILL BE ADMITTED. 5 NO SHAREHOLDER OF RECORD MAY APPOINT MORE THAN THREE PERSONS TO ACT AS HIS OR HER PROXY AT THE SPECIAL MEETING. ITT CORPORATION Gwenn L. Carr Vice President and Secretary [ ], 1995 NONE OF THE GAMING AUTHORITIES (AS DEFINED HEREIN) HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT OR THE MERITS OF THE TRANSACTIONS CONTEMPLATED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. 6 TABLE OF CONTENTS
PAGE ---- PROXY STATEMENT SUMMARY............... 1 INTRODUCTION.......................... 14 THE DISTRIBUTION...................... 18 THE REINCORPORATION OF ITT............ 26 EMPLOYEE BENEFITS AND COMPENSATION MATTERS............................. 28 AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF ITT.............................. 35 RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION........................ 36 DIVIDEND POLICY....................... 38 DIVIDENDS AND PRICE RANGE OF ITT COMMON STOCK........................ 40 ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS......................... 41 ITT INDUSTRIES FORECASTED CAPITALIZATION...................... 43 NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS......................... 44 NEW ITT FORECASTED CAPITALIZATION..... 45 ITT HARTFORD SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS......................... 46 ITT HARTFORD FORECASTED CAPITALIZATION...................... 47 ITT INDUSTRIES SELECTED FINANCIAL AND OPERATING DATA...................... 48 NEW ITT SELECTED FINANCIAL AND OPERATING DATA...................... 49 ITT HARTFORD SELECTED FINANCIAL AND OPERATING DATA...................... 51 NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS................... 52 ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 56 NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 65 PAGE ---- ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 74 BUSINESS OF ITT INDUSTRIES AFTER THE DISTRIBUTION........................ 87 BUSINESS OF NEW ITT AFTER THE DISTRIBUTION........................ 96 BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION........................ 126 ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION.............. 139 NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION........................ 157 ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION........................ 178 DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK............................... 195 DESCRIPTION OF NEW ITT CAPITAL STOCK............................... 207 DESCRIPTION OF ITT HARTFORD CAPITAL STOCK............................... 217 INDEPENDENT ACCOUNTANTS............... 220 SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING............................. 221 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 221 AVAILABLE INFORMATION................. 221 REPORTS OF NEW ITT AND ITT HARTFORD... 222 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES........................... F-1 ANNEX A AGREEMENT AND PLAN OF MERGER BETWEEN ITT AND ITT INDIANA... A-1 ANNEX B ITT DESTINATIONS, INC. 1995 INCENTIVE STOCK PLAN..................... B-1 ANNEX C ITT HARTFORD GROUP, INC. 1995 INCENTIVE STOCK PLAN..................... C-1 ANNEX D ARTICLE 7 OF THE RESTATED CERTIFICATE OF INCORPORATION OF ITT........................ D-1
i 7 PROXY STATEMENT SUMMARY The following is a summary of certain information contained in this Proxy Statement. This summary is included for convenience only and should not be considered complete. This summary is qualified in its entirety by the more detailed information and financial statements contained elsewhere in this Proxy Statement. Throughout this Proxy Statement (i) the term "ITT Industries" refers to ITT Corporation (or its successor) after the Distribution, renamed ITT Industries, Inc., (ii) the term "New ITT" refers to ITT Destinations, Inc. after the Distribution, renamed ITT Corporation, and (iii) the term "ITT Industries Common Stock" refers to ITT Common Stock after the Distribution and ITT Industries Common Stock after the Reincorporation, in each case unless the context otherwise requires. Certain capitalized terms used in this summary are defined elsewhere in this Proxy Statement. THE SPECIAL MEETING DATE, TIME AND PLACE OF SPECIAL MEETING A Special Meeting of the Shareholders of ITT Corporation ("ITT") will be held at [location], at [ ]:00 A.M., local time, on [ ], [ ], 1995. This Proxy Statement and the accompanying form of proxy are first being mailed to shareholders of ITT on or about [ ], 1995. PURPOSE OF THE SPECIAL MEETING At the Special Meeting, shareholders of ITT will be asked to consider and vote upon six separate but related proposals (collectively, the "Distribution Proposals") providing for: Proposal One: Approval of the distribution by ITT of all the outstanding shares of common stock of ITT Destinations, Inc., a wholly owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or "New ITT"), and of all the outstanding shares of common stock of ITT Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware corporation ("ITT Hartford"), on the basis described herein, and the related agreements to be entered into in connection therewith (collectively, the "Distribution"); Proposal Two: Approval and adoption of an Agreement and Plan of Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed Indiana corporation and a wholly owned subsidiary of ITT in the form of Annex A hereto (the "Merger Agreement"), providing for the reincorporation of ITT in Indiana pursuant to a statutory merger of ITT into ITT Indiana (the "Reincorporation"), to be effective only if the Distribution occurs; Proposal Three: Approval of the treatment, in connection with the Distribution, of employee stock options, related stock appreciation rights and restricted stock granted under the ITT 1977 Stock Option Incentive Plan and ITT 1986 Incentive Stock Plan and related amendments to such plans; Proposal Four: Approval of the adoption by New ITT of the New ITT 1995 Incentive Stock Plan, to be effective only following the Distribution; Proposal Five: Approval of the adoption by ITT Hartford of the ITT Hartford 1995 Incentive Stock Plan, to be effective only following the Distribution; and Proposal Six: Approval of the amendment of the Restated Certificate of Incorporation of ITT to change the name of ITT to ITT Industries, Inc. and remove the article of the Restated Certificate of Incorporation in respect of ITT's gaming licenses, in each case only if the Distribution occurs. THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS OF ITT WILL REEVALUATE ITS INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD COULD DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE DISTRIBUTION ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF APPROVAL OR ABANDON THE DISTRIBUTION. 1 8 Although counsel has advised ITT that shareholder approval of the Distribution is not required under Delaware law, the Board of Directors of ITT has made shareholder approval of the Distribution (along with shareholder approval of each of the other Distribution Proposals) a condition to the Distribution because of the importance of the Distribution to ITT and its shareholders. In addition, approval of Proposal Two and Proposal Six is being sought because of the requirements of applicable state corporate law. Approval of Proposal Three is being sought to preserve ITT's ability to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. Under Section 162(m) of the Internal Revenue Code, shareholder approval of performance-based compensation plans (including material amendments thereto) is necessary to qualify for the performance-based compensation exception to the limitation on ITT's ability to deduct compensation paid to certain specified individuals in excess of $1 million. Such approval is also being sought because of Rule 16b-3 under the Exchange Act, which requires shareholder approval under certain circumstances of material amendments to stock option plans. Although ITT does not believe the contemplated amendments are material, it is seeking shareholder approval to avoid any potential uncertainty that arguably might exist if such approval were not obtained. Approval of Proposal Four and Proposal Five is being sought to establish New ITT's and ITT Hartford's ability, as applicable, to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. As noted above, under Section 162(m) of the Internal Revenue Code, shareholder approval of performance-based compensation plans is necessary to qualify for the performance-based compensation exception to the limitation on a company's ability to deduct compensation paid to certain specified individuals in excess of $1 million. See "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING". VOTING Only holders of record of ITT Common Stock at the close of business on , 1995 (the "Special Meeting Record Date"), are entitled to notice of, and to vote at, the Special Meeting. Each of the shares of ITT Common Stock outstanding at the close of business on the Special Meeting Record Date is entitled to one vote at the Special Meeting. All such shares entitled to vote at the Special Meeting are referred to herein as "Record Shares". The presence in person or by proxy of shareholders holding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares will constitute a quorum for the transaction of business at the Special Meeting. THE BOARD OF DIRECTORS OF ITT UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR ALL OF THE DISTRIBUTION PROPOSALS. Approval of Proposals One, Two and Six at the Special Meeting will require the affirmative vote of outstanding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares. Approval of Proposals Three, Four and Five at the Special Meeting will require the affirmative vote of outstanding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares, present in person or represented by proxy, at the Special Meeting. SEE "INTRODUCTION -- VOTING". NO APPRAISAL RIGHTS Shareholders of ITT will not be entitled to appraisal rights in connection with the Distribution Proposals. BUSINESS OF ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION As part of the Distribution, the name of ITT Corporation will be changed to ITT Industries, Inc. In addition, the name of ITT Destinations will be changed to ITT Corporation. 2 9 ITT INDUSTRIES After the Distribution, ITT Industries will be engaged, directly and through its subsidiaries, in the design and manufacture of a wide range of high technology products, focused on the three principal business segments of automotive, defense and electronics, and fluid technology. ITT Industries is a substantial worldwide enterprise with 1994 sales of $7.8 billion, of which approximately half is produced or sold outside the United States, and which would rank ITT Industries among the top 200 of companies in the "Fortune 500". With 58,000 employees based in over 40 countries, ITT Industries companies sell products in over 100 countries under a variety of highly regarded brand names coupled with the ITT trademark. Each of its three principal business units is recognized internationally as a leader in its chosen field and competes based on the skills of its people in technical leadership, customer relations and manufacturing proficiency. Following the Distribution, ITT Industries will continue to pursue opportunities for growth with focus on strengthening its position in areas of existing product leadership, and expanding international sales. ITT Automotive is one of the largest independent suppliers of systems and components to vehicle manufacturers worldwide with 1994 sales of $4.8 billion. Through operations located in Europe, North and South America and joint ventures and licensees in Asia, ITT Automotive designs, engineers and manufactures a broad range of automotive systems and components under two major worldwide product groupings. The Brake and Chassis Systems group, with annual sales approaching $3 billion, represents the world's largest array of expertise in braking and chassis system capabilities, including anti-lock brake ("ABS") and traction control ("TCS") systems, chassis systems, foundation brake components, fluid handling products and Koni shock absorbers. In 1994, ITT Automotive maintained its position as a leading global supplier of four-wheel ABS and TCS, sales of which exceeded $1 billion for the second consecutive year. The Body and Electrical Systems group, with sales approaching $2 billion annually, produces automotive products, such as door and window assemblies, wiper module assemblies, seat systems, air management systems, switches and fractional horsepower DC motors. During 1994, ITT Automotive substantially increased its previously established position as a leading producer of electric motors and wiper systems, through the acquisition from General Motors of its motors and actuators business unit, now renamed ITT Automotive Electrical Systems, Inc. ITT Defense & Electronics companies, with 1994 sales of $1.5 billion, develop, manufacture and support high technology electronic systems and components for defense and commercial markets on a worldwide basis with operations in North America, Europe and Asia. Defense market products include tactical communications equipment, electronic warfare systems, night vision devices, radar, space payloads and operations and management services. Commercial products include interconnect products such as connectors, switches and cable assemblies and night vision devices. ITT Defense & Electronics enjoys a leadership position in certain products that are expected to be critical to the armed forces in the 21st century, particularly products that facilitate communications in the forward area battlefield, night vision devices that enable soldiers to conduct night combat operations and electronic systems that protect allied forces from enemy radar controlled missiles. Through its international field engineering business, ITT Defense & Electronics is well positioned to gain from trends to commercialize and outsource military support operations. In the Interconnect market, ITT Cannon maintains a position as one of the world's top ten connector companies based on revenue and is a leading supplier to the military/aerospace and industrial sectors. ITT Fluid Technology, with 1994 sales of $1.1 billion, is a worldwide leader in the design, development, production and sale of products, systems and services used to move, handle, transfer, control and contain fluids of all kinds. Operating in more than 100 countries, ITT Fluid Technology is a leading supplier of pumps, valves, heat exchangers, mixers, instruments and controls for the management of fluids. Its major unit is ITT Flygt, which is headquartered in Sweden and is a pioneer in submersible technology and the world leader in submersible pumping and mixing products. Other units hold market leadership positions in a number of product/market segments under long established, strong brand names such as AC Pump, Barton, Bell & Gossett, Cam-tite and Dia-Flo valves, McDonnell & Miller, Jabsco, Marlow and others. In 1994, ITT acquired Richter Chemie-Technik GmbH, a leading German producer of specialized pumps and valves to handle the flow of high temperature corrosive liquid and gaseous media. 3 10 D. Travis Engen, who is currently Executive Vice President of ITT, will become Chairman, President and Chief Executive of ITT Industries, and certain persons who are currently directors of ITT will remain as directors of ITT Industries. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD OF DIRECTORS". In addition, most of the other executive officers of ITT Industries will be drawn from the current management of ITT or subsidiaries of ITT. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES EXECUTIVE OFFICERS". NEW ITT After the Distribution, New ITT will be engaged, directly and through subsidiaries, in the hospitality and entertainment business and the information services business. New ITT will conduct its hospitality and entertainment business through ITT Sheraton Corporation ("ITT Sheraton"), Ciga S.p.A. ("Ciga"), Caesars World, Inc. ("CWI") and Madison Square Garden, L.P. ("MSG") and conduct its information services business through ITT World Directories, Inc. ("ITT World Directories") and ITT Educational Services, Inc. ("ITT Educational"). New ITT will combine the world's largest hotel and gaming company with a premier sports and entertainment company and information services businesses to create a dynamic and rapidly growing enterprise. Management of ITT projects that New ITT will generate pro forma (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994) revenues of approximately $6.5 billion in 1995 and pro forma EBITDA of approximately $875 million in 1995. The projected pro forma EBITDA for 1995 would represent a 36% increase over EBITDA in 1994 also determined on a pro forma basis (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994). For a discussion of certain important limitations and related assumptions concerning this projected and other pro forma financial data and ITT management's beliefs as to future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". ITT completed the acquisition of the world's most recognized gaming company, CWI, in January 1995. In March 1995, ITT also acquired the most famous sports arena and basketball and hockey franchises in the world through its investment in MSG. In addition, the acquisition in 1994 of 70.3% of Ciga and other key hotel properties enhanced New ITT's geographic balance along with its image and profile. These acquisitions have helped to create a formidable hotel, gaming and entertainment company that is a leader in its served markets. Through the ITT Sheraton brand name, New ITT is represented in most major markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton in 60 countries. When including visitors to CWI and Madison Square Garden and customers of the Information Services companies, New ITT will provide services to over 100 million people a year. ITT Sheraton, which has been a wholly owned subsidiary of ITT since 1968, is a worldwide hospitality network of approximately 420 owned, leased, managed and franchised properties, including hotels, casinos and inns. Gaming operations are marketed under the Caesars World and ITT Sheraton brand names and are represented in Las Vegas, Atlantic City, Halifax (Nova Scotia), Lake Tahoe, Tunica County (Mississippi), Lima (Peru), Cairo, Windsor (Ontario) and Townsville (Australia). The acquisition of CWI greatly enhanced New ITT's profile in the rapidly growing gaming business. CWI's flagship property is the renowned Caesars Palace in Las Vegas, and it also owns and operates Caesars Atlantic City in Atlantic City and Caesars Tahoe in Stateline, Nevada, both leaders in their served markets. CWI also owns one-third of a management company that operates Casino Windsor which was opened in May 1994 in Windsor, Ontario, and operates four non-gaming resorts in Pennsylvania's Pocono Mountains. The MSG investment, which was made through a partnership with a subsidiary of Cablevision Systems Corporation, includes the famed Madison Square Garden arena, the Paramount special events theater, the New York Knickerbockers and New York Rangers basketball and hockey franchises, as well as the Madison Square Garden Network. 4 11 ITT World Directories, an 80%-owned subsidiary, engages in the publication of telephone directories, including classified directory services for telephone subscribers in numerous countries outside the United States, as well as in Puerto Rico and the United States Virgin Islands. ITT Educational, which will be owned 83% by New ITT and 17% by the public, operates technical colleges offering postsecondary career education. See "BUSINESS OF NEW ITT AFTER THE DISTRIBUTION". Rand V. Araskog, who is currently Chairman, President and Chief Executive of ITT, will become Chairman and Chief Executive of New ITT, and certain persons who are currently directors of ITT will become directors of New ITT. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT BOARD OF DIRECTORS". In addition, the other executive officers of New ITT will be drawn from the current management of ITT or subsidiaries of ITT. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT EXECUTIVE OFFICERS". ITT HARTFORD After the Distribution, ITT Hartford will continue as one of the largest insurance companies in the United States, a diversified, international multi-line organization founded in 1810. In the United States, ITT Hartford is the 8th largest property and casualty insurer and the 12th largest life insurer, with total assets exceeding $82 billion and equity of $3.9 billion at March 31, 1995. The property and casualty operations, with premiums written of $6.7 billion as of December 31, 1994, provide a wide range of personal, commercial, specialty and reinsurance coverages. In personal lines, ITT Hartford ranks among the 10 largest carriers and is the endorsed provider of automobile and homeowners coverages to members of the American Association of Retired Persons. Commercial insurance, the property and casualty company's largest line with $2.7 billion in written premiums, offers an array of products to address customer needs, including commercial multi-peril, general liability and workers' compensation. Specialty lines provides the expertise necessary to meet the needs of customers with sophisticated insurance, service or risk financing requirements. ITT Hartford is also a major reinsurer, with subsidiaries and operations located in Hong Kong, Spain, the United States, the United Kingdom and Canada. ITT Hartford maintains a dynamic presence in the European insurance market. The largest operations are London and Edinburgh, a market leader in the United Kingdom, and Zwolsche Algemeene, which has a strong presence in The Netherlands. Both operations provide multi-line property and casualty and life products. ITT Hartford's life insurance operations have been among the fastest growing major life insurance companies in the United States for five years, with assets exceeding $50 billion at December 31, 1994. The life operations provide individual and group life and disability insurance, asset accumulation products and financial services for individuals, corporations and government entities. ITT Hartford ranks among the top providers of retirement planning products and services for corporations and government entities, and, with $7.1 billion in new fixed and variable annuity deposits in 1994, it continues to rank among industry leaders in the sale of these products. See "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION." Donald R. Frahm, who is currently Chairman and Chief Executive of Hartford Fire Insurance Company ("The Hartford"), will become Chairman and Chief Executive Officer of ITT Hartford. The directors of ITT Hartford will include certain persons who are currently directors of ITT and certain persons who are currently directors or members of senior management of The Hartford. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD BOARD OF DIRECTORS". In addition to Mr. Frahm, it is expected that the other executive officers of ITT Hartford will be drawn from the current management of The Hartford. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD EXECUTIVE OFFICERS". 5 12 THE DISTRIBUTION SHARES TO BE DISTRIBUTED The Distribution will be made to holders of record on the Distribution Record Date of issued and outstanding shares of ITT Common Stock. Based on the 116,151,428 shares of ITT Common Stock outstanding as of June 1, 1995 (assuming conversion of the ITT Series N Preferred Stock and the ITT ESOP Preferred Stock which have been called for redemption), the Distribution will consist of 116,151,428 shares of New ITT Common Stock and 116,151,428 shares of ITT Hartford Common Stock. Each holder of ITT Common Stock will receive as a dividend one share of New ITT Common Stock for every one share of ITT Common Stock held and one share of ITT Hartford Common Stock for every one share of ITT Common Stock held. It is expected that the Board of Directors of New ITT will adopt a shareholder rights plan. Certificates evidencing shares of New ITT Common Stock issued in the Distribution will therefore represent the same number of New ITT Rights issued under the New ITT Rights Plan. It is also expected that the Board of Directors of ITT Hartford will adopt a shareholder rights plan. Certificates evidencing shares of ITT Hartford Common Stock issued in the Distribution will therefore represent the same number of ITT Hartford Rights issued under the ITT Hartford Rights Plan. Furthermore, it is expected that the Board of Directors of ITT (or ITT Industries) will adopt a shareholder rights plan in respect of the ITT Industries Common Stock to be effective following the Distribution. Accordingly, after the Distribution, certificates evidencing shares of ITT Industries Common Stock will represent the same number of ITT Industries Rights issued under the ITT Industries Rights Plan. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEW ITT RIGHTS PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- ITT HARTFORD RIGHTS PLAN". ITT shareholders will not have to make any payment to receive their pro rata share of the Distribution. See "THE DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION". DISTRIBUTION RECORD DATE The "Distribution Record Date" will be established by the Board of Directors of ITT shortly before the Distribution. DISTRIBUTION DATE The "Distribution Date" will be established by the Board of Directors of ITT and is presently expected to be on or about December 31, 1995. On or about the first business day following the Distribution Date, ITT will effect the Distribution by providing for the delivery of all outstanding shares of New ITT Common Stock and ITT Hartford Common Stock to the Transfer Agent for the transfer and distribution to the holders of record on the Distribution Record Date of ITT Common Stock, and will instruct the Transfer Agent to mail stock certificates to shareholders of ITT as soon as practicable thereafter. See "THE DISTRIBUTION -- MANNER OF EFFECTING THE DISTRIBUTION". TRANSFER AGENT AND REGISTRAR The ITT Corporate Stock Services Department will be the Transfer Agent (the "Transfer Agent") for the Distribution and Chemical Bank will be the Registrar (the "Registrar") for the Distribution. CONDITIONS TO THE DISTRIBUTION The Distribution is subject to (i) approval of the Distribution Proposals by shareholders of ITT; (ii) receipt of favorable tax rulings from the Internal Revenue Service as to certain Federal income tax consequences of the Distribution; (iii) all necessary consents of any third parties having been obtained; (iv) all necessary consents of any governmental or regulatory bodies having been obtained; (v) the Registration Statement on Form 10 under the Exchange Act, to be filed by New ITT with the SEC in respect of the New 6 13 ITT Common Stock, having become effective; (vi) the Registration Statement on Form 8-A under the Exchange Act, to be filed by ITT Hartford with the SEC in respect of the ITT Hartford Common Stock, having become effective; (vii) the shares of New ITT Common Stock and ITT Hartford Common Stock to be issued or initially reserved for issuance having been approved for listing on a national securities exchange or designated as a national market system security on the National Association of Securities Dealers Automated Quotation System, subject to official notice of issuance; (viii) consummation of the Reincorporation; and (ix) there not being in effect any statute, rule, regulation or order of any court, governmental or regulatory body which prohibits or makes illegal the transactions contemplated by the Distribution and the related agreements. The terms of the Distribution may be modified or conditions thereto may be waived by the Board of Directors of ITT. However, the Board will not waive the requirement of receipt of favorable tax rulings from the Internal Revenue Service unless, in the Board's judgment, based on the opinion of counsel, Section 355 of the Internal Revenue Code will apply to the Distribution. In addition, the Board has retained discretion, even if shareholder approval of the Distribution Proposals is obtained and the other conditions to the Distribution are satisfied, to abandon, defer or modify the Distribution or any other matter contemplated by the Distribution Proposals. See "THE DISTRIBUTION -- CONDITIONS TO THE DISTRIBUTION". REASONS FOR THE DISTRIBUTION The Board of Directors believes that the Distribution should occur for the following reasons: Facilitate Growth of New ITT and ITT Industries. Each of New ITT and ITT Industries intends to pursue acquisition and growth opportunities in its business areas. Such acquisitions and growth would be financed through the proceeds of indebtedness or through the issuance of capital stock of New ITT or ITT Industries, as applicable. It is expected that the Distribution will increase the availability and decrease the cost of raising capital for New ITT and ITT Industries and, at the same time, protect the insurance and credit rating of ITT Hartford from being eroded by those financings. Accordingly, the Distribution should facilitate the growth of New ITT and ITT Industries. Management Considerations. At present, the insurance business of ITT, the automotive, defense and electronics, and fluid technology businesses of ITT and the hospitality, entertainment, and information services businesses of ITT are conducted as separate operating groups under the direction of ITT. The Distribution should be beneficial to each of ITT's three operating groups, because it will enable the management of each group to design and advance corporate policies and strategies that are based primarily on the business characteristics of the group and to concentrate its financial resources wholly on its own operations. Some companies that have been spun-off have experienced improved performance as independent companies. An example of this is ITT Rayonier, ITT's former forest products segment. Rayonier's net income in 1994, the first year of operations after the February 1994 spin-off, exceeded budgeted expectations by 30%. However, this is only one example and may not be indicative of outcomes in respect of the Distribution. The Distribution will also permit each of ITT Industries, New ITT and ITT Hartford to design incentive compensation programs that relate more directly to its own business characteristics and performance. Cost Savings. Each of ITT Industries, New ITT and ITT Hartford should be able to rationalize its organizational structure as a result of the Distribution. Accordingly, the administrative and organizational costs of ITT Industries, New ITT and ITT Hartford, taken together, should be reduced from the aggregate levels experienced by ITT prior to the Distribution. Investor Understanding. Debt and equity investors should be able to evaluate better the financial performance of each of ITT Industries, New ITT and ITT Hartford and their respective strategies, thereby enhancing the likelihood that each will achieve appropriate market recognition. See "THE DISTRIBUTION -- REASONS FOR THE DISTRIBUTION". FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION It is intended that the Distribution will be a tax-free spinoff under Section 355 of the Internal Revenue Code of 1986. Under Section 355 of the Internal Revenue Code, in general, no income, gain or loss will be 7 14 recognized by holders of ITT Common Stock or by ITT Industries, New ITT or ITT Hartford on the Distribution. It is a condition to the Distribution that ITT receive a ruling from the Internal Revenue Service that Section 355 of the Internal Revenue Code will apply to the Distribution. The Board of Directors of ITT has reserved the right to waive the receipt of such ruling as a condition to consummation of the Distribution. The Board will not waive such condition unless, in the Board's judgment, based on opinion of counsel, Section 355 of the Internal Revenue Code will apply to the Distribution. See "THE DISTRIBUTION -- FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION". STOCK EXCHANGE LISTINGS There is not currently a public market for either the New ITT Common Stock or the ITT Hartford Common Stock. Application will be made to list the New ITT Common Stock and the ITT Hartford Common Stock on the NYSE under the symbols "[ ]" and "[ ]", respectively. Application will also be made to list the ITT Industries Common Stock on the NYSE and the PSE under the new symbol "[ ]". It is presently anticipated that New ITT Common Stock and ITT Hartford Common Stock will be approved for listing on the NYSE prior to the Distribution Date, and trading may commence on a "when-issued" basis prior to the Distribution, but no earlier than the Distribution Record Date. It is also possible that ITT Industries Common Stock would be traded on a "when-issued" basis prior to the Distribution, but no earlier than the Distribution Record Date. On the first NYSE trading day following the Distribution Date, "when-issued" trading in respect of each of the ITT Industries Common Stock, New ITT Common Stock and the ITT Hartford Common Stock would end and "regular-way" trading would begin. See "THE DISTRIBUTION -- LISTING AND TRADING OF ITT INDUSTRIES COMMON STOCK, NEW ITT COMMON STOCK AND ITT HARTFORD COMMON STOCK". TREATMENT OF INDEBTEDNESS ITT's practice has been to incur long-term debt at the parent company to a greater extent than at the operating company level. Accordingly, management of ITT intends to allocate the consolidated indebtedness of ITT between ITT Industries and New ITT. This allocation of indebtedness is expected to reflect, in part, the capitalization of comparable companies in the industries represented by such businesses. See "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". LIMITED RELATIONSHIPS BETWEEN THE COMPANIES AFTER THE DISTRIBUTION After the Distribution, none of ITT Industries, New ITT or ITT Hartford will have any ownership interest in the others. Each of ITT Industries, New ITT and ITT Hartford will be an independent public company. ITT Industries, New ITT and ITT Hartford will enter into certain agreements governing their relationship subsequent to the Distribution and providing for certain administrative and employee benefit services and for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Distribution. There will be individuals on the Boards of Directors of ITT Industries, New ITT and ITT Hartford who will also serve on the Board of Directors of one or both of the other companies. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION". DIVIDEND POLICIES The payment and level of dividends by ITT Industries after the Distribution will be subject to the discretion of the ITT Industries Board of Directors. Although it is anticipated that ITT Industries will initially pay quarterly cash dividends of $.15 per share, dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of ITT Industries on a stand-alone basis. New ITT does not intend to pay cash dividends on New ITT Common Stock for the foreseeable future after the Distribution. In addition to being subject to regulatory approval thresholds, the payment and level of cash dividends by ITT Hartford after the Distribution will be subject to the discretion of the ITT Hartford Board of Directors. Although it is anticipated that ITT Hartford will initially pay quarterly cash dividends of $.40 per share, 8 15 dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of ITT Hartford on a stand-alone basis and the impact of the regulatory restrictions discussed herein. See "DIVIDEND POLICY". CORPORATE GOVERNANCE; RIGHTS PLANS Each of ITT Industries, New ITT and ITT Hartford intend to implement a shareholder rights plan. A shareholder rights plan is designed to protect shareholders in the event of an unsolicited offer and other takeover tactics which, in the opinion of the relevant board of directors, could impair its ability to represent shareholder interests. The provisions of a shareholder rights plan may render a takeover of ITT Industries, New ITT or ITT Hartford, as applicable, more difficult or less likely to occur. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEW ITT RIGHTS PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- ITT HARTFORD RIGHTS PLAN". Each of ITT Industries, New ITT and ITT Hartford will be subject to provisions of state corporate law which may prevent certain business combination transactions. In this regard, the corporate laws of Indiana (which would govern ITT Industries as a result of the Reincorporation) and of Nevada (which will govern New ITT) differ in some material respects from the corporate law of Delaware (which now governs ITT and will govern ITT Hartford). See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- INDIANA BUSINESS CORPORATION LAW", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEVADA GENERAL CORPORATION LAW" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW". New ITT and ITT Hartford are also subject to regulations that may have an antitakeover effect. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS". See also "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- PROVISIONS OF ITT INDUSTRIES ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL", "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- PROVISIONS OF ITT HARTFORD CERTIFICATE OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL". DIFFERENT JURISDICTION OF INCORPORATION As a result of the Reincorporation, ITT Industries would be incorporated under Indiana law. Accordingly, shareholders should note the difference between Indiana law and Delaware law, the law under which ITT is incorporated. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW". Since New ITT will be incorporated under Nevada law, shareholders should note the difference between Nevada law and Delaware law, the law under which ITT is incorporated. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND NEVADA LAW". THE REINCORPORATION OF ITT Subject to the conditions summarized below, ITT will be reincorporated in Indiana by merging ITT into ITT Indiana pursuant to the Merger Agreement and, in connection therewith, the name of ITT Corporation will be changed to ITT Industries, Inc. ITT Industries will succeed to all the business, properties, assets and liabilities of ITT, and the shareholders of ITT will automatically become shareholders of ITT Industries. Pursuant to the Reincorporation, each outstanding share of ITT Common Stock will automatically be converted into one share of ITT Industries Common Stock. The number of shares of outstanding capital stock of ITT Industries will be the same as that of ITT. After the Reincorporation, the rights of ITT Industries' 9 16 shareholders will be governed by Indiana law and by ITT Industries' Articles of Incorporation and By-laws, rather than by Delaware law and ITT's existing Restated Certificate of Incorporation and By-laws. If Proposal Two is approved, it is expected that the Reincorporation will be consummated simultaneously with or immediately following the Distribution. REASONS FOR THE REINCORPORATION The Reincorporation is being proposed so that ITT Industries and its Board of Directors will have the benefit of certain features of the Indiana Business Corporation Law. In particular, the Board of Directors of ITT believes the Board of Directors of ITT Industries will have greater flexibility in responding to unsolicited proposals for ITT Industries since Indiana law authorizes directors to consider both the short-term and long-term interests of the corporation as well as interests of other constituencies and other relevant factors. This feature and others may have the effect of discouraging certain types of transactions involving an actual or threatened change of control of ITT Industries as is more fully discussed under "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- INDIANA BUSINESS CORPORATION LAW". In addition, ITT Industries has manufacturing facilities in Indiana. CONDITIONS TO THE REINCORPORATION The Reincorporation is subject to (i) approval of Proposal Two by shareholders of ITT; (ii) the Distribution occurring; (iii) receipt of a favorable opinion of counsel as to the Federal income tax consequences of the Reincorporation; and (iv) the shares of ITT Industries Common Stock to be issued or initially reserved for issuance having been approved for listing on the NYSE, subject to official notice of issuance. The Merger Agreement may be terminated by ITT's Board of Directors in its discretion, and the terms of the Merger Agreement may be amended prior to its effective date. See "THE REINCORPORATION OF ITT -- MERGER AGREEMENT -- CONDITIONS TO THE REINCORPORATION". FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION It is intended that no gain or loss will be recognized to ITT or its shareholders upon the Reincorporation. It is a condition to the Reincorporation that ITT receive an opinion of counsel to this effect. See "THE REINCORPORATION -- FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION". 10 17 ITT INDUSTRIES SUMMARY FINANCIAL AND OPERATING DATA The following table summarizes certain selected consolidated financial data of ITT Industries which has been derived from the Consolidated Financial Statements of ITT Industries for the five years ended December 31, 1994, and the three months ended March 31, 1995 and 1994. The Distribution has been recorded as a discontinuance of the businesses of New ITT and ITT Hartford in the consolidated financial statements of ITT Industries (currently ITT Corporation) contained herein. The information set forth below should be read in conjunction with the information set forth under "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and ITT Industries' Consolidated Financial Statements and the Notes thereto included in this Proxy Statement. The following information is qualified in its entirety by the information and financial statements appearing elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- ------- ------- ($ IN MILLIONS, EXCEPT PER SHARE) INCOME STATEMENT DATA: Net Sales............................. $ 2,248 $ 1,691 $ 7,758 $ 6,621 $ 6,845 $ 6,430 $ 6,972 Income from Continuing Operations..... $ 45 $ 37 $ 202 $ 135 $ 655(1) $ 231 $ 521 Income from Continuing Operations per Share Primary............................. $ .34 $ .24 $ 1.46 $ .83 $ 5.34 $ 1.58 $ 3.82 Fully Diluted....................... $ .34 $ .25 $ 1.46 $ .88 $ 4.77 $ 1.58 $ 3.63 BALANCE SHEET DATA: Total Assets.......................... $12,768 $12,249 $11,035 $12,981 $12,560 $13,283 $12,810 Total Assets, Excluding Net Assets of Discontinued Operations............. $ 6,110 $ 5,850 $ 5,577 $ 5,063 $ 5,746 $ 4,589 $ 4,780 Long-Term Debt, including Capital Leases.............................. $ 1,691 $ 2,064 $ 1,712 $ 1,994 $ 2,272 $ 2,323 $ 2,357 OPERATING DATA: Operating Income...................... $ 103 $ 62 $ 418 $ 229 $ 19 $ 158 $ 305 Depreciation and Amortization......... $ 110 $ 86 $ 373 $ 323 $ 315 $ 295 $ 259 ------- ------- ------- ------- ------- ------- ------- EBITDA(2)............................. $ 213 $ 148 $ 791 $ 552 $ 334 $ 453 $ 564 Orders on Hand(3)..................... $ 3,866 $ 3,392 $ 3,713 $ 3,443 $ 3,861 Number of Employees (in thousands).... 58 50 53 55 60
- --------------- (1) Includes $622 million after tax gain from the sale of the equity interest in Alcatel N.V. (2) EBITDA is presented here as an alternative measure of the ability of ITT Industries to generate cash flow and should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined on the Consolidated Cash Flow Statements in the ITT Industries financial statements.) (3) Orders on hand reflects contracts representing firm contractual commitments as of the respective period (i.e., backlog). 11 18 NEW ITT SUMMARY FINANCIAL AND OPERATING DATA The following table summarizes certain selected combined financial data of New ITT which has been derived from the Combined Financial Statements of New ITT for the five years ended December 31, 1994, and the three months ended March 31, 1995 and 1994. The historical financial statements of New ITT contained in this Proxy Statement are presented as if New ITT were a separate entity for all periods presented. The projected pro forma financial information for the six months ended June 30, 1995, and pro forma financial information for the six months ended June 30, 1994 were prepared as detailed in Note (1) below. A black line separates the historical financial information presented below from the projected pro forma financial information and pro forma financial information presented below. The information set forth below should be read in conjunction with the information set forth under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS", "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and New ITT's Combined Financial Statements and the Notes thereto included in this Proxy Statement. The following information is qualified in its entirety by the information and financial statements appearing elsewhere in this Proxy Statement. For a discussion of certain important limitations and related assumptions concerning the projected and other pro forma financial data presented below, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
PROJECTED PRO FORMA PRO FORMA THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30, --------------- ------------------------------------------ 1995(1) 1994(1) 1995 1994 1994 1993 1992 1991 1990 ---------- ---------- ------ ------ ------ ------ ------ ------ ------ ($ IN MILLIONS) INCOME STATEMENT DATA: Revenues.................. $3,079 $2,744 $1,285 $ 876 $4,760 $4,169 $4,253 $3,855 $3,966 Income before Accounting Changes................. $ 7 $ 8 $ 74 $ 39 $ 2 $ 43 $ 20 BALANCE SHEET DATA: Total Assets.............. $7,968 $3,439 $5,012 $3,791 $3,375 $2,462 $2,222 Long-Term Debt, including Capital Leases.......... $ 671 $ 48 $ 600 $ 169 $ 186 $ 160 $ 120 OPERATING DATA: Operating Income.......... $ 246 $ 156 $ 66 $ 28 $ 292 $ 142 $ 34 $ 126 $ 121 Depreciation and Amortization............ $ 127 $ 129 $ 56 $ 33 $ 132 $ 109 $ 80 $ 63 $ 51 ---------- ---------- ------ ------ ------ ------ ------ ------ ------ EBITDA(2)................. $ 373 $ 285 $ 122 $ 61 $ 424 $ 251 $ 114 $ 189 $ 172 =========== =========== ====== ====== ====== ====== ====== ====== ====== Number of Employees (in thousands).............. 35 19 25 18 18 20 19
- --------------- (1) The projected and other pro forma financial information assumes that the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel properties and MSG in partnership with another entity were completed on January 1, 1995, or January 1, 1994, as applicable. The projected pro forma financial information includes ITT management's estimates of results for the period ended June 30, 1995, which, among other things, assume revenue and expense levels based on historical trends and ITT management's views of current economic conditions. Such information may not be indicative of the results that would have occurred if the acquisitions were completed on January 1, 1995, or January 1, 1994, or of the operating results that will occur for the period ended June 30, 1995. This information should be read in conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" (including, without limitation, the information under the heading "-- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION"), as well as "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". (2) EBITDA is presented here as an alternative measure of the ability of New ITT to generate cash flow and should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined on the Combined Cash Flow Statements in the New ITT financial statements.) 12 19 ITT HARTFORD SUMMARY FINANCIAL AND OPERATING DATA The following table summarizes certain selected consolidated financial data of ITT Hartford which has been derived from the Consolidated Financial Statements of ITT Hartford for the five years ended December 31, 1994, and the three months ended March 31, 1995 and 1994. The historical financial statements of ITT Hartford contained in this Proxy Statement are presented as if ITT Hartford were a separate entity for all periods presented. The information set forth below should be read in conjunction with the information set forth under "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and ITT Hartford's Consolidated Financial Statements and the Notes thereto included in this Proxy Statement. The following information is qualified in its entirety by the information and financial statements appearing elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- ------- ------- ($ IN MILLIONS) INCOME STATEMENT DATA: Revenues................................ $ 3,005 $ 2,642 $11,102 $10,338 $ 9,862 $ 9,242 $ 8,836 Income (Loss) before Accounting Changes............................... $ 140 $ 135 $ 632 $ 537 $ (274) $ 431 $ 328 BALANCE SHEET DATA: Total Assets............................ $82,121 $67,579 $76,765 $66,179 $54,180 $37,771 $32,014 Long-Term Debt, including Capital Leases................................ $ 599 $ 579 $ 596 $ 579 $ 576 $ 594 $ 63 OPERATING DATA: Worldwide Combined Ratio(1)(2).......... 102.7 104.7 102.8 105.9 114.8 111.3 109.7 Number of Employees (in thousands)...... 20 21 21 21 21
- --------------- (1) "Combined ratio" is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of the ratio of incurred losses and loss adjustment expenses to premiums earned (the "loss ratio") and the ratio of underwriting expenses incurred to premiums written (the "expense ratio"). A combined ratio under 100% generally indicates an underwriting profit; a combined ratio over 100% generally indicates an underwriting loss. Federal income taxes, investment income, policy acquisition costs and other non-underwriting expenses are not reflected in the combined ratio. (2) For the periods after 1992, the combined ratios exclude the results of the First State Insurance Companies ("First State"), a group of entities that ceased writing new and renewal business at the end of 1992. Additionally, the 1992 combined ratio excludes the impact of $900 million of reserve-strengthening actions taken to address loss developments in surplus lines and reinsurance at First State and $250 million of legal defense costs associated with environmental-related claims. Including the impact of these actions, the combined ratio for 1992 was 133.7. 13 20 ITT CORPORATION PROXY STATEMENT SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON [ ], 1995 INTRODUCTION This Proxy Statement is being furnished to shareholders of ITT Corporation, a Delaware corporation ("ITT"), in connection with the solicitation of proxies by the Board of Directors of ITT for use at a Special Meeting of Shareholders to be held on [ ], [ ], 1995, and at any adjournment thereof (the "Special Meeting"), for the purpose of considering and acting upon the matters set forth in the accompanying Notice of Special Meeting of Shareholders. This Proxy Statement and the accompanying form of proxy are first being mailed to shareholders of ITT on or about [ ], 1995. Throughout this Proxy Statement (i) the term "ITT Industries" refers to ITT Corporation (or its successor) after the Distribution, renamed ITT Industries, Inc., (ii) the term "New ITT" refers to ITT Destinations, Inc. after the Distribution, renamed ITT Corporation and (iii) the term "ITT Industries Common Stock" refers to ITT Common Stock after the Distribution and ITT Industries Common Stock after the Reincorporation, in each case unless the context otherwise requires. PURPOSE OF THE SPECIAL MEETING At the Special Meeting, the shareholders of ITT will be asked to consider and vote upon six separate but related proposals ("Distribution Proposals") providing for: Proposal One: Approval of the distribution by ITT of all the outstanding shares of common stock of ITT Destinations, Inc., a wholly owned subsidiary of ITT and a Nevada corporation ("ITT Destinations" or "New ITT"), and of all the outstanding shares of common stock of ITT Hartford Group, Inc., a wholly owned subsidiary of ITT and a Delaware corporation ("ITT Hartford"), on the basis described herein, and the related agreements to be entered into in connection therewith (collectively, the "Distribution") (see "THE DISTRIBUTION"); Proposal Two: Approval and adoption of an Agreement and Plan of Merger between ITT and ITT Indiana, Inc. ("ITT Indiana"), a newly formed Indiana corporation and a wholly owned subsidiary of ITT in the form of Annex A hereto (the "Merger Agreement"), providing for the reincorporation of ITT in Indiana pursuant to a statutory merger of ITT into ITT Indiana (the "Reincorporation"), to be effective only if the Distribution occurs (see "THE REINCORPORATION OF ITT"); Proposal Three: Approval of the treatment, in connection with the Distribution, of employee stock options, related stock appreciation rights and restricted stock granted under the ITT 1977 Stock Option Incentive Plan and ITT 1986 Incentive Stock Plan and related amendments to such plans (see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS"); Proposal Four: Approval of the adoption by New ITT of the New ITT 1995 Incentive Stock Plan, to be effective only following the Distribution (see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- NEW ITT INCENTIVE STOCK PLAN"); Proposal Five: Approval of the adoption by ITT Hartford of the ITT Hartford 1995 Incentive Stock Plan, to be effective only following the Distribution (see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT HARTFORD INCENTIVE STOCK PLAN"); and Proposal Six: Approval of the amendment of the Restated Certificate of Incorporation of ITT to change the name of ITT to ITT Industries, Inc. and remove the article of the Restated Certificate of Incorporation in respect of ITT's gaming licenses, in each case only if the Distribution occurs (see "AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF ITT"). 14 21 THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS OF ITT WILL REEVALUATE ITS INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD COULD DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE DISTRIBUTION ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF APPROVAL OR ABANDON THE DISTRIBUTION. The Board has further retained discretion, even if shareholder approval of the Distribution Proposals is obtained and the other conditions to the Distribution are satisfied, to abandon, defer or modify the Distribution or any other element contained in the Distribution Proposals. See "THE DISTRIBUTION -- CONDITIONS TO THE DISTRIBUTION". Although counsel has advised ITT that shareholder approval of the Distribution is not required under Delaware law, the Board of Directors of ITT has made shareholder approval of the Distribution (along with shareholder approval of each of the other Distribution Proposals) a condition to the Distribution because of the importance of the Distribution to ITT and its shareholders. In addition, approval of Proposal Two and Proposal Six is being sought because of the requirements of applicable state corporate law. Approval of Proposal Three is being sought to preserve ITT's ability to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), shareholder approval of performance-based compensation plans (including material amendments thereto) is necessary to qualify for the performance-based compensation exception to the limitation on ITT's ability to deduct compensation paid to certain specified individuals in excess of $1 million. Such approval is also being sought because of Rule 16b-3 under the Exchange Act, which requires shareholder approval under certain circumstances of material amendments to stock option plans. Although ITT does not believe the contemplated amendments are material, it is seeking shareholder approval to avoid any potential uncertainty that arguably might exist if such approval were not obtained. Approval of Proposal Four and Proposal Five is being sought to establish New ITT's and ITT Hartford's ability, as applicable, to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. As noted above, under Section 162(m) of the Internal Revenue Code, shareholder approval of performance-based compensation plans is necessary to qualify for the performance-based compensation exception to the limitation on a company's ability to deduct compensation paid to certain specified individuals in excess of $1 million. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors of ITT unanimously recommends a vote FOR adoption of all the Distribution Proposals. VOTING Only holders of record of Common Stock, $1.00 par value, of ITT (the "ITT Common Stock" or "ITT Industries Common Stock"), at the close of business on , 1995 (the "Special Meeting Record Date"), are entitled to notice of, and to vote at, the Special Meeting. Each of the shares of ITT Common Stock outstanding at the close of business on the Special Meeting Record Date is entitled to one vote at the Special Meeting. All such shares entitled to vote at the Special Meeting are referred to herein as "Record Shares". The presence in person or by proxy of shareholders holding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares will constitute a quorum for the transaction of business at the Special Meeting. As discussed in "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP", it is anticipated that prior to the Special Meeting Record Date all the outstanding shares of the Cumulative Preferred Stock, ESOP Convertible Series, of ITT (the "ITT ESOP Preferred Stock") will be converted into ITT Common Stock. Accordingly, in their capacity as beneficial owners of shares of ITT Common Stock, the participants in the employee stock ownership plan (the "ESOP") feature of the ITT Investment and Savings Plan for Salaried Employees (the "ITT Investment and Savings Plan") will be provided with a proxy in respect of the Distribution Proposals. Pursuant to the terms of 15 22 the ITT Investment and Savings Plan, allocated shares are voted by the trustee in accordance with the directions of the employees to whom such shares have been allocated. Each participant in any of the savings plans for hourly employees will also receive a proxy in respect of the Distribution Proposals representing the shares such participant is entitled to vote under the plans. The relevant trustee, as record holder of the shares, will vote shares corresponding to the relevant participant's account in accordance with instructions received. If you are a participant in ITT's Dividend Reinvestment and Common Stock Purchase Plan, the accompanying proxy indicates the number of shares registered in your name and the number of full shares credited to your account in the Plan. Approval of Proposals One, Two and Six at the Special Meeting will require the affirmative vote of outstanding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares. Approval of Proposals Three, Four and Five at the Special Meeting will require the affirmative vote of outstanding Record Shares which are entitled to vote a majority of the votes of all holders of Record Shares, present in person or represented by proxy, at the Special Meeting. As of June 1, 1995, there were 116.2 million shares of ITT Common Stock outstanding, taking into account the expected conversion of the Cumulative Preferred Stock, $2.25 Convertible Series N, of ITT (the "ITT Series N Preferred Stock") and the ITT ESOP Preferred Stock. Abstentions and broker non-votes are counted as shares present for determination of a quorum. For purposes of determining whether the Distribution Proposals are approved by the shareholders, abstentions and broker non-votes will have the same effect as votes against the Distribution Proposals. PROXIES All shares of ITT Common Stock represented by properly executed proxies will, unless such proxies have previously been revoked, be voted at the Special Meeting in accordance with the directions on the proxies. If no direction is indicated on a properly executed proxy, the shares will be voted in favor of the Distribution Proposals. If any other matters are properly presented at the Special Meeting for action, which is not anticipated, the proxy holders will vote the proxies (which confer authority to such holders to vote on such matters) in accordance with their best judgment. An ITT shareholder returning a proxy may revoke it at any time before it is voted by communicating such revocation in writing to the Secretary of ITT or by executing and delivering a later-dated proxy. In addition, any person who has executed a proxy and is present at the Special Meeting may vote in person instead of by proxy, thereby cancelling any proxy previously given, whether or not written revocation of such proxy has been given. No shareholder of record may appoint more than three persons to act as his or her proxy at the Special Meeting. Any written notice revoking a proxy should be sent to ITT Corporation, 1330 Avenue of the Americas, New York, New York 10019-5490, Attention: Secretary. STOCK OWNERSHIP As of June 1, 1995, there were no shareholders known by ITT to be beneficial owners of more than 5% of any class of voting securities of ITT except as set forth in the following table (which assumes conversion of the ITT Series N Preferred Stock and the ITT ESOP Preferred Stock):
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS ----------------------------- ----------------- ----------------------------- ---------- Bankers Trust Company........ ITT Common Stock 9,708,114 shares, as Trustee 8.36% 280 Park Avenue New York, NY
For a discussion of certain matters in respect of the ITT Investment and Savings Plan and ESOP, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP". 16 23 Information as of March 31, 1995, with respect to the stock ownership of voting securities of ITT of directors and executive officers of ITT and those individuals who will be directors and executive officers of ITT Industries, New ITT and ITT Hartford after the Distribution is set forth under "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- STOCK OWNERSHIP OF ITT INDUSTRIES DIRECTORS AND EXECUTIVE OFFICERS", "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- STOCK OWNERSHIP OF NEW ITT DIRECTORS AND EXECUTIVE OFFICERS" and "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- STOCK OWNERSHIP OF ITT HARTFORD DIRECTORS AND EXECUTIVE OFFICERS". COSTS OF SOLICITATION ITT will bear the costs of the solicitation. In addition to solicitation by mail, ITT will request banks, brokers and other custodian nominees and fiduciaries to supply proxy material to the beneficial owners of ITT Common Stock of whom they have knowledge, and will reimburse them for their expenses in so doing; and certain directors, officers and other employees of ITT, not specially employed for the purpose, may solicit proxies, without additional remuneration therefor, by personal interview, mail, telephone or telegraph. In addition, ITT has retained Georgeson & Company Inc. to assist in the solicitation for a fee of $[ ] plus expenses. NO APPRAISAL RIGHTS Shareholders of ITT will not be entitled to appraisal rights in connection with the Distribution Proposals. 17 24 THE DISTRIBUTION GENERAL The Board of Directors of ITT has approved (subject to the satisfaction of certain conditions, the actual declaration of the dividend in respect of the Distribution and certain other matters) a plan to distribute all the outstanding shares of common stock, without par value, of New ITT ("New ITT Common Stock"), and all the outstanding shares of common stock, without par value, of ITT Hartford ("ITT Hartford Common Stock") to all holders of outstanding ITT Common Stock. In the Distribution, each holder of ITT Common Stock will receive as a dividend one share of New ITT Common Stock for every one share of ITT Common Stock held and one share of ITT Hartford Common Stock for every one share of ITT Common Stock held. MANNER OF EFFECTING THE DISTRIBUTION Certain general terms and conditions relating to the Distribution will be set forth in the Distribution Agreement (the "Distribution Agreement") among ITT, New ITT and ITT Hartford. On or about the first business day following the Distribution Date, ITT will effect the Distribution by providing for the delivery of all outstanding shares of New ITT Common Stock and ITT Hartford Common Stock to the Transfer Agent for the transfer and distribution to the holders of record on the Distribution Record Date of ITT Common Stock. Certificates representing shares of New ITT Common Stock or ITT Hartford Common Stock will be mailed or delivered by the Transfer Agent beginning on or about the first business day following the Distribution Date. In the Distribution, holders of ITT Common Stock will receive one share of New ITT Common Stock for every one share of ITT Common Stock held of record on the Distribution Record Date and one share of ITT Hartford Common Stock for every one share of ITT Common Stock held of record on the Distribution Record Date. It is expected that the Board of Directors of New ITT will adopt a shareholder rights plan. Certificates evidencing shares of New ITT Common Stock issued in the Distribution will therefore represent the same number of New ITT Rights issued under the New ITT Rights Plan. It is also expected that the Board of Directors of ITT Hartford will adopt a shareholder rights plan. Certificates evidencing shares of ITT Hartford Common Stock issued in the Distribution will therefore represent the same number of ITT Hartford Rights issued under the ITT Hartford Rights Plan. Furthermore, it is also expected that the Board of Directors of ITT will adopt a shareholder rights plan in respect of the ITT Industries Common Stock to be effective immediately following the Distribution. Accordingly, after the Distribution, certificates evidencing shares of ITT Industries Common Stock will represent the same number of ITT Industries Rights issued under the ITT Industries Rights Plan. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", "DESCRIPTION OF NEW ITT CAPITAL STOCK -- NEW ITT RIGHTS PLAN" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- ITT HARTFORD RIGHTS PLAN". Unless the context otherwise requires, references herein to the ITT Industries Common Stock include the related ITT Industries Rights, references herein to the New ITT Common Stock include the related New ITT Rights and references herein to the ITT Hartford Common Stock include the related ITT Hartford Rights. No certificates representing fractional shares of either New ITT Common Stock or ITT Hartford Common Stock will be delivered in the Distribution. The Transfer Agent will aggregate fractional shares into whole shares of New ITT Common Stock and ITT Hartford Common Stock, as applicable, and the Registrar will sell them in the open market at prevailing prices on behalf of holders who otherwise would be entitled to receive fractional share interests. Such persons will then receive a cash payment for the amount of their allocable share of the total sale proceeds. The amount of such payment will depend on the prices at which the aggregated fractional shares are sold by the Registrar in the open market shortly after the Distribution Date. Such sales are expected to be made as soon as practicable after the mailing of the New ITT Common Stock certificates and ITT Hartford Common Stock certificates to ITT shareholders. ITT will bear the cost of any commissions incurred in connection with such sales. Fractional share interests are only possible in connection with holdings in the ITT Dividend Reinvestment and Common Stock Purchase Plan. 18 25 Holders of ITT Common Stock on the Distribution Record Date will not be required to pay cash or any other consideration for the New ITT Common Stock or ITT Hartford Common Stock received in the Distribution or to surrender or exchange certificates representing shares of ITT Common Stock (ITT Industries Common Stock after the Distribution) in order to receive New ITT Common Stock or ITT Hartford Common Stock. Holders of ITT Common Stock (ITT Industries Common Stock after the Distribution) will continue to own their shares of ITT Common Stock (ITT Industries Common Stock after the Distribution), and, if such shareholders were shareholders of record on the Distribution Record Date, they will also receive shares of New ITT Common Stock and ITT Hartford Common Stock. The Distribution will not change the number of outstanding shares of ITT Common Stock (ITT Industries Common Stock after the Distribution). The shares of New ITT Common Stock and ITT Hartford Common Stock will be fully paid and nonassessable, and the holders thereof will not be entitled to preemptive rights. See "DESCRIPTION OF NEW ITT CAPITAL STOCK" and "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK". The ITT Board of Directors may amend, modify or abandon the Distribution at any time prior to the Distribution. See "-- CONDITIONS TO THE DISTRIBUTION". Shareholders of ITT having inquiries relating to the Distribution prior to the Distribution Date should contact Georgeson & Company Inc., Wall Street Plaza, New York, New York, 10005, telephone number: 1-800-223-2064, or may call the special telephone number of ITT for the Distribution, 1-800-DIALITT (342-5488), for recorded information. Written inquiries may be directed to the Director of Investor Relations, ITT Corporation, 1330 Avenue of the Americas, New York, New York, 10019-5490. CONDITIONS TO THE DISTRIBUTION The Distribution is subject to (i) approval of the Distribution Proposals by shareholders of ITT; (ii) receipt of favorable tax rulings from the Internal Revenue Service as to certain Federal income tax consequences of the Distribution; (iii) all necessary consents of any third parties having been obtained; (iv) all necessary consents of any governmental or regulatory bodies having been obtained; (v) the Registration Statement on Form 10 under the Securities Exchange Act of 1934 (the "Exchange Act"), to be filed by New ITT with the Securities and Exchange Commission (the "SEC") in respect of the New ITT Common Stock, having become effective; (vi) the Registration Statement on Form 8-A under the Exchange Act, to be filed by ITT Hartford with the SEC in respect of the ITT Hartford Common Stock, having become effective; (vii) the shares of New ITT Common Stock and ITT Hartford Common Stock to be issued or initially reserved for issuance having been approved for listing on a national securities exchange or designated as a national market system security on the National Association of Securities Dealers Automated Quotation System, subject to official notice of issuance; (viii) consummation of the Reincorporation; and (ix) there not being in effect any statute, rule, regulation or order of any court, governmental or regulatory body which prohibits or makes illegal the transactions contemplated by the Distribution and the related agreements. The Board has retained discretion, even if shareholder approval of the Distribution Proposals is obtained and the other conditions to the Distribution are satisfied, to abandon, defer or modify the Distribution or any other element contained in the Distribution Proposals. The terms of the Distribution thus may be modified or conditions thereto may be waived by the Board of Directors of ITT. However, the Board will not waive the requirement of receipt of the favorable tax rulings from the Internal Revenue Service unless, in the Board's judgment, based on the opinion of counsel, Section 355 of the Internal Revenue Code will apply to the Distribution. REASONS FOR THE DISTRIBUTION The Board of Directors of ITT believes that the Distribution should occur for the following reasons: Facilitate Growth of New ITT and ITT Industries. Each of New ITT and ITT Industries intends to pursue acquisition and growth opportunities in its business areas. Such acquisitions and growth would be financed through the proceeds of indebtedness or through the issuance of capital stock of New ITT or ITT Industries, as applicable. It is expected that the Distribution will increase the availability and decrease the cost of raising capital for New ITT and ITT Industries and, at the same time, protect the insurance and credit 19 26 rating of ITT Hartford from being eroded by those financings. Accordingly, the Distribution should facilitate the growth of New ITT and ITT Industries. Management Considerations. At present, the insurance business of ITT, the automotive, defense and electronics, and fluid technology businesses of ITT and the hospitality, entertainment, and information services businesses of ITT are conducted as separate operating groups under the direction of ITT. The Distribution should be beneficial to each of ITT's three operating groups, because it will enable the management of each group to design and advance corporate policies and strategies that are based primarily on the business characteristics of the group and to concentrate its financial resources wholly on its own operations. Some companies that have been spun-off have experienced improved performance as independent companies. An example of this is ITT Rayonier, ITT's former forest products segment. Rayonier's net income in 1994, the first year of operations after the February 1994 spin-off, exceeded budgeted expectations by 30%. However, this is only one example and may not be indicative of outcomes in respect of the Distribution. The Distribution will also permit each of ITT Industries, New ITT and ITT Hartford to design incentive compensation programs that relate more directly to its own business characteristics and performance. Cost Savings. Each of ITT Industries, New ITT and ITT Hartford should be able to rationalize its organizational structure as a result of the Distribution. Accordingly, the administrative and organizational costs of ITT Industries, New ITT and ITT Hartford, taken together, should be reduced from the aggregate levels experienced by ITT prior to the Distribution. Investor Understanding. Debt and equity investors should be able to evaluate better the financial performance of each of ITT Industries, New ITT and ITT Hartford and their respective strategies, thereby enhancing the likelihood that each will achieve appropriate market recognition. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION ITT has requested rulings from the Internal Revenue Service substantially to the effect that, among other things, the Distribution will qualify as a tax-free spinoff under Section 355 of the Internal Revenue Code of 1986. Under Section 355 of the Internal Revenue Code, in general: 1. Holders of ITT Common Stock will not recognize any income, gain or loss as a result of the Distribution except that holders of ITT Common Stock that receive cash in lieu of fractional shares of New ITT Common Stock or ITT Hartford Common Stock will recognize gain or loss equal to the difference between such cash and the tax basis allocated to such fractional shares. Any such gain or loss will constitute capital gain or loss if such fractional shares would have been held as a capital asset on the Distribution Date. 2. Holders of ITT Common Stock will apportion the tax basis of their ITT Common Stock among such ITT Common Stock and any New ITT Common Stock and ITT Hartford Common Stock (including fractional shares of New ITT Common Stock or ITT Hartford Common Stock) received by such holder in the Distribution in proportion to the relative fair market values of such stock on the Distribution Date. 3. The holding period for the New ITT Common Stock and ITT Hartford Common Stock received in the Distribution by holders of ITT Common Stock will include the period during which such holder held the ITT Common Stock with respect to which the Distribution was made, provided that such ITT Common Stock is held as a capital asset by such holder on the Distribution Date. 4. The Distribution will not be treated as a taxable disposition of New ITT or ITT Hartford by ITT Industries. Current Treasury regulations require each holder of ITT Common Stock who receives New ITT Common Stock or ITT Hartford Common Stock pursuant to the Distribution to attach to his or her Federal income tax return for the year in which the Distribution occurs a detailed statement setting forth such data as may be appropriate in order to show the applicability of Section 355 of the Internal Revenue Code to the 20 27 Distribution. ITT will convey the appropriate information to each holder of record of ITT Common Stock as of the Distribution Record Date. The receipt of an Internal Revenue Service ruling, substantially to the foregoing effect, is a condition to the Distribution. The Board of Directors of ITT has reserved the right to waive the receipt of such ruling as a condition to consummation of the Distribution. The Board will not waive such condition unless, in the Board's judgment, based on the opinion of counsel, Section 355 of the Internal Revenue Code will apply to the Distribution. Such a ruling, while generally binding upon the Internal Revenue Service, is subject to certain factual representations and assumptions. If such factual representations and assumptions were incorrect in a material respect, such ruling could become invalid. ITT is not aware of any facts or circumstances which would cause such representations and assumptions to be untrue. Each of ITT, New ITT and ITT Hartford has agreed to certain restrictions on its future actions to provide further assurances that Section 355 of the Internal Revenue Code will apply to the Distribution. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION". If the Distribution were not to qualify under Section 355 of the Internal Revenue Code, then, in general, a corporate tax (which would be very substantial) would be payable by the consolidated group, of which ITT is the common parent, based upon the difference between (x) the fair market value of the New ITT Common Stock and the ITT Hartford Common Stock and (y) the adjusted basis of such New ITT and ITT Hartford Common Stock. In addition, under the consolidated return rules, each member of the consolidated group (including New ITT and ITT Hartford) is jointly and severally liable for such tax liability. Furthermore, if the Distribution were not to qualify as a tax-free spinoff, each ITT shareholder receiving shares of New ITT Common Stock and ITT Hartford Common Stock in the Distribution would be treated as if such shareholder had received a taxable distribution in an amount equal to the fair market value of New ITT Common Stock and ITT Hartford Common Stock received, which would result in (x) a dividend to the extent of such shareholder's pro rata share of ITT's current and accumulated earnings and profits, (y) a reduction in such shareholder's basis in ITT Common Stock to the extent the amount received exceeds such shareholder's share of earnings and profits and (z) a gain from the exchange of ITT Common Stock to the extent the amount received exceeds both such shareholder's share of earnings and profits and such shareholder's basis in ITT Common Stock. ITT has not sought rulings from the Internal Revenue Service as to the Federal income tax consequences of certain restructurings to be effected by ITT prior to the Distribution. Additional taxes may be asserted against ITT Industries, New ITT or ITT Hartford in the course of audits by the Internal Revenue Service or state, local or foreign taxing authorities with respect to ongoing business operations or these restructurings of the ITT group of companies. Assertions of additional tax liability in the course of such audits are a routine matter, and ITT believes that it has adequately provided for any such assertions. The foregoing summary of the anticipated Federal income tax consequences of the Distribution is for general information only. ITT SHAREHOLDERS SHOULD CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF FOREIGN, STATE AND LOCAL TAX LAWS. LISTING AND TRADING OF ITT INDUSTRIES COMMON STOCK, NEW ITT COMMON STOCK AND ITT HARTFORD COMMON STOCK Application will be made to list the ITT Industries Common Stock on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE") under the new symbol "[ ]". As is noted below under "-- CERTAIN FACTORS AFFECTING TRADING PRICES", the trading price of ITT Industries Common Stock will be affected by the Distribution. In addition, the price for ITT Industries Common Stock will be determined in the marketplace and may be influenced by many factors, including (i) the depth and liquidity of the market for ITT Industries Common Stock, (ii) developments affecting the business of ITT Industries, (iii) investor perception of ITT Industries and (iv) general economic and market conditions. Prior to the date hereof, there has not been any established trading market for New ITT Common Stock or ITT Hartford Common Stock. Each of New ITT and ITT Hartford will make application to the NYSE for the listing, as applicable, of the New ITT Common Stock and ITT Hartford Common Stock under the 21 28 symbols "[ ]" and "[ ]", respectively. It is presently anticipated that New ITT Common Stock and ITT Hartford Common Stock will be approved for listing on the NYSE prior to the Distribution Date, and trading may commence on a "when-issued" basis prior to the Distribution, but no earlier than the Distribution Record Date. It is also possible that ITT Common Stock (ITT Industries Common Stock) would be traded on a "when-issued" basis prior to the Distribution, but no earlier than the Distribution Record Date. On the first NYSE trading day following the Distribution Date, "when-issued" trading in respect of each of the ITT Industries Common Stock, New ITT Common Stock and the ITT Hartford Common Stock would end and "regular-way" trading would begin. The NYSE will not approve any trading in respect of the New ITT Common Stock or ITT Hartford Common Stock until the SEC has declared effective the Registration Statement of New ITT on Form 10 in respect of the New ITT Common Stock and the Registration Statement of ITT Hartford on Form 8-A in respect of the ITT Hartford Common Stock. There can be no assurance as to the prices at which the ITT Common Stock (or ITT Industries Common Stock), New ITT Common Stock and ITT Hartford Common Stock will trade before, on or after the Distribution Date. Until each of the New ITT Common Stock and ITT Hartford Common Stock is fully distributed and an orderly market develops in the ITT Industries Common Stock, New ITT Common Stock and ITT Hartford Common Stock, the respective price at which each such stock trades may fluctuate significantly and may be lower than the respective price that would be expected for a fully distributed issue. Prices for each of the New ITT Common Stock and ITT Hartford Common Stock will be determined in the marketplace and may be influenced by many factors, including (i) the depth and liquidity of the market for New ITT Common Stock and ITT Hartford Common Stock, as applicable, (ii) developments affecting the respective businesses of New ITT and ITT Hartford generally, (iii) investor perception of New ITT and ITT Hartford, as the case may be, and (iv) general economic and market conditions. Shares of New ITT Common Stock and ITT Hartford Common Stock distributed to ITT shareholders will be freely transferable, except for shares of New ITT Common Stock received by persons who may be deemed to be "affiliates" of New ITT under the Securities Act of 1933 (the "Securities Act") and shares of ITT Hartford Common Stock received by persons who may be deemed to be "affiliates" of ITT Hartford under the Securities Act. Persons who may be deemed to be affiliates of New ITT or ITT Hartford after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with, New ITT or ITT Hartford, as applicable, and may include certain officers and directors of New ITT or ITT Hartford, as applicable, as well as principal shareholders of New ITT or ITT Hartford, as applicable. Persons who are affiliates of New ITT will be permitted to sell their shares of New ITT Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Section 4(1) of the Securities Act or Rule 144 thereunder. Similarly, persons who are affiliates of ITT Hartford will be permitted to sell their shares of ITT Hartford Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Section 4(1) of the Securities Act or Rule 144 thereunder. CERTAIN FACTORS AFFECTING TRADING PRICES As a result of the Distribution, the trading price of ITT Industries Common Stock will be lower immediately following the Distribution as compared to the trading price of ITT Common Stock immediately prior to the Distribution Record Date, although the receipt of the shares of New ITT Common Stock and ITT Hartford Common Stock is expected to offset such effect. The aggregate market values of ITT Industries Common Stock, New ITT Common Stock and ITT Hartford Common Stock after the Distribution may be less than, equal to, or greater than the market value of ITT Common Stock prior to the Distribution Record Date. The trading price of each of ITT Industries Common Stock, New ITT Common Stock and ITT Hartford Common Stock may also be negatively affected by the continuing impact of the sales of ITT Common Stock prior to the Distribution in respect of the termination of the ESOP feature of the ITT Investment and Savings Plan. See "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP". 22 29 TREATMENT OF CERTAIN DEBT INSTRUMENTS ITT has historically incurred indebtedness at the parent company to a greater extent than at the operating company level. As a result of the Distribution, absent action by ITT, the capital structures of ITT Industries and New ITT after the Distribution would be inappropriate. Accordingly, in connection with the Distribution, management of ITT intends to allocate the consolidated indebtedness of ITT between ITT Industries and New ITT. This allocation of indebtedness is expected to reflect, in part, the capitalization of comparable companies in the industries represented by such businesses. The specific goal will be to reach approximately the allocation of indebtedness after the Distribution as reflected below under "ITT INDUSTRIES FORECASTED CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION" and "ITT HARTFORD FORECASTED CAPITALIZATION". ITT (ITT Industries after the Distribution), New ITT and ITT Hartford will agree in the Distribution Agreement to use their respective reasonable best efforts to achieve an allocation of indebtedness of ITT that reflects the capital structure after the Distribution of ITT Industries, New ITT and ITT Hartford set forth under the above-mentioned captions. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- DISTRIBUTION AGREEMENT". ITT expects that it will have to allocate an aggregate of $2.5 billion of its public indebtedness to New ITT. Depending upon market conditions, expected transaction costs and other factors, ITT may pursue one or more different approaches to achieve the allocation of the public indebtedness of ITT from ITT (ITT Industries) to New ITT. ITT expects to launch in the near future a tender offer and consent solicitation for all ITT debt maturing after December 31, 1995. The tender will be financed with the proceeds from bank borrowings or commercial paper. Such bank or commercial paper borrowings would then be refinanced through obligations of New ITT or ITT Industries, as applicable. The Distribution and the allocation of indebtedness of ITT are not contingent upon the success of the tender and consent solicitation or any particular approach with respect to public bondholders of ITT. Under certain circumstances, ITT Industries, ITT Hartford and New ITT may provide guarantees of or assume ITT public indebtedness allocated to one or more of the other businesses. Management does not believe such guarantees or assumptions would significantly impair the creditworthiness of any of the businesses. Management of ITT believes that there is sufficient financing capability in respect of ITT Industries and ITT Hartford to accomplish the allocation of indebtedness contemplated. See "ITT INDUSTRIES FORECASTED CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION" and "ITT HARTFORD FORECASTED CAPITALIZATION". In addition to the above mentioned actions, ITT expects to establish commercial bank credit facilities for each of ITT Industries, New ITT and ITT Hartford in advance of the Distribution. Although management of ITT has not entered into any formal negotiations with potential lenders, it expects that such credit facilities should provide sufficient liquidity for each of the companies' respective funding needs and should reflect terms customary in the commercial bank credit market. REDEMPTION OF SERIES N PREFERRED STOCK ITT has called for redemption all the outstanding shares of ITT Series N Preferred Stock. Accordingly, there will be no outstanding shares of ITT Series N Preferred Stock on the Special Meeting Record Date. It is expected that the holders of shares of ITT Series N Preferred Stock will exercise their right to convert the ITT Series N Preferred Stock into ITT Common Stock. INTEREST OF CERTAIN PERSONS IN THE DISTRIBUTION As a result of the Distribution, individuals who are directors and executive officers of ITT and certain individuals who will be directors and executive officers of ITT Industries, New ITT or ITT Hartford will receive New ITT Common Stock and ITT Hartford Common Stock in respect of the ITT Common Stock held by such individuals. The beneficial ownership of ITT capital stock for such individuals is reflected in "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- STOCK OWNERSHIP OF ITT INDUSTRIES DIRECTORS AND EXECUTIVE OFFICERS", "NEW ITT MANAGEMENT AND EXECUTIVE COMPENS- 23 30 TION -- STOCK OWNERSHIP OF NEW ITT DIRECTORS AND EXECUTIVE OFFICERS" and "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- STOCK OWNERSHIP OF ITT HARTFORD DIRECTORS AND EXECUTIVE OFFICERS". Stock options, stock appreciation rights and restricted stock held by individuals who are directors and executive officers of ITT and certain individuals who will be directors and executive officers of ITT Industries, New ITT or ITT Hartford will be adjusted in connection with the Distribution. For a discussion of such adjustments, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS". Also, new employee benefit plans for the benefit of such individuals and others will be adopted by each of New ITT and ITT Hartford effective after the Distribution. ITT Industries will enter into an employment agreement with the Chairman, President and Chief Executive of ITT Industries. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENT; OTHER RELATIONSHIPS". Also, New ITT will enter into an employment agreement with the Chairman and Chief Executive of New ITT. In addition, the guarantee obligations of ITT under the employment agreement between CWI and the Chairman and Chief Executive Officer of CWI will be assigned to New ITT, and certain amendments will be made to such employment agreement to reflect such assignment. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENTS WITH CERTAIN NEW ITT EXECUTIVE OFFICERS; OTHER RELATIONSHIPS". Furthermore, ITT Hartford will enter into an employment agreement with each of the President and Chief Operating Officer of The Hartford and the President and Chief Operating Officer of the Hartford Life Insurance Companies. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- EMPLOYMENT AGREEMENTS WITH CERTAIN ITT HARTFORD EXECUTIVE OFFICERS". Information concerning the management and executive compensation arrangements of ITT Industries, New ITT and ITT Hartford after the Distribution is set forth under "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION", "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION" AND "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION". ACCOUNTING TREATMENT The Distribution has been recorded as a discontinuance of the businesses of New ITT and ITT Hartford in the consolidated financial statements of ITT Industries contained herein. The historical financial statements of New ITT and ITT Hartford contained in this Proxy Statement are presented as if New ITT and ITT Hartford were separate entities for all periods presented. This Proxy Statement contains certain pro forma financial information for New ITT and related projected pro forma financial information that, in each case, reflects the acquisition of the 70.3% interest in Ciga, the acquisition of certain other hotel properties, the acquisition of MSG in partnership with another entity and the acquisition of CWI. Certain historical financial information is also included for Ciga (presented in Italian lira and in accordance with Italian accounting principles) and CWI. The capitalization tables included in this Proxy Statement reflect the actual capitalization of ITT Industries, New ITT and ITT Hartford as of a particular date, the projected capitalization of such companies immediately prior to the anticipated Distribution and the capitalization of such companies adjusted for the Distribution. The projected capitalization set forth for such companies immediately prior to the anticipated Distribution is based on important assumptions and qualifications as to the transactions or results expected to occur prior to the anticipated Distribution Date. See "ITT INDUSTRIES FORECASTED CAPITALIZATION", "NEW ITT FORECASTED CAPITALIZATION", "ITT HARTFORD FORECASTED CAPITALIZATION", "ITT INDUSTRIES SELECTED FINANCIAL AND OPERATING DATA", "NEW ITT SELECTED FINANCIAL AND OPERATING DATA", "ITT HARTFORD SELECTED FINANCIAL AND OPERATING DATA" and "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS". After the Distribution, the date of the fiscal year end for both New ITT and ITT Hartford will be December 31. The date of the fiscal year end for ITT Industries will remain December 31. 24 31 DIVIDEND REINVESTMENT PLAN The Transfer Agent will mail to participants in the ITT Dividend Reinvestment Plan shares of New ITT Common Stock and ITT Hartford Common Stock in the same manner as to other ITT shareholders. The existing ITT Dividend Reinvestment and Common Stock Purchase Plan will continue in effect in respect of ITT Industries after the Distribution. New ITT and ITT Hartford have not made any determination as to whether to establish a dividend reinvestment plan in respect of their respective common stock. FINANCIAL ADVISORS Lazard Freres & Co. and Bear Stearns & Co. Inc. have been engaged by ITT on customary terms to provide financial advice in connection with the Distribution. 25 32 THE REINCORPORATION OF ITT Subject to the conditions summarized below, ITT will be reincorporated in Indiana by merging ITT into ITT Indiana pursuant to the Merger Agreement and, in connection therewith, the name of ITT Corporation will be changed to ITT Industries, Inc. ITT Industries will succeed to all the business, properties, assets and liabilities of ITT, and the shareholders of ITT will automatically become shareholders of ITT Industries. Pursuant to the Reincorporation, each outstanding share of ITT Common Stock will automatically be converted into one share of ITT Industries Common Stock. The number of shares of outstanding capital stock of ITT Industries will be the same as that of ITT. After the Reincorporation, the rights of ITT Industries' shareholders will be governed by Indiana law and by ITT Industries' Articles of Incorporation and By-laws, rather than by Delaware law and ITT's existing Restated Certificate of Incorporation and By-laws. If Proposal Two is approved, it is expected that the Reincorporation will be consummated simultaneously with or immediately following the Distribution. REASONS FOR THE REINCORPORATION The Reincorporation is being proposed so that ITT Industries and its Board of Directors will have the benefit of certain features of the Indiana Business Corporation Law. In particular, the Board of Directors of ITT believes that the Board of Directors of ITT Industries will have greater flexibility in responding to unsolicited proposals for ITT Industries since Indiana law authorizes directors to consider both the short-term and long-term interests of the corporation as well as interests of other constituencies and other relevant factors. This feature and others may have the effect of discouraging certain types of transactions involving an actual or threatened change of control of ITT Industries as is more fully discussed under "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- INDIANA BUSINESS CORPORATION LAW". In addition, ITT Industries has manufacturing facilities in Indiana. MERGER AGREEMENT The following summary of certain provisions of the Merger Agreement is qualified in its entirety by reference to the text of the Merger Agreement set forth as Annex A attached to this Proxy Statement. ITT INDUSTRIES COMMON STOCK Upon the effectiveness of the Reincorporation, each outstanding share of ITT Common Stock will be automatically converted into one share of ITT Industries Common Stock. Each outstanding certificate representing shares of ITT Common Stock will automatically represent the same number of shares of ITT Industries Common Stock. ITT Industries will be entitled to the same rights, powers, qualifications, limitations and restrictions as the presently outstanding ITT Common Stock, although some differences will arise as a result of the application of Indiana law. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW". EXCHANGE OF STOCK CERTIFICATES NOT REQUIRED It will not be necessary for shareholders of ITT to exchange their existing stock certificates of ITT Common Stock for stock certificates of ITT Industries Common Stock. Delivery of stock certificates issued by ITT prior to the Reincorporation or the Distribution will constitute "good delivery" of shares of ITT Industries Common Stock in transactions subsequent to the Reincorporation or the Distribution. When presently outstanding certificates are presented for transfer after the Reincorporation, new certificates of ITT Industries will be issued. New certificates will also be issued upon the request of any shareholder, subject to renewal requirements as to proper endorsement, signature guarantee, if required, and payment of applicable taxes. CONDITIONS TO THE REINCORPORATION The Reincorporation is subject to the (i) approval of Proposal Two by shareholders of ITT; (ii) the Distribution occurring; (iii) receipt of a favorable opinion of counsel as to the Federal income tax 26 33 consequences of the Reincorporation; and (iv) the shares of ITT Industries Common Stock to be issued or initially reserved for issuance having been approved for listing on the NYSE, subject to official notice of issuance. The Merger Agreement may be terminated by ITT's Board of Directors in its discretion, and the terms of the Merger Agreement may be amended prior to its effective date. SIGNIFICANT CHANGES AFFECTING SHAREHOLDERS Differences between Delaware and Indiana law will result in certain significant changes affecting shareholders. For a discussion of certain significant differences between Delaware and Indiana law, see "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW". The Articles of Incorporation of ITT Industries would be substantially the same as the Restated Certificate of Incorporation of ITT except as summarized in this paragraph. The description of the history of ITT and the provision pertaining to gaming licenses would be removed. See "AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF ITT -- REMOVAL OF GAMING LICENSE PROVISION". In addition, the provision expressly authorizing the Board of Directors of ITT to perform certain acts would be replaced with a more general provision authorizing the Board of Directors of ITT Industries to perform all acts that may be performed by the company, subject to applicable state law, the other provisions of the Articles of Incorporation and the By-laws. A provision specifying the manner in which vacancies on the Board of Directors are to be filled and a provision providing for the indemnification of directors and officers for liability arising as a result of their respective positions, both of which are contained in the By-laws of ITT, would be included in the Articles of Incorporation of ITT Industries. Finally, several new provisions, including a series of provisions specifying the manner in which the number of directors constituting the Board of Directors of ITT Industries is to be determined, a provision limiting the conditions under which directors may be removed from office, a provision expressly limiting the preemptive rights of the shareholders to subscribe for additional issues of stock and a provision expressly providing that the shareholders will not be liable for the debts of the company, would be added. A copy of the Articles of ITT Industries is included as an exhibit to the Merger Agreement, which is set forth as Annex A and attached to this Proxy Statement. The By-laws of ITT Industries would be substantially the same as the By-laws of ITT, except that the "alien" ownership provision may be removed. See "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- RESTRICTIONS ON ALIEN OWNERSHIP". In addition, a provision specifying that all actions required or permitted to be taken by shareholders be taken at a duly called annual or special meeting of the shareholders, which is contained in the Restated Certificate of Incorporation of ITT, would be included in the By-laws of ITT Industries. Finally, the provision limiting the conditions under which directors may be removed from office, reflecting the provision in ITT Industries' Articles, would be added. A copy of the By-laws of ITT Industries is included as an exhibit to the Merger Agreement, which is set forth as Annex A and attached to this Proxy Statement. FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION As a condition to the Reincorporation, ITT will receive an opinion of counsel substantially to the effect that for Federal income tax purposes: (1) No gain or loss will be recognized to ITT shareholders upon the automatic conversion of ITT Common Stock into ITT Industries Common Stock, as described above. (2) The basis of the ITT Industries Common Stock into which a shareholder's ITT Common Stock is to be converted will be the same as the basis of such ITT Common Stock. (3) The holding period of the ITT Industries Common Stock into which a shareholder's ITT Common Stock is to be converted will include the period during which such ITT Common Stock was held, provided that the shares of ITT Common Stock were held as a capital asset on the date of the conversion. 27 34 (4) The merger of ITT into ITT Indiana (ITT Industries), as described above, will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code. (5) No gain or loss will be recognized to ITT Industries upon the receipt of the assets of ITT in exchange for ITT Industries Common Stock. (6) No gain or loss will be recognized to ITT upon the transfer of its assets to ITT Industries solely in exchange for shares of and the assumption by ITT Industries of the liabilities of ITT. (7) The basis of the assets of ITT in the hands of ITT Industries will be the same as the basis of such assets in the hands of ITT immediately prior to the transfer. (8) The holding period of the assets of ITT in the hands of ITT Industries will include the period during which such assets were held by ITT. EMPLOYEE BENEFITS AND COMPENSATION MATTERS In connection with the Distribution, nearly all of ITT's existing employee benefit and incentive compensation plans and outstanding awards thereunder will be amended and adjusted. Moreover, certain plans will be adopted by New ITT and by ITT Hartford. The employee benefits and compensation matters being undertaken in connection with the Distribution are being done with the overriding goal of putting in place or continuing essentially the same benefits arrangements at the three companies after the Distribution as those that currently exist at ITT. Some adjustments to employee incentive stock awards will also take place to preserve the economic value of such awards. Approval of Proposal Three set forth under "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the amendments to certain of the employee compensation plans of ITT described below under the heading "-- ITT STOCK OPTIONS AND OTHER AWARDS -- ADJUSTMENTS TO AWARDS HELD BY EMPLOYEES OF ITT INDUSTRIES AND CERTAIN OTHERS". Such approval is being sought to preserve ITT's ability to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. Under Section 162(m) of the Internal Revenue Code, shareholder approval of performance-based compensation plans (including material amendments thereto) is necessary to qualify for the performance-based compensation exception to the limitation on ITT's ability to deduct compensation paid to certain specified individuals in excess of $1 million. Such approval is also being sought because of Rule 16b-3 under the Exchange Act, which requires shareholder approval under certain circumstances of material amendments to stock option plans. Although ITT does not believe the contemplated amendments are material, it is seeking shareholder approval to avoid any potential uncertainty that arguably might exist if such approval were not obtained. Approval of Proposal Four set forth under the heading "INTRODUCTION - -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the incentive stock plan of New ITT described below under the heading "-- NEW ITT INCENTIVE STOCK PLAN". Approval of Proposal Five set forth under the heading "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the incentive stock plan of ITT Hartford described below under the heading "-- ITT HARTFORD INCENTIVE STOCK PLAN". Approval of Proposal Four and Proposal Five is being sought to establish New ITT's and ITT Hartford's ability, as applicable, to deduct, for Federal income tax purposes, compensation paid pursuant to the exercise of stock options and in respect of other stock awards. As noted above, under Section 162(m) of the Internal Revenue Code, shareholder approval of performance-based compensation plans is necessary to qualify for the performance-based compensation exception to the limitation on a company's ability to deduct compensation paid to certain specified individuals in excess of $1 million. In addition to the foregoing, ITT Industries, New ITT and ITT Hartford will enter into an Employee Benefits Services and Liability Agreement pursuant to which the liability of ITT with respect to certain employee benefits matters will be allocated among ITT Industries, New ITT and ITT Hartford in the manner described below. For a discussion of additional terms of such agreement, see "RELATIONSHIP BETWEEN ITT 28 35 INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". ITT STOCK OPTIONS AND OTHER AWARDS Stock options, stock appreciation rights and restricted stock awards (collectively, "stock awards") of ITT currently are outstanding under the ITT 1977 Stock Option Incentive Plan (the "1977 Plan"), the ITT 1986 Incentive Stock Plan (the "1986 Plan") and the ITT 1994 Incentive Stock Plan (the "1994 Plan"). These stock awards would be adjusted or substituted as a result of the Distribution. The treatment of stock awards that are outstanding prior to the Distribution is designed to preserve, as a general matter, the economic value of each award. In addition, with respect to individuals who will continue their employment with either ITT Industries, New ITT or ITT Hartford, the treatment of outstanding stock awards is designed to provide an incentive for such employees to remain employed with their respective employers and to benefit by their efforts to increase the market value of the stock of such employer. With respect to individuals who hold outstanding stock awards but who will not continue employment after the Distribution with either ITT Industries, New ITT or ITT Hartford, including individuals who are retired or who were employed in ITT's discontinued businesses, the treatment of outstanding stock awards is designed to permit such individuals to elect either to liquidate their investment in ITT prior to the Distribution or to retain their stock awards with respect to ITT Industries, as adjusted to reflect the Distribution. ADJUSTMENTS TO AWARDS HELD BY EMPLOYEES OF ITT INDUSTRIES AND CERTAIN OTHERS In general, it is expected that the number of shares of ITT Industries Common Stock in respect of each stock option and related right held by employees of ITT Industries and certain others (including any employees of New ITT or ITT Hartford who do not surrender their ITT stock awards as contemplated below) and the exercise price with respect thereto, and the number of shares in respect of restricted stock awards, will be adjusted as necessary to reflect the Distribution. The 1977 Plan provides that, in the event the number of outstanding shares of ITT Common Stock is changed by reason of a split-up or combination of shares or recapitalization or by reason of a stock dividend, the ITT Board of Directors shall appropriately adjust the number of shares then subject to options granted under the Plan and the price per share payable upon exercise of such options so as to reflect such change. The 1986 Plan provides that, in the event of any recapitalization, reclassification, split-up or consolidation of shares, merger or consolidation of ITT or sale by ITT of all or a substantial portion of its assets, the Compensation and Personnel Committee of the Board of Directors of ITT may make such adjustments in the stock subject to stock awards granted under the Plan as such Committee deems equitable. The Distribution is not one of the transactions specifically listed in the adjustment provisions of the 1977 Plan or the 1986 Plan. The Board of Directors of ITT, however, believes that it would be inequitable and inconsistent with the clear intent of these Plans not to adjust outstanding awards for the effect of the Distribution. Accordingly, the 1977 Plan and the 1986 Plan will be amended to provide expressly that stock options and related rights and restricted stock awards under the 1977 Plan and the 1986 Plan shall be appropriately adjusted by the Compensation and Personnel Committee of the Board of Directors of ITT to reflect the Distribution in the case of the 1977 Plan and the 1986 Plan. Approval of Proposal Three set forth under "INTRODUCTION --PURPOSE OF THE SPECIAL MEETING" will constitute approval of such amendments. As amended, the relevant portion of the 1977 Plan would read as follows: "In the event of any reorganization, merger, recapitalization, consolidation, liquidation, stock dividend, stock split, reclassification, combination of shares, rights offering, split-up, or extraordinary dividend (including a spin-off) or divestiture, or any other change in the corporate structure or shares of the Corporation, the number of shares for which options may thereafter be granted under this Plan, the number of shares then subject to options theretofore granted under this Plan, the price per share payable upon exercise of such options, shall be appropriately adjusted as determined by the Committee so as to reflect such change." 29 36 As amended, the relevant portion of the 1986 Plan would read as follows: "In the event of any reorganization, merger, recapitalization, consolidation, liquidation, stock dividend, stock split, reclassification, combination of shares, rights offering, split-up, or extraordinary dividend (including a spin-off) or divestiture, or any other change in the corporate structure or shares, the Committee may make such adjustment in the Stock subject to Awards, including Stock subject to purchase by an Option, or the terms, conditions or restrictions on Stock or Awards, including the price payable upon the exercise of such Option and the number of shares subject to restricted stock awards, as the Committee deems equitable." Under the 1994 Plan, in the event of any recapitalization, reclassification, split-up or consolidation of shares of stock or stock dividend, merger or consolidation of ITT or sale by ITT of all or a portion of its assets, the Compensation and Personnel Committee of the Board of Directors may make such adjustments in the stock subject to awards under the plan as such Committee deems equitable. Pursuant to that provision, awards granted under the 1994 Plan will be adjusted to reflect the Distribution. TREATMENT OF AWARDS HELD BY EMPLOYEES OF NEW ITT It is expected that awards in respect of ITT Common Stock held by those individuals who will become employees of New ITT will be replaced with substitute awards in respect of New ITT Common Stock under the 1995 New ITT Incentive Stock Plan discussed below under "-- NEW ITT INCENTIVE STOCK PLAN". Such substitute awards will be designed to preserve the economic value of the related ITT stock awards, and the vesting and expiration dates and other terms of the related awards will remain in effect under the New ITT substitute stock awards. In order to obtain such substitute stock awards, the employees will be required to surrender their ITT stock awards. Following the Distribution, New ITT intends to grant substitute stock options and related stock appreciation rights with respect to New ITT Common Stock in substitution for the surrendered ITT stock options and related stock appreciation rights. The total number of New ITT substitute options granted will be determined so that the aggregate spread between the exercise price and the fair market value with respect to New ITT options immediately after the Distribution will equal such aggregate spread with respect to the ITT options immediately before the Distribution. Substitution of stock appreciation rights will be calculated in a like manner so as to maintain the economic value of surrendered ITT stock appreciation rights. It is also anticipated that New ITT will grant to its employees substitute restricted stock awards to replace surrendered shares of ITT restricted stock. Shares of New ITT Common Stock received in respect of restricted shares of ITT Common Stock will be made subject to the same restrictions as apply to the restricted shares of ITT Common Stock. Replacement of surrendered ITT stock awards is believed to be beneficial to New ITT and its shareholders because it will allow New ITT to restore meaningful compensation incentives to its key employees. All other terms and conditions of the ITT stock awards will apply to the substitute stock awards, and the vesting provisions with respect thereto are expected to provide a continuing incentive to remain in the employ of New ITT after the Distribution. TREATMENT OF AWARDS HELD BY EMPLOYEES OF ITT HARTFORD It is expected that awards in respect of ITT Common Stock held by those individuals who will become employees of ITT Hartford will be replaced with substitute awards in respect of ITT Hartford Common Stock under the 1995 ITT Hartford Incentive Stock Plan discussed below under "-- ITT HARTFORD INCENTIVE STOCK PLAN". Such substitute awards will be designed to preserve the economic value of the related ITT stock awards, and the vesting and expiration dates and other terms of the related awards will remain in effect under the ITT Hartford substitute stock awards. In order to obtain such substitute stock awards, the employees will be required to surrender their unexercised ITT stock awards. Following the Distribution, ITT Hartford intends to grant substitute stock options with respect to ITT Hartford Common Stock in substitution for the surrendered ITT stock options. The total number of ITT Hartford substitute options granted will be determined so that the aggregate spread between the exercise price and the fair market value with respect to 30 37 ITT Hartford options immediately after the Distribution will equal such aggregate spread with respect to the ITT options immediately before the Distribution. It is also anticipated that ITT Hartford will grant to its employees substitute restricted stock awards to replace surrendered shares of ITT restricted stock. Shares of ITT Hartford Common Stock received in respect of restricted shares of ITT Common Stock will be made subject to the same restrictions as apply to the restricted shares of ITT Common Stock. Replacement of surrendered ITT stock awards is believed to be beneficial to ITT Hartford and its shareholders because it will allow ITT Hartford to restore meaningful compensation incentives to its key employees. All other terms and conditions of the ITT stock awards will apply to the substitute stock awards, and the vesting provisions with respect thereto are expected to provide a continuing incentive to remain in the employ of ITT Hartford after the Distribution. TREATMENT OF AWARDS HELD BY OTHER INDIVIDUALS A number of retirees and former employees of ITT, including executives of certain of ITT's discontinued businesses, currently hold outstanding ITT stock awards. With respect to holders of ITT stock awards in these categories, it is expected that the Board of Directors of ITT and/or the Compensation and Personnel Committee of the Board of Directors of ITT will waive any remaining restrictions on the exercisability and vesting of such stock awards beginning October 1, 1995 (or such earlier date as the Board or Committee may determine). Those holders who do not exercise their stock options and related rights (or dispose of their restricted stock) on or prior to the Distribution Date will continue to hold their stock awards with respect to ITT Industries, as adjusted to reflect the Distribution in the same manner as for stock awards held by employees of ITT Industries, as described above. NEW ITT INCENTIVE STOCK PLAN Effective prior to the Distribution, New ITT is expected to adopt the 1995 New ITT Incentive Stock Plan (the "1995 New ITT Stock Plan"), under which New ITT may grant to its employees awards in the form of stock options, stock appreciation rights, restricted stock and performance shares, as well as substitute stock options, stock appreciation rights and restricted stock awards. The 1995 New ITT Stock Plan will be administered by the New ITT Compensation and Personnel Committee, and is designed to enable New ITT to attract and retain key employees and to directly link their incentives to the performance of New ITT Common Stock. The 1995 New ITT Stock Plan will be substantially similar to the current 1994 ITT Incentive Stock Plan. For a more complete description of the 1995 New ITT Stock Plan, see "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION - -- NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS". The 1995 NEW ITT Stock Plan is also set forth in full as Annex B hereto. Approval of Proposal Four set forth under the heading "INTRODUCTION - -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the 1995 New ITT Stock Plan. ITT HARTFORD INCENTIVE STOCK PLAN Effective prior to the Distribution, ITT Hartford is expected to adopt the 1995 ITT Hartford Incentive Stock Plan (the "1995 ITT Hartford Stock Plan"), under which ITT Hartford may grant to its employees awards in the form of stock options, stock appreciation rights, restricted stock and performance shares, as well as substitute stock options, stock appreciation rights and restricted stock awards. The 1995 ITT Hartford Stock Plan will be administered by the ITT Hartford Compensation and Personnel Committee, and is designed to enable ITT Hartford to attract and retain key employees and to directly link their incentives to the performance of ITT Hartford Common Stock. The 1995 ITT Hartford Stock Plan will be substantially similar to the current 1994 ITT Incentive Stock Plan. For a more complete description of the terms of the 1995 ITT Hartford Incentive Stock Plan, see "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD COMPENSATION, BENEFIT AND RETIREMENT PLANS". The 1995 ITT Hartford Stock Plan is also set forth in full as Annex C hereto. Approval of Proposal Five set forth under the heading "INTRODUCTION - -- PURPOSE OF THE SPECIAL MEETING" will constitute approval of the 1995 ITT Hartford Stock Plan. 31 38 TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP The ITT Investment and Savings Plan is a tax-qualified profit sharing, stock bonus and 401(k) plan covering all eligible employees of ITT and its affiliates (including New ITT and ITT Hartford and their respective subsidiaries). The ITT Investment and Savings Plan contains a leveraged ESOP. As of June 1, 1995, the ITT Investment and Savings Plan held 8,674,930 shares of ITT ESOP Preferred Stock convertible into 9,708,114 shares of ITT Common Stock. On May 9, 1989, the leveraged ESOP acquired 9,384,951 shares of ITT ESOP Preferred Stock from ITT for approximately $700 million. The acquisition was financed by the ITT Investment and Savings Plan with a cash contribution from ITT of $1.2 million and the issuance by the ITT Investment and Savings Plan of its promissory note to ITT in the aggregate principal amount of approximately $698.8 million. The ITT Investment and Savings Plan's note was refinanced on June 19, 1989, through the issuance of two series of notes (the "ESOP Notes") to a number of banks and other institutional investors pursuant to a Note and Guaranty Agreement among ITT, as guarantor, the ITT Investment and Savings Plan, acting by and through Bankers Trust Company, the trustee of the ESOP, and the various purchasers of the ESOP Notes. The proceeds of the sale of the ESOP Notes were used to repay all but approximately $5 million of the promissory note held by ITT. Excluding accrued interest, approximately $541 million of the ESOP Notes and $5 million of the original ITT note remain unpaid as of June 1, 1995. The Note and Guaranty Agreement provides that, in the event of an optional prepayment of all or a portion of the ESOP Notes prior to their scheduled maturities, a "makewhole payment" may be required to compensate the purchasers for their loss of certain tax benefits available generally to lenders in connection with loans to employee stock ownership plans. Payments on the ESOP Notes are made with employer contributions and cash dividends paid on shares acquired by the leveraged ESOP. As employer contributions and dividends paid on the ITT ESOP Preferred Stock are used to make principal and interest payments on the ESOP Notes, shares of ITT ESOP Preferred Stock are allocated to participants' accounts in the ESOP. As of June 1, 1995, 5,878,616 shares of ITT ESOP Preferred Stock (on an as-converted basis, approximately 5.06% of the shares of ITT Common Stock then outstanding) remained unallocated. ITT has called for redemption all the outstanding shares of ITT ESOP Preferred Stock. It is expected that the trustee of the ESOP will exercise its right to convert the ITT ESOP Preferred Stock into ITT Common Stock. Accordingly, there will be no outstanding shares of ITT ESOP Preferred Stock on the Special Meeting Record Date. ITT also plans to terminate the ESOP portion of the ITT Investment and Savings Plan and has given notice to such effect. In connection with such termination, it is expected that the trustee of the ESOP will sell a portion of the unallocated converted shares of ITT Common Stock. The net proceeds of the sale of such shares will be used to prepay the ESOP Notes and the remaining balance on the loan from ITT. After taking into account the payment of the ESOP Notes, the loan from ITT and the "makewhole" prepayment penalty in respect of the ESOP Notes, any remaining value attributable to the unallocated shares of ITT Common Stock (substantially in the form of shares of ITT Common Stock) will be allocated to the accounts of participants in the ITT Investment and Savings Plan based on the value of their individual ESOP account in proportion to the value of all ESOP accounts. Shares of ITT Common Stock issued upon conversion of the ITT ESOP Preferred Stock, whether held or sold by the trustee for the ESOP, will participate in the Distribution. Effective as of the Distribution Date, the ITT Investment and Savings Plan will be divided into three separate plans: a plan (the "ITT Industries Investment and Savings Plan") covering eligible salaried employees of ITT Industries and its affiliates ("ITT Industries Employees"); a plan (the "New ITT Investment and Savings Plan") covering eligible salaried employees of New ITT and its affiliates ("New ITT Employees"); and a plan (the "ITT Hartford Investment and Savings Plan") covering eligible salaried employees of ITT Hartford and its affiliates ("ITT Hartford Employees"). Existing account balances of current New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the New ITT Investment and Savings Plan. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS -- NEW ITT INVEST- 32 39 MENT AND SAVINGS PLAN". Existing account balances of current ITT Hartford Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the ITT Hartford Investment and Savings Plan. See "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD COMPENSATION, BENEFIT AND RETIREMENT PLANS -- ITT HARTFORD INVESTMENT AND SAVINGS PLAN". Existing account balances of current ITT Industries Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will remain in the ITT Investment and Savings Plan, which will continue in existence as the ITT Industries Investment and Savings Plan. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES COMPENSATION, BENEFIT AND RETIREMENT PLANS -- ITT INDUSTRIES INVESTMENT AND SAVINGS PLAN". Existing account balances of each former employee of ITT Industries, New ITT and ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such former employee, will be transferred to the investment and savings plan maintained by the company responsible for providing retirement plan benefits to such former employee. ITT SALARIED RETIREMENT PLAN ITT currently maintains the Retirement Plan for Salaried Employees of ITT Corporation (the "ITT Salaried Retirement Plan"), a defined benefit retirement plan that, as of March 31, 1995, covered approximately 15,000 active U.S. salaried employees, approximately 5,500 active U.S. salaried employees at divested companies who continue to earn credit under the ITT Salaried Retirement Plan for purposes of eligibility (but not benefit accrual) and 29,000 former employees of ITT, including retirees. The Hartford currently maintains the Hartford Fire Insurance Company Retirement Plan (the "ITT Hartford Retirement Plan"), a defined benefit retirement plan that, as of March 31, 1995, covered approximately 17,600 active U.S. salaried employees and 9,200 former employees of The Hartford, including retirees. In addition, ITT Sheraton sponsors the Sheraton Corporation Retirement Plan for Salaried Employees (the "ITT Sheraton Salaried Retirement Plan"), a defined benefit retirement plan for its U.S. salaried employees, which, as of March 31, 1995, covered approximately 4,100 active employees and 3,700 former employees of ITT Sheraton, including retirees. Management of ITT has determined that, after the Distribution, such Plan should remain with ITT Industries and be renamed the "ITT Industries Salaried Retirement Plan". See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". As a result of those arrangements, ITT Industries will be responsible for administering benefits under the ITT Industries Salaried Retirement Plan with respect to its own employees as well as ITT retirees and certain employees of ITT Hartford and New ITT. As sponsor of the ITT Industries Salaried Retirement Plan, ITT Industries will be responsible for all benefits accrued thereunder. To the extent that the assets in the ITT Industries Salaried Retirement Plan are insufficient to satisfy the benefit liabilities thereunder, ITT Industries will be responsible, in accordance with applicable law, for satisfying those liabilities with its own assets. As of December 31, 1994, the fair market value of the assets of the ITT Salaried Retirement Plan exceeded the accumulated benefit obligations thereunder, as calculated for purposes of Statement of Financial Accounting Standards No. 87. Effective as of the Distribution Date, the ITT Hartford Retirement Plan will be amended and will continue to be maintained by ITT Hartford following the Distribution. Effective as of the Distribution Date, New ITT will adopt the ITT Sheraton Salaried Retirement Plan as the New ITT Salaried Employees Retirement Plan (the "New ITT Salaried Retirement Plan"), and New ITT will maintain such Plan following the Distribution. Each of the ITT Industries Salaried Retirement Plan, the New ITT Salaried Retirement Plan and the ITT Hartford Retirement Plan will be amended to recognize all service rendered on or prior to the Distribution Date with other ITT companies for all purposes of determining eligibility, vesting and benefit accrual and to further provide for an offset of any benefit payable from any other ITT retirement plan covering 33 40 the same period of service. Each such plan will be further amended to recognize post-Distribution Date service with other ITT companies for purposes of eligibility and vesting. EXCESS BENEFIT PLANS Applicable Federal legislation limits the amount of benefits that can be paid and compensation that may be recognized under a tax-qualified retirement plan. Accordingly, ITT currently maintains a non-qualified retirement plan (the "ITT Excess Benefit Plan") for payment of those benefits at retirement that cannot be paid from the ITT Salaried Retirement Plan. In addition, ITT maintains a "rabbi trust" (the "ITT Excess Plan Trust") to fund excess retirement benefits for its officers. The Hartford and ITT Sheraton maintain similar non-qualified retirement plans, and The Hartford maintains a similar rabbi trust for certain plan members. It is expected that, as of the Distribution Date, ITT Industries will retain primary liability under the ITT Excess Benefit Plan with respect to those individuals who were employees of ITT prior to the Distribution. In addition, ITT Industries will maintain the assets and liabilities associated with the ITT Excess Plan Trust, although employees of New ITT and ITT Hartford will be asked to waive their benefits under the ITT Excess Benefit Plan and ITT Excess Plan Trust and to receive such benefits from similar plans and trusts of New ITT and ITT Hartford, as the case may be. Although the liabilities associated with the rabbi trusts are funded, the assets in such trusts are subject to the claims of creditors. After considering various alternatives with respect to providing additional security for these benefits, ITT has determined that, with respect to the period after the Distribution Date, ITT Industries, New ITT and ITT Hartford will enter into an agreement to provide joint and several guarantees to employees and retirees who are participants in any of the existing excess plans as of the Distribution Date for obligations accrued as of the Distribution Date and will further provide for indemnification in favor of the company required to provide excess benefit payments pursuant to such guarantee. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS ITT currently maintains an employee welfare benefit program that includes retiree medical and life insurance benefits for certain of its salaried employees and certain hourly employees. ITT salaried retirees, as of March 31, 1995, currently covered for such benefits numbered approximately 7,500. Retiree medical and life insurance benefits for these retirees, including retirees who were employed by companies no longer affiliated with ITT, will remain the responsibility of ITT Industries after the Distribution Date. The Hartford and ITT Destinations (through its subsidiaries) each maintains a separate employee welfare benefit program that also includes retiree medical and life insurance benefits for certain of their respective salaried employees. The Hartford salaried retirees and ITT Destinations salaried retirees currently covered for such benefits numbered approximately 4,100 and 450, respectively, as of March 31, 1995. ITT Hartford and New ITT, as applicable, will continue to be responsible for providing benefits to these retirees. After the Distribution Date, each of ITT Industries, New ITT and ITT Hartford will also assume the responsibility for providing retiree medical and life insurance benefits to their respective employees and future retirees pursuant to applicable plans, including plans for hourly employees and others. ITT is required to reflect in its financial statements a reasonable estimate of the present value of the liabilities associated with retiree medical and life insurance benefits. As of December 31, 1994, the actuarially computed value of these liabilities (the Accumulated Postretirement Benefit Obligation, or the "APBO") amounted to $679 million, of which $191 million has been funded through various trust arrangements, leaving a net unfunded APBO of $488 million. Based on the allocation of the responsibility of these benefits described above, the portion of the net unfunded APBO allocable to ITT Industries, New ITT and ITT Hartford is $271 million, $23 million and $194 million, respectively. ITT has previously established reserves to provide for the net unfunded APBO, which reserves will be apportioned among ITT Industries, New ITT and ITT Hartford in accordance with the Employee Benefit Services and Liability Agreement. 34 41 Effective as of the Distribution Date, ITT Industries, New ITT and ITT Hartford will enter into the Employee Benefits Services and Liability Agreement pursuant to which ITT Industries, New ITT and ITT Hartford will agree that, upon the occurrence of a change in corporate control (as defined in the Employee Benefits Services and Liability Agreement) of ITT Industries, New ITT or ITT Hartford, as applicable, during the ten-year period immediately following the Distribution, the company at which a change in control occurred will not reduce or eliminate, during the balance of such ten-year period, medical benefits (or increase associated retiree contributions) provided to individuals who were retirees as of the Distribution Date unless the other companies consent to such reduction or elimination, except that the company in respect of which a change in control occurred may, in its sole discretion, modify such benefits in accordance with the changes contemplated in the assumptions that were used to establish the APBO in effect immediately preceding the change in control. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". This portion of the Agreement may tend to restrict the flexibility of ITT Industries, New ITT and ITT Hartford to take steps to manage costs associated with retiree medical benefits after a change in corporate control. Accordingly, the Agreement may limit the financial flexibility of ITT Industries, New ITT and ITT Hartford during its term. This portion of the agreement may also make the acquisition of control of ITT Industries, New ITT and ITT Hartford more difficult or less likely to occur. The Employee Benefits Services and Liability Agreement expressly provides that there are no third-party beneficiaries to that Agreement (although the Agreement will provide for direct guarantees to employees and retirees of ITT Industries, New ITT and ITT Hartford with respect to certain excess plan benefits as discussed above). Accordingly, retirees of ITT and others will have no right to enforce the Agreement and thus should not rely in any respect on the agreement by New ITT, ITT Industries and ITT Hartford to maintain a level of retiree medical benefits for a specified period of time either before or after a change in corporate control or the other agreements specified therein. OTHER Pursuant to the Employee Benefits Services and Liability Agreement between ITT Industries, New ITT and ITT Hartford, which will be effective as of the Distribution Date, the liability of ITT for the employee benefits matters discussed above and certain other matters will be allocated among ITT Industries, New ITT and ITT Hartford. See "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". As a result, each of ITT Industries, New ITT and ITT Hartford will have certain direct and indirect liabilities and obligations to certain individuals who were employed by ITT prior to the Distribution Date, including ITT retirees. AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF ITT NAME CHANGE Shareholders will be asked to vote to amend the Restated Certificate of Incorporation of ITT to change the name of ITT Corporation to ITT Industries, Inc. effective only if the Distribution occurs. Immediately prior to or simultaneously with the Distribution, the name of ITT Destinations, Inc. will be changed to ITT Corporation. REMOVAL OF GAMING LICENSE PROVISION After the Distribution, ITT (renamed ITT Industries) will no longer be in the gaming business. Rather, as a result of the Distribution, the gaming operations of ITT will be owned and operated by New ITT. Accordingly, shareholders of ITT will be asked to vote to amend the Restated Certificate of Incorporation of ITT, effective only if the Distribution occurs, to remove certain provisions that had been included therein solely because of ITT's gaming operations. 35 42 Article 7 of ITT's Restated Certificate of Incorporation provides that (i) all securities of ITT are subject to redemption by ITT to the extent necessary to prevent the loss, or to secure the reinstatement, of any casino gaming license held by ITT or any of its subsidiaries in any jurisdiction within or without the United States of America, (ii) all securities of ITT are held subject to the condition that if a holder thereof is found by a gaming authority in any such jurisdiction to be disqualified or unsuitable pursuant to any gaming law, such holder will be required to dispose of all securities of ITT held by such holder and (iii) it will be unlawful for any such disqualified person to (A) receive payments of interest or dividends on any ITT securities, (B) exercise, directly or indirectly, any rights conferred by any securities of ITT or (C) receive any remuneration in any form, for services rendered or otherwise, from the subsidiary that holds the gaming license in such jurisdiction. The full text of Article 7 is attached hereto as Annex D. A provision comparable to such Article will be included in the Articles of Incorporation of New ITT after the Distribution. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS". RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION New ITT is wholly owned by ITT, and the results of operations of its subsidiaries have been included in ITT's consolidated financial results. After the Distribution, ITT Industries will not have any ownership interest in New ITT, and New ITT will be an independent public company. Furthermore, except as described below, all contractual relationships existing prior to the Distribution between ITT and New ITT will be terminated except for commercial relationships in the ordinary course of business. ITT Hartford is also wholly owned by ITT, and the results of operations of its subsidiaries have been included in ITT's consolidated financial results. After the Distribution, ITT Industries will not have any ownership interest in ITT Hartford, and ITT Hartford will be an independent public company. Furthermore, except as described below, all contractual relationships existing prior to the Distribution between ITT and ITT Hartford will be terminated except for commercial relationships in the ordinary course of business. After the Distribution, neither New ITT nor ITT Hartford will have any ownership interest in the other. In addition, except as described below, all contractual relationships existing prior to the Distribution between New ITT and ITT Hartford will be terminated except for commercial relationships in the ordinary course of business. Prior to the Distribution, ITT, New ITT and ITT Hartford will enter into certain agreements, described below, governing their relationship subsequent to the Distribution (at which time ITT will have been renamed ITT Industries) and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Distribution. Each of ITT, New ITT and ITT Hartford believes that the agreements are fair to the parties to the relevant agreements and contain terms which generally are comparable to those which would have been reached in arms-length negotiations with unaffiliated parties (although such comparisons are difficult with respect to certain agreements which relate to the specific circumstances of the Distribution and the transactions contemplated thereby). In some cases, portions of the agreements are based on agreements ITT has negotiated with third parties. In other cases, portions of the agreements are believed to be comparable to those used by others in similar transactions. In each case, the terms of these agreements will have been reviewed by individuals who will be included at a senior management level of ITT Industries, New ITT and ITT Hartford. In addition, for a discussion of the treatment and allocation of certain indebtedness of ITT among ITT Industries, New ITT and ITT Hartford and the potential for agreements among the companies with respect thereto, see "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". Copies of the forms of such agreements will be filed as exhibits to the Registration Statements of each of New ITT and ITT Hartford in respect of the registration of the New ITT Common Stock and the ITT Hartford Common Stock under the Exchange Act. In addition, ITT intends to file a Current Report on Form 8-K in connection with the Distribution, and the agreements either will be filed as exhibits to such Report or will be included in a later filing by ITT under the Exchange Act. See "AVAILABLE INFORMATION". The 36 43 following description summarizes certain terms of such agreements, but is qualified by reference to the texts of such agreements, which are incorporated herein by reference. DISTRIBUTION AGREEMENT ITT, New ITT and ITT Hartford will enter into the Distribution Agreement providing for, among other things, certain corporate transactions required to effect the Distribution and other arrangements between ITT Industries, New ITT and ITT Hartford subsequent to the Distribution. The Distribution Agreement will provide for, among other things, assumptions of liabilities and cross-indemnities designed to allocate, effective as of the Distribution Date, financial responsibility for the liabilities arising out of or in connection with (i) the automotive, defense and electronics, and fluid technology businesses to ITT Industries and its subsidiaries, (ii) the hospitality, entertainment and information services businesses to New ITT and its subsidiaries and (iii) the insurance businesses to ITT Hartford and its subsidiaries. The Distribution Agreement will also provide for the allocation of the financial responsibility for the liabilities arising out of or in connection with former and present businesses not described in the immediately preceding sentence to or among ITT Industries, New ITT and ITT Hartford. The Distribution Agreement will provide that New ITT and ITT Hartford will use their respective reasonable best efforts to achieve an allocation of indebtedness of ITT that reflects the capital structure after the Distribution of ITT Industries, New ITT and ITT Hartford as contemplated in the discussion under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The Distribution Agreement will provide that neither ITT Industries, New ITT nor ITT Hartford will take any action that would jeopardize the intended tax consequences of the Distribution. Specifically, each of ITT Industries, New ITT and ITT Hartford will agree to maintain its status as a company engaged in the active conduct of a trade or business, as defined in Section 355(b) of the Internal Revenue Code, until the first anniversary of the Distribution Date. Neither ITT Industries, New ITT nor ITT Hartford expects this limitation to inhibit its financing or other activities or its ability to respond to unanticipated developments. However, compliance with the provisions of Section 355 of the Internal Revenue Code may make the acquisition of control of each of ITT Industries, New ITT and ITT Hartford more difficult or less likely to occur. Under the Distribution Agreement, each of ITT Industries, New ITT and ITT Hartford will agree to provide to the other parties, for a fee agreed upon by the parties, subject to certain conditions, on an "as-needed" basis such services as may be agreed upon between such applicable parties. The Distribution Agreement will also provide that, except as otherwise set forth therein or in any other agreement, all costs or expenses incurred on or prior to the Distribution Date in connection with the Distribution will be charged to the party for whose benefit the expenses are incurred. Each party shall bear its own costs and expenses incurred after the Distribution Date. INTELLECTUAL PROPERTY AGREEMENT ITT (ITT Industries), New ITT and ITT Hartford will enter into Intellectual Property Transfer and License Agreements (collectively, "IP Agreements") which will provide for the transfer of, or licensing to or among these companies of, rights under patents, trademarks, copyrights, software, technology, trade secrets and other intellectual property (collectively, "Intellectual Property") owned by ITT, New ITT or ITT Hartford and their respective subsidiaries and associated companies as of the Distribution Date. The purpose of these IP Agreements is to provide ITT, New ITT and ITT Hartford and their respective subsidiaries and associated companies with those continuing rights and licenses under such Intellectual Property following the Distribution Date necessary for the continued conduct of their respective businesses. Included within the IP Agreements will be: (i) a transfer from ITT to New ITT of all the right, title and interest in the "ITT" name, mark, and logo and the applications, registrations and goodwill associated therewith, and (ii) a grant of rights and licenses from New ITT to ITT (ITT Industries) and ITT Hartford and their respective subsidiaries and associated companies to continue to use the "ITT" name, mark and logo in the operation of their respective 37 44 businesses following the Distribution Date, subject to the maintenance of quality standards for their products and services as determined by New ITT in accordance with the terms of the IP Agreements and subject to certain other conditions. TAX ALLOCATION AGREEMENT ITT Industries, New ITT and ITT Hartford will enter into a Tax Allocation Agreement to the effect that New ITT and ITT Hartford will pay their respective shares of ITT's (ITT Industries') consolidated tax liability for the tax years that New ITT and ITT Hartford, as applicable, are included in ITT's (ITT Industries') consolidated Federal income tax return. The Agreement will also provide for sharing of pre-closing state taxes where appropriate as well as certain other matters. EMPLOYEE BENEFITS AGREEMENT ITT Industries, New ITT and ITT Hartford will enter into an Employee Benefits Services and Liability Agreement providing for the allocation of retirement, medical, disability and other employee welfare benefit plans among ITT Industries, New ITT and ITT Hartford. The Agreement will provide for the treatment described above of certain retirement plans for salaried employees, investment and savings programs, excess benefit plans, retiree medical and life insurance benefits and stock awards. See "EMPLOYEE BENEFITS AND COMPENSATION MATTERS". In addition, the Agreement will provide that, as of the Distribution Date, each of ITT Industries, New ITT and ITT Hartford shall generally assume all liability for their respective active employees under their respective employee welfare benefit plans and that each of ITT Industries, New ITT and ITT Hartford will be allocated a proportionate share of any assets of ITT held with respect thereto. The Agreement will further set forth the responsibility for post-Distribution payments to ITT employees in respect of the ITT Annual Incentive Bonus Plan and the ITT Long-Term Performance Plan. The responsibility for each such employee will generally be allocated to the company with whom he or she will be employed immediately following the Distribution. Finally, the Agreement will provide that, to the extent that any non-U.S. retirement plans of ITT cover employees of more than one of ITT Industries, New ITT and ITT Hartford, the assets and liabilities with respect to such plans will be allocated between such companies in an equitable manner, in accordance with applicable law. DIRECTORS After the Distribution Date, there will be individuals on the Boards of Directors of ITT Industries, New ITT and ITT Hartford who will also serve on the Board of Directors of one or both of the other companies. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD OF DIRECTORS", "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- NEW ITT BOARD OF DIRECTORS" and "ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT HARTFORD BOARD OF DIRECTORS". DIVIDEND POLICY ITT INDUSTRIES DIVIDEND POLICY The payment and level of cash dividends by ITT Industries after the Distribution will be subject to the discretion of the Board of Directors of ITT Industries. Although it is anticipated that ITT Industries will initially declare quarterly dividends of $.15 per share, dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of ITT Industries on a stand-alone basis. Although there can be no assurance that dividends will be paid, and no dividends have been declared, management of ITT Industries believes that its cash flows after the Distribution should be sufficiently strong, after giving effect to the Distribution, that, barring unforeseen circumstances, the initial dividend rate can be maintained for the foreseeable future. 38 45 NEW ITT DIVIDEND POLICY New ITT does not intend to pay cash dividends on New ITT Common Stock for the foreseeable future after the Distribution. ITT HARTFORD DIVIDEND POLICY In addition to being subject to regulatory approval thresholds, the payment and level of cash dividends by ITT Hartford after the Distribution will be subject to the discretion of the Board of Directors of ITT Hartford. Although it is anticipated that ITT Hartford will initially declare quarterly dividends of $.40 per share, dividend decisions will be based on, and affected by, a number of factors, including the operating results and financial requirements of ITT Hartford on a stand-alone basis and the impact of the regulatory restrictions discussed below under "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION - -- HOLDING COMPANY; LIMITATION ON DIVIDENDS". Although there can be no assurance that dividends will be paid, and no dividends have been declared, management of ITT Hartford believes that its cash flows after the Distribution should be sufficiently strong, after giving effect to the Distribution, that, barring unforeseen circumstances, the initial dividend rate can be maintained for the foreseeable future. 39 46 DIVIDENDS AND PRICE RANGE OF ITT COMMON STOCK The ITT Common Stock is listed and traded on the NYSE and the PSE. The following table reflects for the periods subsequent to the spin-off of Rayonier Inc. ("Rayonier") in February 1994 the high and low sales prices per share of ITT Common Stock, as reported on the NYSE Composite Tape. Such prices prior to the spin-off of Rayonier have been adjusted by a factor to reflect the value of Rayonier. The table also sets forth the cash dividends paid per share of ITT Common Stock.
PRICE RANGE OF ITT COMMON CASH STOCK DIVIDENDS ------------------ ON ITT HIGH LOW COMMON STOCK ------ ------- ------------ 1993 First Quarter...................................... $73.55 $62.65 $ .495 Second Quarter..................................... 78.77 70.14 .495 Third Quarter...................................... 86.03 76.04 .495 Fourth Quarter..................................... 86.15 78.77 .495 1994 First Quarter...................................... 94.66 80.25 $ .495 Second Quarter..................................... 90.75 81.13 .495 Third Quarter...................................... 87.13 78.63 .495 Fourth Quarter..................................... 90.38 77.00 .495 1995 First Quarter...................................... 104 86.63 .495 Second Quarter (through June 14, 1995)............. 118.25 96.63 .495
The Board of Directors of ITT has declared a dividend of $.495 on the ITT Common Stock to be paid July 1, 1995. In connection with its approval (subject to the satisfaction of certain conditions, the actual declaration of the dividend in respect of the Distribution and certain other matters) of the Distribution, the Board of Directors of ITT has determined that it will not pay any cash dividend on the ITT Common Stock prior to the currently anticipated Distribution Date of December 31, 1995, other than the July 1 dividend. On June 12, 1995, the last trading day before ITT announced that, subject to the matters in the previous paragraph, its Board of Directors had approved the Distribution, the closing price for ITT Common Stock on the NYSE Composite Tape was $109.25. On June 14, 1995, the closing price for ITT Common Stock on the NYSE Composite Tape was $117.38. SHAREHOLDERS ARE URGED TO OBTAIN CURRENT TRADING PRICE INFORMATION. ITT Common Stock is also listed on the following exchanges: U.S. regional exchanges, Amsterdam, Antwerp, Basel, Bern, Brussels, Frankfurt, Geneva, Lausanne, London, Paris, Vienna and Zurich. For a discussion of the impact of the Distribution on the trading price of ITT Industries Common Stock, see "THE DISTRIBUTION -- CERTAIN FACTORS AFFECTING TRADING PRICES". For a discussion of the dividend policy of ITT Industries, New ITT and ITT Hartford after the Distribution, see "DIVIDEND POLICY". There has not been any established public trading market for New ITT Common Stock or ITT Hartford Common Stock. For a discussion of certain matters in respect thereof, see "THE DISTRIBUTION -- LISTING AND TRADING OF ITT INDUSTRIES COMMON STOCK, NEW ITT COMMON STOCK AND ITT HARTFORD COMMON STOCK". 40 47 ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS The following financial forecast of the capitalization of ITT Industries is based on ITT management's forecasts and assumptions concerning events and circumstances which are expected to occur subsequent to the latest historical balance sheet date but prior to and including December 31, 1995 (the anticipated Distribution Date), including future results of operations and other events. For purposes of this forecasted capitalization, net income in the last nine months of 1995 is assumed to approximate the same level as the comparable 1994 period. Significant assumptions of events between March 31, 1995 and December 31, 1995, include the following: - - The completion of the sale of assets of ITT Financial which was merged into ITT in May 1995. Gross proceeds of $12.8 billion are assumed and through May 31, 1995, $10.6 billion of gross proceeds have been received. Agreements for the sale or monetization of an additional $1.9 billion in assets have been negotiated. Net proceeds, after repayment of ITT Financial debt and payment of related income taxes, are expected to approximate $1.4 billion. - - Termination of the ESOP portion of the ITT Investment and Savings Plan. It is expected that the Plan trustee will exercise the right to convert the ITT ESOP Preferred Stock into ITT Common Stock. A portion of the unallocated converted shares of ITT Common Stock is then expected to be sold with proceeds used to repay ESOP debt, which totalled $541 million at March 31, 1995. - - The sale of certain non-strategic assets resulting in debt reduction of approximately $90 million. - - The transfer of certain assets from New ITT to ITT Industries totalling approximately $400 million, which had not been completed at March 31, 1995. - - The use of $300 million in cash balances at various subsidiaries of ITT Industries to repay existing short-term borrowings, primarily in Germany. - - Net capital expenditures totalling $300 million in the last nine months of 1995 ($352 million was incurred in the comparable 1994 period). - - Conversion into ITT Common Stock of the 531,000 shares of the ITT Series N Preferred Stock which will result in an additional 672,000 common shares outstanding based on June 1, 1995 data. As noted under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS", depending upon market conditions, expected transaction costs and other factors, ITT may pursue one or more different approaches to achieve the allocation of the public indebtedness from ITT (ITT Industries) to New ITT. ITT expects to launch in the near future a tender offer and consent solicitation for all ITT debt maturing after December 31, 1995. The forecasted capitalization does not assume any particular approach, costs or benefits associated with such allocation. These forecasts and assumptions do not represent an all-inclusive list of those events or transactions expected to occur prior to the Distribution which will affect the capitalization of ITT Industries; however, in ITT management's judgment, the listed assumptions and forecasts are the most significant. There have been no changes in accounting principles anticipated in this capitalization forecast. * * * * LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION The assumptions and estimates underlying the projected and forecasted data and information in this Proxy Statement are inherently uncertain and, although considered reasonable by management of ITT, are subject to significant business, economic and competitive uncertainties, many of which are beyond the control of ITT and its subsidiaries. Accordingly, there can be no assurance that the projected and forecasted financial results will be realized. In fact, actual results in the future usually will differ from the forecasted financial results and the differences may be material. NEITHER ITT NOR ANY OF ITS SUBSIDIARIES INTENDS TO UPDATE ANY FORECASTED OR PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE ABSENCE OF 41 48 ANY SUCH UPDATE SHOULD NOT BE CONSTRUED AS AN INDICATION THAT MANAGEMENT OF ITT (OR OF ITT INDUSTRIES AFTER THE DISTRIBUTION) CONTINUES TO BELIEVE THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT IS REASONABLE. In addition, the pro forma financial information contained in this Proxy Statement does not purport to be indicative of the results of operations that would actually have been reported had the transactions underlying the pro forma adjustments actually been consummated on such dates or of the results of operations that may be reported by ITT Industries in the future. 42 49 ITT INDUSTRIES FORECASTED CAPITALIZATION The following table sets forth the consolidated capitalization of ITT Industries as of March 31, 1995 on a historical basis, forecasted as to December 31, 1995 (the anticipated Distribution Date), and as adjusted to give effect to the Distribution and the transactions contemplated thereby, including the allocation of indebtedness discussed under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The significant assumptions used below have been described in "ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding two pages. The following data is qualified in its entirety by the financial statements of ITT Industries and other information contained elsewhere in this Proxy Statement.
(A) (A)(B) FORECASTED PRO FORMA MARCH 31, 1995 AT DECEMBER 31, AFTER ACTUAL 1995 DISTRIBUTION -------------- --------------- ------------- ($ IN MILLIONS) Cash and Cash Equivalents.............................. $ 401 $ 103 $ 103 ====== ======= ======= Debt, excluding ESOP................................... 2,763 1,843 1,843 ESOP Debt.............................................. 541 -- -- Cumulative Preferred Stock............................. 652 -- -- Common Stock........................................... 106 116 116 Capital Surplus........................................ -- 642 642 Deferred Compensation -- ESOP.......................... (541) -- -- Cumulative Translation Adjustment...................... (49) (49) (49) Unrealized Loss on Securities, Net of Tax.............. (737) (711) -- Retained Earnings...................................... 6,906 8,069 624 ------ ------- ------- Total Capitalization......................... $9,641 $ 9,910 $ 3,176 ====== ======= =======
- --------------- (a) See "ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding two pages. (b) Column gives effect to the distribution of ITT Hartford Common Stock and New ITT Common Stock (book values of $3.9 billion and $2.9 billion, respectively) and the allocation of indebtedness contemplated by "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The unrealized loss on securities, net of tax, relates solely to the investment portfolios at ITT Hartford and is included in the forecasted capitalization of ITT Hartford after the Distribution. See "ITT HARTFORD FORECASTED CAPITALIZATION". 43 50 NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS The following financial forecast of the capitalization of New ITT is based on ITT management's forecasts and assumptions concerning events and circumstances which are expected to occur subsequent to the latest historical balance sheet date but prior to and including December 31, 1995 (the anticipated Distribution Date), including future results of operations and other events. For purposes of this forecasted capitalization, net income in the last nine months of 1995 is assumed to approximate the same level as the comparable 1994 period. Significant assumptions of events between March 31, 1995 and December 31, 1995, include the following: - The sale of certain non-strategic assets resulting in debt reduction of approximately $400 million. Negotiations are in progress for the sale of assets with an estimated fair value of approximately $500 million. - The transfer of certain assets to ITT Industries by New ITT totalling approximately $400 million, which had not been completed at March 31, 1995. - The completion of the planned independent financing of a hotel joint venture project in which New ITT provided the initial funding. The independent financing contemplated in 1995 would have the effect of reducing debt by $110 million. - The transfer to New ITT, through ITT Industries, of approximately 4.3 million shares of Alcatel Alsthom at net carrying value which was $380 million at March 31, 1995. - Net capital expenditures totalling $240 million in the last nine months of 1995 ($407 million was incurred in the comparable 1994 period). As noted under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS", depending upon market conditions, expected transaction costs and other factors, ITT may pursue one or more different approaches to achieve the allocation of the public indebtedness from ITT (ITT Industries) to New ITT. ITT expects to launch in the near future a tender offer and consent solicitation for all ITT debt maturing after December 31, 1995. The following financial forecast does not assume any particular approach costs or benefits to such allocation. These forecasts and assumptions do not represent an all-inclusive list of those events or transactions expected to occur prior to the Distribution which will affect the capitalization of New ITT; however, in ITT management's judgment, the listed assumptions and forecasts are the most significant. There have been no changes in accounting principles anticipated in this capitalization forecast. * * * * LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION The assumptions and estimates underlying the projected and forecasted data and information in this Proxy Statement are inherently uncertain and, although considered reasonable by management of ITT, are subject to significant business, economic and competitive uncertainties, many of which are beyond the control of ITT and its subsidiaries. Accordingly, there can be no assurance that the projected and forecasted financial results will be realized. In fact, actual results in the future usually will differ from the forecasted financial results and the differences may be material. NEITHER ITT NOR ANY OF ITS SUBSIDIARIES INTENDS TO UPDATE ANY FORECASTED OR PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE ABSENCE OF ANY SUCH UPDATE SHOULD NOT BE CONSTRUED AS AN INDICATION THAT MANAGEMENT OF ITT (OR OF NEW ITT AFTER THE DISTRIBUTION) CONTINUES TO BELIEVE THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT IS REASONABLE. In addition, the pro forma financial information contained in this Proxy Statement does not purport to be indicative of the results of operations that would actually have been reported had the transactions underlying the pro forma adjustments actually been consummated on such dates or of the results of operations that may be reported by New ITT in the future. 44 51 NEW ITT FORECASTED CAPITALIZATION The following table sets forth the consolidated capitalization of New ITT as of March 31, 1995 on a historical basis, forecasted as to December 31, 1995 (the anticipated Distribution Date), and as adjusted to give effect to the Distribution and the transactions contemplated thereby, including the allocation of indebtedness discussed under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". The significant assumptions used below have been described in "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding page. The following data is qualified in its entirety by the financial statements of New ITT and other information contained elsewhere in this Proxy Statement.
(A) (A)(B) FORECASTED PRO FORMA MARCH 31, 1995 AT DECEMBER 31, AFTER ACTUAL 1995 DISTRIBUTION -------------- ---------------- -------------- ($ IN MILLIONS) Cash and Cash Equivalents......................... $ 244 $ 177 $ 177 =========== ============ ========== Debt from Non-Affiliated Entities(c).............. 886 713 3,196 Investments and Advances from ITT Industries (ITT)(c)........................................ 5,590 5,365 -- Common Shares and Capital Surplus................. -- -- 2,882 Minority Interest................................. 213 213 213 ------- ------- ------- Total Capitalization.............................. $6,689 $6,291 $6,291 =========== ============ ==========
- --------------- (a) See "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding page. (b) Column gives effect to the distribution of New ITT Common Stock and the transfer of various long-term debt agreements to New ITT as contemplated by "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS". (c) Prior to the Distribution, New ITT financed its operations with interest-bearing debt from both external and internal sources. Debt from non-affiliated entities represents external borrowings, while Investments and Advances from ITT Industries (ITT) represents internal sources of capital. 45 52 ITT HARTFORD SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS The following financial forecast of the capitalization of ITT Hartford is based on ITT management's forecasts and assumptions concerning events and circumstances which are expected to occur subsequent to the latest historical balance sheet date but prior to December 31, 1995 (the anticipated Distribution Date), including future results of operations and other events. For purposes of this forecasted capitalization, net income in the last nine months of 1995 is assumed to approximate the same level as the comparable 1994 period. Significant assumptions of events between March 31, 1995 and December 31, 1995, include the following: - The transfer to New ITT, through ITT Industries, of approximately 4.3 million shares of Alcatel Alsthom at net carrying value which was $380 million at March 31, 1995. - Redemption of the remainder of ITT Hartford's currently outstanding preferred stock with new borrowings totalling $86 million. - Additional borrowings of approximately $170 million by December 31, 1995. - No change in the unrealized loss on securities, net of tax, between March 31, 1995 and December 31, 1995. These forecasts and assumptions do not represent an all-inclusive list of those events or transactions expected to occur prior to the Distribution which will affect the capitalization of ITT Hartford; however, in ITT management's judgment, the listed assumptions and forecasts are the most significant. There have been no changes in accounting principles anticipated in this capitalization forecast. * * * * LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION The assumptions and estimates underlying the projected and forecasted data and information in this Proxy Statement are inherently uncertain and, although considered reasonable by management of ITT, are subject to significant business, economic and competitive uncertainties, many of which are beyond the control of ITT and its subsidiaries. Accordingly, there can be no assurance that the projected and forecasted financial results will be realized. In fact, actual results in the future usually will differ from the forecasted financial results and the differences may be material. NEITHER ITT NOR ANY OF ITS SUBSIDIARIES INTENDS TO UPDATE ANY FORECASTED OR PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE ABSENCE OF ANY SUCH UPDATE SHOULD NOT BE CONSTRUED AS AN INDICATION THAT MANAGEMENT OF ITT (OR OF ITT HARTFORD AFTER THE DISTRIBUTION) CONTINUES TO BELIEVE THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT IS REASONABLE. In addition, the pro forma financial information contained in this Proxy Statement does not purport to be indicative of the results of operations that would actually have been reported had the transactions underlying the pro forma adjustments actually been consummated on such dates or of the results of operations that may be reported by ITT Hartford in the future. 46 53 ITT HARTFORD FORECASTED CAPITALIZATION The following table sets forth the consolidated capitalization of ITT Hartford as of March 31, 1995 on a historical basis, forecasted as to December 31, 1995 (the anticipated Distribution Date), and as adjusted to give effect to the Distribution and the transactions contemplated thereby, including the allocation of indebtedness discussed under "THE DISTRIBUTION -- TREATMENT OF CERTAIN DEBT INSTRUMENTS." The significant assumptions used below have been described in "ITT HARTFORD SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on the preceding page. The following data is qualified in its entirety by the financial statements of ITT Hartford and other information contained elsewhere in this Proxy Statement.
(A) (A)(B) FORECASTED PRO FORMA MARCH 31, 1995 AT DECEMBER 31, AFTER ACTUAL 1995 DISTRIBUTION -------------- --------------- --------- ($ IN MILLIONS) Cash................................................ >$ 98 $ 98 $ 98 ====== ====== ====== Short-Term Debt..................................... 903 1,156 1,156 Long-Term Debt...................................... 599 599 599 Subsidiary Preferred Stock.......................... 86 -- -- Common Stock and Capital Surplus.................... 1,357 1,517 1,517 Cumulative Translation Adjustments.................. 73 73 73 Unrealized Loss on Securities, Net of Tax(c)........ (711) (711) (711) Retained Earnings................................... 3,147 2,973 2,973 ------ ------ ------ Total Capitalization................................ $5,454 $ 5,607 $ 5,607 ====== ====== ======
- --------------- (a) See "ITT HARTFORD SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS" on preceding page. (b) Column gives effect to the distribution of ITT Hartford Common Stock. (c) The unrealized loss on securities, net of tax, is approximately $290 million at May 31, 1995, resulting in an additional $421 million of equity compared with the March 31, 1995 actual results. 47 54 ITT INDUSTRIES SELECTED FINANCIAL AND OPERATING DATA The following data is qualified in its entirety by the financial statements of ITT Industries and other information contained elsewhere in this Proxy Statement. The financial data as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, has been derived from the audited financial statements of ITT Industries (currently ITT Corporation) contained elsewhere in this Proxy Statement. The financial data as of March 31, 1995 and 1994, and December 31, 1991 and 1990, and for the three months ended March 31, 1995 and 1994, and for the years ended December 31, 1991 and 1990, are unaudited. The Distribution has been recorded as a discontinuance of the businesses of New ITT and ITT Hartford in the consolidated financial statements of ITT Industries contained herein. The following financial and operating data should be read in conjunction with information set forth under "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and ITT Industries' Consolidated Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------ --------------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- ------- ------- ($ IN MILLIONS, EXCEPT PER SHARE) INCOME STATEMENT DATA: Net Sales................. $ 2,248 $ 1,691 $ 7,758 $ 6,621 $ 6,845 $ 6,430 $ 6,972 Income from Continuing Operations.............. $ 45 $ 37 $ 202 $ 135 $ 655(1) $ 231 $ 521 Income from Continuing Operations per Share Primary................. $ .34 $ .24 $ 1.46 $ .83 $ 5.34 $ 1.58 $ 3.82 Fully Diluted........... $ .34 $ .25 $ 1.46 $ .88 $ 4.77 $ 1.58 $ 3.63 BALANCE SHEET DATA: Total Assets.............. $12,768 $12,249 $11,035 $12,981 $12,560 $13,283 $12,810 Total Assets, Excluding Net Assets of Discontinued Operations.............. $ 6,110 $ 5,850 $ 5,577 $ 5,063 $ 5,746 $ 4,589 $ 4,780 Long-Term Debt, including Capital Leases.......... $ 1,691 $ 2,064 $ 1,712 $ 1,994 $ 2,272 $ 2,323 $ 2,357 OPERATING DATA: Operating Income.......... $ 103 $ 62 $ 418 $ 229 $ 19 $ 158 $ 305 Depreciation and Amortization............ $ 110 $ 86 $ 373 $ 323 $ 315 $ 295 $ 259 ------- ------- ------- ------- ------- ------- ------- EBITDA(2)................. $ 213 $ 148 $ 791 $ 552 $ 334 $ 453 $ 564 Orders on Hand(3)............................. $ 3,866 $ 3,392 $ 3,713 $ 3,443 $ 3,861 Number of Employees (in thousands)............ 58 50 53 55 60
- --------------- (1) Includes $622 million after tax gain from the sale of the equity interest in Alcatel N.V. (2) EBITDA is presented here as an alternative measure of the ability of ITT Industries to generate cash flow and should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined on the Consolidated Cash Flow Statements in the ITT Industries financial statements.) (3) Orders on hand reflects contracts representing firm contractual commitments as of the respective period (i.e., backlog). 48 55 NEW ITT SELECTED FINANCIAL AND OPERATING DATA The following data is qualified in its entirety by the financial statements of ITT Destinations and other information contained elsewhere in this Proxy Statement. The financial data as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, has been derived from the audited financial statements of ITT Destinations contained elsewhere in this Proxy Statement. The projected pro forma financial information for the six months ended June 30, 1995, and pro forma financial information for the six months ended June 30, 1994 were prepared as detailed in Note (1) below. A black line separates the historical financial information presented below from the projected pro forma financial information and pro forma financial information presented below. The financial data as of March 31, 1995 and 1994, and December 31, 1991 and 1990, the three months ended March 31, 1995 and 1994, and for the years ended December 31, 1991 and 1990, are unaudited. The historical financial statements of New ITT contained in this Proxy Statement are presented as if New ITT were a separate entity for all periods presented. The projected pro forma financial data for the six months ended June 30, 1995, and the pro forma financial data for the six months ended June 30, 1994, are unaudited. The following financial and operating data should be read in conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS", "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and New ITT's Combined Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement. For a discussion of certain important limitations and related assumptions concerning the projected and other pro forma financial data contained below, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
PROJECTED PRO FORMA PRO FORMA THREE MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30, --------------- ------------------------------------------ 1995(1) 1994(1) 1995 1994 1994 1993 1992 1991 1990 ---------- ---------- ------ ------ ------ ------ ------ ------ ------ ($ IN MILLIONS, EXCEPT PER SHARE) INCOME STATEMENT DATA: Revenues..................... $3,079 $2,744 $1,285 $ 876 $4,760 $4,169 $4,253 $3,855 $3,966 Income before Accounting Changes.................... $ 7 $ 8 $ 74 $ 39 $ 2 $ 43 $ 20 Pro Forma Income before Accounting Changes per Share(2)................... $ .06 $ .07 $ .63 $ .33 $ .02 $ .37 $ .17 BALANCE SHEET DATA: Total Assets................. $7,968 $3,439 $5,012 $3,791 $3,375 $2,462 $2,222 Long-Term Debt, including Capital Leases............. $ 671 $ 48 $ 600 $ 169 $ 186 $ 160 $ 120 OPERATING DATA: Operating Income............. $ 246 $ 156 $ 66 $ 28 $ 292 $ 142 $ 34 $ 126 $ 121 Depreciation and Amortization............... 127 $ 129 56 33 132 109 80 63 51 ---------- ---------- ------ ------ ------ ------ ------ ------ ------ EBITDA(3).................... $ 373 $ 285 $ 122 $ 61 $ 424 $ 251 $ 114 $ 189 $ 172 ======== ======== ====== ====== ====== ====== ====== ====== ====== Number of Employees (in thousands)................. 35 19 25 18 18 20 19
- --------------- (1) The projected and other pro forma financial information assumes that the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel properties and MSG in partnership with another entity were completed on January 1, 1995, or January 1, 1994, as applicable. The projected pro forma financial information includes ITT management's estimates of results for the period ended June 30, 1995, which, among other things, assume revenue and expense levels based on historical trends and ITT management's views of current economic conditions. Such information may not be indicative of the results that would have occurred if the acquisitions had been completed on January 1, 1995, or January 1, 1994, or of the operating results that will occur for the period ended June 30, 1995. This information should be read in conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" (including, without limitation, the information under the heading "-- LIMITATIONS ON PROJECTIONS, 49 56 FORECASTS AND PRO FORMA FINANCIAL INFORMATION"), as well as "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". (2) Pro forma per share income before accounting changes was computed assuming the distribution of 117 million shares of New ITT Common Stock in the Distribution for all periods presented above. Such number of shares assumes conversion of all common stock equivalents and preferred stock issuances. (3) EBITDA is presented here as an alternative measure of the ability of New ITT to generate cash flow and should not be construed as an alternative to operating income (as determined in accordance with generally accepted accounting principles) or to cash flows from operating activities (as determined on the Combined Cash Flow Statements in the New ITT financial statements). 50 57 ITT HARTFORD SELECTED FINANCIAL AND OPERATING DATA The following data is qualified in its entirety by the financial statements of ITT Hartford and other information contained elsewhere in this Proxy Statement. The financial data as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and 1992, has been derived from the audited financial statements of ITT Hartford contained elsewhere in this Proxy Statement. The financial data as of March 31, 1995 and 1994, and December 31, 1991 and 1990, and for the three months ended March 31, 1995 and 1994, and for the years ended December 31, 1991 and 1990, are unaudited. The historical financial statements of ITT Hartford contained in this Proxy Statement are presented as if ITT Hartford were a separate entity for all periods presented. The following financial and operating data should be read in conjunction with "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and ITT Hartford's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ----------------------------------------------- 1995 1994 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- ------- ------- ($ IN MILLIONS, EXCEPT PER SHARE) INCOME STATEMENT DATA: Revenues.................... $ 3,005 $ 2,642 $11,102 $10,338 $ 9,862 $ 9,242 $ 8,836 Income (Loss) before Accounting Changes........ $ 140 $ 135 $ 632 $ 537 $ (274) $ 431 $ 328 Pro Forma Income before Accounting Changes per Share(1).................. $ 1.20 $ 1.15 $ 5.40 $ 4.59 $ (2.34) $ 3.68 $ 2.80 BALANCE SHEET DATA: Total Assets................ $82,121 $67,579 $76,765 $66,179 $54,180 $37,771 $32,014 Long-Term Debt, including Capital Leases............ $ 599 $ 579 $ 596 $ 579 $ 576 $ 594 $ 63 OPERATING DATA: Worldwide Combined Ratio(2)(3)............... 102.7 104.7 102.8 105.9 114.8 111.3 109.7 Number of Employees (in thousands)............ 20 21 21 21 21
- --------------- (1) Pro forma per share income before accounting changes was computed assuming the issuance of 117 million shares of ITT Hartford Common Stock in the Distribution for all periods presented. Such number of shares assumes conversion of all common stock equivalents and preferred stock issuances. (2) "Combined ratio" is a common industry measurement of the results of property and casualty insurance underwriting. This ratio is the sum of the ratio of incurred losses and loss adjustment expenses to premiums earned (the "loss ratio") and the ratio of underwriting expenses incurred to premiums written (the "expense ratio"). A combined ratio under 100% generally indicates an underwriting profit; a combined ratio over 100% generally indicates an underwriting loss. Federal income taxes, investment income, policy acquisition costs and other non-underwriting expenses are not reflected in the combined ratio. (3) For the periods after 1992, the combined ratios exclude the results of the First State Insurance Companies ("First State"), a group of entities that ceased writing new and renewal business at the end of 1992. Additionally, the 1992 combined ratio excludes the impact of $900 million of reserve-strengthening actions taken to address loss developments in surplus lines and reinsurance at First State and $250 million of legal defense costs associated with environmental-related claims. Including the impact of these actions, the combined ratio for 1992 was 133.7. 51 58 NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS The following Unaudited Pro Forma Combined Income Statements for the year ended December 31, 1994, and the three months ended March 31, 1995, give effect under the purchase method of accounting only to the acquisitions of CWI, MSG in partnership with another entity, the 70.3% interest in Ciga and other luxury hotel properties. The Unaudited Pro Forma Combined Income Statements are based on the historical financial statements of these entities under the assumptions and adjustments set forth in the accompanying Notes to the Unaudited Pro Forma Combined Income Statements and below. The Unaudited Pro Forma Combined Income Statements assume the acquisitions were consummated on January 1, 1994. The pro forma adjustments are based on the terms of the acquisitions which, among other things, provide: - CWI -- In January 1995, CWI shareholders received $67.50 in cash for each share of CWI common stock. New ITT made cash payments totaling $1,754 million to CWI shareholders and incurred $10 million in expenses for the transaction. - MSG -- In March 1995, New ITT's 50% interest in MSG required an initial investment of $610 million which is expected to be reduced by $250 million no later than March 1996, as contemplated by the terms of the agreement related to the acquisition of MSG. - Ciga and other luxury hotel properties -- New ITT paid $523 million for a 70.3% interest in Ciga and $550 million for three other hotels. These properties were acquired at various times during 1994. The pro forma adjustments reflect acquisition financing costs to the extent such interest expense is not included in the historical statements. For purposes of developing the adjustment to depreciation and amortization, assets and liabilities have been recorded at their fair market values and the excess purchase price has been assigned to goodwill. The MSG acquisition was made through a partnership with Cablevision Systems Corporation for approximately $1 billion and accounted for under the equity method. MSG recorded its assets and liabilities at their fair market values and the excess purchase price was assigned to goodwill. The Unaudited Pro Forma Combined Income Statements include New ITT's share of MSG's results, including the amortization of the excess purchase price. The New ITT Unaudited Pro Forma Combined Income Statements do not take into account any benefits that have or may result from these acquisitions as a result of cost savings and synergies that may be derived from the elimination of duplicate efforts or other factors. 52 59 NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENT YEAR ENDED DECEMBER 31, 1994 ($ MILLIONS, EXCEPT PER SHARE DATA)
CIGA AND EQUITY OTHER HOTEL PRO FORMA PRO FORMA HISTORICAL CWI IN MSG ACQUISITIONS ADJUSTMENTS COMBINED ---------- ------ ------ ------------ ----------- --------- Revenues............................. $4,760 $1,005 $ -- $196 $ -- $ 5,961 Costs and expenses before depreciation and amortization................... 4,336 812 -- 168 -- 5,316 ---------- ------ ------ ------ ----------- --------- EBITDA............................... 424 193 -- 28 -- 645 Depreciation & Amortization.......... 132 57 -- 30 16 235 ---------- ------ ------ ------ ----------- --------- Operating Income..................... 292 136 -- (2) (16) 410 Interest expense, net................ (131) (15) -- (8) (143) (297) Other................................ (17) -- (29) (5) -- (51) Income tax (expense) benefit......... (58) (45) 10 (7) 51 (49) Minority (income) loss............... (12) -- -- 7 -- (5) ---------- ------ ------ ------ ----------- --------- Net Income (Loss).................... $ 74 $ 76 $(19) $(15) $(108) $ 8 ======= ====== ====== ========= ========= ======== Pro Forma Earnings per fully diluted share...................... $0.63 $0.07
NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENT THREE MONTHS ENDED MARCH 31, 1995 ($ MILLIONS, EXCEPT PER SHARE DATA)
EQUITY PRO FORMA PRO FORMA HISTORICAL CWI IN MSG ADJUSTMENTS COMBINED ---------- --- ------ ----------- ---------- Revenues......................................... $1,285 $82 $ -- $ -- $1,367 Costs and expenses before depreciation and amortization................................... 1,163 73 -- -- 1,236 ---------- --- ------ ----------- ---------- EBITDA........................................... 122 9 -- -- 131 Depreciation & Amortization...................... 56 4 -- 2 62 ---------- --- ------ ----------- ---------- Operating Income................................. 66 5 -- (2) 69 Interest expense, net............................ (67) (1) -- (21) (89) Other............................................ 6 -- (1) -- 5 Income tax (expense) benefit..................... (4) (3) 1 7 1 Minority (Income) loss........................... 6 -- -- -- 6 ---------- --- ------ ----------- ---------- Net Income (Loss)................................ $ 7 $ 1 $ -- $ (16) $ (8) ======= ==== ====== ========= ======== Pro Forma Earnings (Loss) per fully diluted share.......................................... $0.06 $(0.07)
See accompanying Notes to Unaudited Pro Forma Combined Income Statements. 53 60 NOTES TO NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS In addition to the historical results of New ITT, CWI, MSG, Ciga and such other hotel properties for the respective periods presented, the Unaudited Pro Forma Combined Income Statements reflect the following: CWI - The CWI column on the 1995 pro forma income statement reflects the 1995 results of CWI prior to the date of acquisition and before purchase accounting adjustments. - CWI's results for 1994 were depressed due to an abnormally low table game win percentage at Caesars Palace in Las Vegas. The table game win percentage at CWI's casinos has been reasonably predictable over the long-term, but may vary considerably over the short-term because of the significant amount of high-wagering play. In 1994, CWI experienced lower table game win percentages at Caesars Palace as a result of unusually large losses to a small number of table game customers. If operating margins were at a normalized rate based on the average for the three previous fiscal years, EBITDA would have been $216 million. This adjustment is not reflected in the CWI column or for 1994. MSG - The acquisition of MSG was completed on March 10, 1995, in partnership with Cablevision Systems Corporation for $1 billion. MSG has recorded goodwill representing the excess of the fair value over the assets acquired which is being amortized over 40 years on a straight-line basis. The amortization of such goodwill and of other intangibles is included in the Equity in MSG column. New ITT has a 50% voting interest in MSG, and, accordingly, the acquisition is accounted for on the equity method. - The MSG column on the 1994 pro forma income statement reflects New ITT's equity in MSG's 1994 losses, including amortization of goodwill. The column on the 1995 pro forma income statement reflects New ITT's equity in MSG's 1995 losses, including amortization of goodwill, prior to the date of acquisition. OTHER ACQUISITIONS The acquisitions of the 70.3% interest in Ciga and other luxury hotels within the Hotel operations (including the Phoenician and Crescent hotels in Scottsdale, Arizona and the Park Grand in Australia) were made at different times during 1994. Therefore, the 1994 historical results of New ITT include the results of Ciga and these luxury hotels from their respective acquisition dates along with the related purchase accounting adjustments (comprised primarily of additional goodwill amortization). The Ciga and Other Hotel Acquisition column on the 1994 pro forma statement represents the 1994 results of these hotels prior to the dates of acquisition and before purchase accounting adjustments. PRO FORMA ADJUSTMENTS - The recorded values of CWI's assets and liabilities approximated fair market value as of the acquisition date except for: (1) land whose estimated fair value was $250 million in excess of its recorded value and (2) goodwill representing the excess of the fair value over the assets acquired. Amortization of goodwill is on a straight-line basis over 40 years. A Federal income tax benefit was not provided on goodwill amortization as no basis step-up is allowable for tax purposes. - Interest cost on the acquisition financing was calculated based on the acquisitions being funded with approximately 50% debt and 50% advances from ITT Industries (ITT). Interest on the debt is 8%, the rate ITT Industries (ITT) charges New ITT on interest bearing advances. A Federal income tax benefit computed at the statutory rate is also reflected. - The pro forma adjustments column on the 1994 income statement reflects a full year of the acquisition financing costs to the extent not reflected in the historical results. 54 61 PER SHARE AMOUNTS Earnings (loss) per fully diluted share assumes 117 million shares of New ITT Common Stock outstanding in all periods. This represents ITT's fully diluted shares outstanding at March 31, 1995. * * * * LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION The assumptions and estimates underlying the projected and forecasted data or information in this Proxy Statement are inherently uncertain and, although considered reasonable by management of ITT, are subject to significant business, economic and competitive uncertainties, many of which are beyond the control of ITT and its subsidiaries. Accordingly, there can be no assurance that the projected and forecasted financial results will be realized. In fact, actual results in the future usually will differ from the forecasted financial results and the differences may be material. NEITHER ITT NOR ANY OF ITS SUBSIDIARIES INTENDS TO UPDATE ANY FORECASTED OR PROJECTED FINANCIAL DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE ABSENCE OF ANY SUCH UPDATE SHOULD NOT BE CONSTRUED AS AN INDICATION THAT MANAGEMENT OF ITT (OR OF NEW ITT AFTER THE DISTRIBUTION) CONTINUES TO BELIEVE THE FORECASTED OR PROJECTED DATA OR INFORMATION CONTAINED IN THIS PROXY STATEMENT IS REASONABLE. In addition, the pro forma financial information contained in this Proxy Statement does not purport to be indicative of the results of operations that would actually have been reported had the transactions underlying the pro forma adjustments actually been consummated on such dates or of the results of operations that may be reported by New ITT in the future. Pro forma information in respect of New ITT assumes that the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel properties and MSG in partnership with another entity were completed at the beginning of the relevant reporting period. The Unaudited Pro Forma Combined Income Statements and projected, forecasted and pro forma financial data contained in this Proxy Statement should be read in conjunction with, and are qualified by, information set forth under "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and New ITT's Combined Financial Statements and Notes thereto appearing elsewhere in this Proxy Statement and these limitations. 55 62 ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of financial condition and results of operations is prepared to reflect the discontinuance of the businesses of New ITT and ITT Hartford and refers to ITT Industries, although the corporation was named ITT Corporation during the periods covered. BACKGROUND AND BUSINESS CONDITIONS After the Distribution, ITT Industries will be engaged, directly and through its subsidiaries, in the design and manufacture of a wide range of high technology products, focused on the three principal business segments of automotive, defense and electronics, and fluid technology. ITT Industries is a substantial worldwide enterprise with 1994 sales of $7.8 billion, of which approximately half is produced or sold outside the United States, and which would rank ITT Industries among the top 200 of companies in the "Fortune 500". With 58,000 employees based in over 40 countries, ITT Industries companies sell products in over 100 countries under a variety of highly regarded brand names coupled with the ITT trademark. Each of its three principal business units is recognized internationally as a leader in its chosen field and competes based on the skills of its people in technical leadership, customer relations and manufacturing proficiency. Following the Distribution, ITT Industries will continue to pursue opportunities for growth with focus on strengthening its position in areas of existing product leadership, and expanding international sales. ITT Automotive is one of the largest independent suppliers of systems and components to vehicle manufacturers worldwide with 1994 sales of $4.8 billion. Through operations located in Europe, North and South America and joint ventures and licensees in Asia, ITT Automotive designs, engineers and manufactures a broad range of automotive systems and components under two major worldwide product groupings. The Brake and Chassis Systems group, with annual sales approaching $3 billion, represents the world's largest array of expertise in braking and chassis system capabilities, including anti-lock brake ("ABS") and traction control ("TCS") systems, chassis systems, foundation brake components, fluid handling products and Koni shock absorbers. In 1994, ITT Automotive maintained its position as a leading global supplier of four-wheel ABS and TCS, sales of which exceeded $1 billion for the second consecutive year. The Body and Electrical Systems group, with sales approaching $2 billion annually, produces automotive products, such as door and window assemblies, wiper module assemblies, seat systems, air management systems, switches and fractional horsepower DC motors. During 1994, ITT Automotive substantially increased its previously established position as a leading producer of electric motors and wiper systems, through the acquisition from General Motors of its motors and actuators business unit, now renamed ITT Automotive Electrical Systems, Inc. ITT Defense & Electronics companies, with 1994 sales of $1.5 billion, develop, manufacture and support high technology electronic systems and components for defense and commercial markets on a worldwide basis with operations in North America, Europe and Asia. Defense market products include tactical communications equipment, electronic warfare systems, night vision devices, radar, space payloads and operations and management services. Commercial products include interconnect products such as connectors, switches and cable assemblies and night vision devices. ITT Defense & Electronics enjoys a leadership position in certain products that are expected to be critical to the armed forces in the 21st century, particularly products that facilitate communications in the forward area battlefield, night vision devices that enable soldiers to conduct night combat operations and electronic systems that protect allied forces from enemy radar controlled missiles. Through its international field engineering business, ITT Defense & Electronics is well positioned to gain from trends to commercialize and outsource military support operations. In the Interconnect market, ITT Cannon maintains a position as one of the world's top ten connector companies based on revenue and is a leading supplier to the military/aerospace and industrial sectors. ITT Fluid Technology, with 1994 sales of $1.1 billion, is a worldwide leader in the design, development, production and sale of products, systems and services used to move, handle, transfer, control and contain fluids of all kinds. Operating in more than 100 countries, ITT Fluid Technology is a leading supplier of pumps, valves, heat exchangers, mixers, instruments and controls for the management of fluids. Its major unit is ITT Flygt, which is headquartered in Sweden and is a pioneer in submersible technology and the world leader 56 63 in submersible pumping and mixing products. Other units hold market leadership positions in a number of product/market segments under long established, strong brand names such as AC Pump, Barton, Bell & Gossett, Cam-tite and Dia-Flo valves, McDonnell & Miller, Jabsco, Marlow and others. In 1994, ITT acquired Richter Chemie-Technik GmbH, a leading German producer of specialized pumps and valves to handle the flow of high temperature corrosive liquid and gaseous media. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1994 Net income from continuing operations of $45 million or $0.34 per fully diluted share increased 22% compared with the $37 million or $0.25 per fully diluted share reported in the 1994 first quarter, due primarily to the contribution of Electrical Systems Inc. ("ESI"), the former General Motors' motors and actuators business acquired in March 1994. Excluding ESI, net income was slightly below the 1994 level, as higher volume in several product lines and the favorable impact of continuing cost reduction programs were offset by higher interest expense, net. Net income was $228 million or $1.91 per fully diluted share, compared with $202 million or $1.54 per fully diluted share in the 1994 period. Income from discontinued operations totaled $183 million and $176 million for the first quarter of 1995 and 1994, respectively, and represents the results of ITT Hartford, New ITT, ITT Financial and, in 1994, Rayonier. Net sales rose 33% with improvements at Automotive and Fluid Technology. Excluding the ESI contribution, net sales improved 17%. Gross margin approximated 14% in both periods while selling, general and administrative expenses decreased to 7.5% of sales from 8.9% in the 1994 first quarter due to a continuing focus on cost reduction and efficiency programs. Service charges from affiliated companies represent fees for advice and assistance related to certain centralized general and administrative functions of ITT Corporation before the Distribution. Such services represent advice and assistance in connection with cash management, legal, accounting, tax and insurance services and such charges totaled $22 million and $16 million in the 1995 and 1994 first quarters, respectively. The fees for these services, which are based upon a general relations agreement approximate 1% of ITT Industries' sales. See "Plan of Distribution" note to ITT Industries Consolidated Financial Statements herein. After the Distribution, reduction of such expenses will be a focus of ITT Industries as these services are developed or purchased from other sources. Other operating expenses, which include gains and losses from foreign exchange transactions and other charges, totaled $13 million in the current quarter, compared with $14 million in the 1994 first quarter. Operating margins (excluding service charges from affiliated companies) rose to 5.6% in the quarter, up from 4.6% in the first quarter of 1994, a result of the factors discussed above. Interest expense, net, benefited in the 1994 first quarter from interest income totaling $16 million on a note receivable from the sale of Alcatel N.V. in 1992. Excluding interest income in both periods, interest expense increased to $33 million compared with $23 million in the 1994 first quarter reflecting higher borrowings in connection with the March 1994 ESI acquisition. The effective income tax rate approximated 43% in the 1995 first quarter and 41% in the 1994 first quarter. Income tax expense increased by $8 million, to $34 million in the 1995 first quarter, due to the higher pretax earnings. Business Segments -- Sales and operating income before service charges from affiliated companies for each of ITT Industries' three major business segments were as follows for the first quarter of 1995 and 1994 ($ in millions):
OPERATING SALES INCOME ----------------- -------------- FIRST QUARTER FIRST QUARTER ----------------- -------------- 1995 1994 1995 1994 ------ ------ ---- ---- $1,510 $ 986 ............... Automotive..................... $ 96 $60
57 64 Automotive's first quarter 1995 results benefited significantly from the ESI acquisition and from higher volumes and the continued impact of cost reduction programs. These benefits were partly offset by continued pricing pressure from original equipment manufacturers and higher material and labor costs.
OPERATING SALES INCOME ----------------- -------------- FIRST QUARTER FIRST QUARTER ----------------- -------------- 1995 1994 1995 1994 ------ ------ ---- ---- $ 369 $ 369 ............... Defense & Electronics.......... $ 18 $15
At Defense & Electronics, first quarter 1995 operating income rose on flat revenues due to improved margins at several units and a $3 million gain on the termination of a leasehold interest. Order backlog was $2.3 billion at March 31, 1995, compared with $2.0 billion at March 31, 1994.
OPERATING SALES INCOME ----------------- -------------- FIRST QUARTER FIRST QUARTER ----------------- -------------- 1995 1994 1995 1994 ------ ------ ---- ---- $ 289 $ 249 ............... Fluid Technology............... $ 18 $17
At Fluid Technology, first quarter 1995 sales increased at all units, most significantly at Flygt due to higher volume. Operating income also improved on the higher volume but was partly offset by foreign exchange losses. YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993 Net income was $1.022 billion or $8.02 per fully diluted share compared with $913 million or $6.90 per fully diluted share in 1993, including income from Discontinued Operations totaling $831 million and $828 million, respectively. Reported net income was adversely impacted by the net effect of three accounting changes, the cumulative effect of which totaled $11 million after tax or $.09 per fully diluted share as of January 1, 1994. ITT Industries adopted Statement of Financial Accounting Standards ("SFAS") No. 115 and related pronouncements which required adjustments to the fair value of mortgage-backed interest-only securities held by discontinued businesses through the statement of income. The cumulative effect of this accounting change was a $36 million after tax charge or $.29 per fully diluted share. In an unrelated change, the basis for discounting certain workers' compensation liabilities in the Insurance business was changed from an insurance guideline-based method to the estimated risk-free rate of return to reflect more appropriately current market conditions. The cumulative effect of this accounting change was a benefit of $42 million after tax or $.33 per fully diluted share. Finally, ITT Industries changed the accounting for certain marketing and start-up costs at the discontinued ITT Educational. Such costs, which had been previously deferred and amortized, are now expensed as incurred. The cumulative effect of this accounting change was an after-tax charge of $17 million or $.13 per fully diluted share. The 1993 net income was adversely impacted by an extraordinary loss of $50 million after tax or $.38 per fully diluted share resulting from the retirement of fixed rate debt. Net income from continuing operations of $202 million rose by $67 million (50%) from the 1993 level of $135 million. Over 46% of the net income growth was contributed by ESI, which was acquired in March 1994. Net income in 1994 included a $15 million after tax loss from the divestment of ITT Instruments, a non-strategic business within the Defense & Electronics business segment. Net income in 1993 included an after tax gain of $10 million for the divestment of ITT Components Distribution, also within the Defense & Electronics segment. Higher volumes at Automotive and Fluid Technology combined with the favorable impact of ongoing cost reduction programs in all businesses to contribute to the favorable net income comparison. Net sales in 1994 rose to a record $7.8 billion, an increase of 17% from $6.6 billion in 1993. Without ESI, net sales from existing businesses rose 6.6% principally from higher Automotive volumes. 58 65 Gross margins remained steady at approximately 15% in both periods. Selling, general and administrative expenses declined by $12 million or 2% in response to ongoing efforts to reduce costs and increase efficiency. Service charges from affiliated companies, which are based on a percentage of sales, rose by $14 million to $73 million. See "Plan of Distribution" note to ITT Industries Consolidated Financial Statements herein. After the Distribution, reduction of such expenses will be a focus of ITT Industries as these services are developed or purchased from other sources. Other operating expenses declined from $31 million to $17 million due chiefly to the absence of significant restructuring provisions recorded by Automotive in the fourth quarter of 1993 for the downsizing and consolidation of its European operations. Operating margins (excluding service charges from affiliated companies) increased to 6.3%, compared with 4.3% in 1993. Interest expense, net, benefited from income on notes receivable related to the 1992 Alcatel N.V. sale totaling $32 million in 1994 and $90 million in 1993. Excluding interest income, interest expense decreased to $114 million compared with $153 million in the prior year principally due to the collection of Alcatel notes in July and the use of those proceeds to reduce debt. Share repurchases in excess of $1 billion resulted in higher debt levels at year end. Miscellaneous expense in 1994 totaled $21 million due primarily to the aforementioned loss on the sale of ITT Industries' Instruments subsidiary. Results in 1993 included the gain on the fourth quarter sale of ITT Components Distribution, partly offset by smaller losses on the disposition of certain Automotive operations. Income taxes of $147 million were provided on pretax income of $349 million representing a 42% effective tax rate. In 1993, the effective income tax rate was 33%. This rate is unusually low and reflected the one-time remeasurement of deferred tax liabilities pursuant to changes in the German statutory tax rates as well as the realization of tax benefits on the disposition of certain subsidiaries. Business Segments -- Sales and operating income before service charges from affiliated companies for each of ITT Industries' three major business segments were as follows ($ in millions):
OPERATING SALES INCOME ----------------- -------------- 1994 1993 1994 1993 ------ ------ ---- ---- $4,784 $3,580.........Automotive........... $328 $164
Sales in 1994 for Automotive increased 34% from 1993 levels to $4.8 billion. Approximately 58% of the increase is due to the March 1994 ESI acquisition, with the balance reflecting higher market penetration of anti-lock brake systems ("ABS") in North America and Europe as well as increased vehicle production. The ESI acquisition improved the geographic balance of Automotive's North American and European sales mix. In 1994, North American sales comprised 50% of the total, compared with 43% in 1993. Automotive segment operating income more than doubled in the year on increased sales volumes (including the ESI acquisition) and continued cost reductions. Lower sales prices and higher labor costs partly offset the growth in sales. Excluding ESI, higher sales volume resulted in an operating improvement of 60%, compared with 1993. The benefits of cost reduction programs and the successful integration of ESI enabled Automotive to improve operating margins despite significant price concessions granted to customers. Operating margins (excluding service charges from affiliated companies) increased to 6.9% from 4.6% last year.
OPERATING SALES INCOME ----------------- -------------- 1994 1993 1994 1993 ------ ------ ---- ---- $1,498 $1,426.....Defense & Electronics.... $ 96 $ 77
Sales for Defense & Electronics rose 5%, compared with 1993 primarily due to increased international defense radar and radio product sales as well as higher connector volumes. Operating income increased 25% to $96 million due principally to the return to profitability of the connectors business, which benefited from restructuring actions in prior years. Operating income in other defense businesses declined in 1994 due to lower margin adjustments on mature military programs, partly offset by higher sales volumes and the benefits of cost reduction programs. Order backlog at the end of 1994 remained even with the $2.1 billion backlog at the end of 1993. 59 66
OPERATING SALES INCOME ----------------- -------------- 1994 1993 1994 1993 ------ ------ ---- ---- $1,125 $1,030......Fluid Technology...... $ 99 $ 95
Fluid Technology reported 9% growth in sales in 1994, the first significant increase since 1990. The improvement was the result of new product initiatives, global market development activities, a strong North American heating season caused by severe winter weather and generally strengthening economic conditions worldwide. The acquisition of Richter Chemie-Technik, a German manufacturer of plastic-lined valves and pumps, also contributed to the increase. ITT Flygt, through an increase in market share, was the primary contributor to the improvements at Fluid Technology. Operating income improved in 1994 despite intense competition, increased raw material costs and the absence of favorable 1993 foreign exchange transactions. The improvement was achieved through higher sales volume, price increases and benefits from cost reduction efforts. YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1992. Net income in 1993 of $913 million compared with a net loss in 1992 of $885 million. The 1993 net income was adversely impacted by an extraordinary loss of $50 million after tax, or $.38 per fully diluted share, resulting from the retirement of fixed rate debt at ITT Financial. The net loss in 1992 included the effects of ITT Industries' adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", and SFAS No. 112, "Employers' Accounting for Postemployment Benefits", which were recorded effective January 1, 1992, using the immediate recognition method. These accounting changes resulted in a cumulative catch-up adjustment of $625 million after tax or $4.71 per fully diluted share. In July 1992, ITT Industries (ITT) completed the sale of its 30% stake in Alcatel N.V. to its joint venture partner, Alcatel Alsthom, resulting in a gain of $942 million ($622 million after tax) or $4.71 per fully diluted share. In addition, ITT Industries embarked on a significant restructuring program in 1992, and restructuring provisions were recorded at all major business segments, the most significant of which were recorded at Defense & Electronics. Such provisions, which totaled $82 million pretax ($54 million after tax), included the closedown of facilities and product lines as well as personnel termination costs at several of the segment business units. Income from continuing operations (excluding the Alcatel N.V. gain in 1992) rose to $135 million in 1993 from $33 million in 1992. Net sales in 1993 of $6.6 billion declined from the $6.8 billion reported in 1992 due principally to reduced Defense business as several major programs were completed. Gross margins approximated 15% in 1993, up from less than 13% in 1992, with all major businesses contributing to the improvement. Selling, general and administrative expenses in 1993, at 9.9% of sales, were $31 million lower than the $686 million reported in 1992. Service charges from affiliated companies of $59 million declined $3 million in conjunction with lower sales levels (see "Plan of Distribution" note to ITT Industries Consolidated Financial Statements herein). Other operating expenses of $31 million in 1993 were $79 million lower than in 1992, which included the previously mentioned restructuring provisions. Expenditures, totaling $8 million in 1993 and $20 million in 1992, to cover environmental exposures are also included in other operating expenses. Interest expense, net, benefited in both 1993 and 1992 from interest income on notes receivable pertaining to the July 1992 sale of Alcatel N.V. Such income totaled $90 million in 1993 and $57 million in 1992. Excluding interest income, interest expense totaled $153 million in 1993, compared with $180 million in 1992. The decrease primarily reflects lower effective interest rates on interest-bearing debt. Miscellaneous income of $3 million in 1993 primarily reflected a gain on the sale of ITT Components Distribution, partly offset by smaller losses on the disposition of certain Automotive operations. The $10 million expense in 1992 includes a $7 million write-down to reflect a small, non-core operation at its estimated net realizable value. Income taxes of $65 million in 1993 were provided on pretax income of $200 million, representing a 33% effective tax rate, which was unusually low for the reasons discussed above. The 1992 effective tax rate was 60 67 32% due to the effect of the Alcatel N.V. gain and equity earnings. "Cumulative Effect of Accounting Changes" in the financial statements is presented on a net of tax basis, and, accordingly, the associated tax benefit is not included in the benefit above. Business Segments -- Sales and operating income, excluding service charges from affiliated companies for each of ITT Industries' three major business segments were as follows ($ in millions):
OPERATING SALES INCOME - --------------- ------------- 1993 1992 1993 1992 - ------ ------ ---- ---- $3,580 $3,498......Automotive............ $164 $118
Automotive sales increased in 1993 as a result of increased ABS market penetration, higher light vehicle production in North America and the continued shift in consumer preference toward light trucks for which Automotive maintains a strong product offering. Tempering the growth in 1993 was the deepening recession in Western Europe which resulted in a decline in Western European car production. Western European sales comprised 57% of the total in 1993 compared with 68% in 1992. Operating income rose by nearly 40% compared with 1992 due largely to continued cost reduction efforts partially offset by lower sales prices and higher labor costs.
OPERATING SALES INCOME - --------------- ------------- 1993 1992 1993 1992 - ------ ------ ---- ---- $1,426 $1,663.... Defense & Electronics ... $ 77 $(29)
The 14% sales reduction at Defense & Electronics in 1993 was anticipated as the completion of several major programs and reduced U.S. government defense spending resulted in lower shipments and a decline in operations and maintenance contracts. Operating income improved substantially in 1993 due in part to current year cost improvements at several units and favorable margin adjustments on mature military programs. The comparison with 1992 also benefits from the absence of the $82 million restructuring charge. Order backlog totaled $2.1 billion at both December 31, 1993 and December 31, 1992.
OPERATING SALES INCOME - --------------- ------------ 1993 1992 - ------ ------ $1,030 $1,070... Fluid Technology.... $95 $67
Sales at Fluid Technology were $40 million lower than in 1992 due primarily to a stronger U.S. dollar versus many currencies of the European countries in which Fluid Technology operates. Growth in markets including water and wastewater treatment, power generation, exports and new products was largely offset by weak market conditions in such industries as construction, industrial process, oil and gas, mining and leisure marine. Despite sales pressures, operating income in 1993 improved at all businesses and benefited from the impact of cost improvement actions taken in 1992, including the consolidation of facilities to reduce excess capacity. In 1992, provisions for restructuring, along with devaluation of the Swedish krona, adversely impacted operating income. ALCATEL N.V.
1994 1993 1992 ---- ---- ---- Equity in Earnings of Alcatel N.V. ($ in millions).............. -- -- $97
ITT Industries (ITT) sold its 30% interest in Alcatel N.V. to its joint venture partner, Alcatel Alsthom in July 1992. Proceeds from the sale included $1 billion in cash, two notes collected in July 1993 and 1994 totaling $1.6 billion (including interest) and 9.1 million shares in Alcatel Alsthom. The shares have a net book value of $806 million and are included in the net assets of Discontinued Operations. ITT Industries (ITT) recognized a pretax gain of $942 million ($622 million after tax) in 1992 on the transaction. 61 68 DISCONTINUED OPERATIONS AND UNITS HELD FOR DISPOSITION The following is a table summarizing the results of discontinued operations, net of tax ($ in millions):
FOR THE YEAR ENDED MARCH 31, DECEMBER 31, ------------- ----------------------- 1995 1994 1994 1993 1992 ---- ---- ---- ---- ----- New ITT.............................................. $ 7 $ 8 $ 74 $ 39 $ 2 ITT Hartford......................................... 140 135 632 537 (274) ITT Financial........................................ 36 21 113 199 (571) ITT Rayonier......................................... -- 12 12 53 (72) ---- ---- ---- ---- ----- Total Discontinued Operations...................... $183 $176 $831 $828 $(915) ==== ==== ==== ==== =====
The Board of Directors of ITT has approved (subject to the satisfaction of certain conditions, the actual declaration of the dividend in respect of the Distribution and certain other matters) a plan to distribute to its shareholders all outstanding shares of common stock of ITT Destinations (New ITT) and ITT Hartford. Under the proposed plan, ITT Destinations (to be renamed ITT Corporation) and ITT Hartford will become independent, publicly-traded companies in which ITT Industries will not retain any equity interest. The accompanying financial statements reflect these businesses as discontinued operations in all periods presented. ITT Financial and Rayonier, which were previously discontinued, are also included in discontinued operations in the appropriate periods. LIQUIDITY AND CAPITAL RESOURCES ITT Industries generated operating cash flow (defined as operating income before interest, taxes, depreciation and amortization) of $213 million in the three months ended March 31, 1995, compared with $148 million in the comparable 1994 period, a 44% improvement. Operating cash flow is expected to continue to grow in the balance of 1995, but at a slower pace than the first quarter where the comparison benefited from the March 1994 ESI acquisition. Operating cash flow for the full year 1994 was $791 million, a 43% improvement over the $552 million in 1993 and 137% better than the $334 million generated in 1992. The improvements are a result of ITT Industries' earnings growth, primarily in the Automotive business segment which benefited from the ESI acquisition. Additional funds of $853 million were generated in 1994 from cash from the sale of divested assets, primarily receipt of $817 million as the final installment from the 1992 sale of Alcatel N.V. Previous payments from that sale totaled $767 million in 1993 and $1.0 billion in 1992. The cash generated was used to fund strategic acquisitions and capital additions along with repurchases of the ITT Common Stock. Many of ITT Industries' businesses require substantial investment in plant and tooling in order to produce competitively superior products, including development costs of next generation products. Gross plant additions totaled $81 million in the 1995 first quarter, with approximately two-thirds of that total incurred at Automotive, primarily in ABS and traction control technology. First quarter 1994 spending was $51 million, two-thirds of which was also at Automotive. Gross plant additions totaled $407 million in 1994, $337 million in 1993 and $351 million in 1992, as expenditures for adaptive braking systems, including the latest variation of low cost ABS technology, was and continues to be important to overall strategy. Investments in foundation brakes and brake actuation technology, electrical systems and motors, and facilities in developing countries, including the Far East, the Czech Republic and Hungary, were also integral to ITT Industries' investment strategy. Acquisition spending totaled $418 million in 1994, consisting of Automotive's purchase of ESI for $374 million in March 1994 and Fluid Technology's acquisition of Richter Chemie-Technik. The first quarter of 1995 included a small acquisition at Automotive. Expenditures for research, development and engineering totaled $396 million in 1994, $460 million in 1993 and $502 million in 1992, approximately 50% of which was pursuant to customer contracts. The reduction over the three years is directly attributable to reduced customer requirements in the Defense 62 69 companies. Research and development expenditure levels, excluding those pursuant to customer contracts, are expected to remain at approximately 3% of sales for the foreseeable future, although there can be no assurance such results will occur. Research, development and engineering expenditures have funded numerous product developments such as anti-lock brake and wiper systems and electronic countermeasures and tactical radio communications technology. Cash flows after gross plant additions are expected to be sufficient to cover working capital needs, interest, taxes and, subject to the limitations discussed under "DIVIDEND POLICY", a dividend to shareholders. Working capital needs in the first quarter of 1995 and 1994 largely reflect seasonality in the Automotive business. Working capital needs increased in 1994 compared with 1993 and 1992 due principally to growth in the Automotive business. External borrowings at ITT Industries were $3.3 billion at March 1995 compared with $2.6 billion at December 1994 and $3.0 billion at December 1993. The higher debt level at March 1995 reflected funding for working capital, capital additions and share repurchases. Cash and cash equivalents of $401 million at March 1995 compared to $322 million at year-end 1994 and $240 million at year-end 1993. Effective January 1, 1994, ITT Industries adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires investments to be reflected at fair value, with the corresponding impact reported as a separate component of Stockholders' Equity in situations where those investments are "available for sale", as defined in SFAS No. 115. The accounting standard does not allow for a corresponding fair value adjustment to liabilities. Stockholders' Equity can vary significantly between reporting periods as market interest rates and other factors change. Accordingly, ITT Industries does not include unrealized gains or losses in its assessment of debt to total capitalization. Following the Distribution, the impact of this accounting standard to ITT Industries' Stockholders' Equity will be immaterial. Stockholders' Equity increased $239 million during the first quarter of 1995, excluding the SFAS No. 115 impact, due to growth in retained earnings but decreased $0.7 billion in 1994 mainly as the result of share repurchases ($1.0 billion), dividends ($0.3 billion) and the spin-off of Rayonier ($0.6 billion), which were partly offset by 1994 net income. ITT intends to terminate the ESOP portion of the ITT Investment and Savings Plan as a result of which ITT expects the trustee of the ESOP will sell unallocated shares and apply the sales proceeds to repay the debt associated with the ESOP, which totaled $541 million at March 31, 1995. In addition, proceeds from the sale of ITT Financial assets as well as other non-strategic assets are expected to be used to repay outstanding borrowings. Management of ITT expects to capitalize ITT Industries in manner similar to comparable companies in the industries represented by such businesses following the Distribution. For a discussion of certain important limitations and related assumptions concerning the projected capitalization of ITT Industries, see "ITT INDUSTRIES SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS - -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION." ITT Industries uses derivative financial instruments extensively in its discontinued Insurance segment as part of its risk management strategy. Derivative financial instruments are also used to a much lesser degree in several other segments of ITT Industries. Interest rate risk relative to ITT Industries' debt portfolios is managed through interest rate swap agreements, primarily in the discontinued Finance segment. The multinational operations of ITT Industries also create exposure to foreign currency fluctuation. Foreign currency risk relative to ITT Industries' net investment in a foreign country, foreign denominated debt or a specific foreign denominated transaction is managed in part through currency swaps and forward exchange contracts. Foreign currency transaction gains or losses were not significant in the periods discussed above. ITT Industries is an end-user of derivatives and does not utilize them for speculative purposes. The notional amounts of derivative contacts represent the basis upon which pay and receive amounts are calculated and therefore are not reflective of credit risk. Credit risk is limited to the amounts calculated to be due or owed by ITT Industries on such contracts. ITT Industries expects to continue to use interest rate swaps to reduce its cost of borrowing in the future, although the divestment of ITT Financial will result in substantially reduced activity in the future. 63 70 INCOME TAXES Income taxes have been assessed to ITT Industries historically in accordance with a tax sharing agreement with New ITT and ITT Hartford that generally requires the computation of income taxes as if these companies had been stand-alone entities. In all years presented, credits for income taxes paid in foreign jurisdictions were fully utilizable in the United States in the ITT consolidated tax return. This full utilization of credits may not be achievable in the future and, to the extent foreign tax credits cannot be used to reduce the U.S. tax obligation, a higher effective income tax rate will be incurred. ENVIRONMENTAL MATTERS ITT Industries is subject to stringent environmental laws and regulations that affect its operating facilities and impose liability for the clean-up of past discharges of hazardous substances. These laws include the Federal Clean Water Act, Clean Air Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. Management of ITT Industries believes that ITT Industries is in substantial compliance with these and all other applicable environmental requirements. Environmental compliance costs are accounted for primarily as normal operating expenses. Management of ITT Industries does not believe that such environmental compliance costs will have a material adverse effect on ITT Industries' financial position or results of operations. In estimating the costs of environmental investigation and remediation, ITT Industries considers, among other things, its prior experience in remediating contaminated sites, remediation efforts by other parties, the professional judgment of environmental experts and the likelihood that other parties which have been named potentially responsible parties ("PRPs") will have the financial resources to fulfill their obligations at sites where they and ITT Industries may be jointly and severally liable. Under the scheme of joint and several liability, ITT Industries theoretically could be liable for the full costs of investigation and remediation, even if additional parties are found to be responsible under the applicable laws. It is difficult to estimate the total costs of investigation and remediation due to various factors, including incomplete information regarding particular sites and other PRPs, uncertainty regarding the extent of contamination and ITT Industries' share, if any, of liability for such problems, the selection of alternative remedies and changes in cleanup standards. When it is possible to create reasonable estimates of liability with respect to environmental matters, ITT Industries establishes reserves in accordance with generally accepted accounting principles. While the outcome of ITT Industries' various remediation efforts presently cannot be predicted with a high level of certainty, management does not expect that these matters will have a material adverse effect on ITT Industries' financial position, results of operations or cash flow. See "BUSINESS OF ITT INDUSTRIES AFTER THE DISTRIBUTION -- LEGAL PROCEEDINGS". EFFECT OF INFLATION The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenues or operating results of ITT Industries during the three most recent fiscal years. 64 71 NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of financial condition and results of operations is prepared as if New ITT were a separate entity for all periods discussed. BACKGROUND AND BUSINESS CONDITIONS ITT Destinations, Inc. (to be renamed ITT Corporation after the Distribution and hereafter referred to as "New ITT"), combines the world's largest hotel and gaming company with a premier sports and entertainment company and information services businesses to create a dynamic and rapidly growing enterprise. Management of ITT projects that New ITT will generate pro forma (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994) revenues of approximately $6.5 billion in 1995 and pro forma operating income before interest, taxes, depreciation and amortization ("EBITDA") of approximately $875 million in 1995. The projected pro forma EBITDA for 1995 would represent a 36% increase over EBITDA in 1994 also determined on a pro forma basis (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994). For a discussion of certain important limitations and related assumptions concerning this projected and other pro forma financial data and ITT management's belief as to future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". ITT completed the acquisition of the world's most recognized gaming company, CWI, in January 1995. In March 1995, ITT also acquired the most famous sports arena and basketball and hockey franchises in the world through its investment in MSG. In addition, the acquisition in 1994 of 70.3% of Ciga and other key hotel properties enhanced New ITT's geographic balance along with its image and profile. These acquisitions have helped to create a formidable hotel, gaming and entertainment company that is a leader in its served markets. New ITT also operates a telephone directory publishing business for telephone subscribers outside the United States, as well as in Puerto Rico and the U.S. Virgin Islands, a United States-based provider of post-secondary degree technical education, and will own approximately 6% of Alcatel Alsthom, a French telecommunications equipment company, as of the Distribution Date. Through the ITT Sheraton brand name, New ITT is represented in most major markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton in 60 countries. When including visitors to CWI and Madison Square Garden, and customers of the Information Services companies, New ITT will provide services to over 100 million people in a year. ITT Sheraton, which has been a wholly owned subsidiary of ITT since 1968, is a worldwide hospitality network of approximately 420 owned, leased, managed and franchised properties including hotels, casinos and inns. Gaming operations are marketed under the Caesars World and ITT Sheraton brand names and are represented in Las Vegas, Atlantic City, Halifax (Nova Scotia), Lake Tahoe, Tunica County (Mississippi), Lima (Peru), Cairo, Windsor (Ontario) and Townsville (Australia). The Information Services segment consists of an 80% interest in ITT World Directories, a directory publishing business, and an 83% interest in ITT Educational, a provider of postsecondary degree technical education. ITT Educational operates 55 ITT Technical Institutes in 25 states to approximately 20,000 students. New ITT's revenues and EBITDA have historically been lowest in the first quarter and highest in the fourth quarter, the result of seasonality in the Hotels segment and the timing of the directory publishing schedule at ITT World Directories. In the Gaming segment, CWI's results have not been particularly seasonal (as a result of its mix of gaming jurisdictions); however, such results have been volatile as a result of the nature of high limit baccarat wagering. These seasonality factors are not expected to differ significantly in 65 72 1995, although there can be no assurance the historical seasonality trends will continue. The following table reflects the historical seasonality of New ITT:
PERCENT OF TOTAL YEAR --------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ------- ------- ------- ------- ----- Revenues 1994...................... 18% 26% 23% 33% 100% 1993...................... 19% 28% 24% 29% 100% EBITDA 1994...................... 13% 30% 24% 33% 100% 1993...................... 12% 31% 24% 33% 100%
Operating performance in the Hotels segment is cyclical and fluctuates to some degree based on general economic conditions as well as specific factors affecting relevant local markets. In the Gaming segment, operating performance is impacted by, among other things, competition in the markets in which ITT operates and increased competition is likely as other states and countries authorize casino gaming. Certain casino analysts however, believe that such competition will be beneficial to established markets. Management of ITT generally concurs with such belief. In the Information Services segment, ITT World Directories has historically been the sole provider of yellow page directories in specific markets and has performed its services on behalf of the local telephone companies. In 1994, ITT World Directories began competing with another directory publisher in The Netherlands and, in 1995, began competing with the national telephone company in that country. Such competition could adversely impact the operating results of ITT World Directories, although there has been no adverse impact to date. The higher education industry is usually counter-cyclical to the health of the national economy, with student enrollment softening in periods of strong job creation. ITT Educational continues to grow through new school openings and added curricula and management of ITT believes it is well positioned to benefit from the expected rise in high school graduates entering the work force over the next ten years (as currently forecasted by the U.S. Department of Labor). A substantial portion of the remaining discussion and analysis of results of operations relates to the historical periods of New ITT which, for the most part, do not include the results of the acquisitions completed in late 1994 and the 1995 first quarter. The unaudited pro forma combined income statements of New ITT appearing elsewhere in this Proxy Statement for the year ended December 31, 1994, and the three months ended March 31, 1995, give effect to these acquisitions as if they had been completed on January 1, 1994. See "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS". This pro forma information relates to a large degree to periods prior to New ITT's ownership and does not take into account synergies that may be derived or the elimination of duplicative efforts that has begun to be implemented and is expected to continue to be implemented. Actual financial results for the first five months in 1995 have been compiled and, based on such information along with projected information for June 1995, the following projected unaudited projected pro forma results for the six months ended June 30, 1995 are set forth. Such projections are compared with unaudited pro forma results for the six months ended June 30, 1994 as follows:
REVENUES EBITDA OPERATING INCOME -------------------------------- -------------------------------- -------------------------------- PROJECTED PROJECTED PROJECTED PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS ENDED ENDED ENDED ENDED ENDED ENDED JUNE 30, JUNE 30, % JUNE 30, JUNE 30, % JUNE 30, JUNE 30, % 1995 1994 CHANGE 1995 1994 CHANGE 1995 1994 CHANGE ---------- ---------- ------ ---------- ---------- ------ ---------- ---------- ------ Hotels...................... $2,012 $1,836 10% $177 $130 36% $103 $ 65 58% Gaming...................... 673 535 26 120 92 30 77 47 64 Information Services........ 394 373 6 107 81 32 95 64 48 Corporate Overhead and Minority.................. -- -- -- (31) (18) -- (29) (20) -- -- -- -- ---------- ---------- ----- ----- ----- ----- $3,079 $2,744 12% $373 $285 31% $246 $156 58% ========= ========= ====== ========= ========= ====== ========= ========= ======
The unaudited projected and other pro forma financial information presented above assumes that the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel properties and MSG in partnership with 66 73 another entity were completed on January 1, 1995, or January 1, 1994, as applicable. The projected pro forma financial information includes ITT management's estimates of results for the period ended June 30, 1995, which, among other things, assume revenue and expense levels based on historical trends and ITT management's views of current economic conditions. Such information may not be indicative of the results that would have occurred if the acquisitions were completed on January 1, 1995, or January 1, 1994, or of the operating results that will occur for the period ended June 30, 1995. For a discussion of certain important limitations and related assumptions concerning the projected and other pro forma financial data set forth above, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS OF PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". RESULTS OF OPERATIONS All per share amounts are computed based on New ITT net income divided by 117 million shares of New ITT Common Stock, the estimated number of shares to be outstanding after the Distribution. THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1994 Operating cash flow (defined as operating income before interest, taxes, depreciation and amortization, or "EBITDA") doubled in the 1995 first quarter to $122 million from $61 million in the comparable 1994 period, reflecting the $35 million contribution of CWI since its January 31, 1995 acquisition date along with improved results in the Hotels segment. Operating cash flow represented 9.5% of revenues in the 1995 quarter compared with 7.0% in the 1994 quarter. Revenues of $1,285 million included $171 million from CWI and $104 million from Ciga and other significant hotel acquisitions completed subsequent to the 1994 first quarter. Excluding these acquisitions, revenues increased 15% in the quarter on higher average room rates in all major hotel divisions. Average occupancy of owned and leased hotels (excluding the newly acquired Ciga hotels) improved 2.5% to 70.9% in the 1995 first quarter. Selling, general and administrative expenses include $34 million in the 1995 first quarter and $28 million in the 1994 first quarter, representing overhead expenses related to the world headquarters management and supervision of the entities comprising ITT Corporation before the Distribution. These expenses are reflected and charged out of New ITT since this entity includes many of the corporate personnel and functions that are expected to remain with New ITT after the Distribution. Of these amounts, $26 million and $20 million were charged in the respective quarters to affiliated companies (ITT Hartford and ITT Industries) and represent fees for advice and assistance provided by New ITT in connection with cash management, legal, accounting, tax and insurance services. The fees for these services are based upon a general relations agreement with each affiliate. See "Basis of Presentation" note to the New ITT Combined Financial Statements herein. Excluding these overhead expenses and related service fee income, selling, general and administrative expenses increased approximately 65% in the quarter due primarily to the overhead of the acquired companies and hotels. Operating income (defined as operating cash flow less depreciation and amortization) rose 136% in the quarter reflecting the impact of the acquisitions discussed above, along with a 21% improvement in the average room rates of owned and leased hotels. The 1995 first quarter was the first full quarter that Ciga was under New ITT's control. Operating income includes an $11 million loss incurred at Ciga which is not expected to recur in future quarters. Excluding these acquisitions, operating income increased 61% in the quarter on higher average room rates in all major hotel divisions. Depreciation and amortization rose 70% in the quarter due primarily to the fixed asset additions made through acquisitions and the goodwill amortization associated with CWI, Ciga and The Phoenician. Interest expense, before interest income of $5 million in 1995 and $4 million in 1994, increased to $72 million compared with $16 million in the 1994 first quarter, the result of higher debt due to the 1994 and 1995 acquisitions discussed above and the acquisition of MSG on March 10, 1995 (which required an initial investment of $610 million which is expected to be reduced by $250 million no later than March 1996 as contemplated by the terms of the agreement related to the acquisition of MSG). Average interest-bearing debt of $3.4 billion in the 1995 first quarter rose significantly from the $0.6 billion average in the 1994 first quarter. Interest-bearing debt represents external borrowings (averaging $0.8 billion in 1995 and $0.1 billion in 67 74 1994) and interest-bearing advances from ITT Industries (ITT) (averaging $2.6 billion in 1995 and $0.5 billion in 1994). The acquisitions and acquired debt of CWI ($1.8 billion), MSG ($610 million), Ciga and other significant hotel acquisitions ($1.3 billion) is the principal cause of the increase. Upon completion of the Distribution, New ITT is expected to carry a $3.2 billion debt portfolio. See "NEW ITT PROJECTED CAPITALIZATION". Operating income, less interest expense, resulted in nominal pretax earnings and income tax expense for both quarters. Net income of $7 million or $0.06 per pro forma share in 1995 compares with $8 million or $0.07 per pro forma share in the 1994 quarter. The minority loss of $6 million in the quarter represents the net loss attributable to the minority shareholders of Ciga. Business Segments -- Revenues, operating cash flow and operating income (excluding the effect of corporate overhead and minority income) for each of New ITT's three major business segments were as follows ($ in millions):
FIRST QUARTER 1995 FIRST QUARTER 1994 - ------------------------------- ------------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $938 $ 61 $30 ............ Hotels ............ $740 $ 36 $19
Hotels revenues benefited significantly from the Ciga and other acquisitions. EBITDA and operating income, however, were adversely impacted by losses at Ciga in the 1995 first quarter, the first full quarter under New ITT's control. Significantly higher average rates in the quarter are the primary contributor to the remaining improvement. Average room rates at ITT Sheraton's owned and leased properties totaled $130 in the 1995 first quarter, compared with $107 in the 1994 first quarter.
FIRST QUARTER 1995 FIRST QUARTER 1994 - ------------------------------- ------------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $255 $ 46 $28 ............ Gaming ............. $ 58 $ 12 $10
The Gaming segment includes two months of CWI results in 1995 along with the Sheraton Desert Inn and Sheraton Casino in Tunica County, Mississippi. In the future, the Gaming segment is expected to contribute a growing portion of New ITT's revenues and operating income.
FIRST QUARTER 1995 FIRST QUARTER 1994 - ----------------------------- ----------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $ 92 $ 17 $10 ........ Information Services ........ $ 78 $ 14 $ 3
The Information Services segment includes ITT World Directories, the 80%-owned yellow page directory operation based in Europe, and New ITT's 83% interest in ITT Educational, a provider of postsecondary degree technical programs. Results in the 1995 first quarter benefited from the acceleration of the publishing schedule in Holland and higher royalties in Japan at ITT World Directories, along with higher student enrollment and tuition price increases at ITT Educational, which more than offset the operating costs of newly-opened schools at ITT Educational. YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1993 Operating cash flow (defined as operating income before interest, taxes, depreciation and amortization, or EBITDA) increased a substantial 69% in 1994 to $424 million from the $251 million generated in 1993. Improved occupancy and rates in the Hotels segment (primarily in the North American region) and lower overhead costs coupled with the absence of 1993 restructuring provisions, which totaled $49 million, are the primary contributors to the improvement. As in the 1995 first quarter, acquisitions made throughout 1994 impacted revenues to a much larger degree than operating cash flow. Operating cash flow represented 8.9% of revenues in 1994 compared with 6.0% in 1993. Revenues of $4,760 million included $271 million from several significant hotel acquisitions completed in 1994. These included 70.3% of Ciga, the Italian luxury hotel chain, purchased in stages during the second half of the year, as well as The Phoenician, The Crescent and The Park 68 75 Grande Hotel. Revenues in 1994 also benefited from a full year of operations at the Gaming segment's Sheraton Desert Inn which was acquired in November 1993. Excluding these acquisitions, revenues increased 3% over 1993, reflecting improved results at Hotels in the North American and Asia Pacific regions, partially offset by the loss of revenues from the World Directories United Kingdom unit disposed of in 1993. Selling, general and administrative expenses include $118 million in 1994 and $122 million in 1993, representing overhead expenses related to the management and supervision of the entities comprising ITT Corporation before the Distribution. Of these amounts, $88 million and $73 million were charged in the respective years to affiliated companies (ITT Hartford and ITT Industries) and represented fees for advice and assistance provided by New ITT in connection with cash management, legal, accounting, tax and insurance services. The fees for these services are based upon a general relations agreement with each affiliate. See "Plan of Distribution" note to New ITT Combined Financial Statements herein. Excluding these overhead expenses and related service fee income, selling, general and administrative expenses increased approximately 12% due primarily to the overhead of the acquired companies and hotels. Operating income rose 106% in 1994, reflecting the aforementioned North American occupancy and rate improvement at Hotels, a full year of Gaming operations and benefits from cost reduction actions initiated in 1993 in all major business segments. Operating income in 1993 included restructuring provisions totaling $49 million aimed at increasing the efficiency and productivity of overhead functions at the segment and regional headquarters locations. These provisions have yielded the desired improvements as evidenced, in part, by the increased operating cash flow in 1994 and ITT management's expectations for projected increased operating cash flow in 1995. In addition, the 1993 results included a $29 million provision for the accelerated write-off of capitalized development expenses stemming from a reevaluation of future plans and projects. Depreciation and amortization rose 21% due primarily to the fixed asset additions made through acquisition and the goodwill amortization associated with the Ciga and Phoenician acquisitions. Interest expense, before interest income of $16 million in 1994 and $14 million in 1993, increased to $147 million compared with $47 million in 1993, the result of additional debt required to fund the Desert Inn purchase in 1993 and the 1994 acquisitions discussed above. Average interest-bearing debt of $1.4 billion in 1994 compares with $.4 billion in 1993. Interest-bearing debt represents external borrowings (averaging $.4 billion in 1995 and $.2 billion in 1994) and interest-bearing advances from ITT Industries ($1 billion in 1994 and $.2 billion in 1993). Miscellaneous income (expense) reflects non-operating items of a non-recurring nature including gains and losses on the sale of investments. In 1994, miscellaneous expense of $17 million primarily relates to the write-off of expenses incurred in connection with the Desert Kingdom, an indefinitely postponed gaming project, partly offset by the gain on the public offering of 17% of ITT Educational. In 1993, miscellaneous income of $10 million related primarily to the gain on the sale of an ITT World Directories unit. Income taxes of $58 million in 1994 were provided on pretax income of $144 million representing a 40% effective tax rate. Tax on repatriation of foreign earnings in addition to U.S. state and local income taxes raises New ITT's effective tax rate above the U.S. statutory rate. The decrease from the 1993 53% effective tax rate results primarily from the absence of the 1993 tax cost associated with repatriating cash to the United States from ITT World Directories units in Portugal, Belgium and The Netherlands. Minority income in 1994 represents the effect of minority ownership in ITT World Directories and Ciga. In 1993, minority income related solely to ITT World Directories. Net income of $74 million or $0.63 per pro forma share in 1994 improved 90% compared with $39 million or $0.33 per pro forma share in 1993, the result of the factors discussed above. 69 76 Business Segments -- Revenues, operating cash flow and operating income (excluding the effect of corporate overhead, minority income and dispositions) for each of New ITT's three major business segments were as follows ($ in millions):
1994 1993 - ------------------------------ ------------------------------ OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - ------- ------ --------- ------- ------ --------- $3,700 $239 $ 152 ............. Hotels ............. $3,160 $167 $87
Properties in the Hotels segment are marketed under the ITT Sheraton brand name and include 209 properties (49%) which are owned, leased or managed under long-term agreements and 214 properties (51%) which are franchised at December 31, 1994. At year end 1993, 176 properties (43%) were owned or managed and 230 properties (57%) were franchised. The shift in mix toward owned hotels, including the purchase of a controlling interest in Ciga in 1994, is indicative of New ITT's focus on improving the standards of properties carrying the ITT Sheraton brand name. Hotels revenues increased in 1994 due to improved results in the North American and Asia/Pacific regions and the contribution of new acquisitions, namely Ciga, The Phoenician and The Park Grande. Operating cash flow improved a substantial 43% from 1993, partly as a result of acquisitions. Operating income in 1994 reflected, among other things, the improvements in the North American region and benefits from cost reductions. In 1993, operating income reflected the accelerated write-off of capitalized development expenses totaling $23 million, partly offset by an $11 million gain on the sale of an investment in Bally's Las Vegas operations. Room rates of owned and leased properties (excluding the newly acquired Ciga hotels) averaged $109.53 in 1994, compared with $105.24 in 1993, while occupancy rates rose to 72.9% from 70.2% in the prior year. Hotels segment revenues are geographically diverse with 45% and 48% generated in North America in 1994 and 1993, respectively. New York, Washington, D.C. and Miami are among the larger markets served.
1994 1993 - ------------------------------ ------------------------------ OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - ------- ------ --------- ------- ------ --------- $ 227 $ 19 $ 9 ............ Gaming ............ $24 $ (3) $(9)
The Sheraton Desert Inn is included in the Gaming segment for the full year in 1994 compared with two months in 1993. The ITT Sheraton opened the Sheraton Casino in Tunica County, Mississippi in August 1994. Gaming contributed $19 million to the New ITT's operating cash flow in 1994, up $22 million from $(3) million in 1993, when New ITT began its gaming efforts in the United States. As discussed earlier, the acquisition of CWI in the first quarter will further increase the revenue and income contribution from the Gaming segment in future periods.
1994 1993 - ------------------------------ ------------------------------ OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - ------- ------ --------- ------- ------ --------- $ 833 $181 $ 155 ....... Information Services ....... $ 800 $178 $ 162
Operating income fell at the Information Services segment in 1994 on modestly higher revenues, reflecting additional expenses of publishing in competitive markets and ITT World Directories' share of the costs of establishing a European directory in a joint venture with the Thomas Publishing Co. Both revenues and income improved at ITT Educational. YEAR ENDED DECEMBER 31, 1993 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1992 Operating cash flow (defined as operating income before interest, taxes, depreciation and amortization, or EBITDA) more than doubled in 1993 to $251 million, compared with $114 million in 1992, reflecting dramatic improvements at Hotels, as the increase in both occupancy and room rates in the North American region more than offset the impact of room rate reductions in Europe which was driven by a strong U.S. dollar at such time. The aforementioned 1993 provisions totaling $49 million, aimed at increasing the efficiency and productivity of overhead functions at the segment and regional headquarters locations, and $29 million for the accelerated write-off of capitalized development expenses adversely impacted the results. In 1992, provisions 70 77 totaling $45 million to write down financial assets at Hotels and $41 million for the closedown of ITT World Directories unit in Turkey also adversely impacted operating cash flow. Excluding these items, operating cash flow increased 65% and represented 7.9% of revenues in 1993 compared with 4.7% in 1992. Revenues of $4,169 million were down slightly from 1992, reflecting the absence of several units sold during the period, principally the United Kingdom operation of ITT World Directories. The Sheraton Desert Inn property in Las Vegas, the acquisition of which in November marked New ITT's entrance to the U.S. gaming industry, contributed $24 million to 1993 revenues. Operating income quadrupled to $142 million from 1992 results, reflecting the aforementioned strength in Hotels' North American region and the effect of the unusual provisions. Selling, general and administrative expenses include $122 million in 1993 and $127 million in 1992, representing overhead expenses related to the management and supervision of the entities comprising the ITT Corporation before the Distribution. Of these amounts, $73 million and $74 million were charged in the respective years to affiliated companies (ITT Hartford and ITT Industries) and represent fees for advice and assistance provided by New ITT in connection with manufacturing, operating, accounting, commercial, financial and other matters. The fees for these services were based upon a general relations agreement with each affiliate. These expenses are reflected and charged out of New ITT since this entity includes many of the corporate functions that are expected to remain with New ITT after the Distribution. See "Basis of Presentation" note to New ITT Combined Financial Statements herein. Excluding these overhead expenses and related service fee income, selling, general and administrative expenses were approximately even compared with 1992. Interest expense, before interest income of $14 million in 1993 and $21 million in 1992, increased to $47 million compared with $41 million in 1992, the result of additional debt required to fund the Desert Inn and other asset purchases in 1993. Miscellaneous income (expense) reflects nonoperating items of a nonrecurring nature, including gains and losses on the sale of investments. In 1993, miscellaneous income of $10 million related primarily to the gain on the sale of ITT World Directories' United Kingdom unit and, in 1992, miscellaneous income of $7 million related to a number of small non-operating items. The effective income tax rate of 53% in 1993 was unusually high due to the tax cost associated with repatriating cash to the United States from ITT World Directories units in Portugal, Belgium and The Netherlands. In addition, U.S. state and local income taxes raises the New ITT's effective tax rate above the U.S. statutory rate. Absent unusual tax transactions, the New ITT's effective rate approximates 40%. The 1992 income tax provision of $4 million was provided on pretax income of $21 million, resulting in an abnormal effective rate due to the mix of earnings from various taxing jurisdictions on a small pretax income base. Minority income in both periods represents the effect of minority ownership in ITT World Directories. Net income of $39 million or $0.33 per pro forma share in 1993 compares with income before accounting changes of $2 million or $0.02 per pro forma share in 1992, the result of the factors discussed above. Additionally in 1992, New ITT adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions", and SFAS No. 112, "Employers' Accounting for Postemployment Benefits", which were recorded effective January 1, 1992, using the immediate recognition method. These accounting changes resulted in a cumulative catch-up adjustment of $47 million after tax or $0.40 per pro forma share. Business Segments -- Revenues, operating cash flow and operating income (excluding the effect of corporate overhead, minority income and Dispositions) for each of New ITT's three major business segments were as follows ($ in millions):
1993 1992 - ------------------------------- ------------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $3,160 $167 $87 ............. Hotels ............. $3,109 $ 25 $ (28)
71 78 Properties in the Hotels segment are marketed under the ITT Sheraton brand name and include 176 properties (43%) which are owned or managed under long term agreements and 230 properties (57%) which were franchised at December 31, 1993. At year end 1992, 174 properties (41%) were owned or managed and 252 properties (59%) were franchised. Operating cash flow and operating income at Hotels improved as the combined impact of increased occupancy and room rates in the North American region more than offset lower results in Europe reflecting the impact of room rate reductions, caused by the strengthened U.S. dollar and lower occupancy. Results in 1993 also reflected the accelerated write-off of capitalized development expenses totaling $23 million, partially offset by an $11 million gain on the sale of an investment in Bally's Las Vegas operations. In 1992, a provision of $45 million to write down hotel investments resulted in a reported operating loss. Hotels segment revenues are geographically diverse, with 48% and 46% generated in North America in 1993 and 1992, respectively. New York, Washington, D.C. and Miami are among the larger markets served.
1993 1992 - ------------------------------- ------------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $ 24 $ (3) $(9) ............ Gaming ............. $ -- $ -- $ --
In November 1993, New ITT entered the U.S. gaming industry with the acquisition of the Desert Inn Properties in Las Vegas. This acquisition afforded New ITT with the opportunity to enter immediately the North American land-based gaming industry. The EBITDA and operating income results reported for 1993 reflect start-up costs for the gaming operations.
1993 1992 - ------------------------------- ------------------------------- OPERATING OPERATING REVENUES EBITDA INCOME REVENUES EBITDA INCOME - -------- ------ --------- -------- ------ --------- $800 $178 $ 162 .........Information Services........ $817 $185 $ 170
The decline in Information Services reflects unfavorable foreign exchange impacts. When excluding these impacts, revenues, EBITDA and operating income rose approximately 5%. The increases reflected improvements in the telephone directory operations in Western Europe as well as an increase in the number of ITT Technical Institutes and student enrollment at those institutes at ITT Educational. LIQUIDITY AND CAPITAL RESOURCES The preceding discussion of the results of operations of New ITT describes New ITT over a period of significant transformation and growth. ITT has historically incurred debt at the parent level to a greater extent than at the operating company level, particularly when funding major capital programs or acquisitions. In connection with the Distribution, a portion of parent company debt would be allocated to New ITT so that the aggregate amount of debt of New ITT after the Distribution would be less than the aggregate amount of debt from non-affiliated entities and investments and advances from ITT Industries (ITT) prior to the Distribution. See "NEW ITT FORECASTED CAPITALIZATION". The future liquidity of New ITT will, to a large degree, depend on the integration and performance of its recent acquisitions as well as the previously existing businesses of New ITT. New ITT will not be able to rely on the earnings, assets or cash flows of ITT Industries or ITT Hartford after the Distribution nor, however, will its earnings, assets or cash flows be used to contribute to the capital requirements of those entities. In addition, income taxes have been assessed to New ITT in accordance with a tax sharing agreement with ITT Industries that generally requires the computation of income taxes as if New ITT had been a stand-alone entity. In all years presented, credits for income taxes paid in foreign jurisdictions were fully utilizable in the United States in the ITT consolidated tax return. This full utilization of credits may not be achievable in the future, and, to the extent foreign tax credits cannot be used to reduce the U.S. tax obligation, a higher effective income tax rate will be incurred. New ITT generated EBITDA of $424 million in 1994 which was prior to the acquisition of CWI and without the benefit of a full year of Ciga, MSG and other luxury hotel acquisitions. On a pro forma basis giving effect to the acquisitions (see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS"), EBITDA was $645 million in 1994. Management of ITT expects that EBITDA for 1995 will 72 79 substantially exceed pro forma EBITDA for 1994 based on preliminary results to date and expectations for the balance of the period. However, for a discussion of certain important limitations and related assumptions concerning this projected and other pro forma financial data and ITT management's beliefs as to future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS, AND PRO FORMA FINANCIAL INFORMATION". These cash flows are expected to be sufficient to cover capital expenditures and other liquidity needs. Funds used for capital expenditures and acquisitions totaled $2.3 billion in the three months ended March 31, 1995, and $1.5 billion in the year ended December 31, 1994, for combined expenditures of $3.8 billion since January 1, 1994. Of this amount, the acquisition of CWI ($1.7 billion), MSG ($.6 billion), Ciga ($.5 billion) and other major hotel acquisitions ($.5 billion) comprised 87% of this amount. The balance was used for smaller acquisitions and to maintain New ITT's facilities. Interest charges have historically been incurred based on the external debt outstanding as well as on interest-bearing advances from ITT Industries at 8%. Management of ITT expects to capitalize New ITT in a manner similar to comparable companies in the industries represented by such businesses following the Distribution. For a discussion of certain important limitations and related assumptions concerning the projected capitalization of New ITT, see "NEW ITT SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION." ENVIRONMENTAL MATTERS New ITT is subject to stringent environmental laws and regulations in all jurisdictions in which it operates. Management of ITT believes that New ITT is in substantial compliance with all applicable environmental requirements. Environmental compliance costs are accounted for primarily as normal operating expenses. Management does not believe that such environmental compliance costs will have a material adverse effect on New ITT's financial position or results of operations. EFFECT OF INFLATION The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenues or operating results of New ITT during the three most recent fiscal years. 73 80 ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis of financial condition and results of operations is prepared as if ITT Hartford were a separate entity for all periods presented. BACKGROUND AND BUSINESS CONDITIONS ITT Hartford is a diversified, multi-national, multi-line insurance organization which offers a wide array of products and services. The North American property and casualty operations ("Property & Casualty"), headquartered in Hartford, Connecticut, provide a wide range of personal, commercial, specialty and reinsurance coverages. Property & Casualty includes the First State companies, formerly Cameron and Colby, a group of three Boston-based excess and surplus lines and reinsurance subsidiaries of ITT prior to the Distribution. Effective at the end of 1992, First State ceased writing new and renewal business and is being managed as an operation in run-off until all claims have been resolved. The International property & casualty operations are located primarily in the United Kingdom and The Netherlands. In the property and casualty arena, ITT Hartford ranks among the leaders in a competitive environment which includes stock companies, mutual companies and other underwriting organizations. The residual effects of the recent recession coupled with a demand for low cost, high quality service have created difficult conditions in the domestic property and casualty market, as evidenced by a leveling or reduction in premium rates in certain lines of business. Additionally, some competitors obtain their business at less cost through captive agents or salaried employees rather than through independent agents and brokers such as those utilized by ITT Hartford. In meeting the challenges of this environment, ITT Hartford has implemented an effective cost containment program, increasing efficiencies across all segments of its property and casualty business. In personal lines insurance, ITT Hartford has obtained an exclusive marketing arrangement with The American Association of Retired Persons ("AARP") through the year 2002, providing a competitive advantage in a growing segment of the population. ITT Hartford's life operations ("Life") rank among the fastest growing life insurance organizations in the United States based on total assets. Products offered include individual life insurance, retirement annuities, group pension plans, deferred compensation plans, group life, group disability and corporate-owned life insurance ("COLI"). The life markets in which ITT Hartford operates are highly competitive, with approximately 2,000 stock life and mutual life companies in the United States competing in the areas of price, quality of service, effectiveness of distribution systems and perceived financial strength. Other factors that could potentially impact the life insurance business include current and proposed Federal measures allowing banks to engage in the insurance business and tax law changes affecting the tax treatment of life insurance products. Hartford Life Insurance Company, ITT Hartford's largest subsidiary, is ranked fourteenth among U.S. life insurers based on total assets according to the July 1994 edition of Best's Review, a trade publication. RESULTS OF OPERATIONS All per share amounts are computed based on ITT Hartford net income divided by 117 million shares of ITT Hartford Common Stock, the estimated number of shares to be outstanding after the Distribution. THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1994 Revenues and Income Insurance revenues were $3.0 billion in the first quarter of 1995 as compared with $2.6 billion in 1994. This increase over the prior year first quarter reflects the continued growth of the Life segment and results from a greater volume of COLI business. Net income for the first quarter of 1995 was $140 million or $1.20 per share compared with $147 million or $1.26 per share in the comparable 1994 quarter. Included in these results were after tax portfolio gains of $13 million or $0.11 per share in the first quarter, compared with $32 million or $0.27 per share in the prior year first quarter. 74 81 First quarter operating income of $197 million approximated the prior year first quarter, as lower portfolio gains, reduced earnings in Property & Casualty's workers' compensation line of business and lower earnings within Life's group pension line of business were largely offset by lower catastrophe losses. BUSINESS SEGMENTS -- THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1994 Following is a discussion of important factors affecting the revenues and operating income of each of the business segments. PROPERTY AND CASUALTY OPERATIONS ($ IN MILLIONS):
THREE MONTHS ENDED MARCH 31, ------------------- 1995 1994 ------- ------- Revenues Domestic Commercial............................................ $ 786 $ 789 Domestic Personal.............................................. 445 416 Reinsurance.................................................... 163 165 International.................................................. 284 245 Net Investment Income.......................................... 217 193 Net Realized Investment Gains.................................. 17 47 ------- ------- Total....................................................... 1,912 1,855 Claims and Expenses.............................................. (1,774) (1,720) ------- ------- Operating Income............................................... $ 138 $ 135 ======= =======
Year-to-date March 1995 property and casualty revenues of $1.9 billion grew $57 million, or 3%, over the prior year's first quarter. Excluding portfolio gains, revenues grew $87 million or 5%. This increase was due to growth in earned premium in domestic personal lines and international operations combined with increased investment income, the result of a larger asset base. The increase in domestic personal lines, $39 million or 9%, was attributable in large part to business volume associated with its exclusive marketing arrangement with AARP. The growth in international earned premium, primarily in the United Kingdom, was due to a combination of improved European market conditions and changes in foreign exchange rates. Property and casualty operating income for the first quarter of 1995 was $138 million as compared to $135 million in the prior year first quarter, an increase of $3 million, or 2%. Excluding portfolio gains, operating income increased $33 million or 38% due to increased investment income and improved underwriting results. Property and casualty underwriting results reflected a reduction in catastrophes due to the adverse impact in the first quarter of 1994 of the California earthquake and winter freezes. Lower earnings in the workers' compensation line of business largely offset this favorable catastrophe experience. The prior year first quarter benefited from unusually good workers' compensation results due to the impacts of managed care initiatives and favorable legislative reform. Excluding operations in runoff, the first quarter 1995 worldwide property and casualty combined ratio was 102.0 as compared with 104.7 in the first quarter of 1994 (for a discussion of 75 82 combined ratios, see "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION -- PROPERTY AND CASUALTY INSURANCE OPERATIONS -- COMBINED RATIOS"). LIFE OPERATIONS ($ IN MILLIONS):
THREE MONTHS ENDED MARCH 31, ----------------- 1995 1994 ------- ----- Revenues Individual Life and Annuity..................................... $ 193 $ 154 Employee Benefits............................................... 289 277 Asset Management Services....................................... 196 184 Specialty....................................................... 386 152 International Operations........................................ 29 20 ------- ----- Total........................................................ 1,093 787 Benefits and Expenses............................................. (1,034) (724) ------- ----- Operating Income................................................ $ 59 $ 63 ======= =====
First quarter 1995 revenues of $1.1 billion increased $306 million or 39% over the first quarter of 1994. This increase reflects a greater volume of account charge revenues from COLI business (within the specialty line of business) and continued expansion of the individual life and annuity lines of business. Growth in fixed and variable annuity sales, which are generally recorded as deposits, as well as the impacts of several assumption reinsurance transactions in recent years have dramatically increased assets under management in the Life segment. The premiums, management and maintenance fees, and cost of insurance associated with the growing policyholder asset base have continued to increase revenues, including investment income. Deposits on investment-type products, which are not reported as premiums or revenues, totaled $4.3 billion for the first quarter of 1995 as compared with $2.8 billion in the 1994 first quarter, reflecting a $1.5 billion or 54% increase. Deposits have increased dramatically in the individual life and annuity, COLI and group pension lines of business. Life operations first quarter 1995 operating income was $59 million, a decrease of $4 million when compared with the first quarter of 1994. This decrease was largely due to reduced earnings within the group pension line of business, the result of lower investment income on mortgage-backed securities which have experienced prepayments in excess of anticipated levels. Offsetting this decrease were improved earnings in the individual life and annuity, employee benefits and COLI lines of business, the result of increased sales. YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEARS ENDED DECEMBER 31, 1993 AND 1992 Revenues and Income Worldwide insurance revenues were $11.1 billion in 1994 compared with $10.3 billion in 1993 and $9.9 billion in 1992. Revenues increased 7% and 5% in 1994 and 1993, respectively, despite lower portfolio gains in each of those years. Portfolio gains included in revenues totaled $90 million, $155 million, and $443 million in 1994, 1993 and 1992, respectively. These increases reflect the dramatic growth of the Life operations combined with consistent increases in business volume in worldwide property and casualty operations. Net income was $644 million or $5.50 per share compared with $537 million or $4.59 per fully diluted share in 1993 and a net loss of $653 million or $5.58 per share in 1992. The net loss in 1992 was due to several significant nonrecurring items and accounting changes in that year. Items excluded from the results of operations include the impact in 1994 of the net effect of two accounting changes, the cumulative effect of which totaled $12 million after tax or $0.10 per share recorded as of January 1, 1994, and the effects in 1992 of two accounting changes, the cumulative effect of which totaled 76 83 $(379 million) after tax or ($3.24) per share. The table below summarizes the (charge) benefit of the cumulative effect adjustments, net of tax ($ in millions):
1994 1993 1992 ---- ---- ----- Adjustment to fair value of mortgage-backed, interest-only investments.......................................................... $(30) $-- $ -- Change in basis of discounting certain workers' compensation liabilities.......................................................... 42 -- -- Change in accounting for post-retirement benefits other than pensions............................................................. -- -- (358) Change in accounting for post-employment benefits...................... -- -- (21) ---- ---- ----- Net cumulative effect benefit (charge)................................. $ 12 $-- $(379) ==== ==== =====
See the "Changes in Accounting Policies" note in the Notes to ITT Hartford's Consolidated Financial Statements for additional information on the accounting changes referenced in this table. Income (loss) before cumulative effect of accounting changes was $632 million or $5.40 per share compared with $537 million or $4.59 per share in 1993 and $(274 million) or ($2.34) per share in 1992. Income before cumulative effect of accounting changes for 1994 increased over 1993 due to improved international property and casualty underwriting results combined with continued profitable growth of the life insurance operation annuity and COLI lines of business. The impact of the California earthquake and winter freezes generated excess catastrophe losses at domestic property and casualty of $40 million or $0.34 per share, which partially offset these improvements. Income before the cumulative effect of accounting changes for 1993 increased $811 million over 1992. A number of items dramatically affected the comparison to 1992 results. - In the fourth quarter of 1992, ITT Hartford established reserves in the amounts of $594 million after tax ($900 million before tax) to fund expected loss developments in surplus lines and reinsurance business and $165 million after tax ($250 million before tax) for expected legal defense costs associated with environmental-related claims. - During 1992, record catastrophes which included Hurricanes Andrew and Iniki, the Los Angeles riots and the Chicago flood reduced earnings $224 million after tax, as compared with catastrophe losses of $69 million after tax in 1993. - Portfolio gains in 1993 totaled $101 million after tax as compared with $292 million after tax in 1992. In addition, 1993 net income increased over 1992 due to improved international property and casualty underwriting results combined with the growth of the life insurance operation annuity and COLI lines of business. CASH FLOW ITT Hartford reported cash flow of $824 million from operating activities in 1994, compared with $807 million and $816 million in 1993 and 1992, respectively. Investment contracts written at Life provided $2.6 billion in 1994, compared with $1.7 billion in 1993 and $1.6 billion in 1992. These funds, along with cash reserves, were invested in securities held by ITT Hartford ($3.3 billion), used to fund capital additions ($.1 billion) and used in connection with the redemption of preferred stock ($.2 billion). During the 1995 first quarter, ITT Hartford generated $241 million of cash from operating activities, up from $96 million in the 1994 first quarter. The increase is due primarily to the timing of Federal income tax payments and lower operating cash requirements. Cash was used for capital additions ($14 million) and to pay dividends to shareholders. In addition, investment life contracts provided $1.0 billion and $.1 billion for the first three months of 1995 and 1994, respectively. 77 84 BUSINESS SEGMENTS -- YEAR ENDED DECEMBER 31, 1994 COMPARED WITH THE YEARS ENDED DECEMBER 31, 1993 AND 1992 Following is a discussion of important factors affecting the revenues and operating income of each of the business segments. PROPERTY AND CASUALTY OPERATIONS ($ IN MILLIONS):
1994 1993 1992 ------- ------- ------- Revenues Domestic Commercial................................. $ 3,194 $ 3,234 $ 3,219 Domestic Personal................................... 1,698 1,622 1,492 Reinsurance......................................... 623 465 379 International....................................... 1,065 1,017 1,005 Net Investment Income............................... 828 847 924 Net Realized Investment Gains....................... 85 143 427 ------- ------- ------- Total............................................ 7,493 7,328 7,446 Claims and Expenses................................... (6,887) (6,862) (8,117) ------- ------- ------- Operating Income.................................... $ 606 $ 466 $ (671) ======= ======= =======
1994 property and casualty revenues of $7.5 billion grew $165 million, or 2%, over 1993. Revenues in 1993 were $7.3 billion, or 2%, below 1992. Excluding net realized investment gains, revenues grew over the prior year by $223 million in 1994 and $166 million in 1993. Investment income decreased $19 million and $77 million in 1994 and 1993, respectively, due primarily to declining interest rates. Despite difficult conditions in the domestic property and casualty market, domestic underwriting revenues increased moderately, growing $194 million (4%) over 1993 results, which had grown $231 million (5%) when compared with 1992 revenues. International underwriting revenues reflected year-to-year growth rates of 5% and 1% in 1994 and 1993, respectively, largely as a result of improving market conditions in Europe. Property & Casualty operating income increased $140 million, or 30%, in 1994, reflecting improved underwriting results, partially offset by lower portfolio gains and investment income. ITT Hartford's underwriting results reflect a combination of improved market conditions at its London-based subsidiary, London & Edinburgh, and favorable loss experience in the workers' compensation line of business within the domestic operations. Results in the workers' compensation line of domestic Property & Casualty benefited from the impacts of managed care initiatives and favorable legislative reform. Operating income at First State also improved as a reduction in losses more than offset the impacts of a shrinking investment portfolio. Operating income in 1993 improved dramatically when compared to 1992, reflecting the impact in 1992 of $900 million of reserve strengthening for expected loss developments in surplus lines and reinsurance at First State, $250 million of legal defense costs associated with environmental-related claims and record-setting catastrophe losses. The worldwide combined ratio improved for three consecutive years, reflecting a combination of business growth, better European market conditions and effective cost containment strategies. The combined ratio was 104.0 (102.8, excluding First State), 107.3, and 133.7 in 1994, 1993 and 1992, respectively (for a discussion of combined ratios, see "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION -- PROPERTY AND CASUALTY INSURANCE OPERATIONS -- COMBINED RATIOS"). A continuation of improving operating performance is expected in 1995, although there can be no assurance such improvement will, in fact, occur. Property & Casualty underwriting results are expected to continue to be enhanced by business development and cost containment strategies. 78 85 LIFE OPERATIONS ($ IN MILLIONS):
1994 1993 1992 ------- ------- ------- Revenues Individual Life and Annuity......................... $ 682 $ 599 $ 374 Employee Benefits................................... 1,130 1,105 1,080 Asset Management Services........................... 789 794 770 Specialty........................................... 919 424 97 International Operations............................ 89 88 95 ------- ------- ------- Total............................................ 3,609 3,010 2,416 Benefits and Expenses................................. (3,363) (2,789) (2,246) ------- ------- ------- Operating Income.................................... $ 246 $ 221 $ 170 ======= ======= =======
Life insurance revenues in 1994 of $3.6 billion increased $599 million, or 20%, over the $3.0 billion recorded in 1993, which in turn had increased $594 million, or 25% over 1992 reserves. This dramatic growth reflects a greater volume of account charge revenues from COLI within Specialty, significant growth in annuity business and continued expansion of the individual life line of business. Three recent assumption reinsurance transactions have helped fuel Life's growth: in June 1993, ITT Hartford assumed and reinsured $3.2 billion in fixed and variable annuity assets of Fidelity Bankers Life Insurance Company (Fidelity); in August 1993, ITT Hartford assumed a portion of Mutual Benefit group COLI contract obligations; and in May 1994, ITT Hartford assumed and reinsured the life insurance policies and individual annuity contracts of Pacific Standard Life Insurance Company in Receivership ("Pacific Standard") adding $219 million of annual life premiums and $181 million of annuity assets. Driven by the rapid expansion of the COLI business and the continued significant growth in annuity sales, Life operations operating income grew 11% from 1993 to $246 million in 1994, up from $221 million and $170 million in 1993 and 1992, respectively. The impact of the assumption reinsurance transactions described above, combined with new deposits from fixed and variable annuity sales (which are not reported as revenues) of $10.7 billion, $8.2 billion (excluding the Fidelity transaction) and $5.9 billion in 1994, 1993 and 1992, respectively, has served to increase assets under management dramatically. The management and maintenance fees and cost of insurance associated with this growing policyholder base are the source of Individual Life and Annuity's increased revenues and operating income. Partially offsetting this improvement was a decline in operating income of the GRC line of business within Asset Management Services ("AMS") due to lower investment earnings on mortgage-backed securities which experienced prepayments in excess of assumed levels. The GRC portfolio was also affected by the interest rate rise in 1994 where the duration of the assets lengthened more than the liabilities. Although income for this line will continue to be reduced by these factors, additional strategies were formulated to limit income volatility due to interest rate movements and to mitigate any resulting liquidity needs. Notwithstanding the foregoing, it is anticipated that the life insurance segment in total will continue to grow in both size and profitability, particularly in the area of individual annuities. INCOME TAXES Income taxes of $214 million in 1994 were provided on pretax income of $852 million representing a 25% effective tax rate. Tax exempt interest earned on invested assets is the principal cause of a lower effective rate than the U.S. statutory rate. The increase in ITT Hartford's effective tax rate from 20% in 1993 is due primarily to the absence of several one-time benefits, the largest of which related to a change in the U.S. Federal tax rate. This benefit, totaling $22 million, resulted from the remeasurement of ITT Hartford's net deferred tax assets at 35%. The line item, "Cumulative Effect of Accounting Changes", in the ITT Hartford income statement is presented on a net of tax basis and, accordingly, the associated taxes are not included in the provision above. Income taxes paid in 1994, 1993 and 1992 were $317 million, $383 million and $57 million, respectively. 79 86 Income taxes decreased in the first quarter of 1995 versus the first quarter of 1994 due to a decrease in pretax income before the cumulative effect of accounting changes. Income taxes related to the "Cumulative Effect of Accounting Changes" are reflected within this caption separately on the ITT Hartford income statement. ITT Hartford's effective tax rate was 28% in the first quarter of 1995 compared with 31% in the first quarter of 1994. ENVIRONMENTAL MATTERS ITT Hartford continues to receive claims asserting injuries from asbestos and asbestos-related products and damages from environmental and related clean-up costs. With regard to these claims, deviations from past experience significantly impact the ability of insurance companies to estimate the ultimate reserves for unpaid losses and related settlement expenses. ITT Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For 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 as they have in the past, the need for additional reserves may arise, adversely affecting future results. Due to the uncertainties described above, a range of such reserve increases cannot be meaningfully quantified. In light of the extensive claim settlement process with asbestos and environmental claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, ITT Hartford has established an environmental claims facility to defend itself aggressively against unwarranted claims. In addition, ITT Hartford in 1992 provided $250 million of additional loss adjustment expense reserves for expected environmental claim defense costs. Reserve activity for both reported and unreported claims relating to asbestos and environmental, including reserves for legal defense costs, is as follows:
QUARTER ENDED FOR THE YEARS ENDED DECEMBER 31, MARCH 31, -------------------------------- 1995 1994 1993 1992 --------- ------ ------ ------ ($ IN MILLIONS) Beginning Liability for Unpaid Asbestos and Environmental Claims and Claim Adjustment Expenses..................... $ 1,191 $1,179 $1,118 $ 853 Loss and Loss Expenses Incurred, Less Reinsurance............................. 46 124 166 381 Loss and Loss Expenses Paid, Less Reinsurance............................. (42) (112) (105) (116) --------- ------ ------ ------ Ending Liability for Unpaid Asbestos and Environmental Claims and Claim Adjustment Expenses(1).................. $ 1,195 $1,191 $1,179 $1,118 ======= ====== ====== ======
- --------------- (1) The ending reserves for asbestos and environmental claims are net of reinsurance on reported claims of $980 in the first quarter of 1995, $969 million in 1994, $937 million in 1993 and $876 million in 1992. LIQUIDITY AND CAPITAL RESOURCES ITT Hartford's outstanding debt and preferred stock was 26% of total capitalization at March 31, 1995 (before recognition of the unrealized loss on investment securities as required by SFAS No. 115 beginning in 80 87 1994), compared with 26% and 24% on the same basis at December 31, 1994 and 1993, respectively. The consistency in the first quarter of 1995 and the increase in 1994 is reflected in borrowings which total $1.6 billion at March 31, 1995 as compared with $1.6 billion and $1.2 billion at December 31, 1994 and 1993, respectively. Effective January 1, 1994, ITT Hartford adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires investments to be reflected at fair value with the corresponding impact reported as a separate component of Stockholders' Equity in situations where these investments are "available for sale" as defined in SFAS No. 115. The accounting standard does not allow for a corresponding fair value adjustment to ITT Hartford's liabilities. Stockholders' Equity can vary significantly between reporting periods as market interest rates and other factors change. Accordingly, ITT Hartford does not include unrealized gains or losses in its assessment of debt to total capitalization. ITT Hartford, after the Distribution, will not rely on the earnings or cash flow of New ITT or ITT Industries to service debt obligations or fund its operations. In addition ITT Hartford, after the Distribution, will likely maintain leverage ratios that are lower than the current leverage ratio of ITT Industries (ITT). After the Distribution, management believes that the liquidity requirements of ITT Hartford will be met by funds from operations as well as the issuance of commercial paper, debt securities and bank borrowings. The principal sources of funds are premiums and investment income as well as maturities and sales of invested assets. The primary uses of funds are to pay claims, policy benefits, operating expenses and commissions and to purchase new investments. In addition, ITT Hartford carries a significant short-term investment position and accordingly does not anticipate selling intermediate and long-term fixed maturity investments to meet any liquidity needs. ITT Hartford has 1,700,000 shares of Class A Preferred Stock -- Series 2 outstanding that are subject to mandatory redemption by November 15, 1995. These shares will be redeemed during 1995 at $50 per share, totaling $85 million. ITT Hartford is an end-user of derivatives and does not utilize them for speculative purposes. The notional amounts of derivative contracts represent the basis upon which pay and receive amounts are calculated and therefore are not reflective of credit risk. Credit risk is limited to the amounts calculated to be due or owed by ITT Hartford on such contracts. ITT Hartford expects to continue to use interest rate swaps to reduce its cost of borrowing in the future. INVESTMENT OPERATIONS An important element of the financial results of ITT Hartford is return on invested assets. ITT Hartford's investment activities are divided between property and casualty insurance and life insurance. The investment portfolios of both the property and casualty and the life operations are managed based on the underlying characteristics and nature of their respective policy liabilities. Investment management strategies differ significantly as do the nature of these two businesses. PROPERTY AND CASUALTY OPERATIONS Property and casualty investment strategies are developed based on a variety of factors including business needs, duration, regulatory requirements and tax considerations. The weighted average duration of the property and casualty investments approximates four and one-half years while the weighted average duration of the policy obligations approximates three years. Property and casualty policy liabilities totaled $14.8 billion (net of ceded reinsurance) at December 31, 1994, which are backed by $20.2 billion in total assets (including insurance investments of $14.1 billion). There are generally no guaranteed interest requirements related to property and casualty policy liabilities. Investments are comprised primarily of intermediate fixed maturity 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. 81 88 LIFE OPERATIONS -- POLICY LIABILITY CHARACTERISTICS Policy liabilities in the Life operations totaled $19.5 billion (net of ceded reinsurance) at December 31, 1994, which are backed by $22.0 billion in total assets (including insurance investments of $18.4 billion). Matching of the duration of life investments with respective policyholder obligations is an explicit objective of the Life management strategy. Policy liabilities in the Life operations, along with estimated duration periods, can be summarized based on investment needs in the following five categories at December 31, 1994 ($ in billions):
ESTIMATED DURATION (YEARS) BALANCE AT ----------------------------------- DECEMBER 31, LESS OVER DESCRIPTION 1994 THAN 1 1-5 6-10 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 ITT Hartford to pay a fixed rate for a certain period of time. The cash flows are not interest sensitive, because the products are written with a market value adjustment, and the liabilities have protection against the early withdrawal of funds through surrender charges. The primary risk associated with these products is that the spread between investment return and credited rate is not sufficient to earn the required return. Product examples include fixed rate annuities with a market rate adjustment and fixed rate guaranteed investment contracts. Contract duration is reflected above and is dependent on the policyholder's choice of guarantee period. The weighted average credited policyholder rate for these policyholder liabilities is 7.5%. Indexed Asset Accumulation Vehicles -- Products in this category are similar to the fixed rate asset accumulation vehicles, but require ITT Hartford to pay a rate that is determined by an external index. The amount and/or timing of cash flows will therefore vary based on the level of the particular index. The risks inherent in these products are similar to the fixed rate asset accumulation vehicles, with an additional risk of changes in the index adversely affecting profitability. The weighted average credited rate for these contracts is 5.8%. Product examples include indexed guaranteed investment contracts with an estimated duration of up to two years. Interest Credited Asset Accumulation Vehicles -- Products in this category credit interest to policyholders, subject to market conditions and minimum guarantees. Policyholders may surrender at book value, but are subject to surrender charges for an initial period. The risks vary depending on the degree of insurance element contained in the product. Product examples include universal life contracts and fixed account 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%. Long-Term Pay-Out Liabilities -- Products in this category are long-term in nature and contain significant actuarial (mortality, morbidity) pricing risks. The cash flows are not interest sensitive, but do vary based on the timing and amount of benefit payments. The risks associated with these products are that the benefits will exceed expected actuarial pricing and/or the investment return is lower than assumed in pricing. Product examples include structured settlement contracts, on-benefit annuities and long-term disability contracts. Contract duration is generally six to 10 years but, at times, exceeds 30 years. Policy liabilities under these contracts are not interest sensitive. Asset and liability durations are matched with the cash flow characteristics of the claims. 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 contingen- 82 89 cies such as mortality or morbidity. Liquidity is of greater concern than for the long-term pay-out liabilities. Products include individual and group term contracts and short-term disability contracts. SEPARATE ACCOUNT PRODUCTS These represent products for which a separate investment and liability account is maintained on behalf of the policyholder. Separate accounts reflect two categories of risk assumption: non-guaranteed separate accounts totaling $15.3 billion, wherein the policyholder assumes the investment risk, and guaranteed separate accounts totaling $8.0 billion, wherein ITT Hartford contractually guarantees either a minimum return or account value to the policyholder. Investment strategy varies by fund choice, as outlined in the fund prospectus or separate account plan of operations. Non-guaranteed products include variable annuities and variable life contracts. Guaranteed separate account products primarily consist of modified guaranteed individual annuity and modified guaranteed life insurance and generally include market value adjustment provisions to mitigate the impact of early surrenders. LIFE OPERATIONS -- INVESTED ASSET CHARACTERISTICS AND DERIVATIVE STRATEGIES TO FACILITATE ASSET-LIABILITY MANAGEMENT Invested assets in the Life operations totaled $18.4 billion at December 31, 1994, and are comprised of asset-backed securities ($6.2 billion), bonds and notes ($8.5 billion), inverse floating securities ($0.5 billion) and other investments, primarily policy loans ($3.2 billion). The estimated maturities of these fixed and variable rate investments, along with the respective yields at December 31, 1994, are reflected below (in millions). Asset-backed securities are distributed to maturity year based on ITT Hartford's estimate of the 83 90 rate of future prepayments of principal over the remaining life of the securities. Expected maturities differ from contractual maturities reflecting borrowers' rights to call or prepay their obligations.
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 ITT Hartford's holdings of residuals which represent less than 1% of the Life operations investment assets. Residuals, for which cost approximates market, have an average life of 4.8 years and earn an average yield of 12.2%. Interest-only securities, for which cost approximates market, have an average life of 7 years and earn an average yield of 10.7%. In addition, other investments, comprised primarily of policy loans, totaled $3.2 billion at December 31, 1994. These loans, which carry a current weighted average interest rate of 10%, are secured by the cash value of the life policy. These loans do not mature in a conventional sense but expire in conjunction with the supporting actuarial assumptions and developments. Life investments are managed to conform with the various liability-driven objectives discussed above. Derivatives play an important role in facilitating the management of interest rate risk, in creating opportunities to develop asset packages which efficiently fund product obligations, in hedging against indexation risks which affect the value of certain liabilities and in adjusting broad investment risk characteristics when dictated by significant changes in market risks. As an end-user of derivatives, ITT Hartford uses a variety of derivative financial instruments, including swaps, caps, floors and exchange-traded financial futures and options as a means of prudently hedging exposure to price, foreign currency and/or interest rate risk on anticipated investment purchases or existing assets and liabilities. The notional amounts of derivative contracts represent the basis upon which pay and receive amounts are calculated and are not reflective of credit risk. Credit risk is limited to the amounts calculated to be due to ITT Hartford on such contracts. Payment obligations between ITT Hartford and its counterparties are typically netted on a quarterly basis. ITT Hartford has strict policies regarding the financial stability and credit standing of its major counterparties and typically requires credit enhancement requirements to further limit its credit risk. Notional amounts pertaining to derivative financial 84 91 instruments totaled $9.4 billion at December 31, 1994 ($7.7 billion related to Life investments and $1.7 billion on the liabilities). The following strategies are used to manage the aforementioned risks associated with the Life obligations: Anticipatory Hedging -- For certain liability types, ITT Hartford commits to the price of the product in advance of the receipt of the associated premium or deposit. To hedge ITT Hartford's expected cash flows against adverse changes in market interest rates, ITT Hartford routinely executes anticipatory hedges which immunize ITT Hartford against asset price changes which would result from changes in market interest rates. Typically, these hedges involve taking a long position in an interest rate future or swap which has a duration equivalent to the anticipated investments, which in turn approximate the duration of the associated liabilities. The notional amount of derivatives used for anticipatory hedges totaled $1.1 billion at December 31, 1994. Liability Risk Adjustments -- Several products obligate ITT Hartford to credit a return to the contractholder which is indexed to a market rate. Derivatives, typically in the form of swaps, are extensively used to convert the specific liability indexation risk to a risk which is more common, such as a fixed rate or a floating rate of LIBOR. By swapping the liability risk into a more common asset risk, a broader array of assets may be effectively matched against these liabilities. This strategy permits the customization of liability indexation to meet customer objectives without the need to identify assets which directly match each index. The notional amount of derivatives used for liability risk adjustment totaled $1.7 billion at December 31, 1994. Asset Hedges/Synthetic Asset Investments -- The selection of investment risk characteristics is driven by the liability-specific needs of each obligation. Investment needs may range from very short duration to very long duration, from floating rate to fixed rate, from callable to non-callable. To meet the obligations of life policyholders, investment managers consider a range of available investment alternatives. In order to provide greater risk diversification, ITT Hartford often invests in securities for which most, but not all, of the desired investment characteristics are met. ITT Hartford may choose to create a synthetic asset by combining two or more instruments to achieve the desired investment characteristics. Many times, the unwanted risks can be effectively managed through the use of derivatives. As an example, currency-linked notes or inverse floating rate characteristics can be converted to alternative fixed or floating rate notes with any currency or unwanted interest risk eliminated or reduced. The choice of derivative instrument for hedging depends upon the investment risk to be offset, the cost efficiency and liquidity of the derivative instrument, as well as the ongoing need to review the overall balance of asset and liability characteristics in the Life operations. The notional amount of derivatives used for hedges of physical or synthetic assets totaled $3.0 billion at December 31, 1994. Duration Hedges -- The term "duration" refers to the degree of change in the value or return of an asset (or group of assets) which results from an external market change, such as a change in level of current interest rates. As market conditions change, these duration characteristics sometimes require adjustments in order to preserve the appropriate asset/liability balance. As an example, a precipitous drop in interest rates may accelerate mortgage prepayments and shorten the expected maturity of a portfolio of mortgage securities. Duration hedges compensate for this risk by adjusting average asset duration parameters. The notional amount of derivatives used for duration hedges totaled less than $3.6 billion at December 31, 1994. ITT Hartford is committed to maintaining an effective risk management discipline. Approved derivatives usage must support at least one of the following objectives: to manage the risk to the operation arising from price, interest rate and foreign currency volatility, to manage liquidity and/or to control transaction costs. All investment activity in the Insurance operations is subject to regular review and approval by the Insurance Operations Finance Committee. Credit limits, diversification standards and review procedures for all credit risk, whether borrower, issuer or counterparty, have been established. The Life operations analyze the aggregate interest rate risk through the use of a proprietary, multi-scenario cash flow projection model which encompasses all liabilities and their associated investments, including derivatives. 85 92 For an important discussion of (i) the investments of ITT Hartford, including assets of both Property & Casualty and Life, segregated by major category, (ii) the types of derivatives related to the type of investment and their respective notional amounts and (iii) the accounting policies utilized by ITT Hartford for derivative financial instruments, see the Notes to the ITT Hartford Consolidated Financial Statements contained herein. EFFECT OF INFLATION The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenues or operating results of ITT Hartford during the three most recent fiscal years. 86 93 BUSINESS OF ITT INDUSTRIES AFTER THE DISTRIBUTION GENERAL As part of the Distribution, the Restated Certificate of Incorporation of ITT will be amended to change the name of ITT Corporation to ITT Industries, Inc. As a result of the Reincorporation, ITT Industries will be an Indiana corporation after the Distribution. The corporate headquarters of ITT Industries is presently in New York City. Unless the context otherwise indicates, references herein to ITT Industries include its subsidiaries. ITT Industries is a worldwide enterprise engaged through its subsidiaries in the design and manufacture of a wide range of high technology products, focused on three principal business segments. These segments, described below, are ITT Automotive, ITT Defense & Electronics and ITT Fluid Technology. In addition, ITT Industries will also hold the stock of certain other subsidiaries whose operations have been, or are in the process of being, discontinued or sold as described under "-- DISCONTINUED OPERATIONS". The table below shows in percentage terms ITT Industries' consolidated net sales and operating income attributable to each of its ongoing lines of business for the three months ended March 31, 1995 and March 31, 1994 and for the last three years:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, --------------- ----------------------- 1995 1994 1994 1993 1992 ---- ---- ---- ---- ---- NET SALES ITT Automotive.................................. 70% 61% 65% 59% 56% ITT Defense & Electronics....................... 17 23 20 24 27 ITT Fluid Technology............................ 13 16 15 17 17 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === === OPERATING INCOME ITT Automotive.................................. 72% 65% 63% 49% 76% ITT Defense & Electronics....................... 14 16 18 23 (19) ITT Fluid Technology............................ 14 19 19 28 43 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
BUSINESS AND PRODUCTS ITT AUTOMOTIVE ITT Automotive is one of the largest independent suppliers of systems and components to vehicle manufacturers worldwide and also supplies related products to the aftermarket. Through operations located in Europe, North America and South America and joint ventures and licensees in Asia, ITT Automotive designs, engineers and manufactures a broad range of automotive systems and components under two major worldwide product groupings -- Brake and Chassis Systems and Body and Electrical Systems. The Brake and Chassis Systems group, with annual sales for 1994 approaching $3 billion, produces anti-lock brake ("ABS") and traction control ("TCS") systems, chassis systems, foundation brake components, fluid handling products and Koni shock absorbers. The Body and Electrical Systems group, with sales for 1994 approaching $2 billion, produces automotive products, such as door and window assemblies, wiper module assemblies, seat systems, air management systems, switches and fractional horsepower DC motors. 87 94 The following table illustrates the percentage sales by group for the periods specified.
YEAR ENDED DECEMBER 31, ------------------------ 1994 1993 1992 ---- ---- ---- Brake & Chassis Systems....................................... 61% 71% 70% Body & Electrical Systems..................................... 39 29 30 --- --- --- 100% 100% 100% === === ===
In 1994, ITT Automotive maintained its position as a leading global supplier of four-wheel ABS and TCS. Global sales of ITT Automotive ABS and TCS exceeded $1 billion for the second consecutive year. During the year, major new contracts for ITT Automotive's modular MK20 ABS were received from a number of major customers, including Chrysler, Ford, Volkswagen and BMW. During 1994, ITT Automotive also increased its previously established position as a leading producer of electric motors and wiper systems, through the acquisition from General Motors of its motors and actuators business unit, now renamed ITT Automotive Electrical Systems, Inc. ("ESI"). ESI is expected to account for 20% of ITT Automotive's sales in 1995. ITT Automotive is beginning to introduce front and rear corner modules (which contain brake components, suspension components, bearings and other smaller items) and is developing new product lines such as complete axle assemblies and vehicle stability management systems (i.e. integrated chassis systems, including, for example, functions such as traction control, anti-lock braking, electronic brake-force distribution and control of engine torque to maintain vehicle stability), although there can be no assurance ITT Automotive will ultimately have a significant presence in such product areas. ITT Automotive also has various recognizable brand names in the automotive industry, including ITT Teves (brake components and systems), ITT SWF (wiper systems, electric motors and switches), and ITT Koni (shock absorbers). The principal customers for products of ITT Automotive are the top vehicle manufacturers worldwide. Of these manufacturers, ITT Automotive's largest customers are General Motors (26% of 1994 ITT Automotive net sales) and Ford (18% of 1994 ITT Automotive net sales). In addition, approximately 9% of ITT Automotive's 1994 net sales were to customers in the aftermarket. ITT Automotive sells a variety of products in this market, including brake parts, shocks and struts and windshield wiper components. ITT Automotive companies have approximately 35,400 employees in 76 facilities located in 18 countries. ITT DEFENSE & ELECTRONICS ITT Defense & Electronics companies develop, manufacture and support high technology electronic systems and components for defense and commercial markets on a worldwide basis, with operations in North America, Europe and Asia. Defense market products include tactical communications equipment, electronic warfare systems, night vision devices, radar, space payloads, and operations and management services. Commercial products include interconnect products (such as connectors, switches and cable assemblies) and night vision devices. The ITT Defense & Electronics business continues to concentrate its efforts in those market segments where it can be a market leader, with increasing expansion into international defense markets. In Tactical Communications, ITT Defense & Electronics manufactures products that facilitate communications in the forward area battlefield. ITT Aerospace/Communications Division ("A/CD") won the major share of the U.S. Army's Single Channel Ground and Airborne Radio System ("SINCGARS") competition in 1994 and, in the view of ITT Industries management, maintains its position as the world's largest producer of combat radios. In Night Vision, ITT Electro-Optical Products Division provides United States and Allied soldiers with the capability to conduct night combat operations (as demonstrated in the Persian Gulf War) with the production of advanced goggles for airborne and ground applications. Radar, produced by ITT Gilfillan, includes ship and air defense radar and air traffic control systems. In Airborne Electronic Warfare, ITT Avionics was selected by the U.S. Army to develop the next-generation fully integrated airborne electronic 88 95 warfare system, called Advanced Threat Radar Jammer ("ATRJ"). In addition, ITT Avionics' Airborne Self-Protection Jammer ("ASPJ") was selected by both Finland and Switzerland to protect their new F-18 fighter aircraft. In Remote Sensing/Navigation Space Payloads, ITT A/CD produces extremely sophisticated geostationary sounding and imaging instruments, such as those used by the National Oceanographic and Atmospheric Agency to track weather patterns such as hurricanes and tornadoes. In Operations and Maintenance Services, ITT Federal Services Corporation ("FSC") provides military base operations support, equipment and facility maintenance, and training services for government sites around the world. In 1994, ITT FSC was awarded a major contract by the U.S. Army to provide combat support services in Kuwait and, in 1995, has recently been awarded a renewal of competitive contracts for continued support at two major United States military bases in Germany. In the Interconnect market (which includes products such as connectors, switches and cable assemblies used with workstations, local area networks and personal computers and other applications), ITT Cannon maintains a position as one of the world's largest connector companies based on revenue and is a leading supplier to the military/aerospace and industrial sectors. Management of ITT Industries believes that progress continues to be made in redirecting business growth into the communication and information systems sectors of the interconnect market, which, in the view of ITT Industries' management, have strong potential for growth. Expansion into the Asia-Pacific market continued during 1994 with the establishment of a joint venture in China and a business office location in Hong Kong. The following table illustrates the percentage sales by product line for the periods specified.
YEAR ENDED DECEMBER 31, -------------------------- 1994 1993 1992 ---- ---- ---- Tactical Communications..................................... 28% 29% 23% Electronic Defense.......................................... 7 8 18 Night Vision/Radar.......................................... 16 14 15 Government Services......................................... 16 16 15 Interconnect................................................ 30 30 26 Other....................................................... 3 3 3 --- --- --- 100% 100% 100% === === ===
ITT Defense & Electronics sells its products to a wide variety of governmental and non-governmental entities located throughout the world. Approximately 66% of 1994 net sales of ITT Defense & Electronics were to governmental entities, of which approximately 90% were to the United States Government (principally in defense programs). As a result, a substantial portion of the work of ITT Defense & Electronics is performed in the United States under prime contracts and subcontracts, some of which by statute are subject to profit limitations and all of which are subject to termination by the United States Government. Apart from the United States Government, no other governmental or commercial customer accounted for more than 2% of 1994 net sales for ITT Defense & Electronics. Sales to non-governmental entities have remained approximately at one-third of sales from 1992 through 1994. Certain of the products sold by ITT Defense & Electronics have particular commercial application, including night vision products and those products already sold to the commercial sector, such as connectors and switches. For example, ITT Defense & Electronics has entered into an agreement with the Sports Optics Division of Bausch & Lomb under the terms of which Bausch & Lomb has become the sole distributor of certain night vision products to the sports market. In addition, ITT Defense & Electronics has entered into a partnership with California Commercial Spaceport, Inc. to form Spaceport Systems International ("SSI"). SSI will build and operate the first commercial satellite launch facility in the United States at Vandenberg Air Force Base in California, to launch commercial satellite payloads into low earth polar orbits. The new facility is expected to be ready for operation in 1997, at which time SSI expects to be able to provide full launch and support services to commercial and government customers worldwide. 89 96 ITT Defense & Electronics companies have approximately 14,700 employees in 74 facilities in 15 countries. ITT FLUID TECHNOLOGY ITT Fluid Technology is a worldwide enterprise engaged in the design, development, production and sale of products, systems and services used to move, handle, transfer, control and contain fluids of all kinds. Operating in more than 100 countries, ITT Fluid Technology is a leading supplier of pumps, valves, heat exchangers, mixers, instruments and controls for the management of fluids. The majority of ITT Fluid Technology sales are in North America and Western Europe. Principal markets are water and wastewater treatment, industrial and process, and construction. Industrial and process market activity includes strong market niche positions in the chemical processing, pharmaceutical and biotechnology sectors, and in selected segments of the oil and gas and mining markets. Construction market activity includes leading market positions in certain heating, ventilation and air conditioning ("HVAC") segments of the residential and non-residential construction market, and in construction dewatering. ITT Fluid Technology also has significant niche positions in the commercial and leisure marine and aerospace markets. Sales are made directly and through independent distributors and representatives. ITT Fluid Technology is structured in three divisions, each of which is briefly described below. No single customer accounted for more than 2% of 1994 net sales for ITT Fluid Technology. ITT Flygt, headquartered in Sweden, is a pioneer in submersible technology and is the world leader in submersible pumping and mixing products. About half of Flygt's worldwide sales come from wastewater treatment expenditures in the municipal sector. ITT Fluid Transfer produces a wide range of commercial and industrial pumps, heat exchangers and related components. The division holds market leadership positions in a number of product/market sectors under long established brand names such as AC Pump, Bell & Gossett, McDonnell & Miller, Jabsco, Marlow and others. Major markets include construction building trades, HVAC, general industrial and major original equipment manufacturers, leisure marine, water and wastewater and fire protection. ITT Controls & Instruments primarily produces measuring instruments and valves. This division also holds market leadership positions in a number of product/market niches under long established brand names such as Barton, Dia-Flo, Cam-tite and others. Markets include chemical, industrial process, oil and gas, power generation and aerospace. The following table illustrates the percentage sales by division for the periods specified.
YEAR ENDED DECEMBER 31, ----------------------- 1994 1993 1992 --- --- --- Flygt (Submersible Products)................................. 46% 46% 48% Fluid Transfer............................................... 34 34 33 Controls & Instruments....................................... 20 20 19 --- --- --- 100% 100% 100% === === ===
In May 1994, ITT Fluid Technology acquired Richter Chemie-Technik GmbH ("Richter") of Kempen, Germany. Richter, with annual sales of approximately $25 million, is a leading European producer of specialized pumps and valves designed to handle the flow of high temperature corrosive liquid and gaseous media. Also, during 1994, ITT Fluid Technology announced the formation of manufacturing and sales joint ventures with local partners in China and in Brazil. Management of ITT Industries believes that ITT Fluid Technology has a solid technology base and proven expertise in applying its products to meet customer needs. Management of ITT Industries also believes the continuing development of new products enables ITT Fluid Technology to maintain and build market leadership positions in served markets. 90 97 ITT Fluid Technology companies have approximately 8,300 employees in 45 facilities located in 18 countries, with sales representation in over 100 countries. GEOGRAPHIC MARKETS Approximately one-half of ITT Industries sales are to customers outside the United States. The geographic sales mix of ITT Industries is illustrated (in percentage terms) by the following table for the periods specified.
1994 1993 1992 ---- ---- ---- United States............................................... 50% 46% 44% Western Europe.............................................. 38 43 48 Canada...................................................... 6 4 3 Asia/Pacific................................................ 3 3 2 Other....................................................... 3 4 3 --- --- --- 100% 100% 100% === === ===
The geographic sales base of ITT Automotive is predominantly in Europe and North America. In 1994, approximately 50% of the sales of ITT Automotive were to customers in the United States and Canada and 46% of sales were to customers in Western Europe. The economic performance of ITT Automotive is reasonably dependent upon strong economic growth in all major international markets, including that of the United States. The geographic sales mix differs between products and is greatly influenced, from year to year, by vehicle production levels in the relevant countries. Management of ITT Industries sees particular growth opportunities in Latin America, Mexico and Asia, particularly China. Most recently, ITT Automotive formed a joint venture, as a 40% owner, in China with Shanghai Automotive Industries Co., Ltd. to manufacture brake systems and established a joint venture, as a 40% owner, in Korea with Kia Motors and Kia Precision Works to produce advanced braking systems. In 1994, ITT Automotive established a manufacturing facility in Hungary. The plant currently is producing switches and door checks and plans call for it also to produce sensors, electric motors and lamps. A manufacturing facility is presently under construction in the Czech Republic to produce brake boosters and master cylinders. ITT Automotive is involved in joint venture arrangements and licensing arrangements throughout the world as a means of serving its international customer base. The economic performance of ITT Defense & Electronics is particularly dependent upon sales in the United States which accounted for over 70% of 1994 sales. Management of ITT Defense & Electronics is attempting to increase its international defense business and sees particular growth opportunities in the Asia/Pacific region and Middle East. For example, a subsidiary of ITT Defense & Electronics was awarded a $44 million contract in 1994 from the Republic of Korea for air traffic, precision approach and control radar systems. In addition, ITT Cannon has formed a joint venture, as a majority owner, in China with Zhenjiang Connector Factory to supply connectors and switches for, in large part, consumer electronics products in that growing market. This new Far East production capability is in addition to ITT Industries' wholly owned subsidiary in Japan. The geographic sales mix of ITT Fluid Technology is somewhat diverse. In 1994, slightly under one-half of the sales of ITT Fluid Technology was derived in the United States while one-third was derived from Western Europe. The economic performance of ITT Fluid Technology is dependent upon strong economic growth in major international markets, particularly that of the United States and Europe. The geographic sales mix differs between products and between divisions of ITT Fluid Technology. Management of ITT Industries sees particular growth opportunities in Eastern Europe and Russia, Africa/Middle East, Latin America and the Asia/Pacific region. Recently, ITT Fluid Technology established a manufacturing and distribution joint venture arrangement, as a majority owner, with First Auto Jinbei Automobile Co., Ltd. of Shenyang, China to produce and sell submersible pumps in China for the sewage handling and mining markets. ITT Fluid 91 98 Technology has also established joint venture sales and manufacturing operations and other operations in Eastern Europe, Latin America and other locations in the Asia/Pacific region. COMPETITION Substantially all of ITT Industries' operations are in highly competitive businesses, although the nature of the competition varies among the business segments. A number of large companies engaged in the manufacture and sale of similar lines or products and the provision of similar services are included in the competition, as are many small enterprises with only a few products or services. Technological innovation, price, quality and reliability are primary factors in markets served by the various segments of ITT Industries' businesses. ITT AUTOMOTIVE In the global automotive industry, competition is strong. This competitive environment has particularly resulted in increased pressure to reduce costs. Since purchased items represent a major portion of the total costs of vehicle manufacturers, vehicle manufacturers are expected to continue to pressure suppliers such as ITT Automotive to share in these cost reductions through a variety of means. Suppliers such as ITT Automotive are also likely to continue to experience competitive and pricing pressures as vehicle manufacturers adopt manufacturing strategies such as the use of worldwide common platforms for the manufacture of automobiles. ITT DEFENSE & ELECTRONICS Competition in the businesses of ITT Defense & Electronics is increasing as a result of, among other things, consolidation in the defense industry. The reduction of government defense budgets, particularly in the United States, has also produced overcapacity in various market segments, including markets in which ITT Defense & Electronics participates. This overcapacity has resulted in various adverse consequences, including aggressive price competition. In most of the markets served by ITT Defense & Electronics competition is based primarily upon price, quality, technological know-how, cycle time and service. ITT FLUID TECHNOLOGY The ITT Fluid Technology business is marked by strong competition fueled by public bidding, economic conditions, intense pricing pressures, significant overcapacity, technological changes that produce new market entrants and dynamic markets. Management of ITT Fluid Technology attempts to compete in this business and respond to competitive pressures through cost-cutting efforts, broad product offerings, customer service, efficient manufacturing, quality control and utilization of and proper reaction to technological changes. EXPOSURE TO CURRENCY FLUCTUATIONS ITT Industries companies conduct operations worldwide. ITT Industries is therefore exposed to the effects of fluctuations in relative currency values. Although ITT Industries companies engage where appropriate in various hedging strategies in respect of its foreign currency exposure, it is not possible to hedge all such exposure. Accordingly, the operating results of ITT Industries will be impacted by fluctuations in relative currency values. CYCLICALITY The markets in which ITT Industries' subsidiaries operate are cyclical, and operating results therefore fluctuate based on both general economic factors and factors affecting the relevant markets served by ITT Industries. For example, a large percentage of the ITT Industries' 1994 net sales were derived from sales to automobile manufacturers. The automobile industry is highly cyclical. A decline in the demand for new automobiles and industry production levels is likely to have an adverse effect on ITT Industries. ITT 92 99 Industries also manufactures and sells products used in other historically cyclical industries, such as the construction, mining and minerals and aerospace industries, and thus could be adversely affected by negative cycles affecting those and other industries. In addition, a large percentage of ITT Industries' 1994 net sales was derived from government contracts with the United States Department of Defense or other United States and foreign governmental agencies. ITT Industries' operating results are thus exposed to changes in government budget levels and budget priorities, particularly in respect of the United States defense budget. In addition, economic factors that cause a decline in consumer spending may adversely affect ITT Industries. GOVERNMENTAL REGULATION AND RELATED MATTERS A number of ITT Industries' businesses are subject to governmental regulation by law or through contractual arrangements. ITT Industries' companies in the defense segment perform work under contracts with the United States Department of Defense and similar agencies in certain other countries. These contracts are subject to security and facility clearances under applicable governmental regulations, including regulations (requiring background investigations for high-level security clearances) applicable to ITT Industries' executive officers, and most of such contracts are subject to termination by the respective governmental parties on various grounds. ENVIRONMENTAL MATTERS ITT Industries is subject to stringent environmental laws and regulations concerning air emissions, water discharges and waste disposal. Environmental regulations are significant factors affecting all operations. The ITT Industries companies closely monitor all their respective environmental responsibilities, together with trends in environmental laws. ITT Industries has established an internal audit program to assess compliance with applicable environmental requirements for all its facilities, both domestic and overseas. The audit procedure is designed to identify problems and to instruct employees to correct deficiencies and to prevent future noncompliance. Over the past 15 years, usually with the assistance of independent consultants, ITT Industries has conducted regular, thorough audits of its major operating facilities. As a result, the ITT Industries companies are in substantial compliance with current environmental requirements. Management does not believe that it will incur compliance costs pursuant to such requirements that will have a material adverse effect on ITT Industries' financial position, results of operations or cash flows. See "ITT INDUSTRIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS -- ENVIRONMENTAL MATTERS" and "-- LEGAL PROCEEDINGS". RAW MATERIALS All the businesses of ITT Industries require various raw materials (e.g., metals, plastics and packaging) in connection with manufacturing their respective products. Although some of these costs may be reflected through increased prices for products, the operating results of ITT Industries are exposed to fluctuating costs of such raw materials. The subsidiaries of ITT Industries attempt to control such costs through various purchasing programs and other techniques. In recent years, the businesses of ITT Industries have not experienced any significant difficulties in obtaining an adequate supply of raw materials necessary for manufacturing and related activities. RESEARCH, DEVELOPMENT AND ENGINEERING The businesses of ITT Industries require substantial commitment of resources to research, development and engineering activities. Research, development and engineering activities of ITT Industries are conducted in laboratory and engineering facilities at most of its major manufacturing subsidiaries. ITT Industries believes that continued leadership in technology is essential to its future, and most ITT Industries funds dedicated to research and development are applied to areas of high technology, such as aerospace, automotive braking and electrical systems, and applications involving semiconductors and electronic components. 93 100 For a further discussion of the research, development and engineering expenditures of ITT Industries, see "ITT INDUSTRIES MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- LIQUIDITY AND CAPITAL RESOURCES". INTELLECTUAL PROPERTY While ITT Industries owns and controls a number of patents, trade secrets, confidential information, trademarks, trade names, copyrights and other intellectual property rights which, in the aggregate, are of material importance to its business, management of ITT Industries believes that ITT Industries' business, as a whole, is not materially dependent upon any one intellectual property or related group of such properties. ITT Industries is licensed to use certain patents, technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain patents, technology and other intellectual property rights owned and controlled by ITT Industries. EMPLOYEES As of March 31, 1995, ITT Industries, through its subsidiaries, employed an aggregate of approximately 58,400 people. Of this number, approximately 26,000 are employees in the United States, of whom approximately 35% are represented by labor unions. Generally, labor relations have been maintained in a normal and satisfactory manner. LEGAL PROCEEDINGS ITT or its subsidiaries are responsible, or are alleged to be responsible, for the investigation and remediation at a total of approximately 100 sites. ITT or its subsidiaries have received notices that they are PRPs in approximately 30 proceedings instituted by the U.S. Environmental Protection Agency or similar state agencies. In many of these proceedings, ITT or its subsidiaries are considered "de minimis" contributors. Another approximately 70 matters involve ongoing or prospective remedial measures, or, in the case of several such matters, are the subject of actions brought by other private parties seeking to recoup or apportion cleanup costs or damages that allegedly have been or may be incurred by such other parties. Of these various matters, as set forth in the Distribution Agreement, ITT Industries will have liability, if any, for over 80 of these sites. The alleged environmental liabilities at approximately one-half of these sites are in connection with the operations of former ITT subsidiaries and are not related to the present businesses of ITT Industries. ITT and its former subsidiaries, Rayonier and Southern Wood Piedmont Company ("SWP"), are named defendants in a lawsuit filed in 1991 in the U.S. District Court for the Southern District of Georgia, Ernest L. Jordan, Sr. et. al. v. Southern Wood Piedmont Company, et al., in which plaintiffs allege property damage and personal injury based on alleged exposure to toxic chemicals used by SWP in its former wood preserving operations, seek certification as a class action and ask for compensatory and punitive damages in the amount of $700 million. Several other suits arising out of former wood preserving operations of SWP also include ITT among the named defendants. Under an agreement entered into by ITT and Rayonier in connection with the distribution of Rayonier stock to ITT shareholders in February 1994, ITT is entitled to be indemnified by Rayonier for any expenses or losses incurred by ITT in connection with the aforementioned suits as well as in any other legal proceedings arising out of Rayonier or SWP operations. ITT Industries will continue to have the benefit of such agreement after the Distribution. While there can be no assurance as to the ultimate outcome of any litigation involving ITT Industries, management does not believe any pending legal proceeding will result in a judgment or settlement that will have, after taking into account ITT Industries' existing provisions for such liabilities, a material adverse effect on ITT Industries' financial position, results of operations or cash flows. DISCONTINUED OPERATIONS Effective on February 28, 1994, ITT completed the distribution of all the outstanding common shares of its former forest products subsidiary, Rayonier (formerly ITT Rayonier Incorporated) to the holders of record on February 24, 1994, of ITT Common Stock and ITT Series N Preferred Stock. The former subsidiary has 94 101 been reflected as a "Discontinued Operation." See NOTES TO ITT INDUSTRIES CONSOLIDATED FINANCIAL STATEMENTS. For a discussion of the treatment of Rayonier and its subsidiaries under the Distribution Agreement, see "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION DISTRIBUTION AGREEMENT". On September 16, 1994, ITT announced plans to seek offers for the purchase of ITT Financial Corporation ("ITT Financial"), one of the largest independent finance companies in the United States. On such date ITT Financial consisted of businesses conducting commercial and consumer finance, related insurance and other financial services including a mortgage banking operation. Gross proceeds of $12.8 billion are expected and through May 31, 1995, the following portions of ITT Financial have been sold for the approximate aggregate cash proceeds indicated: Island Finance, $1.5 billion; Commercial Finance, $2.7 billion; Equipment Finance, Small Business Finance and Real Estate Services, $1.8 billion; home equity loan portfolio, $1.0 billion; and residential first mortgage portfolio, $3.6 billion. Subject to certain regulatory approvals, ITT has agreements for the sale or monetization of an additional $1.9 billion in assets, including Lyndon Insurance Group, a St. Louis based reinsurance company, a major loan portfolio operated out of Costa Mesa, California, and a mortgage servicing business based in La Jolla, California. Although there can be no assurances as to the amount ultimately received, ITT expects to realize in the aggregate cash proceeds in excess of the book value of the assets sold in the various transactions. ITT Financial merged into ITT effective May 1, 1995. Indebtedness of ITT Financial has been assumed by ITT. ITT expects to repay an amount of debt of ITT equivalent to the funds generated by the sale of the ITT Financial assets. ITT Financial has been reflected as a "Discontinued Operation" in the financials of ITT Industries. New ITT and ITT Hartford have also been reflected as "Discontinued Operations". See Notes to ITT Industries Consolidated Financial Statements. 95 102 BUSINESS OF NEW ITT AFTER THE DISTRIBUTION GENERAL After the Distribution, New ITT will be engaged through its subsidiaries in two major businesses: Hospitality & Entertainment and Information Services. New ITT also will own approximately 6% of the outstanding capital shares of Alcatel Alsthom, a French company which owns, among other things, Alcatel N.V., one of the largest telecommunications equipment manufacturers in the world. New ITT will be a Nevada corporation, with World Headquarters at 1330 Avenue of the Americas, New York, NY 10019-5490. New ITT will hold the capital stock of the companies engaged in the Hospitality & Entertainment and Information Services businesses of ITT. Immediately prior to the Distribution, the name of ITT Destinations will be changed to ITT Corporation. Unless the context otherwise indicates, references herein to ITT Destinations (or New ITT) include its subsidiaries after the Distribution. HOSPITALITY & ENTERTAINMENT New ITT will conduct its hospitality and entertainment business through ITT Sheraton Corporation ("ITT Sheraton"), Ciga S.p.A. ("Ciga"), Caesars World, Inc. ("CWI") and Madison Square Garden, L.P. ("MSG"). After the Distribution, New ITT will combine the world's largest hotel and gaming company with a premier sports and entertainment company to create a dynamic and rapidly growing enterprise. Management of ITT projects that New ITT will generate pro forma (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994) revenues of approximately $6.5 billion in 1995 and pro forma EBITDA of $875 million in 1995. The projected pro forma EBITDA for 1995 would represent a 36% increase over EBITDA in 1994 also determined on a pro forma basis (i.e., assuming all acquisitions during 1994 and 1995 had been consummated on January 1, 1994). However, for a discussion of certain important limitations and related assumptions concerning this projected and other pro forma financial data and ITT management's beliefs as to future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". ITT completed the acquisition of the world's most recognized gaming company, CWI, in January 1995. In March 1995, ITT also acquired the most famous sports arena and basketball and hockey franchises in the world through its investment in MSG. In addition, the acquisition in 1994 of 70.3% of Ciga and other key hotel properties enhanced New ITT's geographic balance along with its image and profile. These acquisitions have helped to create a formidable hotel, gaming and entertainment company that is a leader in its served markets. Through the ITT Sheraton brand name, New ITT is represented in most major markets of the world. In 1994, over 45 million customers stayed at ITT Sheraton in 60 countries. When including visitors to CWI and Madison Square Garden and customers of the Information Services companies, New ITT will provide services to over 100 million people a year. ITT Sheraton, which has been a wholly owned subsidiary of ITT since 1968, is a worldwide hospitality network of approximately 420 owned, leased, managed and franchised properties, including hotels, casinos and inns. Gaming operations are marketed under the Caesars World and ITT Sheraton brand names and are represented in Las Vegas, Atlantic City, Halifax (Nova Scotia), Lake Tahoe, Tunica County (Mississippi), Lima (Peru), Cairo, Windsor (Ontario) and Townsville (Australia). The acquisition of CWI greatly enhanced New ITT's profile in the rapidly growing gaming business. CWI's flagship property is the renowned Caesars Palace in Las Vegas, and it also owns and operates Caesars Atlantic City in Atlantic City and Caesars Tahoe in Stateline, Nevada, both leaders in their served markets. CWI also owns one-third of a management company that operates Casino Windsor which was opened in May 1994 in Windsor, Ontario, and operates four non-gaming resorts in Pennsylvania's Pocono Mountains. The MSG investment, which was made through a partnership with an indirect subsidiary of Cablevision Systems Corporation ("Cablevision"), includes the famed Madison Square Garden arena, the Paramount special events theater, the New York Knickerbockers and New York Rangers basketball and hockey 96 103 franchises, as well as the Madison Square Garden Network. New ITT companies in this segment have approximately 30,000 employees. Unless the context otherwise required, references herein to "ITT Sheraton" include its subsidiaries after the Distribution (including Ciga). INFORMATION SERVICES ITT World Directories, Inc., an 80%-owned subsidiary, engages in the publication of telephone directories, including classified directory services for telephone subscribers in numerous countries outside the United States, as well as in Puerto Rico and the United States Virgin Islands. ITT Educational Services, Inc., a subsidiary in the United States, operates technical colleges offering postsecondary career education. On December 27, 1994, ITT completed an underwritten public offering of approximately 17% of the common stock of ITT Educational Services, Inc. New ITT companies in this segment have approximately 5,000 employees. The table below shows in percentage terms New ITT's EBITDA attributable to each of its lines of business on a projected pro forma basis for the six months ended June 30, 1995, and on a pro forma basis for the six months ended June 30, 1994, and the year ended December 31, 1994. The percentages for all periods give effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the same manner as under such heading. For a discussion of certain important limitations and related assumptions concerning the projected and other pro forma financial data reflected below, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION".
PROJECTED PRO FORMA PRO FORMA PRO FORMA SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994 ---------------- ---------------- ----------------- REVENUES(1)(2) Hospitality & Entertainment Hotel Operations.................. 65% 67% 65% Gaming Operations................. 22 19 21 Information Services ITT World Directories............. 10 11 11 ITT Educational................... 3 3 3 --- --- --- 100% 100% 100% === === ==== EBITDA(1)(2) Hospitality & Entertainment Hotel Operations.................. 45% 43% 41% Gaming Operations................. 31 30 33 Information Services ITT World Directories............. 24 24 25 ITT Educational................... 3 3 3 Other............................... (3) -- (2) --- --- --- 100% 100% 100% === === ===
- --------------- (1) The projected and other pro forma financial information presented above assumes that the acquisitions of CWI, the 70.3% interest in Ciga, certain other hotel properties and MSG in partnership with another entity were completed on January 1, 1995, or January 1, 1994, as applicable. The projected pro forma financial information includes ITT management's estimates of results for the period ended June 30, 1995, which, among other things, assume revenue and expense levels based on historical trends and ITT management's views of current economic conditions. Such information may not be indicative of the results that would have occurred if the acquisitions were completed on January 1, 1995, or January 1, 1994, or of the operating results that will occur for such periods. 97 104 This information should be read in conjunction with "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" (including, without limitation, the information under the heading "-- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION"), as well as "NEW ITT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS". (2) MSG is accounted for using the equity method and, accordingly, its revenues and EBITDA are not included above. MSG expects to generate or has generated, as applicable, EBITDA of $34 million, $25 million and $12 million for the respective periods shown above. However, for a discussion of certain important limitations and related assumptions concerning this projected data and ITT management's beliefs as to future results, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". HOSPITALITY & ENTERTAINMENT HOTEL OPERATIONS ITT Destinations' revenues from hotel operations are derived worldwide from ITT Sheraton's owned, leased and managed hotels, and franchise fees. Revenues in the hotel business are essentially a function of number of rooms, average daily rate charged for rooms and number of rooms occupied. Six of the hotels in the ITT Sheraton network have casino operations. The gaming operations in the ITT Sheraton network and the gaming operations of CWI are discussed below under "-- HOSPITALITY & ENTERTAINMENT -- GAMING OPERATIONS". All of the tables presented in this section include projected information for the six months ended June 30, 1995. This projected information includes management's estimates of June 1995 results, which assume revenue, expense and other operating data levels based on historical trends and current economic conditions. Such information may not be indicative of the results that will occur in June 1995. For a discussion of certain important limitations and related assumptions concerning the projected, projected pro forma and pro forma financial data in this section, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". The following table illustrates in percentage terms the sources of revenues of New ITT's hotel operations. The percentages for the 1994 and 1995 periods give effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the same manner as under such heading. ITT Sheraton's owned hotel/casinos and CWI are not included in the table.
PROJECTED PRO FORMA PRO FORMA PRO FORMA SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994 ------------------- ---------------- ----------------- Owned or Leased Hotels.................... 31% 20% 26% Managed and Joint Venture Hotels.......... 66 76 71 Franchised Hotels(1)...................... 1 1 1 Other(2).................................. 2 3 2 --- --- --- 100% 100% 100% === === ===
- --------------- (1) Includes franchise fees to ITT Sheraton, not revenues of franchise hotels. (2) Other revenues primarily include reservations fees and Sheraton Club International fees. Owned and Leased Hotels The following table illustrates for ITT Sheraton's owned and leased properties the number of properties, available room nights, average daily occupancy rate and average daily rate, in each case for the periods indicated. For all periods, the table gives effect to the relevant transactions discussed under "NEW ITT PRO FORMA FINANCIAL INFORMATION" in the same manner as under such heading, including the acquisition of the 70.3% interest in Ciga. ITT Sheraton's owned hotel/casinos and CWI are not included in the table. 98 105
PROJECTED PRO FORMA PRO FORMA PRO FORMA SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994 ---------------- ---------------- ----------------- Number of properties at period end........ 68 65 66 Available room nights(1).................. 3,817,937 3,532,574 7,426,414 Average daily occupancy rate(2)........... 71.0% 68.4% 70.0% Average daily rate(3)..................... $ 141.28 $ 123.93 $ 124.22
- --------------- (1) Based on properties held at period end. (2) Occupied rooms in the period divided by rooms available for sale in the same period. (3) Room revenues for the period divided by rooms occupied for the same period. The owned and leased properties in the ITT Sheraton network are, in many cases, subject to mortgage and lease indebtedness. As of March 31, 1995, the aggregate mortgage and lease indebtedness in respect of such hotels was $520 million. In connection with the leased properties in the ITT Sheraton network, an ITT Sheraton subsidiary generally leases the land upon which the hotel has been built and the hotel building. Upon expiration of the lease, the buildings and other leasehold improvements owned by such subsidiary revert to the landlord. Usually, such ITT Sheraton subsidiary will own the furniture and equipment, is responsible for repairs, maintenance, operating expenses and lease rentals and retains managerial discretion over operations. Generally, ITT Sheraton pays a percentage rental based on total revenues (as defined) or gross operating profit (as defined) in respect of the relevant facility but with a minimum fixed annual rent. During the three months ended March 31, 1995, and the year ended December 31, 1994, ITT Sheraton paid aggregate rentals, including rentals attributable to the leased properties referenced above, of $10 million and $17 million, respectively. Managed and Joint Venture Hotels ITT Sheraton through subsidiary companies manages, under long-term agreements, a number of hotels throughout the world. The following table illustrates for the managed and joint venture hotels in the ITT Sheraton network the number of managed and joint venture properties, available room nights, average daily occupancy rate and average daily rate, in each case for the periods indicated. For all periods, the table gives effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS" in the same manner as under such heading, including the acquisition of the 70.3% interest in Ciga.
PROJECTED PRO FORMA PRO FORMA PRO FORMA SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994 ---------------- ------------------ ----------------- Number of properties at period end...... 131 142 143 Available rooms nights(1)............... 9,023,927 9,290,890 18,961,017 Average daily occupancy rate(2)......... 70.8% 69.3% 70.4% Average daily rate(3)................... $119.40 $110.36 $111.64
- --------------- (1) Based on properties held at period end. (2) Occupied rooms in the period divided by rooms available for sale in the same period. (3) Room revenues for the period divided by rooms occupied for the same period. Under its standard management agreement, ITT Sheraton operates lodging facilities under long-term management agreements with property owners. ITT Sheraton's responsibilities include hiring, training and supervising the managers and employees required to operate the facilities. ITT Sheraton provides reservation services, national advertising, marketing and promotional services. ITT Sheraton prepares and implements annual budgets for lodging facilities under its management and is responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. ITT Sheraton's management fee is generally based on a percentage of the hotel's total revenues (as defined), plus, in certain instances, an incentive fee based on the operating performance. 99 106 Expansion Program In 1990 and 1991, ITT Sheraton began a deliberate and accelerated expansion and refurbishment program designed to exploit the downturn in the hospitality sector occurring at that time and to position ITT Sheraton for the ensuing upturn which began in 1994. Significant renovations to key properties such as The St. Regis Hotel, Sheraton New York/Manhattan and Sheraton Bal Harbour Beach Resort in Miami were undertaken. Negotiations began to purchase the interests of ITT Sheraton's partners in several hotels in a period when the values of those interests were believed to be depressed due to market conditions. The search for acquisition opportunities that both enhanced ITT Sheraton's image and its geographic reach was a primary focus and, most recently, resulted in the 1994 acquisitions of the Phoenician and Crescent Hotels in Arizona, The Park Grande Hotel in Australia and the Ciga hotel group in Europe. Management of ITT believes that this expansion and refurbishment program has uniquely positioned ITT Sheraton as the premier hotelier in terms of global reach and customer service. As a general matter, the development and acquisition of hotels involves certain risks, including the possibility, as applicable, of construction cost overruns and delays, uncertainties as to market potential, market deterioration, political risks, the emergence of competition from unanticipated sources and difficulties associated with integrating new operations into existing operations. Although ITT Sheraton aggressively manages its hotel developments and acquisitions so as to minimize these risks, there can be no assurance that recent or future acquisitions or development projects will perform in accordance with ITT Sheraton's expectations. Selected Key Properties The following table sets forth some of the prominent properties in the ITT Sheraton network by geographic region and market segment.
BUSINESS/CONVENTION LOCATION HOTELS RESORT HOTELS LUXURY HOTELS -------- ------------------- ------------- ------------- North America New York Harbor Island, San St. Regis, New York Boston Diego Carlton, Washington, D.C. Seattle The Phoenician, Arizona Palace, San Francisco New Orleans Disney Dolphin, Florida Princeville, Hawaii Chicago Moana Surfrider, Hawaii Hana Maui, Hawaii Bal Harbor, Miami Europe Brussels Algarve, Portugal Prince de Galles, Paris Copenhagen Costa Smeralda: Park Tower, London Frankfurt -- Cala di Volpe Hotel Imperial, Austria Rome -- Pitrizza Danieli, Venice Skyline, London -- Romazzino Principe di Savoia, Lisbon, Portugal Milan Palace Madrid, Spain Africa/Middle East Cairo Luxor, Egypt Kuwait Lagos Jeddah, Saudi Arabia Abu Dhabi Asia/Pacific Hong Kong Fiji Royal Orchid, Bangkok Brisbane Bali, Indonesia Sheraton on the Park, Auckland, New Zealand Gold Coast, Australia Sydney Port Douglas, Australia Grande Tokyo Bay Southgate, Melbourne Latin America Buenos Aires Cancun, Mexico Mofarrej, Brazil Lima Macuto, Venezuela San Cristobal, Chile Maria Isabel, Mexico City Rio de Janiero
100 107 INTERNATIONAL OPERATIONS The hotel operations of ITT Sheraton are conducted worldwide. As a general matter, ITT Sheraton's presence outside of North America consists of contracts to manage hotels and, to a far more limited extent, equity positions in hotels. With the acquisition of 70.3% of Ciga, a deluxe hotel group in Europe with 33 hotels, and The Park Grande Hotel in Sydney, Australia, ITT Sheraton has recently expanded its role as an owner of hotels outside of North America. As of March 31, 1995, ITT Sheraton had an equity interest of 50% or more in 37 properties in Europe (including Ciga), one property in the Asia/Pacific region, five properties in Latin America and no properties in the Africa/Middle East region. The source of revenues in geographic terms of New ITT's operations (excluding revenues from gaming operations and reservations-based revenues) is set forth in the following table for the periods indicated. The data for the 1994 and 1995 periods give effect to the relevant transactions discussed under "NEW ITT UNAUDITED PRO FORMA INCOME STATEMENTS". For a discussion of certain important limitations and related assumptions concerning the projected, projected pro forma and pro forma financial data in this section, see "NEW ITT UNAUDITED PRO FORMA COMBINED INCOME STATEMENTS -- LIMITATIONS ON PROJECTIONS, FORECASTS AND PRO FORMA FINANCIAL INFORMATION". ITT Sheraton's hotel/casinos and CWI are not included in the table.
PROJECTED PRO FORMA PRO FORMA PRO FORMA SIX MONTHS ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30, 1994 DECEMBER 31, 1994 ---------------- ---------------- ----------------- REVENUES North America(1)......................... 46% 49% 45% Europe................................... 19 13 18 Africa/Middle East....................... 9 10 10 Latin America............................ 6 6 6 Asia/Pacific............................. 18 19 19 Headquarters and Other................... 2 3 2 ---- ---- ---- Total............................ 100% 100% 100% ==== ==== ==== EBITDA North America(1)......................... 61% 55% 60% Europe................................... 20 5 6 Africa/Middle East....................... 3 2 3 Latin America............................ 16 22 21 Asia/Pacific............................. 11 20 15 Headquarters and Other................... (11) (4) (5) ---- ---- ---- Total............................ 100% 100% 100% ==== ==== ====
- --------------- (1) Includes franchise fees. The operation of hotels and other business entities internationally is affected by the political and economic conditions of the countries and regions in which they are located, in addition to factors affecting the hotel industry generally. Certain countries have also restricted, from time to time, the repatriation of funds. ITT Sheraton considers the foregoing factors, among others, when evaluating a management and/or investment opportunity abroad, but there can be no assurance that changes in law or governmental policy will not adversely affect international operations in the future. For a discussion of certain matters relating to the currency risk of international operations, see "-- EXPOSURE TO CURRENCY FLUCTUATIONS". 101 108 FRANCHISE BUSINESS The franchise business of ITT Sheraton largely relates to properties based in North America. Only 20 of the franchise hotels and inns (631 rooms) are located outside of North America. The following table illustrates for ITT Sheraton's franchise business the number of properties, available room nights, average daily occupancy rate and average daily rate, in each case for the periods indicated.
PROJECTED SIX MONTHS PRO FORMA PRO FORMA PRO FORMA ENDED SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 JUNE 30 1994 DECEMBER 31, 1994 --------------- ---------------- ----------------- Number of properties at period end......... 219 221 214 Available room nights(1)................... 9,744,744 10,373,000 20,530,000 Average daily occupancy rate(2)............ 67.2% 66.7% 67.4% Average daily rate(3)...................... $ 76.56 $ 71.56 $ 72.89
- --------------- (1) Based on properties held at period end. (2) Occupied rooms in the period divided by rooms available for sale in the same period. (3) Room revenues for the period divided by rooms occupied for the same period. Sheraton franchise hotels are licensed to operate under the "Sheraton" tradename and the stylized "S" and Wreath service mark. The franchise hotels operated under the "Sheraton" name are generally smaller than the hotels owned, leased or managed by ITT Sheraton. In each instance, ITT Sheraton approves the plans for, and the location of, franchise hotels and reviews their design. At March 31, 1995, there were 219 franchise hotels operated by other business entities under the "Sheraton" name. In general, each franchisee pays ITT Sheraton an initial minimum fee, plus an additional fee for every room over 100. There is a continuing monthly license fee based on a percentage of the facility's room revenues. Although ITT Sheraton does not directly participate in the management or operation of franchise hotels, it periodically inspects those facilities to ensure that ITT Sheraton's standards are maintained. MARKETING ITT Sheraton is a leading global marketing organization in the hospitality industry, delivering a well-coordinated, worldwide marketing strategy through the tactical use of regional and local units. A primary focus of ITT Sheraton's marketing efforts is the creation of a competitive advantage, which translates into rate premiums and incremental revenue, through brand management, superior sales force coverage and effectiveness, the development of new marketing products and programs, including customer loyalty programs, and the use of sophisticated sales and distribution technology as well as direct marketing and advertising campaigns. Another primary focus of ITT Sheraton's marketing efforts is to serve each of ITT Sheraton's four business units: Luxury Group, Business Convention Group, Resort Hotels and Franchise. ITT Sheraton's marketing organization consists of a global sales force of more than 130 sales professionals located in 24 offices and 15 countries. This sales force is accompanied by a number of marketing programs including the Global Preference/SET Preferred Program, which is a leading, volume-based corporate rate program in the hotel industry, involving more than 450 major multinational corporations and producing more than $120 million in revenues for ITT Sheraton's hotels, the ITT Sheraton Connections Program, which offers meeting planners a simplified solution to booking multiple meetings in single or multiple destinations, and the Global Awards Plus Program, which offers incentives for travel to individuals. ITT Sheraton has also successfully developed marketing partnerships. These marketing partnerships allow for the effective use of marketing resources by creating opportunities for joint marketing initiatives, which reinforce core brand qualities through association with partners sharing identical values and expand ITT Sheraton's potential customer base by providing access to the partners' existing customers. 102 109 RESERVATIONS In 1992, ITT Sheraton implemented a state-of-the-art computerized reservations system. This system, called Reservatron IV, has significantly improved the worldwide reservations network at ITT Sheraton in the opinion of its management. Reservatron IV allows the delivery of up-to-the-minute status information on each of ITT Sheraton's approximately 420 properties and each of Ciga's approximately 33 properties. It delivers instant confirmation of specific rates, room types and local destination information which formerly was available only by calling the property directly. Reservatron IV also allows for the specification of a large number of regular and special rates on the system, confirmation of guests' special requests and storing of special preferences of members of Sheraton Club International (the frequent guest program). ITT Sheraton continues to add new development and features to Reservatron IV from time to time. The system is owned and operated by a wholly owned subsidiary of ITT Sheraton with offices located worldwide. GAMING OPERATIONS New ITT's gaming operations consist primarily of CWI, acquired by ITT in January 1995, ITT Sheraton's Desert Inn Resort & Casino in Las Vegas, the Sheraton Casino in Tunica County, Mississippi and various hotel/casino operations in the ITT Sheraton network outside of the United States. Caesars World In January 1995, a subsidiary of ITT acquired through a cash tender offer approximately 92.9% of the outstanding shares of CWI. Upon the merger of the ITT subsidiary into CWI, effective March 2, 1995, CWI became a direct, wholly owned subsidiary of ITT. The cost of the transaction to ITT was approximately $1.7 billion. For purposes of New Jersey gaming laws (see "-- GOVERNMENTAL REGULATION AND RELATED MATTERS -- CASINO GAMING REGULATION -- GENERAL -- NEW JERSEY CASINO GAMING REGULATION"), the CWI shares owned by ITT are being held under a trust arrangement pending the qualification of ITT by the New Jersey Casino Control Commission (the "New Jersey Commission") as a holding company of the Caesars New Jersey Companies (as defined below). After the Distribution, CWI will be a subsidiary of New ITT. CWI's wholly owned subsidiaries operate three destination gaming resorts: Caesars Palace in Las Vegas, Nevada; Caesars Tahoe in Stateline, Nevada; and Caesars Atlantic City in Atlantic City, New Jersey. A CWI subsidiary carries on operations of small casinos on two cruise ships in conjunction with the operator of the ships. CWI also owns one-third of a management company which operates Casino Windsor, a casino opened on May 17, 1994, in Windsor, Canada, which is owned by the Government of the Province of Ontario. CWI's subsidiaries also own and operate four non-gaming resorts in the Pocono Mountains of Pennsylvania. Nevada Properties. Caesars Palace, which opened in 1966 and was purchased by CWI in 1969, is a casino/hotel complex located on approximately 80 acres on the "Strip" in Las Vegas, Nevada. At March 31, 1995, Caesars Palace had 1,495 hotel rooms and suites, 10 restaurants, a 1,126-seat showroom, a convention complex with approximately 100,000 square feet of meeting and banquet space, numerous bars and lounges, a shopping arcade, two swimming pools, tennis facilities, a 4,500-seat sports pavilion, a 15,000-seat outdoor stadium, health spas, and an "Omnimax" theater. Its casino is approximately 118,000 square feet, and it offers wagering limits among the highest in Nevada. Casino games include baccarat, blackjack, dice, roulette, slot machines, keno, pai gow, big "6" and a Race and Sports Book. For the eight months ended March 31, 1995, the average occupancy rate at Caesars Palace of 91.1% included occupancy of approximately 44.4% of the available rooms and suites by guests receiving complimentary rooms. The average occupancy rate at Caesars Palace was 90.4%, 91.6% and 85.8% for the years ended July 31, 1994, 1993, and 1992, respectively, including occupancy of 35.9%, 35.6% and 33.6%, respectively, of the available rooms and suites by guests receiving complimentary rooms. 103 110 Recent major capital projects at Caesars Palace include room and public area refurbishments, replacement of slot machines, enhancements to security systems in the casino and completion of luxury suites. Scheduled capital projects include Caesars Magical Empire, a new state-of-the-art magical and dining entertainment facility scheduled to open in January 1996, a second parking garage, guest room and public area refurbishments and replacement of slot machines. Caesars Tahoe casino/hotel opened in 1980 and is located in Stateline, Nevada, adjacent to Lake Tahoe. In 1979, CWI entered into a long-term lease of the 24-acre property on which the casino/hotel stands. At March 31, 1995, Caesars Tahoe had 440 hotel rooms and suites, six restaurants, a 1,500-seat showroom, 25,000 square feet of convention rooms, a Roman-themed nightclub, a 40,000-square-foot casino including a race and sports book, bars, shops, four outdoor tennis courts and an indoor health spa containing a swimming pool and a racquetball court. For the eight months ended March 31, 1995, the average occupancy rate at Caesars Tahoe of 88.2% included occupancy of approximately 31.0% of the available rooms and suites by guests receiving complimentary rooms.The average occupancy rate at Caesars Tahoe was 89.5%, 90.1% and 86.3% for the years ended July 31, 1994, 1993, and 1992, respectively, including occupancy of 32.7%, 38.3% and 41.2%, respectively, of the available rooms and suites by guests receiving complimentary rooms. Recent major capital projects at Caesars Tahoe include costs for a themed restaurant, room renovations and remodeling/refurbishing of the casino floor. Scheduled capital projects include room renovations and replacement of slot equipment. CWI's casino gaming operations in Nevada are conducted by Desert Palace, Inc. ("DPI"), which is a wholly owned subsidiary of Caesars Palace Corporation ("CPC"), which, in turn, is a wholly owned subsidiary of CWI (CWI, CPC and DPI collectively referred to as the "Caesars Nevada Companies"). In addition, DPI owns all of the issued and outstanding capital stock of Tele/Info, Inc., which is a Nevada-licensed disseminator of horse race simulcasts for the purpose of receiving and disseminating live telecasts of horse racing information. Caesars Atlantic City. Caesars Atlantic City is a 641-room casino/hotel on the Boardwalk in Atlantic City, New Jersey. At March 31, 1995, it had a 74,000-square-foot casino, including table games, slots, keno, poker and race simulcasting, 13 restaurants and bars, 10,000 square feet of meeting and banquet space, an 1,100-seat showroom, a shopping arcade, a Roman-themed transportation center which accommodates 2,500 cars and 11 buses, a health club and tennis courts. The property on which Caesars Atlantic City stands consists of approximately 8.1 acres, including contiguous parcels totaling approximately 5.4 acres bounded on three sides by Missouri, Arkansas and Pacific Avenues, with an entire block of Boardwalk frontage. For the eight months ended March 31, 1995, the average occupancy rate at Caesars Atlantic City of 92.0% included occupancy of approximately 82.2% of the available rooms and suites by guests receiving complimentary rooms. The average occupancy rate at Caesars Atlantic City was 91.8%, 89.5% and 86.4% for the years ended July 31, 1994, 1993, and 1992, respectively, including occupancy of 49.1%, 46.2% and 43.1%, respectively, of the available rooms and suites by guests receiving complimentary rooms. Recent major capital expenditures at Caesars Atlantic City include completion of a casino expansion (including additional slot machines, table games, poker games, and a keno and simulcasting area), remodeling and refurbishing of guest rooms and the baccarat casino area and purchase of slot equipment. Scheduled capital projects include casino renovation to add slot machines, computer equipment, a themed restaurant, replacement of slot machines and renovation of guest rooms and suites. CWI's casino gaming operations in Atlantic City, New Jersey are conducted by Boardwalk Regency Corporation ("BRC"), which is a wholly owned subsidiary of Caesars New Jersey, Inc. ("CNJ"), which, in turn, is a wholly owned subsidiary of CWI (CWI, CNJ and BRC collectively referred to as the "Caesars New Jersey Companies"). Windsor, Ontario. In December 1993, a newly-formed corporation, Windsor Casino Limited ("WCL"), owned equally by a subsidiary of CWI, Circus Circus Enterprises, Inc. and a subsidiary of Hilton 104 111 Hotels Corporation was selected by the government of Ontario, Canada, to develop and operate the province's first casino, in Windsor, Canada. In May 1994, a 50,000-square-foot interim casino, owned by the government of Ontario and operated by WCL, was opened in Windsor. WCL receives a management fee based on specified performance criteria of the interim casino. The permanent hotel/casino complex, to be located on 13 acres in downtown Windsor, is anticipated to be completed in 1997 at an approximate estimated cost of $300 million. Each shareholder of WCL, including CWI, is required to provide approximately $25 million of such capital. The remaining $225 million is expected to be financed through outside sources. Pocono Mountain Resorts. CWI also owns four non-gaming resorts in the Pocono Mountains of Pennsylvania (collectively, the "Pocono Resorts"). The Pocono Resorts are resort hotels which cater primarily to honeymoon and other couples. At March 31, 1995, the Pocono Resorts had an aggregate of 769 rooms. Subsidiaries of CWI exercised purchase options in respect of two of the Pocono Resorts in early 1995. Casino Credit. CWI's casino/hotels extend substantial amounts of credit to their customers. Betting and credit limits of CWI are among the highest in the industry. Substantial reserves are maintained against such casino accounts receivable. For the year ended July 31, 1992, the provision for doubtful accounts was 4.6% of credit extended. For the year ended July 31, 1993, the provision was 4.8% of credit extended and for the year ended July 31, 1994, increased to 5.3% of credit extended. For the eight months ended March 31, 1995, the provision was 4.5% of credit extended. The provision for doubtful accounts includes the use of receivable allowances as a marketing tool to high-wagering customers. The amount of credit extended as a percentage of table game drop at CWI's casinos is substantially higher in CWI's Nevada properties than in New Jersey. The collectability of receivables depends, in part, upon the future economic stability or significant events in the countries in which these high-wagering customers live, including the enforceability of casino accounts receivable. Marketing -- International and National. CWI has centralized its international and national marketing activities in a subsidiary which markets on behalf of, and coordinates among, CWI's three casino/hotels. The subsidiary's international division has 82 representatives in 21 countries, including branch offices in Bangkok, Hong Kong, Singapore, two in Taiwan, Vancouver, and Tokyo, as well as several in the United States which serve national ethnic markets. Through this subsidiary, CWI's international marketing division representatives: search out and attract upper income customers to each of CWI's three casino/hotels by actively promoting them as world class destination resorts; evaluate and, in conjunction with CWI executives, oversee credit extension practices in accordance with and to the extent allowed under gaming regulations; and coordinate travel and entertainment arrangements. Although it is difficult to estimate reasonably the level of casino win from international customers, CWI estimates that table game (including baccarat) win from international customers in the year ended 1994 comprised approximately 45% of its total table game win. CWI's marketing subsidiary also has a national marketing division similar to the international division whose goal is to centralize and coordinate the marketing activities of CWI's national branch offices and to attract national customers to the three casino/hotels. This division has branch offices in nine United States cities as well as independent agents in various United States cities. National representatives perform functions similar to those of the international division representatives, but have an additional objective of broadening CWI's customer base to include additional middle-market customers. Merchandising. Merchandising of Caesars branded products, including fragrance products, is centralized in a subsidiary of CWI. Clothing, accessories and gift items with the Caesars name are sold primarily at retail outlets located at CWI's properties. This subsidiary manages these outlets as well as a retail outlet at McCarran International Airport in Las Vegas and retail sites in The Forum Shops at Caesars, a shopping complex adjacent to Caesars Palace owned by an unaffiliated party. CWI's fragrance lines, "Caesars for Women" and "Caesars Man", along with the newly-launched "Ferentina" spa line, are sold in retail outlets located at CWI's properties, in a limited number of other stores and through other distribution channels domestically and internationally. The subsidiary also has licensing agreements for jewelry, games and giftware and has the responsibility for creating unique merchandise for special entertainment and sporting events held at CWI's properties. 105 112 Sheraton Desert Inn Resort & Casino The Sheraton Desert Inn Resort & Casino, which was purchased, through a wholly owned subsidiary, by ITT Sheraton in November 1993, is a casino/hotel complex located on approximately 200 acres on the "Strip" in Las Vegas, Nevada. At March 31, 1995, the Sheraton Desert Inn had 916 hotel rooms and suites, five restaurants, a 636-seat showroom, a convention complex with approximately 24,500 square feet of meeting and banquet space, numerous bars and lounges, a shopping arcade, three swimming pools, tennis facilities, an 18 hole golf course and other facilities. Its casino is approximately 20,000 square feet. Casino games include baccarat, black jack, dice, roulette, slot machines, keno and big "6". For the three months ended March 31, 1995, the average occupancy rate at Sheraton Desert Inn of 83.4% included occupancy of approximately 19.4% of the available rooms and suites by guests receiving complimentary rooms. In 1994, the average occupancy rate at Sheraton Desert Inn of 78.4% included occupancy of approximately 18.3% of the available rooms and suites by guests receiving complimentary rooms. The average hotel occupancy rate at Sheraton Desert Inn was 82.6% and 80.4% in 1993 and 1992, respectively, including occupancy of 18.9% and 16.8%, respectively, of the available rooms and suites by guests receiving complimentary rooms. The Sheraton Desert Inn is owned and operated by Sheraton Desert Inn Corporation ("SDI"), which is a wholly owned subsidiary of Sheraton Gaming Corporation ("SGC"), which, in turn, is a wholly owned subsidiary of ITT Sheraton (ITT Sheraton, SGC and SDI, collectively referred to as the "Sheraton Desert Inn Companies"). Like the CWI casino/hotels, the Sheraton Desert Inn extends substantial amounts of credit to its customers. Betting and credit limits at this casino are among the highest in the industry. Substantial reserves are maintained against such casino accounts receivable. As in the case of the CWI casino/hotels, the provision for doubtful accounts includes the use of receivable allowances as a marketing tool to high-wagering customers. The collectability of receivables depends, in part, upon the future economic stability or significant events in the countries in which these high-wagering customers live, including the enforceability of casino accounts receivable. Tunica The Sheraton Casino opened in Robinsonville, Tunica County, Mississippi in August 1994. At March 31, 1995, the Sheraton Casino had three restaurants, three bars and lounges and other facilities. Its casino has approximately 31,000 square feet. Casino games include mini-baccarat, black jack, craps, roulette, slot machines, Caribbean stud poker, big "6" and "let it ride". There are currently no hotel facilities at this casino. ITT Sheraton has a plan under consideration in which it would manage a new Sheraton hotel adjacent to the casino. The Sheraton Casino is owned and operated by Sheraton Tunica Corporation ("STC"), which is a wholly owned subsidiary of SDI. Other In October, 1994, ITT Sheraton expanded its foreign casino gaming operations with the opening of a casino in Lima, Peru in the Sheraton Lima Hotel & Towers now renamed the Sheraton Lima Hotel & Casino, which has 511 rooms and suites. In December 1994, the government of the Province of Nova Scotia, Canada announced that a 95%-owned joint venture of ITT Sheraton had been selected as the developer for the only two casinos to be permitted in the Province and that ITT Sheraton had been selected as the operator, on behalf of the Provincial government, of such casinos. These casinos will be located in the city of Halifax, the Provincial capital, and in the city of Sydney, located in the Cape Breton area of the Province. A temporary casino in Halifax will initially be housed in the 353-room ITT Sheraton hotel in Halifax, while a new ITT Sheraton casino is being constructed in Halifax in close proximity to that ITT Sheraton hotel. ITT Sheraton also operates casinos in Australia and Egypt. 106 113 Both ITT Sheraton and CWI are actively exploring various gaming opportunities in the United States and internationally. There can be no assurance, however, that any of these projects or proposals will ultimately result in completed and operating facilities. MADISON SQUARE GARDEN In March 1995, ITT, in partnership with an indirect subsidiary of Cablevision, acquired MSG for approximately $1 billion. MSG's activities include owning and operating the Madison Square Garden Arena, which seats approximately 20,000 people, The Paramount, a special events theater which seats approximately 5,600 people, the New York Knicks of the National Basketball Association (the "NBA") and the New York Rangers of the National Hockey League (the "NHL"). It also supplies and distributes television programming for cable systems principally in New York, New Jersey and Connecticut through the MSG Network. Its programming includes its own sporting events and rights to the New York Yankees baseball games through the year 2000. In addition, MSG produces, promotes and/or presents live entertainment, which includes television event production of the Miss Universe, Miss USA and Miss Teen USA pageants and auto thrill shows through SRO Motorsports, an operating unit of MSG. Ownership Structure On March 10, 1995, MSG Holdings, L.P. ("Holdings"), a partnership among subsidiaries of Rainbow Programming Holdings, Inc. ("Rainbow Programming"), a wholly owned subsidiary of Cablevision, and wholly owned subsidiaries of ITT acquired the business and assets of Madison Square Garden Corporation in a transaction in which that corporation merged with and into Holdings. Holdings funded the purchase price of the acquisition through (i) borrowings of $289.1 million under a credit agreement among Holdings, various lending institutions and Chemical Bank as administrative agent, (ii) an equity contribution from Rainbow Programming of $110 million and (iii) an equity contribution from ITT of $610 million. Pursuant to agreements among ITT, Rainbow Programming and Cablevision, within 12 months (18 months under certain circumstances) following the MSG closing, Rainbow Programming may elect to acquire interests in Holdings from ITT sufficient to equalize the equity ownership of ITT and Rainbow Programming in Holdings (the "Equalization Interest"). Rainbow Programming has the option during such period to (i) acquire all or a portion of the Equalization Interest for cash (including interest on such Equalization Interest at the rate of 11 1/2% per year calculated from the MSG acquisition closing date), (ii) maintain its investment at the initial level or (iii) require ITT to purchase all or any portion of Rainbow Programming's initial interest in Holdings at the price paid by Rainbow Programming plus an adjustment for Rainbow Programming's share of Holdings' operating income after interest expense following the MSG acquisition closing. Management of ITT expects to receive payment in respect of the Equalization Interest as contemplated by the terms of the applicable agreements. Initially Holdings will be managed on a 50-50 basis by Rainbow Programming and ITT. If Rainbow Programming does not equalize its ownership interest in Holdings as discussed above, its management role will effectively be eliminated. The name of Holdings has been changed to Madison Square Garden, L.P. MSG Network The MSG Network is an advertiser-supported cable television entertainment program service that was launched in October 1969. The MSG Network's programming is distributed primarily via satellite for distribution by cable television operators and other video distributors principally in New York, New Jersey and Connecticut. The MSG Network currently has over 5,000,000 homes that are subscribers in the New York, New Jersey and Connecticut metropolitan area. The MSG Network derives revenue from two principal sources: sale of advertising time on the network and receipt of per-subscriber license fees paid by cable operators and other distributors pursuant to negotiated carriage arrangements. 107 114 The sale of advertising time is affected by viewer demographics, viewer ratings and market conditions. In order to evaluate the level of its viewing audience, the MSG Network makes use of the metered method of audience measurement. This method, which provides a sample through the use of meters attached to television sets, produces a continuous measurement of viewing activity within those households. The MSG Network utilizes the services of A.C. Nielsen, the metered estimates of which are widely accepted by advertisers as a basis for determining advertising placement strategy and rates. The MSG Network programming generally consists of sporting events and is filled through program rights to various sporting events, particularly rights with respect to the New York Yankees baseball games, and its own sporting events and related productions, particularly New York Knicks and New York Rangers games and events held at the Madison Square Garden Arena. The MSG Network has acquired programming rights from the New York Yankees to broadcast its baseball games through the year 2000, for an aggregate of $493.5 million. In addition to rights fees paid to the New York Yankees, the MSG Network pays a fee to (i) the NBA for distribution of New York Knicks games to, as a general matter, households located outside of a 75 mile radius of New York City and (ii) the NHL for distribution of New York Rangers games to, as a general matter, households located outside of a 50 mile radius of New York City. New York Knicks MSG owns the New York Knicks, a member of the NBA. The New York Knicks play their home games in the Madison Square Garden Arena, which is owned and operated by MSG. The NBA, through its constitution, has established rules governing club operations, including drafting of players and trading player contracts. The New York Knicks are subject to payment of ongoing assessments and dues to the NBA and to compliance with the constitution and by-laws of the NBA, as the same may be modified from time to time by the membership, as well as with rules promulgated by the Commissioner of the NBA. These rules include standards of conduct for players and front office personnel; methods of operation; procedures for drafting new players and for purchasing, selling and trading player contracts; rules for implementing disciplinary action relative to players, coaches and front office personnel; and certain financial requirements. In addition to ticket revenues from home games (basketball clubs in the NBA do not share in gate receipts from games away from home), a portion of the New York Knicks' revenues is derived from a pro-rata share of the network broadcast rights fees received by the NBA, pursuant to a broadcast rights fee agreement through the 1997-1998 seasons awarded to NBC Sports, a division of the National Broadcasting Company, and from a pro-rata share of the broadcast rights fees received by the NBA, pursuant to the broadcast rights fee agreement through the 1997-1998 season awarded to TBS Superstation and Turner Network Television, Inc., affiliates of Turner Broadcasting System, Inc. The New York Knicks also receive revenue from local cable rights fees for games broadcast by the MSG Network and from local radio rights fees for games broadcast by WFAN-AM. Other sources of revenues for the New York Knicks' operations include promotional and novelty revenues, including royalties from NBA Properties, Inc., and a pro rata share of expansion fees paid by new NBA franchises. NBA players are represented for collective bargaining purposes by the National Basketball Players' Association (the "NBPA"). During June 1988, the NBA and the NBPA agreed to a new six-year collective bargaining agreement, that, among other things, reduced the NBA draft to three rounds for the 1988-89 season (two rounds in subsequent years), continued the salary cap, which ties a team's payroll to the league's gross revenues, as defined, and altered free agency guidelines regarding the right of first refusal. A player may, under certain circumstances, become a total free agent upon termination of his contract. For the 1994-95 season, the NBA and NBPA are operating without a collective bargaining agreement but essentially under the same terms as the last agreement. 108 115 New York Rangers MSG owns the New York Rangers, a member of the NHL. In addition to owning the New York Rangers, MSG licenses the Rangers name in connection with the operation of a minor league hockey team in Binghamton, New York. The New York Rangers play their home games in the Madison Square Garden Arena. The NHL, through its constitution, has established rules governing club operations, including drafting of players and trading player contracts. The New York Rangers are subject to payment of ongoing assessments and dues to the NHL and to compliance with the constitution and by-laws of the NHL, as the same may be modified from time to time by the membership, as well as with rules promulgated by the Commissioner of the NHL. These rules include standards of conduct for players and front office personnel; methods of operation; procedures for drafting new players and for purchasing, selling and trading player contracts; rules for implementing disciplinary action relative to players, coaches and front office personnel; and certain financial requirements. In addition to ticket revenues from home games, a portion of the New York Rangers' revenues is derived from a pro-rata share of the revenues generated through contracts negotiated with television networks. The principal broadcast agreements are with the Entertainment and Sports Programming Network ("ESPN") and the Fox Television Network, covering the 1994-1995 through 1998-1999 seasons. In early 1994, the NHL negotiated a four-year extension of the exclusive Canadian television broadcast agreement with Molson Companies Ltd. The New York Rangers also receive revenue from local cable rights fees for games broadcast by the MSG Network and from local radio rights fees for games broadcast by WFAN-AM. Other sources of revenues for the New York Rangers' operations include promotional and novelty revenues including royalties from NHL Enterprises, Inc., and a pro rata share of expansion fees paid by new NHL franchises. NHL hockey players are represented for collective bargaining purposes by the National Hockey League Players' Association (the "NHLPA"). During the 1993-1994 season, the NHL and NHLPA operated without a collective bargaining agreement as the existing agreement expired on September 15, 1993. However, as a result of a labor dispute between the NHL and NHLPA concerning the terms of a new collective bargaining agreement, the 1994-1995 season began with a lock-out. A new collective bargaining agreement was agreed to in mid-January 1995, which, among other things, instituted an escalating salary cap on draft picks and altered salary arbitration allowing teams to decline three times over a period of two years (but not all in one year) to accept an unfavorable salary arbitration decision over $550,000, the league average salary (which figure escalates as the league average salary grows). Negotiations on the collective bargaining agreement may be opened by either side after the 1997-1998 season. As a result of the lock-out, the NHL scheduled only 48 regular season games for the 1994-1995 season. Madison Square Garden Arena The principal tenants of the Madison Square Garden Arena are the New York Knicks and the New York Rangers. In addition to the New York Knicks basketball games and New York Rangers hockey games, MSG derives revenues from various other activities and events held at the Madison Square Garden Arena and The Paramount. These events include various other sporting events, concerts, family shows, the circus, trade shows, conventions and other special events. MSG generates revenue through luxury suite licensing, concessions (fast food, restaurants and catering), ticket sales and merchandise sales. Other MSG produces, promotes and/or presents live entertainment. Some of the more prominent events or activities include television event production of the Miss Universe, Miss USA and Miss Teen USA pageants and auto thrill shows through SRO Motorsports, an operating unit of MSG. 109 116 INFORMATION SERVICES ITT WORLD DIRECTORIES After the Distribution, New ITT through an 80%-owned subsidiary, ITT World Directories, Inc. ("ITT World Directories"), will engage in the publication of telephone directories, including classified directory services for telephone subscribers in numerous countries outside the United States, as well as in Puerto Rico and the United States Virgin Islands. ITT World Directories is among the world's largest publishers of yellow pages directories (in terms of advertising revenues). BellSouth Corporation owns the remaining 20% of ITT World Directories. Overview ITT World Directories publishes traditional telephone directories -- alphabetical and classified -- and also publishes specialized directories, including directories of facsimile numbers and business-to-business directories. ITT World Directories' principal source of revenues in connection with its operations is advertising revenue generated by advertisements published in its directories. Its principal publications are in Belgium, The Netherlands, Portugal, The Republic of Ireland, Puerto Rico and the United States Virgin Islands. ITT publishes directories in these jurisdictions either pursuant to a contract with the existing national telecommunications provider or as a proprietary directory in such jurisdiction after expiration of such a contract. ITT World Directories is currently the largest publisher of telephone directories in each of the various countries that it serves. ITT World Directories is continuing a program of product diversification and, where possible, geographic expansion, as exemplified by its recent return to South Africa and the participation with the entity providing management services to the publisher of telephone directories in that country. It also recently established a joint venture with Thomas Publishing Co. for a Pan-European industrial directory. The first directory was published in Europe by this joint venture in April 1995. Historically, the business of ITT World Directories had consisted of contracts for the publication of telephone directories with monopoly providers of telecommunications services. In many jurisdictions, the monopoly provider of telecommunications services was obligated to publish white pages telephone directories and the obligation or right (depending on the jurisdiction) to publish yellow pages directories (and thus claim significant advertising revenues) went along with the requirement to publish white pages. As a means of satisfying its publication obligations, various monopoly providers contracted with ITT World Directories to publish telephone directories. Some of the current business of ITT World Directories remains consistent with this historical source of business. However, one of the most important factors currently affecting the business of ITT World Directories is the changing competitive environment in the member states of the European Union in which it publishes telephone directories. Specifically, in Belgium and The Netherlands, the historical contractual relationship between ITT World Directories and the national telecommunications entity, namely Belgacom and PTT Telecom, respectively, were not renewed or extended when the last contract term expired. As contracts are scheduled for renewal in other jurisdictions within the European Union, the contracts there may also not be renewed or extended, thereby possibly adversely affecting ITT World Directories. A second important factor affecting the business of ITT World Directories is the challenge presented by new interactive and other technologies (including as the traditional yellow pages market moves to a paperless product). The operating performance of ITT World Directories is not expected to be materially adversely affected by the emergence of new technologies in the immediate future. However, if ITT World Directories is not successful in implementing a strategy to apply new technologies to its business, its longer-term operating results may be adversely affected. These new technologies are likely to include information delivery methods such as CD ROMs and computer diskettes and operator-assisted yellow pages. ITT World Directories has activities in this arena. Specifically, in Portugal, ITT World Directories has had an operator-assisted yellow pages in operation for three years; in Belgium and The Netherlands, it is publishing its classified directories on CD ROM and it is publishing a fax directory in Portugal on CD ROM; and it is working with the directory operation in South Africa on enhancing the operator-assisted yellow pages that have been in operation there for approximately nine years. 110 117 Belgium ITT World Directories through its subsidiary, ITT Promedia, had been the only publisher of a classified directory in Belgium for approximately 25 years. ITT World Directories is now facing competition in Belgium from Belgacom Directory Services ("BDS"), an 80% subsidiary of Belgacom, the Belgian national telephone company, in partnership with GTE Directories. Previously, ITT Worldwide Directories had a contract with Belgacom to publish telephone directories. When the completion of the last contract with the publication of the 1994 directories occurred and a renewal was not negotiated, Belgacom chose to compete with ITT World Directories through BDS. The operations of ITT World Directories in Belgium are among its most significant. Accordingly, any adverse developments in the competitive environment in Belgium could adversely impact the operating performance of ITT World Directories. Belgacom and ITT World Directories are currently in litigation in Belgium over Belgacom's position regarding the financial and commercial terms for access by ITT World Directories to the database necessary to publish classified and alphabetical directories. Belgacom maintains that, under the current regulatory framework in Belgium, ITT World Directories is required both to purchase the database from it and to publish white pages directories. ITT World Directories maintains that the regulatory framework permits Belgacom to abuse its dominant position in violation of Belgian and European Union law; and that the fee for the subscriber data established by Belgacom is in violation of Belgian and European Union law in that it is not fair or reasonable and may well be discriminatory. In addition to the matter pending in Belgian Commercial Court, the issues have been raised in a complaint by ITT Promedia filed with the European Union and in a complaint filed by ITT Promedia with the Belgian Competition Service. The Netherlands ITT World Directories, through its subsidiary, ITT World Directories Netherlands, had been the principal publisher of a classified directory in The Netherlands for approximately 25 years. The national telephone company of The Netherlands, PTT Telecom Nederland ("PTT"), has now begun publishing a classified directory along with the white pages directories it previously published. PTT is in partnership with Telemedia of Sweden. This new competitive dynamic could adversely impact ITT World Directories. Previously, ITT World Directories had a contract with PTT to publish classified telephone directories which was not renewed or extended. Instead, PTT chose to compete with ITT World Directories. The impact of this new competitor could be adverse to ITT World Directories, but to a lesser extent than in Belgium since the more limited market penetration in classified directory advertising in The Netherlands leaves more room for expansion in the market. Portugal ITT World Directories, through its subsidiary, ITT Paginas Amarelas, has a contract with the national telephone company of Portugal, Portugal Telecom, for the publication of telephone directories in Portugal. The contract expires with the completion of the 1997 directories and discussions toward an extension or renewal of the collaboration have not yet commenced. Telecom Portugal has recently introduced a product facsimile directory (outside the contract with ITT Paginas Amarelas) that competes with ITT World Directories' facsimile directory. This new competitive dynamic may portend an adverse impact for ITT World Directories in Portugal after 1997. Puerto Rico/United States Virgin Islands ITT World Directories publishes telephone directories in Puerto Rico and the United States Virgin Islands through its subsidiary, ITT Intermedia. ITT Intermedia has a contract with the Puerto Rico Telephone Company through 1996 and has reached an agreement in principle for a three-year extension on more favorable terms, which extension would run through 1999. These markets are characterized by the continuing effects of an economic downturn. 111 118 The Republic of Ireland ITT World Directories, through its 51%-owned subsidiary, Golden Pages Ltd. ("Golden Pages"), has a contract with Telecom Eireann, the national telephone company of The Republic of Ireland, for the publication of telephone directories in The Republic of Ireland. The contract expires in 1999. Telecom Eireann owns the remaining equity in Golden Pages. In the Republic of Ireland, Golden Pages competes with a proprietary directory, The Independent, which competitor is concentrated in the Dublin market. South Africa In September 1994, ITT World Directories acquired a 50% equity interest in the Maister Management Company ("MMC") in South Africa, an ownership position that ITT World Directories previously had disposed of as a result of political events in South Africa. MMC has a contract to manage sales, marketing and other operations of telephone directories published by South African Telkom, including proprietary software for electronic directory services. The contract expires in 1999 when the contract of South African Telkom to publish directories also expires. Other ITT World Directories has a consulting agreement and software license and support agreements with Nippon Telegraph and Telephone ("NTT") in Japan through a joint venture company in which ITT World Directories has a minority position. The consulting and related agreements expire on March 31, 1999. Under the agreements, ITT World Directories provides consulting and other assistance in connection with the publication by NTT of telephone directories. The contract that expires on March 31, 1999, is for a term of three years and follows two previous five-year contracts between NTT and ITT World Directories. ITT World Directories recently entered into a consulting arrangement with Norwegian Telkom to assist such company in the publication of telephone directories and other matters. ITT also is pursuing opportunities in other jurisdictions, although there can be no assurance that any such efforts will be successful. ITT EDUCATIONAL Prior to its initial public offering, which was consummated on December 27, 1994, ITT Educational Services, Inc. ("ITT Educational") was a wholly owned subsidiary of ITT. After the Distribution, New ITT will beneficially own 83.3% of the outstanding shares of common stock of ITT Educational. The shares of common stock of ITT Educational are traded on the NYSE under the symbol "ESI". The term "ITT Technical Institutes" (in singular or plural form) refers to educational institutions owned and operated by ITT Educational. Overview ITT Educational is a leading proprietary provider of technical postsecondary degree programs in the United States based on student enrollment. ITT Educational offers degree programs and non-degree diploma programs to over 20,000 students through a system of 55 ITT Technical Institutes located in 25 states. These programs are designed, after consultation with employers, to provide students with the knowledge and skills necessary for entry-level employment in technical positions in a variety of industries. ITT entered the education services business in 1966 through the acquisition of a predecessor of ITT Educational which owned three technical institutes. In 1981, ITT Educational began a strategy of significant expansion, acquiring three and establishing 42 new technical institutes since that date. Of the 55 institutes currently operating, 21 were established since 1989. As a result of adding new institutes and increasing enrollment at existing institutes, the number of students attending Technical Institutes rose from 15,582 students at December 31, 1989, to 19,498 students at March 31, 1995, while the number of new high school graduates in the general population continued to decline. ITT Educational has recently accelerated its expansion program, opening five new technical institutes in 1993 and six more institutes in 1994. 112 119 ITT Educational's revenue varies based on the aggregate student population, which is influenced by the number of students attending ITT Technical Institutes at the beginning of a fiscal period, by the number of new students entering and former students reentering ITT Technical Institutes during such period and by student retention rates. New students enter ITT Technical Institutes at the beginning of each academic quarter, which commence in March, June, September and December. ITT Educational believes that the size of its student population is affected to some extent by general economic conditions, and that, in the absence of countervailing factors, student enrollments and retention rates would tend to increase as opportunities for immediate employment for high school graduates decline and decrease as such opportunities increase. The establishment of new ITT Technical Institutes and the introduction of additional program offerings at existing ITT Technical Institutes have been significant factors in increasing the aggregate student population in recent years. The postsecondary education industry is highly regulated and thus the business of ITT Educational is materially influenced by applicable regulations. For a discussion of the regulatory environment applicable to ITT Educational, see "-- GOVERNMENTAL REGULATION AND RELATED MATTERS -- ITT EDUCATIONAL". Student Admissions and Retention All applicants for admission to any of the ITT Technical Institutes are required to have a high school diploma or a recognized equivalent and also must pass an admissions examination. Students interested in bachelor's degree programs must satisfy additional admissions criteria which generally require, among other things, that the student first earn an associate's degree or complete an equivalent level program in the same or a related subject matter. The average withdrawal rate at ITT Technical Institutes for the three academic quarters from July 1994 through March 1995, as calculated under the current Federal regulations, was approximately 19.9%. Students are most likely to withdraw before they begin their second academic quarter of study at an ITT Technical Institute. Approximately 70% of all students who continue their education past their first academic quarter complete their education at an ITT Technical Institute. It is anticipated that certain state regulatory entities may establish certain standards for withdrawal and completion rates. See "-- GOVERNMENTAL REGULATION AND RELATED MATTERS -- ITT EDUCATIONAL" for a more detailed discussion. Graduate Placement ITT Technical Institutes have graduated over 100,000 students since 1976. Based on information from students and employers, ITT Educational believes that students graduating from the ITT Technical Institutes during 1989-1993 obtained employment in a field related to their program of study as of June 30 or earlier of the year following graduation at rates ranging from 77-83% of placeable graduates (excluding graduates who continue in a bachelor's degree program at an ITT Technical Institute). Administration Each ITT Technical Institute is administered by a director who has overall responsibility for the management of the technical institute. The administrative staff of each ITT Technical Institute also includes a director of recruitment, a director of placement, a director of finance and a director of education. Intercompany Agreements Under agreements with ITT Educational, ITT provides certain administrative, financial, treasury, accounting, tax and other services to ITT Educational and makes available certain of its employee benefit plans to ITT Educational's employees. In addition, ITT Educational and ITT have entered into a number of intercompany agreements covering matters such as corporate governance, tax sharing arrangements, registration rights and the use of the "ITT" name. As part of the Distribution, these various agreements will be amended to replace ITT with New ITT as the counterparty to ITT Educational. 113 120 Dividend Policy ITT Educational does not currently pay dividends in respect of its shares of common stock and does not intend to pay dividends for the foreseeable future. ALCATEL ALSTHOM In July 1992, ITT sold its 30% equity interest in Alcatel N.V., a Netherlands company which is one of the largest telecommunications equipment manufacturers in the world, to Alcatel Alsthom, a major French company which owned the other 70% of Alcatel N.V. At the closing of the sale, ITT received $1 billion in cash and 9.1 million capital shares of Alcatel Alsthom, recorded at $806 million, which, at December 31, 1994, represented approximately 6% of the outstanding capital shares of Alcatel Alsthom. In addition, ITT received a cash payment of approximately $767 million in July 1993 and a cash payment of approximately $817 million in July 1994. New ITT will retain its equity interest in Alcatel Alsthom until at least July 1997, unless Alcatel Alsthom and New ITT agree otherwise. Mr. Rand V. Araskog, Chairman, President and Chief Executive of ITT is a member of the board of directors of Alcatel Alsthom. Alcatel N.V. was formed in 1986, when ITT and Alcatel Alsthom, then known as Compagnie Generale d'Electricite, transferred their respective telecommunications operations to the joint venture company. COMPETITION HOSPITALITY & ENTERTAINMENT Hotel operations Competition in the hotel industry is vigorous and is generally based on quality of service, attractiveness of facilities and locations, consistency of product offerings, price and other factors. Room revenues, which are determined by occupancy levels and room rates, have continued to be constrained in certain of the markets in which ITT Sheraton hotels are located as a result of economic factors, overbuilt markets, price sensitive customers and other factors. The principal competitors of ITT Sheraton hotels include Hilton, Marriott, Hyatt, and various other hotels, motels and inns located in the markets in which ITT Sheraton hotels compete. Ciga faces similar competitive dynamics in its markets. Gaming Operations New ITT's gaming operations face intense competition from other companies in the gaming industry. New ITT's Las Vegas properties compete primarily with casino/hotels on the Las Vegas Strip, and to a lesser extent with operations outside of Las Vegas and the State of Nevada. Although the Las Vegas market has absorbed recent growth, the trend of industry expansion is expected to continue over the next several years. It is possible that the expansion of existing casinos and the opening of additional casino/hotels may further increase the competition for customers and for trained employees and thus adversely impact New ITT's gaming operations in Las Vegas. New ITT casino facilities in Stateline, Nevada, Atlantic City, New Jersey and Tunica County, Mississippi also face intense competition for similar reasons and under similar circumstances. New ITT's casino/hotel and casino operations are likely to experience increased competition as other states authorize casino gaming and other gaming activities and as non-United States countries authorize gaming. Competition in the gaming industry is generally based on the quality of the facilities and services and the entertainment offered at such facilities. In addition, New ITT believes that name and reputation are significant competitive factors. Madison Square Garden As a supplier and distributor of television programming, the MSG Network competes with other such suppliers and distributors of television programming for cable systems. The MSG Network also competes for viewers with other forms of programming provided to cable subscribers such as broadcasting networks and local over-the-air television stations, home video viewership, movie theaters and all other forms of 114 121 audio/visual entertainment, news and information services. MSG's sports and entertainment operations compete against other sporting and entertainment events in their respective areas and other entertainment and leisure activities. INFORMATION SERVICES ITT World Directories ITT World Directories faces competition in various of its markets from other publishers of telephone directories. In particular, new competitors in Belgium and The Netherlands and existing competitors in other jurisdictions could adversely impact the operating results of ITT World Directories and thus New ITT. For a more complete discussion of the competitive environment affecting the business of ITT World Directories, see "-- INFORMATION SERVICES -- ITT WORLD DIRECTORIES -- OVERVIEW". ITT World Directories also faces competition from other sources of advertising, including newspapers, television, direct mail, radio, magazines, outdoor advertising and other sources. ITT Educational The postsecondary education market in the United States is highly fragmented and competitive, with no private or public institution enjoying a significant market share. ITT Technical Institutes compete for students with four-year and two-year degree granting institutions, which include not-for-profit public and private colleges and proprietary institutions, as well as with alternatives to higher education, such as military service or immediate employment. Competition among educational institutes is believed to be based on the quality of the educational program, perceived reputation of the institution, cost of the program and employability of graduates. Certain public and private colleges may offer programs similar to those of ITT Technical Institutes at a lower tuition cost due in part to government subsidies, foundation grants, tax deductible contributions or other financial resources not available to proprietary institutions. Other proprietary institutions offer programs that compete with those of the ITT Technical Institutes. Certain of ITT Educational's competitors in both the public and private sectors have greater financial and other resources than ITT Educational. EXPOSURE TO CURRENCY FLUCTUATIONS Certain of the subsidiaries of New ITT conduct operations worldwide. New ITT is therefore exposed to the effects of fluctuations in relative currency values. Accordingly, the operating results of New ITT will be impacted by fluctuations in relative currency values. GOVERNMENTAL REGULATION AND RELATED MATTERS CASINO GAMING REGULATION -- GENERAL The ownership and/or operation of casino gaming facilities in the United States are subject to extensive Federal, state and local regulations. On the Federal level, in addition to all other relevant Federal regulation, New ITT's casino gaming operations are specifically subject to the compliance with the Gambling Devices Act of 1962, as amended, and the Bank Secrecy Act, as amended; these govern the ownership, possession, manufacture, distribution and transportation in interstate commerce of gaming devices and the recording and reporting of currency transactions, respectively. New ITT's Nevada casino gaming operations -- at the Sheraton Desert Inn in Las Vegas, Caesars Palace in Las Vegas, and Caesars Tahoe in Stateline -- are subject to the Nevada Gaming Control Act (the "Nevada Act") and the licensing and regulatory control of the Nevada Gaming Commission (the "Nevada Commission") and the Nevada State Gaming Control Board (the "Nevada Control Board"), as well as various local, county and state regulatory agencies (hereinafter collectively referred to as the "Nevada Gaming Authorities"). New ITT's New Jersey casino gaming operations -- at Caesars Atlantic City -- are subject to the New Jersey Casino Control Act (the "New Jersey Act") and the licensing and regulatory control of the New Jersey Commission and the New Jersey Department of Law & Public Safety, Division of Gaming Enforcement (the "New Jersey DGE"), as well as various local, county and state regulatory agencies (hereinafter collectively referred to as the "New Jersey Gaming Authorities"). Due to its casino gaming operations in Mississippi, New ITT's Mississippi casino 115 122 gaming operations -- at the Sheraton Casino in Robinsonville, Mississippi -- are subject to the Mississippi Gaming Control Act (the "Mississippi Act") and the licensing and regulatory control of the Mississippi Gaming Commission (the "Mississippi Commission"), as well as various local, county and state regulatory agencies (hereinafter collectively referred to as the "Mississippi Gaming Authorities"). New ITT's Ontario casino gaming operations -- through its one-third interest in WCL -- are subject to the Ontario Gaming Control Act (the "Ontario Act"), and the registration and regulatory control of the Ontario Gaming Control Commission (the "Ontario Commission"), the Ontario Casino Corporation (the "Ontario Corporation"), the Registrar of Gaming Control (the "Ontario Registrar"), and the Director of Gaming Control (the "Ontario Director"), as well as various local, county and provincial regulatory agencies (hereinafter collectively referred to as the "Ontario Gaming Authorities"). New ITT's incipient Nova Scotia casino gaming operations -- at Sheraton Casinos Nova Scotia/Halifax and Sheraton Casinos Nova Scotia/Sydney -- are subject to the Nova Scotia Gaming Control Act (the "Nova Scotia Act"), and the registration and regulatory control of the Nova Scotia Gaming Commission, and the Nova Scotia Gaming Corporation (the "Nova Scotia Corporation"), as well as various local, county and provincial regulatory agencies (hereinafter collectively referred to as the "Nova Scotia Gaming Authorities"). The casino gaming laws, regulations and supervisory procedures of Nevada, New Jersey, Mississippi, Ontario and Nova Scotia are extensive and reflect certain public policy considerations as to (i) the integrity of casino gaming operations and its participants, (ii) the need for strict governmental and regulatory control of casino gaming operations, (iii) the creation of economic development, taxes and employment and (iv) the need to foster and enhance the public confidence and trust in casino gaming regulation and control. Changes to such laws, regulations and supervisory procedures could have an adverse effect on New ITT's casino gaming operations. Nevada Gaming Regulation The ownership and/or operation of casino gaming facilities in Nevada are subject to state and local regulation. Nevada's casino gaming laws, regulations and supervisory procedures are extensive and reflect certain broad declarations of public policy. In general, Nevada's gaming laws, regulations and supervisory procedures seek to (i) prevent unsavory or unsuitable persons from having any direct or indirect involvement with gaming at any time or in any capacity, (ii) establish and maintain responsible accounting practices and procedures, (iii) maintain effective control over the financial practices of licensees, including establishing minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing reliable recordkeeping, and making periodic reports to the applicable casino gaming authority, (iv) prevent cheating and fraudulent practices and (v) provide a source of state and local revenues through taxation and licensing fees. SDI, as the operator of the Sheraton Desert Inn, and DPI, as the operator of Caesars Palace and Caesars Tahoe, are required to be licensed by the Nevada Gaming Authorities. The casino gaming licenses are not transferable and must be renewed periodically by the payment of casino gaming license fees and taxes. The Nevada Commission requires that (i) SGC and ITT Sheraton be registered as intermediary companies of SDI and (ii) CPC be registered as an intermediary company of DPI; the Nevada Commission also requires that New ITT be registered as a publicly traded corporation. No person may become a shareholder of, or receive any percentage of profits from, SDI or DPI without first obtaining certain required licenses and approvals from the Nevada Gaming Authorities. The Nevada Gaming Authorities may investigate any individual who has a material relationship to, or material involvement with, New ITT, the Sheraton Desert Inn Companies or the Caesars Nevada Companies in order to determine whether such individual is suitable or should be licensed as a business associate of either SDI or DPI. Officers, directors and key employees of each of SDI and DPI must be individually licensed by, and changes in corporate positions must be reported to, the Nevada Gaming Authorities; the Nevada Gaming Authorities may disapprove a change in corporate position. Certain officers, directors and key employees of New ITT 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 116 123 employees of New 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. If the Nevada Gaming Authorities find an officer, director or key employee unsuitable for licensing or unsuitable to continue having a relationship with New ITT, the Sheraton Desert Inn Companies or the Caesars Nevada Companies, the companies involved would be required to sever all relationships with such person. In addition, the Nevada Gaming Authorities may require a registered company or licensee to terminate the employment of any person who refuses to file appropriate disclosures. New ITT, the Sheraton Desert Inn Companies and the Caesars Nevada Companies are required to submit detailed financial and operating reports to the Nevada Commission. Substantially all loans, leases, sales of securities and similar financing transactions by either SDI or DPI must be reported to or approved by the Nevada Commission. 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 is 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, New ITT, the Sheraton Desert Inn Companies and the persons involved could be subject to substantial fines for each separate violation of the Nevada gaming laws by the Sheraton Desert Inn; similarly, and also at the discretion of the Nevada Commission, New ITT, the Caesars Nevada Companies and the persons involved could be subject to substantial fines for each separate violation of the Nevada gaming 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 New ITT's voting securities at any time. Nevada law requires any person who acquires more than 5% of any class of New ITT's voting securities to report the acquisition to the Nevada Commission and such person may be investigated and found suitable. Any person who becomes a beneficial owner of more than 10% of any class of New ITT's voting securities must apply for a finding of suitability by the Nevada Commission within 30 days after the Nevada Control Board Chairman mails a written notice requiring such filing, and must pay the costs and fees incurred by the Nevada Control Board in connection with the investigation. Under certain circumstances, an "institutional investor", as such term is defined in the Nevada Act and regulations, that acquires more than 10% but not more than 15% of New ITT's voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability requirements if such institutional investor holds the voting securities for investment purposes only; an institutional investor shall not be deemed to hold voting securities for investment purposes unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of the Board of Directors of New ITT, any change in New ITT's corporate charter, by-laws, management, policies or operations of New ITT or any of its casino gaming operations, or any other action which the Nevada Commission finds to be inconsistent with holding New ITT's voting securities for investment purposes only. Notwithstanding the foregoing, activities which are not deemed to be inconsistent with holding voting securities for investment purposes only include (i) voting on all matters voted on by shareholders, (ii) making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in its management, policies or operations and (iii) such other activities as the Nevada Commission may determine to be consistent with such 117 124 investment intent. If the shareholder who must be found suitable is a corporation, partnership or trust, it must submit detailed business and financial information, including a list of beneficial holders. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission or by the Chairman of the Nevada Control Board may be found unsuitable. Any holder of any equity or debt security found unsuitable and who holds, directly or indirectly, any beneficial ownership of New ITT's debt or equity voting securities beyond such period or periods of time as may be prescribed by the Nevada Commission may be guilty of a gross misdemeanor. New ITT could be subject to disciplinary action if, without the prior approval of the Nevada Commission and after New ITT receives notice that a person is unsuitable to be an equity or debt security holder or to have any other relationship with New ITT, the Sheraton Desert Inn Companies or the Caesars Nevada Companies, New ITT, the Sheraton Desert Inn Companies, the Caesars Nevada Companies or any one of them either (i) pays to the unsuitable person any dividend, interest or any distribution whatsoever, (ii) recognizes any voting right by such unsuitable person in connection with such securities, (iii) pays the unsuitable person remuneration in any form, (iv) makes any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction or (v) fails to pursue all lawful efforts to require such unsuitable person to relinquish his securities including, if necessary, the immediate purchase of such securities for cash at fair market value. Regulations of the Nevada Commission provide that control of a registered publicly traded corporation cannot be changed through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover without the prior approval of the Nevada Commission. Persons seeking approval to control a registered publicly traded corporation must satisfy the Nevada Commission as to a variety of stringent standards prior to assuming control of such corporation. The failure of a person to obtain such approval prior to assuming control over the registered publicly traded corporation may constitute grounds for finding such person unsuitable. Regulations of the Nevada Commission also prohibit certain repurchases of securities by registered publicly traded corporations without the prior approval of the Nevada Commission. Transactions covered by these regulations are generally aimed at discouraging repurchases of securities at a premium over market price from certain holders of more than 3% of the outstanding securities of the registered publicly traded corporation. The regulations of the Nevada Commission also require prior approval for a "plan of recapitalization", as such term is defined in the Nevada regulations; generally, a plan of recapitalization is a plan proposed by the management of a registered publicly traded corporation that contains recommended action in response to a proposed corporate acquisition opposed by management of the corporation which acquisition itself would require the prior approval of the Nevada Commission. Any person who is licensed, required to be licensed, registered, required to be registered, or is under common control with such persons (collectively "Licensees"), and who proposes to become involved in a gaming operation outside the State of Nevada is required to deposit with the Nevada Control Board, and thereafter maintain, a revolving fund in the amount of $10,000 to pay the expenses of investigation by the Nevada Control Board of the Licensees' participation in such foreign gaming. The revolving fund is subject to increase or decrease in the discretion of the Nevada Commission. Once such revolving fund is established, the Licensees may engage in gaming activities outside the State of Nevada without seeking the approval of the Nevada Commission provided (i) such activities are lawful in the jurisdiction in which they are to be conducted and (ii) the Licensees comply with certain reporting requirements imposed by the Nevada Act. Licensees are subject to disciplinary action by the Nevada Commission if they or any one of them (i) knowingly violates any laws of the foreign jurisdiction pertaining to the foreign gaming operation, (ii) fails to conduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevada gaming operations, (iii) engages in activities that are harmful to the State of Nevada or its ability to collect gaming taxes and fees or (iv) employs a person in the foreign operation who has been denied a license or finding of suitability in Nevada on the ground of personal unsuitability. 118 125 New Jersey Casino Gaming Regulation Casino gaming in New Jersey is subject to strict compliance with the New Jersey Act, the strict supervision of the New Jersey Commission and compliance with the regulations adopted by the New Jersey Commission. The New Jersey gaming laws and regulations primarily concern (a) the financial stability and character of casino operators, their employees, their security holders and others financially interested in casino operations, and (b) the operating methods -- including the rules of the games and credit issuance procedures -- and the financial and accounting procedures used in connection with casino operations. The New Jersey gaming laws and regulations include detailed provisions concerning, among other things, (i) the type, manner and number of applications and licenses required to conduct casino gaming and ancillary activities, (ii) the licensing, regulation and curricula of gaming schools, (iii) the establishment of minimum standards of accounting and internal control, including the issuance and enforceability of casino credit, (iv) the manufacture, sale, distribution and possession of gaming equipment, (v) the rules of the games, (vi) the exclusion of undesirable persons, (vii) the use, regulation and reporting of junket activities, (viii) the possession, sale and distribution of alcoholic beverages, (ix) the regulation and licensing of suppliers to licensed casino operators, (x) the conduct of entertainment within licensed casino facilities, (xi) equal employment opportunity for employees of licensed casino operators, contractors for casino facilities and the like, (xii) the payment of gross revenue taxes and similar fees and expenses, (xiii) the conduct of casino 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, New 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 New ITT, CWI or CNJ will have to be found qualified. The qualification requirement of any debt or equity security holder of New ITT may be waived based on an express finding by the New Jersey Commission, with the consent of the Director of the New Jersey DGE, that the security holder either (a) (i) is not significantly involved in the activities of BRC, (ii) does not have the ability to control New ITT, CWI, CNJ or BRC and (iii) does not have the ability to elect one or more members of the respective boards of directors of New ITT, CWI, CNJ or BRC, or (b) is an "institutional investor", as such term is defined in the New Jersey Act and regulations; for purposes of the former, the New Jersey Act presumes that any non-"institutional investor" security holder who owns or beneficially holds 5% or more of the equity securities of New ITT has the ability to control New ITT, 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 119 126 organized by banks under Part Nine of the Rules of the Comptroller of the Currency, (iv) a closed end investment trust, (v) a chartered or licensed life insurance company or property and casualty insurance company, (vi) banking or other licensed or chartered lending institutions, (vii) an investment adviser registered under the Investment Advisers Act of 1940 or (viii) such other persons as the New Jersey Commission may determine for reasons consistent with the policies of the New Jersey Act. In the absence of a prima facie showing by the Director of the New Jersey DGE that there is any cause to believe that such institutional investor may be found unqualified, upon application and for good cause shown, an institutional investor holding either (a) less than 10% of the equity securities of New ITT or (b) New ITT debt securities constituting less than 20% of the outstanding debt of New ITT and less than 50% of the issue involved 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 New ITT, CWI, CNJ or BRC; notwithstanding the foregoing, the institutional investor is permitted to vote on matters put to the vote of the outstanding security holders of New ITT. If an institutional investor who has been granted a waiver subsequently determines to influence or affect the affairs of New ITT, the institutional investor must provide to the New Jersey Commission not less than 30 days prior notice of such intent and the institutional investor must file with the New Jersey Commission an application for qualification before taking any action that may influence or affect the affairs of New ITT. Notwithstanding the foregoing, the institutional investor is permitted to vote on matters put to the vote of the outstanding security holders of New ITT. If an institutional investor changes its investment intent, or if the New Jersey Commission finds reasonable cause to believe that the institutional investor may be found unqualified, no action other than divestiture shall be taken by such institutional investor with respect to its security holdings until there has been compliance with the interim casino authorization provisions of the New Jersey Act, including the execution of a trust agreement. New ITT, CWI, CNJ and BRC are required to immediately notify the New Jersey Commission and the New Jersey DGE of any information about, or action of, an institutional investor holding its equity or debt securities where such information or action may impact on the eligibility of such institutional investor for a waiver. If the New Jersey Commission finds an institutional investor unqualified or if the New Jersey Commission finds that, by reason of the extent or nature of its holdings, an institutional investor is in the position to exercise a substantial impact on the controlling interests of BRC so that qualification of the institutional investor is necessary to protect the public interest, the New Jersey Act vests in the New Jersey Commission the power to take all necessary action to protect the public interest, including the power to require that the institutional investor submit to qualification and become qualified under the New Jersey Act. An equity or debt security holder -- including institutional investors -- of New ITT, CWI, CNJ or BRC who is required to be found qualified by the New Jersey Commission must submit an application for qualification within 30 days after being ordered to do so or divest all security holdings within 120 days after the New Jersey Commission determines such qualification is required. The application for qualification must include a trust agreement by which the security holder places its interest in New ITT in trust with a trustee qualified by the New Jersey Commission. If the security holder is ultimately found qualified, the trust agreement is terminated. If the security holder is not found qualified or withdraws its application for qualification prior to a determination on qualification being made, the trustee will be empowered with all rights of ownership pertaining to such security holder's New ITT securities, including all voting rights and the power to sell the securities; in any event, the unqualified security holder will not be entitled to receive in exchange for its New ITT securities an amount in excess of the lower of (i) the actual cost the security holder incurred in acquiring the securities or (ii) the value of such securities calculated as if the investment had been made on the date the trust became operative. By the same token, if the security holder is not found qualified, it is unlawful for the security holder to (i) receive any dividends or interest on such securities, (ii) exercise, directly or through any trustee or nominee, any right conferred by such securities, or (iii) receive any remuneration in any form from New ITT, CWI, CNJ or BRC for services rendered or otherwise. 120 127 Each officer, director, lender and certain other persons of New 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 New 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 New 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 New 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 Jersey Act, (iv) the ability to make necessary capital and maintenance expenditures in a timely manner which are adequate to insure maintenance of a superior first class facility of exceptional quality as required by the New Jersey Act and (v) the ability to pay, exchange, refinance or extend debts, including long-term and short-term principal and interest and capital lease obligations, which will mature or otherwise come due and payable during either the license term or within 12 months after the end of the license term or to otherwise manage such debts and any default with respect to the debts. The New Jersey Commission regulations provide that the financial stability standards concerning casino bankroll, operating expenses and capital and maintenance expenditures are met if the following is shown by clear and convincing evidence: (i) casino bankroll -- the maintenance, on a daily basis, of a casino bankroll at least equal to the average daily casino bankroll, calculated on a monthly basis, for the corresponding month in the previous year, (ii) operating expenses -- the demonstration of the ability to achieve positive gross operating profit measured on an annual basis and (iii) capital and maintenance expenditures -- the demonstration that its capital and maintenance expenditures over the five year period, which includes the previous 36 calendar months and the upcoming license period, average at least 5% of net revenue per annum. New ITT believes that, at current operating levels, BRC will have no difficulty in complying with these requirements. The New Jersey Commission has the authority to restrict or prohibit the transfer of cash or the assumption of liabilities by BRC if such action will adversely impact the financial stability of BRC and the prior approval of the New Jersey Commission is required to incur indebtedness and guarantees of affiliated indebtedness by BRC involving amounts greater than $25 million. If it is determined that New Jersey gaming laws were violated by BRC, BRC could be subject to fines or its casino license could be limited, conditioned, suspended or revoked. In addition, if a security holder of New ITT, CWI, CNJ or BRC is found disqualified but does not dispose of the securities, the New Jersey Commission is authorized to take any necessary action to protect the public interest, including the suspension or revocation of the casino license; however, the New Jersey Commission may not take any action against New ITT, CWI, CNJ or BRC with respect to the continued ownership of the security interest by the disqualified holder if the New Jersey Commission finds that (i) New ITT has provided in its corporate charter that any New ITT securities are held subject to the condition that, if a holder thereof is found to be disqualified by the New Jersey Commission pursuant to the provisions of the New Jersey Act, such holder shall dispose of his interest in New ITT, (ii) New ITT has made a good faith effort, including the prosecution of all legal remedies, to comply with any order of the New Jersey Commission requiring the divestiture of the security interest held by the disqualified holder and (iii) such disqualified holder does not have the ability to control New ITT, CWI, CNJ or BRC or to elect one or more members of the boards of directors of New 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 121 128 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. New ITT and STC are required to submit detailed financial, operating and other reports to the Mississippi Commission. Substantially all loans, leases, sales of securities and similar financing transactions entered into by New ITT or by STC must be reported to or approved by the Mississippi Commission. New ITT and STC are also required to periodically submit detailed financial and operating reports to the Mississippi Commission and furnish any other information that the Mississippi Commission may require. Each of the directors, officers and certain key employees of New ITT and STC who is actively and directly engaged in the administration or supervision of casino gaming in Mississippi, or who has any other significant involvement with the activities of STC, must be found suitable therefor and may be required to be licensed by the Mississippi Commission. A finding of suitability is comparable to licensing, and both require the submission of detailed personal financial information followed by a thorough investigation. An application for licensing may be denied for any cause deemed reasonable by the Mississippi Commission. Changes in licensed positions must be reported to the Mississippi Commission. In addition to its authority to deny an application for a license, the Mississippi Commission has the authority to disapprove a change in corporate position. If the Mississippi Commission finds a director, officer or key employee of New ITT or STC unsuitable for licensing or unsuitable to continue having a relationship with New ITT or STC, New ITT or STC, as the case may be, is required to suspend, dismiss and sever all relationships with such person. New ITT and STC have similar obligations with regard to any person who fails or refuses to file appropriate applications. Each gaming employee must obtain a work permit; the Mississippi Commission may refuse to issue a work permit to a gaming employee (i) if the employee has committed larceny, embezzlement or any other crime of moral turpitude or knowingly violated the Mississippi Act or the regulations of the Mississippi Commission or (ii) for any other reasonable cause. Mississippi gaming licenses are not transferable and must be renewed periodically. The Mississippi Commission is empowered to deny, limit, condition, revoke and/or suspend any license, finding of suitability or registration, and to fine any person as it deems reasonable and in the public interest, subject to the due process considerations of notice and an opportunity for a hearing. The Mississippi Commission may fine any licensee or other person who is subject to the Mississippi Act up to $100,000 for each violation of the Mississippi Act which is the subject of an initial complaint and up to $250,000 for each violation of the Mississippi Act which is the subject of any subsequent complaint. The Mississippi Act provides for judicial review of certain decisions of the Mississippi Commission; however, the filing for such judicial review does not automatically stay the action taken by the Mississippi Commission pending the court's review. License fees and taxes, computed in various ways depending on the type of casino gaming involved, are payable to the State of Mississippi and to the counties and cities in which the gaming operations are located. Depending on the particular fee or tax imposed, these fees and taxes are based on a percentage of the gross gaming revenues received by the casino operation, the number of slot machines operated by such casino or the number of table games operated by such casino. Moreover, several local governments have been authorized to 122 129 impose either additional gross fees on adjusted gross gaming revenues or, alternatively, per person boarding fees and annual license fees based on the number of gaming devices aboard the vessel. License fees paid to the State of Mississippi are allowed as a credit against Mississippi state income taxes. In all other material respects, casino gaming regulation in Mississippi is similar to the regulation of casino gaming in Nevada and New Jersey. Windsor, Ontario Casino Gaming Regulation The operation of casino facilities by WCL is subject to extensive regulation under the registration and regulatory control of the Ontario Gaming Authorities. So long as WCL operates a casino in Ontario, it must be registered as a casino operator under the Ontario Act. An application for registration or renewal of registration in Ontario will be denied if there are reasonable grounds to believe either that the applicant will not be financially responsible in the conduct of its business or that the applicant will not act in accordance with the law or with integrity, honesty and in the public interest. In determining whether registration should be granted or renewed, the Ontario Gaming Authorities may have regard to the financial history and past conduct of the applicant, its officers, directors and "interested persons" who have a beneficial interest in, control of or have financed the applicant's business or any of its officers' or directors' businesses. Thus, the Ontario Gaming Authorities are empowered to investigate the character, financial history and competence of WCL, or of any person who has a beneficial interest in, control of, or who has financed WCL's business, including WCL's officers, directors and shareholders. The applicant for registration or renewal must pay the reasonable costs of such investigations. Each gaming employee at an Ontario casino gaming facility must be registered under the Ontario Act, which registration may be revoked upon the occurrence of certain events. The Ontario Gaming Authorities may, subject to a registrant's right to a hearing under the Ontario Act, suspend or revoke a registration for any reason that would disentitle such registrant to registration or renewal. A change in control of WCL could result in revocation of WCL's registration if the new person or entity in control is determined to be unsuitable by the Ontario Gaming Authorities. WCL's registration is deemed to expire immediately upon any change in the composition of the officers and directors of WCL, unless the Ontario Gaming Authorities have consented in writing to such change. There can be no assurance that the Ontario Gaming Authorities will approve any renewal applications. All suppliers of goods and services to WCL must be either (i) registered as a "supplier" under the Ontario Act and the regulations promulgated thereunder or (ii) issued a certificate of exemption by the Ontario Gaming Authorities. Investigators appointed by the Ontario Gaming Authorities have the right, subject to certain limitations, to conduct warrantless searches for the purpose of determining compliance with the Ontario Act, its regulations or the terms of a registration. The Ontario Gaming Authorities may issue an order freezing the assets of a person (i) if it is alleged that such person has contravened the Ontario Act or the regulations promulgated thereunder, (ii) such person is subject to a criminal proceeding or is the subject of an investigation under the Ontario Act and (iii) the Ontario Gaming Authorities find reasonable grounds to believe that the interests of the person on whose behalf the assets are being held require protection. Substantial fines for each violation of the Ontario Act or its regulations may be levied against WCL. Suspension or revocation of registration could lead to a termination of any contract with WCL and could have a materially adverse effect on any business conducted by WCL in Ontario. Similarly, the revocation of WCL's license to sell alcoholic beverages at its casino gaming facilities could have a materially adverse effect on WCL's casino business. WCL is required to submit audited financial statements to the Ontario Gaming Authorities and to retain certain records as required by regulation. WCL must make available to the Ontario Gaming Authorities all reports, accounts, records and other documents related to the operation of the casino. 123 130 The Ontario Act and the regulations promulgated thereunder are subject to amendment, change, modification or repeal. Any such amendment, change, modification or repeal could have a materially adverse effect on WCL's operations and New ITT's interests therein. All games of chance must be played in accordance with the rules of play prescribed by the regulations and approved in writing by the Ontario Gaming Authorities. Nova Scotia Casino Gaming Regulation ITT Sheraton's subsidiary, which will both (i) own and operate the proposed casino in the City of Halifax, Nova Scotia and (ii) operate the proposed casino in the City of Sydney, Nova Scotia, all on behalf of the Nova Scotia Corporation, will be required to comply with registration requirements set forth in the Nova Scotia Act and the regulations promulgated thereunder and will also be subject to operational regulation by the Nova Scotia Gaming Authorities. The requirements of the Nova Scotia Act and its attendant regulations are substantially similar to those in effect in the Province of Ontario. Casino Gaming -- Related Provisions of the New ITT Articles of Incorporation New ITT's Articles of Incorporation provide that (i) all securities of New ITT are subject to redemption by New ITT to the extent necessary to prevent the loss, or to secure the reinstatement, of any casino gaming license held by New ITT or any of its subsidiaries in any jurisdiction within or without the United States of America, (ii) all securities of New ITT are held subject to the condition that if a holder thereof is found by a gaming authority in any such jurisdiction to be disqualified or unsuitable pursuant to any gaming law, such holder will be required to dispose of all New ITT securities held by such holder, and (iii) it will be unlawful for any such disqualified person to (A) receive payments of interest or dividends on any New ITT securities, (B) exercise, directly or indirectly, any rights conferred by any New ITT securities or (C) receive any remuneration in any form, for services rendered or otherwise, from the subsidiary that holds the gaming license in such jurisdiction. MADISON SQUARE GARDEN Suppliers and distributors of cable television programming such as the MSG Network are not regulated by the Federal Communications Commission under the Communications Act of 1934. To the extent that regulations and laws, either presently in force or proposed, hinder or stimulate the growth of the cable television industries, the business of the MSG Network will be directly affected. Management of New ITT does not believe that the currently proposed regulatory developments in the area of cable regulation or other areas affecting its business should have a significant adverse effect on its operations. ITT EDUCATIONAL The postsecondary education industry is highly regulated. ITT Educational must be authorized by each state in which it operates an ITT Technical Institute. Each ITT Technical Institute must be accredited by a national or regional accrediting commission, and that commission in turn must satisfy applicable Federal requirements. Most students at the ITT Technical Institutes rely on funds received under various government-sponsored student financial aid programs, especially Federal programs, to pay a substantial portion of their tuition and other education-related expenses. Accordingly, a substantial majority of ITT Educational's revenues are indirectly derived from Federal student financial aid programs. In order for an individual ITT Technical Institute to continue to participate in such programs, the institute must comply with applicable Federal standards for these programs. Some of the standards and regulations governing institutions such as the ITT Technical Institutes recently have been expanded and made more stringent. Because such a substantial portion of ITT Educational's revenues are derived from student aid programs, the direct and indirect application of these and other standards and regulations to institutions such as the ITT Technical Institutes (including to the students of institutions such as the ITT Technical Institutes) could have a material adverse impact on such institutions and the expansion plans of ITT Educational. In addition, any failure of ITT Educational or any ITT Technical Institute to be in compliance with such regulations and standards could 124 131 have a material adverse effect on the operating performance of ITT Educational and the ability of ITT Educational to participate in Federal student financial aid programs. For the fiscal year ended December 31, 1994, ITT Educational derived an aggregate of approximately 78.6% of its revenues from Federal or state student aid programs (with only approximately 2% of revenues coming from state student aid programs). OTHER In addition, a number of New ITT's businesses are subject to other governmental regulation by law or through contractual arrangements. For example, ITT Sheraton hotels in the United States are liquor retailers where permitted, licensed in each state in which they do such business and in certain states are subject to statutes which prohibit ITT Sheraton or its owner from being both a wholesaler and retailer of alcoholic beverages. EMPLOYEES As of March 31, 1995, New ITT, through its subsidiaries, employed approximately 35,000 people. Of this number, approximately 24,000 are employees in the United States, of whom approximately 37% are represented by labor unions. Generally, labor relations have been maintained in a normal and satisfactory manner. LEGAL PROCEEDINGS On April 26, 1994, a purported class action lawsuit was filed in the United States District Court, Middle District of Florida, against 41 manufacturers, distributors and casino operators of video poker and electronic slot machines, including CWI. The suit alleges that the defendants have engaged in a course of fraudulent and misleading conduct intended to induce persons to play such games by collectively misrepresenting how the gaming machines operate, as well as the extent to which there is an opportunity to win. It also alleges violations of the Racketeer Influenced and Corrupt Organizations Act, as well as claims of common law fraud, unjust enrichment and negligent misrepresentation, and seeks damages in excess of $6 billion. Management of New ITT believes that the claims are without merit and intends to defend this case vigorously. While there can be no assurance as to the ultimate outcome of any litigation involving New ITT, management does not believe any pending legal proceeding will result in a judgment or settlement that will have, after taking into account New ITT's existing provisions for such liabilities, a material adverse effect on New ITT's financial position, results of operations or cash flows. 125 132 BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION GENERAL After the Distribution, ITT Hartford will be a holding company which owns 100% of the capital stock of Hartford Fire Insurance Company ("The Hartford"), First State Insurance Company and its subsidiaries ("First State") and Fencourt Reinsurance Company Ltd. ("Fencourt"). The Hartford, organized in 1810, is one of the nation's oldest and largest international insurance organizations. ITT Hartford has stockholders' equity of $3.9 billion and assets of $82.1 billion as of March 31, 1995. The Hartford is engaged in the writing of commercial property and casualty insurance, personal automobile and homeowners coverages and a variety of life insurance plans. The business of ITT Hartford may be generally categorized as (i) property and casualty insurance operations ("Property & Casualty") and (ii) life insurance operations ("Life"), and, in both instances, related investment activities. Unless the context otherwise indicates, references herein to ITT Hartford include its subsidiaries after the Distribution. The corporate headquarters of ITT Hartford is located at Hartford Plaza, Hartford, Connecticut 06115. First State, formerly Cameron and Colby, is a group of three Boston-based excess and surplus lines and reinsurance subsidiaries of ITT prior to the Distribution. Effective at the end of 1992, First State ceased writing new and renewal business and is being managed as an operation in run-off until all claims have been resolved. During 1992, First State strengthened reserves related to future asbestos and pollution claims in the amount of $594 million after tax. This action was necessary due to adverse development on excess and surplus lines and reinsurance business written before 1986. The table below shows in percentage terms ITT Hartford's consolidated revenues attributable to each of its lines of business for the three months ended March 31, 1995 and March 31, 1994 and for the last three years:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ----------- ------------------- 1995 1994 1994 1993 1992 --- --- --- --- --- REVENUES Property & Casualty: Domestic Commercial...................................... 26% 30% 29% 31% 33% Domestic Personal........................................ 15 16 15 16 15 Reinsurance.............................................. 5 6 6 4 4 International............................................ 9 9 10 10 10 Net Investment Income.................................... 7 7 7 8 9 Net realized investment gains............................ 1 2 1 1 4 Life: Individual Life and Annuity.............................. 6 6 6 6 4 Employee Benefits........................................ 10 10 10 11 11 Asset Management Services................................ 7 7 7 8 8 Specialty................................................ 13 6 8 4 1 International Operations................................. 1 1 1 1 1 --- --- --- --- --- 100% 100% 100% 100% 100% === === === === ===
HOLDING COMPANY; LIMITATION ON DIVIDENDS As of the Distribution Date, ITT Hartford's investment in its insurance subsidiaries will represent all the assets of ITT Hartford. ITT Hartford does not intend to engage in any significant business activities unrelated to the funding of its insurance subsidiaries, the purchase from time to time from The Hartford of certain short-term assets and the performance by ITT Hartford of its obligations under certain agreements governing the arrangements among ITT Hartford, ITT Industries and New ITT after the Distribution. 126 133 After the Distribution, ITT Hartford will continue to be an entity separate and distinct from The Hartford and its insurance subsidiaries. The principal source of funds for the payment of dividends by, as well as other obligations of, ITT Hartford is expected to be dividends paid on common stock of The Hartford. The rights of ITT Hartford to participate in any distribution of assets of any of its subsidiaries upon the liquidation or reorganization thereof or otherwise (and thus the ability of holders of ITT Hartford Common Stock to benefit indirectly from such distribution) will be subject to the prior claims of creditors of the applicable subsidiary, except to the extent that ITT Hartford may itself be a valid creditor of that subsidiary. Claims on these subsidiaries by persons other than ITT Hartford include claims by policyholders for benefits payable, claims of trade creditors, claims from guaranty funds and claims from holders of debt obligations and any preferred shareholders. Various legal limitations govern the extent to which ITT Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise provide funds to ITT Hartford. A number of these subsidiaries, including The Hartford are insurance companies organized and regulated under the laws of the State of Connecticut, although insurance laws of other jurisdictions are also applicable to The Hartford and its subsidiaries. Under Connecticut law, notice to and approval by the state insurance commissioner is required for the declaration or payment of any dividend from a property and casualty insurance company to its shareholders which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of such insurance company's surplus with respect to policyholders as of the thirty-first day of December last preceding, or (ii) net income for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting policies. The insurance laws of other jurisdictions in which ITT Hartford's subsidiaries are organized contain analogous restrictions. The total amount of statutory dividends which may be paid by The Hartford in 1995 without prior approval is estimated to be approximately $310 million. ITT Hartford does not expect to receive payment of dividends from First State for the foreseeable future. PROPERTY AND CASUALTY INSURANCE OPERATIONS Property & Casualty writes most types of property and casualty insurance, including personal lines insurance, commercial lines insurance and specialty insurance. Property & Casualty engages in business throughout the United States, Canada and Western Europe and participates in the worldwide reinsurance market. The following table summarizes for the periods indicated the net written premiums of Property & Casualty:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ----------------------------------- ------------------------------------------------------ 1995 1994 1994 1993 1992(1) ---------------- ---------------- ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ($ IN MILLIONS) Personal Lines -- Excluding AARP...................... $ 171 10% $ 169 10% $ 708 11% $ 741 11% $ 670 11% Personal Lines -- AARP...... 259 14 233 14 1,032 15 944 15 859 15 Commercial Lines............ 710 40 681 40 2,743 41 2,593 41 2,273 38 Specialty, Reinsurance & Surplus Lines............. 290 16 321 19 1,166 17 1,079 17 702 12 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Domestic Companies -- All Lines................. 1,430 80 1,404 83 5,649 84 5,357 84 4,504 76 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- International Companies -- All Lines................. 361 20 296 17 1,085 16 1,059 16 1,160 19 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- First State................. -- -- 2 -- 5 -- 32 -- 310 5 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total Property and Casualty.................. $1,791 100% $1,702 100% $6,739 100% $6,448 100% $5,974 100% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- --------------- (1) In 1992, the domestic operations of Property & Casualty changed their method of recognizing written and unearned premiums on indeterminate premium products. The change involved recognizing written premiums billed rather than estimated and booked at policy inception. The effect of this change was a one-time reduction in written premiums and the unearned premium reserve of $254 million with no impact on revenues. 127 134 PRINCIPAL MARKETS AND METHODS OF DISTRIBUTION Property & Casualty is serviced in North America through its home office and 40 regional offices and is represented by approximately 6,000 independent agents in North America. Property & Casualty conducts business through approximately 8,800 brokers in Western Europe. Independent agents, who often represent other companies as well, and brokers are compensated on a commission basis and are not employees of ITT Hartford. ITT Hartford also assumes insurance from other insurers and cedes insurance to other insurers or reinsurers in the worldwide reinsurance market. In addition, Property & Casualty has been endorsed by the American Association of Retired Persons ("AARP") to provide automobile and homeowners insurance programs to A.A.R.P. members on a direct response basis. Approximately 80% of the net written premiums of Property & Casualty is written in the United States. In 1994, five percent or more of the net written premiums of ITT Hartford's domestic property and casualty insurance operations was written in each of New York (12%), California (10%), Connecticut (6%) and Florida (5%). COMBINED RATIOS A common industry measurement of the results of property and casualty insurance underwriting is the "combined ratio". This ratio is the sum of the ratio of incurred losses and loss adjustment expenses to premiums earned (the "loss ratio"), the ratio of underwriting expenses incurred to premiums written (the "expense ratio") and the ratio of dividends to policyholders to premiums earned. A combined ratio under 100% generally indicates an underwriting profit; a combined ratio over 100% generally indicates an underwriting loss. Federal income taxes, investment income, deferred policy acquisition costs and other non-underwriting income or expenses are not reflected in the combined ratio. The profitability of property and casualty insurance companies depends on income from underwriting, investment and service operations. As shown in the following table, the combined ratios for several lines of insurance of Property & Casualty have improved significantly over the past three years, although 1992 results were adversely affected by actions taken to strengthen loss and loss adjustments.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------- --------------------------- 1995 1994 1994 1993 1992(1) ------ ------ ------ ------ ------- Personal Lines -- Excluding A.A.R.P............... 107.0 116.4 103.0 104.4 109.1 Personal Lines -- A.A.R.P......................... 99.5 109.2 102.6 102.0 102.3 Commercial Lines.................................. 99.4 102.1 101.7 105.3 113.9 Specialty, Reinsurance & Surplus Lines............ 104.3 99.0 104.3 100.6 120.0 Domestic Companies -- All Lines................... 101.5 104.6 102.5 103.6 112.3 International Companies -- All Lines.............. 104.0 105.1 104.6 118.0 127.5 Total Property and Casualty....................... 102.7 104.7 102.8 105.9 114.8
- --------------- (1) For the periods after 1992, the combined ratios exclude the results of First State. (2) The 1992 combined ratios exclude the impact of actions taken to strengthen loss and loss adjustment expense reserves costing $1.2 billion before-tax. See "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS" and the Notes to the ITT Hartford Consolidated Financial Statements. Including the impact of these actions, the 1992 combined ratios for Specialty, Reinsurance & Surplus Lines, Domestic Companies -- All Lines and Total Property and Casualty would have been 232.5, 135.4 and 133.7, respectively. UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Property & Casualty establishes reserves to provide for the estimated costs of paying claims made by or against policyholders. These reserves include estimates for both claims that have been reported and those that have been incurred but not yet reported to Property & Casualty and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is an uncertain and complex process that is based on the assumption that past 128 135 developments are an appropriate predictor of future events. The process involves a variety of actuarial and scientific techniques that analyze experience, trends and other relevant factors. ITT Hartford continually reviews its loss and loss adjustment expense reserves as additional experience and other relevant data become available and adjusts reserve levels accordingly. The uncertainties involved with the reserving process have become increasingly unpredictable due to a number of complex factors, including social and economic trends and changes in the concept of legal liability and damage awards. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. Any adjustments to previously established reserves are reflected in net income of the period in which they are made. In the judgment of ITT Hartford management, all information currently available has been properly considered in establishing reserves for losses and loss adjustment expenses, and, except to the extent such reserves are related to asbestos and environmental claims (as discussed below), such reserves are adequate to cover their eventual costs. ITT Hartford continues to receive claims asserting injuries from asbestos and asbestos-related products and damages from environmental pollution and related cleanup costs. With regard to these claims, deviations from past experience adversely and significantly impact the ability of insurance companies to estimate the ultimate reserves for unpaid losses and related settlement expenses. ITT Hartford finds that conventional reserving techniques cannot be used to create reliable estimates of the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For many types of asbestos claims and the majority of environmental claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent determining what, if any, coverage exists or which, if any, policy years and insurers may be liable. Additional uncertainty exists with respect to environmental claims, because such claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, that may not provide for legal defense costs, and that may or may not include pollution exclusion clauses which, if included, may not be absolute or allow for fortuitous events. There is also substantial uncertainty concerning the ultimate costs of cleanup at the sites that are the subject of such claims. Because insurance coverage issues have been held to be governed by state contract law, courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. If future legislative, social, economic or legal developments continue to expand the scope of policy coverage as they have in the past, the need for additional reserves may arise, adversely affecting future results. Due to the uncertainties described above, a range of such reserve increases, if any, cannot be meaningfully quantified. For a further discussion of these matters, see "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- ENVIRONMENTAL MATTERS". Certain liabilities for unpaid claims, principally for permanently disabled claimants, terminated reinsurance treaties and certain contracts that fund loss run-offs for unrelated parties have been discounted to present value. The amount of the discount was approximately $432 million and $362 million as of December 31, 1994 and 1993, and the amortization of the discount had no material effect on net income during 1994, 1993 and 1992, respectively. 129 136 A reconciliation of liabilities for unpaid claims and claim adjustment expenses for the last three years follows:
YEAR 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 PROVISIONS FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES: Current year................................................ 4,841 4,611 4,822 Prior years(1).............................................. 55 248 1,406 ------- ------- ------- Total Provision for Unpaid Claims and Claim Adjustment Expenses............................... 4,896 4,859 6,228 ------- ------- ------- LESS PAYMENTS: Current year................................................ 1,891 1,856 1,927 Prior years................................................. 2,832 2,806 2,879 ------- ------- ------- Total Payments...................................... 4,723 4,662 4,806 ------- ------- ------- Foreign Currency Translation.................................. 65 (37) (195) Cumulative Effect of Accounting Change(2)..................... (65) -- -- ------- ------- ------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES EXCLUDING REINSURANCE RECOVERABLES................. 12,118 11,945 11,785 Add Reinsurance Recoverables.................................. 5,317 5,339 5,633 ------- ------- ------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES.................................................... $17,435 $17,284 $17,418 ======= ======= =======
- --------------- Note: The liabilities for unpaid claims and claim adjustment expenses shown above are greater than those reported in the domestic insurance subsidiaries statutory filings by $1.8 billion for both 1994 and 1993 and $1.7 billion for 1992. These amounts are related to non-U.S. subsidiaries. (1) Does not include the effects of foreign exchange adjustments which are included in the table on the following page. (2) Reflects a change in the method of discounting to present value certain workers' compensation reserves, principally for permanently disabled claimants. See Notes to ITT Hartford Consolidated Financial Statements for further discussion of this accounting change. 130 137 The following table shows the historical development of the liabilities for unpaid claims and claim adjustment expenses follows. PROPERTY AND CASUALTY CLAIMS AND CLAIM ADJUSTMENT EXPENSES LIABILITY DEVELOPMENT (IN MILLIONS OF DOLLARS)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1984 1985 1986 1987 1988 1989 1990 ------- ------- ------- ------- ------- ------- ------- Liabilities for Unpaid Claims and Claim Adjustment Expenses(Note 1).................................... $ 4,287 $ 4,868 $ 5,903 $ 7,262 $ 8,168 $ 8,666 $ 9,366 Cumulative Paid Claims and Claim Expenses(Note 1): One year later...................................... 1,393 1,607 1,808 2,089 2,296 2,545 2,789 Two years later..................................... 2,283 2,632 2,916 3,323 3,618 4,013 4,428 Three years later................................... 2,953 3,356 3,683 4,187 4,577 5,132 5,511 Four years later.................................... 3,425 3,883 4,275 4,846 5,341 5,863 6,304 Five years later.................................... 3,808 4,308 4,743 5,392 5,872 6,435 -- Six years later..................................... 4,136 4,633 5,168 5,787 6,320 -- -- Seven years later................................... 4,346 4,980 5,481 6,155 -- -- -- Eight years later................................... 4,628 5,248 5,803 -- -- -- -- Nine years later.................................... 4,784 5,534 -- -- -- -- -- Ten years later..................................... 5,020 -- -- -- -- -- -- Liabilities Reestimated: One year later...................................... 4,469 5,324 6,293 7,437 8,342 8,879 9,636 Two years later..................................... 4,860 5,558 6,422 7,619 8,432 9,052 10,780 Three years later................................... 5,002 5,656 6,718 7,719 8,482 10,200 10,905 Four years later.................................... 5,074 6,100 6,885 7,827 9,645 10,342 11,151 Five years later.................................... 5,484 6,291 7,021 9,117 9,829 10,578 -- Six years later..................................... 5,653 6,456 8,504 9,287 10,068 -- Seven years later................................... 5,767 8,015 8,652 9,521 -- -- -- Eight years later................................... 7,177 8,157 8,878 -- -- -- -- Nine years later.................................... 7,280 8,363 -- -- -- -- -- Ten years later..................................... 7,500 -- -- -- -- -- -- Deficiency............................................ 3,213 3,495 2,975 2,259 1,900 1,912 1,785 1991 1992 1993 1994 ------- ------- -------- -------- Liabilities for Unpaid Claims and Claim Adjustment Expenses(Note 1).................................... $ 9,796 $11,103 $ 11,441 $ 11,623 Cumulative Paid Claims and Claim Expenses(Note 1): One year later...................................... 2,879 2,806 2,832 -- Two years later..................................... 4,465 4,415 -- -- Three years later................................... 5,605 -- -- -- Four years later.................................... -- -- -- -- Five years later.................................... -- -- -- -- Six years later..................................... -- -- -- -- Seven years later................................... -- -- -- -- Eight years later................................... -- -- -- -- Nine years later.................................... -- -- -- -- Ten years later..................................... -- -- -- -- Liabilities Reestimated: One year later...................................... 11,053 11,311 11,484 -- Two years later..................................... 11,202 11,354 -- -- Three years later................................... 11,315 -- -- -- Four years later.................................... -- -- -- -- Five years later.................................... -- -- -- -- Six years later..................................... -- -- -- -- Seven years later................................... -- -- -- -- Eight years later................................... -- -- -- -- Nine years later.................................... -- -- -- -- Ten years later..................................... -- -- -- -- Deficiency............................................ 1,519 251 43 --
- --------------- 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. 131 138 PREMIUM RATES Subject to regulatory requirements, Property & Casualty management determines the premium rates charged for its policies. Methods for arriving at rates vary by line of business, exposure assumed and size of risk. For some lines of business, Property & Casualty uses the rates and rating plans that are filed in various states by certain fire, casualty and surety rating organizations of which Property & Casualty is a member, while for other lines of business it uses loss cost data published by such organizations. Property & Casualty also uses its own independent rates or otherwise departs from rating organization rates, where appropriate. Regulatory requirements applicable to premium rates vary from state to state, but generally provide that rates shall not be inadequate, excessive or unfairly discriminatory. In many states, rates for many lines of business, including automobile and homeowners insurance, are subject to prior regulatory approval. Proposition 103 is a voter initiative adopted in California in 1988 which, among other things, mandated a rollback of premium charges for the year commencing on November 8, 1988. The California Supreme Court subsequently ruled that the rollback need not be made if the insurer required higher rates in order to earn a fair rate of return. In November 1994, the California Insurance Commissioner (the "Commissioner") issued ITT Hartford an order pursuant to Proposition 103 to pay premium refunds under 1989 insurance policies with interest accruing from May 1989. The Commissioner alleged that the rates charged by ITT Hartford during 1989 in California were in excess of those allowed by Proposition 103 as modified by the California Supreme Court and that ITT Hartford's refund obligation was $95 million plus interest. In December 1994, ITT Hartford responded to the Commissioner with the assertion that ITT Hartford did not have a rollback obligation. In May 1995, the Commissioner announced that the Insurance Department had determined that ITT Hartford did not have a rollback obligation. The Department and ITT Hartford have executed a stipulation to this effect which becomes final (unless appealed) on June 22, 1995. COMPETITION The property and casualty insurance industry is highly competitive. Property & Casualty competes with other stock companies, mutual companies and other underwriting organizations. Some competitors obtain their business at less cost through captive agents or salaried personnel rather than through independent agents and brokers. Intense competition among insurers combined with the continued effects of the recession has created difficult market conditions in the domestic property and casualty industry. This situation continues to be evidenced by a leveling or reduction in premium rates in certain lines of business. In order to compete effectively in this environment, Property & Casualty has implemented programs to control costs across all segments of its property and casualty business. In personal lines insurance, Property & Casualty has an exclusive marketing arrangement with A.A.R.P. through the year 2002, providing a competitive advantage in a growing segment of the population. Net written premiums resulting from this arrangement represented 15% of total net written premiums for the operations of Hartford Property and Casualty in each of 1994, 1993 and 1992. REINSURANCE In accordance with normal industry practice, Property & Casualty is involved in both the ceding of property and casualty insurance to, and the assumption of property and casualty insurance of, other companies. These reinsurance arrangements provide greater diversification of business and limit Property & Casualty's maximum net loss arising from large risks or from catastrophes. A major portion of Property & Casualty's reinsurance is effected under general reinsurance contracts known as treaties, and in some instances is negotiated on individual risks, the latter type of reinsurance being known as facultative reinsurance. The Hartford also has in-force excess of loss contracts with other companies that protect it against a specified part or all of certain losses over stipulated amounts arising from any one occurrence. The ceding of insurance does not discharge the original insurer from its primary liability to the policyholder. The original insurer remains liable in situations in which the reinsurance provided is insufficient to meet the obligations assumed under the reinsurance agreements. Virtually all of Property & Casualty's reinsurance is placed among reinsurers that are required to meet strict financial criteria established by a credit 132 139 committee of The Hartford, including the maintenance of ratings among the highest by major insurance rating agencies. LIFE INSURANCE OPERATIONS The operations of Life in the United States are comprised of the sale of individual and group life and health insurance and the sale of individual and group annuity contracts, both fixed and variable. In conjunction with its life insurance operations, Life sponsors a number of mutual funds and separate accounts which serve primarily as underlying investments for variable life insurance and annuity products. Life's operations include its wholly owned subsidiaries, Hartford Life Insurance Company ("HLIC") and Life and Accident Insurance Company ("HLA"), both of which are based in Simsbury, Connecticut, ITT Hartford Life and Annuity Insurance Company, which is based in Minneapolis, Minnesota, ITT Hartford International Life Reassurance Corporation ("HLre"), which is based in Westport, Connecticut, ITT Hartford Life Insurance Company of Canada, which is based in Ontario, Canada, and Alpine Life Insurance Company, which is based in Princeton, New Jersey. In 1993, Life initiated a transfer of a majority of its group medical and dental benefits business to Massachusetts Mutual Life Insurance Company ("Mass Mutual"). The transfer to Mass Mutual, which was completed in 1994, reflects the strategy of ITT Hartford to move away from traditional medical health insurance. This strategy is further reflected by the decision of the management of Life to discontinue selling individual and group health insurance in September, 1993, other than stop loss and supplementary medical insurance sold with group life insurance plans. Life's current participation in the health insurance market consists solely of the administration of insurance plans sold prior to that date. In June, 1994, Life made its first international investment outside North America by forming, through a wholly-owned subsidiary, a joint venture in Argentina. The joint venture, ITT Cenit Seguros S. A., which provides individual retirement accounts, became the sixth largest pension administrator in Argentina within the five-month period after its formation. PRODUCT LINES Life sells a variety of individual and group insurance products and financial services through a combination of a direct sales force, licensed agents and third party administrators. These operations are managed in the following product lines: Employee Benefits The Employee Benefits division sells group life insurance, short-term and long-term managed disability insurance, and stop loss and supplementary medical insurance to employers and to employee-sponsored plans, and also provides underwriting, administrative and claim processing services. These and other products are sold through licensed agents and third party administrators. HLA is the eighth largest provider of group life insurance and the fourth largest provider of group disability insurance in the United States based on in-force levels as of March 31, 1995. Specialty ITT Hartford sells individual and group corporate owned life insurance ("COLI") products directly and through a marketing company in which ITT Hartford owns a 60% interest. ITT Hartford offers both leveraged and non-leveraged COLI products. ITT Hartford earns fees for management and cost of insurance. Policyholders may receive dividends based on experience. ITT Hartford began offering a new COLI product in 1994 for which the investments and liabilities are held in a separate account. No policy loans are permitted under this product, and the policy owner bears the investment risks. Asset Management Services Asset Management Services ("AMS") offers retirement products and services to employer groups through a direct sales force, assisted by home office personnel. As part of its services, AMS manages assets 133 140 and acts as plan administrator for pension plans qualified under Sections 401, 403 and 457 of the Internal Revenue Code. The most significant product type offered by AMS is the guaranteed rate contract ("GRC"). GRCs offer fixed or indexed rates that are guaranteed for a specific period. The assets related to the remaining products are managed for various IRS qualified plans and other pension plan products. Credited rates for these products vary with interest rate conditions. The related policyholder liabilities are held at account value less amounts held for deferred expenses. AMS faces significant competition from a number of financial institutions, including other insurance companies, based on rates and credit quality. Individual Life and Annuity The Individual Life and Annuity Division ("ILAD") sells to individuals life insurance products that include universal life insurance, traditional and interest-sensitive whole life insurance, individual and group annuity contracts, term and modified guaranteed life insurance and variable life insurance. ILAD's products are primarily sold through brokers and licensed agents affiliated with Life, assisted by home office personnel and HLIC's own sales offices. ILAD's products face significant competition from most other insurers, based somewhat on price, name recognition and quality of distribution systems. LIFE INSURANCE REVENUES The following table summarizes for the periods indicated total revenues of ITT Hartford's life insurance operations. Revenues regarding each type of insurance set forth in the table include not only revenues arising from the sale of insurance but also net investment income and net realized investment gains related to such sales of insurance.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------------------ -------------------------------------------------------- 1995 1994 1994 1993(1) 1992(1) ---------------- ---------------- ---------------- ---------------- ---------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ($ IN MILLIONS) Employee Benefits -- Domestic.............. $ 289 26% 277 35% $1,130 31% 1,105 37% 1,080 45% Specialty -- Domestic... 386 35 152 19 919 26 424 14 97 4 Asset Management Services -- Domestic... 196 18 184 23 789 22 794 26 770 32 Individual Life and Annuity -- Domestic... 193 18 154 20 682 19 599 20 374 15 International Operations............ 29 3 20 3 89 2 88 3 95 4 ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total........... $1,093 100% $ 787 100% $3,609 100% $3,010 100% $2,416 100% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
- --------------- (1) Prior year amounts have been restated to conform with current year presentation. RESERVES In accordance with the insurance laws and regulations under which Life operates, life insurance subsidiaries of ITT Hartford are obligated to carry on their books, as liabilities, actuarially determined reserves to meet their obligations on their outstanding life insurance contracts, as well as reserves for their universal life and investment contracts. Reserves for life insurance contracts are based on mortality and morbidity tables in general use in the United States, modified to reflect ITT Hartford's experience. ITT Hartford management believes that these reserves, with additions from premiums to be received, and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet ITT Hartford's policy obligations at their maturities or in the event of an insured's death. Reserves for universal life insurance and investment products represent policy account balances before applicable surrender charges. In the ITT Hartford Consolidated Financial Statements, life insurance reserves are determined in accordance with generally accepted accounting principles, which vary from statutory requirements. 134 141 COMPETITION The life insurance industry in the United States is highly competitive and includes approximately 2,000 insurers, primarily stock life and mutual life companies. Among the stock life companies, HLIC and HLA rank 14th and 85th, respectively, as of December 31, 1993 based on total assets, according to AM Best's Review, a trade publication. For the year ended December 31, 1994, total assets for ITT Hartford's domestic life operations grew 27%. HLIC and HLA have been assigned AM Best's highest rating, A++, as of December 31, 1994. REINSURANCE Life, like many other companies engaged in writing life insurance, reinsures with other companies portions of the life insurance risks it underwrites. Currently, the maximum amount of life insurance retained on any one life by any of the life operations is approximately one million dollars, excluding accidental death benefits. In June 1993, ITT Hartford acquired, in an assumption reinsurance transaction, the annuity, life and accident and sickness insurance contracts and related liabilities of Fidelity Bankers Life Insurance Company in Receivership ("Fidelity Bankers"). ITT Hartford received approximately $3.2 billion of cash and investment grade assets to support the liabilities assumed. In November 1992, ITT Hartford acquired the individual COLI contracts of Mutual Benefit Life Insurance Company in Rehabilitation ("Mutual Benefit") pursuant to an assumption reinsurance agreement. In August 1993, ITT Hartford acquired the group COLI contracts of Mutual Benefit in an assumption reinsurance transaction. Assets assumed consisted primarily of policy loans and investment grade securities. All assets supporting Mutual Benefit's reinsurance liability are held in a security trust, with ITT Hartford as the sole beneficiary. In May 1994, ITT Hartford assumed and reinsured the life insurance policies and individual annuity contracts of Pacific Standard Life Insurance Company in Receivership. INVESTMENT OPERATIONS An important element of the financial results of ITT Hartford is the return on invested assets. The following table summarizes ITT Hartford's investment results for the period indicated(1):
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------- ($ IN MILLIONS) 1995 1994 1994 1993 1992 ------- ------- ------- ------- ------- Average Cash and Investments(1).......... $35,175 $30,890 $32,477 $29,221 $26,144 Net Investment Income Excluding Realized Gains.................................. 561 471 2,259 2,033 1,985 Net Realized Gains(2).................... 20 51 90 155 443 % Earned on Investments and Cash......... 6.37% 6.10% 6.96% 6.96% 7.59%
- --------------- (1) The average amount for investments is the average of the cost at the beginning and end of the relevant period. (2) Net realized gains includes net gains on sales of bonds, stock, real estate, other investments and policyholder gains before applicable income taxes. ITT Hartford's investment activities are divided between property and casualty insurance and life insurance. The investment portfolios of both the Property and Casualty and the Life operations are managed based on the underlying characteristics and nature of the respective policy liabilities. Investment management strategies differ significantly as do the nature of these two businesses. The investment objective of the Property and Casualty companies is the maximization of after-tax yields consistent with maintenance of appropriate liquidity and preservation of capital. Property and Casualty investment strategies are developed based on a variety of factors including business needs, duration, regulatory requirements and tax considerations. Investments are comprised primarily of taxable and non-taxable 135 142 intermediate fixed maturity bonds and notes and corporate bonds. The characteristics of these investments have generally not been altered through the use of derivative financial instruments. The investment objective of Life operations is to maximize after-tax yields consistent with acceptable risk and appropriate liquidity. Matching of the duration of life investments with respective policyholder obligations is an explicit objective of the life management strategy. Derivatives utilization plays an important role in the management of interest rate risk, in creating opportunities to develop asset packages which efficiently fund product obligations, in hedging against indexation risks which affect the value of certain liabilities, and in adjusting broad investment risk characteristics when dictated by significant changes in market risks. Approved derivatives usage must support at least one of the following objectives: to manage the risk to the operation arising from price, interest rate and foreign current volatility, to manage liquidity, and/or control transaction costs. All investment activity is subject to regular review and approval by ITT Hartford's Finance Committee. Credit limits, diversification standards and review procedures for all credit risk, whether borrower, issuer, or counterparty, have been established. The Life operations analyze the aggregate interest rate risk through the use of a proprietary, multi-scenario cash flow projection model which encompasses all liabilities and their associated investments, including derivatives. See "ITT HARTFORD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for further discussion of these matters. REGULATION ITT Hartford's insurance businesses are subject to comprehensive and detailed regulation and supervision throughout the United States and in the foreign jurisdictions in which they operate. While the insurance laws of the jurisdictions in which ITT Hartford and its subsidiaries operate vary, such laws generally establish supervisory agencies with broad administrative powers with respect to, among other things, licensing to transact business, overseeing trade practices, licensing agents, regulating premium rates, approving policy forms, underwriting and claims practices, establishing reserve requirements and solvency standards, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values and regulating the types, amounts and valuations of investments. See "-- PROPERTY AND CASUALTY INSURANCE OPERATIONS -- PREMIUM RATES". In addition, each insurance company is required to file detailed annual reports and statutory financial statements with supervisory agencies in each of the jurisdictions in which it does business, and its operations and accounts are subject to examination by such agencies at regular intervals. As a holding company with no significant business operations of its own, ITT Hartford will rely on dividends from its insurance company subsidiaries, particularly The Hartford, as the principal source of cash to meet its obligations and to pay dividends to its shareholders. The payment of dividends by The Hartford is limited under the insurance holding company laws of Connecticut which require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer's policyholder surplus as of December 31 of the preceding year or (ii) net income for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting policies. The insurance holding company laws of the other jurisdictions in which ITT Hartford's insurance subsidiaries are incorporated generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends. ITT Hartford is also subject to laws governing insurance holding companies in the states in which its insurance subsidiaries are incorporated or deemed to be commercially domiciled, including Connecticut, Florida, Hawaii, Indiana, Illinois, New Jersey, Texas, Wisconsin and California. The insurance holding company statutes generally provide that each insurance company in the system is required to register with the insurance department of its state of incorporation (or commercial domicile) and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and reasonable. Notice to the insurance departments is 136 143 required prior to the consummation of transactions affecting the control of an insurer and of certain transactions between an insurer and any person in its holding company system, and certain of such transactions may not be consummated without the applicable department's prior approval. Many of the foreign jurisdictions in which various insurance subsidiaries are incorporated impose similar requirements. The insurance holding company laws of each of the jurisdictions in which ITT Hartford's insurance subsidiaries are incorporated or commercially domiciled (as well as state corporation laws) will also govern any acquisition of control of such insurance subsidiaries or of ITT Hartford. In general, such laws provide that no person or entity may directly or indirectly acquire control of an insurance company unless such person or entity has received the prior approval of the insurance regulatory authorities. Such acquisition of control would be presumed in the case of any person or entity who purchase 10% or more of ITT Hartford's outstanding Common Stock (5% or more, in the case of the Florida insurance holding company laws) unless the applicable insurance regulatory authorities determine otherwise. Although the Federal government does not directly regulate the insurance business, Federal initiatives often have an impact on the insurance industry in a variety of ways. Legislation has been introduced in the Congress during the past several sessions which, if enacted, would result in substantially greater Federal regulation of the property and casualty and life insurance industries. Current and proposed Federal measures which may significantly affect the life insurance business include removal of barriers preventing banks from engaging in the insurance and annuity business, medical testing for insurability, tax law changes affecting the taxation of life insurance companies, the tax treatment of life insurance products and its impact on the relative desirability of various personal investment vehicles and proposed legislation to prohibit the use of gender in determining insurance and pension rates and benefits. Such measures which may significantly impact the property and casualty industry include possible modifications to the Superfund program and the tax laws governing property and casualty insurance companies, proposed limits to product liability lawsuits and other tort reform proposals. In all states, insurers licensed to transact certain classes of property and casualty insurance are required to become members of an insolvency fund. In most states, in the event of the insolvency of an insurer writing any such class of insurance in the state, all members of the fund are assessed to pay certain claims of the insolvent insurer. A particular state's fund assesses its members based on their respective written premiums in the state for the classes of insurance in which the insolvent insurer engaged. Assessments are generally limited for any year to one or two percent of premiums written per year depending on the state. Such assessments on The Hartford approximated $13 million in 1994, $15 million in 1993 and $16 million in 1992. State insurance regulation also requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms to provide various basic or minimum insurance coverage of certain risks for which insurance is not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in so-called FAIR Plans or Windstorm Plans providing basic property coverages, and some states also mandate such participation in facilities for providing medical malpractice insurance. Participation is based upon the amount of a company's written premiums in a particular state for the classes of insurance involved. In recent years the insurance industry has been subject to increasing scrutiny. The National Association of Insurance Commissioners (the "NAIC") and state insurance regulatory authorities have taken a number of initiatives to expand existing laws and regulations applicable to insurance companies for the protection of policyholders, particularly with respect to assessments of solvency and of investment and insurance risks. For example, the NAIC has approved and recommended for adoption by the states several initiatives designed to identify weakly capitalized insurance companies and to decrease the risk of insolvency. The rules, known as Risk Based Capital ("RBC"), apply to both property and casualty and life companies. For property and casualty companies, the RBC requirements are effective starting with 1994 statutory financial statements filed in 1995, and for life insurance companies RBC requirements are effective starting with 1993 statutory financial statements filed in 1994. ITT Hartford's property and casualty and life operations exceeded the applicable RBC requirements as of December 31, 1994. During the past several years, various regulatory and legislative bodies have adopted or proposed new laws or regulations to deal with the cyclical nature of the insurance industry, catastrophic events and insurance 137 144 capacity and pricing. These regulations include (i) the creation of "market assistance plans" under which insurers are induced to provide certain coverages, (ii) restrictions on the ability of insurers to cancel certain policies in mid-term, (iii) advance notice requirements or limitations imposed for certain policy non-renewals and (iv) limitations upon or decreases in rates permitted to be charged. It is not possible to predict the future impact of changing state and Federal regulation of ITT Hartford's operations, and there can be no assurance that existing insurance-related laws and regulations will not become more restrictive in the future or that laws and regulations enacted in the future will not be more restrictive than existing laws. PROPERTIES The Hartford owns its home office complex, comprising several buildings in greater Hartford, Connecticut which total approximately 1.6 million square feet. The Hartford's international companies own approximately 185,000 square feet in the United Kingdom and 177,000 square feet in the Netherlands. In addition, The Hartford and its subsidiaries lease approximately 4.8 million square feet throughout the United States and 145,000 square feet in other countries. EMPLOYEES The Hartford had approximately 20,000 employees as of March 31, 1995. Of this number, approximately 19,000 are employees in the United States, none of which are represented by labor unions. LEGAL PROCEEDINGS The Hartford, together with other companies, associations and organizations involved in the business of property and casualty insurance and reinsurance, was named as a defendant in a group of lawsuits filed by Attorneys General of 20 states and by various private parties in the United States District Court for the Northern District of California. All of the suits, which were filed in 1988, 1990 and 1991, were based upon allegations that the defendants violated federal and/or state antitrust laws by reason of their activities in connection with the development of new standard commercial general liability policy forms by the Insurance Services Office, an industry organization. In June 1991, the Ninth Circuit U.S. Court of Appeals reversed the United States District Court for the Northern District of California, which had granted summary judgment in September 1989 in favor of the defendants. On June 28, 1993, the United States Supreme Court reversed the Ninth Circuit U.S. Court of Appeals, holding that the domestic insurers, including The Hartford, had not lost their McCarran-Ferguson Act exemption from the antitrust laws generally, as a result of activities alleged in the complaints, but remanded the case for further proceedings to determine if certain of those activities came within the "boycott" exception to the McCarran-Ferguson Act exemption. On October 3, 1994, The Hartford announced that it, along with the other 31 defendants, had settled this lawsuit. The settlement provides for a payment of $36 million, the majority of which funds will be used to create a public entity risk institute and national public risk database. It also calls for changes in control of Insurance Services, Inc., a nationwide organization which develops standardized policy language and compiles information insurers use to determine their own insurance rates. Following notice of the settlement to all class members in the private actions, the Court granted final approval of the settlement at a final fairness hearing on March 29, 1995. The time for appeal has now passed. ITT Hartford is involved in claim litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As discussed above and in the accompanying ITT Hartford Consolidated Financial Statements, ITT Hartford continues to receive claims related to environmental and asbestos disputes that involve significant uncertainty regarding policy coverage issues. See "-- PROPERTY AND CASUALTY INSURANCE OPERATIONS -- UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES". 138 145 ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION After the Distribution, it is intended that ITT Industries will operate the Automotive, Defense & Electronics and Fluid Technology businesses of ITT substantially in the manner in which they currently are operated. D. Travis Engen, who is currently Executive Vice President of ITT, will become Chairman, President and Chief Executive of ITT Industries, and certain persons who are currently directors of ITT will remain as directors of ITT Industries. See "-- ITT INDUSTRIES BOARD OF DIRECTORS". In addition, most of the other executive officers of ITT Industries will be drawn from the current management of ITT or subsidiaries of ITT. See "-- ITT INDUSTRIES EXECUTIVE OFFICERS". ITT INDUSTRIES BOARD OF DIRECTORS Immediately after the Distribution, ITT Industries expects to have a board of six directors. Effective as of the Distribution Date, following the resignations from the Board of Directors of ITT of Bette B. Anderson, who will serve on the Boards of Directors of New ITT and ITT Hartford, Nolan D. Archibald, who will serve on the Board of Directors of New ITT, Henry Gluck, who will serve on the Board of Directors of New ITT, Paul G. Kirk, Jr., who will serve on the Boards of Directors of New ITT and ITT Hartford, Benjamin F. Payton, who will serve on the Board of Directors of New ITT, and Margita E. White, who will serve on the Board of Directors of New ITT, and the election by the remaining directors of D. Travis Engen, the Board of Directors of ITT Industries is expected to consist of the persons listed below. Mr. Araskog, who will become Chairman and Chief Executive of New ITT, will resign as Chairman, President and Chief Executive of ITT effective as of the Distribution Date, although he will continue as a director of ITT Industries. As noted above, Mr. Engen will become Chairman, President and Chief Executive of ITT Industries effective as of the Distribution Date. It is thus the intent of ITT Industries that a majority of the directors comprising ITT Industries' Board of Directors will not be employees of ITT Industries. The following table sets forth the names, in alphabetical order, and information as to the persons who are expected to serve as directors of ITT Industries following the Distribution.
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Rand V. Araskog, 63..................... Mr. Araskog joined ITT in 1966 and has been chief Chairman, President and executive of ITT since 1979 and chairman since Chief Executive of ITT 1980. In March 1991, he assumed the title of president. Mr. Araskog also will be a director of New ITT and of ITT Hartford and will continue as well as a director of Alcatel Alsthom of France. He is also a director of Dow Jones & Company, Inc., Dayton-Hudson Corporation, Rayonier Inc., ITT Educational Services, Inc. and Shell Oil Company. He is a member of The Business Council, the Council on Foreign Relations and the Trilateral Commission. He is a trustee of the New York Zoological Society and Salk Institute. Mr. Araskog is a graduate of the U.S. Military Academy at West Point and attended Harvard Graduate School of Arts and Sciences.
139 146
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Robert A. Burnett, 68................... Mr. Burnett served as chairman of Meredith Chairman and Chief Executive Corporation from 1988 until his retirement in 1992. Officer (Retired) of He served as president and chief executive officer Meredith Corporation from 1977 and relinquished the latter office in (diversified media company) 1989. Mr. Burnett is currently a director of ITT and has been a director of ITT since 1985, and he will be a director of New ITT and of ITT Hartford. Mr. Burnett is a director of Dayton-Hudson Corporation, Meredith Corporation, Whirlpool Corporation, and Midwest Resources Inc. Mr. Burnett is a member of the Board of Trustees of Grinnell College, Grinnell, Iowa. He also is a director of the Greater Des Moines Committee and the Des Moines Art Center. Mr. Burnett has a BA degree in economics from the University of Missouri. Michel David-Weill, 63.................. Mr. David-Weill has been Senior Partner of Lazard Senior Partner of Lazard Freres & Co. Freres & Co. since 1977. He became a partner in (investment bankers) Lazard Freres & Co., New York, in 1961, where he served until 1965. In 1965 he became a partner of Lazard Freres & Cie., Paris, and a director of Lazard Brothers & Co. Limited, London. He is currently a director of ITT and has been a director of ITT since 1981. He will also be a director of New ITT. Mr. David-Weill is a director of a number of corporations, including Groupe Danone in France, Fiat S.p.A. in Italy, Pearson plc in England and The Dannon Company, Inc. in the United States, as well as other companies of which Lazard Freres & Cie., Paris, or one of its affiliates, is the principal shareholder. He graduated from the Institut des Sciences Politiques, Paris, France. D. Travis Engen, 51..................... Mr. Engen has been Executive Vice President of ITT Executive Vice President of ITT since January 1991, and he served as Senior Vice President of ITT and Chief Executive Officer of ITT Defense, Inc. from 1987 until January 1991. Mr. Engen joined ITT in April 1985. He is a director of Lyondell Petrochemical Company and a member of the Manufacturers Alliance Board of Trustees. Mr. Engen has a B.S. degree in Aeronautics and Astronautics from the Massachusetts Institute of Technology. S. Parker Gilbert, 61................... Mr. Gilbert retired in 1990 from Morgan Stanley Chairman, Morgan Stanley Advisory Board Group Inc., where he served as chairman from 1984 (international consultants) until he retired. He joined Morgan Stanley in 1960, was elected a partner in 1969, a managing director in 1970, and president in 1983. He is currently a director of ITT and has been a director of ITT since 1991. Mr. Gilbert is a director of Morgan Stanley Group Inc., Burlington Resources Inc. and Taubman Centers, Inc. He is president, Board of Trustees, the Pierpont Morgan Library; member, Board of Trustees, the Metropolitan Museum of Art, the Alfred P. Sloan Foundation and the John Simon Guggenheim Memorial Foundation; and director, Josiah H. Macy Foundation. Mr. Gilbert is a graduate of Yale University.
140 147
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Edward C. Meyer, 66..................... General Meyer retired in 1983 as chief of staff of Chairman of GRC International the United States Army. He is currently a director (professional and technical of ITT and has been a director of ITT since 1989. services provider) He will also be a director of New ITT. General Meyer is a member of the supervisory board of Compagnie Financiere Alcatel. He is a director of FMC Corporation and its joint venture company in Turkey, Savunma Sanayii A.S., the United Defense Group, the Brown Group, and GRC International. He is a managing partner of Cilluffo Associates Limited Partnership, which owns approximately 20% of GRC International. General Meyer is a trustee of The Mitre Corporation and the George C. Marshall Foundation. He is president of the Army Emergency Relief Association, the Board of Overseers of the Hoover Institution and the Board of Advisors of the Center for Strategic and International Studies, and he is a board member of the Smith Richardson Foundation. General Meyer received a BS degree in engineering from the U.S. Military Academy at West Point and an MS degree in international affairs from George Washington University.
Mr. Harold S. Geneen will be designated Chairman Emeritus of ITT Industries as well as New ITT and ITT Hartford. Mr. Geneen was named President and Chief Executive of ITT in 1959 and Chairman in 1964. He relinquished the post of President in 1973, the post of Chief Executive in 1978 and the chairmanship on January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen continued to serve on the Board of Directors of ITT until 1983. DIRECTORS' COMPENSATION ITT Industries will continue the policy of ITT that members of the ITT Industries Board of Directors who are employees of ITT Industries or its subsidiaries will not be compensated for service on the ITT Industries Board or any Committee of the ITT Industries Board. Compensation for non-employee directors will consist of an annual retainer fee of $30,000 payable solely in shares of ITT Industries Common Stock, a $1,000 fee for each meeting of the ITT Industries Board attended and a $750 fee for each Committee meeting attended. Directors will continue to be reimbursed for travel expenses incurred on behalf of ITT Industries. DIRECTORS' RETIREMENT POLICY The ITT Industries Board of Directors will continue the retirement policy adopted by the ITT Board of Directors which provides that (i) no person may be nominated for election or reelection as a non-employee director after reaching age 72 and (ii) no employee of ITT Industries or of any of its subsidiaries (other than an employee who has served as chief executive of ITT Industries) may be nominated for election or reelection as a director after reaching age 65, unless there has been a specific waiver by the ITT Industries Board of Directors of these age requirements. DIRECTORS' BENEFITS The directors of ITT Industries who are currently non-employee directors of ITT have been participants in the 1995 ITT Deferred Compensation Plan, the Retirement Benefit Plan for Non-Management Directors of ITT Corporation (the "ITT Directors Retirement Plan"), a group life insurance program and the ITT Group Accident Program for Officers and Directors. At or prior to the Distribution Date, the ITT Industries Board of Directors will continue such plans and programs as the "1995 ITT Industries Deferred Compensation Plan", the "ITT Industries Directors Retirement Plan", the "ITT Industries Directors Group Life Plan" and the "ITT Industries Group Accident Program for Officers and Directors". Under the 1995 ITT Industries 141 148 Deferred Compensation Plan, non-employee directors will be permitted to elect to defer receipt of all or a portion of their 1995 ITT Industries and ITT Industries' subsidiaries fees. ITT Industries will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the 1995 ITT Industries Deferred Compensation Plan and selected by the director. Under the ITT Industries Directors Retirement Plan, non-employee directors who retire from the Board of Directors at or after age 65 after completing five years of service on the ITT Industries Board of Directors will be entitled to an annual pension based on the ITT Industries Board of Directors annual retainer fee payable at retirement. Pensions will range from 50% of such fee after five years of service to 100% after 10 years, with an additional 5% for each year of service in excess of 10 to a maximum of 200% of the annual retainer fee after 30 or more years of service. With respect to any non-management director of ITT Industries who, immediately following the Distribution, is not also a director of New ITT, the ITT Industries Directors Retirement Plan will provide credit for any accrued benefit with respect to ITT board service prior to the Distribution Date, but only to the extent such prior service benefit accrual is not duplicated under a plan maintained by New ITT or ITT Hartford. A director will be permitted to indicate a preference, subject to certain conditions, to receive any accrued benefit under the ITT Industries Directors Retirement Plan in the form of a single (discounted) lump sum payment immediately payable upon such director's retirement. The ITT Industries Directors Group Life Plan will provide $100,000 of non-contributory group life insurance to participating non-employee directors during their service on the ITT Industries Board of Directors. The non-employee directors of ITT Industries will be covered under the ITT Industries Group Accident Program for Officers and Directors, which is a non-contributory group accidental death and dismemberment program that provides each director $750,000 of coverage during his or her service on the ITT Industries Board. Additional benefits are permitted to be purchased. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The Articles of Incorporation of ITT Industries waive the personal liability of a director for damages for breach of fiduciary duty except for (i) a breach of duty if such breach constitutes wilful misconduct or recklessness or (ii) the payment of distributions in violation of Section 23-1-28-3 of the Indiana Business Corporation Law, which concerns the unlawful payment of distributions to shareholders. While the Articles of Incorporation and the By-laws of ITT Industries provide directors with protection from awards for monetary damages for breaches of their duty of care, they do not eliminate such duty. Accordingly, the Articles of Incorporation and By-laws of ITT Industries will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. The Articles of Incorporation and the By-laws of ITT Industries provide for indemnification of the directors and officers of ITT Industries to the fullest extent permitted by applicable state law, as then in effect. The indemnification rights conferred by the Articles of Incorporation and the By-laws of ITT Industries are not exclusive of any other right to which a person seeking indemnification may otherwise be entitled. ITT Industries also has provided liability insurance for the directors and officers for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers and has entered into, or expects to enter into, an indemnification agreement with each of its directors. Under its form of indemnification agreement, ITT Industries agrees to indemnify its directors against all expenses, liabilities or losses incurred by the directors in their capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as provided in the Articles of Incorporation and the By-laws of ITT Industries as in effect on the date of such agreement; and (iii) in the event ITT Industries does not maintain the aforementioned insurance or comparable coverage, to the full extent provided in the applicable policies as in effect on the date of such agreement (ITT Industries obligations described in (ii) and (iii) being subject to certain exceptions). Contractual rights under such indemnification agreements are believed to provide the directors more protection than the Articles of Incorporation and the By-laws which are subject to change. 142 149 COMMITTEES OF THE ITT INDUSTRIES BOARD OF DIRECTORS ITT currently has seven standing committees: Audit, Capital, Compensation and Personnel, Executive and Policy, Legal Affairs, Nominating and Public Affairs. It is expected that ITT Industries will combine the Legal Affairs and Public Affairs Committees into the Corporate Responsibility Committee and eliminate the Executive and Policy Committee after the Distribution. AUDIT COMMITTEE The Audit Committee recommends the selection of independent auditors for ITT (and after the Distribution, ITT Industries), confirms the scope of audits to be performed by such auditors, reviews audit results and internal accounting and control procedures and policies and reviews the fees paid to the independent auditors. The Audit Committee also reviews and recommends approval of the audited financial statements of ITT (and after the Distribution, ITT Industries) and the annual reports to shareholders. It also reviews the expense accounts of senior executives. CAPITAL COMMITTEE The Capital Committee is responsible for reviewing capital expenditures and appropriations and maximizing the effective use of the assets of ITT (and after the Distribution, ITT Industries) and its subsidiaries. COMPENSATION AND PERSONNEL COMMITTEE The Compensation and Personnel Committee oversees the compensation and benefits of employees, evaluates management performance and establishes executive compensation. In the performance of its functions, the Compensation and Personnel Committee has access to independent compensation counsel. ITT Industries will maintain the current ITT policy as of the Distribution Date of comprising the Compensation and Personnel Committee entirely of non-employee directors. CORPORATE RESPONSIBILITY COMMITTEE The Corporate Responsibility Committee will review and define social responsibilities and will review and consider major claims and litigation and legal, regulatory, intellectual property and related governmental policy matters affecting ITT Industries and its subsidiaries. The Corporate Responsibility Committee will review and approve management policies and programs relating to compliance with legal and regulatory requirements, business ethics and environmental matters. NOMINATING COMMITTEE The Nominating Committee makes recommendations concerning the organization, size and composition of the Board of Directors and its Committees, proposes nominees for election to the Board of Directors and its Committees and considers the qualifications, compensation, and retirement of directors. PUBLIC AFFAIRS COMMITTEE The Public Affairs Committee reviews and defines social responsibilities of ITT (and, after the Distribution, ITT Industries), including issues of significance to ITT (and, after the Distribution, ITT Industries) and its shareholders and employees. ITT INDUSTRIES EXECUTIVE OFFICERS Listed below is certain information as to the executive officers who have been selected to serve after the Distribution. 143 150
NAME, POSITION WITH ITT INDUSTRIES AND AGE BIOGRAPHICAL DATA - ---------------------------------------- --------------------------------------------------- D. Travis Engen, 51..................... See information under "ITT INDUSTRIES MANAGEMENT Chairman, President and Chief Executive AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD OF DIRECTORS". Louis J. Giuliano, 48................... Mr. Giuliano has been Senior Vice President of ITT Senior Vice President and President of and Chief Executive Officer of ITT Defense & ITT Defense & Electronics, Inc. Electronics, Inc. from June 1991 to the present. Prior to that time, Mr. Giuliano served as Vice President of ITT and Vice President/Director -- Defense Operations of ITT Defense, Inc. from 1988 until June 1991. Richard J.M. Hamilton, 45............... Mr. Hamilton has been Director of Corporate Senior Vice President and Controller Analysis from October 1993 to the present and also Vice President of ITT from February 1992 to the present. He served as Assistant Controller and General Auditor of ITT between 1991 and October 1993. After joining ITT in September 1971, Mr. Hamilton held various financial positions in ITT companies located in Europe and the United States. Martin Kamber, 47....................... Mr. Kamber has been Vice President, Corporate Senior Vice President, Development of ITT Automotive from 1993 to the Corporate Development present. He served as Executive Assistant to the President, COO and Executive Vice President at ITT Headquarters from 1984 to January 1993. Prior to joining ITT in July 1977, Mr. Kamber held various positions in companies located in Europe and the United States. Timothy D. Leuliette, 45................ Mr. Leuliette has been Senior Vice President of ITT Senior Vice President and President of and President and Chief Executive Officer of ITT ITT Automotive, Inc. Automotive, Inc. since September 1991. Prior to that time, Mr. Leuliette served as President and Chief Executive of Siemens Automotive and Vice President of Siemens A.G. from 1988 to September 1991. Vincent A. Maffeo, 44................... Mr. Maffeo joined ITT in July 1977. He has been Senior Vice President and Vice President and General Counsel of ITT General Counsel Automotive, Inc. since January 1992. Prior to that time, Mr. Maffeo served as Vice President and General Counsel of ITT Defense, Inc. from January 1987 to December 1991. Bertil T. Nilsson, 63................... Mr. Nilsson has been Senior Vice President of ITT Senior Vice President and President, and President and Chief Executive Officer of ITT ITT Fluid Technology Corporation Fluid Technology Corporation from September 1992 to the present. He served as Vice President of ITT between 1987 and September 1992, and as President and Chief Operating Officer of ITT Fluid Technology Corporation from October 1991 to August 1992.
144 151
NAME, POSITION WITH ITT INDUSTRIES AND AGE BIOGRAPHICAL DATA - ---------------------------------------- --------------------------------------------------- James P. Smith, Jr., 52................. Mr. Smith has been Executive Vice President, Senior Vice President, Human Resources Director of Administration and President of ITT Sheraton from 1993 to the present. From 1990 to 1993 he was Senior Vice President and Director of Administration of ITT Sheraton. Mr. Smith served as Director of Executive Continuity and Headquarters Personnel of ITT from 1987 to 1990. Prior to joining ITT in June 1973, Mr. Smith held various positions in companies located in the United States.
EMPLOYMENT AGREEMENT; OTHER RELATIONSHIPS Prior to the Distribution, ITT Industries is expected to enter into an employment agreement with Mr. Engen (the "Engen Employment Agreement") which will provide for: (i) a salary, participation in ITT Industries' benefits plans and possible awards under ITT Industries' executive incentive bonus program; (ii) Mr. Engen's employment as chairman and chief executive of ITT Industries from the Distribution Date through December 31, 1999; and (iii) certain payments and benefits in the event of termination, without cause, by ITT Industries such that Mr. Engen will (A)(I) receive (x) salary, on a monthly basis, equivalent in the aggregate to the amounts of salary remaining unpaid until the expiration of the Engen Employment Agreement or (y) at ITT Industries discretion, the balance remaining of such aggregate amount in a lump sum payment if Mr. Engen accepts other full-time employment and (II) as long as salary under clause (A) above continues to be paid, be eligible (x) for participation in certain ITT Industries benefit plans and (y) to exercise outstanding stock options or (B) receive in lieu of such payments and benefits described in clause (A) above, if Mr. Engen is entitled to receive a termination allowance under any ITT Industries severance plan or termination allowance plan which exceeds the salary described in clause (A)(I) above, such termination allowance amount. Lazard Freres & Co., of which Mr. David-Weill is Senior Partner, performed various investment banking services for ITT and its subsidiaries in 1994. It is anticipated that such firm will perform similar services for ITT and its subsidiaries during 1995 and ITT Industries and its subsidiaries thereafter. In 1988, the ITT Master Retirement Trust, Industries Accident and Indemnity Company and Industries Life Insurance Company (the "ITT Investment Vehicles") committed to invest an aggregate of $35 million in, and became limited partners of, Corporate Partners, L.P., a fund organized by Lazard Freres & Co. With certain exceptions, such commitment expired in 1994. Under the terms of the limited partnership agreement, the ITT Investment Vehicles have agreed to pay Corporate Advisors, L.P., the general partner of Corporate Partners, L.P., certain amounts in connection with their investment. During 1994, the ITT Investment Vehicles paid Corporate Advisors, L.P. fees aggregating $204,377. See also "THE DISTRIBUTION -- FINANCIAL ADVISORS". STOCK OWNERSHIP OF ITT INDUSTRIES DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information concerning shares of ITT Industries Common Stock projected to be beneficially owned after the Distribution Date by (a) each of ITT Industries' directors and the executive officers named in the summary compensation table and (b) all ITT Industries directors and executive officers as a group. The projections are based on the number of shares of ITT Common Stock and ITT ESOP Preferred Stock owned by such persons at March 31 1995, and the expected treatment of stock awards held by such directors and executive officers at that date prior to any adjustments in values of employee stock options as a result of the Distribution. Based on such projections, none of the ITT Industries directors or executive officers individually, nor all directors and executive officers as a group, will beneficially own as much as 1% of the outstanding shares of ITT Industries Common Stock after the Distribution. 145 152
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2) - ------------------------------------------------------- ----------------------- ------------------- D. Travis Engen........................................ 229,011 Louis J. Giuliano...................................... 71,314 Timothy D. Leuliette................................... 67,923 Bertil T. Nilsson...................................... 66,034 James P. Smith, Jr. ................................... 10,240 Rand V. Araskog........................................ 653,139 Robert A. Burnett...................................... 1,166 Michel David-Weill..................................... 1,000 S. Parker Gilbert...................................... 5,000 Edward C. Meyer........................................ 2,500 All ITT Industries directors and executive officers as a group(13).................... 1,124,722
- --------------- (1) All shares reflected are owned directly except as hereinafter otherwise indicated. Pursuant to regulations of the SEC, shares (i) receivable by directors and executive officers upon exercise of employee stock options exercisable within 60 days after March 31, 1995 (ii) allocated to the accounts of certain directors and executive officers under the ITT Investment and Savings Plan at March 31, 1995 and (iii) acquired by directors and executive officers under the ITT Dividend Reinvestment and Common Stock Purchase Plan through March 31, 1995 are deemed to be beneficially owned by such directors and executive officers at said date. Of the number of shares shown above, (i) the following represent shares that may be acquired upon exercise of employee stock options for the accounts of: Mr. Engen, 213,405 common shares; Mr. Guiliano, 69,181 common shares; Mr. Leuliette, 67,115 common shares; Mr. Nilsson, 63,356 common shares; Mr. Smith, 5,902 common shares; Mr. Araskog, 229,312 common shares; and all directors and executive officers of ITT Industries as a group, 658,217 common shares; (ii) the following amounts were allocated under the ITT Investment and Savings Plan to the accounts of: Mr. Engen, 465 common shares and 503 ESOP preferred shares; Mr. Guiliano, 133 common shares and 516 ESOP preferred shares; Mr. Leuliette, 466 common shares and 306 ESOP preferred shares; Mr. Nilsson, 278 ESOP preferred shares; Mr. Smith, 805 common shares and 526 ESOP preferred shares; Mr. Araskog, 17,463 common shares and 497 ESOP preferred shares; and all directors and executive officers of ITT Industries as a group, 22,662 common shares and 4,029 ESOP preferred shares; and (iii) the following amounts were acquired under the ITT Dividend Reinvestment and Common Stock Purchase Plan for the accounts of: Mr. Burnett, 166 common shares; and all directors and executive officers of ITT Industries as a group, 557 common shares. (2) Share ownership does not exceed one percent of the class so owned. 146 153 COMPENSATION OF ITT INDUSTRIES EXECUTIVE OFFICERS The following table discloses compensation received by ITT Industries' Chief Executive Officer and the four other most highly paid executive officers for services rendered to ITT for the fiscal years ended December 31. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ---------------------------------- ----------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION(1)($) OPTIONS(2)(#) COMPENSATION(3)($) - ---------------------------------------- ---- --------- -------- ------------------ ------------- ------------------ D. Travis Engen 1994 608,333 638,250 15,991 60,000 23,073 Executive Vice 1993 541,667 731,000 13,043 54,656 19,930 President -- ITT Corporation 1992 504,167 -- 9,645 -- 17,646 Louis J. Giuliano 1994 333,814 280,000 27,577 37,000 13,465 Sr. Vice President -- ITT & 1993 315,000 205,000 13,201 40,445 11,996 President and Chief 1992 289,667 149,700 11,463 -- 10,172 Executive -- ITT Defense & Electronics Timothy D. Leuliette 1994 425,417 360,000 10,230 37,000 16,668 Sr. Vice President -- ITT & 1993 405,000 197,200 114,912 40,445 15,146 President and Chief 1992 377,500 248,600 109,198 -- 6,694 Executive -- ITT Automotive, Inc. Bertil T. Nilsson 1994 327,100 190,000 9,331 33,000 12,806 Sr. Vice President -- ITT & 1993 315,000 152,000 16,738 36,073 11,996 President and Chief 1992 305,000 69,300 51,750 -- 10,709 Executive -- ITT Fluid Technology Corp. James P. Smith, Jr. 1994 220,000 105,000 4,464 6,000 9,481 Executive Vice President and 1993 201,000 43,000 -- 6,559 8,338 Director of Administration -- 1992 192,000 -- -- -- 6,765 ITT Sheraton Corporation
- --------------- (1) Amounts shown in this column include the value of certain benefits, except that (a) the amounts shown for Mr. Leuliette for 1992 and 1993 include payments of $100,000 each year pursuant to his offer of employment with ITT and (b) the amount shown for Mr. Nilsson includes $39,773 in relocation allowance for 1992. (2) The named executives do not hold any stock appreciation rights in connection with the options shown. The number and exercise prices of all ITT stock options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (3) All amounts shown in this column are company contributions under the ITT Investment and Savings Plan and the ITT Excess Savings Plan, which are defined contribution plans. ITT makes a matching contribution in an amount equal to 50% of an employee's contribution, such matching contribution not to exceed three percent (3%) of such employee's salary. Under these plans, ITT also makes a nonmatching contribution equal to one-half of one percent (1/2 of 1%) of an employee's salary. ANNUAL INCENTIVE BONUS PLAN Mr. Engen participates in an annual incentive bonus program sponsored by ITT. For a discussion of the terms of this bonus program, see "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- ANNUAL INCENTIVE BONUS PLAN". Certain amendments to the bonus program were recently approved by the shareholders of ITT. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- ANNUAL INCENTIVE BONUS PLAN". If the amendments had been in effect at the time the performance bonuses for 1994 were determined, the amount of the performance bonus payable to Mr. Engen would have been $777,000 instead of the amount shown opposite his name under "Bonus" in the Summary Compensation Table shown above. In connection with the Distribution, responsibility for payments (and the corresponding reserves) for 1995 bonuses to current ITT executives (including Mr. Engen in respect of the ITT Annual Incentive Bonus Plan and Mr. Smith in respect of the ITT Sheraton Bonus Plan) will be allocated between ITT Industries and New ITT pursuant to the Employee Benefits Services and Liability Agreement described under "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". Responsibility for payments under the bonus plans of ITT Industries discussed immediately below will remain that of ITT Industries after the Distribution. Messrs. Giuliano, Leuliette, Nilsson and Smith participate in bonus programs applicable to their respective companies. The bonus plans for ITT Automotive and ITT Defense & Electronics measure actual net income, return on total capital ("ROTC") and operating funds flow ("OFF") against the approved 147 154 budgeted amounts for the year for each performance measure. Net income, ROTC and OFF performance is weighted 60%, 25% and 15%, respectively. For ITT Fluid Technology, the formula measures (i) operating income vs. budget, (ii) operating income vs. the prior year, (iii) controllable assets as a percent of sales vs. the prior year and (iv) sales against budget. For ITT Fluid Technology, these measures are weighted 30%, 30%, 30% and 10%, respectively. ITT Sheraton's bonus plan measures operating income against budget and against the prior year, and these measures are weighted 50% each. With respect to the operating company plans, the maximum bonus pool is 150% of the aggregated standard bonus pool. Individual bonus amounts within the authorized pool are determined on a discretionary basis taking into account specific personal contributions during the year. Bonus awards for ITT Industries' executive officers are subject to approval by ITT senior line management and the ITT Compensation and Personnel Committee. During 1994, the standard bonus adjustment factors pursuant to the above formula for Messrs. Engen (under the ITT bonus plan), Giuliano, Leuliette, Nilsson and Smith were 148%, 150%, 141%, 109% and 140%, respectively. In total $1,858,250 was authorized for expenditure to eight individuals who are or will become executive officers of ITT Industries, including the amounts indicated in the Summary Compensation Table for the named executives. It is contemplated that the annual bonus program described above in respect of ITT Industries will be used by ITT Industries in substantially the same form for 1995. It is also contemplated that a new program based on industry competitive practices and complying with Federal income tax requirements with regard to performance-based, tax deductible executive compensation will become effective after the Distribution. OPTION GRANTS ON ITT COMMON STOCK TO ITT INDUSTRIES EXECUTIVES IN LAST FISCAL YEAR The following table provides information on fiscal year 1994 grants of options to the named ITT Industries executives to purchase shares of ITT Common Stock. No options to acquire ITT Industries Common Stock have been granted or are outstanding.
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK - ------------------------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED ANNUAL SECURITIES % OF TOTAL RATES OF STOCK PRICE UNDERLYING OPTIONS APPRECIATION FOR OPTION OPTIONS GRANTED TO EXERCISE TERM(4) GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION ------------------------- NAME (#) 1994(2) ($/SHARE) DATE 5% 10% - --------------------- ---------- ------------ -------------- ---------- ---------- ---------- D. Travis Engen...... 60,000 3.2 $84.00 10/13/04 $3,169,800 $8,032,200 Louis J. Giuliano.... 37,000 2.0 $84.00 10/13/04 1,954,710 4,953,190 Timothy D. Leuliette.......... 37,000 2.0 $84.00 10/13/04 1,954,710 4,953,190 Bertil T. Nilsson.... 33,000 1.8 $84.00 10/13/04 1,743,390 4,417,710 James P. Smith....... 6,000 0.3 $84.00 10/13/04 316,980 803,220
- --------------- (1) The numbers in this column represent the options to purchase ITT Common Stock. (2) Percentages indicated are based on a total of 1,876,198 options granted to 656 employees during 1994. (3) The exercise price per share is 100% of the fair market value of a share of ITT Common Stock on the date of grant. The exercise price may be paid in cash or in shares of ITT Common Stock valued at their fair market value on the date of exercise. Options granted to Messrs. Engen, Giuliano, Leuliette and Nilsson on October 11, 1994 at the exercise price of $84.00 per share are not exercisable until the trading price of ITT Common Stock equals or exceeds $105.00 per share for 10 consecutive trading days (which occurred on May 15, 1995) at which time two-thirds of the options will be exercisable; when the trading price equals or exceeds $117.60 per share for 10 consecutive trading days, the options will be fully exercisable. Notwithstanding the above, the options will be fully exercisable after October 11, 2003, but no later than October 13, 2004. Mr. Smith's stock option will vest in three equal annual installments commencing on the first anniversary date of the grant and the option will expire on October 13, 2004. (4) At the end of the term of the options granted October 11, 1994, the projected price per share of ITT Common Stock would be $136.83 and $217.87 at an assumed annual appreciation rate of 5% and 10%, respectively. On May 9, 1995, the Compensation and Personnel Committee awarded 185,500 stock options to eight executive officers of ITT Industries including Messrs. Engen, Giuliano, Leuliette, Nilsson and Smith for 60,000, 37,000, 37,000, 33,000 and 5,000 shares of ITT Common Stock, respectively. These options were granted at the exercise price of $108.75 per share. Options for Messrs. Engen, Giuliano, Leuliette and Nilsson 148 155 will become fully exercisable at the earlier of the ninth anniversary date of the grant or when the closing price on an ITT share is equal to or greater than $135.38 for 10 consecutive trading days. Mr. Smith's option will become exercisable in three equal annual installments commencing on the first anniversary date of the grant. All of these options will expire on May 11, 2005. In connection with the Distribution, it is expected that each of these outstanding options will be adjusted under the 1994 ITT Incentive Stock Plan to preserve its economic value. For a discussion of the treatment of stock options and other stock awards held by current employees of ITT and future employees of ITT Industries, New ITT or ITT Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS". AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table provides information on option exercises in 1994 by the named executives of ITT Industries and the value of each such executive's unexercised options to acquire ITT Common Stock at December 31, 1995. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED, UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT HELD AT SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(2) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------- ------------ ----------- ----------- ------------- ----------- ------------- Engen, D.T..................... -- -- 141,887 114,658 5,972,719 522,112 Giuliano, L.J.................. -- -- 28,057 77,445 1,182,986 352,099 Leuliette, T.D................. -- -- 15,486 77,445 631,654 352,099 Nilsson, B.T................... -- -- 17,308 69,073 734,324 314,036 Smith, J.P..................... -- -- 5,902 10,373 161,068 47,327
- --------------- (1) The number and exercise price of all options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (2) Based on the NYSE consolidated trading closing price of ITT Common Stock on December 30, 1994 of $88.63. ITT LONG-TERM PERFORMANCE PLAN Under the ITT Long-Term Performance Plan, target contingent cash awards were made on December 12, 1991 (the "1992 Class Awards") to ITT executives including certain of those individuals who will be executive officers of ITT Industries after the Distribution. Under the 1992 Class Awards, with respect to Mr. Engen, the ultimate payment value of his target award, if any, will be based upon ITT's return on equity ("ROE") performance during the three-year period 1993 through 1995 as measured against predetermined ROE goals for each year. Each year of the performance period has been assigned a specific weighting: 15%, 35% and 50% for 1993, 1994 and 1995, respectively. If the actual weighted average ROE performance is less than 90% of the ROE goals, no payment is earned. The ultimate payment values for Messrs. Leuliette, Nilsson and Smith will be determined in the same manner as described for Mr. Engen except that the ROE performance will be for their respective companies: ITT Automotive for Mr. Leuliette, ITT Fluid Technology for Mr. Nilsson and ITT Sheraton for Mr. Smith. With respect to Mr. Giuliano, the ultimate payment value of his target award, if any, will be based upon the ROE performance of the Defense segment of ITT Defense & Electronics during the four-year period 1992 through 1995 as measured against predetermined ROE goals for each year. For the ITT Defense segment, each year of the performance period has been assigned a specific weighting: 10%, 15%, 25% and 50% for 1992, 1993, 1994 and 1995, respectively. If the actual weighed average ROE performance is less than 90% of the ROE goals, no payment is earned. 149 156 1992 Class Awards for the five most highly compensated executive officers of ITT Industries are listed in the table below:
PERFORMANCE OR OTHER CONTINGENT PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS TARGET MATURATION OR AWARD AWARD AWARD NAME AWARDS PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3) - ----------------------- ---------------- ------------- ------------ ---------- ---------- D. Travis Engen........ $1,500,000 12/31/95 $500,000 $1,500,000 $3,000,000 Louis J. Guiliano...... 500,000 12/31/95 166,667 500,000 1,000,000 Timothy D. Leuliette... 700,000 12/31/95 233,333 700,000 1,400,000 Bertil T. Nilsson...... 500,000 12/31/95 166,667 500,000 1,000,000 James P. Smith, Jr. ... 250,000 12/31/95 83,333 250,000 500,000
- --------------- (1) Based upon a weighted average ROE goal achievement of 90%, resulting in payment of 33% of the target award in the first quarter of 1996. (2) Based upon a weighted average ROE goal achievement of 100%, resulting in payment of 100% of the target award in the first quarter of 1996. (3) Based upon a weighted average ROE goal achievement of 130% or more, resulting in payment of 200% of the target award in the first quarter of 1996. Except for Messrs. Engen and Smith, the reserves for these awards under the Plan are maintained on the books of ITT Industries and, accordingly, payments in respect of the Plan to such participants therein will remain the responsibility of ITT Industries after the Distribution. In connection with the Distribution, responsibility for payments (and the corresponding reserves) to current ITT executives (including Messrs. Engen and Smith) under the ITT Long-Term Performance Plan will be allocated between ITT Industries and New ITT pursuant to the Employee Benefits Services and Liability Agreement described under "RELATIONSHIP BETWEEN ITT INDUSTRIES NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". The ITT Long-Term Performance Plan will not be continued as such by ITT Industries after the Distribution. It is contemplated that a comparable long-term incentive plan, which will be administered by the Compensation and Personnel Committee of the ITT Industries Board of Directors, will become effective after the Distribution. The Plan provides that in the event of material changes in accounting practices, principles or their application, the ITT Compensation and Personnel Committee may make such adjustments as it deems appropriate in performance goals and/or target values so that the performance measurement for all purposes of this Plan with respect to awards may be made as nearly as practicable on the same accounting basis. In addition, the ITT Compensation and Personnel Committee may make such other adjustments as it deems appropriate in performance goals and/or target values for material acquisitions or dispositions of stock or property or for other circumstances specified by the ITT Compensation and Personnel Committee in order to limit or avoid distortion in the operation of the Plan that may result from such circumstances. ITT INDUSTRIES COMPENSATION, BENEFIT AND RETIREMENT PLANS The following is a description of the compensation, benefit and retirement plans currently in effect with respect to ITT and which, as of the Distribution Date, will be in effect with respect to ITT Industries. 1994 ITT INCENTIVE STOCK PLAN After the Distribution, ITT Industries will continue the ITT 1994 Incentive Stock Plan (the "1994 Plan"). The 1994 Plan will be administered by ITT Industries' Compensation and Personnel Committee after the Distribution. The 1994 Plan provides for the grant of incentive stock options (qualifying under Section 422 of the Internal Revenue Code), non-qualified stock options, stock appreciation rights ("SARs"), performance shares and restricted stock, or any combination of the foregoing, as the Compensation and Personnel Committee may determine (collectively, "Awards"). The 1994 Plan will expire on December 31, 2003. 150 157 The 1994 Plan contains a formula for establishing an annual limit on the number of shares which may be awarded (or with respect to which non-stock Awards may be made) in any given calendar year (the "Annual Limit"). The Annual Limit formula is expressed as a percentage of ITT Industries' total issued and outstanding Common Stock as of the year end immediately preceding the year of awards ("Plan Year"). Under the Annual Limit formula, the maximum number of shares of ITT Industries Common Stock for which Awards may be granted under the Plan in each Plan Year shall be 1.5% of the total of the issued and outstanding shares of ITT Industries Common Stock and treasury stock as reported in the Annual Report on Form 10-K of ITT Industries for the fiscal year ending immediately prior to any Plan Year. Any unused portion of the Annual Limit for any Plan Year shall be carried forward and be made available for awards in succeeding Plan Years. In addition to the foregoing, in no event shall more than five million shares of ITT Industries Common Stock be cumulatively available for Awards of incentive stock options under the 1994 Plan, and provided further, that no more than 20% of the total number of shares available on a cumulative basis shall be available for restricted stock and performance share awards. For any Plan Year, no individual employee may receive stock options for more than the lesser of (i) 10% of the Annual Limit applicable to that Plan Year and (ii) 500,000 shares. Subject to the above limitations, shares of ITT Industries Common Stock to be issued under the 1994 Plan may be made available from the authorized but unissued ITT Industries Common Stock or from shares purchased on the open market. In the event of a stock split or stock dividend, reorganization, recapitalization or other similar event affecting the price of ITT Industries Common Stock, the number of shares subject to the 1994 Plan, the number of shares then subject to Awards and the price per share payable on exercise of options may be appropriately adjusted by the Compensation and Personnel Committee. Other than the above adjustments, it is expected that the ITT Industries Board of Directors will continue the ITT Board's policy that no options will be cancelled and reissued at a lower price unless the shareholders of ITT approve such action. For the purpose of computing the total number of shares of stock available for Awards under the 1994 Plan, there shall be counted against the foregoing limitations the number of shares of ITT Industries Common Stock subject to issuance upon exercise or settlement of Awards and the number of shares of ITT Industries Common Stock which equal the value of Performance Share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the 1994 Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of ITT Industries Common Stock or are exchanged for other Awards, the shares of stock which were theretofore subject to such Awards shall again be available for Awards under the 1994 Plan to the extent of such forfeiture, termination, expiration, cash settlement or exchange of such Awards. Further, any shares that are exchanged (either actually or constructively) by optionees as full or partial payment to ITT Industries of the purchase price of shares being acquired through the exercise of a stock option granted under the 1994 Plan may be available for subsequent Awards. The Compensation and Personnel Committee, made up entirely of non-employee directors, none of whose members may receive any award under the 1994 Plan, will administer the 1994 Plan, including, but not limited to, making determinations with respect to the designation of those employees who shall receive Awards, the number of shares to be covered by options, SARs and restricted stock awards, the exercise price of options (which may not be less than 100% of the fair market value of ITT Industries Common Stock on the date of grant), other option terms and conditions and the number of performance shares to be granted and the applicable performance objectives. The Compensation and Personnel Committee may impose such additional terms and conditions on an Award as it deems advisable. The Compensation and Personnel Committee's decisions in the administration of the 1994 Plan shall be binding on all persons for all purposes. The Compensation and Personnel Committee may in its sole discretion delegate such administrative powers as it may deem appropriate to the chief executive officer or other members of senior management, except that Awards to executive officers shall be made solely by the Compensation and Personnel Committee and subject to compliance with Rule 16b-3 of the Exchange Act. Awards will be made, in the discretion of the Compensation and Personnel Committee, to employees of ITT Industries and any of its subsidiaries (including officers and members of the Board of Directors who are 151 158 also employees) whose responsibilities and decisions directly affect the performance of ITT Industries and its subsidiaries. Stock Options and Related SARs Incentive stock options and related SARs under the 1994 Plan must expire within 10 years after grant; non-qualified stock options and related SARs will expire not more than 10 years and two days after grant. No SAR may be exercised until at least six months after it is granted. The exercise price for options and SARs must be at least equal to the fair market value of the ITT Industries Common Stock on the date of grant. The exercise price for options must be paid to ITT Industries at the time of exercise and, in the discretion of the Compensation and Personnel Committee, may be paid in the form of cash or already-owned shares of ITT Industries Common Stock or a combination thereof. During the lifetime of an employee, an option must be exercised only by the individual (or his or her estate or designated beneficiary) but no later than three months after his or her termination of employment (or for longer periods as determined by the Compensation and Personnel Committee if termination is caused by retirement, disability or death, but in no event later than the expiration of the original term of the option). If an optionee voluntarily resigns or is terminated for cause, the options and SARs are cancelled immediately. Performance Shares Performance shares under the 1994 Plan are contingent rights to receive future payments based on the achievement of individual or company performance objectives as prescribed by the Compensation and Personnel Committee. The maximum number of performance shares that may be granted to any individual employee in any given year is 100,000. The amounts paid will be based on actual performance over a period from two to five years, as determined by the Compensation and Personnel Committee, using one or more of the following objective criteria, as it deems appropriate: earnings per share, return on equity, cash flow or total shareholder return of ITT Industries. Payments may be made in the form of shares of ITT Industries Common Stock, cash or a combination of ITT Industries Common Stock and cash. The ultimate payments are determined by the number of shares earned and the price of ITT Industries Common Stock at the end of the performance period. In the event an employee terminates employment during such a performance period, the employee will forfeit any right to payment. However, in the case of retirement, permanent total disability, death or cases of special circumstances, the employee may, in the discretion of the Compensation and Personnel Committee, be entitled to an award prorated for the portion of the performance period during which he or she was employed by ITT Industries. Restricted Shares Restricted shares of ITT Industries Common Stock awarded under the 1994 Plan will be issued subject to a restriction period set by the Compensation and Personnel Committee during which time the shares may not be sold, transferred, assigned or pledged. In the event an employee terminates employment during a restriction period, all such shares still subject to restrictions will be forfeited by the employee and reacquired by ITT Industries. The Compensation and Personnel Committee may provide for the lapse of restrictions in installments where deemed appropriate and it may also require the achievement of predetermined performance objectives in order for such shares to vest. The recipient, as owner of the awarded shares, shall have all other rights of a shareholder, including the right to vote the shares and receive dividends and other distributions during the restriction period. The restrictions may be waived, in the discretion of the Compensation and Personnel Committee, in the event of the awardee's retirement, permanent total disability, death or in cases of special circumstances. Compensation Upon Change of Control The 1994 Plan provides for the automatic protection of intended economic benefits by key employees in the event of a change in control of ITT Industries (i.e., upon the occurrence of an "Acceleration Event" as defined in the 1994 Plan). Notwithstanding any other provisions of the 1994 Plan, upon the occurrence of an Acceleration Event (a) all options and SARs will generally become immediately exercisable for a period of 60 calendar days; (b) options and SARs will continue to be exercisable for a period of seven months in the case 152 159 of an employee whose employment is terminated other than for cause or who voluntarily terminates employment because of a good faith belief that such employee will not be able to discharge his or her duties; (c) SARs exercised during the 60-day period will be settled fully in cash based on a formula price generally reflecting the highest price paid for a share of ITT Industries Common Stock during the 60-day period preceding the date such SAR is exercised; (d) "limited stock appreciation rights" shall automatically be granted on all outstanding options not otherwise covered by a SAR, which shall generally be immediately exercisable in full and which shall entitle the holders to the same exercise period and formula price referred to in (a), (b) and (c) above; (e) outstanding performance share awards shall automatically vest, with the valuation of such performance shares based on the formula price; and (f) restrictions applicable to awards of restricted stock shall be automatically waived. Options, SARs, performance shares or restricted stock which are granted, accelerated or enhanced upon the occurrence of a takeover (i.e., an "Acceleration Event" as defined in the 1994 Plan) may give rise, in whole or in part, to "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code and, to such extent, will be nondeductible by ITT Industries and subject to a 20% excise tax to the awardee. "Acceleration Event" is generally defined in the 1994 Plan as any of the following events: (i) a report on Schedule 13D shall be filed with the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person (within the meaning of Section 13(d) of the Exchange Act), other than ITT Industries or a subsidiary of ITT Industries or any employee benefit plan sponsored by ITT Industries or a subsidiary of ITT Industries, is the beneficial owner directly or indirectly of 20% or more of the outstanding ITT Industries Common Stock; (ii) any person (within the meaning of Section 13(d) of the Exchange Act), other than ITT Industries or a subsidiary of ITT Industries or any employee benefit plan sponsored by ITT Industries or a subsidiary of ITT Industries, shall purchase shares pursuant to a tender offer or exchange offer to acquire any ITT Industries Common Stock (or securities convertible into such Common Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or more of the outstanding ITT Industries Common Stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to acquire Common Stock); (iii) the shareholders of ITT Industries shall approve (A) any consolidation or merger of ITT Industries in which ITT Industries is not the continuing or surviving corporation or pursuant to which shares of ITT Industries Common Stock would be converted into cash, securities or other property, other than a merger of ITT Industries in which holders of ITT Industries Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of ITT Industries; or (iv) there shall have been a change in a majority of the members of the Board of Directors of ITT Industries within a 12-month period unless the election or nomination for election by ITT Industries' shareholders of each new director during such 12-month period was approved by the vote of two-thirds of the directors then still in office who were directors at the beginning of such 12-month period. The ITT Industries Board may amend or discontinue the 1994 Plan at any time and, specifically, may make such modifications to the 1994 Plan as it deems necessary to avoid the application of Section 162(m) of the Internal Revenue Code and the Treasury regulations issued thereunder. However, shareholder approval is required for certain amendments, including any amendment which may (i) increase the number of shares reserved for awards (except as provided in the 1994 Plan with respect to stock splits or other similar changes), (ii) materially change the group of employees eligible for Awards, (iii) materially increase the benefits accruing to participants under the 1994 Plan or (iv) permit Awards after December 31, 2003. After the Distribution, ITT Industries will also continue necessary administration of grants remaining outstanding and governed by the ITT 1977 Stock Option Incentive Plan and the ITT 1986 Incentive Stock Plan. 153 160 ITT INDUSTRIES SEVERANCE PAY PLAN The existing ITT severance pay plan applies to ITT senior executives who are United States citizens or who are employed in the United States. Under the plan, if a participant's employment is terminated by ITT, other than for cause or as a result of other occurrences specified in the plan, the participant is entitled to severance pay in an amount up to 24 months of base salary depending upon his or her length of service. In no event shall such severance pay exceed the amount of base salary for the number of months remaining between the termination of employment and the participant's normal retirement date or two times the participant's total annual compensation during the year immediately preceding such termination. The plan includes offset provisions for other compensation from ITT and requirements on the part of executives with respect to non-competition and compliance with the ITT Code of Corporate Conduct. Under the plan, severance payments would ordinarily be made monthly over the scheduled term of such payments; however, ITT has the option to make such payments in the form of a single lump sum payment discounted to present value. At June 1, 1995, the named executive officers in the Summary Compensation Table (see "-- COMPENSATION OF ITT INDUSTRIES EXECUTIVE OFFICERS") participate in this plan. The annual salaries of Messrs. Engen, Giuliano, Leuliette, Nilsson and J.P. Smith, Jr. as of June 1, 1995, were $700,000, $375,000, $500,000, $335,000 and $228,500, respectively. After the Distribution, it is anticipated that ITT Industries will adopt a similar plan for its senior executives, except for Mr. Engen who will be covered by an employment agreement, "-- EMPLOYMENT AGREEMENT; OTHER RELATIONSHIPS". ITT INDUSTRIES INVESTMENT AND SAVINGS PLAN Many of the salaried employees of ITT Industries have been participants in the ITT Investment and Savings Plan for Salaried Employees. Effective as of the Distribution Date, the ITT Investment and Savings Plan will be split into three separate plans, each covering the ITT Industries Employees, the New ITT Employees or the ITT Hartford Employees. Existing account balances of current New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the New ITT Investment and Savings Plan. Existing account balances of current ITT Hartford Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account balances of current ITT Industries Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will remain in the ITT Investment and Savings Plan, which will continue in existence as the ITT Industries Investment and Savings Plan. Existing account balances of each former employee of ITT Industries, New ITT and ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such former employee, will be transferred to the investment and savings plan maintained by the company responsible for providing retirement benefits to such former employee. Federal legislation limits the annual contributions that an employee may make to the ITT Industries Investment and Savings Plan, a tax-qualified retirement plan. Accordingly, ITT has adopted, and ITT Industries will continue after the Distribution, the ITT Excess Savings Plan (after the Distribution, the "ITT Industries Excess Savings Plan"), which enables an employee who is precluded by these limitations from contributing six percent of salary to the tax-qualified plan to make up the shortfall through salary deferrals and thereby receive the three percent maximum matching company contribution and one-half of one percent non-matching company contribution otherwise allowable under the tax-qualified plan. Salary deferrals, company contributions and imputed earnings are entered into a book reserve account maintained by ITT Industries for each participant. ITT INDUSTRIES RETIREMENT PROGRAM Most of the U.S. salaried employees of ITT Industries have been participants in the Retirement Plan for Salaried Employees of ITT Corporation. After the Distribution, this plan will remain with ITT Industries (after the Distribution, the "ITT Industries Salaried Retirement Plan"). The ITT Industries Salaried 154 161 Retirement Plan will be amended to recognize service with other ITT companies prior to the Distribution Date for eligibility, vesting and benefit accrual purposes and will further provide for an offset of any benefits payable from any other ITT retirement plan covering the same period of service. The plan will be further amended to recognize service with New ITT and ITT Hartford after the Distribution Date for eligibility and vesting purposes. The ITT Industries Salaried Retirement Plan will continue to cover substantially all eligible salaried employees of ITT Industries, including senior executive officers and other ITT Industries executives. The cost of the ITT Industries Salaried Retirement Plan will be borne entirely by ITT Industries. A member's annual pension will equal two percent of the member's average final compensation for each of the first 25 years of benefit service, plus one and one-half percent of a member's average final compensation for each of the next 15 years of benefit service, reduced by one and one-quarter percent of the member's primary Social Security benefit for each year of benefit service to a maximum of 40 years; provided that no more than one-half of the member's primary Social Security benefit is used for such reduction. A member's average final compensation (including salary plus approved bonus payments) is defined under the Plan as the total of (i) a member's average annual base salary for the five calendar years of the last 120 consecutive calendar months of eligibility service affording the highest such average plus (ii) a member's average annual compensation not including base salary for the five calendar years of the member's last 120 consecutive calendar months of eligibility service affording the highest such average. The Plan will also provide for undiscounted early retirement pensions for members who retire at or after age 60 following completion of 15 years of eligibility service. A member will be vested in benefits accrued under the Plan upon completion of five years of eligibility service. Applicable Federal legislation limits the amount of benefits that can be paid and compensation which may be recognized under a tax-qualified retirement plan. ITT currently maintains an excess benefit plan. ITT Industries will continue this non-qualified unfunded retirement plan (the "ITT Industries Excess Plan") for payment of those benefits at retirement that cannot be paid from the ITT Industries Salaried Retirement Plan. The practical effect of the ITT Industries Excess Plan is to continue calculation of retirement benefits to all employees on a uniform basis. Benefits under the ITT Industries Excess Plan are generally paid directly by ITT Industries. ITT Industries will also adopt an excess plan trust under which excess benefits accrued after the Distribution Date under the ITT Industries Excess Plan for certain officers of ITT Industries will be funded. Any such employee may indicate a preference, subject to certain conditions, to receive any excess benefit in the form of a single discounted lump sum payment. Any "excess" benefit accrued to any such employee will be immediately payable in the form of a single discounted lump sum payment upon the occurrence of a change in corporate control (as defined in the ITT Industries Excess Plan). At the time of the Distribution, certain retired employees of ITT will have accrued certain benefits under the ITT Excess Benefit Plan (the "ITT Excess Plan") for payment of those benefits at retirement that cannot be paid from the ITT Salaried Retirement Plan. ITT Industries will continue to be responsible for such accrued benefits after the Distribution. For a discussion of certain matters in respect of cross-guarantees to secure such benefits and the trust that funds certain such benefits, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- EXCESS BENEFIT PLANS". Based on various assumptions as to remuneration and years of service, before Social Security reductions, the following table illustrates the estimated annual benefits payable from the Retirement Program at retirement at age 65 that are paid for by ITT Industries. For a discussion of certain contractual relationships among ITT Industries, New ITT and ITT Hartford that relate to the ITT Industries Salaried Retirement Plan, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT SALARIED RETIREMENT PLAN". 155 162 PENSION PLAN TABLE
AVERAGE YEARS OF SERVICE FINAL -------------------------------------------------------------- COMPENSATION 20 25 30 35 40 ------------------------- -------- -------- -------- -------- ---------- $ 50,000............... $20,000 $25,000 $28,750 $32,500 $36,250 100,000............... 40,000 50,000 57,500 65,000 72,500 300,000............... 120,000 150,000 172,500 195,000 217,500 500,000............... 200,000 250,000 287,500 325,000 362,500 750,000............... 300,000 375,000 431,250 487,500 543,750 1,000,000............... 400,000 500,000 575,000 650,000 725,000 1,500,000............... 600,000 750,000 862,500 975,000 1,087,500
The amounts shown under "Salary" and "Bonus" opposite the names of the individuals in the ITT Industries Summary Compensation Table comprise the compensation which is used for purposes of determining "average final compensation" under the plan. The years of service with ITT of each of the individuals for eligibility and benefit purposes as of June 1, 1995, are as follows: D. Travis Engen, 10.15 years; Louis J. Giuliano, 6.92 years; Timothy D. Leuliette, 3.70 years; Bertil T. Nilsson, 39.92 years; and James P. Smith, 21.94 years. 1995 ITT INDUSTRIES DEFERRED COMPENSATION PLAN Executives of ITT Industries have been participants in the 1995 ITT Deferred Compensation Plan. Effective as of the Distribution Date, it is intended that ITT Industries will continue that plan as the 1995 ITT Industries Deferred Compensation Plan. Under the plan, executives with a base salary of $200,000 or more could elect to defer receipt of all or a portion of their 1994 bonus and those with a base salary of at least $300,000 could in addition defer up to 50% of their 1995 salary. ITT Industries will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the plan and selected by the executive. ITT INDUSTRIES EMPLOYEE WELFARE BENEFITS At or prior to the Distribution Date, ITT Industries and its participating subsidiaries will continue the broad-based ITT employee welfare benefits program which is currently available to ITT salaried employees. ITT Industries' executives will participate in ITT Industries' comprehensive benefits program which will include group medical and dental coverage, group life insurance and other benefit plans, in addition to the pension program and investment and savings plan described previously. For a discussion of certain contractual relationships among ITT Industries, New ITT and ITT Hartford that affect welfare benefit programs, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS". 156 163 NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION After the Distribution, it is intended that New ITT will operate the Hospitality & Entertainment and Information Services businesses of ITT substantially in the manner in which they currently are operated. Rand V. Araskog, who is currently Chairman, President and Chief Executive of ITT, will become Chairman and Chief Executive of New ITT, and certain persons who are currently directors of ITT will become directors of New ITT. See "-- NEW ITT BOARD OF DIRECTORS". In addition, the other executive officers of New ITT will be drawn from the current management of ITT or subsidiaries of ITT. See "-- NEW ITT EXECUTIVE OFFICERS". NEW ITT BOARD OF DIRECTORS Immediately after the Distribution, New ITT expects to have a board of eleven directors. Prior to the Distribution Date, ITT, as sole shareholder of New ITT, plans to elect, as necessary, the following directors of ITT to the Board of Directors of New ITT: Bette B. Anderson, Rand V. Araskog, Nolan D. Archibald, Robert A. Burnett, Michel David-Weill, Henry Gluck, Paul G. Kirk, Edward C. Meyer, Benjamin F. Payton and Margita E. White. In addition, Robert A. Bowman will be so elected to the Board of Directors of New ITT. As noted above, Mr. Araskog will become Chairman and Chief Executive Officer of New ITT effective as of the Distribution Date. It is thus the intent of New ITT that a majority of the directors comprising New ITT's Board of Directors will not be employees of New ITT. The following table sets forth the names, in alphabetical order, and information as to the persons who are expected to serve as directors of New ITT following the Distribution.
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Bette B. Anderson, 66................... Mrs. Anderson joined Kelly, Anderson, Pethick & President, Kelly, Anderson, Associates, Inc., a Washington-based management Pethick & Associates, Inc. firm, in 1990 and was elected president effective (consultants) January 1, 1991. She had previously been executive vice president of the firm. Mrs. Anderson was formerly a partner in the public affairs company of Anderson, Benjamin, Read & Haney. She was Undersecretary of the Treasury from 1977 to 1981. Mrs. Anderson was affiliated for 27 years with the Citizens and Southern National Bank of Savannah, having served as a vice president until she assumed the Treasury post. Mrs. Anderson is currently a director of ITT and has been a director of ITT since 1981. She will also be a director of ITT Hartford. Mrs. Anderson is also a director of ITT Educational Services, Inc., Riverwood International Corporation and Manville Corporation. She is a director of the Miller Foundation and the University of Virginia and a member of the Advisory Council of Girl Scouts of America. She attended Georgia Southern and Armstrong State Colleges and is a graduate of the Stonier Graduate School of Banking at Rutgers University. Rand V. Araskog, 63..................... See information under "ITT INDUSTRIES MANAGEMENT Chairman, President and Chief AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD Executive of ITT OF DIRECTORS".
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NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Nolan D. Archibald, 51.................. Mr. Archibald joined Black & Decker in 1985 as Chairman, President and Chief Executive president and chief operating officer and since Officer of The Black & Decker that time has been elected chief executive officer Corporation (consumer and commercial and chairman. Prior to joining Black & Decker, he products company) was senior vice president and president of the Consumer and Commercial Products Group of the Beatrice Companies, Inc. and held various executive and marketing positions with Beatrice Companies, Inc. during the period 1977 to 1985. Mr. Archibald is currently a director of ITT and has been a director of ITT since 1991. He previously served as a director of ITT from September 1986 to March 1988. Mr. Archibald serves as a member of the Board of Trustees for The Johns Hopkins University and is a member of The Business Roundtable. Mr. Archibald received a BS degree from Weber State University and an MBA degree from The Harvard Business School. Robert A. Bowman, 40.................... Mr. Bowman has been Executive Vice President and Executive Vice President and Chief Chief Financial Officer since September 1992. From Financial Officer of ITT July to September 1992, Mr. Bowman served as Executive Vice President and Chief Financial Officer of ITT Sheraton Corporation. From April 1991 to July 1992, Mr. Bowman served as Senior Vice President and Chief Financial Officer of ITT Sheraton. From January to April 1991, Mr. Bowman was an economics commentator on an American Broadcasting Company affiliated television station in Detroit. Mr. Bowman was Treasurer of the State of Michigan from 1983 until December 1990. He is also a director of ITT Educational Services, Inc. Mr. Bowman is a member of The Wharton Graduate Executive Board. Mr. Bowman has an AB degree in Economics from Harvard College and an MBA degree from The Wharton School. Robert A. Burnett, 68................... See information under "ITT INDUSTRIES MANAGEMENT Chairman and Chief Executive Officer AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD (Retired) of Meredith Corporation OF DIRECTORS". (diversified media company) Michel David-Weill, 63.................. See information under "ITT INDUSTRIES MANAGEMENT Senior Partner of Lazard Freres & Co. AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD (investment bankers) OF DIRECTORS". Henry Gluck, 67......................... Mr. Gluck has been Chairman and Chief Executive Chairman and Chief Executive Officer of CWI since 1983. Prior to joining CWI, he Officer of Caesars World, Inc. was president of Monogram Industries, Inc., and Chairman, President and Chief Executive Officer of Magnasync-Moviola Inc. He is currently a director of ITT and has been a director of ITT since February 1995. Mr. Gluck has a BS degree in Economics, Finance and International Trade from the University of Pennsylvania, Wharton School of Finance and Commerce.
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NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Paul G. Kirk, Jr., 57................... Mr. Kirk became a partner in the law firm of Of Counsel to Sullivan & Worcester Sullivan & Worcester in 1977 and is presently of (law firm) counsel to the firm. He served as chairman of the Democratic National Committee from 1985 to 1989 and as treasurer from 1983 to 1985. Following his resignation in 1989 as chairman of the Democratic National Committee, he returned to Sullivan & Worcester as a partner in general corporate practice at the firm's Boston and Washington offices. He is currently a director of ITT and has been a director of ITT since 1989. Mr. Kirk is a director of Kirk-Sheppard & Co., Inc., of which he also is chairman and treasurer. He is a director of Hartford Fire Insurance Company, the Bradley Real Estate Corporation and Rayonier Inc., and he will be a director of ITT Hartford. Mr. Kirk is co-chairman of the Commission on Presidential Debates, chairman of the John F. Kennedy Library Foundation Board of Directors, Chairman of the Board of Directors of the National Democratic Institute for International Affairs and a trustee of Stonehill College. He is a graduate of Harvard College and Harvard Law School. Edward C. Meyer, 66..................... See information under "ITT INDUSTRIES MANAGEMENT Chairman of GRC International AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD (professional and technical services OF DIRECTORS". provider) Benjamin F. Payton, 62.................. Dr. Payton has been president of Tuskegee President of Tuskegee University University in Alabama since 1981. Previously he had served as president of Benedict College and as program officer, education and public policy, of the Ford Foundation. He is currently a director of ITT and has been a director of ITT since 1987. He is also a director of Amsouth Bancorporation, Amsouth Bank, the Liberty Corporation, Praxair Corporation, SONAT Inc., Morrisons, Inc., the Southern Regional Council and the Alabama Shakespeare Festival. He is a member of the Business-Higher Education Forum and of the Visiting Committee of the Board of Overseers of Harvard College. Dr. Payton has been awarded honorary degrees from Eastern Michigan University, Lehigh University, Morris Brown College, Morgan State University, Benedict College and the University of Maryland. He is a graduate of South Carolina State College and received a Bachelor of Divinity degree from Harvard University, an MA degree from Columbia University and a PhD from Yale University.
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NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Margita E. White, 57.................... Mrs. White joined the Association for Maximum President of the Association for Maximum Service Television, Inc. as president in 1987 after Service Television, Inc. (television serving as an independent consultant and trade association) coordinator of the Television Operations Caucus, Inc. She was a member of the Federal Communications Commission between 1976 and 1979. Previously she served in the Federal government as director of the White House office of communications, assistant press secretary to President Ford and assistant director of the U.S. Information Agency. Mrs. White is currently a director of ITT and has been a director of ITT since 1980. She is a director of ITT Educational Services, Inc., The Growth Fund of Washington, Leitch Technology Corp. and Washington Mutual Investors Fund. Mrs. White received BA and LLD degrees from the University of Redlands and an MA degree from Rutgers University.
Mr. Harold S. Geneen will be designated Chairman Emeritus of New ITT as well as ITT Industries and ITT Hartford. Mr. Geneen was named President and Chief Executive of ITT in 1959, and Chairman in 1964. He relinquished the post of President in 1973, the post of Chief Executive in 1978, and the chairmanship on January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen continued to serve on the Board of Directors of ITT until 1983. Messrs. Thomas W. Keesee, Jr. and Richard S. Perkins will each be designated a Director Emeritus of New ITT. Mr. Perkins served on the Board of Directors of ITT from 1953 until 1986. Mr. Keesee served on the ITT Board of Directors from 1976 until 1991. Each is now a Director Emeritus of ITT. DIRECTORS' COMPENSATION Members of the New ITT Board of Directors who are employees of New ITT or its subsidiaries will not be compensated for service on the New ITT Board or any Committee of the New ITT Board. Compensation for non-employee directors will consist of a $1,000 fee for each meeting of the New ITT Board of Directors attended and a $1,000 fee for each Committee meeting attended. Members of the Executive and Policy Committee, except for Mr. Araskog, will receive an annual retainer fee of $48,000 payable solely in shares of New ITT Common Stock. Directors will be reimbursed for travel expenses incurred on behalf of New ITT. The non-employee directors of New ITT who serve on the Board of Directors of ITT Educational will continue to receive an annual retainer fee of $18,000 and a fee of $750 for each meeting of the Board of Directors of ITT Educational and a fee of $500 for each Committee meeting attended. DIRECTORS' RETIREMENT POLICY New ITT's Board of Directors will adopt a retirement policy which provides that (i) no person may be nominated for election or reelection as a non-employee director after reaching age 72 and (ii) no employee of New ITT or of any of its subsidiaries (other than an employee who has served as chief executive of New ITT) may be nominated for election or reelection as a director after reaching age 65, unless there has been a specific waiver by the New ITT Board of Directors of these age requirements. DIRECTORS' BENEFITS The directors of New ITT who are currently non-employee directors of ITT have been participants in the 1995 ITT Deferred Compensation Plan, the ITT Directors Retirement Plan, a group life insurance program and the ITT Group Accident Program for Officers and Directors. At or prior to the Distribution Date, the New ITT Board of Directors will adopt identical "mirror image" plans and programs (the "1995 New ITT Deferred Compensation Plan", the "New ITT Directors Retirement Plan", the "New ITT Directors Group 160 167 Life Plan" and the "New ITT Group Accident Program for Officers and Directors"). Under the 1995 New ITT Deferred Compensation Plan, non-employee directors will be permitted to elect to defer receipt of all or a portion of their 1995 New ITT and New ITT subsidiary fees. New ITT will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the 1995 New ITT Deferred Compensation Plan and selected by the director. Under the New ITT Directors Retirement Plan, non-employee directors who retire from the Board of Directors at or after age 65 after completing at least five years of service on the New ITT Board of Directors will be entitled to an annual pension based on the New ITT Board's annual retainer fee payable at retirement. Pensions will range from 50% of such fee after five years of service to 100% after 10 years, with an additional 5% for each year of service in excess of ten, to a maximum of 200% of the annual retainer fee after 30 or more years of service. The New ITT Directors Retirement Plan will provide to non-employee directors credit for any accrued benefit with respect to ITT board service prior to the Distribution Date, but only to the extent such prior service benefit accrual is not duplicated under a plan maintained by ITT Industries or ITT Hartford. A director will be permitted to indicate a preference, subject to certain conditions, to receive any accrued benefit under the New ITT Directors Retirement Plan in the form of a single (discounted) lump sum payment immediately payable upon such director's retirement. The New ITT Directors Group Life Plan will provide $100,000 of non-contributory group life insurance to participating non-employee directors during their service on the New ITT Board of Directors. The non-employee directors of New ITT will be covered under the New ITT Group Accident Program for Officers and Directors which will be a non-contributory group accidental death and dismemberment program that will provide each director $750,000 of coverage during his or her service on the New ITT Board. Additional benefits will be permitted to be purchased. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The Articles of Incorporation of New ITT waive the personal liability of a director or officer for damages for breach of fiduciary duty except for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) the payment of distributions in violation of Section 78.300 of the Nevada General Corporation Law, which concerns the unlawful payment of distributions to stockholders. While the Articles of Incorporation and the By-laws of New ITT provide directors and officers with protection from awards for monetary damages for breaches of their duty of care, they do not eliminate such duty. Accordingly, the Articles of Incorporation and the By-laws of New ITT will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's or officer's breach of his or her duty of care. The Articles of Incorporation and the By-laws of New ITT provide for indemnification of the directors and officers of New ITT to the fullest extent permitted by applicable state law, as then in effect. The indemnification rights conferred by the Articles of Incorporation and the By-laws of New ITT are not exclusive of any other right to which a person seeking indemnification may otherwise be entitled. New ITT will also provide liability insurance for the directors and officers for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers and will enter into an indemnification agreement with each of its directors. Under its form of indemnification agreement, New ITT agrees to indemnify its directors against all expenses, liabilities or losses incurred by the directors in their capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as provided in the Articles of Incorporation and the By-Laws of New ITT as in effect on the date of such agreement; and (iii) in the event New ITT does not maintain the aforementioned insurance or comparable coverage, to the full extent provided in the applicable policies as in effect on the date of such agreement (New ITT's obligations described in (ii) and (iii) being subject to certain exceptions). Contractual rights under such indemnification agreements are believed to provide the directors more protection than the Articles of Incorporation and the By-laws which are subject to change. 161 168 COMMITTEES OF THE NEW ITT BOARD OF DIRECTORS Prior to the Distribution, the New ITT Board of Directors will establish Audit, Capital, Compensation and Personnel, Executive and Policy, Legal Affairs, Nominating and Public Affairs Committees. AUDIT COMMITTEE The Audit Committee will recommend the selection of independent auditors for New ITT, confirm the scope of audits to be performed by such auditors, review audit results and internal accounting and control procedures and policies and review the fees paid to the independent auditors of New ITT. The Audit Committee will review and recommend approval of the audited financial statements of New ITT and the annual reports to shareholders. It will also review the expense accounts of senior executives. CAPITAL COMMITTEE The Capital Committee will be responsible for reviewing capital expenditures and appropriations and maximizing the effective use of the assets of New ITT and its subsidiaries. COMPENSATION AND PERSONNEL COMMITTEE The Compensation and Personnel Committee, which will be comprised entirely of non-employee directors, will oversee the compensation and benefits of employees, evaluate management performance and establish executive compensation. In the performance of its functions, the Compensation and Personnel Committee will have access to independent compensation counsel. EXECUTIVE AND POLICY COMMITTEE The Executive and Policy Committee will exercise the powers of the Board of Directors in the management of the business and affairs of New ITT in the intervals between meetings of the Board of Directors. The Executive and Policy Committee will review the long-range corporate strategies formulated by senior management, and the non-employee directors will meet in executive session to review the overall performance of the chief executive, particularly with respect to the long-range strategies of New ITT. LEGAL AFFAIRS COMMITTEE The Legal Affairs Committee will review and consider major claims and litigation and legal, regulatory, intellectual property, and related governmental policy matters affecting New ITT and its subsidiaries. The Legal Affairs Committee will review and approve management policies and programs relating to compliance with legal and regulatory requirements, business ethics and environmental matters. NOMINATING COMMITTEE The Nominating Committee will make recommendations concerning the organization, size and composition of the Board of Directors and its Committees, propose nominees for election to the Board of Directors and its Committees and will consider the qualifications, compensation, and retirement of directors. PUBLIC AFFAIRS COMMITTEE The Public Affairs Committee will review and define New ITT's social responsibilities, including issues of significance to New ITT and its shareholders and employees. 162 169 NEW ITT EXECUTIVE OFFICERS Listed below is certain information as to the executive officers who have been selected to serve after the Distribution.
NAME, POSITION WITH NEW ITT AND AGE BIOGRAPHICAL DATA - ------------------------------------------ ------------------------------------------------- Rand V. Araskog, 63....................... See information under "-- NEW ITT BOARD OF Chairman and Chief Executive DIRECTORS". Robert A. Bowman, 40...................... See information under "-- NEW ITT BOARD OF President and Chief Operating Officer DIRECTORS". Juan C. Cappello, 57...................... Mr. Cappello has been Senior Vice President and Senior Vice President, Corporate Relations Director of Corporate Relations since 1984 and a corporate officer since 1981. He has occupied executive positions with ITT, both in Latin America and the United States, since joining ITT in 1968. Mr. Cappello also serves on the Board of Directors of ITT Educational Services, Inc., the Board of Ciga S.p.A. and of Ciga Immobiliaria Sardegna, a 51% owned subsidiary of Ciga S.p.A. Gerald C. Crotty, 43...................... Mr. Crotty has been Senior Vice President of ITT Senior Vice President and Chairman, since October 1994 and Chairman, President and President and Chief Executive Officer of Chief Executive Officer of ITT Information ITT Information Services Services, Inc. from October 1993 to the present. He served as Vice President of ITT from August 1991 until September 1994 and also served as President and Chief Operating Officer of ITT Consumer Financial Corporation from February 1992 until September 1993. Mr. Crotty served for several years as Secretary to the Governor of the State of New York ending in July 1991. Jon F. Danski, 42......................... Mr. Danski has been Senior Vice President and Senior Vice President and Controller Controller of ITT since October 1993. Prior to that time, Mr. Danski served as Vice President and General Auditor of RJR Nabisco Corporation from August 1989 until October 1993. Henry Gluck, 67........................... See information under "-- NEW ITT BOARD OF Chairman and Chief Executive Officer of DIRECTORS". CWI John Kapioltas, 67........................ Mr. Kapioltas has been Chairman of the Board and Chairman and Chief Executive Officer of Chief Executive Officer of ITT Sheraton since ITT Sheraton 1985 and was also President of ITT Sheraton between 1985 and 1993. Ralph W. Pausig, 60....................... Mr. Pausig has been Senior Vice President and Senior Vice President, Human Resources Director of Human Resources of ITT since 1987. Mr. Pausig also serves on the Board of Directors of ITT Educational Services, Inc. Ann N. Reese, 42.......................... Ms. Reese has been Senior Vice President and Executive Vice President and Chief Treasurer of ITT since September 1992. Ms. Reese Financial Officer served as Vice President and Assistant Treasurer of ITT from January 1989 to August 1992.
163 170
NAME, POSITION WITH NEW ITT AND AGE BIOGRAPHICAL DATA - ------------------------------------------ ------------------------------------------------- Richard S. Ward, 54....................... Mr. Ward has been Executive Vice President and Executive Vice President, General Counsel General Counsel of ITT since May 1994. Prior to and Corporate Secretary that time, Mr. Ward served as Senior Vice President and General Counsel of ITT from September 1992 to May 1994 and as Vice President and Associate General Counsel of ITT from 1984 to August 1992. Mr. Ward also serves on the Board of Directors of ITT Educational Services, Inc.
EMPLOYMENT AGREEMENTS WITH CERTAIN NEW ITT EXECUTIVE OFFICERS; OTHER RELATIONSHIPS Prior to the Distribution, New ITT is expected to enter into an employment contract with Mr. Araskog (the "Araskog Employment Agreement") which will provide for: (i) in addition to salary, participation in New ITT's benefit plans (other than pre-retirement and post-retirement life insurance benefits), contractual disability and death benefits, his employment as chairman and chief executive of New ITT until October 31, 2000 (when he will have reached age 69); (ii) his service as consultant to his successor as chief executive of New ITT from November 1, 2000 through October 31, 2003 for a fee of not less than $400,000 per year; (iii) his nomination as director of New ITT at each annual meeting of New ITT shareholders commencing with the annual meeting for 2001 and including the annual meeting to be held in 2003 and, upon election, payment to him of the usual director's fees for service in such capacity; (iv) the provision of office space and certain staff and transportation assistance in connection with his service as a director and consultant subsequent to October 31, 2000; (v) certain payments in the event that (A) at any time prior to October 31, 2000, Mr. Araskog is not re-elected as chairman and employed as chief executive, which payments would be made (I) in monthly installments over the term of the contract remaining through October 31, 2000 in amounts equal per annum to the salary received by Mr. Araskog for the calendar year immediately preceding such event plus a percentage of the average bonus received by Mr. Araskog with respect to the three calendar years immediately preceding such event and (II) in the form of a discounted lump sum payment on or about October 31, 2000 equal to the then present value of the consulting fee and the director's fees referred to above, or (B) after completion of services through October 31, 2000 in accordance with the terms of the contract, Mr. Araskog at any time prior to October 31, 2003 is not nominated as a director of New ITT, which payment would be in the form of a discounted lump sum payment equal to the then present value of the balance remaining of the consulting fee and the director's fees referred to above; and (vi) covenants by Mr. Araskog against competition with any business actively conducted by New ITT or any of its subsidiaries and for compliance with the New ITT Code of Corporate Conduct. An Agreement and Plan of Merger dated as of December 19, 1994, among ITT, an ITT subsidiary and CWI provided, among other things, for (i) an offer by the ITT subsidiary to purchase all the outstanding shares of common stock of CWI for $67.50 per share in cash and (ii) the subsequent merger of the ITT subsidiary into CWI (which would result in CWI becoming a wholly owned direct subsidiary of ITT). Concurrently with the execution of the Agreement and Plan of Merger, Mr. Henry Gluck, Chairman and Chief Executive Officer of CWI, entered into an amended and restated employment agreement with CWI and ITT (the "Gluck Employment Agreement"). The Gluck Employment Agreement became effective on January 24, 1995, when the ITT subsidiary acquired CWI shares pursuant to the aforementioned offer to purchase. The principal terms of the Gluck Employment Agreement provide for (i) a salary, subject to annual cost of living increases or decreases equivalent to two-thirds of the change in the consumer price index and further subject to discretionary increases by the Audit and Compensation Committee of the CWI Board of Directors, an annual incentive bonus which will be the greater of (A) 1% of the adjusted pre-tax net income of CWI and its subsidiaries which exceeds 12% of CWI's total shareholders' equity on the books of CWI as of the end of the previous fiscal year (as adjusted for changes during the relevant year) and (B) an amount based on an $800,000 target bonus, with a pay-out varying between 0% and 150% of the target bonus, determined by the degree to which pre-established performance goals based on CWI's budgeted operating cash flow and 164 171 improvements are attained, an annual grant (the first of which was effective January 24, 1995) of an ITT employee stock option for 35,000 shares of ITT Common Stock with an exercise price equal to the fair market value of such shares on the date of such grant, participation in CWI's benefit plans, supplemental retirement benefits and contractual disability and death benefits; (ii) Mr. Gluck's employment as chairman and chief executive of CWI during the five-year term of employment (the "Employment Term"); (iii) Mr. Gluck's nomination as a director of ITT at each annual meeting of ITT shareholders during the Employment Term (subject to retirement at age 72); (iv) the provision of office space, a private secretary and an automobile allowance; (v) the limitation that Mr. Gluck shall not be required to render services outside the west Los Angeles area except for business travel reasonably necessary in connection with CWI's business and with his service as a director of ITT; (vi) certain rights and payments in the event of a wrongful termination by CWI, such that (A) all the then outstanding unvested restricted or contingent stock and any unexercisable stock options held by Mr. Gluck would vest or become exercisable and (B) Mr. Gluck shall be entitled to (I) the present value (using a rate based on five-year treasury notes) of unpaid salary and incentive compensation for the then remaining term and (II) all benefits for the remaining term, subject to a mitigation obligation unless Mr. Gluck agrees to a 10% reduction in the amount otherwise payable; (vii) a one-year option, exercisable by Mr. Gluck, to terminate the Gluck Employment Agreement in the event of a Change in Control (as defined in the Gluck Employment Agreement) and to be entitled to the rights and payments substantially equivalent to the rights and payments for wrongful termination as described in clause (vi) above, plus a lump-sum amount equal to the Termination Benefit (as defined in the Gluck Employment Agreement) under CWI's Executive Security Plan; (viii) an indemnity by CWI in the case of claims related to Mr. Gluck's employment to the maximum extent allowed under the Florida General Corporation Act; (ix) covenants by Mr. Gluck (A) that during the Employment Term, Mr. Gluck shall not work for, or participate in, the activities of any firm which is engaged (I) in the operation of a casino in the continental United States or (II) in any line of business from which CWI and its subsidiaries derive at least 25% of their consolidated revenue and which is engaged in significant competition with CWI or its subsidiaries and (B) that during or after the Employment Term, Mr. Gluck will not disclose confidential information of CWI; and (x) confirmation that ITT subsidiary's acquisition of CWI shares pursuant to the offer to purchase constitutes a Change of Control (as defined in the Gluck Agreement) giving Mr. Gluck the right to terminate his employment as discussed in clause (vii) above. Immediately prior to the Distribution, it is expected that ITT will assign the Gluck Employment Agreement to New ITT and the Gluck Employment Agreement will be amended to provide that, among other things, during the term of the Gluck Employment Agreement, the Nominating Committee of New ITT (rather than ITT, as is currently in effect) will nominate Mr. Gluck for election as a director of New ITT at each annual meeting of the shareholders that immediately precedes the expiration of the Employment Term, that the stock option in respect of ITT Common Stock will be in respect of New ITT Common Stock and that New ITT will guarantee the undertakings directly related to New ITT or its common stock and the obligations of CWI. Pursuant to the ITT subsidiary's offer to purchase with respect to the CWI common stock, Mr. Gluck caused the tender of 433,356 shares of common stock owned by Mr. Gluck and 10,000 shares of CWI common stock owned by a foundation controlled by Mr. Gluck. These shares constituted Mr. Gluck's entire holdings of such shares. All such shares were purchased by the ITT subsidiary pursuant to the offer. Lazard Freres & Co., of which Mr. David-Weill is Senior Partner, performed various investment banking services for ITT and its subsidiaries in 1994. It is anticipated that such firm will perform similar services for ITT and its subsidiaries during 1995 and New ITT and its subsidiaries thereafter. In 1988, the ITT Master Retirement Trust, Industries Accident and Indemnity Company and Industries Life Insurance Company (the "ITT Investment Vehicles") committed to invest an aggregate of $35 million in, and became limited partners of, Corporate Partners, L.P., a fund organized by Lazard Freres & Co. With certain exceptions, such commitment expired in 1994. Under the terms of the limited partnership agreement, the ITT Investment Vehicles have agreed to pay Corporate Advisors, L.P., the general partner of Corporate Partners, L.P., certain amounts in connection with their investment. During 1994, the ITT Investment Vehicles paid Corporate Advisors, L.P. fees aggregating $204,377. See also "THE DISTRIBUTION - -- FINANCIAL ADVISORS". 165 172 STOCK OWNERSHIP OF NEW ITT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information concerning shares of New ITT Common Stock projected to be beneficially owned after the Distribution Date by (a) each of New ITT's directors and the executive officers named in the summary compensation table and (b) all New ITT directors and executive officers as a group. The projections are based on the number of shares of ITT Common Stock and ITT ESOP Preferred Stock owned by such persons at March 31, 1995, and the expected treatment of stock awards held by such directors and executive officers at that date prior to any adjustments in values of employee stock options as a result of the Distribution. Based on such projections, none of the New ITT directors or executive officers individually will beneficially own as much as 1% of the outstanding shares of New ITT Common Stock after the Distribution, however, the number of shares owned by all directors and executive officers as a group will represent slightly in excess of 1% of the outstanding shares of New ITT Common Stock after the Distribution.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2) ----------------------------------------------- ----------------------- ------------------- Rand V. Araskog................................ 653,139 Robert A. Bowman............................... 115,382 Henry Gluck.................................... 1,000 John Kapioltas................................. 102,126 Richard S. Ward................................ 74,835 Bette B. Anderson.............................. 2,000 Nolan D. Archibald............................. 8,350 Robert A. Burnett.............................. 1,166 Michel David-Weill............................. 1,000 Paul G. Kirk, Jr............................... 1,010 Edward C. Meyer................................ 2,500 Benjamin F. Payton............................. 491 Margita E. White............................... 2,000 All New ITT directors and executive officers as a group (18)........... 1,237,896
- --------------- (1) All shares reflected are owned directly except as hereinafter otherwise indicated. Pursuant to regulations of the SEC, shares (i) receivable by directors and executive officers upon exercise of employee stock options exercisable within 60 days after March 31, 1995, (ii) allocated to the accounts of certain directors and executive officers under the ITT Investment and Savings Plan at March 31, 1995 and (iii) acquired by directors and executive officers under the ITT Dividend Reinvestment and Common Stock Purchase Plan through March 31, 1995 are deemed to be beneficially owned by such directors and executive officers at said date. Of the number of shares reflected above, (i) the following represent shares that may be acquired upon exercise of employee stock options for the accounts of: Mr. Araskog, 229,312 common shares; Mr. Bowman, 114,696 common shares; Mr. Kapioltas, 78,320 common shares; Mr. Ward, 53,903 common shares; and all directors and executive officers of New ITT as a group, 715,411 common shares; (ii) the following amounts were allocated under the ITT Investment and Savings Plan to the accounts of: Mr. Araskog, 17,463 common shares and 497 ESOP preferred shares; Mr. Bowman, 384 common shares and 270 ESOP preferred shares; Mr. Kapioltas, 4,731 common shares and 483 ESOP preferred shares; Mr. Ward, 7,651 common shares and 572 ESOP preferred shares; and all directors and executive officers of New ITT as a group, 35,336 common shares and 3,719 ESOP preferred shares; and (iii) the following amounts were acquired under the ITT Dividend Reinvestment and Common Stock Purchase Plan for the accounts of: Mr. Kapioltas, 2,402 common shares; Mr. Ward, 1,854 common shares; Mr. Burnett, 166 common shares; Mr. Payton, 91 common shares; and all directors and executive officers of New ITT as a group 4,657 common shares. (2) Share ownership does not exceed one percent of the class so owned, except as noted above in the case of all directors and executive officers as a group. 166 173 COMPENSATION OF NEW ITT EXECUTIVE OFFICERS The following table discloses the compensation received by New ITT's Chief Executive Officer and the four other most highly paid executive officers for the fiscal years ending December 31, except for Mr. Gluck whose compensation is for the fiscal years ending July 31. During 1994, Messrs. Araskog, Bowman and Ward were executive officers of ITT Corporation. During 1994, Mr. Gluck was chief executive officer of Caesars World Inc. which was an independent, publicly traded company. Mr. Kapioltas was chief executive officer of ITT Sheraton Corporation, a wholly owned subsidiary of ITT. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------------------------------------- ---------------------------- OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER COMPENSATION STOCK UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY(1)($) BONUS($) (2)($) AWARDS(3)($) OPTIONS(4)(#) (5)($) - ----------------------------------- ---- ------------ --------- ------------ ------------ ------------- ------------ Rand V. Araskog.................... 1994 1,625,000 2,405,000 219,457 -- 180,000 58,656 Chairman, President and 1993 1,525,000 2,584,900 185,793 -- 163,968 54,346 Chief Executive Officer-ITT 1992 1,462,500 -- 210,459 -- -- 51,188 Robert A. Bowman................... 1994 456,250 471,750 25,534 -- 60,000 13,844 Executive Vice President 1993 416,667 540,300 368,537 -- 65,587 11,388 & Chief Financial Officer-ITT 1992 289,166 -- 587 -- 5,466 6,544 Henry Gluck........................ 1994 886,144 741,840 13,029 1,995,550 -- 26,919 Chairman and Chief 1993 862,400 848,008 10,802 2,428,398 -- 20,822 Executive Officer-CWI 1992 814,400 800,000 -- 2,140,500 -- -- John Kapioltas..................... 1994 510,417 400,000 13,051 -- 15,000 19,652 Chairman and Chief Executive 1993 500,000 175,000 8,693 -- 16,397 18,471 Officer-ITT Sheraton 1992 479,167 -- 4,601 -- -- 16,805 Richard S. Ward.................... 1994 358,750 336,874 22,544 -- 35,000 14,338 Executive Vice President 1993 285,833 200,000 30,953 -- 27,328 10,976 and General Counsel-ITT 1992 226,667 -- 246,293 -- -- 7,986
- --------------- (1) The salary for Mr. Gluck includes fixed monthly auto allowance. (2) All allowances shown in this column are tax reimbursement allowances, which are intended to offset the inclusion in taxable income of the value of certain benefits, except that: (a) the amounts shown for Mr. Araskog also includes $128,873, $99,929, and $132,052 in 1994, 1993, and 1992, respectively, for personal benefits including tax and financial counseling and transportation services, (b) the amount shown for Mr. Bowman in 1993 also includes $205,373 in relocation allowance and (c) the amounts for Mr. Ward include $11,167 and $164,057 in relocation allowances in 1993 and 1992, respectively. (3) The column for Long-Term Incentive Plan Payouts was eliminated because there were no such items during the three-year period ending in 1994. The amounts shown for Mr. Gluck represent the value of restricted shares of CWI common stock at the time of grant. The aggregate number of restricted shares of CWI common stock at July 31, 1994 held by Mr. Gluck and the value (in parentheses) of such shares as of July 29, 1994 based on the closing price of CWI shares on the NYSE on such date was 222,499 ($8,844,335). Reference is made to "EMPLOYMENT AGREEMENTS WITH CERTAIN NEW ITT EXECUTIVE OFFICERS; OTHER RELATIONSHIPS" for information on the purchase by an ITT subsidiary of CWI common stock. (4) The named executives do not hold any stock appreciation rights in connection with the options shown. The number and exercise prices of all ITT stock options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (5) Except for Mr. Gluck, all amounts shown in this column are company contributions under the ITT Investment and Savings Plan and the ITT Excess Savings Plan, which are defined contribution plans. ITT makes a matching contribution in an amount equal to 50% of an employee's contribution, such matching contribution not to exceed three percent (3%) of such employee's salary. Under these plans, ITT also makes a non-matching contribution equal to one-half of one percent ( 1/2 of 1%) of an employee's salary. In the case of Mr. Gluck, the amounts in this column include (a) $2,000 as an annual contribution to an IRA (such IRA Plan terminated as of December 31, 1993), (b) $21,720 paid for fiscal 1994 for premiums on employee-owned life insurance and (c) $3,199 for fiscal 1994, Section 401(k) retirement plan contributions. ANNUAL INCENTIVE BONUS PLAN Under the ITT Annual Incentive Bonus Plan, the amounts of annual bonus awards are based upon corporate financial performance for the year compared to annual performance goals established by the 167 174 Compensation and Personnel Committee at the beginning of the year. For 1994, such performance goals were earnings per share compared to budget, earnings per share compared to the prior year and return on equity compared to budget. These measures were weighted 40%, 40% and 20%, respectively. The weighted average performance factor under the formula was calculated at 116%. Under a leveraged performance/payout schedule, the performance factor generated a standard bonus adjustment factor of 148%. The calculated bonus amounts for 1994 performance are shown in the Summary Compensation Table above. The Compensation and Personnel Committee awarded a bonus of $2,405,000 to Mr. Araskog for 1994. This amount, as well as the awards for the other named officers, was determined strictly in accordance with the above described formula and standard bonus adjustment factor, except for Mr. Ward, who earned a 1994 bonus of $236,874 pursuant to the formula. In addition, the Compensation and Personnel Committee authorized a special discretionary bonus of $100,000 for Mr. Ward to recognize his contributions as General Counsel in negotiating new business acquisitions in 1994. At the 1995 Annual Meeting of ITT Shareholders, the shareholders approved certain amendments to the annual incentive bonus program. One of the proposed amendments established a maximum amount of $4 million which may be paid to any covered executive. The other amendment provides that a participant's target bonus award for a particular performance year will be based upon the covered employee's annual rate of salary and position as of the end of such performance year rather than at the beginning thereof. If the proposed amendments had been in effect at the time the performance bonuses for 1994 were determined, the amount of the performance bonus payable to Mr. Araskog would still have been the amount actually paid as shown under "Bonus" in the Summary Compensation Table set forth above, while the amounts of the bonuses payable to Mr. Bowman and Mr. Ward would have been $555,000 and $440,000, respectively, instead of the amounts shown opposite their respective names under "Bonus" in such table. Mr. Gluck's bonus was determined pursuant to a formula referred to above under "-- EMPLOYMENT AGREEMENTS WITH CERTAIN NEW ITT EXECUTIVE OFFICERS; OTHER RELATIONSHIPS". Mr. Kapioltas' bonus was determined according to a bonus plan applicable to ITT Sheraton. In connection with the Distribution, responsibility for payments (and the corresponding reserves) to such current ITT executives in respect of the ITT Annual Incentive Bonus Plan will be allocated among ITT Industries, New ITT and ITT Hartford pursuant to the Employee Benefits Services and Liability Agreement described under "RELATIONSHIP BETWEEN ITT INDUSTRIES, NEW ITT AND ITT HARTFORD AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". It is contemplated that an annual bonus program with substantially comparable terms will be carried forward in future years by New ITT in substantially the same form after the Distribution Date and that it will be administered by the Compensation and Personnel Committee of the New ITT Board of Directors. The Compensation and Personnel Committee, however, will evaluate the program and may adopt a new program based on industry competitive practices and to comply with Federal income tax requirements with regard to performance-based, tax deductible executive compensation. 168 175 OPTION GRANTS ON ITT COMMON STOCK TO NEW ITT EXECUTIVES IN LAST FISCAL YEAR The following table provides information on fiscal year 1994 grants of options to the named New ITT executives to purchase shares of ITT Common Stock. No options to acquire New ITT Common Stock have been granted or are outstanding.
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK - ------------------------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES SECURITIES % OF TOTAL OF STOCK PRICE UNDERLYING OPTIONS APPRECIATION OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(4) GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION -------------------------- NAME (#) 1994(2) ($/SHARE) DATE 5% 10% ---- ---------- ------------ --------- ---------- ---------- ----------- Rand V. Araskog............ 180,000 9.6 $ 84.00 10/13/04 $9,509,400 $24,096,600 Robert A. Bowman........... 60,000 3.2 84.00 10/13/04 3,169,800 8,032,200 Henry Gluck................ -- -- -- -- John Kapioltas............. 15,000 0.8 84.00 10/13/04 792,450 2,008,050 Richard S. Ward............ 35,000 1.9 84.00 10/13/04 1,849,050 4,685,450
- --------------- (1) The numbers in this column represent options to purchase ITT Common Stock. (2) Percentages indicated are based on a total of 1,876,198 options granted to 656 employees during 1994. (3) The exercise price per share is 100% of the fair market value of a share of ITT Common Stock on the date of grant. The exercise price may be paid in cash or in shares of ITT Common Stock valued at their fair market value on the date of exercise. Options granted on October 11, 1994 at the exercise price of $84.00 per share are not exercisable until the trading price of ITT Common Stock equals or exceeds $105.00 per share for 10 consecutive trading days (which occurred on May 15, 1995) at which time two-thirds of the options will be exercisable; when the trading price equals or exceeds $117.60 per share for 10 consecutive trading days, the options will be fully exercisable. Notwithstanding the above, the options will be fully exercisable after October 11, 2003, but no later than October 13, 2004. (4) At the end of the term of the options granted on October 11, 1994, the projected price of a share of ITT Common Stock would be $136.83 and $217.67 at an assumed annual appreciation rate of 5% and 10%, respectively. Pursuant to Mr. Gluck's amended employment agreement with CWI, on January 25, 1995, ITT granted an option to purchase 35,000 shares of ITT Common Stock at an exercise price of $89.88 per share. This option will become exercisable as to two-thirds of such shares when the closing price of ITT Common Stock equals or exceeds $112.35 per share for 10 consecutive trading days and will become fully exercisable upon the earlier of January 25, 2000 or when the closing price of ITT Common Stock equals or exceeds $125.83 per share for 10 consecutive trading days. The option will expire nine years from the date of grant. On May 9, 1995, the Compensation and Personnel Committee of ITT awarded 430,000 stock options to eight executive officers of New ITT including Messrs. Araskog, Bowman, Kapioltas and Ward for 180,000, 60,000, 15,000 and 35,000 shares of ITT Common Stock, respectively. These options were granted at the exercise price of $108.75 per share and will become fully exercisable at the earlier of the ninth anniversary date of the grant or when the closing price of ITT Common Stock is equal to or greater than $135.38 for ten consecutive trading days. All of these options will expire on May 11, 2005. In addition, on May 9, 1995, the Committee granted 47,500 shares of restricted stock to five executive officers of New ITT including Messrs. Araskog, Bowman and Ward for 25,000, 10,000 and 2,500 shares, respectively. Mr. Araskog's award will vest in full on January 1 of the year following the year of his retirement. Awards for the other named officers will vest in full on the fifth anniversary of the date of grant. Termination of employment before restrictions lapse will generally cause the shares to be forfeited except in cases of death, disability or retirement. Recipients of restricted stock receive dividends in the same manner as other shareholders. In connection with the Distribution, it is expected that each of the above stock options and restricted stock awards will be surrendered to ITT and that substitute stock options and substitute restricted stock awards will be made under the 1995 New ITT Incentive Stock Plan (as described below). For a discussion of the treatment of stock options and other stock awards held by current employees of ITT and future employees 169 176 of ITT Industries, New ITT or ITT Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS". AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUE(1) The following table provides information on option exercises in 1994 by the named executives of New ITT and the value of each such executive's unexercised options to acquire ITT Common Stock at December 31, 1994. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
NUMBER OF SECURITIES VALUE OF UNEXERCISED, UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS HELD AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(2) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------- ---------------- ----------- ----------- ------------- ----------- ------------- Rand V. Araskog.............. -- -- -- 343,968 -- 1,566,337 Robert A. Bowman............. -- -- 34,615 123,766 1,249,083 736,343 Henry Gluck.................. -- -- -- -- -- -- John Kapioltas............... -- -- 57,389 31,397 2,194,311 142,745 Richard S. Ward.............. -- -- 12,352 62,328 518,413 284,206
- --------------- (1) The number and exercise price of all options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (2) Based on the NYSE consolidated trading closing price of ITT Common Stock on December 30, 1994 of $88.63. ITT LONG-TERM PERFORMANCE PLAN Under the ITT Long-Term Performance Plan, target contingent cash awards were made on December 12, 1991 (the "1992 Class Awards") to ITT executives, including certain of those individuals who will be executive officers of New ITT after the Distribution. Under the 1992 Class Awards, for Messrs. Araskog, Bowman and Ward, the ultimate payment value of a target award, if any, will be based upon ITT's return on equity ("ROE") performance during the three-year period 1993 through 1995 as measured against predetermined ROE goals for each year. Each year of the performance period has been assigned a specific weighting: 15%, 35% and 50% for 1993, 1994 and 1995, respectively. If the actual weighted average ROE performance is less than 90% of the ROE goals, no payment is earned. A similar formula will apply to Mr. Kapioltas based on ITT Sheraton's ROE performance. 1992 Class Awards for the five most highly compensated executive officers of New ITT are listed in the table below:
PERFORMANCE OR OTHER PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS CONTINGENT TARGET MATURATION AWARD AWARD AWARD NAME AWARDS OR PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3) - --------------------------------- ----------------- ------------ ---------- ---------- ---------- Rand V. Araskog.................. $ 3,500,000 12/31/95 $1,166,667 $3,500,000 $7,000,000 Robert A. Bowman................. 1,200,000 12/31/95 400,000 1,200,000 2,400,000 Henry Gluck...................... -- -- -- -- -- Richard S. Ward.................. 300,000 12/31/95 100,000 300,000 600,000 John Kapioltas................... 700,000 12/31/95 233,333 700,000 1,400,000
- --------------- (1) Based upon a weighted average ROE goal achievement of 90%, resulting in payment of 33% of the target award in the first quarter of 1996. (2) Based upon a weighted average ROE goal achievement of 100%, resulting in payment of 100% of the target award in the first quarter of 1996. 170 177 (3) Based upon a weighted average ROE goal achievement of 130% or more, resulting in payment of 200% of the target award in the first quarter of 1996. Reserves for these awards under the Plan are maintained on the books of ITT and ITT Sheraton. In connection with the Distribution, however, responsibility for payments (and the corresponding reserves of ITT) to current ITT executives in respect of the Plan will be allocated between ITT Industries and New ITT pursuant to the Employee Benefits Services and Liability Agreement described under "RELATIONSHIP BETWEEN ITT HARTFORD, NEW ITT AND ITT INDUSTRIES AFTER THE DISTRIBUTION -- EMPLOYEE BENEFITS AGREEMENT". It is contemplated that New ITT may adopt a comparable long-term incentive plan after the Distribution Date and, if adopted, the plan will be administered by the Compensation and Personnel Committee of the New ITT Board of Directors. For a description of certain other aspects of the Plan, see "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT LONG-TERM PERFORMANCE PLAN". NEW ITT COMPENSATION, BENEFIT AND RETIREMENT PLANS The following is a description of the compensation, benefit and retirement plans currently expected to be adopted by New ITT. 1995 NEW ITT INCENTIVE STOCK PLAN One of the reasons for the Distribution is to enable New ITT to provide meaningful long-term incentives for its executives and other key employees, directly related to their individual and collective performance in enhancing shareholder value. Once the Distribution has been effected and a public market has developed for the New ITT Common Stock, market-based incentives based on New ITT stock performance will allow New ITT to provide significant incentives to the key employees of New ITT to a degree not previously available under ITT's compensation programs. Awards of stock options and other market-based incentives will permit key employees to profit proportionately as shareholder value is enhanced (as evidenced by the market price for New ITT Common Stock) and will also give New ITT an effective tool to encourage key employees to continue in the employ of New ITT. In order to achieve these objectives, effective prior to the Distribution, the Board of Directors of New ITT is expected to adopt the 1995 New ITT Incentive Stock Plan (the "1995 New ITT Plan"). The 1995 New ITT Plan will be administered by the New ITT Compensation and Personnel Committee. Approval of Proposal Four set forth under "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute shareholder approval of the 1995 New ITT Plan. The 1995 New ITT Plan provides for the grant of incentive stock options (qualifying under Section 422 of the Internal Revenue Code), non-qualified stock options, SARs, performance shares and restricted stock, or any combination of the foregoing, as the Compensation and Personnel Committee may determine, as well as substitute stock options, stock appreciation rights and restricted stock (collectively, "Awards"). The 1995 New ITT Plan will expire on December 31, 2005. The 1995 New ITT Plan contains a formula for establishing an annual limit on the number of shares which may be awarded (or with respect to which non-stock Awards may be made) in any given calendar year (the "Annual Limit"). The Annual Limit formula is expressed as a percentage of New ITT's total issued and outstanding Common Stock and treasury stock as of the year end immediately preceding the year of awards ("Plan Year"). Under the Annual Limit formula, the maximum number of shares of New ITT Common Stock for which Awards may be granted under the Plan in each Plan Year shall be 1.5% of the total of the issued and outstanding shares of New ITT Common Stock and treasury stock as reported in the Annual Report on Form 10-K of New ITT for the fiscal year ending immediately prior to any Plan Year. Any unused portion of the Annual Limit for any Plan Year shall be carried forward and be made available for awards in succeeding Plan Years. In addition to the foregoing, in no event shall more than five million shares of New ITT Common Stock be cumulatively available for Awards of incentive stock options under the 1995 New ITT Plan, and provided 171 178 further, that no more than 20% of the total number of shares available on a cumulative basis shall be available for restricted stock and performance share awards. For any Plan Year, no individual employee may receive stock options for more than the lesser of (i) 10% of the Annual Limit applicable to that Plan Year and (ii) 500,000 shares; except that, for the Plan Year that follows the Distribution Date, each individual employee may receive in addition to the foregoing limit that number of stock options equal to the lesser of (x) 2,600,000 and (y) the number of substitute stock options required to replace ITT stock options surrendered by such employee in connection with the spin-off by ITT of the shares of New ITT to ITT shareholders. Subject to the above limitations, shares of New ITT Common Stock to be issued under the 1995 New ITT Plan may be made available from the authorized but unissued New ITT Common Stock or from shares purchased on the open market. In the event of a stock split or stock dividend, reorganization, recapitalization or other similar event affecting the price of New ITT Common Stock, the number of shares subject to the 1995 New ITT Plan, the number of shares then subject to Awards and the price per share payable on exercise of options may be appropriately adjusted by the Compensation and Personnel Committee. Other than the above adjustments, it is the New ITT Board's policy that no options will be cancelled and reissued at a lower price unless the shareholders approve such action. For the purpose of computing the total number of shares of stock available for Awards under the 1995 New ITT Plan, there shall be counted against the foregoing limitations the number of shares of New ITT Common Stock subject to issuance upon exercise or settlement of Awards and the number of shares of New ITT Common Stock which equal the value of Performance Share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the 1995 New ITT Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of New ITT Common Stock or are exchanged for other Awards, the shares of stock which were theretofore subject to such Awards shall again be available for Awards under the 1995 New ITT Plan to the extent of such forfeiture, termination, expiration, cash settlement or exchange of such Awards. Further, any shares that are exchanged (either actually or constructively) by optionees as full or partial payment to New ITT of the purchase price of shares being acquired through the exercise of a stock option granted under the 1995 New ITT Plan may be available for subsequent Awards. The Compensation and Personnel Committee, made up entirely of non-employee directors, none of whose members may receive any award under the 1995 New ITT Plan, will administer the 1995 New ITT Plan, including, but not limited to, making determinations with respect to the designation of those employees who shall receive Awards, the number of shares to be covered by options, SARs and restricted stock awards, the exercise price of options (which may not be less than 100% of the fair market value of New ITT Common Stock on the date of grant), other option terms and conditions and the number of performance shares to be granted and the applicable performance objectives. The Compensation and Personnel Committee may impose such additional terms and conditions on an Award as it deems advisable. The Compensation and Personnel Committee's decisions in the administration of the 1995 New ITT Plan shall be binding on all persons for all purposes. The Compensation and Personnel Committee may in its sole discretion delegate such administrative powers as it may deem appropriate to the chief executive officer or other members of senior management, except that Awards to executive officers shall be made solely by the Compensation and Personnel Committee and subject to compliance with Rule 16b-3 of the Exchange Act. Awards will be made, in the discretion of the Compensation and Personnel Committee, to employees of New ITT and any of its subsidiaries (including officers and members of the Board of Directors who are also employees) whose responsibilities and decisions directly affect the performance of New ITT and its subsidiaries. Substitute Awards To provide meaningful compensation in the form of stock options to acquire New ITT Common Stock to key employees of New ITT who surrendered options to acquire stock in ITT in connection with the Distribution, the Compensation and Personnel Committee is authorized to issue substitute New ITT stock 172 179 options and related rights in the aggregate amount of 16,500,000 shares or such lower number as may be necessary to preserve the economic value of the surrendered ITT options and related rights. Subject to this limitation, shares of New ITT Common Stock to be issued upon the exercise of substitute stock options may be made available from authorized but unissued shares or from treasury shares or from shares purchased in the open market. The maximum number of substitute New ITT stock options and related rights that may be granted to any individual employee is 2,600,000 or such lower number as may be necessary to preserve the economic value of the surrendered ITT options and related rights by any such individual employee. The Compensation and Personnel Committee is also authorized to issue substitute grants of New ITT restricted stock to replace the ITT restricted stock surrendered by New ITT employees in connection with the Distribution. The terms and conditions of each substitute stock award, including, without limitation, the time or times when, and the manner in which, each substitute option shall be exercisable, the duration of the exercise period, the permitted method of exercise, settlement and payment, the rules that shall apply in the event of the termination of employment of the key employee, the events, if any, that may give rise to a key employee's right to accelerate the time of exercise of an option and the vesting provisions of restricted stock, shall be the same as those of the surrendered ITT stock award. Stock Options and Related SARs Incentive stock options and related SARs under the 1995 New ITT Plan must expire within 10 years after grant; non-qualified stock options and related SARs will expire not more than 10 years and two days after grant. No SAR may be exercised until at least six months after it is granted. The exercise price for options and SARs must be at least equal to the fair market value of the New ITT Common Stock on the date of grant. The exercise price for options must be paid to New ITT at the time of exercise and, in the discretion of the Compensation and Personnel Committee, may be paid in the form of cash or already-owned shares of New ITT Common Stock or a combination thereof. During the lifetime of an employee, an option must be exercised only by the individual (or his or her estate or designated beneficiary) but no later than three months after his or her termination of employment (or for longer periods as determined by the Compensation and Personnel Committee if termination is caused by retirement, disability or death, but in no event later than the expiration of the original term of the option). If an optionee voluntarily resigns or is terminated for cause, the options and SARs are cancelled immediately. Performance Shares Performance shares under the 1995 New ITT Plan are contingent rights to receive future payments based on the achievement of individual or company performance objectives as prescribed by the Compensation and Personnel Committee. The maximum number of performance shares that may be granted to any individual employee in any given year is 100,000. The amounts paid will be based on actual performance over a period from two to five years, as determined by the Compensation and Personnel Committee, using [one or more of the following] objective criteria, as it deems appropriate: earnings per share, return on equity, cashflow or total shareholder return of New ITT. Payments may be made in the form of shares of New ITT Common Stock, cash or a combination of New ITT Common Stock and cash. The ultimate payments are determined by the number of shares earned and the price of New ITT Common Stock at the end of the performance period. In the event an employee terminates employment during such a performance period, the employee will forfeit any right to payment. However, in the case of retirement, permanent total disability, death or cases of special circumstances, the employee may, in the discretion of the Compensation and Personnel Committee, be entitled to an award prorated for the portion of the performance period during which he or she was employed by New ITT. 173 180 Restricted Shares Restricted shares of New ITT Common Stock awarded under the 1995 New ITT Plan shall be issued subject to a restriction period set by the Compensation and Personnel Committee during which time the shares may not be sold, transferred, assigned or pledged. In the event an employee terminates employment during a restriction period, all such shares still subject to restrictions will be forfeited by the employee and reacquired by New ITT. The Compensation and Personnel Committee may provide for the lapse of restrictions in installments where deemed appropriate and it may also require the achievement of predetermined performance objectives in order for such shares to vest. The recipient, as owner of the awarded shares, shall have all other rights of a shareholder, including the right to vote the shares and receive dividends and other distributions during the restriction period. The restrictions may be waived, in the discretion of the Compensation and Personnel Committee, in the event of the awardee's retirement, permanent total disability, death or in cases of special circumstances. Compensation Upon Change of Control The 1995 New ITT Plan provides for the automatic protection of intended economic benefits by key employees in the event of a change in control of New ITT (i.e., upon the occurrence of an "Acceleration Event" as defined in the 1995 New ITT Plan). Notwithstanding any other provisions of the 1995 New ITT Plan, upon the occurrence of an Acceleration Event (a) all options and SARs will generally become immediately exercisable for a period of 60 calendar days; (b) options and SARs will continue to be exercisable for a period of seven months in the case of an employee whose employment is terminated other than for cause or who voluntarily terminates employment because of a good faith belief that such employee will not be able to discharge his or her duties; (c) SARs exercised during the 60-day period will be settled fully in cash based on a formula price generally reflecting the highest price paid for a share of New ITT Common Stock during the 60-day period preceding the date such SAR is exercised; (d) "limited stock appreciation rights" shall automatically be granted on all outstanding options not otherwise covered by a SAR, which shall generally be immediately exercisable in full and which shall entitle the holders to the same exercise period and formula price referred to in (a), (b) and (c) above; (e) outstanding performance share awards shall automatically vest, with the valuation of such performance shares based on the formula price; and (f) restrictions applicable to awards of restricted stock shall be automatically waived. Options, SARs, performance shares or restricted stock which are granted, accelerated or enhanced upon the occurrence of a takeover (i.e., an "Acceleration Event" as defined in the 1995 New ITT Plan) may give rise, in whole or in part, to "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code and, to such extent, will be nondeductible by New ITT and subject to a 20% excise tax to the awardee. "Acceleration Event" is generally defined in the 1995 New ITT Plan as any of the following events: (i) a report on Schedule 13D shall be filed with the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person (within the meaning of Section 13(d) of the Exchange Act), other than New ITT or a subsidiary of New ITT or any employee benefit plan sponsored by New ITT or a subsidiary of New ITT, is the beneficial owner directly or indirectly of 20% or more of the outstanding New ITT Common Stock; (ii) any person (within the meaning of Section 13(d) of the Exchange Act), other than New ITT or a subsidiary of New ITT or any employee benefit plan sponsored by New ITT or a subsidiary of New ITT, shall purchase shares pursuant to a tender offer or exchange offer to acquire any New ITT Common Stock (or securities convertible into such Common Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or more of the outstanding New ITT Common Stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to acquire Common Stock); (iii) the shareholders of New ITT shall approve (A) any consolidation or merger of New ITT in which New ITT is not the continuing or surviving corporation or pursuant to which shares of New ITT Common Stock would be converted into cash, securities or other property, other than a merger of New ITT in which holders of New ITT Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as 174 181 immediately before or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of New ITT; or (iv) there shall have been a change in a majority of the members of the Board of Directors of New ITT within a 12-month period unless the election or nomination for election by New ITT's shareholders of each new director during such 12-month period was approved by the vote of two-thirds of the directors then still in office who were directors at the beginning of such 12-month period. The New ITT Board may amend or discontinue the 1995 New ITT Plan at any time and, specifically, may make such modifications to the 1995 New ITT Plan as it deems necessary to avoid the application of Section 162(m) of the Internal Revenue Code and the Treasury regulations issued thereunder. However, shareholder approval is required for certain amendments, including any amendment which may (i) increase the number of shares reserved for awards (except as provided in the 1995 New ITT Plan with respect to stock splits or other similar changes), (ii) materially change the group of employees eligible for Awards, (iii) materially increase the benefits accruing to participants under the 1995 New ITT Plan or (iv) permit Awards after December 31, 2005. NEW ITT SEVERANCE PAY PLAN The existing ITT severance pay plan applies to ITT senior executives who are United States citizens or who are employed in the United States. Under the plan, if a participant's employment is terminated by ITT, other than for cause or as a result of other occurrences specified in the plan, the participant is entitled to severance pay in an amount up to 24 months of base salary depending upon his or her length of service. In no event shall such severance pay exceed the amount of base salary for the number of months remaining between the termination of employment and the participant's normal retirement date or two times the participant's total annual compensation during the year immediately preceding such termination. The plan includes offset provisions for other compensation from ITT and requirements on the part of executives with respect to non-competition and compliance with the ITT Code of Corporate Conduct. Under the plan, severance payments would ordinarily be made monthly over the scheduled term of such payments; however, ITT has the option to make such payments in the form of a single lump sum payment discounted to present value. At June 1, 1995, the named executive officers in the Summary Compensation Table (see "-- COMPENSATION OF NEW ITT EXECUTIVE OFFICERS") participate in this plan, except for Messrs. Araskog and Gluck who are covered by employment contracts. The annual salaries of Messrs. Bowman, Kapioltas and Ward as of June 1, 1995, were $500,000, $525,000 and $400,000, respectively. After the Distribution, it is anticipated that New ITT will adopt a similar plan for its senior executives, except for Messrs. Araskog and Gluck, each of whom will be covered by an employment agreement (see "-- EMPLOYMENT AGREEMENTS WITH CERTAIN NEW ITT EXECUTIVE OFFICERS; OTHER RELATIONSHIPS"). NEW ITT INVESTMENT AND SAVINGS PLAN Many of the salaried employees of New ITT have been participants in the ITT Investment and Savings Plan for Salaried Employees. CWI maintains a similar plan which will be continued after the Distribution Date. Effective as of the Distribution Date, the ITT Investment and Savings Plan will be split into three separate plans, each covering the ITT Industries Employees, the New ITT Employees or the ITT Hartford Employees. Existing account balances of current New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the New ITT Investment and Savings Plan. Existing account balances of current ITT Hartford Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account balances of current ITT Industries Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will remain in the ITT Investment and Savings Plan, 175 182 which will continue in existence as the ITT Industries Investment and Savings Plan. Existing account balances of each former employee of ITT Industries, New ITT and ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such former employee, will be transferred to the investment and savings plan maintained by the company responsible for providing retirement benefits to such former employee. Federal legislation limits the annual contributions which an employee may make to the New ITT Investment and Savings Plan, a tax-qualified retirement plan. Accordingly, prior to the Distribution Date, New ITT will adopt the New ITT Excess Savings Plan, which will enable an employee who is precluded by these limitations from contributing six percent of salary to the tax-qualified plan to make up the shortfall through salary deferrals and thereby receive the three percent maximum matching company contribution and one-half of one percent non-matching company contribution otherwise allowable under the tax-qualified plan. Salary deferrals, company contributions and imputed earnings will be entered into a book reserve account maintained by New ITT for each participant. NEW ITT RETIREMENT PROGRAM ITT Sheraton sponsors a retirement plan for its U.S. salaried employees which mirrors the ITT Salaried Retirement Plan. CWI maintains a non-qualified pension arrangement for certain senior level executives, which will be continued after the Distribution Date. New ITT will adopt the ITT Sheraton Plan as the New ITT Salaried Retirement Plan and extend it to employees formerly covered by the ITT Salaried Retirement Plan. The New ITT Salaried Retirement Plan will be amended to recognize service with other ITT companies prior to the Distribution Date for eligibility, vesting and benefit accrual purposes and will further provide for an offset of any benefit payable from any ITT retirement plan covering the same period of service. The Plan will be further amended to recognize service with ITT Industries and ITT Hartford after the Distribution Date for eligibility and vesting purposes. The New ITT Salaried Retirement Plan will cover all eligible salaried employees of New ITT, including senior executive officers and other New ITT executives, but will not cover any employees of ITT Industries or ITT Hartford. The cost of the New ITT Salaried Retirement Plan will be borne entirely by New ITT. A member's annual pension will equal two percent of the member's average final compensation for each of the first 25 years of benefit service, plus one and one-half percent of a member's average final compensation for each of the next 15 years of benefit service, reduced by one and one-quarter percent of the member's primary Social Security benefit for each year of benefit service to a maximum of 40 years; provided that no more than one-half of the member's primary Social Security benefit is used for such reduction. A member's average final compensation (including salary plus approved bonus payments) will be defined under the Plan as the total of (i) a member's average annual base salary for the five calendar years of the last 120 consecutive calendar months of eligibility service affording the highest such average plus (ii) a member's average annual compensation not including base salary for the five calendar years of the member's last 120 consecutive calendar months of eligibility service affording the highest such average. The Plan also will provide for undiscounted early retirement pensions for members who retire at or after age 60 following completion of 15 years of eligibility service. A member will be vested in benefits accrued under the Plan upon completion of five years of eligibility service. Applicable Federal legislation limits the amount of benefits that can be paid and compensation which may be recognized under a tax-qualified retirement plan. ITT Sheraton currently maintains an excess benefit plan. New ITT will adopt this non-qualified unfunded retirement plan (the "New ITT Excess Plan") for payment of those benefits at retirement that cannot be paid from the qualified Retirement Plan. The practical effect of the New ITT Excess Plan is to continue calculation of retirement benefits to all employees on a uniform basis. Benefits under the New ITT Excess Plan will generally be paid directly by New ITT. New ITT will also adopt an excess plan trust under which excess benefits under the New ITT Excess Plan for certain officers of New ITT will be funded. Any such employee may indicate a preference, subject to certain conditions, to receive any excess benefit in the form of a single discounted lump sum payment. Any "excess" 176 183 benefit accrued to any such employee will be immediately payable in the form of a single discounted lump sum payment upon the occurrence of a change in corporate control (as defined in the New ITT Excess Plan). Based on various assumptions as to remuneration and years of service, before Social Security reductions, the following table illustrates the estimated annual benefits payable from the Retirement Program at retirement at age 65 that are paid for by New ITT, subject to the offset described above. PENSION PLAN TABLE
AVERAGE YEARS OF SERVICE FINAL ----------------------------------------------------------------- COMPENSATION 20 25 30 35 40 - ------------ --------- --------- --------- --------- --------- $50,000.. $20,000 $25,000 $28,750 $32,500 $36,250 100,000.. 40,000 50,000 57,500 65,000 72,500 300,000.. 120,000 150,000 172,500 195,000 217,500 500,000.. 200,000 250,000 287,500 325,000 362,500 750,000.. 300,000 375,000 431,250 487,500 543,750 1,000,000.. 400,000 500,000 575,000 650,000 725,000 1,500,000.. 600,000 750,000 862,500 975,000 1,087,500 2,000,000.. 800,000 1,000,000 1,150,000 1,300,000 1,450,000 2,500,000.. 1,000,000 1,250,000 1,437,500 1,625,000 1,812,500 3,000,000.. 1,200,000 1,500,000 1,725,000 1,950,000 2,175,000 3,500,000.. 1,400,000 1,750,000 2,012,500 2,275,000 2,537,500 4,000,000.. 1,600,000 2,000,000 2,300,000 2,600,000 2,900,000 5,000,000.. 2,000,000 2,500,000 2,875,000 3,250,000 3,625,000
The amounts shown under "Salary" and "Bonus" opposite the names of the individuals in the Summary Compensation Table comprise the compensation which is used for purposes of determining "average final compensation" under the plan. The years of service with ITT of each of the individuals for eligibility and benefit purposes as of June 1, 1995, are as follows: Rand V. Araskog, 28.51 years; Robert A. Bowman, 4.15 years; Richard S. Ward, 25.86 years; and John Kapioltas, 23.92 years of service. In addition to the above service, Mr. Kapioltas has 11.47 years of service recognized under a former plan of ITT Sheraton. Henry Gluck has been covered by a non-qualified pension plan under which, as of June 1, 1995, he has accrued a retirement benefit equal to 29.7% of his average final salary. 1995 NEW ITT DEFERRED COMPENSATION PLAN Executives of New ITT have been participants in the 1995 ITT Deferred Compensation Plan. Effective as of the Distribution Date, it is intended that New ITT will adopt a "mirror image" 1995 New ITT Deferred Compensation Plan. Under that plan, executives with a base salary of $200,000 or more could elect to defer receipt of all or a portion of their 1994 bonus and those with a base salary of at least $300,000 could in addition defer up to 50% of their 1995 salary. New ITT will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the plan and selected by the executive. NEW ITT EMPLOYEE WELFARE BENEFITS At or prior to the Distribution Date, New ITT and its participating subsidiaries will adopt the broad-based employee welfare benefits program of ITT Sheraton which is a "mirror image" of the various welfare benefit programs previously available to salaried employees of ITT. New ITT executives will participate in New ITT's comprehensive benefits program which will include group medical and dental coverage, group life insurance and other benefit plans, in addition to the pension program and investment and savings plan described previously. CWI will continue its separate employee welfare benefit program covering its own employees. For a discussion of certain contractual relationships among ITT Industries, New ITT and ITT Hartford that affect employee welfare benefit programs, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS". 177 184 ITT HARTFORD MANAGEMENT AND EXECUTIVE COMPENSATION After the Distribution, it is intended that ITT Hartford will operate the Insurance businesses of ITT substantially in the manner in which they currently are operated. Donald R. Frahm, who is currently Chairman and Chief Executive of The Hartford will become Chairman and Chief Executive Officer of ITT Hartford. The directors of ITT Hartford will include certain persons who are currently directors of ITT, and certain persons who are currently directors or members of senior management of The Hartford. See "-- ITT HARTFORD BOARD OF DIRECTORS". In addition to Mr. Frahm, it is expected that the other executive officers of ITT Hartford will be drawn from the current management of The Hartford. See "-- ITT HARTFORD EXECUTIVE OFFICERS". ITT HARTFORD BOARD OF DIRECTORS Immediately after the Distribution, ITT Hartford expects to have a board of ten directors. Prior to the Distribution Date, ITT, as sole shareholder of ITT Hartford, plans to elect, as necessary, the following directors of ITT to the Board of Directors of ITT Hartford: Bette B. Anderson, Rand V. Araskog, Robert A. Burnett and Paul G. Kirk, Jr. In addition, Ramani Ayer, Donald R. Frahm, Arthur A. Hartman, Lowndes A. Smith, DeRoy C. Thomas and Gordon L. Ulmer, who are currently directors of Hartford Fire Insurance Company, will be so elected to the Board of Directors of ITT Hartford. As noted above, Mr. Frahm will become Chairman and Chief Executive Officer of ITT Hartford effective as of the Distribution Date. It is thus the intent of ITT Hartford that a majority of the directors comprising ITT Hartford's Board of Directors will not be employees of ITT Hartford. The following table sets forth the names, in alphabetical order, and information as to the persons who are expected to serve as directors of ITT Hartford following the Distribution.
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Bette B. Anderson, 66................... See information under "NEW ITT MANAGEMENT AND President, Kelly, Anderson, EXECUTIVE COMPENSATION -- NEW ITT BOARD OF Pethick & Associates, Inc. DIRECTORS". (consultants) Rand V. Araskog, 63..................... See information under "ITT INDUSTRIES MANAGEMENT Chairman, President and AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD Chief Executive of ITT OF DIRECTORS". Ramani Ayer, 48......................... Mr. Ayer has been President and Chief Operating President and Officer of The Hartford since 1991. Prior to that Chief Operating Officer time, he served as Executive Vice President of the of The Hartford domestic property-casualty operations of The Hartford. Mr. Ayer joined The Hartford in 1973 as a member of the operations research department. In 1981 he was appointed the secretary and director of corporate reinsurance. In 1983 he was named Vice President of HartRe, The Hartford's reinsurance subsidiary, and in 1984 he joined the Hartford Specialty Company, of which he was appointed President in 1986. Mr. Ayer was elected Senior Vice President of The Hartford in 1989 and named Executive Vice President in 1990. Robert A. Burnett, 68................... See information under "ITT INDUSTRIES MANAGEMENT Chairman and Chief Executive Officer AND EXECUTIVE COMPENSATION -- ITT INDUSTRIES BOARD (Retired) of Meredith Corporation OF DIRECTORS". (diversified media company)
178 185
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Donald R. Frahm, 63..................... Mr. Frahm has been Chairman and Chief Executive Chairman and Chief Executive Officer of Officer of The Hartford since April 1988. He is a The Hartford member of the Board of Directors of the Insurance Information Institute and a member of the Board of Trustees and the Executive Committee of the American Institute for Property and Liability Underwriters, the Insurance Institute of America and the American Insurance Association. Mr. Frahm is a director of the Hartford Hospital and Junior Achievement North Central Connecticut Inc. and the Greater Hartford Chamber of Commerce. He is also a corporator of Newington Children's Hospital and Co-chairman of the Advocates for Highway and Auto Safety. Arthur A. Hartman, 69................... Mr. Hartman has been Senior Consultant to APCO Senior Consultant to APCO Associates, Associates, The Arnold & Porter Consulting Group, The Arnold & Porter Consulting Group Washington, D.C., since 1989. In 1988, he was (consulting firm) Senior Consultant to Anderson, Benjamin, Read & Haney. From 1981 to 1987 he was the U.S. Ambassador to the former Union of Soviet Socialist Republics. He is a director of the Dreyfus Fund, Lawter International Inc. and Ford Meter Box Co. Paul G. Kirk, 57........................ See information under "NEW ITT MANAGEMENT AND Of Counsel to Sullivan & EXECUTIVE COMPENSATION -- NEW ITT BOARD OF Worcester (law firm) DIRECTORS". Lowndes A. Smith, 55.................... Mr. Smith has been President and Chief Operating President and Chief Operating Officer of Officer of Hartford Life Insurance Companies since Hartford Life Insurance Companies 1989. Prior to that time, he served as Senior Vice President and Group Controller for all companies owned or operated by The Hartford. Mr. Smith joined The Hartford in 1968 as a member of the corporate accounting department. In 1972 he was appointed the secretary and director of corporate accounting. He was elected Assistant Vice President in 1974, and he was named Controller in 1977. DeRoy C. Thomas, 69..................... Mr. Thomas was a partner of LeBoeuf, Lamb, Greene & Retired Partner, LeBoeuf, Lamb, MacRae, a law firm in New York, New York, from 1991 Greene & MacRae (law firm) through December 31, 1994. He was President, Chief Operating Officer and Director of ITT from 1988 to 1991, and from 1983 to 1988 he was Vice Chairman and Chief Operating Officer, ITT Diversified Services, and Chairman and Chief Executive Officer of The Hartford. He is a director of Houghton-Mifflin, Connecticut National Gas and Connecticut Health Services. He is also a director of Fordham University, Wheelock College, University of Hartford, Hartford Hospital, CT Health System, Goodspeed Opera House and the Old State House Association.
179 186
NAME, AGE AND CURRENT PRINCIPAL OCCUPATION INFORMATION - ---------------------------------------- --------------------------------------------------- Gordon I. Ulmer, 62..................... Mr. Ulmer joined Connecticut Bank and Trust Company Retired Chairman and Chief Executive ("CBT") in 1957 and held numerous positions before Officer of the Connecticut Bank and being elected President and Director in 1980 and Trust Company and Retired President of Chairman and Chief Executive Officer in 1985. In Bank of New England Corporation 1988 he was elected President of the Bank of New England Corporation ("BNEC"), the holding company of CBT. He retired from his positions with CBT in December 1990 and as President of BNEC in February 1991. In January 1991, BNEC filed a petition under Chapter 7 of the Bankruptcy Code and CBT commenced insolvency proceedings. Mr. Ulmer also serves as a director of Rayonier, Inc. and the Old State House Association. He is a graduate of Middlebury College, the American Institute of Banking and Harvard Business School Advanced Management Program and attended New York University's Graduate School of Engineering.
Mr. Harold S. Geneen will be designated Chairman Emeritus of ITT Hartford as well as ITT Industries and New ITT. Mr. Geneen was named President and Chief Executive of ITT in 1959, and Chairman in 1964. He relinquished the post of President in 1973, the post of Chief Executive in 1978, and the chairmanship on January 1, 1980, when he became Chairman Emeritus of ITT. Mr. Geneen continued to serve on the Board of Directors of ITT until 1983. Senator Abraham A. Ribicoff will be designated a Director Emeritus of ITT Hartford. Senator Ribicoff currently serves on the Board of Directors of Hartford Fire Insurance Company and has been a director of The Hartford since 1981. Mr. Isaac B. Grainger will also be designated a Director Emeritus of ITT Hartford. Mr. Grainger currently serves as Director Emeritus of The Hartford and was a member of the Board of Directors of The Hartford from January 10, 1956 to January 31, 1987. DIRECTORS' COMPENSATION Members of the ITT Hartford Board of Directors who are employees of ITT Hartford or its subsidiaries will not be compensated for service on the ITT Hartford Board or any Committee of the ITT Hartford Board. Compensation for non-employee directors will consist of an annual retainer fee of $30,000 payable solely in shares of ITT Hartford Common Stock, a $1,000 fee for each meeting of the ITT Hartford Board attended and a $1,000 fee for each Committee meeting attended. Directors will be reimbursed for travel expenses incurred on behalf of ITT Hartford. DIRECTORS' RETIREMENT POLICY The ITT Hartford Board of Directors will adopt a retirement policy which provides that (i) no person may be nominated for election or reelection as a non-employee director after reaching age 72 and (ii) no employee of ITT Hartford or of any of its subsidiaries (other than an employee who has served as chief executive of ITT Hartford) may be nominated for election or reelection as a director after reaching age 65, unless there has been a specific waiver by the ITT Hartford Board of Directors of these age requirements. DIRECTORS' BENEFITS The directors of ITT Hartford who are currently non-employee directors of ITT have been participants in the 1995 ITT Deferred Compensation Plan. At or prior to the Distribution Date, the ITT Hartford Board of Directors will adopt an identical "mirror image" plan, the "1995 ITT Hartford Deferred Compensation Plan", which is also applicable to certain executives. Under this ITT Plan, non-employee directors were permitted to elect to defer receipt of all or a portion of their 1995 fees. ITT Hartford will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the ITT Hartford Deferred Compensation Plan and selected by the individual. 180 187 After the Distribution, ITT Hartford also intends to adopt an unfunded retirement benefit plan for non-employee directors who retire from the ITT Hartford Board of Directors at or after age 65 after completing at least five years of service on the Board of Directors (the "ITT Hartford Directors Retirement Plan"). The ITT Hartford Directors Retirement Plan will be identical in all material respects to the ITT Directors Retirement Plan. Under the ITT Hartford Directors Retirement Plan, non-employee directors who retire from the Board of Directors at or after age 65 after completing at least five years of service on the ITT Hartford Board of Directors will be entitled to an annual pension based on the ITT Hartford Board's annual retainer fee payable at retirement. Pensions will range from 50% of such fee after five years of service to 100% after 10 years, with an additional 5% for each year of service in excess of ten, to a maximum of 200% of the annual retainer fee after 30 or more years of service. The ITT Hartford Directors Retirement Plan will provide to non-employee directors credit for any accrued benefit with respect to ITT or The Hartford Boards of Directors service prior to the Distribution Date, but only to the extent such prior service benefit accrual is not duplicated under a plan maintained by ITT Industries or New ITT. A director will be permitted to indicate a preference, subject to certain conditions, to receive any accrued benefit under the ITT Hartford Directors Retirement Plan in the form of a single (discounted) lump sum payment immediately payable upon such director's retirement. After the Distribution, ITT Hartford intends to adopt a group life insurance plan (the "ITT Hartford Directors Group Life Plan") that is identical in all material respects to the ITT group life insurance program. The ITT Hartford Directors Group Life Plan will provide $100,000 of non-contributory group life insurance to participating non-employee directors during their service on the ITT Hartford Board of Directors. After the Distribution, ITT Hartford intends to adopt a group accident program (the "ITT Hartford Group Accident Program for Officers and Directors") that is identical in all material respects to the ITT Group Accident Program for Officers and Directors. The ITT Hartford Group Accident Program for Officers and Directors will provide each director with $750,000 of coverage during his or her service on the ITT Hartford Board. Additional benefits also will be permitted to be purchased. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate of Incorporation of ITT Hartford waives the personal liability of a director or officer for damages for breach of fiduciary duty except for (i) a breach of duty of loyalty to ITT Hartford or its shareholders, (ii) acts or omissions not in good faith or which include intentional misconduct or a knowing violation of law, (iii) any transaction from which the director derived an improper personal benefit, (iv) a violation of Section 174 of the Delaware General Corporation Law, which concerns unlawful payments of dividends, stock purchases or redemptions or (iv) for any act of omission occurring prior to the effective date of such applicable provision of the ITT Hartford Certificate of Incorporation. While the Certificate of Incorporation and the By-laws of ITT Hartford provide directors with protection from awards for monetary damages for breaches of their duty of care, they do not eliminate such duty. Accordingly, the Certificate of Incorporation and the By-laws of ITT Hartford will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's or officer's breach of his or her duty of care. The Certificate of Incorporation and the By-laws of ITT Hartford provide for indemnification of the directors and officers of ITT Hartford to the fullest extent permitted by applicable state law, as then in effect. The indemnification rights conferred by the Certificate of Incorporation and the By-laws of ITT Hartford are not exclusive of any other right to which a person seeking indemnification may otherwise be entitled. ITT Hartford will also provide liability insurance for the directors and officers for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers and will enter into an indemnification agreement with each of its directors. Under its form of indemnification agreement, ITT Hartford agrees to indemnify its directors against all expenses, liabilities or losses incurred by the directors in their capacity as such: (i) to the fullest extent permitted by applicable law; (ii) as provided in the Certificate of Incorporation and the By-laws of ITT Hartford as in effect on the date of such agreement; and (iii) in the event ITT Hartford does not maintain the aforementioned insurance or comparable coverage, to the full extent provided in the applicable policies as in effect on the date of such agreement (ITT Hartford's obligations described in (ii) and (iii) being subject to certain exceptions). Contractual rights under such indemnification 181 188 agreements are believed to provide the directors more protection than the Certificate of Incorporation and By-laws which are subject to change. COMMITTEES OF THE ITT HARTFORD BOARD OF DIRECTORS Prior to the Distribution, the ITT Hartford Board of Directors will establish Audit, Compensation and Personnel, Finance, Legal and Public Affairs, and Nominating Committees. AUDIT COMMITTEE The Audit Committee will recommend the selection of independent auditors for ITT Hartford, confirm the scope of audits to be performed by such auditors, review audit results and internal accounting and control procedures and policies and review the fees paid to the independent auditors of ITT Hartford. The Audit Committee will review and recommend approval of the audited financial statements of ITT Hartford and the annual reports to shareholders. It will also review the expense accounts of senior executives. COMPENSATION AND PERSONNEL COMMITTEE The Compensation and Personnel Committee, which will be comprised entirely of non-employee directors, will oversee the compensation and benefits of employees, evaluate management performance and establish executive compensation. In the performance of its functions, the Compensation and Personnel Committee will have access to independent compensation counsel. FINANCE COMMITTEE The Finance Committee will be responsible for reviewing capital expenditures and appropriations and maximizing the effective use of the assets of ITT Hartford and its subsidiaries. Such responsibility will include the direction of investment allocation and risk management policies. LEGAL AND PUBLIC AFFAIRS The Legal and Public Affairs Committee will review and consider major claims and litigation and legal, regulatory, intellectual property and related governmental policy matters affecting ITT Hartford and its subsidiaries. The Legal and Public Affairs Committee will review and approve management policies and programs relating to compliance with legal and regulatory requirements, business ethics and environmental matters. The Legal and Public Affairs Committee will also review and define ITT Hartford's social responsibilities, including issues of significance to ITT Hartford and its shareholders and employees. NOMINATING COMMITTEE The Nominating Committee will make recommendations concerning the organization, size and composition of the Board of Directors and its Committees, propose nominees for election to the Board of Directors and its Committees and will consider the qualifications, compensation, and retirement of directors. ITT HARTFORD EXECUTIVE OFFICERS Listed below is certain information as to the executive officers who have been selected to serve after the Distribution.
NAME, POSITION WITH ITT HARTFORD AND AGE BIOGRAPHICAL DATA - ---------------------------------------- --------------------------------------------------- Donald R. Frahm, 63..................... See information under "ITT HARTFORD BOARD OF Chairman and Chief Executive Officer DIRECTORS". Ramani Ayer, 48......................... See information under "ITT HARTFORD BOARD OF President and Chief Operating Officer of DIRECTORS." The Hartford
182 189
NAME, POSITION WITH ITT HARTFORD AND AGE BIOGRAPHICAL DATA - ---------------------------------------- --------------------------------------------------- John F. Donahue, 59..................... Mr. Donahue has been Senior Vice President of The Senior Vice President, Business Hartford since 1989. In addition, he is the Senior Development Underwriting Officer and Director of Business Development and Corporate Services for The Hartford. Mr. Donahue holds the designation of Chartered Property Casualty Underwriter. He was elected Vice President of The Hartford in 1980 and named Director of the commercial lines of business for The Hartford in 1987. Joseph H. Gareau, 48.................... Mr. Gareau has been Executive Vice President and Executive Vice President and Chief Chief Investment Officer of The Hartford since Investment Officer 1993. Prior to that time, he served as Senior Vice President and Chief Investment Officer for the domestic property-casualty operations of The Hartford. Mr. Gareau was elected Vice President of The Hartford in 1987. Helen G. Goodman, 54.................... Ms. Goodman has been Senior Vice President and Senior Vice President, Human Resources Director of Human Resources of The Hartford since 1994. Prior to that time, she held the position of Senior Vice President of Human Resources for Tambrands Inc. Edward L. Morgan, 52.................... Mr. Morgan has been Senior Vice President, Senior Vice President, Corporate Corporate Relations and Government Affairs of The Relations and Government Affairs Hartford since 1993. From 1991 to 1993, he served as Vice President and Director of Corporate Relations of The Hartford. Prior to that time, Mr. Morgan held the position of Vice President of Corporate Relations at Allstate Insurance Company. Lowndes A. Smith, 55.................... See information under "-- ITT HARTFORD BOARD OF President and Chief Operating Officer of DIRECTORS". Hartford Life Insurance Companies James J. Westervelt, 48................. Mr. Westervelt has been Senior Vice President and Senior Vice President, Group Controller Group Controller of The Hartford since 1994. He was elected Vice President and became Group Controller in 1989. Michael S. Wilder, 53................... Mr. Wilder has been Senior Vice President of The Senior Vice President, General Counsel Hartford since 1987 and General Counsel and and Secretary Corporate Secretary of The Hartford since 1975.
183 190 EMPLOYMENT AGREEMENTS WITH CERTAIN ITT HARTFORD EXECUTIVE OFFICERS Prior to the Distribution, ITT Hartford is expected to enter into employment agreements with Messrs. Ayer and Smith (the "Employment Agreements") which will provide for: (i) a salary, participation in ITT Hartford's benefits plans and possible awards under ITT Hartford's executive incentive bonus program; (ii) Mr. Ayer's and Mr. Smith's employment as president and chief operating officer of, respectively, The Hartford and The Hartford Life Insurance Companies, from the Distribution Date through December 31, 1999 and (iii) certain payments and benefits in the event of termination, without cause, by ITT Hartford such that the executive will (A)(I) receive (x) salary, on a monthly basis, equivalent in the aggregate to the amounts of salary remaining unpaid until the expiration of the Employment Agreement or (y) at ITT Hartford's discretion, the balance remaining of such aggregate amount in a lump sum payment if the executive accepts other full-time employment and (II) as long as salary under clause (A) above continues to be paid, be eligible (x) for participation in certain ITT Hartford benefit plans and (y) to exercise outstanding stock options or (B) receive in lieu of such payments and benefits described in clause (A) above, if the executive is entitled to receive a termination allowance under any ITT Hartford severance plan or termination allowance plan which exceeds the salary described in clause (A)(I) above, such termination allowance amount. STOCK OWNERSHIP OF ITT HARTFORD DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information concerning shares of ITT Hartford Common Stock projected to be beneficially owned after the Distribution Date by (a) each of ITT Hartford's directors and the executive officers named in the summary compensation table and (b) all ITT Hartford directors and executive officers as a group. The projections are based on the number of shares of ITT Common Stock and ITT ESOP Preferred Stock owned by such persons at March 31, 1995 and the expected treatment of stock awards held by such directors and executive officers at that date prior to any adjustments in values of employee stock options as a result of the Distribution. Based on such projections, none of the ITT Hartford directors or executive officers individually, nor all directors and executive officers as a group, will beneficially own as much as 1% of the outstanding shares of ITT Hartford Common Stock after the Distribution.
AMOUNT AND NATURE OF NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS(2) - ------------------------------------------------------- ----------------------- ------------------- Donald R. Frahm........................................ 48,065 Ramani Ayer............................................ 64,217 John F. Donahue........................................ 23,946 Joseph H. Gareau....................................... 28,843 Lowndes A. Smith....................................... 60,052 Bette B. Anderson...................................... 2,000 Rand V. Araskog........................................ 653,139 Robert A. Burnett...................................... 1,166 Arthur A. Hartman...................................... 0 Paul G. Kirk, Jr. ..................................... 1,010 DeRoy C. Thomas........................................ 0 Gordon I. Ulmer........................................ 0 All ITT Hartford directors and executive officers as a group (16)........................................... 898,894
- --------------- (1) All shares reflected are owned directly except as hereinafter otherwise indicated. Pursuant to regulations of the SEC, shares (i) receivable by directors and executive officers upon exercise of employee stock options exercisable within 60 days after March 31, 1995, (ii) allocated to the accounts of certain directors and executive officers under the ITT Investment and Savings Plan at March 31, 1995 and (iii) acquired by directors and executive officers under the ITT Dividend Reinvestment and Common Stock Purchase Plan through March 31, 1995 are deemed to be beneficially owned by such directors and executive officers at said date. Of the number of shares reflected above, (i) the following represent shares that may be acquired upon exercise of employee stock options for the accounts of: Mr. Frahm, 42,884 common shares; Mr. Ayer, 62,140 common shares; Mr. Donahue, 21,119 common shares; Mr. Gareau, 27,818 common shares; Mr. Smith, 57,475 common shares; Mr. Araskog, 229,312 common shares; and all directors and executive officers of ITT Hartford as a group, 453,044 common shares; (ii) the following amounts were allocated under 184 191 the ITT Investment and Savings Plan to the accounts of: Mr. Frahm, 4,460 common shares and 645 ESOP preferred shares; Mr. Ayer, 926 common shares and 498 ESOP preferred shares; Mr. Donahue, 2,188 common shares and 571 ESOP preferred shares; Mr. Gareau, 440 common shares and 523 ESOP preferred shares; Mr. Smith, 2,056 common shares and 466 ESOP preferred shares; Mr. Araskog, 17,463 common shares and 497 ESOP preferred shares; and all directors and executive officers of ITT Hartford as a group, 30,171 common shares and 4,505 ESOP preferred shares; and (iii) the following amounts were acquired under the ITT Dividend Reinvestment and Common Stock Purchase Plan for the accounts of: Mr. Ayer, 594 common shares; Mr. Burnett, 166 common shares; and all directors and executive officers of ITT Hartford as a group, 823 common shares. (2) Share ownership does not exceed one percent of the class so owned. COMPENSATION OF ITT HARTFORD EXECUTIVE OFFICERS The following table discloses compensation received by ITT Hartford's Chief Executive Officer and the four other most highly paid executive officers for services rendered to The Hartford for the fiscal years ending December 31, 1994. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------------------- -------------------------------------------------- OTHER ANNUAL SECURITIES PAYOUTS ALL OTHER NAME AND COMPENSA- UNDERLYING LONG-TERM COMPEN- PRINCIPAL POSITION YEAR SALARY($) BONUS($) TION(1)($) OPTIONS(2)(#) INCENTIVE PLAN($) SATION(3)($) - ---------------------------- ----- --------- -------- ------------ ------------- ----------------- ------------ Donald R. Frahm............. 1994 565,833 270,000 6,149 37,000 -- 21,585 Chairman and Chief 1993 540,000 280,000 4,934 27,328 -- 20,428 Executive Officer -- 1992 565,833 -- 8,351 -- -- 18,247 Hartford Fire Insurance Company Ramani Ayer................. 1994 333,333 235,000 2,185 25,000 -- 13,448 President and Chief 1993 291,667 150,000 1,012 26,235 -- 11,180 Operating Officer -- 1992 264,167 -- 4,504 -- -- 9,280 Hartford Fire Insurance Company John Donahue................ 1994 233,333 75,000 286 6,100 -- 9,929 Senior Vice President and 1993 227,500 66,000 475 5,903 -- 9,437 Senior Underwriting 1992 215,000 15,300 345 -- -- 7,575 Officer Joseph H. Gareau.......... 1994 264,583 140,000 1,379 15,000 -- 11,041 Executive Vice President 1993 218,750 150,000 376 10,931 -- 9,074 and Chief Investment 1992 181,333 160,000 -- -- -- 6,389 Officer Lowndes A. Smith............ 1994 333,333 200,000 3,075 25,000 -- 13,448 President and Chief 1993 279,167 145,000 1,966 21,862 -- 10,796 Operating Officer -- 1992 255,417 117,100 5,604 -- -- 9,000 Hartford Life Insurance Co.
- --------------- (1) Amounts shown in this column include the value of certain benefits. (2) The named executives do not hold any stock appreciation rights in connection with the options shown. The number and exercise prices of all ITT stock options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (3) All amounts shown in this column are company contributions under the ITT Investment and Savings Plan and the ITT Excess Savings Plan, which are defined contribution plans. ITT makes a matching contribution in an amount equal to 50% of an employee's contribution, such matching contribution not to exceed three percent (3%) of such employee's salary. Under these plans, ITT also makes a non-matching contribution equal to one-half of one percent ( 1/2 of 1%) of an employee's salary. ANNUAL BONUS PLAN Eligible executives and key managers of ITT Hartford participate in an annual incentive bonus program sponsored by ITT. Under this program, each executive and key manager is assigned to a salary grade which has a standard bonus associated with it expressed as a percentage of the executive's year-end base salary rate ("standard bonus"). At year end, the aggregate amount of individual standard bonuses is adjusted in accordance with a pre-established formula to create a bonus pool for the year. The current formula for the Property & Casualty Operations measures actual net income, return on total capital ("ROTC") and cash flow against the approved budgeted amounts for the year for each performance measure. Net income, ROTC and cash flow performance are weighted 65%, 25% and 10%, respectively. For Life Insurance Operations, the 185 192 formula measures net income and ROTC against budgeted amounts and the measures are weighted 60% and 40%, respectively. The corporate staff, including Messrs. Frahm and Gareau, are measured by a weighted average performance factor for both the Property & Casualty and the Life Operations. The maximum bonus pool is 150% of the aggregated standard bonus pool. Individual bonus amounts within the authorized pool are determined on a discretionary basis taking into account specific personal contributions during the year. Bonus awards for ITT Hartford executive officers are subject to approval by the compensation committee of The Hartford Board of Directors, ITT senior line management and the ITT Compensation and Personnel Committee. During 1994, the standard bonus adjustment factors pursuant to the above formulas were 95.8% for Messrs. Frahm and Gareau, 94.2% for Mr. Ayer, 92.5% for Mr. Donahue and 99.9% for Mr. Smith. In total $1,164,000 was authorized for expenditure to nine executive officers, including the amounts indicated in the Summary Compensation Table for the named executives. It is contemplated that the annual bonus program described above will be used by ITT Hartford in substantially the same form for 1995. After the Distribution Date, the Compensation and Personnel Committee of the ITT Hartford Board will evaluate the program and may adopt a new program based on industry competitive practices and to comply with the requirements of the Federal Tax Code with regard to performance-based, tax deductible executive compensation. OPTION GRANTS ON ITT COMMON STOCK TO ITT HARTFORD EXECUTIVES IN LAST FISCAL YEAR The following table provides information on fiscal year 1994 grants of options to the named ITT Hartford executives to purchase shares of ITT Common Stock. No options to acquire ITT Hartford Common Stock have been granted or are outstanding.
INDIVIDUAL GRANTS TO PURCHASE ITT COMMON STOCK - ------------------------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES % OF TOTAL ANNUAL RATES OF STOCK UNDERLYING OPTIONS PRICE APPRECIATION OPTIONS GRANTED TO EXERCISE FOR OPTION TERM(4)($) GRANTED(1) EMPLOYEES IN PRICE(3) EXPIRATION --------------------------- NAME (#) 1994(2) ($/SHARE) DATE 5% 10% - ------------------------ ------------- ------------ -------- ---------- ---------- ---------- Donald R. Frahm......... 37,000 2.0 $84.00 10/13/04 $1,954,710 $4,953,190 Ramani Ayer............. 25,000 1.3 84.00 10/13/04 1,320,750 3,346,750 John Donahue............ 6,100 0.3 84.00 10/13/04 322,263 816,607 Joseph H. Gareau........ 15,000 0.8 84.00 10/13/04 792,450 2,008,050 Lowndes A. Smith........ 25,000 1.3 84.00 10/13/04 1,320,750 3,346,750
- --------------- (1) The numbers in this column represent options to purchase ITT Common Stock. (2) Percentages indicated are based on a total of 1,876,198 options granted to 656 employees during 1994. (3) The exercise price per share is 100% of the fair market value of a share of ITT Common Stock on the date of grant. The exercise price may be paid in cash or in shares of ITT Common Stock valued at their fair market value on the date of exercise. Options granted on October 11, 1994 at the exercise price of $84.00 per share are not exercisable until the trading price of ITT Common Stock equals or exceeds $105.00 per share for 10 consecutive trading days (which occurred on May 15, 1995) at which time two-thirds of the options will be exercisable; when the trading price equals or exceeds $117.60 per share for 10 consecutive trading days, the options will be fully exercisable. Notwithstanding the above, the options will be fully exercisable after October 11, 2003, but no later than October 13, 2004. (4) At the end of the term of the options granted on October 11, 1994, the projected price of a share of ITT Common Stock would be $136.83 and $217.87 at an assumed annual appreciation rate of 5% and 10%, respectively. On May 9, 1995, the Compensation and Personnel Committee of ITT awarded 126,200 stock options to nine executive officers of ITT Hartford including Messrs. Frahm, Ayer, Donahue, Gareau and Smith for 37,000, 25,000, 6,000, 15,000 and 25,000 shares of ITT Common Stock, respectively. These options were granted at the exercise price of $108.75 per share. Options for Messrs. Frahm, Ayer, Gareau and Smith will become fully exercisable at the earlier of the ninth anniversary date of the grant or when the closing price on an ITT share is equal to or greater than $135.38 for 10 consecutive trading days. Mr. Donahue's option will become exercisable in three equal annual installments commencing on the first anniversary date of the grant. 186 193 All of these options will expire on May 11, 2005. In connection with the Distribution, it is expected that each of the outstanding options will be surrendered to ITT and that substitute stock options will be made under the 1995 ITT Hartford Incentive Stock Plan (as described below). For a discussion of the treatment of stock options and other stock awards held by current employees of ITT and future employees of ITT Industries, New ITT or ITT Hartford, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- ITT STOCK OPTIONS AND OTHER AWARDS". AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table provides information on option exercises in 1994 by the named executives of ITT Hartford and the value of each such executive's unexercised options to acquire ITT Common Stock at December 31, 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1) - ------------------------------------------------------------------------------------------------------------------------ NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED, SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS HELD ACQUIRED ON FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(2) EXERCISE VALUE --------------------------- ------------------------------ NAME (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------- ----------- ------------ ----------- ------------- ----------- ------------- Donald R. Frahm ............. -- -- -- 64,328 -- 293,466 Ramani Ayer ................. -- -- 27,964 51,235 1,198,208 233,020 John Donahue ................ -- -- 13,118 12,003 562,423 54,629 Joseph H. Gareau ............ -- -- 10,531 25,931 449,893 118,312 Lowndes A. Smith............. -- -- 26,235 46,862 1,019,998 213,473
- --------------- (1) The number and exercise price of all options outstanding at the time of the spin-off to shareholders of Rayonier Inc., a former subsidiary of ITT, were adjusted for decreases in the economic value of the options as a result of the distribution to shareholders. This adjustment increased the number of options by 9.3% and decreased the exercise prices of the options then outstanding by approximately 8.5%. (2) Based on the NYSE consolidated trading closing price of ITT Common Stock on December 30, 1994 of $88.63. ITT LONG-TERM PERFORMANCE PLAN Under the ITT Long-Term Performance Plan, target contingent cash awards were made on December 12, 1991 (the "1992 Class Awards") to ITT executives, including certain of those individuals who will be executive officers of ITT Hartford after the Distribution. Under the 1992 Class Awards, the ultimate payment value of a target award, if any, will be based upon ITT Hartford's return on equity ("ROE") performance during the three-year period 1993 through 1995 as measured against predetermined ROE goals for each year. Each year of the performance period has been assigned a specific weighting: 15%, 35% and 50% for 1993, 1994 and 1995, respectively. If the actual weighted average ROE performance is less than 90% of the ROE goals, no payment is earned. 187 194 1992 Class Awards for the five most highly compensated executive officers of ITT Hartford are listed in the table below:
PERFORMANCE OR OTHER PERIOD UNTIL 1992 CLASS 1992 CLASS 1992 CLASS CONTINGENT TARGET MATURATION OR AWARD AWARD AWARD NAME AWARDS PAYOUT THRESHOLD(1) TARGET(2) MAXIMUM(3) - ------------------------------- ----------------- ------------- ------------ ---------- ---------- Donald R. Frahm................ $1,200,000 12/31/95 $600,000 $1,200,000 $2,400,000 Ramani Ayer.................... 625,000 12/31/95 208,333 625,000 1,300,000 John Donahue................... 280,000 12/31/95 140,000 280,000 560,000 Joseph H. Gareau............... 250,000 12/31/95 83,333 250,000 500,000 Lowndes A. Smith............... 500,000 12/31/95 166,667 500,000 1,000,000
- --------------- (1) Based upon a weighted average ROE goal achievement of 90%, resulting in payment of 33% of the target award in the first quarter of 1996. (2) Based upon a weighted average ROE goal achievement of 100%, resulting in payment of 100% of the target award in the first quarter of 1996. (3) Based upon a weighted average ROE goal achievement of 130% or more, resulting in payment of 200% of the target award in the first quarter of 1996. Reserves for awards under the Plan are maintained on the books of ITT Hartford and, accordingly, payments in respect of the Plan to participants therein will remain the responsibility of ITT Hartford after the Distribution. It is contemplated that ITT Hartford may consider adopting a comparable long-term incentive plan after the Distribution Date and, if adopted, the plan will be administered by the Compensation and Personnel Committee of the ITT Hartford Board of Directors. For a discussion of certain other aspects of the Plan, see "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- ITT LONG-TERM PERFORMANCE PLAN". ITT HARTFORD COMPENSATION, BENEFIT AND RETIREMENT PLANS The following is a description of the compensation, benefit and retirement plans currently expected to be adopted by ITT Hartford. 1995 ITT HARTFORD INCENTIVE STOCK PLAN One of the reasons for the Distribution is to enable ITT Hartford to provide meaningful long-term incentives for its executives and other key employees, directly related to their individual and collective performance in enhancing shareholder value. Once the Distribution has been effected and a public market has developed for the ITT Hartford Common Stock, market-based incentives based on ITT Hartford stock performance will allow ITT Hartford to provide significant incentives to the key employees of ITT Hartford to a degree not previously available under ITT's compensation programs. Awards of stock options and other market-based incentives will permit key employees to profit proportionately as shareholder value is enhanced (as evidenced by the market price for ITT Hartford Common Stock) and will also give ITT Hartford an effective tool to encourage key employees to continue in the employ of ITT Hartford. In order to achieve these objectives, effective prior to the Distribution, the Board of Directors of ITT Hartford is expected to adopt the 1995 ITT Hartford Incentive Stock Plan (the "1995 ITT Hartford Plan"). The 1995 ITT Hartford Plan will be administered by the ITT Hartford Compensation and Personnel Committee. Approval of Proposal Five set forth under "INTRODUCTION -- PURPOSE OF THE SPECIAL MEETING" will constitute shareholder approval of the 1995 ITT Hartford Plan. The 1995 ITT Hartford Plan provides for the grant of incentive stock options (qualifying under Section 422 of the Internal Revenue Code), non-qualified stock options, SARs, performance shares and restricted stock, or any combination of the foregoing, as the Compensation and Personnel Committee may determine, as well as substitute stock options, stock appreciation rights and restricted stock (collectively, "Awards"). The 1995 ITT Hartford Plan will expire on December 31, 2005. 188 195 The 1995 ITT Hartford Plan contains a formula for establishing an annual limit on the number of shares which may be awarded (or with respect to which non-stock Awards may be made) in any given calendar year (the "Annual Limit"). The Annual Limit formula is expressed as a percentage of ITT Hartford's total issued and outstanding Common Stock and treasury stock as of the year end immediately preceding the year of awards ("Plan Year"). Under the Annual Limit formula, the maximum number of shares of ITT Hartford Common Stock for which Awards may be granted under the Plan in each Plan Year shall be 1.5% of the total of the issued and outstanding shares of ITT Hartford Common Stock and treasury stock as reported in the Annual Report on Form 10-K of ITT Hartford for the fiscal year ending immediately prior to any Plan Year. Any unused portion of the Annual Limit for any Plan Year shall be carried forward and be made available for awards in succeeding Plan Years. In addition to the foregoing, in no event shall more than five million shares of ITT Hartford Common Stock be cumulatively available for Awards of incentive stock options under the 1995 ITT Hartford Plan, and provided further, that no more than 20% of the total number of shares available on a cumulative basis shall be available for restricted stock and performance share awards. For any Plan Year, no individual employee may receive stock options for more than the lesser of (i) 10% of the Annual Limit applicable to that Plan Year and (ii) 500,000 shares; except that for the Plan Year that follows the Distribution Date, each individual employee may receive in addition to the foregoing limit a number of substitute stock options equal to the lesser of (x) 525,000 and (y) the number of stock options required to replace ITT stock options surrendered by such employee in connection with the spin-off by ITT of the shares of ITT Hartford to ITT shareholders. Subject to the above limitations, shares of ITT Hartford Common Stock to be issued under the 1995 ITT Hartford Plan may be made available from the authorized but unissued ITT Hartford Common Stock or from shares purchased on the open market. In the event of a stock split or stock dividend, reorganization, recapitalization or other similar event affecting the price of ITT Hartford Common Stock, the number of shares subject to the 1995 ITT Hartford Plan, the number of shares then subject to Awards and the price per share payable on exercise of options may be appropriately adjusted by the Compensation and Personnel Committee. Other than the above adjustments, it is the ITT Hartford Board's policy that no options will be cancelled and reissued at a lower price unless the shareholders approve such action. For the purpose of computing the total number of shares of stock available for Awards under the 1995 ITT Hartford Plan, there shall be counted against the foregoing limitations the number of shares of ITT Hartford Common Stock subject to issuance upon exercise or settlement of Awards and the number of shares of ITT Hartford Common Stock which equal the value of Performance Share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the 1995 ITT Hartford Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of ITT Hartford Common Stock or are exchanged for other Awards, the shares of stock which were theretofore subject to such Awards shall again be available for Awards under the 1995 ITT Hartford Plan to the extent of such forfeiture, termination expiration, cash settlement or exchange of such Awards. Further, any shares that are exchanged (either actually or constructively) by optionees as full or partial payment to ITT Hartford of the purchase price of shares being acquired through the exercise of a stock option granted under the 1995 ITT Hartford Plan may be available for subsequent Awards. The Compensation and Personnel Committee, made up entirely of non-employee directors, none of whose members may receive any award under the 1995 ITT Hartford Plan, will administer the 1995 ITT Hartford Plan, including, but not limited to, making determinations with respect to the designation of those employees who shall receive Awards, the number of shares to be covered by options, SARs and restricted stock awards, the exercise price of options (which may not be less than 100% of the fair market value of ITT Hartford Common Stock on the date of grant), other option terms and conditions, and the number of performance shares to be granted and the applicable performance objectives. The Compensation and Personnel Committee may impose such additional terms and conditions on an Award as it deems advisable. The Compensation and Personnel Committee's decisions in the administration of the 1995 ITT Hartford Plan shall be binding on all persons for all purposes. 189 196 The Compensation and Personnel Committee may in its sole discretion delegate such administrative powers as it may deem appropriate to the chief executive officer or other members of senior management, except that Awards to executive officers shall be made solely by the Compensation and Personnel Committee and subject to compliance with Rule 16b-3 of the Exchange Act. Awards will be made, in the discretion of the Compensation and Personnel Committee, to employees of ITT Hartford and any of its subsidiaries (including officers and members of the Board of Directors who are also employees) whose responsibilities and decisions directly affect the performance of ITT Hartford and its subsidiaries. Substitute Awards To provide meaningful compensation in the form of stock options to acquire ITT Hartford Common Stock to key employees of ITT Hartford who surrendered options to acquire stock in ITT in connection with the Distribution, the Compensation and Personnel Committee is authorized to issue substitute ITT Hartford stock options and related rights in the aggregate amount of 8,000,000 shares or such lower number as may be necessary to preserve the economic value of the surrendered ITT options and related rights. Subject to this limitation, shares of ITT Hartford Common Stock to be issued upon the exercise of substitute stock options may be made available from authorized but unissued shares or from treasury shares or from shares purchased in the open market. The maximum number of substitute ITT Hartford stock options and related rights that may be granted to any individual employee is 525,000 or such lower number as may be necessary to preserve the economic value of the surrendered ITT options and related rights by any such individual employee. The Compensation and Personnel Committee is also authorized to issue substitute grants of ITT Hartford restricted stock to replace the ITT restricted stock surrendered by ITT Hartford employees in connection with the Distribution. The terms and conditions of each substitute stock award, including, without limitation, the time or times when, and the manner in which, each substitute option shall be exercisable, the duration of the exercise period, the permitted method of exercise, settlement and payment, the rules that shall apply in the event of the termination of employment of the key employee, the events, if any, that may give rise to a key employee's right to accelerate the time of exercise of an option and the vesting provisions of restricted stock, shall be the same as those of the surrendered ITT award. Stock Options and Related SARs Incentive stock options and related SARs under the 1995 ITT Hartford Plan must expire within 10 years after grant; non-qualified stock options and related SARs will expire not more than 10 years and two days after grant. No SAR may be exercised until at least six months after it is granted. The exercise price for options and SARs must be at least equal to the fair market value of the ITT Hartford Common Stock on the date of grant. The exercise price for options must be paid to ITT Hartford at the time of exercise and, in the discretion of the Compensation and Personnel Committee, may be paid in the form of cash or already-owned shares of ITT Hartford Common Stock or a combination thereof. During the lifetime of an employee, an option must be exercised only by the individual (or his or her estate or designated beneficiary) but no later than three months after his or her termination of employment (or for longer periods as determined by the Compensation and Personnel Committee if termination is caused by retirement, disability or death, but in no event later than the expiration of the original term of the option). If an optionee voluntarily resigns or is terminated for cause, the options and SARs are cancelled immediately. Performance Shares Performance shares under the 1995 ITT Hartford Plan are contingent rights to receive future payments based on the achievement of individual or company performance objectives as prescribed by the Compensation and Personnel Committee. Such performance objectives will be determined by the Compensation and 190 197 Personnel Committee over a measurement period or periods of not less than two years established by such Committee and related to at least one of the following criteria, which may be (i) determined solely by reference to the performance of ITT Hartford, any subsidiary or affiliate of ITT Hartford or any division or unit of any of the foregoing or (ii) based on comparative performance of any one or more of the foregoing relative to other entities; earnings per share, return on equity, cash flow, return on total capital, return on assets, economic value added, increase in surplus, reductions in operating expenses, increases in operating margins, earnings before income taxes and depreciation or total shareholder return of ITT Hartford. The maximum number of performance shares that may be granted to any individual employee in any given year is 100,000. Payments may be made in the form of shares of ITT Hartford Common Stock, cash or a combination of ITT Hartford Common Stock and cash. The ultimate payments are determined by the number of shares earned and the price of ITT Hartford Common Stock at the end of the performance period. In the event an employee terminates employment during such a performance period, the employee will forfeit any right to payment. However, in the case of retirement, permanent total disability, death or cases of special circumstances, the employee may, in the discretion of the Compensation and Personnel Committee, be entitled to an award prorated for the portion of the performance period during which he or she was employed by ITT Hartford. Restricted Shares Restricted shares of ITT Hartford Common Stock awarded under the 1995 ITT Hartford Plan shall be issued subject to a restriction period set by the Compensation and Personnel Committee during which time the shares may not be sold, transferred, assigned or pledged. In the event an employee terminates employment during a restriction period, all such shares still subject to restrictions will be forfeited by the employee and reacquired by ITT Hartford. The Compensation and Personnel Committee may provide for the lapse of restrictions in installments where deemed appropriate and it may also require the achievement of predetermined performance objectives in order for such shares to vest. The recipient, as owner of the awarded shares, shall have all other rights of a shareholder, including the right to vote the shares and receive dividends and other distributions during the restriction period. The restrictions may be waived, in the discretion of the Compensation and Personnel Committee, in the event of the awardee's retirement, permanent total disability, death or in cases of special circumstances. Compensation Upon Change of Control The 1995 ITT Hartford Plan provides for the automatic protection of intended economic benefits by key employees in the event of a change in control of ITT Hartford (i.e., upon the occurrence of an "Acceleration Event" as defined in the 1995 ITT Hartford Plan). Notwithstanding any other provisions of the 1995 ITT Hartford Plan, upon the occurrence of an Acceleration Event (a) all options and SARs will generally become immediately exercisable for a period of 60 calendar days; (b) options and SARs will continue to be exercisable for a period of seven months in the case of an employee whose employment is terminated other than for cause or who voluntarily terminates employment because of a good faith belief that such employee will not be able to discharge his or her duties; (c) SARs exercised during the 60-day period will be settled fully in cash based on a formula price generally reflecting the highest price paid for a share of ITT Hartford Common Stock during the 60-day period preceding the date such SAR is exercised; (d) "limited stock appreciation rights" shall automatically be granted on all outstanding options not otherwise covered by a SAR, which shall generally be immediately exercisable in full and which shall entitle the holders to the same exercise period and formula price referred to in (a), (b) and (c) above; (e) outstanding performance share awards shall automatically vest, with the valuation of such performance shares based on the formula price; and (f) restrictions applicable to awards of restricted stock shall be automatically waived. Options, SARs, performance shares or restricted stock which are granted, accelerated or enhanced upon the occurrence of a takeover (i.e., an "Acceleration Event" as defined in the 1995 ITT Hartford Plan) may give rise, in whole or in part, to "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code and, to such extent, will be nondeductible by ITT Hartford and subject to a 20% excise tax to the awardee. 191 198 "Acceleration Event" is generally defined in the 1995 ITT Hartford Plan as any of the following events: (i) a report on Schedule 13D shall be filed with the SEC pursuant to Section 13(d) of the Exchange Act disclosing that any person (within the meaning of Section 13(d) of the Exchange Act), other than ITT Hartford or a subsidiary of ITT Hartford or any employee benefit plan sponsored by ITT Hartford or a subsidiary of ITT Hartford, is the beneficial owner directly or indirectly of 20% or more of the outstanding ITT Hartford Common Stock; (ii) any person (within the meaning of Section 13(d) of the Exchange Act), other than ITT Hartford or a subsidiary of ITT Hartford or any employee benefit plan sponsored by ITT Hartford or a subsidiary of ITT Hartford, shall purchase shares pursuant to a tender offer or exchange offer to acquire any ITT Hartford Common Stock (or securities convertible into such Common Stock) for cash, securities or any other consideration, provided that after consummation of the offer, the person in question is the beneficial owner (as such term is defined in Rule 13d-3 under the Exchange Act) directly or indirectly of 15% or more of the outstanding ITT Hartford Common Stock (calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in the case of rights to acquire Common Stock); (iii) the shareholders of ITT Hartford shall approve (A) any consolidation or merger of ITT Hartford in which ITT Hartford is not the continuing or surviving corporation or pursuant to which shares of ITT Hartford Common Stock would be converted into cash, securities or other property, other than a merger of ITT Hartford in which holders of ITT Hartford Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger as immediately before or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of ITT Hartford; or (iv) there shall have been a change in a majority of the members of the Board of Directors of ITT Hartford within a 12-month period unless the election or nomination for election by ITT Hartford's shareholders of each new director during such 12-month period was approved by the vote of two-thirds of the directors then still in office who were directors at the beginning of such 12-month period. The ITT Hartford Board may amend or discontinue the 1995 ITT Hartford Plan at any time and, specifically, may make such modifications to the 1995 ITT Hartford Plan as it deems necessary to avoid the application of Section 162(m) of the Internal Revenue Code and the Treasury regulations issued thereunder. However, shareholder approval is required for certain amendments, including any amendment which may (i) increase the number of shares reserved for awards (except as provided in the 1995 ITT Hartford Plan with respect to stock splits or other similar changes), (ii) materially change the group of employees eligible for Awards, (iii) materially increase the benefits accruing to participants under the 1995 ITT Hartford Plan or (iv) permit Awards after December 31, 2005. ITT HARTFORD SEVERANCE PAY PLAN The existing ITT severance pay plan applies to ITT senior executives who are United States citizens or who are employed in the United States. Under the plan, if a participant's employment is terminated by ITT, other than for cause or as a result of other occurrences specified in the plan, the participant is entitled to severance pay in an amount up to 24 months of base salary depending upon his or her length of service. In no event shall such severance pay exceed the amount of base salary for the number of months remaining between the termination of employment and the participant's normal retirement date or two times the participant's total annual compensation during the year immediately preceding such termination. The plan includes offset provisions for other compensation from ITT and requirements on the part of executives with respect to non-competition and compliance with the ITT Code of Corporate Conduct. Under the plan, severance payments would ordinarily be made monthly over the scheduled term of such payments; however, ITT has the option to make such payments in the form of a single lump sum payment discounted to present value. At June 1, 1995, the named executive officers in the Summary Compensation Table (see "-- COMPENSATION OF ITT HARTFORD EXECUTIVE OFFICERS") participate in this plan. The annual salaries of Messrs. Frahm, Ayer, Donahue, Gareau and L. A. Smith as of June 1, 1995, were $600,000, $425,00, $240,000, $300,000 and $425,000, respectively. After the Distribution, it is anticipated that ITT Hartford will adopt a similar plan for its senior executives, except for Messrs. Ayer and Smith, each of whom will be covered by employment agreements, see "-- EMPLOYMENT AGREEMENTS WITH CERTAIN ITT HARTFORD EXECUTIVE OFFICERS"). 192 199 ITT HARTFORD INVESTMENT AND SAVINGS PLAN Many of the salaried employees of ITT Hartford have been participants in the ITT Investment and Savings Plan for Salaried Employees. Effective as of the Distribution Date, the ITT Investment and Savings Plan will be split into three separate plans, each covering the ITT Industries Employees, the New ITT Employees or the ITT Hartford Employees. Existing account balances of current New ITT Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the New ITT Investment and Savings Plan. Existing account balances of current ITT Hartford Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will be transferred from the ITT Investment and Savings Plan to the ITT Hartford Investment and Savings Plan. Existing account balances of current ITT Industries Employees, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such employees, will remain in the ITT Investment and Savings Plan, which will continue in existence as the ITT Industries Investment and Savings Plan. Existing account balances of each former employee of ITT Industries, New ITT and ITT Hartford, including all shares of ITT Common Stock acquired by the ESOP that have been allocated to the accounts of such former employee, will be transferred to the investment and savings plan maintained by the company responsible for providing retirement benefits to such former employee. Federal legislation limits the annual contributions which an employee may make to the ITT Hartford Investment and Savings Plan, a tax-qualified retirement plan. Accordingly, prior to the Distribution Date, ITT Hartford will adopt the ITT Hartford Excess Savings Plan, which will enable an employee who is precluded by these limitations from contributing six percent of salary to the tax-qualified plan to make up the shortfall through salary deferrals and thereby receive the three percent maximum matching company contribution and one-half of one percent non-matching company contribution otherwise allowable under the tax-qualified plan. Salary deferrals, company contributions and imputed earnings will be entered into a book reserve account maintained by ITT Hartford for each participant. ITT HARTFORD RETIREMENT PROGRAM Most of the U.S. salaried employees of The Hartford have been participants in the ITT Hartford Retirement Plan. The ITT Hartford Retirement Plan will be amended to recognize service with other ITT companies prior to the Distribution Date for eligibility, vesting and benefit accrual purposes and will further provide for an offset of any benefit payable from any ITT retirement plan covering the same period of service. The Plan will be further amended to recognize service with ITT Industries and New ITT after the Distribution Date for eligibility and vesting purposes. The ITT Hartford Retirement Plan will cover substantially all eligible U.S. salaried employees of ITT Hartford, including senior executive officers and other ITT Hartford executives. The cost of the ITT Hartford Retirement Plan will be borne entirely by ITT Hartford. A member's annual pension will equal two percent of the member's average final compensation for each of the first 30 years of benefit service, reduced by one and two-thirds percent of the member's primary Social Security benefit for each year of benefit service to a maximum of 30 years; provided that no more than one-half of the member's primary Social Security benefit is used for such reduction. A member's average final compensation (including salary plus approved bonus payments) will be defined under the Plan as the total of (i) a member's average annual base salary for the five calendar years of the last 120 consecutive calendar months of eligibility service affording the highest such average plus (ii) a member's average annual compensation not including base salary for the five calendar years of the member's last 120 consecutive calendar months of eligibility service affording the highest such average. The Plan also will provide for undiscounted early retirement pensions for members who retire at or after age 60 following completion of 15 years of eligibility service. A member will be vested in benefits accrued under the Plan upon completion of five years of eligibility service. Applicable Federal legislation limits the amount of benefits that can be paid and compensation which may be recognized under a tax-qualified retirement plan. ITT Hartford will continue its non-qualified 193 200 unfunded retirement plan (the "Hartford Excess Benefit Plan") for payment of those benefits at retirement that cannot be paid from the qualified Retirement Plan. The practical effect of the Hartford Excess Benefit Plan is to continue calculation of retirement benefits to all employees on a uniform basis. Benefits under the Hartford Excess Benefit Plan will generally be paid after the Distribution Date directly by ITT Hartford. ITT Hartford will also continue to maintain the excess plan trust under which excess benefits under the Hartford Excess Benefit Plan for certain officers of ITT Hartford are funded. Any such employee may indicate a preference, subject to certain conditions, to receive any excess benefit in the form of a single discounted lump sum payment. Any "excess" benefit accrued to any such employee will be immediately payable in the form of a single discounted lump sum payment upon the occurrence of a change in corporate control (as defined in the Hartford Excess Benefit Plan). Based on various assumptions as to remuneration and years of service, before Social Security reductions, the following table illustrates the estimated annual benefits payable from the Retirement Program at retirement at age 65 that are paid for by ITT Hartford. PENSION PLAN TABLE
AVERAGE YEARS OF SERVICE FINAL ----------------------------------------------- COMPENSATION 15 20 25 30 - ------------ -------- -------- -------- -------- $ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 100,000 30,000 40,000 50,000 60,000 300,000 90,000 120,000 150,000 180,000 500,000 150,000 200,000 250,000 300,000 750,000 225,000 300,000 375,000 450,000 1,000,000 300,000 400,000 500,000 600,000 1,500,000 450,000 600,000 750,000 900,000
The amounts shown under "Salary" and "Bonus" opposite the names of the individuals in the Summary Compensation Table comprise the compensation which is used for purposes of determining "average final compensation" under the plan. The years of service with ITT Hartford of each of the individuals for eligibility and benefit purposes as of June 1, 1995, are as follows: Donald R. Frahm, 26.83 years; Ramani Ayer, 21.92 years; John F. Donahue, 30.00 years; Joseph H. Gareau, 21.83 years; and Lowndes A. Smith, 28.17 years. Mr. Frahm's years of service include five years that were granted to him by ITT Hartford on the date of his employment. Mr. Donahue has 40.92 years of service with ITT Hartford, but the ITT Hartford Retirement Plan recognizes a maximum of 30 years of service. 1995 ITT HARTFORD DEFERRED COMPENSATION PLAN Executives of ITT Hartford have been participants in the 1995 ITT Deferred Compensation Plan. Effective as of the Distribution Date, it is intended that ITT Hartford will adopt a "mirror image" 1995 ITT Hartford Deferred Compensation Plan. Under that plan, executives with a base salary of $200,000 or more could elect to defer receipt of all or a portion of their 1994 bonus and those with a base salary of at least $300,000 could in addition defer up to 50% of their 1995 salary. ITT Hartford will credit interest on the deferred compensation based upon the performance of benchmark investment funds made available under the plan and selected by the executive. ITT HARTFORD EMPLOYEE WELFARE BENEFITS After the Distribution Date, ITT Hartford and its participating subsidiaries will continue the broad-based employee welfare benefits program which is currently available to salaried employees of The Hartford. ITT Hartford executives will participate in ITT Hartford's comprehensive benefits program which will include group medical and dental coverage, group life insurance and other benefit plans, in addition to the pension program and investment and savings plan available to salaried employees of The Hartford described previously. For a discussion of certain contractual relationships among ITT Industries, New ITT and ITT Hartford that affect employee welfare benefits programs, see "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS". 194 201 DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK AUTHORIZED CAPITAL STOCK After the Distribution, ITT Industries' authorized capital stock will be the same as ITT's authorized capital stock prior to the Distribution. Accordingly, ITT Industries' authorized capital stock will consist of 200,000,000 shares of Common Stock, $1.00 par value per share, and 50,000,000 shares of Preferred Stock, without par value. As of June 1, 1995, there were 105,771,521 shares of ITT Common Stock, 530,642 shares of ITT Series N Preferred Stock (convertible into 671,793 shares of ITT Common Stock) and 8,674,930 shares of ITT ESOP Preferred Stock (convertible into 9,708,114 shares of ITT Common Stock) outstanding. As discussed above under "EMPLOYEE BENEFITS AND COMPENSATION MATTERS -- TREATMENT OF ITT INVESTMENT AND SAVINGS PLAN AND ESOP", ITT has called for redemption all the outstanding shares of ITT ESOP Preferred Stock. It is expected that the trustee of the ESOP will exercise its right to convert the ITT ESOP Preferred Stock into ITT Common Stock. Also, as discussed above under "THE DISTRIBUTION -- REDEMPTION OF SERIES N PREFERRED STOCK", ITT has called for redemption all the outstanding shares of ITT Series N Preferred Stock. It is expected that the holders of the ITT Series N Preferred Stock will exercise their right to convert the ITT Series N Preferred Stock into ITT Common Stock. ITT INDUSTRIES COMMON STOCK Subject to any preferential rights of any ITT Industries Preferred Stock created by the Board of Directors of ITT Industries, each outstanding share of ITT Industries Common Stock will be entitled to such dividends as may be declared from time to time by the Board of Directors of ITT Industries. See "DIVIDEND POLICY -- ITT INDUSTRIES DIVIDEND POLICY". Each outstanding share is entitled to one vote on all matters submitted to a vote of shareholders. The ITT Industries Articles of Incorporation do not provide for cumulative voting rights; therefore, the holders of a majority of the shares voting for the election of the Board of Directors of ITT Industries can elect all the directors up for election, if they so choose. In the event of liquidation, dissolution or winding up of ITT Industries, holders of ITT Industries Common Stock are entitled to receive on a pro rata basis any assets remaining after provision for payment of creditors and after payment of any liquidation preferences to holders of ITT Industries Preferred Stock. ITT INDUSTRIES PREFERRED STOCK The authorized Preferred Stock of ITT Industries is available for issuance from time to time at the discretion of the Board of Directors of ITT Industries without shareholder approval. The ITT Industries Board of Directors has the authority to prescribe for each series of ITT Industries Preferred Stock it establishes the number of shares in that series, the consideration for such shares in that series and the designations, powers, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions of the shares in that series. Depending upon the rights of such Preferred Stock, the issuance of ITT Industries Preferred Stock could have an adverse effect on holders of ITT Industries Common Stock by delaying or preventing a change in control of ITT Industries, making removal of the present management of ITT Industries more difficult or resulting in restrictions upon the payment of dividends and other distributions to the holders of ITT Industries Common Stock. AUTHORIZED BUT UNISSUED CAPITAL STOCK Indiana law does not require shareholder approval for any issuance of authorized shares. However, the listing requirements of the NYSE, which would apply so long as the ITT Industries Common Stock remained listed on the NYSE, require shareholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of ITT Industries Common Stock. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of unissued and unreserved ITT Industries Common Stock and ITT Industries Preferred Stock may be to enable the Board of Directors of ITT Industries to issue shares to 195 202 persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of ITT Industries by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of ITT Industries' management and possibly deprive the shareholders of opportunities to sell their shares of ITT Industries Common Stock at prices higher than prevailing market prices. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of ITT Industries pursuant to the operation of the ITT Industries Rights Plan, which is discussed below. ITT INDUSTRIES RIGHTS PLAN ITT INDUSTRIES RIGHTS It is anticipated that the Board of Directors of ITT Industries will declare a dividend of one right (the "ITT Industries Rights") for each outstanding share of ITT Industries Common Stock. The ITT Industries Rights will be issued to the holders of record of ITT Industries Common Stock outstanding on the ITT Industries Rights issuance date (the "Issuance Date"), and with respect to ITT Industries Common Stock issued thereafter until the Distribution Date (as defined below), and, in certain circumstances, with respect to ITT Industries Common Stock issued after the Distribution Date. Each ITT Industries Right, when it becomes exercisable as described below, will entitle the registered holder to purchase from ITT Industries one one-thousandths (1/1000ths) of a share of Preferred Stock of ITT Industries (the "ITT Industries Preferred Shares") at a price of $[ ], subject to adjustment in certain circumstances (the "Purchase Price"). The description and terms of the ITT Industries Rights are set forth in a form of Rights Agreement (the "ITT Industries Rights Agreement") between ITT Industries and [ ], as rights agent. A copy of the ITT Industries Rights Agreement will be filed as an exhibit to the Registration Statement of ITT Industries in respect of the registration of ITT Industries Common Stock under the Exchange Act. The ITT Industries Rights will not be exercisable until the Distribution Date (as defined below) and will expire on the tenth annual anniversary of the ITT Industries Rights Agreement (the "Expiration Date"), unless earlier redeemed by ITT Industries as described below. Until an ITT Industries Right is exercised, the holder thereof, as such, will have no rights as a shareholder of ITT Industries, including, without limitation, the right to vote or to receive dividends with respect to the ITT Industries Rights or the ITT Industries Preferred Shares relating thereto. Unless the context otherwise requires, references herein to the ITT Industries Common Stock include the related ITT Industries Rights. DISTRIBUTION DATE Under the ITT Industries Rights Agreement, the Distribution Date is the earlier of (i) such time as ITT Industries learns that a person or group (including any affiliate or associate of such person or group) has acquired, or has obtained the right to acquire, beneficial ownership of more than 15% of the outstanding shares of ITT Industries Common Stock (such person or group being an "Acquiring Person"), unless provisions preventing accidental triggering of the distribution of the ITT Industries Rights apply, and (ii) the close of business on such date, if any, as may be designated by the Board of Directors of ITT Industries following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for 15% or more of the outstanding shares of ITT Industries Common Stock. A person or group (or any affiliate or associate of such person or group), however, that inadvertently acquires more than 15% of the outstanding shares of ITT Industries Common Stock will not be deemed to be an Acquiring Person provided that such person or group reduces the percentage of beneficial ownership to less than 15% of the outstanding shares of ITT Industries Common Stock by the close of business on the fifth business day after notice from ITT Industries that such person's or group's ownership interest exceeds 15% of the outstanding shares of ITT Industries Common Stock. Such person or group will be deemed to be an Acquiring Person at the end of such five business day period absent such reduction. EVIDENCE OF ITT INDUSTRIES RIGHTS Until the Distribution Date, the ITT Industries Rights will be evidenced by the certificates for ITT Industries Common Stock registered in the names of the holders thereof (which certificates for ITT Industries Common Stock shall also be deemed to be ITT Industries Right Certificates, as defined below) rather than 196 203 separate ITT Industries Right Certificates. Therefore, on and after the Issuance Date and until the Distribution Date, the ITT Industries Rights will be transferred with and only with the ITT Industries Common Stock and each transfer of ITT Industries Common Stock also will transfer the associated ITT Industries Rights. As soon as practicable following the Distribution Date, separate certificates evidencing the ITT Industries Rights ("ITT Industries Right Certificates") will be mailed to holders of record of the ITT Industries Common Stock as of the close of business on the Distribution Date (and to each initial record holders of certain ITT Industries Common Stock originally issued after the Distribution Date), and such separate ITT Industries Right Certificates alone will thereafter evidence the ITT Industries Rights. ADJUSTMENTS The number of ITT Industries Preferred Shares or other securities issuable upon exercise of the ITT Industries Rights, the Purchase Price, the Redemption Price (as defined below) and the number of ITT Industries Rights associated with each share of ITT Industries Common Stock are all subject to adjustment from time to time in the event of any change in the ITT Industries Common Stock or the ITT Industries Preferred Shares, whether by reason of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of securities, split-ups, split-offs, spin-offs, liquidations, other similar changes in capitalization, any distribution or issuance of cash, assets, evidences of indebtedness or subscription rights, options or warrants to holders of ITT Industries Common Stock or ITT Industries Preferred Shares. ITT Industries may, but is not required to, issue fractions of ITT Industries Rights or distribute ITT Industries Rights Certificates which evidence fractional ITT Industries Rights. In lieu of such fractional ITT Industries Rights, ITT Industries may make a cash payment based on the market price of such rights. In addition, ITT Industries may, but is not required to, issue fractions of shares upon the exercise of the ITT Industries Rights or distribute certificates which evidence fractional ITT Industries Preferred Shares. In lieu of fractional ITT Industries Preferred Shares, ITT Industries may utilize a depository arrangement as provided by the terms of the ITT Industries Preferred Shares and, in the case of fractions other than one one-thousandths (1/1000ths) of an ITT Industries Preferred Share or integral multiples thereof, may make a cash payment based on the market price of such shares. TRIGGERING EVENT AND EFFECT OF TRIGGERING EVENT At such time as there is an Acquiring Person, the ITT Industries Rights will entitle each holder (other than such Acquiring Person) of an ITT Industries Right to purchase, for the Purchase Price, that number of one one-thousandths (1/1000ths) of an ITT Industries Preferred Share equivalent to the number of shares of ITT Industries Common Stock which at the time of such event would have a market value of twice the Purchase Price. In the event ITT Industries is acquired in a merger or other business combination by an Acquiring Person or an affiliate or associate of an Acquiring Person that is a publicly traded corporation or 50% or more of ITT Industries' assets or assets representing 50% or more of ITT Industries' revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an affiliate or associate of an Acquiring Person that is a publicly traded corporation, each ITT Industries Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, that number of common shares of such corporation which at the time of the transaction would have a market value of twice the Purchase Price. In the event ITT Industries is acquired in a merger or other business combination by an Acquiring Person or an affiliate or associate of an Acquiring Person that is not a publicly traded entity or 50% or more of ITT Industries' assets or assets representing 50% or more of ITT Industries' revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person or an affiliate or associate of an Acquiring Person that is not a publicly traded entity, each ITT Industries Right will entitle its holder (subject to the next paragraph) to purchase, for the Purchase Price, at such holder's option, (i) that number of shares of the surviving corporation in the transaction with such entity (which surviving corporation could be ITT Industries) which at the time of the transaction would have a book value of twice the Purchase Price, (ii) that number of shares of such entity which at the time of the transaction would have a book value of twice the Purchase Price or (iii) if such entity has an affiliate which has publicly traded common shares, that 197 204 number of common shares of such affiliate which at the time of the transaction would have market value of twice the Purchase Price. Any ITT Industries Rights that are at any time beneficially owned by an Acquiring Person (or any affiliate or associate of an Acquiring Person) will be null and void and nontransferable and any holder of any such ITT Industries Right (including any purported transferee or subsequent holder) will be unable to exercise or transfer any such ITT Industries Right. REDEMPTION At any time prior to the earlier of (i) such time as a person or group becomes an Acquiring Person and (ii) the Expiration Date, the Board of Directors of ITT Industries may redeem the ITT Industries Rights in whole, but not in part, at a price (in cash or ITT Industries Common Stock or other securities of ITT Industries deemed by the Board of Directors to be at least equivalent in value) of $.01 per ITT Industries Right (which amount shall be subject to adjustment as provided in the ITT Industries Rights Agreement) (the "Redemption Price"). Immediately upon the action of the Board of Directors of ITT Industries ordering the redemption of the ITT Industries Rights, and without any further action and without any notice, the right to exercise the ITT Industries Rights will terminate and the only right of the holders of ITT Industries Rights will be to receive the Redemption Price. Within 10 business days after the action of the Board of Directors ordering the redemption of the ITT Industries Rights, ITT Industries will give notice of such redemption to the holders of the then outstanding ITT Industries Rights by mail. Each such notice of redemption will state the method by which payment of the Redemption Price will be made. In addition, at any time after there is an Acquiring Person, the Board of Directors of ITT Industries may elect to exchange each ITT Industries Right (other than ITT Industries Rights that have become null and void and nontransferable as described above) for consideration per ITT Industries Right consisting of one-half of the securities that would be issuable at such time upon exercise of one ITT Industries Right pursuant to the terms of the ITT Industries Rights Agreement. AMENDMENT At any time prior to the Distribution Date, ITT Industries may, without the approval of any holder of any ITT Industries Rights, supplement or amend any provision of the ITT Industries Rights Agreement (including, without limitation, the date on which the Distribution Date shall occur, the definition of Acquiring Person, the time during which the ITT Industries Rights may be redeemed or the terms of the ITT Industries Preferred Shares), except that no supplement or amendment shall be made which reduces the Redemption Price (other than pursuant to certain adjustments therein) or provides for an earlier Expiration Date. From and after the Distribution Date and subject to applicable law, ITT Industries may amend the ITT Industries Rights Agreement without the approval of any holders of ITT Industries Right Certificates (i) to cure any ambiguity or to correct or supplement any provision contained in the ITT Industries Rights Agreement which may be defective or inconsistent with any other provision of the ITT Industries Rights Agreement or (ii) to make any other provisions which ITT Industries may deem necessary or desirable and which shall not adversely affect the interests of the holders of ITT Industries Right Certificates (other than an Acquiring Person or an affiliate or associate of an Acquiring Person). Any supplement or amendment adopted during any period after any person or group has become an Acquiring Person but prior to the Distribution Date shall be null and void unless such supplement or amendment could have been adopted under the prior sentence from and after the Distribution Date. CERTAIN EFFECTS OF THE ITT INDUSTRIES RIGHTS PLAN The ITT Industries Rights Plan is designed to protect shareholders of ITT Industries in the event of unsolicited offers to acquire ITT Industries and other coercive takeover tactics which, in the opinion of the Board of Directors of ITT Industries, could impair its ability to represent shareholder interests. The provisions of the ITT Industries Rights Plan may render a takeover of ITT Industries more difficult or less likely to occur 198 205 even though such takeover may offer ITT Industries' shareholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of the shareholders of ITT Industries. NO PREEMPTIVE RIGHTS No holder of any class of stock of ITT Industries authorized at the Distribution Date will have any preemptive right to subscribe to any securities of ITT Industries of any kind or class. INDIANA BUSINESS CORPORATION LAW The terms of the Indiana Business Corporation Law (the "IBCL") will apply to ITT Industries since it will be an Indiana corporation. Under certain circumstances, the following selected provisions of the IBCL may delay or make more difficult acquisitions or changes of control of ITT Industries. The Articles of Incorporation and By-laws of ITT Industries will not exclude ITT Industries from such provisions of the IBCL. Such provisions also may have the effect of preventing changes in the management of ITT Industries. It is possible that such provisions could make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests. CONTROL SHARE ACQUISITIONS Pursuant to Sections 23-1-42-1 to 23-1-42-11 of the IBCL, an acquiring person who makes a "control share acquisition" in an "issuing public corporation" may not exercise voting rights on any "control shares" unless such voting rights are conferred by a majority vote of the disinterested shareholders of the issuing corporation at a special meeting of such shareholders held upon the request and at the expense of the acquiring person. For purposes of the above provisions, "control shares" means shares that, when added to all other shares of the issuing public corporation owned by a person or in respect of which that person may exercise or direct the exercise of voting power, would entitle that person to exercise 20%, 33 1/3% or 50% of the voting power of the issuing public corporation in the election of directors. "Control share acquisition" means, subject to certain exceptions, the acquisition, directly or indirectly, by any person of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares. Shares acquired within 90 days or pursuant to a plan to make a control share acquisition are considered to have been acquired in the same acquisition. "Issuing public corporation" means a corporation which is organized in Indiana, has 100 or more shareholders, its principal place of business, its principal office or substantial assets within Indiana and either (i) more than 10% of its shareholders resident in Indiana, (ii) more than 10% of its shares owned by Indiana residents or (iii) 10,000 shareholders resident in Indiana. The above provisions do not apply if, before a control share acquisition is made, the corporation's articles of incorporation or by-laws provide that said provisions do not apply. As noted above, ITT Industries' Articles of Incorporation do not exclude ITT Industries from the restrictions imposed by such provisions. CERTAIN BUSINESS COMBINATIONS Sections 23-1-43-1 to 23-1-43-23 of the IBCL restrict the ability of a "resident domestic corporation" to engage in any combination with an "interested shareholder" for five years after the interested shareholder's date of acquiring shares unless the combination or the purchase of shares by the interested shareholder on the interested shareholder's date of acquiring shares is approved by the board of directors of the resident domestic corporation before that date. If the combination was not previously approved, the interested shareholder may effect a combination after the five-year period only if such shareholder receives approval from a majority of the disinterested shares or the offer meets certain fair price criteria. For purposes of the above provisions, "resident domestic corporation" means an Indiana corporation that has 100 or more shareholders. "Interested shareholder" means any person, other than the resident domestic corporation or its subsidiaries, who is (a) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (b) an affiliate or associate of the resident domestic corporation and at any time within the five-year period immediately before the date in question was the beneficial owner of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation. The above provisions do not apply to corporations that so elect in a charter amendment approved by a majority of the 199 206 disinterested shares. Such a charter amendment, however, would not become effective for 18 months after its passage and would apply only to stock acquisitions occurring after its effective date. As noted above, ITT Industries' Articles of Incorporation do not exclude ITT Industries from the restrictions imposed by such provisions. RIGHTS, OPTIONS OR WARRANTS Section 23-1-26-5 of the IBCL provides that a corporation, acting through its board of directors, may create or issue rights, options or warrants for the purchase of shares or other securities of the corporation or any successor in interest of the corporation. The board of directors may determine the terms upon which the rights, options or warrants are issued, their form and content and the consideration for which the shares or other securities are to be issued. The rights, options or warrants may be issued with or without consideration, and may, but need not, be issued pro rata. DIRECTORS' DUTIES Section 23-1-35-1 of the IBCL provides that the board of directors, in discharging its duties, may consider, in its discretion, both the long-term and short-term best interests of the corporation, taking into account, and weighing as the directors deem appropriate, the effects of an action on the corporation's shareholders, employees, suppliers and customers and the communities in which offices or other facilities of the corporation are located and any other factors the directors consider pertinent. If a determination is made with the approval of a majority of the disinterested directors of the board, that determination is conclusively presumed to be valid unless it can be demonstrated that the determination was not made in good faith after reasonable investigation. Once the board has determined that the proposed action is not in the best interest of the corporation, it has no duty to remove any barriers to the success of the action, including a rights plan. Certain judicial decisions in Delaware and other jurisdictions, which might be looked upon for guidance in interpreting Indiana law, including decisions that propose a higher or different degree of scrutiny in response to a proposed acquisition of the corporation, are inconsistent with the proper application of Section 23-1-35-1. PROVISIONS OF ITT INDUSTRIES ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL Certain provisions of the ITT Industries Articles of Incorporation and By-laws may delay or make more difficult acquisitions or changes of control of ITT Industries not approved by its Board of Directors. It is believed that such provisions will enable ITT Industries to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of ITT Industries and its shareholders. Such provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of ITT Industries, although such proposals, if made, might be considered desirable by a majority of ITT Industries' shareholders. Such provisions may also have the effect of making it more difficult for third parties to cause the replacement of the current management of ITT Industries without the concurrence of the Board of Directors. These provisions include (i) the availability of capital stock for issuance from time to time at the discretion of the Board of Directors (see "-- AUTHORIZED BUT UNISSUED CAPITAL STOCK"), (ii) prohibitions against shareholders calling a special meeting of shareholders or acting by written consent in lieu of a meeting, (iii) requirements for advance notice for raising business or making nominations at shareholders' meetings and (iv) the ability of the Board of Directors to increase the size of the board and to appoint directors to fill newly created directorships. These four provisions were present in the Restated Certificate of Incorporation or By-laws of ITT. NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The ITT Industries Articles of Incorporation and By-laws provide that shareholder action can be taken only at an annual or special meeting and cannot be taken by written consent in lieu of a meeting. The ITT Industries Articles of Incorporation and By-laws also provide that special meetings of the shareholders can be called only by the Chairman of the Board of Directors or by a vote of the majority of the entire Board of 200 207 Directors. Furthermore, the By-laws of ITT Industries provide that only such business as is specified in the notice of any such special meeting of the shareholders may come before such meeting. ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS The By-laws of ITT Industries establish an advance notice procedure for shareholder proposals to be brought before an annual meeting of shareholders and for nominations by shareholders of candidates for election as directors at an annual or special meeting at which directors are to be elected. Only such business may be conducted at an annual meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of ITT Industries timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The chairman of such meeting has the authority to make such determinations. Only persons who are nominated by, or at the direction of, the Board of Directors, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of ITT Industries. To be timely, notice of business to be brought before an annual meeting or nominations of candidates for election as directors at an annual meeting must be received by the Secretary of ITT Industries not later than 90 days in advance of the anniversary date of the immediately preceding annual meeting (or not more than 10 days after the first public disclosure of the date of such annual meeting, whichever is earlier). Similarly, notice of nominations to be brought before a special meeting must be delivered to the Secretary no later than the close of business on the 10th day following the day on which notice of the date of the special meeting of shareholders was given. The notice of any nomination for election as a director must set forth the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; a representation that the shareholder is a holder of record of stock of ITT Industries entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and the consent of each nominee to serve as a director if so elected. NUMBER OF DIRECTORS; FILLING OF VACANCIES The ITT Industries Articles of Incorporation and By-laws provide that newly created directorships resulting from any increase in the authorized number of directors (or any vacancy) may be filled by a vote of a majority of directors then in office, subject to the requirement provided in the By-laws that the majority of directors holding office immediately after such election must be independent directors. Accordingly, the Board of Directors of ITT Industries may be able to prevent any shareholder from obtaining majority representation on the Board of Directors by increasing the size of the board and filling the newly created directorships with its own nominees. COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND INDIANA LAW ITT is incorporated in Delaware. However, because a large portion of its operations are conducted in Indiana and because Indiana corporations enjoy greater statutory protection against changes in control (see "-- INDIANA BUSINESS CORPORATION LAW"), ITT Industries, following the Distribution, will be incorporated in Indiana. The IBCL differs from the Delaware General Corporation Law (the "DGCL") in many respects. The following summary sets forth certain differences that should be considered by shareholders. The following summary does not purport to be a complete statement of the differences between the IBCL and the DGCL, which are too numerous to list in their entirety. 201 208 SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS Section 141(b) of the DGCL provides that the board of directors shall consist of one or more members. The number of directors shall be fixed by, or in the manner provided in, the by-laws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate. Pursuant to Section 141(d) of the DGCL, the directors of any Delaware corporation may, by the certificate of incorporation, by an initial by-law or by a by-law adopted by a vote of the shareholders, be divided into one, two or three classes. Section 23-1-33-3 of the IBCL provides that a board of directors must consist of one or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or by-laws. Section 23-1-33-6 of the IBCL provides that the articles of incorporation, or, if the articles of incorporation so authorize, the by-laws, may provide for staggering the terms of directors by dividing the total number of directors into either two or three classes, with each class containing as closely as possible the same number of directors. The ITT Industries Board of Directors will not be classified. DUTIES OF DIRECTORS Section 23-1-35-1 of the IBCL allows directors of a corporation to consider a variety of nonshareholder interests in discharging their duties to the corporation. See "-- INDIANA BUSINESS CORPORATION LAW". There is no corresponding provision in the DGCL. However, Delaware courts have permitted directors to consider various constituencies provided there exists some rationally related benefit to the shareholders. REMOVAL OF DIRECTORS Section 141(k) of the DGCL provides that any director or the entire board of directors may generally be removed with or without cause by a majority shareholder vote. However, a director of a corporation with a classified board of directors may be removed only for cause unless the certificate of incorporation otherwise provides. Under Section 23-1-33-8 of the IBCL, directors may be removed in any manner provided in the articles of incorporation. In addition, unless the articles of incorporation provide otherwise, the shareholders or directors may remove one or more directors without cause. A director may be removed by the shareholders, if they are otherwise authorized to do so, only at a meeting called for that purpose, and such purpose must be stated in the notice of the meeting. A director elected by a voting group of shareholders may be removed only by that voting group. NEWLY CREATED DIRECTORSHIPS AND VACANCIES Under Section 223 of the DGCL, unless the certificate of incorporation or the by-laws of a corporation provide otherwise, a majority vote of the directors then in office may fill vacancies and newly created directorships, even if the number of current directors is less than a quorum or only one director remains. If the directors filling an open slot on the board constitute less than a majority of the whole board (as measured before an increase in the size of the board), the Delaware Court of Chancery may, upon application of shareholders holding at least 10% of the outstanding voting shares, summarily order an election to fill the open slots or replace directors chosen by the directors then in office. Unless otherwise provided in the certificate of incorporation or by-laws, when one or more directors resign effective at a future date, a majority of directors then in office, including those who have so resigned, may vote to fill the vacancy. Under Section 23-1-33-9 of the IBCL, unless the articles of incorporation provide otherwise, if a vacancy occurs on the board of directors, including a vacancy resulting from an increase in the number of directors, the remaining directors, even if less than a quorum, may fill the vacancy by majority vote. The ITT Industries Articles of Incorporation do not provide otherwise. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group may vote to fill the vacancy if it is filled by shareholders. A vacancy that will occur at a specific later date by reason of resignation of a director 202 209 effective at a later date may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. LIMITATION ON DIRECTORS' LIABILITY Section 102(b)(7) of the DGCL allows a corporation, through its certificate of incorporation, to limit or eliminate the personal liability of directors to the corporation and its shareholders for damages for breach of fiduciary duty. However, this provision excludes any limitation on liability for (i) any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) wilful or negligent violation of the laws governing the payment of dividends or the purchase or redemption of stock or (iv) any transaction from which the director derives an improper personal benefit. Section 23-1-35-1 of the IBCL provides that a director is not liable for any action taken as a director, or any failure to act, unless the director has (i) breached or failed to perform the duties of the director's office in compliance with Section 23-1-35-1 and the breach or failure to perform constitutes willful misconduct or recklessness or (ii) paid distributions in violation of Section 23-1-28-3 of the IBCL. The ITT Industries Articles of Incorporation limit the liability of directors in the above manner. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS". INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL provides that a corporation may indemnify any person made a party or threatened to be made a party to any type of proceeding (other than certain actions by or in right of the corporation) because he or she is or was a director, officer, employee or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation; or in a criminal proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. Expenses incurred by an officer or director (or other employees or agents as deemed appropriate by the board of directors) in defending civil or criminal proceedings may be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the corporation. To indemnify a party, the corporation must determine that the party met the applicable standards of conduct. Section 23-1-37-8 and Section 23-1-37-13 of the IBCL provide that a corporation may indemnify any individual made party to a proceeding because the individual is or was a director, officer, employee or agent of the corporation against liability incurred in the proceeding if the individual acted in good faith and reasonably believed (i) in the case of conduct in the individual's official capacity with the corporation, that the individual's conduct was in its best interests and (ii) in all other cases, that the individual's conduct was at least not opposed to its best interests. In the case of any criminal proceeding, the individual must have had either reasonable cause to believe the conduct was lawful or no reasonable cause to believe that it was unlawful. The ITT Industries Articles of Incorporation provide for the above indemnification of directors and officers. See "ITT INDUSTRIES MANAGEMENT AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS". In addition, Section 23-1-37-9 and Section 23-1-37-13 provide that a corporation, unless limited by its articles of incorporation, must indemnify a director or officer who was wholly successful in the defense of any proceeding to which the director or officer was a party because the director or officer is or was a director or officer against reasonable expenses incurred by the director or officer in connection with the proceeding. The ITT Industries Articles of Incorporation and By-laws do not limit the indemnification provided by the IBCL. 203 210 LOANS TO DIRECTORS Section 143 of the DGCL allows a corporation to lend money to or guarantee an obligation of an officer or employee, including one who acts as a director, if the assistance is reasonably expected to benefit the corporation. Such assistance may be provided without shareholder approval. Pursuant to Section 23-1-35-3 of the IBCL, a corporation may not lend money to or guarantee the obligation of a director of the corporation unless (i) the loan is approved by a majority of the disinterested shares, (ii) the board of directors determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees or (iii) the loan or guarantee is authorized by a statute regulating any special class of corporations. DIVIDENDS Subject to additional restrictions in a corporation's certificate of incorporation, Section 170 of the DGCL allows the board of directors of a Delaware corporation to pay dividends out of surplus or, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Section 23-1-28-1 of the IBCL allows a board of directors to make distributions to shareholders, unless otherwise provided in the articles of incorporation. However, pursuant to Section 23-1-28-3 of the IBCL, no distribution may be made if it would cause (i) the corporation to be unable to pay its debts as they become due or (ii) except as otherwise specifically allowed by the articles of incorporation, the corporation's assets to be less than the sum of its liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the rights of preferential shareholders whose rights are superior to those receiving the distribution. ACTION BY SHAREHOLDERS THROUGH WRITTEN CONSENT Under Section 228(a) of the DGCL, unless otherwise provided in a corporation's certificate of incorporation, any action required to be taken at an annual or special meeting of the shareholders may be taken in the absence of a meeting, without prior notice and without a vote. Such action may be taken by the written consent of shareholders in lieu of meeting setting forth the action so taken and signed by the holders of outstanding stock representing the number of shares necessary to take such action at a meeting at which all shares entitled to vote were present and voted. Under Section 23-1-29-4 of the IBCL, any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if a written consent thereto is signed by all the shareholders entitled to vote on the action. The ITT Industries Articles of Incorporation and By-laws prohibit shareholder action by written consent. See "-- PROVISIONS OF ITT INDUSTRIES ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL". SPECIAL MEETINGS OF SHAREHOLDERS Under Section 211(d) of the DGCL, special meetings of shareholders may be called by the board of directors and by such other person or persons as may be authorized to do so by the corporation's certificate of incorporation or by-laws. Section 23-1-29-2 of the IBCL provides that a corporation with more than 50 shareholders must hold a special meeting of shareholders on demand of its board of directors or the person or persons specifically authorized to do so by the articles of incorporation or by-laws. The ITT Industries Articles of Incorporation and By-laws provide that only the Chairman of the Board of Directors or the Board of Directors acting by majority vote may call a special meeting. See "-- PROVISIONS OF ITT INDUSTRIES ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL". 204 211 CUMULATIVE VOTING Both Section 214 of the DGCL and Section 23-1-30-9 of the IBCL allow a corporation to provide for cumulative voting in the certificate of incorporation or the articles of incorporation. However, the ITT Industries Articles of Incorporation do not provide for cumulative voting. NECESSARY VOTE TO EFFECT MERGER (NOT INVOLVING INTERESTED SHAREHOLDER) The DGCL requires a majority vote of the shares entitled to vote in order to effectuate a merger between two Delaware corporations (Section 251(c)) or between a Delaware corporation and a corporation organized under the laws of another state (a "foreign corporation") (Section 252(c)). However, unless required by the certificate of incorporation, Sections 251(f) and 252(e) do not require a vote of the shareholders of a constituent corporation surviving the merger if (i) the merger agreement does not amend that corporation's certificate of incorporation, (ii) each share of that corporation's stock outstanding before the effective date of the merger is identical to an outstanding or treasury share of the surviving corporation after the merger and (iii) in the event the merger plan provides for the issuance of common stock or securities convertible into common stock by the surviving corporation, the common stock issued and the common stock issuable upon conversion of the issued securities do not exceed 20% of the shares outstanding immediately before the effective date of the merger. Section 23-1-40-3 of the IBCL requires a majority vote of the shares entitled to vote in order to effectuate a merger or exchange. However, the vote of the shareholders of the surviving corporation on a plan of merger is not required if (i) the articles of incorporation of the surviving corporation will not differ from its articles before the merger, (ii) each shareholder of the surviving corporation whose shares were outstanding immediately before the effective date of the merger will hold the same proportionate number of shares held by all such shareholders (except for shares of the surviving corporation received solely as a result of the shareholder's proportionate shareholdings in the other corporations party to the merger), with identical designations, preferences, limitations and relative rights, immediately after the merger, (iii) the number of voting shares outstanding immediately after the merger, plus the number of voting shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger), will not exceed by more than 20% the total number of voting shares of the surviving corporation outstanding immediately before the merger and (iv) the number of participating shares outstanding immediately after the merger, plus the number of participating shares issuable as a result of the merger (either by the conversion of securities issued pursuant to the merger or the exercise of rights and warrants issued pursuant to the merger), will not exceed by more than 20% the total number of participating shares of the surviving corporation outstanding immediately before the merger. BUSINESS COMBINATIONS INVOLVING INTERESTED SHAREHOLDERS For a comparison of the provisions of the DGCL and the IBCL relating to business combinations involving interested shareholders, see "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW" and "-- INDIANA BUSINESS CORPORATION LAW". APPRAISAL RIGHTS; DISSENTERS' RIGHTS Both Section 262 of the DGCL and Section 23-1-44-8 of the IBCL provide that shareholders have the right, in some circumstances, to dissent from certain corporate reorganizations and to instead demand payment of the fair cash value of their shares. Under Section 262 of the DGCL, unless a corporation's certificate of incorporation provides otherwise, dissenters do not have rights of appraisal with respect to (i) a merger or consolidation by a corporation, the shares of which are either listed on a national securities exchange or held by more than 2,000 shareholders, if the shareholders receive shares in the surviving corporation, shares of another corporation that are publicly listed or held by more than 2,000 shareholders, cash in lieu of fractional shares or any combination of the above or (ii) shareholders of a corporation surviving a merger if no vote of the shareholders of the surviving corporation is required to approve the merger. Under Section 23-1-44-8 of the IBCL, dissenters do not have rights of appraisal (i) with respect to shares of any class or 205 212 series of stock registered on a national securities exchange or traded on the National Association of Securities Dealers, Inc. Automated Quotation System Over-the-Counter Markets-National Market Issues or a similar market or (ii) if they were not entitled to vote on the merger. REDEEMABLE SHARES Section 151(b) of the DGCL provides that the certificate of incorporation or a resolution of the board of directors may make any class of stock subject to redemption at the option of the corporation or the shareholders, or upon the happening of a specified event, as long as at the time of redemption one class of voting stock is not subject to redemption. Section 23-1-25-1 of the IBCL provides that the articles of incorporation of a corporation may authorize one or more classes of shares that are redeemable or convertible as specified in the articles of incorporation, at the option of the corporation, the shareholder or another person or upon the occurrence of a designated event. WARRANTS OR OPTIONS Under Section 157 of the DGCL, rights or options to purchase shares of any class of stock may be authorized by a corporation's board of directors subject to the provisions of the certificate of incorporation. The terms of such rights or options must be fixed and stated in the certificate of incorporation or in a resolution or resolutions adopted by the board of directors. Under Section 23-1-26-5 of the IBCL, a corporation, acting through its board of directors, may create or issue rights, options or warrants for the purchase of shares or other securities of the corporation or any successor in interest of the corporation. The board of directors may determine the terms upon which the rights, options or warrants are issued, their form and content and the consideration for which the shares or other securities are to be issued. For a discussion of the ITT Industries Rights Plan, see "-- ITT INDUSTRIES RIGHTS PLAN". PREEMPTIVE RIGHTS Under Section 102(b)(3) of the DGCL and Section 23-1-27-1 of the IBCL, absent an express provision in a corporation's certificate of incorporation or the articles of incorporation, a shareholder does not, by operation of law, possess preemptive rights to subscribe to an additional issue of stock. The ITT Industries Articles of Incorporation expressly deny shareholders any preemptive rights. AMENDMENT OF ARTICLES OF INCORPORATION AND BY-LAWS Section 242 of the DGCL and Sections 23-1-38-3 and 23-1-38-4 of the IBCL permit a corporation to amend its certificate of incorporation or articles of incorporation in any respect provided the amendment contains only provisions that would be lawful in an original certificate of incorporation or articles of incorporation filed at the time of amendment. To amend a certificate of incorporation or the articles of incorporation, the board must adopt a resolution presenting the proposed amendment. In addition, a majority of the shares entitled to vote, as well as a majority of shares by class of each class entitled to vote, must approve the amendment to make it effective. When the substantial rights of a class of shares will be affected by an amendment, the holders of those shares are entitled to vote as a class even if the shares are non-voting shares. When only one or more series in a class of shares, and not the entire class, will be adversely affected by an amendment, only the affected series may vote as a class. Under Section 242(b)(2) of the DGCL, the right to vote as a class may be limited in certain circumstances. Any provision in the certificate of incorporation which requires a greater vote than required by law cannot be amended or repealed except by such greater vote. Section 242(c) of the DGCL provides that, in its resolution proposing an amendment, the board may insert a provision allowing the board to abandon the amendment, without concurrence by shareholders, after the amendment has received shareholder approval but before its filing with the Secretary of State. Section 109 of the DGCL provides that the power to amend the by-laws rests with the stockholders entitled to vote, although the certificate of incorporation may confer the power to amend the by-laws upon the 206 213 board of directors. Section 109 further provides that the fact that the certificate of incorporation confers such power upon the board of directors neither limits nor divests the stockholders of the power to amend the by-laws. Section 23-1-39-1 of the IBCL, on the other hand, provides that, unless the articles of incorporation provide otherwise, only the board of directors of a corporation may amend the by-laws. The Articles of Incorporation and the By-laws of ITT Industries provide that the By-laws may be amended by a majority vote of the entire Board of Directors or by the affirmative vote of not less than a majority of the holders of ITT Industries Common Stock. INSPECTION OF BOOKS AND RECORDS Section 220 of the DGCL entitles any shareholder of record of a corporation, in person or by an agent, upon written demand under oath stating the purpose thereof, to inspect during usual business hours, for any proper purpose, the corporation's stock ledger, a list of its shareholders and its other books and records, and to make copies or extracts therefrom. A proper purpose means a purpose reasonably related to such person's interest as a shareholder. Section 23-1-52-2 of the IBCL entitles any shareholder of a corporation to inspect and copy, during regular business hours, certain enumerated corporate records if the shareholder gives the corporation at least five days' written notice in advance. Certain records may be inspected only if the shareholder's demand is made in good faith and for a proper purpose, the shareholder describes with reasonable particularity the shareholder's purpose and the records to be inspected are directly connected with the shareholder's purpose. RESTRICTIONS ON ALIEN OWNERSHIP It is currently expected that the restrictions on ownership of ITT shares by "aliens" (to the United States) contained in the ITT By-laws would not apply to ITT Industries after the Distribution. RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS The restrictions on ownership of ITT shares in respect of the gaming laws contained in the ITT Restated Certificate of Incorporation would not apply to ITT Industries after the Distribution. Such a restriction would apply, however, to ownership of New ITT shares. See "DESCRIPTION OF NEW ITT CAPITAL STOCK -- RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS". DESCRIPTION OF NEW ITT CAPITAL STOCK AUTHORIZED CAPITAL STOCK The total number of shares of all classes of stock that New ITT has authority to issue under its Articles of Incorporation is 250,000,000 shares of which 200,000,000 shares represent shares of New ITT Common Stock and 50,000,000 shares represent shares of Preferred Stock (the "New ITT Preferred Stock"). Based on 105,771,521 shares of ITT Common Stock outstanding as of June 1, 1995, 530,642 shares of ITT Series N Preferred Stock (convertible into 671,793 shares of ITT Common Stock) outstanding as of June 1, 1995, and 8,674,930 shares of ITT ESOP Preferred Stock (convertible into 9,708,114 shares of ITT Common Stock) outstanding as of June 1, 1995, and a distribution ratio of one share of New ITT Common Stock for every one share of ITT Common Stock, it is expected that approximately 116,151,428 shares of New ITT Common Stock will be distributed to holders of ITT Common Stock on the Distribution Date. NEW ITT COMMON STOCK Subject to any preferential rights of any New ITT Preferred Stock created by the Board of Directors of New ITT, each outstanding share of New ITT Common Stock will be entitled to such dividends, if any, as may be declared from time to time by the Board of Directors of New ITT. See "DIVIDEND POLICY -- NEW ITT DIVIDEND POLICY". Each outstanding share is entitled to one vote on all matters submitted to a vote of shareholders. The New ITT Articles of Incorporation do not provide for cumulative voting rights; therefore, 207 214 the holders of a majority of the shares voting for the election of the Board of Directors of New ITT can elect all the directors up for election, if they so choose. In the event of liquidation, dissolution or winding up of New ITT, holders of New ITT Common Stock are entitled to receive on a pro rata basis any assets remaining after provision for payment of creditors and after payment of any liquidation preferences to holders of New ITT Preferred Stock. NEW ITT PREFERRED STOCK The authorized Preferred Stock of New ITT is available for issuance from time to time at the discretion of the New ITT Board of Directors without shareholder approval. The New ITT Board of Directors has the authority to prescribe for each series of New ITT Preferred Stock it establishes the number of shares in that series, the consideration for such shares in that series and the designations, powers, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions of the shares in that series. Depending upon the rights of such Preferred Stock, the issuance of New ITT Preferred Stock could have an adverse effect on holders of New ITT Common Stock by delaying or preventing a change in control of New ITT, making removal of the present management of New ITT more difficult or resulting in restrictions upon the payment of dividends and other distributions to the holders of New ITT Common Stock. AUTHORIZED BUT UNISSUED CAPITAL STOCK The listing requirements of the NYSE, which would apply so long as the New ITT Common Stock remained listed on the NYSE, require shareholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of New ITT Common Stock. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of unissued and unreserved New ITT Common Stock and New ITT Preferred Stock may be to enable the Board of Directors of New ITT to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of New ITT by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of New ITT's management and possibly deprive the shareholders of opportunities to sell their shares of New ITT Common Stock at prices higher than prevailing market prices. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of New ITT pursuant to the operation of the New ITT Rights Plan, which is discussed below. NEW ITT RIGHTS PLAN NEW ITT RIGHTS It is anticipated that the Board of Directors of New ITT will declare a dividend of one right (the "New ITT Rights") for each outstanding share of New ITT Common Stock. The New ITT Rights will be issued to the holders of record of New ITT Common Stock outstanding on the New ITT Rights issuance date, and with respect to New ITT Common Stock issued thereafter until the distribution date, and in certain circumstances with respect to New ITT Common Stock issued after the distribution date. Each New ITT Right, when it becomes exercisable, will entitle the registered holder to purchase from New ITT one one-thousandths (1/1000ths) of a share of Preferred Stock of New ITT (the "New ITT Preferred Shares") at a price of $[ ], subject to adjustment in certain circumstances. The description and terms of the New ITT Rights are set forth in a form of Rights Agreement (the "New ITT Rights Agreement") between New ITT and [ ], as rights agent. The terms of the New ITT Rights Agreement will be identical to the terms of the ITT Industries Rights Plan, as described in "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN", except such terms will relate to the New ITT Rights. A copy of the New ITT Rights Agreement will be filed as an exhibit to the Registration Statement of New ITT in respect of the registration of the New ITT Common Stock under the Exchange Act. Unless the context otherwise requires, references herein to the New ITT Common Stock includes the related New ITT Rights. 208 215 CERTAIN EFFECTS OF THE NEW ITT RIGHTS PLAN The New ITT Rights Plan is designed to protect shareholders of New ITT in the event of unsolicited offers to acquire New ITT and other coercive takeover tactics which, in the opinion of the Board of Directors of New ITT, could impair its ability to represent shareholder interests. The provisions of the New ITT Rights Plan may render a takeover of New ITT more difficult or less likely to occur even though such takeover may offer New ITT shareholders' the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of the shareholders of New ITT. NO PREEMPTIVE RIGHTS No holder of any class of stock of New ITT authorized at the Distribution Date will have any preemptive right to subscribe to any securities of New ITT of any kind or class. NEVADA GENERAL CORPORATION LAW The terms of the Nevada General Corporation Law (the "NGCL") will apply to New ITT since it will be a Nevada corporation. Under certain circumstances, the following selected provisions of the NGCL may delay or make more difficult acquisitions or changes of control of New ITT. The Articles of Incorporation and By-laws of New ITT will not exclude New ITT from such provisions of the NGCL. Such provisions also may have the effect of preventing changes in the management of New ITT. It is possible that such provisions could make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests. CONTROL SHARE ACQUISITIONS Pursuant to Sections 78.378 to 78.3793 of the NGCL, an "acquiring person" who acquires a "controlling interest" in an "issuing corporation" may not exercise voting rights on any "control shares" unless such voting rights are conferred by a majority vote of the disinterested shareholders of the issuing corporation at a special meeting of such shareholders held upon the request and at the expense of the acquiring person. For purposes of the above provisions, "acquiring person" means (subject to certain exceptions) any person who, individually or in association with others, acquires or offers to acquire, directly or indirectly, a controlling interest in an issuing corporation. "Controlling interest" means the ownership of outstanding voting shares of an issuing corporation sufficient to enable the acquiring person, individually or in association with others, directly or indirectly, to exercise 20%, 33 1/3% or 50% of the voting power of the issuing corporation in the election of directors. "Control Shares" means those outstanding voting shares of an issuing corporation which an acquiring person acquires or offers to acquire in an acquisition or within 90 days immediately preceding the date when the acquiring person became an acquiring person. "Issuing corporation" means a corporation which is organized in Nevada, has 200 or more shareholders, at least 100 of whom are shareholders of record and residents of Nevada, and does business in Nevada directly or through an affiliated corporation. The above provisions do not apply if, before an acquisition is made, the articles of incorporation or by-laws of the corporation in effect on the 10th day following the acquisition of a controlling interest by an acquiring person provide that said provisions do not apply. As noted above, New ITT's Articles of Incorporation do not exclude New ITT from the restrictions imposed by such provisions. CERTAIN BUSINESS COMBINATIONS Sections 78.411 to 78.444 of the NGCL restrict the ability of a "resident domestic corporation" to engage in any combination with an "interested stockholder" for three years after the interested stockholder's date of acquiring shares unless the combination or the purchase of shares by the interested stockholder on the interested stockholder's date of acquiring shares is approved by the board of directors of the resident domestic corporation before that date. If the combination was not previously approved, the interested stockholder may effect a combination after the three-year period only if such stockholder receives approval from a majority of the disinterested shares or the offer meets certain fair price criteria. For purposes of the above provisions, "resident domestic corporation" means a Nevada corporation that has 200 or more shareholders. "Interested 209 216 stockholder" means any person, other than the resident domestic corporation or its subsidiaries, who is (a) the beneficial owner, directly or indirectly, of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or (b) an affiliate or associate of the resident domestic corporation and at any time within three years immediately before the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding shares of the resident domestic corporation. The above provisions do not apply to corporations that so elect in a charter amendment approved by a majority of the disinterested shares. Such a charter amendment, however, would not become effective for 18 months after its passage and would apply only to stock acquisitions occurring after its effective date. As noted above, New ITT's Articles of Incorporation do not exclude New ITT from the restrictions imposed by such provisions. RIGHTS AND OPTIONS Section 78.200 of the NGCL provides that a corporation may create and issue, whether in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options for the purchase of shares of stock of any class of the corporation, to be evidenced by such instrument as is approved by the board of directors. The terms upon which, and the price at which, any such shares may be purchased from the corporation upon the exercise of any right or option must be fixed and stated in the articles of incorporation or in a resolution adopted by the board of directors providing for the creation and issuance of such rights and options, and, in every case, set forth or incorporated by reference in the instrument evidencing the rights or options. DIRECTORS' DUTIES Section 78-138 of the NGCL allows directors and officers, in exercising their respective powers with a view to the interests of the corporation, to consider the interests of the corporation's employees, suppliers, creditors and customers; the economy of the state and the nation; the interests of the community and of society and the long and short-term interests of the company and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation. Directors may resist a change or potential change in control if the directors by a majority vote of a quorum determine that the change or potential change is opposed to or not in the best interest of the corporation upon consideration of the interests set forth above or if the board has reasonable grounds to believe that, within a reasonable time, the debt created as a result of the change in control would cause the assets of the corporation or any successor to be less than the liabilities or would render the corporation or any successor insolvent or would lead to bankruptcy proceedings. PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL Certain provisions of the New ITT Articles of Incorporation and By-laws may delay or make more difficult acquisitions or changes of control of New ITT not approved by its Board of Directors. It is believed that such provisions will enable New ITT to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of New ITT and its shareholders. Such provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of New ITT, although such proposals, if made, might be considered desirable by a majority of New ITT's shareholders. Such provisions may also have the effect of making it more difficult for third parties to cause the replacement of the current management of New ITT without the concurrence of the Board of Directors. These provisions include (i) the availability of capital stock for issuance from time to time at the discretion of the Board of Directors (see "-- AUTHORIZED BUT UNISSUED CAPITAL STOCK"), (ii) prohibitions against shareholders calling a special meeting of shareholders or acting by written consent in lieu of a meeting, (iii) requirements for advance notice for raising business or making nominations at shareholders' meetings, and (iv) the ability of the board of directors to increase the size of the board and to appoint directors to fill newly created directorships. These four provisions were present in the Restated Certificate of Incorporation or By-laws of ITT. 210 217 NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The New ITT Articles of Incorporation and By-laws provide that shareholder action can be taken only at an annual or special meeting and cannot be taken by written consent in lieu of a meeting. The New ITT Articles of Incorporation and By-laws also provide that special meetings of the shareholders can be called only by the Chairman of the Board or by a vote of the majority of the entire Board of Directors. Furthermore, the By-laws provide that only such business as is specified in the notice of any such special meeting of the shareholders may come before such meeting. ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS The By-laws of New ITT establish an advance notice procedure for shareholder proposals to be bought before an annual meeting of shareholders and for nominations by shareholders of candidates for election as directors at an annual or special meeting at which directors are to be elected. Only such business may be conducted at an annual meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of New ITT timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The chairman of such meeting has the authority to make such determinations. Only persons who are nominated by, or at the direction of, the Board of Directors, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of New ITT. To be timely, notice of business to be brought before an annual meeting or nominations of candidates for election as directors at an annual meeting must be received by the Secretary of New ITT not later than 90 days in advance of the anniversary date for the immediately preceding annual meeting (or not more than 10 days after the first public disclosure of the date of such annual meeting, whichever is earlier). Similarly, notice of nominations to be brought before a special meeting must be delivered to the Secretary no later than the close of business on the 10th day following the day on which notice of the date of the special meeting of shareholders is given. The notice of any nomination for election as a director must set forth the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; a representation that the shareholder is a holder of record of stock of New ITT entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and the consent of each nominee to serve as a director if so elected. NUMBER OF DIRECTORS; FILLING OF VACANCIES The New ITT Articles of Incorporation and By-laws provide that newly created directorships resulting from any increase in the authorized number of directors (or any vacancy) may be filled by a vote of a majority of directors then in office, subject to the requirement provided in the By-laws that the majority of directors holding office immediately after such election must be independent directors. Accordingly, the Board of Directors of New ITT may be able to prevent any shareholder from obtaining majority representation on the Board of Directors by increasing the size of the board and filling the newly created directorships with its own nominees. RESTRICTIONS ON OWNERSHIP UNDER GAMING LAWS New ITT's Articles of Incorporation provide that (i) all securities of New ITT are subject to redemption by New ITT to the extent necessary to prevent the loss or to secure the reinstatement of any casino gaming license held by New ITT or any of its subsidiaries in any jurisdiction within or without the United States of 211 218 America, (ii) all securities of New ITT are held subject to the condition that if a holder thereof is found by a gaming authority in any such jurisdiction to be disqualified or unsuitable pursuant to any gaming law, such holder will be required to dispose of all New ITT securities held by such holder and (iii) it will be unlawful for any such disqualified person to (a) receive payments of interest or dividends on any New ITT securities, (b) exercise, directly or indirectly, any rights conferred by any New ITT securities or (c) receive any remuneration in any form, for services rendered or otherwise, from the subsidiary that holds the gaming license in such jurisdiction. The restrictions on ownership of ITT shares in respect of the gaming laws contained in the ITT Restated Certificate of Incorporation would not apply to the ITT Hartford Common Stock after the Distribution. COMPARISON OF SHAREHOLDER RIGHTS UNDER DELAWARE AND NEVADA LAW ITT is incorporated in Delaware. However, because a large portion of its operations are conducted in Nevada and because Nevada corporations enjoy greater statutory protection against changes in control (see "-- NEVADA GENERAL CORPORATION LAW"), New ITT, following the Distribution, will be incorporated in Nevada. The NGCL differs from the DGCL in many respects. The following summary sets forth certain differences that should be considered by shareholders. The following summary does not purport to be a complete statement of the differences between the NGCL and the DGCL, which are too numerous to list in their entirety. SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS Section 141(b) of the DGCL provides that the board of directors shall consist of one or more members. The number of directors shall be fixed by, or in the manner provided in, the by-laws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment of the certificate. Pursuant to Section 141(d) of the DGCL, the directors of any Delaware corporation may, by the certificate of incorporation, by an initial by-law or by a by-law adopted by a vote of the shareholders, be divided into one, two or three classes. Section 78.115 of the NGCL provides that a corporation must have at least one director, and may provide in its articles of incorporation or its by-laws for a fixed number of directors or a variable number of directors within a fixed maximum and minimum, and for the manner in which the number of directors may be increased or decreased. Section 78.330 of the NGCL provides that the articles of incorporation or the by-laws may provide for a classified board of directors, but at least one-fourth of the directors must be elected annually. The New ITT Board of Directors will not be classified. DUTIES OF DIRECTORS Section 78.138 of the NGCL allows directors and officers of a corporation to consider a variety of nonshareholder interests in discharging their duties to the corporation. See "-- NEVADA GENERAL CORPORATION LAW". There is no corresponding provision in the DGCL. However, Delaware courts, in certain instances, have permitted directors to consider various constituencies provided there exists some rationally related benefit to the shareholders. REMOVAL OF DIRECTORS Section 141(k) of the DGCL provides that any director or the entire board of directors may generally be removed with or without cause by a majority shareholder vote. However, a director of a corporation with a classified board of directors may be removed only for cause unless the certificate of incorporation otherwise provides. Under Section 78.335 of the NGCL, directors may be removed from office by a two-thirds shareholder vote, or by the vote of such larger percentage of shares as may be provided in the articles of incorporation. A director elected by a voting group, unless otherwise provided in the articles of incorporation, may only be removed by a vote of two-thirds of the members of the group, or by the vote of such larger percentage of the group as may be provided in the articles of incorporation for the removal of directors. 212 219 NEWLY CREATED DIRECTORSHIPS AND VACANCIES Under Section 223 of the DGCL, unless the certificate of incorporation or the by-laws of a corporation provide otherwise, a majority vote of the directors then in office may fill vacancies and newly created directorships, even if the number of current directors is less than a quorum or only one director remains. If the directors filling an open slot on the board constitute less than a majority of the whole board (as measured before an increase in the size of the board), the Delaware Court of Chancery may, upon application of shareholders holding at least 10% of the outstanding voting shares, summarily order an election to fill the open slots or replace directors chosen by the directors then in office. Unless otherwise provided in the certificate of incorporation or by-laws, when one or more directors resign effective at a future date, a majority of directors then in office, including those who have so resigned, may vote to fill the vacancy. Similarly, under Section 78.335 of the NGCL, all vacancies, including those caused by an increase in the number of directors, may be filled by a majority of the remaining directors, though less than a quorum, unless the articles of incorporation provide otherwise. The New ITT Articles of Incorporation do not provide otherwise. If a director gives notice of his or her resignation to the board of directors, to become effective at a future date, the board may fill the vacancy to take effect when the resignation becomes effective, with the director so appointed to hold office during the remainder of the term of office of the resigning director. LIMITATION ON DIRECTORS' LIABILITY Section 102(b)(7) of the DGCL allows a corporation, through its certificate of incorporation, to limit or eliminate the personal liability of directors to the corporation and its shareholders for monetary damages for breach of fiduciary duty. However, this provision excludes any limitation on liability for (i) any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) wilful or negligent violation of the laws governing the payment of dividends or the purchase or redemption of stock or (iv) any transaction from which the director derives an improper personal benefit. Section 78.037 of the NGCL allows a corporation, through its articles of incorporation, to limit or eliminate the personal liability of directors to the corporation and its shareholders for damages for breach of fiduciary duty. However, this provision excludes any limitation on liability for (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) the payment of distributions in violation of Section 78.300 of the NGCL. The New ITT Articles of Incorporation limit the liability of directors in the above manner. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS". INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the DGCL and Section 78.751 of the NGCL both provide that a corporation may indemnify any person made a party or threatened to be made a party to any type of proceeding (other than certain actions by or in right of the corporation) because he or she is or was a director, officer, employee or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation; or in a criminal proceeding, if he or she had no reasonable cause to believe his or her conduct was unlawful. Expenses incurred by an officer or director (or other employees or agents as deemed appropriate by the board of directors) in defending civil or criminal proceedings may be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the corporation. To indemnify a party, the corporation must determine that the party met the applicable standards of conduct. The New ITT Articles of Incorporation and By-laws provide for the above indemnification of directors and officers. See "NEW ITT MANAGEMENT AND EXECUTIVE COMPENSATION -- LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS". 213 220 LOANS TO DIRECTORS Section 143 of the DGCL allows a corporation to lend money to or guarantee an obligation of an officer or employee, including one who acts as a director, if the assistance is reasonably expected to benefit the corporation. Such assistance may be provided without shareholder approval. The NGCL contains no corresponding provision. DIVIDENDS Subject to additional restrictions in a corporation's certificate of incorporation, Section 170 of the DGCL allows the board of directors of a Delaware corporation to pay dividends out of surplus or, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared or the preceding fiscal year. Section 78.288 of the NGCL allows a board of directors to make distributions to shareholders, unless otherwise provided in the articles of incorporation. However, no distribution may be made if it would cause (i) the corporation to be unable to pay its debts as they become due or (ii) except as otherwise specifically allowed by the articles of incorporation, the corporation's assets to be less than the sum of its liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential shareholders whose rights are superior to those receiving the distribution. ACTION BY SHAREHOLDERS THROUGH WRITTEN CONSENT Under Section 228(a) of the DGCL, unless otherwise provided in a corporation's certificate of incorporation, any action required to be taken at an annual or special meeting of the shareholders may be taken in the absence of a meeting, without prior notice and without a vote. Such action may be taken by the written consent of shareholders in lieu of a meeting setting forth the action so taken and signed by the holders of outstanding stock representing the number of shares necessary to take such action at a meeting at which all shares entitled to vote were present and voted. Under Section 78.320 of the NGCL, unless otherwise provided in a corporation's articles of incorporation or by-laws, any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if a written consent thereto is signed by shareholders holding at least a majority of the voting power, except that if a different proportion of voting power is required for such an action at a meeting, then that proportion of written consents is required. The New ITT Articles of Incorporation and By-laws prohibit shareholder action by written consent. See "-- PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL". SPECIAL MEETINGS OF SHAREHOLDERS Under Section 211(d) of the DGCL, special meetings of shareholders may be called by the board of directors and by such other person or persons as may be authorized to do so by the corporation's certificate of incorporation or by-laws. Under Section 78.310 of the NGCL, meetings may be held in the manner provided by the by-laws of the corporation. The New ITT Articles of Incorporation and By-laws provide that only the Chairman of the Board of Directors or the Board of Directors acting by majority vote may call a special meeting. See "-- PROVISIONS OF NEW ITT ARTICLES OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL". CUMULATIVE VOTING Both Section 214 of the DGCL and Section 78.360 of the NGCL allow a corporation to provide for cumulative voting in the certificate of incorporation of the articles of incorporation. However, the New ITT Articles of Incorporation do not provide for cumulative voting. NECESSARY VOTE TO EFFECT MERGER (NOT INVOLVING INTERESTED STOCKHOLDER) The DGCL requires a majority vote of the shares entitled to vote in order to effectuate a merger between two Delaware corporations (Section 251(c)) or between a Delaware corporation and a corporation organized 214 221 under the laws of another state (a "foreign corporation") (Section 252(c)). However, unless required by the certificate of incorporation, Sections 251(f) and 252(e) do not require a vote of the shareholders of a constituent corporation surviving the merger if (i) the merger agreement does not amend that corporation's certificate of incorporation, (ii) each share of that corporation's stock outstanding before the effective date of the merger is identical to an outstanding or treasury share of the surviving corporation after the merger and (iii) in the event the merger plan provides for the issuance of common stock or securities convertible into common stock by the surviving corporation, the common stock issued and the common stock issuable upon conversion of the issued securities do not exceed 20% of the shares outstanding immediately before the effective date of the merger. Section 78.453 of the NGCL requires a majority vote of the shares entitled to vote in order to effect any merger. However, the articles of incorporation or the board of directors may provide for a greater vote under some circumstances. In addition, Section 78.454 of the NGCL provides that the vote of the stockholders of the surviving corporation on a plan of merger is not required under substantially the same conditions as are specified in Sections 251(f) and 252(e) of the DGCL. BUSINESS COMBINATIONS INVOLVING INTERESTED STOCKHOLDERS For a comparison of the provisions of the DGCL and the NGCL relating to business combinations involving interested stockholders, see "DESCRIPTION OF ITT HARTFORD CAPITAL STOCK -- DELAWARE GENERAL CORPORATION LAW" and "-- NEVADA GENERAL CORPORATION LAW". APPRAISAL RIGHTS; DISSENTERS' RIGHTS Both Section 262 of the DGCL and Sections 78.481 and 78.482 of the NGCL provide that shareholders have the right, in some circumstances, to dissent from certain corporate reorganizations and to instead demand payment of the fair cash value of their shares. Unless a corporation's certificate of incorporation provides otherwise, dissenters do not have rights of appraisal with respect to (i) a merger or consolidation by a corporation, the shares of which are either listed on a national securities exchange or held by more than 2,000 shareholders, if the shareholders receive cash (in the case of the NGCL), shares in the surviving corporation, shares of another corporation that are publicly listed or held by more than 2,000 shareholders, cash in lieu of fractional shares or any combination of the above or (ii) shareholders of a corporation surviving a merger if no vote of the shareholders of the surviving corporation is required to approve the merger. REDEEMABLE SHARES Section 151(b) of the DGCL provides that the certificate of incorporation or a resolution of the board of directors may make any class of stock subject to redemption at the option of the corporation or the shareholders, or upon the happening of a specified event, as long as at the time of redemption one class of voting stock is not subject to redemption. Section 78.196 of the NGCL provides that the articles of incorporation or a resolution of the board of directors may authorize one or more classes of stock that are redeemable or convertible at the option of the corporation, the shareholders or another person or upon the occurrence of a designated event. WARRANTS OR OPTIONS Under Section 157 of the DGCL, rights or options to purchase shares of any class of stock may be authorized by a corporation's board of directors subject to the provisions of the certificate of incorporation. The terms of such rights or options must be fixed and stated in the certificate of incorporation or in a resolution or resolutions adopted by the board of directors. Under Section 78.200 of the NGCL, a corporation may create and issue rights or options entitling the holders thereof to purchase from the corporation shares of its stock of any class or classes. The terms of such rights or options must be fixed and stated in the articles of incorporation or in a resolution or resolutions 215 222 adopted by the board of directors. For a discussion of the New ITT Rights Plan, see " -- NEW ITT RIGHTS PLAN". PREEMPTIVE RIGHTS Under Section 102(b)(3) of the DGCL and Section 78.267 of the NGCL, absent an express provision in a corporation's certificate of incorporation, a shareholder does not, by operation of law, possess preemptive rights to subscribe to an additional issue of stock. The New ITT Articles of Incorporation expressly deny shareholders any preemptive rights. AMENDMENT OF ARTICLES OF INCORPORATION AND BY-LAWS Section 242 of the DGCL and Sections 78.385 and 78.390 of the NGCL permit a corporation to amend its certificate of incorporation in any respect provided the amendment contains only provisions that would be lawful in an original certificate of incorporation filed at the time of amendment. To amend a certificate of incorporation, the board must adopt a resolution presenting the proposed amendment. In addition, a majority of the shares entitled to vote, as well as a majority of shares by class of each class entitled to vote, must approve the amendment to make it effective. When the substantial rights of a class of shares will be affected by an amendment, the holders of those shares are entitled to vote as a class even if the shares are non-voting shares. When only one or more series in a class of shares, and not the entire class, will be adversely affected by an amendment, only the affected series may vote as a class. Under Section 242(b)(2) of the DGCL, the right to vote as a class may be limited in certain circumstances. Any provision in the certificate of incorporation which requires a greater vote than required by law cannot be amended or repealed except by such greater vote. Section 242(c) of the DGCL provides that, in its resolution proposing an amendment, the board may insert a provision allowing the board to abandon the amendment, without concurrence by shareholders, after the amendment has received shareholder approval but before its filing with the Secretary of State. Section 109 of the DGCL provides that the power to amend the by-laws rests with the stockholders entitled to vote, although the certificate of incorporation may confer the power to amend the by-laws upon the board of directors. Section 109 further provides that the fact that the certificate of incorporation confers such power upon the board of directors neither limits nor divests the stockholders of the power to amend the by-laws. Section 78.120 of the NGCL, on the other hand, provides that, subject to the by-laws, if any, adopted by the stockholders, the directors may make the by-laws of the corporation. The Articles of Incorporation and the By-laws of New ITT provide that the By-laws may be amended by a majority vote of the entire Board of Directors or by the affirmative vote of not less than a majority of the holders of New ITT Common Stock. INSPECTION OF BOOKS AND RECORDS Section 220 of the DGCL entitles any shareholder of record of a corporation, in person or by an agent, upon written demand under oath stating the purpose thereof, to inspect during usual business hours, for any proper purpose, the corporation's stock ledger, a list of its shareholders and its other books and records, and to make copies or extracts therefrom. A proper purpose means a purpose reasonably related to such person's interest as a shareholder. Section 78.105 of the NGCL entitles any person who has been a shareholder of record of a corporation for at least six months, or any person holding or representing at least 5% of its outstanding shares, upon at least five days' written demand, to inspect, in person or by an agent, during usual business hours, its stock ledger and to make extracts therefrom. However, pursuant to Section 78.257 of the NGCL, only shareholders of record who own or represent at least 15% of a corporation's shares have the right, upon at least five days' written demand, to inspect, in person or by an agent, during normal business hours, the books of account and financial records of the corporation, to make extracts therefrom and to conduct an audit of such records. 216 223 DESCRIPTION OF ITT HARTFORD CAPITAL STOCK AUTHORIZED CAPITAL STOCK The total number of shares of all classes of stock that ITT Hartford has authority to issue under its Certificate of Incorporation is 250,000,000 shares of which 200,000,000 shares represent shares of ITT Hartford Common Stock and 50,000,000 shares represent shares of Preferred Stock (the "ITT Hartford Preferred Stock"). Based on 105,771,521 shares of ITT Common Stock outstanding as of June 1, 1995, 530,642 shares of ITT Series N Preferred Stock (convertible into 671,793 shares of ITT Common Stock) outstanding as of June 1, 1995, and 8,674,930 shares of ITT ESOP Preferred Stock (convertible into 9,708,114 shares of ITT Common Stock) outstanding as of June 1, 1995, and a distribution ratio of one share of ITT Hartford Common Stock for every one share of ITT Common Stock, it is expected that approximately 116,151,428 shares of ITT Hartford Common Stock will be distributed to holders of ITT Common Stock on the Distribution Date. ITT HARTFORD COMMON STOCK Subject to any preferential rights of any ITT Hartford Preferred Stock created by the Board of Directors of ITT Hartford, each outstanding share of ITT Hartford Common Stock will be entitled to such dividends as may be declared from time to time by the Board of Directors of ITT Hartford. See "DIVIDEND POLICY -- ITT HARTFORD DIVIDEND POLICY". Each outstanding share is entitled to one vote on all matters submitted to a vote of shareholders. The ITT Hartford Certificate of Incorporation does not provide for cumulative voting rights; therefore, the holders of a majority of the shares voting for the election of the Board of Directors of ITT Hartford can elect all the directors up for election, if they so choose. In the event of liquidation, dissolution or winding up of ITT Hartford, holders of ITT Hartford Common Stock will be entitled to receive on a pro rata basis any assets remaining after provision for payment of creditors and after payment of any liquidation preferences to holders of ITT Hartford Preferred Stock. ITT HARTFORD PREFERRED STOCK The authorized Preferred Stock of ITT Hartford is available for issuance from time to time at the discretion of the ITT Hartford Board of Directors without shareholder approval. The ITT Hartford Board of Directors has the authority to prescribe for each series of ITT Hartford Preferred Stock it establishes the number of shares in that series, the consideration for such shares in that series and the designations, powers, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions of the shares in that series. Depending upon the rights of such Preferred Stock, the issuance of ITT Hartford Preferred Stock could have an adverse effect on holders of ITT Hartford Common Stock by delaying or preventing a change in control of ITT Hartford, making removal of the present management of ITT Hartford more difficult or resulting in restrictions upon the payment of dividends and other distributions to the holders of ITT Hartford Common Stock. AUTHORIZED BUT UNISSUED CAPITAL STOCK Delaware law does not require shareholder approval for any issuance of authorized shares. However, the listing requirements of the NYSE, which would apply so long as the ITT Hartford Common Stock remained listed on the NYSE, require shareholder approval of certain issuances that equal to or exceed 20% of the then outstanding voting power or then outstanding number of shares of Common Stock of ITT Hartford. These additional shares may be used for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions. ITT Hartford currently does not have any plans to issue additional shares of ITT Hartford Common Stock or ITT Hartford Preferred Stock. One of the effects of the existence of unissued and unreserved ITT Hartford Common Stock and ITT Hartford Preferred Stock may be to enable the Board of Directors of ITT Hartford to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of ITT Hartford by means of a merger, tender offer, proxy contest or otherwise, and thereby protect 217 224 the continuity of ITT Hartford's management and possibly deprive the shareholders of opportunities to sell their shares of ITT Hartford Common Stock at prices higher than prevailing market prices. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of ITT Hartford pursuant to the operation of the ITT Hartford Rights Plan, which is discussed below. ITT HARTFORD RIGHTS PLAN ITT Hartford Rights It is anticipated that the Board of Directors of ITT Hartford will declare a dividend of one right (the "ITT Hartford Rights") for each outstanding share of ITT Hartford Common Stock. The ITT Hartford Rights will be issued to the holders of record of ITT Hartford Common Stock outstanding on the ITT Hartford Rights issuance date and with respect to ITT Hartford Common Stock issued thereafter until the distribution date, and in certain circumstances with respect to ITT Hartford Common Stock issued after the distribution date. Each ITT Hartford Right, when it becomes exercisable, will entitle the registered holder to purchase from ITT Hartford one one-thousandths (1/1000ths) of a share of Preferred Stock of ITT Hartford (the "ITT Hartford Preferred Shares") at a price of $[ ], subject to adjustment in certain circumstances. The description and terms of the ITT Hartford Rights are set forth in a form of Rights Agreement (the "ITT Hartford Rights Agreement") between ITT Hartford and [ ], as rights agent. The terms of the ITT Hartford Rights Agreement will be identical to the terms of the ITT Industries Rights Plan, as described in "DESCRIPTION OF ITT INDUSTRIES CAPITAL STOCK -- ITT INDUSTRIES RIGHTS PLAN," except such terms will relate to the ITT Hartford Rights. A copy of the ITT Hartford Rights Agreement will be filed as an exhibit to the Registration Statement of ITT Hartford in respect of the registration of ITT Hartford Common Stock under the Exchange Act. Unless the context otherwise requires, references herein to the ITT Hartford Common Stock include the related ITT Hartford Rights. Certain Effects of the ITT Hartford Rights Plan The ITT Hartford Rights Plan is designed to protect shareholders of ITT Hartford in the event of unsolicited offers to acquire ITT Hartford, and other coercive takeover tactics which, in the opinion of the Board of Directors of ITT Hartford, could impair its ability to represent shareholder interests. The provisions of the ITT Hartford Rights Plan may render a takeover of ITT Hartford more difficult or less likely to occur even though such takeover may offer ITT Hartford's shareholders the opportunity to sell their stock at a price above the prevailing market rate and may be favored by a majority of the shareholders of ITT Hartford. NO PREEMPTIVE RIGHTS No holder of any class of stock of ITT Hartford authorized at the Distribution Date will have any preemptive right to subscribe to any securities of ITT Hartford of any kind or class. DELAWARE GENERAL CORPORATION LAW The terms of Section 203 of the Delaware General Corporation Law apply to ITT Hartford since it is a Delaware corporation. Pursuant to Section 203, with certain exceptions, a Delaware corporation may not engage in any of a broad range of business combinations, such as mergers, consolidations and sales of assets, with an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless (a) the transaction that results in the person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, (b) upon consummation of the transaction which results in the shareholder becoming an interested stockholder, the interested stockholder owns 85% or more of the voting stock of the corporation outstanding at the time the transaction commenced, excluding shares owned by persons who are directors and also officers and shares owned by certain employee stock plans, or (c) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by holders of at least two-thirds of the corporation's outstanding voting stock, excluding shares owned by the interested stockholder, at a meeting of shareholders. Under Section 203, 218 225 an "interested stockholder" is defined as any person, other than the corporation and any direct or indirect majority-owned subsidiaries, that is (a) the owner of 15% or more of the outstanding voting stock of the corporation or (b) an affiliate or associate of the corporation and the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder or (c) an affiliate or associate of such person. Section 203 does not apply to a corporation that so provides in an amendment to its certificate of incorporation or by-laws passed by a majority of its outstanding shares at any time. Such stockholder action does not become effective for 12 months following its adoption and would not apply to persons who were already interested stockholders at the time of the amendment. ITT Hartford's Certificate of Incorporation does not exclude ITT Hartford from the restrictions imposed under Section 203. Under certain circumstances, Section 203 makes it more difficult for a person who would be an "interested stockholder" to effect various business combinations with a corporation for a three-year period, although the shareholders may elect to exclude a corporation from the restrictions imposed thereunder. The provisions of Section 203 may encourage companies interested in acquiring ITT Hartford to negotiate in advance with ITT Hartford's Board of Directors, because the shareholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction which results in the shareholder becoming an interested shareholder. Such provisions also may have the effect of preventing changes in the management of ITT Hartford. It is further possible that such provisions could make it more difficult to accomplish transactions which shareholders may otherwise deem to be in their best interests. PROVISIONS OF ITT HARTFORD CERTIFICATE OF INCORPORATION AND BY-LAWS AFFECTING CHANGE IN CONTROL Certain provisions of the ITT Hartford Certificate of Incorporation and By-laws may delay or make more difficult acquisitions or changes of control of ITT Hartford not approved by its Board of Directors. It is believed that such provisions will enable ITT Hartford to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of ITT Hartford and its shareholders. Such provisions could have the effect of discouraging third parties from making proposals involving an acquisition or change of control of ITT Hartford, although such proposals, if made, might be considered desirable by a majority of ITT Hartford's shareholders. Such provisions may also have the effect of making it more difficult for third parties to cause the replacement of the current management of ITT Hartford without the concurrence of the Board of Directors. These provisions include (i) the availability of capital stock for issuance from time to time at the discretion of the Board of Directors (see "-- AUTHORIZED BUT UNISSUED STOCK"), (ii) prohibitions against shareholders calling a special meeting of shareholders or acting by written consent in lieu of a meeting (iii) requirements for advance notice for raising business or making nominations at shareholders' meetings and (iv) the ability of the board of directors to increase the size of the board and to appoint directors to fill newly created directorships. These four provisions were present in the Restated Certificate of Incorporation or By-laws of ITT. NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The ITT Hartford Certificate of Incorporation and By-laws provide that shareholder action can be taken only at an annual or special meeting and cannot be taken by written consent in lieu of a meeting. The ITT Hartford Articles of Incorporation and By-laws also provide that special meetings of the shareholders can be called only by the Chairman of the Board of Directors or by a vote of the majority of the entire Board of Directors. Furthermore, the By-laws of ITT Hartford provide that only such business as is specified in the notice of any such special meeting of shareholders may come before such meeting. ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS The By-laws of ITT Hartford establish an advance notice procedure for shareholder proposals to be brought before an annual meeting of shareholders and for nominations by shareholders of candidates for 219 226 election as directors at an annual or special meeting at which directors are to be elected. Only such business may be conducted at an annual meeting of shareholders as has been brought before the meeting by, or at the direction of, the Board of Directors, or by a shareholder who has given to the Secretary of ITT Hartford timely written notice, in proper form, of the shareholder's intention to bring that business before the meeting. The chairman of such meeting has the authority to make such determinations. Only persons who are nominated by, or at the direction of, the Board of Directors, or who are nominated by a shareholder who has given timely written notice, in proper form, to the Secretary prior to a meeting at which directors are to be elected will be eligible for election as directors of ITT Hartford. To be timely, notice of business to be brought before an annual meeting or nominations of candidates for election as directors at an annual meeting must be received by the Secretary of ITT Hartford not later than 90 days in advance of the anniversary date for the immediately preceding annual meeting (or not more than 10 days after the first public disclosure of the date of such annual meeting, whichever is earlier). Similarly, notice of nominations to be brought before a special meeting must be delivered to the Secretary no later than the close of business on the 10th day following the day on which notice of the date of the special meeting of shareholders is given. The notice of any nomination for election as a director must set forth the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; a representation that the shareholder is a holder of record of share of ITT Hartford entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board of Directors; and the consent of each nominee to serve as a director if so elected. NUMBER OF DIRECTORS; FILLING OF VACANCIES The ITT Hartford Certificate of Incorporation and By-laws provide that newly created directorships resulting from any increase in the authorized number of directors (or any vacancy) may be filled by a vote of a majority of directors then in office, subject to the requirement provided in the By-laws that the majority of directors holding office immediately after such election must be independent directors. Accordingly, the Board of Directors of ITT Hartford may be able to prevent any shareholder from obtaining majority representation on the Board of Directors by increasing the size of the board and filling the newly created directorships with its own nominees. RESTRICTIONS ON OWNERSHIP UNDER INSURANCE LAWS Although the Certificate of Incorporation and By-laws of ITT Hartford will not contain any provision restricting ownership as a result of the application of various state insurance laws, such laws will be a significant deterrent to any person interested in acquiring control of ITT Hartford. See "BUSINESS OF ITT HARTFORD AFTER THE DISTRIBUTION -- REGULATION". INDEPENDENT ACCOUNTANTS Arthur Andersen LLP, independent accountants, are acting as ITT's auditors for the current fiscal year and will be auditors for each of ITT Industries, New ITT and ITT Hartford after the Distribution. Representatives of Arthur Andersen LLP will be present at the Special Meeting, with the opportunity to make a statement if they desire to do so, and will be available to respond to appropriate questions from shareholders. 220 227 SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING Pursuant to Rule 14a-8 under the Exchange Act, shareholders of ITT may present proper proposals for inclusion in ITT's proxy statement and for consideration at its Annual Meeting of Shareholders by submitting their proposals to ITT in a timely manner. In order to be so included for the 1996 Annual Meeting, shareholder proposals must be received by ITT no later than the close of business on November 23, 1995, and must otherwise comply with the requirements of Rule 14a-8. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by ITT with the Securities and Exchange Commission (the "SEC") are incorporated herein by reference: 1. Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 2. Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995. 3. Current Report on Form 8-K dated March 31, 1995. ITT will provide without charge to each person to whom a copy of this Proxy Statement is delivered, on the written request of any such person, by first class mail or other equally prompt means within one business day of receipt of such request, a copy of any or all of the foregoing documents incorporated herein by reference (other than any exhibits to such documents which are not specifically incorporated herein by reference). Requests should be directed to: ITT Corporation 1330 Avenue of the Americas New York, New York 10019-5490 Attention: Corporate Stock Services Department. All documents filed by ITT with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the date of the Special Meeting or any adjournment thereof shall be deemed to be incorporated by reference herein. Any statements contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document that also is incorporated by reference herein) modifies or supersedes such statement. Any statement so modified or superseded shall be deemed to constitute a part hereof except as so modified or superseded. AVAILABLE INFORMATION ITT, ITT Hartford and ITT Educational are subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder and in accordance therewith file reports, proxy statements (in the case of ITT and ITT Educational) and other information with the SEC. Reports, proxy statements and other information filed by ITT, ITT Hartford and ITT Educational may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New York, New York 10048 and in the Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such information may be obtained by mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C 20549 at prescribed rates. Reports and other information concerning ITT may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005, and the PSE, 301 Pine Street, San Francisco, California 94104. Reports and other information concerning ITT Educational may also be inspected at the offices of the NYSE. New ITT and ITT Hartford will file with the SEC a Registration Statement on Form 10 and Form 8-A, respectively, with respect to the shares of New ITT Common Stock (and related New ITT Rights) and ITT 221 228 Hartford Common Stock (and related ITT Hartford Rights) to be received by the shareholders of ITT in the Distribution. This Proxy Statement does not contain all the information to be set forth in the respective Registration Statements and the exhibits thereto, to which reference is hereby made. Statements made in this Proxy Statement as to the contents of any contract, agreement, instrument or other document referred to herein are not necessarily complete. With respect to each such contract, agreement, instrument or other document to be filed as an exhibit to the respective Registration Statements, reference is made to such exhibit for a more complete description of the matter involved, and each statement is qualified in its entirety by such reference. The respective Registration Statements and the exhibits thereto filed by New ITT and ITT Hartford may be inspected and copied at the public reference facilities of the SEC listed above. REPORTS OF NEW ITT AND ITT HARTFORD After the Distribution, both New ITT and ITT Hartford will be required to comply with the reporting requirements of the Exchange Act and, in accordance therewith, to file reports, proxy statements and other information with the SEC. After the Distribution, such reports, proxy statements and other information may be inspected and copied at the public reference facilities of the SEC listed above under "AVAILABLE INFORMATION" and obtained by mail from the SEC as described above under "AVAILABLE INFORMATION". Application will be made to list the shares of New ITT Common Stock (and related New ITT Rights) and ITT Hartford Common Stock (and related ITT Hartford Rights) on the NYSE and, if and when such shares of New ITT Common Stock (and related New ITT Rights) and ITT Hartford Common Stock (and related ITT Hartford Rights), as applicable, commence trading on the NYSE, such reports, proxy statements and other information will be available for inspection at the offices of the NYSE listed above under "AVAILABLE INFORMATION". Additionally, each of New ITT and ITT Hartford intend to provide annual reports, containing audited financial statements, to its shareholders in connection with its annual meetings of shareholders. 222 229 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE ----- ITT INDUSTRIES, INC. Report of Independent Public Accountants............................................. F-3 Consolidated Income for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994............................................................ F-4 Consolidated Balance Sheet as of March 31, 1995 and December 31, 1994 and 1993....... F-5 Consolidated Cash Flow for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994...................................................... F-6 Consolidated Retained Earnings for the Quarter Ended March 31, 1995 and Three Years Ended December 31, 1994............................................................ F-7 Consolidated Capital Stock and Surplus for the Quarter Ended March 31, 1995 and the Three Years Ended December 31, 1994................................................ F-7 Cumulative Preferred Stock as of December 31, 1994 and 1993.......................... F-8 Notes to Financial Statements........................................................ F-9 Business Segment Information......................................................... F-23 Geographical Information............................................................. F-24 Quarterly Results for 1994 and 1993.................................................. F-24 Export Sales......................................................................... F-25 ITT DESTINATIONS, INC. Report of Independent Public Accountants............................................. F-26 Combined Income for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994............................................................ F-27 Combined Balance Sheet as of March 31, 1995 and December 31, 1994 and 1993........... F-28 Combined Cash Flow for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994............................................................ F-29 Investments and Advances from ITT Industries Inc. for the Quarter Ended March 31, 1995 and the Three Years Ended December 31, 1994................................... F-30 Notes to Financial Statements........................................................ F-31 Business Segment Information......................................................... F-41 Geographical Information and Quarterly Results for 1994 and 1993..................... F-42 ITT HARTFORD GROUP, INC. Report of Independent Public Accountants............................................. F-43 Consolidated Income for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994............................................................ F-44 Consolidated Balance Sheet as of March 31, 1995 and December 31, 1994 and 1993....... F-45 Consolidated Cash Flow for the Quarter Ended March 31, 1995 and 1994 and the Three Years Ended December 31, 1994...................................................... F-46 Consolidated Stockholder's Equity for the Quarter Ended March 31, 1995 and the Three Years Ended December 31, 1994...................................................... F-47 Notes to Financial Statements........................................................ F-48 Business Segment Information......................................................... F-64 Quarterly Results for 1994 and 1993.................................................. F-65
F-1 230
PAGE ----- CAESARS WORLD, INC. AND SUBSIDIARIES Report of Independent Public Accountants............................................. F-66 Consolidated Statements of Operations for the Three Years Ended July 31, 1994........ F-67 Consolidated Balance Sheets as of July 31, 1994 and 1993............................. F-68 Consolidated Statements of Stockholder's Equity for the Three Years Ended July 31, 1994............................................................................... F-69 Consolidated Statements of Cash Flows for the Three Years Ended July 31, 1994........ F-70 Notes to Consolidated Financial Statements........................................... F-71 Selected Quarterly Financial Information (unaudited)................................. F-84 CIGA GROUP Report of Independent Public Accountants............................................. F-85 Balance Sheet as of December 31, 1994 and 1993....................................... F-87 Statement of Operations for the Two Years Ended December 31, 1994.................... F-91 Statement of Source and Application of Funds for the Year Ended December 31, 1994.... F-94 Notes to the Financial Statements.................................................... F-96 FINANCIAL STATEMENT SCHEDULES Valuation and Qualifying Accounts -- ITT Industries, Inc............................. S-1 Valuation and Qualifying Accounts -- ITT Destinations, Inc........................... S-2 Supplementary Insurance Information.................................................. S-3 Supplemental Information Concerning Property and Casualty Insurance Operations....... S-3 Reinsurance.......................................................................... S-4
F-2 231 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To ITT Corporation: We have audited the consolidated financial statements of ITT Corporation (a Delaware corporation; to be renamed ITT Industries, Inc., and reincorporated as an Indiana corporation) and subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, as described in the accompanying Index to Financial Statements and Schedules. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ITT Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in the accompanying notes to financial statements, the Company adopted new accounting standards promulgated by the Financial Accounting Standards Board, changing its methods of accounting, effective January 1, 1994, for certain investments in debt and equity securities and effective January 1, 1992, for postretirement benefits other than pensions and postemployment benefits. The Corporation also changed effective January 1, 1994, its method used to discount long-term tabular workers compensation liabilities and its accounting method for deferred marketing and start-up costs. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index to Financial Statements and Schedules is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP New York, New York June 13, 1995 F-3 232 ITT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED INCOME IN MILLIONS EXCEPT PER SHARE
QUARTER ENDED MARCH 31, YEARS ENDED DECEMBER 31, ----------------- ---------------------------- 1995 1994 1994 1993 1992 ------ ------ ------ ------ ------ (UNAUDITED) Net Sales..................................... $2,248 $1,691 $7,758 $6,621 $6,845 Cost of Sales................................. 1,942 1,449 6,607 5,647 5,968 ------ ------ ------ ------ ------ 306 242 1,151 974 877 Selling, General and Administrative Expenses.................................... 168 150 643 655 686 Service Charges from Affiliated Companies..... 22 16 73 59 62 Other Operating Expenses...................... 13 14 17 31 110 ------ ------ ------ ------ ------ 103 62 418 229 19 Equity in Earnings of Alcatel N.V............. -- -- -- -- 97 Gain on Sale of Alcatel N.V................... -- -- -- -- 942 Interest Expense.............................. (33) (23) (114) (153) (180) Interest Income............................... 9 24 66 121 98 Miscellaneous Income (Expense), net........... -- -- (21) 3 (10) ------ ------ ------ ------ ------ 79 63 349 200 966 Income Tax Expense............................ (34) (26) (147) (65) (311) ------ ------ ------ ------ ------ Income from Continuing Operations............. 45 37 202 135 655 Discontinued Operations, net of tax (benefit) of $83, $80, $328, $310 and $(598).......... 183 176 831 828 (915) Extraordinary Item, net of tax benefit of $25......................................... -- -- -- (50) -- Cumulative Effect of Accounting Changes, net of tax benefit of $8, $8 and $322........... -- (11) (11) -- (625) ------ ------ ------ ------ ------ Net Income (Loss)............................. $ 228 $ 202 $1,022 $ 913 $ (885) ====== ====== ====== ====== ====== EARNINGS (LOSS) PER SHARE* Income from Continuing Operations Primary..................................... $ .34 $ .24 $ 1.46 $ .83 $ 5.34 Fully Diluted............................... $ .34 $ .25 $ 1.46 $ .88 $ 4.77 Discontinued Operations Primary..................................... $ 1.71 $ 1.49 $ 7.21 $ 6.90 $(7.81) Fully Diluted............................... $ 1.57 $ 1.38 $ 6.65 $ 6.40 $(6.96) Extraordinary Item Primary..................................... -- -- -- $ (.41) -- Fully Diluted............................... -- -- -- $ (.38) -- Cumulative Effect of Accounting Changes Primary..................................... -- $ (.10) $ (.10) -- $(5.46) Fully Diluted............................... -- $ (.09) $ (.09) -- $(4.71) Net Income (Loss) Primary..................................... $ 2.05 $ 1.63 $ 8.57 $ 7.32 $(7.93) Fully Diluted............................... $ 1.91 $ 1.54 $ 8.02 $ 6.90 $(6.90) ====== ====== ====== ====== ====== AVERAGE COMMON EQUIVALENT SHARES -- PRIMARY... 107 119 115 120 117 ====== ====== ====== ====== ====== AVERAGE COMMON EQUIVALENT SHARES -- FULLY DILUTED..................................... 117