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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from
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COMMISSION FILE NO. 1-5627
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ITT CORPORATION
INCORPORATED IN THE STATE OF DELAWARE
13-5158950
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1330 AVENUE OF THE AMERICAS, NEW YORK, NY 10019-5490
(PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (212) 258-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT, ALL OF WHICH ARE
REGISTERED ON THE NEW YORK STOCK EXCHANGE, INC.:
COMMON STOCK, $1 PAR VALUE (ALSO REGISTERED ON PACIFIC STOCK EXCHANGE)
CUMULATIVE PREFERRED STOCK, WITHOUT PAR VALUE,
$2.25 CONVERTIBLE SERIES N (ALSO REGISTERED ON PACIFIC STOCK
EXCHANGE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value of the Common and Cumulative Preferred Stocks of
the registrant held by non-affiliates of the registrant on January 31, 1994,
was approximately $11.6 billion.
As of March 15, 1994, there were outstanding 117,539,083 shares of Common
Stock, $1 par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 17, 1994, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
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PART 1 Business of ITT...................................................... 1
I 2 Properties........................................................... 10
3 Legal Proceedings.................................................... 11
4 Submission of Matters to a Vote of Security Holders.................. 12
* Executive Officers of ITT............................................ 12
PART 5 Market for ITT's Common Stock and Related Stockholder Matters........ 13
II 6 Selected Financial Data.............................................. 14
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 14
8 Financial Statements and Supplementary Data.......................... 23
9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 23
PART 10 Directors and Executive Officers of ITT.............................. 23
III 11 Executive Compensation............................................... 23
12 Security Ownership of Certain Beneficial Owners and Management....... 23
13 Certain Relationships and Related Transactions....................... 23
PART 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 24
IV
Signatures.................................................................. II-1
Exhibit Index............................................................... II-2
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* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
PART I
ITEM 1. BUSINESS OF ITT
ITT Corporation is a Delaware corporation, with World Headquarters at 1330
Avenue of the Americas, New York, NY 10019-5490. Until December 31, 1983, the
corporation was known as International Telephone and Telegraph Corporation. It
is the successor (since 1968) to a Maryland corporation incorporated in 1920.
Unless the context otherwise indicates, references herein to ITT Corporation
("ITT") include its subsidiaries.
ITT is a diversified global enterprise engaged, either directly or through
subsidiaries, in manufacturing and selling automotive, defense and electronics,
and fluid technology products, in providing and selling insurance, financial and
communications and information services, and in hotel operations. In addition,
ITT owns approximately 6% of the outstanding capital shares of Alcatel Alsthom,
a French company which owns, among other things, Alcatel N.V., the largest
telecommunications equipment manufacturer in the world. ITT has approximately
98,000 employees.
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BUSINESS SEGMENTS*
SALES AND REVENUES INCOME (LOSS)
----------------------------- -------------------------
1993 1992 1991 1993 1992 1991
------- ------- ------- ---- ------- ------
(IN MILLIONS)
FINANCIAL AND BUSINESS SERVICES
Insurance............................................... $10,338 $ 9,862 $ 9,242 $ 719 $ (513) $ 500
Finance................................................. 1,440 1,414 1,321 271 175 343
Communications & Information Services................... 800 817 684 162 170 149
MANUFACTURED PRODUCTS
Automotive.............................................. 3,580 3,498 2,933 164 118 71
Defense & Electronics................................... 1,671 1,927 1,985 51 (82) 83
Fluid Technology........................................ 1,030 1,070 1,064 95 67 83
HOTELS+................................................... 3,184 3,109 2,826 78 (28) 33
------- ------- ------- ------ ------- ------
Ongoing Segments.......................................... 22,043 21,697 20,055 1,540 (93) 1,262
Alcatel N.V............................................... -- 97 208
Dispositions and Other.................................... 719 1,280 1,481 105 (1,003) (246)
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TOTAL SEGMENTS............................................ 22,762 22,977 21,536 1,645 (999) 1,224
Gain on sale of Alcatel N.V............................... -- 942 --
Interest, net............................................. (147) (169) (177)
Other..................................................... (243) (203) (186)
Income tax (expense) benefit.............................. (345) 241 (166)
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Income (Loss) from Continuing Operations.................. 910 (188) 695
Discontinued Operations (after tax)....................... 53 (72) 54
Extraordinary Item, net of tax benefit of $25............. (50) -- --
Cumulative Effect of Accounting Changes
(SFAS Nos. 106 and 112), net of tax benefit of $322..... -- (625) --
------- ------- ------- ------ ------- ------
$22,762 $22,977 $21,536 $ 913 $ (885) $ 749
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------- ------- ------- ------ ------- ------
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* Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Business Segment Information,
included in the Notes to Financial Statements, which include descriptions of
Business Segments.
+ Total sales and revenues of the Hotels segment, including 100% of
unconsolidated revenues generated by franchised hotels, were $4.8, $4.8 and
$4.4 billion in 1993, 1992 and 1991, respectively.
FINANCIAL AND BUSINESS SERVICES
Insurance. ITT companies write commercial property and casualty insurance,
personal automobile and homeowners coverages and a variety of life and health
insurance plans. The businesses in the Insurance segment may be generally
categorized as (i) property and casualty insurance operations and (ii) life and
health insurance operations and, in both instances, their related investment
activities. ITT companies service the United States, Canada and Western Europe
and participate in the worldwide reinsurance market. Companies include Hartford
Fire Insurance Company and its subsidiaries (referred to collectively as "ITT
Hartford"). ITT Hartford is one of the United States' oldest and largest
international insurance organizations.
ITT Hartford is serviced in North America through its home office and 40
regional offices, and it is represented by approximately 6,000 independent
agents in North America. ITT Hartford operates in Western Europe through
independent brokers. It assumes reinsurance from other insurers and also cedes
reinsurance to other insurers or reinsurers in the world reinsurance market.
ITT's insurance operations are subject to regulation and supervision in the
states and other jurisdictions in which they are conducted, which may relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; restrictions on the size of risks which may be
insured under a single policy; approval of policy forms; periodic examinations
of the affairs of companies; and annual and other reports required to be filed
on the financial condition of companies or for other purposes.
Additional information with respect to ITT's property and casualty
insurance operations is set forth below under "Property and Casualty
Insurance--Liabilities for Unpaid Claims and Claim Adjustment Expenses."
Finance. This segment is comprised of ITT Financial Corporation, one of
the largest independent finance companies in the United States, with commercial
and consumer finance, related insurance and other financial services conducted
from offices located throughout the United States and in Puerto Rico, the U.S.
Virgin Islands, the Netherlands Antilles, Aruba and Panama. Commercial finance
operations are also conducted in Canada and the United Kingdom through
subsidiaries of ITT.
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Consumer finance operations include the buying, selling and originating of
residential mortgages, home equity lending and, to a limited extent, the
purchase from retail dealers of installment obligations arising from sales of
consumer goods and services.
Commercial finance operations include inventory financing, installment
lending, real estate financing and loans. Property insurance is made available
to certain retail dealers on the inventory financed.
A mortgage banking operation which includes a federally chartered savings
bank originates, buys, sells and services mortgages.
Communications and Information Services. ITT subsidiaries are engaged in
the publication of telephone directories, including classified directory
services for telephone subscribers in numerous countries outside the United
States, as well as in Puerto Rico and the U.S. Virgin Islands. Subsidiaries in
the United States also operate post-secondary career education and technical
schools and facilities. On March 14, 1994, ITT announced plans for an
underwritten public offering of up to 19.9% of the common stock of ITT
Educational Services Inc.
MANUFACTURED PRODUCTS
Automotive. With approximately twenty-six thousand employees in
seventy-one facilities located in twelve countries, ITT supplies braking,
electrical, suspension and mechanical systems and components to automotive
original equipment manufacturers worldwide. This segment, one of the world's
largest independent suppliers of such products, has expanded its customer base
by introducing sophisticated, high-technology products such as anti-lock brakes,
traction control systems, vehicle electrical components, fluid handling systems
and aftermarket products. More than half of the sales of this segment were made
in Europe in 1993, compared with almost three quarters in 1990.
Defense & Electronics. ITT companies in the defense sector of this segment
design, produce and operate numerous types of tactical communications equipment
for the military, navigation and air traffic control systems for civilian and
military aircraft, air and battlefield surveillance radar and night vision
equipment. Some of these subsidiaries also provide upgrading, maintenance and
training services for the military and other customers. A substantial portion of
the work in the defense sector is performed for the United States government
under prime contracts and subcontracts, some of which by statute are subject to
profit limitations and all of which are subject to termination by the
government.
ITT companies in the electronics sector of this segment operate in several
European countries, Japan and North America and produce a wide variety of
electronic connectors, switches, components and semiconductor devices which are
used in industrial, professional and telecommunications equipment as well as in
consumer appliances and automobiles. Night vision equipment, power supplies,
molded plastic components and electrical instruments are also produced for the
commercial and consumer markets.
Fluid Technology. This segment covers fluid handling products, which
include a wide range of pumps and heat exchangers; controls and instrumentation
products, including high-technology instruments for control and monitoring of
fluids and energy conservation; and a broad range of valves. ITT is one of the
largest pump manufacturers in the world. Most of these operations are carried on
in North America and Western Europe. Principal customers are commercial and
industrial users, construction contractors, process industries, water and
wastewater utilities, and original equipment manufacturers. Sales are made
directly and through independent distributors and representatives.
HOTELS
ITT Sheraton Corporation is a worldwide hospitality network of more than
400 owned, leased, managed and franchised properties in 61 countries, including
hotels, casinos and inns owned and operated, or operated under lease or
management agreements, by ITT subsidiaries, or operated by independent owners
under license agreements with ITT subsidiaries. Approximately 89% of the rooms
in the ITT Sheraton network are either managed or franchised. ITT Sheraton
entered the U.S. gaming industry during 1993 with the acquisition of the Desert
Inn Properties in Las Vegas, Nevada (reference is made to Governmental
Regulation and Related Matters -- Nevada Gaming Laws, below).
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ALCATEL N.V.
In July 1992, ITT sold its 30% equity interest in Alcatel N.V., a
Netherlands company which is the largest telecommunications equipment
manufacturer in the world, to Alcatel Alsthom, a major French company which
owned the other 70% of Alcatel N.V. At the closing of the sale ITT received $1
billion in cash and 9.1 million capital shares of Alcatel Alsthom, recorded at
$806 million, which, at December 31, 1993, 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 will receive a cash
payment of approximately $817 million in July 1994. ITT will retain its equity
interest in Alcatel Alsthom until at least July 1997, unless Alcatel Alsthom and
ITT agree otherwise. Mr. Rand V. Araskog, Chairman, President and Chief
Executive of ITT, is a member of the board of directors of Alcatel Alsthom.
Alcatel N.V. was formed in 1986, when ITT and Alcatel Alsthom, then known as
Compagnie Generale d'Electricite, transferred their respective
telecommunications operations to the joint venture company.
DISCONTINUED OPERATIONS
Effective on February 28, 1994, ITT completed the spin off of all the
outstanding common shares of its former forest products subsidiary, Rayonier
Inc. (formerly ITT Rayonier Incorporated) to the holders of record on February
24, 1994 of ITT common stock and ITT cumulative preferred stock, $2.25
convertible series N.
OPERATIONS OUTSIDE THE UNITED STATES
In 1993, approximately one-third of the Corporation's consolidated sales
and revenues were made outside the United States. Of these, Western Europe
comprised 75%, the Asia Pacific region 9%, Canada 6% with the balance made
elsewhere.
COMPETITION
Substantially all of ITT's operations are in highly competitive businesses,
although the nature of the competition varies among the business segments. A
number of large companies engaged in the manufacture and sale of similar lines
or products and the provision of similar services in most of the geographical
areas in which ITT companies sell their products or render services are included
in the competition, as are many small enterprises with only a few products or
services and operating in limited areas.
Technological innovation, quality and reliability are primary factors
influencing competition in the markets of the Manufactured Products group, where
the competition frequently includes smaller companies with considerable
technological capabilities. In addition, pricing is a significant factor.
Pricing and service are very important considerations for the ITT subsidiaries
in the Financial and Business Services group, which are highly competitive
areas. Numerous factors influence competitive positions in the consumer-oriented
hotels segment, where advertising and pricing are important. ITT's hotel
operations face heavy competition from other large hotel companies, particularly
in North America.
RESEARCH, DEVELOPMENT AND ENGINEERING, AND INTELLECTUAL PROPERTIES
Research, development and engineering activities of ITT are conducted in
laboratory and engineering facilities at most of its major manufacturing
divisions and subsidiaries. ITT believes that continued leadership in technology
is essential to its future, and most ITT funds dedicated to research and
development are applied to areas of high technology, such as aerospace,
automotive braking and suspension systems, semiconductors and electronic
components.
ITT's research, development and engineering expenditures amounted to $460
million in 1993, $502 million in 1992, and $530 million in 1991, of which
approximately 53% was pursuant to customer contracts.
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While ITT owns and controls a number of patents, trade secrets,
confidential information, trademarks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to its business, it is believed that ITT's business, as a whole, is not
materially dependent upon any one intellectual property or related group of such
properties. ITT is licensed to use certain patents, technology and other
intellectual property rights owned and controlled by others, and, similarly,
other companies are licensed to use certain patents, technology and other
intellectual property rights owned and controlled by ITT.
SERVICE CONTRACTS
ITT has contracts with certain of its operating subsidiaries under which it
furnishes them technical, engineering, traffic, insurance, administrative,
personnel, financial, accounting, purchasing and operating advice and
assistance, as well as other services. Where requested, specialized employees
are engaged for the account of the companies served. As compensation, such
subsidiaries pay ITT a percentage of their gross operating revenues. In
addition, reimbursement is sometimes made for the actual salaries and expenses
of specialized employees furnished.
Contracts are also in effect between ITT Industries, Inc. ("ITTI"), a
wholly-owned subsidiary of ITT, and certain subsidiaries and associate companies
of ITT under which ITTI, as part of ITT World Headquarters, undertakes to cause
to be furnished to such entities manufacturing, sales, accounting, technical,
intellectual property and personnel advice and assistance; the results of
research and development work, including rights under patents; information with
regard to sales and business methods and technical, engineering and
manufacturing matters; and other services. The companies served pay an amount
calculated as a percentage of their sales (less intercompany purchases) for the
manufacturing, sales, accounting and other business advice and services
furnished, and/or as a pooling of funds for performing research and development.
ITTI is reimbursed for the cost of any special services rendered. The companies
served also agree to grant ITTI certain patent rights and technical information
with regard thereto.
GOVERNMENTAL REGULATION AND RELATED MATTERS
General. Ownership of ITT shares by "aliens" (to the United States) is
subject to limitation under the United States Communications Act of 1934, as
more fully described under "Restrictions on Alien Ownership" below, due to the
licenses of the United States Federal Communications Commission held by certain
of ITT's subsidiaries. In addition, a number of ITT's businesses are subject to
governmental regulation by law or through contractual arrangements. ITT
companies in the defense segment perform work under contracts with the United
States Department of Defense and similar agencies in certain other countries.
These contracts are subject to security and facility clearances under applicable
governmental regulations, including regulations (requiring background
investigations for high-level security clearances) applicable to ITT executive
officers, and most of such contracts are subject to termination by the
respective governmental parties on various grounds. Sheraton hotels in the
United States are liquor retailers where permitted, licensed in each state where
they do such business, and in certain states are subject to statutes which
prohibit ITT Sheraton Corporation or its owner from being both a wholesaler and
retailer of alcoholic beverages. The post-secondary career education and
technical schools operations are extensively regulated by federal and state
agencies. The numerous regulations to which ITT's insurance operations are
subject include licensing requirements and, in certain states, requirements for
governmental approval of changes of direct or indirect ownership of such
operations or solicitations of proxies for a specified percentage of the voting
power of such insurance operations or their controlling parent. In the financial
services area, ITT's consumer finance operations are regulated at both the
federal and state levels, and its commercial financing is also subject to
regulation by state laws. ITT's bank subsidiaries are subject to both federal
and state laws and regulations governing depository institutions. In addition,
ITT, as a parent company of a federally chartered savings bank, is subject to
federal and state laws and regulations governing unitary savings and loan
holding companies.
Nevada Gaming Laws. During 1993 ITT entered the casino gaming business in
the United States with its acquisition of the Desert Inn hotel and casino in Las
Vegas, Nevada. The casino is operated by Sheraton Desert Inn Corporation
("SDI"), which is a wholly-owned subsidiary of Sheraton Gaming Corporation
("SGC"), which is a wholly-owned subsidiary of ITT Sheraton Corporation
("Sheraton").
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The ownership and operation of casino gaming facilities in the State of Nevada
are subject to extensive state and local regulations. ITT's gaming operation is
subject to the licensing and regulatory control of the Nevada Gaming Commission
(the "Gaming Commission"), the Nevada State Gaming Control Board (the "Control
Board"), and the Clark County Liquor and Gaming Licensing Board (the "CCB"). The
Gaming Commission, the Control Board, and the CCB are collectively referred to
as the "Nevada Gaming Authorities."
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are extensive and reflect certain broad declarations of public
policy. Changes in such laws, regulations and procedures could have an adverse
effect on Sheraton's gaming operation.
SDI, as the operator of the Desert Inn casino, is required to be licensed
by the Nevada Gaming Authorities. The gaming license is not transferable and
must be renewed periodically by the payment of gaming license fees and taxes.
SGC and Sheraton are required to be registered as intermediary companies by the
Gaming Commission and ITT is required to be registered as a publicly traded
corporation. No person may become a stockholder of, or receive any percentage of
profits from, SDI without first obtaining licenses and approvals from the Nevada
Gaming Authorities.
The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, ITT, Sheraton, SGC or
SDI in order to determine whether such individual is suitable or should be
licensed as a business associate of SDI. Officers, directors and key employees
of SDI must be individually licensed by, and changes in corporate positions must
be reported to, the Nevada Gaming Authorities. The Nevada Gaming Authorities may
disapprove a change in corporate position. Certain officers, directors and key
employees of ITT, Sheraton and SGC who are actively and directly involved in the
gaming activities of SDI may be required to be licensed or found suitable by the
Nevada Gaming Authorities. 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 the costs of the investigation.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with ITT, Sheraton, SGC or SDI, the companies involved would have
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 applications.
ITT, Sheraton, SGC and SDI are required to submit detailed financial and
operating reports to the Gaming Commission. Substantially all loans, leases,
sales of securities and similar financing transactions by SDI must be reported
to or approved by the Gaming Commission. Nevada law prohibits a corporation
registered by the Gaming Commission from making a public offering of its
securities without the prior approval of the Commission if any part of the
proceeds of the offering or the securities themselves are to be used to finance
the construction, acquisition or operation of gaming facilities in Nevada, or to
retire or extend obligations incurred for one or more such purposes.
If it were determined that gaming laws were violated by SDI, the gaming
license it holds could be limited, conditioned, suspended or revoked. In
addition ITT, Sheraton, SGC, SDI and the persons involved could be subject to
substantial fines for each separate violation of the gaming laws at the
discretion of the Gaming Commission. Further, a supervisor could be appointed by
the Gaming Commission to operate SDI's gaming property and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of SDI's gaming property) could be forfeited to
the State of Nevada. Any suspension or revocation of SDI's license would have a
materially adverse effect on SDI.
The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of ITT's voting securities at any time.
Nevada law requires any person who acquires more than 5% of any class of ITT's
voting securities to report the acquisition to the Gaming Commission and such
person may be required to be investigated and found suitable. Any person who
becomes a beneficial owner of more than 10% of any class of ITT's voting
securities must apply for a finding of suitability by the Gaming Commission
within thirty days after the Control Board Chairman mails the written notice
requiring
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such filing, and must pay the costs and fees incurred by the Control Board in
connection with the investigation. Under certain circumstances, an
"Institutional Investor," as such term is defined in the Nevada gaming
regulations, which acquires more than 10% but not more than 15% of ITT's voting
securities, may apply to the Gaming Commission for a waiver of such finding of
suitability requirements. If the stockholder who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners.
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 Gaming Commission or
by the Chairman of the Control Board, may be found unsuitable. Any stockholder
found unsuitable and who holds, directly or indirectly, any beneficial ownership
of ITT voting securities beyond such period of times as may be prescribed by the
Gaming Commission may be guilty of a gross misdemeanor. ITT could be subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with ITT, SDI, SGC, Sheraton
or ITT: (i) pays that person any dividend or interest on voting securities of
ITT, (ii) allows that person to exercise, directly or indirectly, any voting
right conferred through securities held by that person, or (iii) gives
remuneration in any form to that person. If a security holder is found
unsuitable, ITT may itself be found unsuitable if it fails to pursue all lawful
efforts to require such unsuitable person to relinquish the voting securities
for cash at fair market value. Additionally, the CCB has taken the position that
it has the authority to approve all persons owning or controlling the stock of
any corporation controlling a gaming license.
ITT is required to maintain a current stock ledger in Nevada which may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding both the record and
beneficial holders unsuitable. ITT is also required to render maximum assistance
in determining the identity of the beneficial owner. The Gaming Commission has
the power to require ITT's stock certificates to bear a legend indicating that
the securities are subject to the Nevada Act and the regulations of the Gaming
Commission. However, ITT has been granted an exemption from this requirement by
the Gaming Commission.
ITT has been advised that the Gaming Commission may also require the holder
of any debt security of a corporation registered under the Nevada Act to file
applications, be investigated and be found suitable to own the debt security of
such corporation. If the Gaming Commission determines that a person is
unsuitable to own such security, then pursuant to the regulations of the Gaming
Commission, the registered corporation can be sanctioned, including the loss of
its approvals, if without the prior approval of the Gaming Commission, it (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 or, (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation or similar transaction.
Regulations of the Gaming Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements of any form of
takeover without the prior approval of the Gaming Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Gaming 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 Gaming Commission prohibit certain repurchases of
securities by registered publicly traded corporations without the prior approval
of the Gaming Commission. Transactions covered by these regulations are
generally aimed at discouraging repurchases of securities at a premium over
market price from certain holders of greater than 3% of the outstanding
securities of the registered publicly traded corporation. The regulations of the
Gaming Commission also require prior approval for a "plan of recapitalization"
as defined by the regulations. Generally, a plan of recapitalization is a plan
proposed by the management of a registered publicly traded corporation that
contains recommended
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action in response to a proposed corporate acquisition opposed by management of
the corporation which acquisition itself would require the prior approval of the
Gaming Commission.
Related Provisions of Certificate of Incorporation. ITT's restated
certificate of incorporation provides that (i) all securities of ITT are subject
to redemption by ITT to the extent necessary to prevent the loss or to secure
the reinstatement of any gaming license held by ITT or any of its subsidiaries
in any jurisdiction within or outside the United States of America, (ii) all
securities of ITT are held subject to the condition that if a holder thereof is
found by a gaming authority in any such jurisdiction to be disqualified or
unsuitable pursuant to any gaming law, such holder will be required to dispose
of all ITT securities held by such holder, and (iii) it will be unlawful for any
such disqualified person to (a) receive payments of interest or dividends on any
ITT securities, (b) exercise, directly or indirectly, any rights conferred by
any ITT securities, or (c) receive any remuneration in any form, for services
rendered or otherwise, from the subsidiary that holds the gaming license in such
jurisdiction.
Nevada Foreign Gaming Disclosure. 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 of Nevada is required to deposit with the
Gaming Board, and thereafter maintain, a revolving fund in the amount of $10,000
to pay the expenses of investigation of the Gaming Board of their participation
in such foreign gaming. The revolving fund is subject to increase or decrease in
the discretion of the Gaming Commission. Thereafter, Licensees are required to
comply with certain reporting requirements imposed by the Nevada Act. Licensees
are also subject to disciplinary action by the Gaming Commission if it knowingly
violates any laws of the foreign jurisdiction pertaining to the foreign gaming
operation, fails to conduct the foreign gaming operation in accordance with the
standards of honesty and integrity required of Nevada gaming operations, engages
in activities that are harmful to the State of Nevada or its ability to collect
gaming taxes and fees, or 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.
PROPERTY AND CASUALTY INSURANCE--LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Liabilities for unpaid claims and claim adjustment expenses as of December
31, 1993 and 1992 were $11.9 billion and $11.8 billion. These amounts differ
from those reflected on the balance sheet by $5.3 billion and $5.6 billion,
respectively, reflecting liabilities on ceded reinsurance contracts as required
by Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".
Liabilities for unpaid claims and claim adjustment expenses are based upon
individual case estimates for known claims, estimates of unreported claims and
estimates of future expenses to be incurred in the settlement of these
liabilities. Estimated loss and loss adjustment expense reserves are continually
reviewed as additional experience and other relevant data become available, and
reserve levels are adjusted accordingly. The natural uncertainties involved with
the reserving process have become increasingly unpredictable due to a number of
complex factors including social and economic trends and changes in the concept
of legal liability and damage awards. Accordingly, final claim settlements may
vary from the present estimates, particularly when those payments may not occur
until well into the future. Any adjustments to previously established reserves
would be reflected in net income for the period in which they are made. In the
judgment of management, all information currently available has been properly
considered and the reserves currently established for losses and loss adjustment
expenses, except for the asbestos-related and environmental claims, as discussed
below, are adequate to cover their eventual costs.
Claims asserting injuries from asbestos and asbestos-related products and
damages from environmental pollution and related clean-up costs continue to be
received. With regard to these claims, deviations from past experience
significantly impact the ability of insurance companies to estimate the ultimate
reserves for unpaid losses and related settlement expenses. ITT finds that
conventional reserving techniques cannot estimate the ultimate cost of these
claims because of inadequate development patterns and inconsistent emerging
legal doctrine. For asbestos and environmental pollution claims,
8
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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
and that requirement cannot be reasonably estimated. Based on current
evaluation, ITT believes the ultimate resolution of all its claims, including
reinsurance effects, will not have a material adverse impact on its overall
financial condition.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties have been discounted to present value. The amount
of discount was approximately $362 million and $325 million as of December 31,
1993 and 1992 and the amortization of the discount had no material effect on net
income during 1993, 1992 and 1991.
A reconciliation of liabilities for unpaid claims and claim adjustment
expenses for the last three years and a table depicting the historical
development of the liabilities for unpaid claims and claim adjustment expenses
follows:
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1993 1992 1991
----- ---- ----
(IN MILLIONS)
Beginning Liabilities for Unpaid Claims and Claim Adjustment Expenses......... $11,785 $10,558 $ 9,995
Add Provision for Claims and Claim Adjustment Expenses:
Current year................................................................ 4,611 4,822 4,679
Prior years*................................................................ 248 1,406 328
------- ------- -------
Total Provision for Unpaid Claims and Claim Adjustment Expenses... 4,859 6,228 5,007
------- ------- -------
Less Payments:
Current year................................................................ 1,856 1,927 1,600
Prior years................................................................. 2,806 2,879 2,789
------- ------- -------
Total Payments.................................................... 4,662 4,806 4,389
------- ------- -------
Foreign Currency Translation.................................................. (37) (195) (55)
------- ------- -------
Ending Liabilities for Unpaid Claims and Claim Adjustment Expenses............ $11,945 $11,785 $10,558
------- ------- -------
------- ------- -------
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 in 1993 reflecting amounts
related to non-U.S. subsidiaries and $1.7 billion in 1992 reflecting
amounts related to non-U.S. subsidiaries and the exclusion of anticipated
salvage and subrogation. The liabilities for claim and claim adjustment
expenses shown above differ from those reflected on the balance sheet by
$5.3 billion and $5.6 billion for 1993 and 1992, respectively. These
amounts, which reflect liabilities on ceded reinsurance contracts as
required by SFAS No. 113 do not lend themselves to practicable
presentation in the above table.
* Does not include the effects of foreign exchange adjustments which are
included in the table on the following page.
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PROPERTY AND CASUALTY CLAIMS AND
CLAIM ADJUSTMENT EXPENSES LIABILITY DEVELOPMENT
(IN MILLIONS OF DOLLARS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Liabilities
for
Unpaid
Claims
and
Claim
Adjustment
Expenses
(Note
1)...... 4,235 4,287 4,868 5,903 7,262 8,168 8,666 9,366 9,796 11,103 11,441
Cumulative
Paid
Claims
and
Claim
Expenses
(Note 1):
One year
later... 1,411 1,393 1,607 1,808 2,089 2,296 2,545 2,789 2,879 2,806 --
Two
years
later... 2,218 2,283 2,632 2,916 3,323 3,618 4,013 4,428 4,465 -- --
Three
years
later... 2,808 2,953 3,356 3,683 4,187 4,577 5,132 5,511 -- -- --
Four
years
later... 3,251 3,425 3,883 4,275 4,846 5,341 5,863 -- -- -- --
Five
years
later... 3,598 3,808 4,308 4,743 5,392 5,872 -- -- -- -- --
Six
years
later... 3,870 4,136 4,633 5,168 5,787 -- -- -- -- -- --
Seven
years
later... 4,108 4,346 4,980 5,481 -- -- -- -- -- -- --
Eight
years
later... 4,241 4,628 5,248 -- -- -- -- -- -- -- --
Nine
years
later... 4,469 4,784 -- -- -- -- -- -- -- -- --
Ten
years
later... 4,615 -- -- -- -- -- -- -- -- -- --
Liabilities
Reestimated:
One year
later... 4,206 4,469 5,324 6,293 7,437 8,342 8,879 9,636 11,053 11,311 --
Two
years
later... 4,355 4,860 5,558 6,422 7,619 8,432 9,052 10,780 11,202 -- --
Three
years
later... 4,632 5,002 5,656 6,718 7,719 8,482 10,200 10,905 -- -- --
Four
years
later... 4,738 5,074 6,100 6,885 7,827 9,645 10,342 -- -- -- --
Five
years
later... 4,822 5,484 6,291 7,021 9,117 9,829 -- -- -- -- --
Six
years
later... 5,162 5,653 6,456 8,504 9,287 -- -- -- -- -- --
Seven
years
later... 5,325 5,767 8,015 8,652 -- -- -- -- -- -- --
Eight
years
later... 5,452 7,177 8,157 -- -- -- -- -- -- -- --
Nine
years
later... 6,605 7,280 -- -- -- -- -- -- -- -- --
Ten
years
later... 6,650 -- -- -- -- -- -- -- -- -- --
Deficiency... 2,415 2,993 3,289 2,749 2,025 1,661 1,676 1,539 1,406 208 --
NOTES:
(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 $688 million, $629
million, $762 million, $682 million and $504 million as of December 31,
1989, 1990, 1991, 1992 and 1993.
The liability for unpaid claims and claim adjustment expenses excludes
the impact of the adoption of SFAS No. 113 of $5.3 billion and $5.6
billion for 1993 and 1992, respectively. Presentation of the above
table to reflect liabilities on ceded reinsurance contracts is not
practicable.
Liabilities on all lines of insurance are monitored regularly and
corrective action is taken as required.
ITEM 2. PROPERTIES
Reference is made to "Business of ITT."
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ITEM 3. LEGAL PROCEEDINGS
Hartford Fire Insurance Company, a subsidiary of ITT, together with other
companies, associations and organizations involved in the business of property
and casualty insurance and reinsurance, was named as a defendant in a group of
lawsuits filed by Attorneys General of 20 states and by various private parties
in the United States District Court for the Northern District of California. All
of the suits, which were filed in 1988, 1990 and 1991, were based upon
allegations that the defendants violated federal and/or state antitrust laws by
reason of their activities in connection with the development of new standard
commercial general liability policy forms by the Insurance Services Office, an
industry organization. The state suits seek civil penalties and fines,
unspecified damages and various forms of injunctive relief. The private suits
seek unspecified treble damages and various forms of injunctive relief. 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. The defendants filed a
petition for certiorari to the United States Supreme Court which was granted by
the Court in October 1992. Oral argument was held on February 23, 1993. On June
28, 1993, the Supreme Court reversed the Ninth Circuit U.S. Court of Appeals,
holding that the domestic insurers, including ITT Hartford, had not lost their
McCarran-Ferguson Act exemption from the antitrust laws generally, as a result
of activities alleged in the complaints, but remanded the case for further
proceedings to determine if certain of those activities came within the
"boycott" exception to the McCarran-Ferguson Act exemption.
ITT and its former subsidiaries, Rayonier Inc. ("Rayonier") and Southern
Wood Piedmont Company ("SWP"), are named defendants in a lawsuit filed in 1991
in the U.S. District Court for the Southern District of Georgia, Ernest L.
Jordan, Sr. et al. v. Southern Wood Piedmont Company, et al., in which
plaintiffs allege property damage and personal injury based on alleged exposure
to toxic chemicals used by SWP in its former wood preserving operations, seek
certification as a class action, and ask for compensatory and punitive damages
in the amount of $700 million. Under an agreement entered into by ITT and
Rayonier in connection with the distribution of Rayonier stock to ITT
stockholders in February 1994, ITT is entitled to be indemnified by Rayonier for
any expenses or losses incurred by ITT in connection with this suit as well as
in other legal proceedings arising out of Rayonier or SWP operations.
In approximately 40 current "Superfund Site" proceedings instituted by the
U.S. Environmental Protection Agency or similar state agencies a subsidiary or
division of ITT has been named a "potentially responsible party." In most
(approximately two-thirds) of these the ITT company is considered a "de minimis
contributor." Other activities in the environmental area in which ITT and its
subsidiaries are participants (approximately another 40 items) involve air,
ground and/or water contamination issues which are the subject of ongoing or
prospective (usually voluntary) remedial measures with any required approvals of
federal or local authorities (approximately three-fourths of such items), or in
connection with which other private parties seek to impose upon an ITT company
the financial responsibility for costs or damages which allegedly have been or
may be incurred by such other parties. Asbestos-related and environmental
pollution claims received by ITT's property and casualty insurance operations
are discussed above under "Business of ITT -- Property and Casualty
Insurance -- Liabilities for Unpaid Claims and Claim Adjustment Expenses."
There are various other lawsuits pending against ITT and its subsidiaries,
some of which involve claims for substantial amounts. However, the ultimate
liability with respect to the actions pending against ITT and its subsidiaries,
including those proceedings and other matters specifically referred to above, is
not considered material in relation to the consolidated financial condition of
ITT and its subsidiaries.
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ITEM 4.
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of ITT during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF ITT
The following information is provided as to the executive officers of ITT.
DATE OF
AGE AT YEAR OF ELECTION
FEBRUARY 1, INITIAL ELECTION TO PRESENT
NAME 1994 POSITION AS AN OFFICER POSITION
------------- ---------------------------------------- ----------------- ------------
Rand V. Araskog................... 62 Chairman, President and Chief Executive 1971 11/14/79
and Director
Howard J. Aibel................... 64 Executive Vice President and Chief 1966 9/ 1/92
Legal Officer
Robert A. Bowman.................. 38 Executive Vice President and Chief 1992 9/15/92
Financial Officer
Juan C. Cappello.................. 55 Senior Vice President, Director of 1981 12/11/84
Corporate Relations
Dale R. Comey..................... 52 Executive Vice President 1990 5/15/90
Jon F. Danski..................... 41 Senior Vice President and Controller 1993 10/18/93
D. Travis Engen................... 49 Executive Vice President 1987 1/30/91
Louis J. Giuliano................. 47 Senior Vice President 1988 6/11/91
Timothy D. Leuliette.............. 44 Senior Vice President 1991 9/21/91
Daniel F. Lundy................... 63 Senior Vice President, Director of Taxes 1976 9/ 7/82
Bertil T. Nilsson................. 61 Senior Vice President 1987 9/ 1/92
Ralph W. Pausig................... 59 Senior Vice President 1979 3/10/87
Ann N. Reese...................... 40 Senior Vice President and Treasurer 1987 9/ 1/92
Frank J. Schultz.................. 55 Senior Vice President 1992 6/ 9/92
Samuel L. Simmons................. 64 Senior Vice President 1987 4/13/87
Richard S. Ward................... 53 Senior Vice President and General 1984 9/ 1/92
Counsel
Each of the above-named officers was elected to his or her present position
to serve at the pleasure of the Board of Directors.
Throughout the past five years, all of the above-named officers have held
executive positions with ITT bearing at least substantially the same
responsibilities as those borne in their present offices, except that (i) Mr.
Aibel, prior to his election as Executive Vice President and Chief Legal
Officer, was Executive Vice President and General Counsel of ITT; (ii) Mr.
Bowman, prior to his election as Executive Vice President and Chief Financial
Officer, was Executive Vice President and Chief Financial Officer of ITT
Sheraton Corporation (1991) and Treasurer of the State of Michigan; (iii) Mr.
Comey, prior to his election as Executive Vice President, was the President and
Chief Operating Officer of Hartford Fire Insurance Company and Executive Vice
President of ITT Hartford; (iv) Mr. Danski, prior to his election as Senior Vice
President and Controller, was Vice President and General Auditor of RJR Nabisco;
(v) Mr. Engen, prior to his election as Executive Vice President, was Senior
Vice President of ITT and the Chief Executive Officer of ITT Defense, Inc.; (vi)
Mr. Giuliano, prior to his election as Senior Vice President, was Vice President
of ITT and Vice President and Director--Defense Operations of ITT Defense, Inc.;
(vii) Mr. Leuliette, prior to his election as Senior Vice President, was
President and Chief Executive of Siemens Automotive and Vice President of
Siemens A.G.; (viii) Mr. Nilsson, prior to his election as Senior Vice
President, was Vice President of ITT (1987) and President and Chief Operating
Officer of ITT Fluid Technology Corporation (1991) and Managing Director of ITT
Flygt AB; (ix) Mrs. Reese, prior to her election as Senior Vice President and
Treasurer, was Vice President of ITT (1989) and Assistant Treasurer; (x) Mr.
Schultz, prior to his election as Senior Vice President, was Executive Vice
President of Bank America Corp.; and (xi) Mr. Ward, prior to his election as
Senior Vice President and General Counsel, was Vice President and Associate
General Counsel of ITT.
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PART II
ITEM 5. MARKET FOR ITT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITT COMMON STOCK -- MARKET PRICES AND DIVIDENDS (UNAUDITED)
1993 1992
-------------------- --------------------
HIGH LOW HIGH LOW
-------- ------- -------- --------
(IN DOLLARS)
Three Months Ended
March 31.................... $81.00 $69.00 $70.63 $54.75
June 30..................... 86.75 77.25 68.50 62.50
September 30................ 94.75 83.75 68.13 62.75
December 31................. 94.88 86.75 72.00 63.25
The above table reflects the range of market prices of ITT Common Stock as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the principal market in which this security is traded, under the
trading symbol "ITT".
During the period from January 1, 1994 through February 28, 1994, the high
and low reported market prices of ITT Common Stock were $104.25 and $90.00. The
dividend declared in the first quarter of 1994 was $.495 per common share. The
dividends declared in each of the four quarters of 1993 were also $.495 per
common share. The dividends declared in each of the four quarters of 1992 were
$.46 per common share. As noted above in Item 1 under "Discontinued Operations,"
ITT also paid a special dividend on its common stock and cumulative preferred
stock, convertible series N, during the first quarter of 1994 in the form of a
distribution of all the outstanding common shares of its former forest products
subsidiary.
See "Notes to Financial Statements -- Capital Stock" for descriptions of
restrictions on dividend payments.
There were approximately 60,000 holders of record of ITT Common Stock on
February 28, 1994.
ITT Common Stock is listed on the following exchanges: Amsterdam, Antwerp,
Basel, Bern, Brussels, Frankfurt, Geneva, Lausanne, London, New York, Pacific,
Paris, Tokyo, Vienna and Zurich.
RESTRICTIONS ON ALIEN OWNERSHIP
Pursuant to the requirements of United States statutes, ITT limits stock
ownership by aliens (as used herein, the term "alien" includes the following and
their representatives: individuals who are not nationals of the United States,
partnerships unless a majority of the partners are such nationals and share in a
majority of its profits, foreign governments, entities created under the laws of
foreign governments, and entities controlled directly or indirectly by one or
more of such individuals, partnerships, governments or entities). The ITT
By-Laws provide that under no circumstances shall the amount of ITT stock owned
of record by aliens exceed 25% of the total outstanding. If and so long as the
stock records of ITT shall at any time disclose 25% alien ownership (i) no
transfers of shares of domestic record to aliens may be made and (ii) if it
shall be found that stock of domestic record is in fact held by or for the
account of an alien, the holder of such stock shall not be entitled to vote, to
receive dividends, or to have any other rights except the right to transfer the
stock to a citizen of the United States. At the close of business on January 31,
1994, approximately 6.5% of the outstanding stock of ITT was owned of record by
aliens. Assuming that all of the shares of ITT Common Stock issuable upon
conversion of securities initially issued to aliens, or issuable pursuant to
other existing commitments to aliens, had been issued at that date to aliens,
and that at that date all other securities then convertible into ITT stock were
owned by nationals of the United States and had also been converted in
accordance with their terms, such percentage would not have been significantly
different.
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ITEM 6.
SELECTED FINANCIAL DATA
1993 1992* 1991* 1990* 1989*
------- ------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE)
RESULTS AND POSITION
Sales and Revenues.................................................. $22,762 $22,977 $21,536 $21,680 $20,822
Income (Loss) from Continuing Operations............................ 910 (188) 695 903 716
Net Income (Loss)................................................... 913 (885) 749 923 848
Total Assets........................................................ 70,560 68,563 53,611 48,704 45,099
Long-Term Debt --
Excluding Finance subsidiaries.................................... 2,710 2,686 3,129 2,182 2,234
Finance subsidiaries.............................................. 6,248 5,888 5,539 4,263 3,822
Stockholders Equity................................................. 7,650 7,247 8,721 8,164 7,710
------- ------- ------- ------- -------
------- ------- ------- ------- -------
EARNINGS (LOSS) PER SHARE
Income (Loss) from Continuing Operations
Primary........................................................... 7.29 (1.85) 5.40 6.84 5.02
Fully Diluted..................................................... 6.87 (1.64) 5.08 6.41 4.85
Net Income (Loss)
Primary........................................................... 7.32 (7.93) 5.84 7.00 5.98
Fully Diluted..................................................... 6.90 (6.90) 5.49 6.56 5.76
------- ------- ------- ------- -------
------- ------- ------- ------- -------
DIVIDENDS DECLARED PER COMMON SHARE................................. $ 1.98 $ 1.84 $ 1.72 $ 1.63 $ 1.51
------- ------- ------- ------- -------
------- ------- ------- ------- -------
SIGNIFICANT RATIOS**
Return on Sales***.................................................. 3.9% (0.7)% 3.4% 4.3% 3.6%
Return on Assets***................................................. 1.3% (0.3)% 1.4% 2.0% 1.8%
Return on Total Capital............................................. 6.9% 2.0% 6.5% 7.8% 8.0%
Return on Stockholders Equity....................................... 12.3% (3.4)% 8.9% 11.6% 11.0%
Assets to Sales..................................................... 305.6% 265.9% 237.5% 216.3% 208.1%
Book Value per Share................................................ $ 58.94 $ 54.63 $ 65.52 $ 60.66 $ 52.59
------- ------- ------- ------- -------
------- ------- ------- ------- -------
- ---------------
* As restated (see Notes to Financial Statements).
** Before the cumulative effect of accounting changes in 1992.
*** Excludes effects of Discontinued Operations.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS ARE IN MILLIONS UNLESS OTHERWISE STATED)
The task of repositioning the Corporation's businesses which began in 1992
was intensified in 1993 with a number of strategic transactions expected to
further the Corporation's goals of improved shareholder value, cash generation
and return on equity.
A major study designed to improve the effectiveness and productivity of the
Corporation's Headquarters functions was completed last fall and will result in
reduced overhead costs in 1994 and future years. At ITT Hartford, both revenues
and operating income reached record levels in 1993 as the life insurance
operations continued to grow through internal expansion and through the
assumption of policies from other insurers. Improved underwriting results in the
property and casualty business were also a significant contributor to ITT
Hartford's performance as the worldwide combined ratio improved to 107.3
percent. ITT Automotive's sales of four-wheel anti-lock brake and traction
control systems exceeded $1 billion for the first time in 1993, making it the
first automotive parts supplier in the world to reach that level.
In June, the sale of ITT Consumer Financial Corporation's domestic
unsecured consumer small loan portfolio was completed resulting in a pretax gain
of $95 ($63 after tax). Proceeds from the sale allowed ITT Financial to retire
higher cost fixed-rate debt, and return capital to the Corporation. An
extraordinary
14
16
pretax loss of $75 ($50 after tax) was recorded on the debt retirement. In
September, the Corporation announced the signing of a preliminary agreement to
acquire the Motors and Actuators Business Unit of General Motors Automotive
Components Group. This acquisition is expected to contribute annual revenues of
$900 and add strength to ITT's position as a global leader in the automotive
components and systems market. The transaction is expected to close in the first
half of 1994. In November, the Corporation entered the U.S. gaming industry with
the acquisition of the Desert Inn Properties in Las Vegas which is expected to
be developed into a major gaming resort. The acquisition of a full-service
resort in Las Vegas, the country's number one destination resort and one of the
largest convention cities in the U.S., afforded the Corporation the opportunity
to immediately enter the North American land-based gaming industry. ITT Sheraton
also plans to open a dockside casino near Memphis by the summer of 1994.
The spin-off of ITT Rayonier to the Corporation's shareholders was
announced in December and was completed in February, 1994. The spin-off allows
Rayonier to better fulfill its long-term strategies and objectives while
furthering the Corporation's strategic goals. Rayonier expects to pay a dividend
of $.72 per share in 1994, the equivalent of $.18 per share to the Corporation's
shareholders. Rayonier has been reflected as a "Discontinued Operation" for all
periods presented.
These important actions further the Corporation's commitment to improving
returns and shareholder value. To that end, additional steps will be taken in
1994, including strategic acquisitions and the continuation of the repurchase of
the Corporation's common shares.
SALES, REVENUES AND INCOME
Worldwide sales and revenues were $22.8 billion in 1993 compared with a
restated $23.0 billion and $21.5 billion in 1992 and 1991, respectively. The
sales and revenues decrease in 1993 primarily reflects the sale of ITT
Financial's domestic unsecured consumer small loan business in June as well as
reduced Defense business as several major programs were completed. Excluding the
sales of companies included in "Dispositions and Other", sales and revenues
increased 2% in 1993 and 8% in 1992. Sales and revenues in all periods have been
modified to include 100 percent of the revenues of partially-owned hotel
properties and hotel properties under long-term management agreements. The
Corporation believes that this presentation better reflects the breadth and
control of hotel operations and increased sales and revenues (with no impact on
operating income) by $2.4, $2.3 and $2.1 billion in 1993, 1992 and 1991,
respectively.
Net income for 1993 was $913 or $6.90 per fully diluted share compared with
a net loss of $885 or $6.90 per fully diluted share in 1992, which was due
primarily to several significant nonrecurring items and accounting changes
during 1992. This was compared with net income in 1991 of $749 or $5.49 per
fully diluted share. Primary earnings (loss) per share were $7.32 in 1993,
$(7.93) in 1992 and $5.84 in 1991.
1993: A number of one-time items are included in net income in 1993
including the gain on the sale of the domestic unsecured consumer small loan
portfolio at ITT Financial of $63 after tax, or $.48 per fully diluted share and
the related retirement of fixed-rate debt at a premium of $50 after tax, or $.38
per fully diluted share. In addition, results included a $33 after tax or $.25
per fully diluted share provision relating to a program aimed at increasing the
effectiveness and productivity at ITT Headquarters and the headquarters of the
business segments and a $22 or $.17 per fully diluted share favorable impact of
the changes in the United States tax law. Income in future periods will be
negatively impacted by the 1% increase in the U.S. Federal tax rate. Further,
the year was impacted by $19 after tax or $.15 per fully diluted share for the
accelerated write-off of capitalized development expenses at ITT Sheraton; $7 or
$.06 per fully diluted share for an after tax gain at ITT Sheraton on its
investment in Bally's Las Vegas and $10 after tax or $.08 per fully diluted
share for an after tax gain on the sale of ITT Components Distribution. The year
also included prior period tax and associated interest charges related to
separate decisions by Canadian and California state taxing authorities of $16
after tax or $.12 per fully diluted share and $10 or $.08 per fully diluted
share. Extraordinary catastrophe losses at ITT Hartford early in the year
negatively impacted earnings by $41 after tax or $.32 per fully diluted share.
The catastrophes included the World Trade Center bombing in New York and
excessive damage from storms in the Northeastern United States. Portfolio gains
at ITT Hartford and ITT Financial in 1993 totalled $98 after tax
15
17
or $.76 per fully diluted share. Excluding these gains along with the one-time
items, net income was $882 or $6.65 per fully diluted share.
1992: The net loss in 1992 included the effects of the Corporation's
adoption of Statement of Financial Accounting Standards ("SFAS") No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions", and
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which were
recorded effective January 1, 1992 using the immediate recognition method. These
accounting changes resulted in a cumulative catch-up adjustment of $625 after
tax, or $4.71 per fully diluted share. These standards required accrual of
postretirement and postemployment health care and life insurance benefit costs
during the years that an employee provides services to the Corporation rather
than on the pay-as-you-go basis previously in effect. There is no cash flow
impact of these accounting changes.
In July 1992, the Corporation completed the sale of its 30% stake in
Alcatel N.V. to its joint venture partner, Alcatel Alsthom, resulting in an
after tax gain of $622 or $4.71 per fully diluted share -- see "Alcatel N.V." in
Notes to Financial Statements. The Corporation also recorded several one-time
items during the year to realign and restructure certain businesses including:
-- A $594 after tax charge at ITT Hartford to fund expected loss
developments in surplus lines and reinsurance business at its Cameron & Colby
unit and $165 after tax for expected legal defense costs associated with
environmental-related claims. The total result was a charge of $759 or $5.75 per
fully diluted share. Extraordinary catastrophe losses at ITT Hartford in 1992
negatively impacted earnings by $131 after tax or $.99 per fully diluted share.
The catastrophes included Hurricanes Andrew and Iniki along with the Los Angeles
riots and the Chicago flood.
-- A $612 after tax charge or $4.66 per fully diluted share at ITT
Financial primarily to strategically transform the consumer finance business by
significantly reducing its domestic unsecured consumer small loan business. As a
result, ITT Financial established reserves of $693 to cover future unsecured
loan losses from the run-off of its existing portfolio, $103 for restructuring,
including consolidation of loan offices, and $132 for anticipated losses in the
commercial real estate portfolio. The domestic unsecured consumer small loan
business has been reflected in "Dispositions and Other" and, as discussed
previously, was sold in June 1993.
-- Other provisions and reserves of $115 after tax or $.87 per fully
diluted share, to cover the loss on the disposal of assets and for closure
expenses of ITT Rayonier's Grays Harbor pulp and paper complex. In addition, a
$34 after tax, or $.25 per fully diluted share provision to write down hotel
investments at ITT Sheraton, and a $33 after tax or $.25 per fully diluted share
charge for restructuring in the Components operations of ITT Defense &
Electronics were recorded.
Portfolio gains at ITT Hartford and ITT Financial in 1992 totalled $337
after tax or $2.56 per fully diluted share. Excluding these gains as well as the
one-time items and accounting changes, net income was $465 or $3.31 per fully
diluted share.
1991: There were no significant items of an unusual or nonrecurring nature
during 1991. Net income was $749 or $5.49 per fully diluted share. Portfolio
gains at ITT Hartford and ITT Financial in 1991 totalled $137 or $1.04 per fully
diluted share. Excluding these gains, net income was $612 or $4.45 per fully
diluted share.
CASH FLOW
The Corporation generated $1.7 billion of cash from operating activities
during 1993, $1.7 billion in 1992 and $2.1 billion in 1991. Additional funds of
$2.4 billion were also raised in 1993 from the sale of companies including ITT
Financial's domestic unsecured consumer small loan business for $1.5 billion and
the collection on a note of $.8 billion from the 1992 sale of Alcatel N.V.
Proceeds in 1992 from the Alcatel N.V. sale totalled $1.0 billion. Growth in
investment life contracts provided $1.7 billion, compared with $1.6 billion and
$1.8 billion in the prior two years.
Cash generated was used to fund internal growth, pay dividends, repay debt
in 1993 and to repurchase and redeem ITT common and preferred shares in 1993 and
1992. Cash was also reinvested in securities at ITT Hartford and ITT Financial.
Additional information on the investment portfolio is included in "Insurance and
Finance Investments" in Notes to Financial Statements.
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Pursuant to the Corporation's share repurchase program announced in May
1992, 3.6 million common shares were repurchased in 1993 at an average price of
$86.52 per share for a total of $310 at December 31, 1993. At December 31, 1992,
approximately 1.7 million common shares had been repurchased at an average price
of $65.63 per share for a total of $109. In addition, the Corporation called for
the redemption of all outstanding $4.00 Convertible Series K and $5.00
Convertible Series O Cumulative Preferred Stock at $100 per share plus accrued
dividends in June 1992. Redemptions totalled $106, which reduced common
equivalent shares by an additional 1.6 million, with the balance converted to
5.8 million shares of common stock. Since the Corporation's stock repurchase
programs began in 1987, nearly 40 million equivalent shares have been
repurchased and redeemed for approximately $2.3 billion. Dividend payments were
$277, $270 and $267 during 1993, 1992 and 1991, including $48 in both 1993 and
1992 and $49 in 1991 related to the ESOP preferred stock.
Cash expenditures for plant, property and equipment were $505 in 1993, $549
in 1992 and $658 in 1991 and are expected to approximate $800 in 1994.
Acquisitions in 1993 included the Desert Inn Properties in Las Vegas for $160.
The planned acquisitions in 1994 in the Automotive and Hotels segments are
expected to total approximately $1.0 billion. The Corporation has sufficient
cash available, along with debt and equity financing alternatives, to fulfill
these and other commitments that may be undertaken during the year. Depreciation
in 1993 was $463 compared with $483 in 1992 and $426 in 1991. Accumulated
depreciation amounted to 47% of gross plant, property and equipment at year-end
1993 and 1992.
Expenditures for research, development and engineering totalled $460 in
1993, $502 in 1992 and $530 in 1991, of which approximately 53% was pursuant to
customer contracts. These expenditures have funded numerous product developments
such as anti-lock brake systems, and integrated circuits for multimedia
applications and digital television, as well as electronic countermeasures and
tactical radio communications technology.
The Corporation remains financially strong and flexible given the level of
cash generated from operations as well as the proceeds received (and expected to
be received in 1994) from the sale of investments. Cash at December 31, 1993
totalled $1.1 billion and debt as a percentage of total capital was 33 percent
with the Insurance and Finance subsidiaries carried on an equity basis and
excluding Discontinued Operations.
BUSINESS SEGMENTS
Following is a discussion of important factors affecting the sales,
revenues and operating income of each Business Segment.
INSURANCE
1993 1992 1991
------- ------ ------
Revenues............................................................................. $10,338 $9,862 $9,242
Operating Income (Loss).............................................................. $ 719 $ (513) $ 500
Revenues and operating income achieved record levels in 1993. Revenues
increased 5 percent despite portfolio gains which were $288 lower than 1992.
Portfolio gains included in revenues totalled $155, $443 and $144 in 1993, 1992
and 1991, respectively.
Life operations provided much of the revenue growth and contributed 29
percent of the segment revenues in 1993 compared with 24 percent and 21 percent
in 1992 and 1991. This increase, 25 percent in 1993, reflects dramatic
improvement in account charge revenues from corporate owned life insurance
contracts (COLI) combined with continued growth in individual life and annuity
lines of business. The assumption and reinsurance of both COLI and annuity
policies from Mutual Benefit and Fidelity Bankers were instrumental in the
continued growth. Operating income in the life operations contributed 31 percent
to the insurance segment in 1993 and increased 30 percent compared with 1992
which, in turn, increased 26 percent over 1991. As with revenues, the effects of
the Mutual Benefit and Fidelity Bankers transactions were the largest
contributors to the improvement.
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North American property and casualty underwriting revenues also increased
modestly while revenues of the international property and casualty operations
were flat compared with 1992. Dramatically improved income performance reflects
improved property and casualty underwriting results as reflected in the
worldwide combined ratio of 107.3 percent in 1993. Worldwide combined ratios
were 133.7 percent in 1992 and 111.3 percent in 1991. Reserves were established
in 1992 for expected loss developments in surplus lines and reinsurance at
Cameron & Colby ($900) as well as projected legal defense costs associated with
environmental-related claims ($250). Excluding the effects of the Cameron &
Colby loss developments in surplus lines and reinsurance, the worldwide combined
ratios were 105.9 percent in 1993, 114.8 percent in 1992 and 109.1 percent in
1991. In addition, catastrophe losses in 1993 were significantly below the
record setting levels of 1992. Adjusted for these unusual items and portfolio
gains, 1993 operating income increased significantly. These improvements were
partially offset by reduced investment income, the result of lower interest
rates and lower portfolio gains in 1993. On the same adjusted basis, 1992
operating income approximated 1991, reflecting a similar trend in domestic
property and casualty results, offset by difficult market conditions in the
international property and casualty business.
Operating results are projected to continue to improve in 1994 due to
improvements in worldwide property and casualty underwriting results combined
with the effect of the growing life insurance operations. These projections
include the benefits of recent restructuring actions designed to increase ITT
Hartford's efficiency and competitiveness.
FINANCE
1993 1992 1991
------ ------ ------
Revenues.............................................................................. $1,440 $1,414 $1,321
Operating Income...................................................................... $ 271 $ 175 $ 343
During 1993, ITT Financial completed a strategic repositioning of the
company aimed toward emphasizing the origination and servicing of secured
lending assets. Actions during 1993 included the sale of its domestic unsecured
consumer small loan portfolio, the start up of ITT Residential Capital Corp. (a
fully integrated residential mortgage company) and the repositioning of the
domestic home equity business. At year-end 1993, secured funded receivables
constituted 88% of total funded receivables as compared to 69% at year-end 1992.
Revenues and operating income data have been restated to exclude the results of
the domestic unsecured consumer small loan business which is reported in
"Dispositions and Other".
The benefits of this strategic shift will be reduced operating expenses,
dramatically improved credit quality, and improved asset liquidity. ITT
Financial plans to leverage these benefits through improved capital efficiency,
primarily securitization. During 1993, ITT Financial completed the
securitization of $2.4 billion of assets.
Finance revenues from ongoing businesses increased in 1993 and 1992 due to
increased finance charges and servicing income on higher levels of owned and
serviced receivables. The operating income improvement in 1993 reflects the
absence of last year's provision of $132 for anticipated losses in the
commercial real estate portfolio. When adjusting for that provision, along with
the portfolio gains which were significantly lower in 1993 compared with prior
years, operating income in 1993 improved over 1992 and approximated 1991 levels.
Emphasis on secured lending and asset securitization will remain the focus
in 1994. The nature of this strategy is to enhance the Company's risk profile
and improve asset quality, although operating income will be somewhat lower.
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COMMUNICATIONS & INFORMATION SERVICES
1993 1992 1991
---- ---- ----
Sales and Revenues......................................................................... $800 $817 $684
Operating Income........................................................................... $162 $170 $149
Both sales and revenues and operating income rose 5 percent in 1993 over
1992 when adjusting for the impact of unfavorable foreign exchange. The increase
in all periods 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 Services.
At ITT World Directories, operating margins are under pressure due to lower
advertising volume in a number of units. Modest price increases, coupled with
reduced operating costs, have resulted in margins that generally meet or exceed
prior year levels. ITT World Directories' operations in the United Kingdom were
sold to British Telecom in 1993 prior to the expiration of a directory sales
contract. Operations in Turkey were shut down in December 1992 as a result of
continuing losses in a difficult economic environment. The operating results of
these units are reported in "Dispositions and Other" for all years presented. A
shift in the regulatory and competitive structures in the European Community may
limit growth of existing operations during 1994. The Company continues to pursue
a program of product diversification and geographic expansion.
At ITT Educational Services, 20,000 students are enrolled at 48 schools.
Five new schools opened during 1993. Operating results at ITT Educational
Services are projected to continue to improve in 1994 due to additional school
openings and a continuing expansion of curricula and degree offerings. A period
of strong growth is expected as a result of ongoing demand for increased
technical education of the U.S. work force.
AUTOMOTIVE
1993 1992 1991
------ ------ ------
Sales................................................................................. $3,580 $3,498 $2,933
Operating Income...................................................................... $ 164 $ 118 $ 71
Sales continued to increase in 1993 as in 1992 as a result of increased
market penetration of ITT Anti-lock Brake Systems ("ABS"), higher light vehicle
production in North America and the continued shift in consumer preference
toward light trucks for which ITT 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 percent of the total in 1993 compared with 68
percent in 1992 and 70 percent in 1991.
Higher operating income in 1993 is largely the result of continued cost
reduction efforts partially offset by lower sales prices and higher labor costs.
Compared with 1991, the increased operating income was largely attributable to
sales growth in addition to cost reduction efforts partially offset by higher
labor costs and restructuring actions.
ITT Automotive will continue to benefit in 1994 from an anticipated
increase in North American light vehicle production, particularly light trucks,
as well as continued cost reduction efforts. Additionally, Western European
passenger car production is anticipated to stabilize. Anti-lock brake systems
remains the largest product line offered by ITT Automotive, comprising 30, 27
and 22 percent of total sales in 1993, 1992 and 1991, respectively. The
acquisition of General Motors' motors and actuators business unit is expected to
strengthen ITT Automotive's position in a number of product lines, particularly
motors and wiper systems for the North American market.
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DEFENSE & ELECTRONICS
1993 1992 1991
------ ------ ------
Sales................................................................................. $1,671 $1,927 $1,985
Operating Income (Loss)............................................................... $ 51 $ (82) $ 83
The 13 percent sales reduction in 1993 was anticipated and related
primarily to the Defense units as the impact of 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. The sales
decrease in 1992 related primarily to the Electronics units due to a worldwide
decline in the television market and softness in the connector product line,
especially due to lower military related demand. Sales and operating income have
been restated in all periods to reflect the December 1993 sale of ITT Components
Distribution. The gain on the sale of $13 pretax and the operating results are
reflected in "Dispositions and Other."
Operating income improved substantially in 1993 reflecting current year
cost improvements at several units and favorable margin adjustments on mature
military programs along with the absence of a 1992 restructuring charge. The
operating loss in 1992 resulted from the $53 million restructuring charge,
reduced volume and downward pricing pressures for commercial products.
Order backlog was $2.2, $2.3 and $2.2 billion at December 31, 1993, 1992
and 1991, respectively. Sales and operating income in 1994 are expected to
approximate 1993 levels. New product development, expanded markets (including
international defense opportunities) and the benefits of ongoing restructuring
activities provide a basis for future growth.
FLUID TECHNOLOGY
1993 1992 1991
------ ------ ------
Sales................................................................................. $1,030 $1,070 $1,064
Operating Income...................................................................... $ 95 $ 67 $ 83
Sales have remained relatively level in the past several years with the
decrease in 1993 due primarily to a stronger U.S. dollar versus many of the
European currencies in which Fluid Technology operates. In the past two years,
growth in markets including water and wastewater treatment, power generation and
exports as well as new products have been largely offset by weak market
conditions in such industries as construction, industrial process, oil and gas,
mining and leisure marine.
Operating income in 1993 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 the
devaluation of the Swedish krona adversely impacted operating income. Slow but
steady economic improvement is expected in served markets in 1994. ITT Fluid
Technology's position of market leadership, customer-oriented marketing
programs, and new products, together with its lower cost structure, should allow
the company to resume its profitable growth.
HOTELS
1993 1992 1991
------ ------ ------
Sales and Revenues................................................................... $3,184 $3,109 $2,826
Operating Income (Loss).............................................................. $ 78 $ (28) $ 33
Sales and revenues have been modified in all periods to include 100 percent
of the revenues of the hotels under Sheraton's management. The Corporation
believes that such a presentation better reflects the breadth and control of
hotel operations and increased sales and revenues (with no impact on operating
income) by $2.4, $2.3 and $2.1 billion in 1993, 1992 and 1991, respectively.
Sales and revenues increased in 1993 largely due to improvements in the
North American region along with the contribution of the Desert Inn which was
acquired in late 1993. The increase in 1992 over 1991 was also attributable to
the North American region, where room inventory levels were fully restored as
renovations were completed at several owned hotels and to higher revenues among
Sheraton's managed properties. In 1993, ITT Sheraton continued its focus on
upgrading properties and enhancing its
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22
image through the completion of renovation work and elimination of properties
which do not meet required standards. More than 30.2 million room nights were
sold in 1993, an increase of 1.7 million room nights from 1992 for comparable
hotels.
Operating income in 1993 reflected the accelerated write-off of capitalized
development expenses totalling $29 along with an $11 gain on the sale of an
investment in Bally's Las Vegas operations. In 1992, a provision of $45 to write
down hotel investments resulted in a reported operating loss. When excluding the
impacts of these one-time items, operating income rose dramatically in 1993.
Total sales and revenues of the Hotels segment, including 100% of
unconsolidated revenue generated by franchised hotels, were (in billions) $4.8
in 1993 and 1992 and $4.4 in 1991. Room rates of owned, managed and leased
properties averaged $105.48, $107.14 and $104.19 for 1993, 1992 and 1991,
respectively, while occupancy rates were 68.5% , 66.4% and 64.9%. The 1993 room
rate reduction reflects the stronger U.S. dollar against numerous foreign
currencies, particularly in Europe. Total properties numbered 407 in 1993
compared with 426 and 423 in 1992 and 1991, respectively, including franchised
properties of 230, 252 and 259 in those years.
Operating income is expected to continue to improve in 1994 both from
existing hotels as well as from acquisitions. The Gaming division, which will
include a full year's results from the Desert Inn and the anticipated
contribution from a casino near Memphis opening mid-year, will be a significant
focal point. Other anticipated acquisitions are expected to provide Sheraton
with an enhanced presence in markets not previously represented.
ALCATEL N.V.
1993 1992 1991
---- ----- ----
Equity in Earnings of Alcatel N.V.......................................................... $ -- $97 $208
The Corporation sold its 30 percent interest in Alcatel N.V. to its joint
venture partner, Alcatel Alsthom in July, 1992. Proceeds from the sale included
$1 billion in cash, two notes payable in 1993 and 1994 totalling $1.6 billion
(including interest) and 9.1 million shares in Alcatel Alsthom. The shares,
which have a net book value of $.8 billion, have a fair market value of $1.1
billion as of February 28, 1994. The Corporation recognized a pretax gain of
$942 ($622 after tax) in 1992 on the transaction.
DISPOSITIONS AND OTHER
Dispositions and Other includes the sales, operating results and the gain
or loss from sale or closedown of units other than "Discontinued Operations,"
along with the sales and operating results of other non-core businesses. Results
for all years presented include sales and operating results of the Corporation's
Community Development subsidiary. The domestic unsecured consumer small loan
portfolio previously included in the Finance segment is the largest business
included in "Dispositions and Other". The operating losses are included in all
years presented along with the provision in 1992 to cover future domestic
unsecured consumer small loan losses and to restructure the business, including
consolidation of consumer loan offices. A $95 pretax gain ($63 after tax) on the
sale of this portfolio is included in 1993. Operating results for all periods
and associated gains on sale in 1993 as they relate to ITT Components
Distribution and World Directories United Kingdom operations are also included.
1992 included provisions for the closedown of World Directories' unit in Turkey
($41 pretax offset with tax benefits of a similar amount included in "Income
Taxes") along with respective operating losses in 1992 and 1991. Sales and
operating results for 1991 included certain Italian automotive operations sold
in 1991.
DISCONTINUED OPERATIONS
During December, 1993, the Corporation announced its plans to spin-off ITT
Rayonier, the Corporation's Forest Products segment to its common and preferred
shareholders. The spin-off was completed in February, 1994. Accordingly, the
results of ITT Rayonier are reported as "Discontinued Operations" on a one-lined
after tax basis. The income (loss) from "Discontinued Operations", net of taxes,
were $53, $(72) and $54 in 1993, 1992 and 1991, respectively. The 1992 results
included an after tax provision of
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$115 for the loss on disposal and the estimated closure costs of ITT Rayonier's
Grays Harbor pulp and paper complex.
INTEREST, TAXES AND OTHER
Net interest expense in 1993 decreased due to lower average debt levels and
higher average cash invested. Net interest expense in 1992 approximated 1991
levels as interest income earned in the second half of the year from the
proceeds of the Alcatel sale offset higher expense from higher average debt
levels incurred to support investments, capital programs and working capital
requirements.
Income taxes of $345 in 1993 were provided on pretax income of $1.3 billion
representing a 27 percent effective tax rate. Tax exempt interest earned on
invested assets at Insurance and Finance caused the effective rate to be lower
than the U.S. statutory rate. Additionally, in 1993, the changes in the United
States tax law resulted in a one-time benefit of $32 representing an increase in
the Corporation's deferred tax assets at the beginning of the year necessitated
by the 1 percent increase in the statutory rate. Partly offsetting this benefit
was a $10 increase to the current year tax provision. "Discontinued Operations",
"Extraordinary Item" and "Cumulative Effect of Accounting Changes" are all
presented on a net of tax basis and accordingly, the associated tax benefits are
not included in the provision above.
The increase in income taxes over 1992 and 1991 related primarily to the
increase in pretax income. In 1992, large provisions in the Insurance and
Finance segments resulted in a pretax loss and a corresponding tax benefit.
Income taxes paid in 1993, 1992 and 1991 were $337, $202 and $157, respectively.
"Other" consists primarily of corporate expenses, minority equity and
non-operating income (expense). In 1993, a provision of $50 pretax is included
for estimated severance and other costs associated with a program aimed at
increasing the effectiveness and productivity at the Corporation's headquarters
locations. "Other" expenses increased in 1992 primarily due to higher corporate
provisions for divested company exposures and environmental issues.
DEBT AND LIQUIDITY
Outstanding debt, including Insurance and Finance debt, was $13.9 billion
at December 31, 1993. This was a $2.0 billion decrease from 1992, and was
primarily due to the application of the proceeds from the sale of ITT
Financial's domestic unsecured consumer small loan portfolio and from ITT
Financial's receivable securitization. At December 31, 1993 and 1992, debt was
64% and 68% of total capitalization, including finance and insurance
subsidiaries debt of $10.4 billion and $12.1 billion, respectively. With
insurance and finance subsidiaries carried on an equity basis and excluding
Discontinued Operations, debt was 33% of total capitalization at the end of 1993
compared with 37% at the end of 1992. The Corporation remains strong, flexible
and well positioned.
Future debt needs can be met as required by traditional and emerging
channels. Certain subsidiaries are subject to restrictions on transfer of funds
to the Corporation, but the restrictions have not affected the Corporation's
ability to meet its cash obligations. No change in this condition is
anticipated.
Stockholders equity increased $403 during 1993 to $7.7 billion mainly as a
result of earnings, partly offset by dividends, share repurchases and
redemptions and a reduction in the cumulative translation account. The
Corporation had cash of $1.1 billion at December 31, 1993, compared with $882 at
the end of 1992. The increase is largely the result of cash generated from
operations and proceeds from the collection of the Alcatel note, partly offset
by share repurchases and acquisitions. Collection of the remaining note received
in the Alcatel sale will supplement the Corporation's available cash by $817 in
1994. This cash, along with debt and equity financing alternatives, is available
for share repurchases, acquisitions or debt repayment in 1994 and future
periods.
In February, 1994, the Corporation entered into a new revolving credit
agreement with terms ranging from one to five years with 65 domestic and foreign
banks providing credit commitments of $7 billion. These commitments were made to
the ITT parent company and certain of its subsidiaries for $3 billion and to ITT
Financial totalling $4 billion. The credit commitments of the ITT parent company
are used to assure working capital needs and to support commercial paper.
Commercial paper borrowings totalled $268 at December 31, 1993.
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ITT's insurance and finance subsidiaries, foreign units and certain other
major domestic subsidiaries usually meet their funding requirements on a direct
basis and, from time to time, are supplemented through Corporate-established
financing vehicles.
ITT Financial is a direct issuer of commercial paper. At December 31, 1993,
$2.0 billion of commercial paper was outstanding.
The Corporation operates in a multinational environment with minimal
exposures in hyper-inflationary countries. Thus, inflation has not had a
significant impact on the financial position of the Corporation or results of
its operations in recent periods, nor is it expected to do so in the near
future.
The multinational operations of the Corporation also create exposure to
foreign currency fluctuation. The Corporation enters into foreign exchange
contracts with major financial institutions to reduce such exposure. These
agreements are meant to either hedge exchange exposure on the Corporation's net
investment in a foreign country or on the Corporation's foreign denominated debt
or are meant to hedge a specific transaction. During 1993, consolidated net
assets decreased by $114 reflecting the effect of translated local currencies on
the Corporation's net foreign investments and was primarily the result of the
strengthening of the U.S. dollar against most European currencies. Foreign
currency transaction gains or losses were not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ITT
The information called for by Item 10 with respect to directors is
incorporated herein by reference to the definitive proxy statement involving the
election of directors filed or to be filed by ITT with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is
set forth above in Part I under the caption "Executive Officers of ITT."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the definitive proxy statement referred to above in Item 10.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements and Schedules appearing on page
F-1 for a list of the financial statements and schedules filed as a
part of this report.
2. See Exhibit Index appearing on pages II-2 and II-3 for a list of
the exhibits filed or incorporated herein as a part of this report.
(b) There were no Form 8-K Current Reports filed by ITT during the quarter
ended December 31, 1993.
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INDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
PAGE
Report of Management........................................................... F-2
Report of Independent Public Accountants....................................... F-3
Consolidated Income for the three years ended December 31, 1993................ F-4
Consolidated Balance Sheet as of December 31, 1993 and 1992.................... F-5
Consolidated Cash Flow for the three years ended December 31, 1993............. F-6
Consolidated Retained Earnings for the three years ended December 31, 1993..... F-7
Consolidated Capital Stock and Surplus for the three years ended
December 31, 1993............................................................ F-7
Cumulative Preferred Stock as of December 31, 1993 and 1992.................... F-7
Notes to Financial Statements.................................................. F-8-19
Supplementary Condensed Financial Statements................................... F-20-21
Business Segment Information................................................... F-22
Geographical Information....................................................... F-22
Quarterly Results for 1993 and 1992............................................ F-23
Export Sales................................................................... F-23
Valuation and Qualifying Accounts.............................................. S-1
Short-term Borrowings.......................................................... S-2
Supplementary Income Statement Information..................................... S-2
Summary of Insurance Investments............................................... S-3
Supplementary Insurance Information............................................ S-4
Supplemental Information Concerning Property and Casualty Insurance
Operations................................................................... S-4
Reinsurance.................................................................... S-5
F-1
27
REPORT OF MANAGEMENT
The management of ITT Corporation is responsible for the preparation and
integrity of the information contained in the financial statements and other
sections of the Annual Report. The financial statements are prepared in
accordance with generally accepted accounting principles and, where necessary,
include amounts that are based on management's informed judgments and estimates.
Other information in the Annual Report is consistent with the financial
statements.
ITT's financial statements are audited by Arthur Andersen & Co.,
independent public accountants, elected by the shareholders. Management has made
ITT's financial records and related data available to Arthur Andersen & Co., and
believes that the representations made to the independent public accountants are
valid and complete.
ITT's system of internal controls is a major element in management's
responsibility to provide a fair presentation of the financial statements. The
system includes both accounting controls and the internal auditing program,
which are designed to provide reasonable assurance that the Corporation's assets
are safeguarded, that transactions are properly recorded and executed in
accordance with management's authorization, and that fraudulent financial
reporting is prevented or detected.
ITT's internal controls provide for the careful selection and training of
personnel and for appropriate divisions of responsibility. The controls are
documented in written codes of conduct, policies and procedures that are
communicated to ITT's employees. Management continually monitors the system of
internal controls for compliance. ITT's internal auditors independently assess
the effectiveness of internal controls and make recommendations for improvement
on a regular basis. The independent public accountants also evaluate internal
controls and perform tests of procedures and accounting records to enable them
to express their opinion on ITT's financial statements. They also make
recommendations for improving internal controls, policies and practices.
Management takes appropriate action in response to each recommendation from the
internal auditors and the independent public accountants.
The Audit Committee of the Board of Directors, composed of nonemployee
directors, meets periodically with management and with the independent public
accountants and internal auditors to evaluate the effectiveness of the work
performed by them in discharging their respective responsibilities and to assure
their independent and free access to the Committee.
F-2
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF ITT CORPORATION:
We have audited the financial statements of ITT Corporation (a Delaware
corporation) and subsidiaries as of December 31, 1993 and 1992, and for each of
the three years in the period ended December 31, 1993, as described in the
accompanying Index to Financial Statements and Schedules. These financial
statements and the schedules referred to below are the responsibility of the
Corporation's m