ITEM 1. BUSINESS
THE COMPANY
ITT Financial Corporation ("Financial" or "Company") is a Delaware corporation with headquarters at 645 Maryville Centre Drive, St. Louis, Missouri 63141-5832. It is the successor by merger in 1974 to ITT Aetna Corporation and ITT Thorp Corporation, both Delaware corporations established in 1964 and 1968, respectively. All of the Company's outstanding stock is owned directly by ITT Corporation, a Delaware corporation ("ITT").
ASSETS HELD SUBJECT TO DISPOSITION
As previously announced by ITT, Financial has and expects to enter into agreements to sell all or substantially all of its businesses and/or assets to various purchasers during the first half of 1995:
1) Financial has agreed to sell its Island Finance operations located in the Caribbean Basin for an amount to be determined at closing. The operations include certain assets of Financial as well as the capital stock of approximately 60 subsidiaries identified by local variations of the name "Island Finance" which operate in the Commonwealth of Puerto Rico, the U. S. Virgin Islands, the Netherlands Antilles and Aruba. In addition, the transaction includes the sale of the capital stock of subsidiaries bearing the names "Financiera el Sol" in Panama and "Credisol" in Costa Rica.
2) Financial has entered into an agreement to sell its commercial floorplan financing operations.
3) Financial has entered into a preliminary agreement to sell its commercial installment lending operations and/or assets.
Further, Financial has commenced negotiations with potential purchasers to sell some or all of its remaining businesses and/or assets in 1995. As a result, Financial's businesses (inventory finance, equipment finance and leasing, small business finance, commercial real estate, consumer residential real estate lending, consumer lending in the Caribbean Basin and insurance operations) have been aggregated and are reflected in the financial statements as "Assets Held Subject to Disposition."
In connection with the sale by Financial of its businesses and/or assets, Financial plans to merge with and into ITT during the first half of 1995. In January 1995, the holders of $3.4 billion in Financial term debt were asked to consent to conform certain Financial indenture provisions with those of ITT which, after the proposed merger of Financial into ITT, will result in ITT becoming the obligor on these debt issues.
ITEM 2.
ITEM 2. PROPERTIES
All space occupied by Financial is leased with lease periods generally ranging from one to fifteen years.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Financial is plaintiff and defendant in numerous legal proceedings, arising in the normal course of its business, which involve the collection of accounts, the validity of liens and damage or loss claims under various types of insurance. Proceedings in which the Company or its subsidiaries are defendants often involve numerous allegations. Several of these proceedings purport to be class actions alleging improper consumer loan deferrals or the unauthorized sale of and/or the involuntariness of the purchase of certain insurance products made available by the Company to its consumer borrowers.
There are various other lawsuits pending against the Company and its subsidiaries, some of which include claims for substantial amounts. While no assurances can be made as to the ultimate outcome of any particular action, management believes that meritorious defenses are generally available and the aggregate liability, if any, likely to result therefrom, will not have a material adverse effect on the consolidated financial position or consolidated results of operations of Financial.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of Financial's stock is owned by ITT. There is no market for Financial's common stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Prepared in accordance with General Instruction J(2)(a) of Form 10-K.)
Reference is made to the statement of Consolidated Income. Net income remained high in 1994 at $159 million and was second only to 1993's net income of $197 million, which was the highest in the Company's history. These record levels of performance are a result of record volumes and improved productivity.
During 1994, ITT Corporation ("ITT") made the decision to exit the finance industry. See below and "Assets Held Subject to Disposition" in the Notes to Financial Statements for further information.
A discussion of the changes in net income for 1994 compared with 1993 follows.
CONTINUING OPERATIONS
Income from affiliates increased in 1994 compared with 1993 primarily due to interest on the notes receivable from ITT related to its purchase from Financial of subordinated mortgage-backed securities and Financial's transfer and assignment of Alcatel Alsthom stock to ITT. See "Transactions with Affiliates" in the Notes to Financial Statements for further information.
Investment income decreased 91% in 1994 compared with 1993 primarily the result of the absence, in 1994, of revenues from mortgage-backed securities purchased and sold during 1993.
Other income decreased 12% in 1994 compared with 1993 primarily due to a reduction in the amount of the dividend declared and received on Alcatel Alsthom stock.
Interest expense on Financial's debt decreased 4% in 1994 compared with 1993. This decline was due to a reduction in average borrowings, partially offset by higher interest rates.
DISCONTINUED OPERATIONS
Reference is made to Part I for a discussion of the Assets Held Subject to Disposition.
The term "finance receivables" as used under this item includes receivables relative to Financial's businesses which have been aggregated and are reflected in the financial statements as "Assets Held Subject to Disposition" (see above).
As shown above, finance charges and fees decreased 22% in 1994 compared with 1993 mainly due to the sale in 1993 of the domestic unsecured loan business. The slight decline in finance receivables earnings was mainly due to asset securitizations and portfolio mix.
Interest expense increased 69% in 1994 compared with 1993 due to higher average borrowings and higher interest rates.
Insurance premiums decreased 27% in 1994 compared with 1993 due mainly to a lower number of captive policies in force as a result of exiting the domestic unsecured loan business in 1993. However, insurance benefits decreased 76% in 1994 compared with 1993 mainly as a result of the reduction in captive insurance activities.
Investment income increased 28% in 1994 compared with 1993 due to a higher level of investments and gains on investment securities, partially offset by a lower portfolio yield primarily the result of a change in portfolio mix. The increase in the level of investments and the change in portfolio mix is primarily the result of the securitization of consumer real estate receivables. The sale of subordinated mortgage-backed securities to ITT in December, 1993, also contributed to the change in the portfolio mix.
Servicing and other income increased by 52% in 1994 over 1993 primarily due to an increase in portfolio servicing activities resulting from the securitization and sale of inventory finance receivables with servicing retained, proceeds from the sale of Financial's specialty insurance line of business and from the sale of the Company's 15% equity interest in the group that purchased the consumer loans held for repositioning, partially offset by the absence, in 1994, of the temporary servicing fees relative to the consumer loans sold.
The provision for credit losses increased by $35 million in 1994 compared with 1993 as a result of an increased loss provision of $52 million related to the California commercial real estate portfolio. This increase reflects earthquake damage and other portfolio deterioration. The loss provision for the rest of the portfolios was down by $17 million.
Income tax decreased in 1994 compared with 1993 primarily due to a decrease in pre-tax income.
CHANGE IN ACCOUNTING PRINCIPLE
Reference is made to "Investment Securities" in the Notes to Financial Statements for a discussion of the change in accounting principle.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
1. See Index to Financial Statements and Financial Statement Schedules.
2. See Exhibit Index.
(B) REPORTS ON FORM 8-K.
The registrant filed the following report on Form 8-K during the last quarter of the period covered by this annual report:
None
REPORT OF MANAGEMENT
The management of ITT Financial Corporation ("Company") is responsible for the preparation and integrity of the information contained in the financial statements and other sections of the Annual Report. The financial statements are prepared in accordance with generally accepted accounting principles, and, where necessary, include amounts that are based on management's informed judgments and estimates. Other information in the Annual Report is consistent with the financial statements.
The Company's financial statements are audited by Arthur Andersen LLP, independent public accountants. Management has made the Company's financial records and related data available to Arthur Andersen LLP, and believes that the representations made to the independent public accountants are valid and complete.
The Company's system of internal controls is a major element in management's responsibility to provide a fair presentation of the financial statements. The system includes both accounting controls and the internal auditing program, which are designed to provide reasonable assurance that the Company's assets are safeguarded, that transactions are properly recorded and executed in accordance with management's authorization, and that fraudulent financial reporting is prevented or detected.
The Company's internal controls provide for the careful selection and training of personnel and for appropriate divisions of responsibility. The controls are documented in written codes of conduct, policies and procedures that are communicated to the Company's employees. Management continually monitors the system of internal controls for compliance. The Company's internal auditors independently assess the effectiveness of internal controls and make recommendations for improvement on a regular basis. The independent public accountants also evaluate internal controls and perform tests of procedures and accounting records to enable them to express their opinion on the Company's financial statements. They also make recommendations for improving internal controls, policies and practices. Management takes appropriate action in response to each recommendation from the internal auditors and the independent public accountants.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT FINANCIAL CORPORATION:
We have audited the accompanying consolidated balance sheets and statements of consolidated term debt of ITT Financial Corporation (a Delaware corporation and wholly-owned subsidiary of ITT Corporation) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings (deficit), capital surplus and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ITT Financial Corporation and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the accompanying notes to financial statements, ITT Financial Corporation adopted new accounting standards promulgated by the Financial Accounting Standards Board, changing its methods of accounting, effective January 1, 1994, for certain investments in debt and equity securities and, effective January 1, 1992, for postretirement benefits other than pensions and postemployment benefits.
ARTHUR ANDERSEN LLP
St. Louis, Missouri, January 30, 1995.
NOTES TO FINANCIAL STATEMENTS ------------------------------------------------------------------------------
ACCOUNTING POLICIES
Consolidation Principles: The consolidated financial statements include the accounts of ITT Financial Corporation and its subsidiaries ("Financial" or "Company"), all of which are wholly-owned. Assets held subject to disposition are reflected net of their related liabilities. Certain 1993 and 1992 items have been reclassified to conform with the 1994 presentation.
Pension: All eligible salaried employees of Financial participate in the Retirement Plan for Salaried Employees of ITT Corporation, which is non-contributory. The cost of the plan to Financial is based on an actuarial allocation and for the years ended December 31, 1994, 1993 and 1992 was $632,000, $387,000 and $453,000, respectively. No allocation of the present value of accumulated plan benefits or assets available for benefits has been made, as it is not readily determinable.
In addition to pension benefits, ITT Corporation ("ITT") provides health care and life insurance for certain retired employees of Financial.
Effective January 1, 1992, ITT adopted Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers' Accounting for Postemployment Benefits," using the immediate recognition method. Accordingly, cumulative after-tax adjustments (through December 31, 1991) of $9,569,000 and $3,452,000, respectively, were allocated by ITT to Financial and recognized at January 1, 1992. Except for the one-time cumulative adjustment, the adoption of SFAS No. 112 was not material to the 1992 results of operations.
ITT adopted certain changes to a number of its postretirement benefit plans during 1992. The effect of these changes are reflected in the determination of the expense reported for 1993 and 1992 and were not significant.
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" in October 1994. These standards require that impaired loans be measured based on the present value of expected future cash flows, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. These statements must be adopted by Financial beginning January 1, 1995. Management has determined that the initial impact of adoption will not have a material impact on the Company's financial condition and results of operations, based on the level of nonperforming loans at December 31, 1994.
ASSETS HELD SUBJECT TO DISPOSITION
As previously announced by ITT, Financial has and expects to enter into agreements to sell all or substantially all of its businesses and/or assets to various purchasers during the first half of 1995:
1) Financial has agreed to sell its Island Finance operations located in the Caribbean Basin for an amount to be determined at closing. The operations include certain assets of Financial as well as the capital stock of approximately 60 subsidiaries identified by local variations of the name "Island Finance" which operate in the Commonwealth of Puerto Rico, the U. S. Virgin Islands, the Netherlands Antilles and Aruba. In addition, the transaction includes the sale of the capital stock of subsidiaries bearing the names "Financiera el Sol" in Panama and "Credisol" in Costa Rica.
2) Financial has entered into an agreement to sell its commercial floorplan financing operations.
3) Financial has entered into a preliminary agreement to sell its commercial installment lending operations and/or assets.
Further, Financial has commenced negotiations with potential purchasers to sell some or all of its remaining businesses and/or assets in 1995. As a result, Financial's businesses (inventory finance, equipment finance and leasing, small business finance, commercial real estate, consumer residential real estate lending, consumer lending in the Caribbean Basin and insurance operations) have been aggregated and are reflected in the financial statements as "Assets Held Subject to Disposition."
In connection with the sale by Financial of its businesses and/or assets, Financial plans to merge with and into ITT during the first half of 1995. In January 1995, the holders of $3.4 billion in Financial term debt were asked to consent to conform certain Financial indenture provisions with those of ITT which, after the proposed merger of Financial into ITT, will result in ITT becoming the obligor on these debt issues.
On January 19, 1993, Financial announced a strategic plan to shift its emphasis to secured lending and downsize unsecured lending.
Notes to Financial Statements (Continued) ==========================================================================
Accordingly, Financial established reserves of $928,242,000 pre-tax ($612,219,000 after-tax) in the fourth quarter of 1992, including a $693,000,000 provision to cover future unsecured consumer loan losses from the run-off of its existing domestic portfolio; $103,000,000 for repositioning, including consolidation of consumer loan offices; and a $132,242,000 provision for anticipated losses in its commercial real estate portfolio.
On June 3, 1993, Financial completed the sale of its domestic unsecured consumer small loan portfolio. Accordingly, Financial recognized a pre- tax gain of $95,000,000 in the second quarter of 1993, based on recorded values as of the closing of the sale and certain costs and restructuring expenses incurred by Financial as part of the transaction.
TRANSACTIONS WITH AFFILIATES
On September 30, 1994, Financial transferred and assigned to ITT 4,808,267 shares of Alcatel Alsthom stock which had a book value at that date of $425,735,000. In return, ITT executed a promissory note payable on demand to Financial for a like amount. The note accrued interest on a monthly basis at a rate per annum equal to LIBOR, as such rate was changed from time to time, calculated on the basis of a year of 365/366 days and actual days elapsed. The balance of the note receivable from ITT at December 31, 1994 was $431,637,000 and is included in Due from Affiliates on the balance sheet of Financial (see "Retained Earnings and Capital Surplus" for further information).
In December, 1993, Financial sold to ITT $358,706,000 of subordinated mortgage-backed securities. In return, ITT executed a promissory note payable to Financial for a like amount. Principal payments are credited monthly against the outstanding principal amount of the note equal to the amount of cash actually received on behalf of ITT from the securities. The note accrued interest on a monthly basis at the rate per annum equal to the average of the daily 90 day LIBOR rate for the month of calculation plus 50 basis points, both for the actual number of days outstanding during the monthly interest period. The note matures on December 31, 2003. At December 31, 1994, the balance of the note receivable from ITT was $332,136,000 and is included in Due from Affiliates on the balance sheet.
INVESTMENT SECURITIES
During the 1994 first quarter, Financial adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The new standard requires, among other things, that securities be classified as "held-to- maturity", "available-for-sale" or "trading" based on Financial's intentions with respect to the ultimate disposition of the security and its ability to effect those intentions. The classification determines the appropriate accounting carrying value (cost basis or fair value) and, in the case of fair value, whether the adjustment impacts Stockholder Equity directly or is reflected in Consolidated Income. Investments in equity securities had previously been recorded at fair value with the corresponding impact included in Stockholder Equity. Under SFAS No. 115, the portfolios included in "Assets Held Subject to Disposition" are classified as "available-for-sale" and accordingly, investments are reflected at fair value with the corresponding impact included as a component of Stockholder Equity designated "Net unrealized gain (loss) on securities, net of tax". At December 31, 1994, the unrealized loss on securities, net of tax, was $156,822,000.
In adopting SFAS No. 115, Emerging Issues Task Force ("EITF") Issue No. 93-18 prescribes specific accounting treatment with respect to mortgage-backed interest-only investments. EITF No. 93-18 reached the conclusion that the measure of impairment of these instruments should be changed from undiscounted cash flows to fair value. Accordingly, the amortized cost basis of such instruments that were determined to have other-than-temporary impairment losses at the time of the initial adoption of SFAS No. 115 have been written down to fair value and reflected as a cumulative effect of accounting change as of January 1, 1994. The writedown totalled $6,747,000 after tax.
At December 31, 1994 and 1993, investment securities held by Financial consisted entirely of certificates of deposit with maturities of less than a year. The carrying amount of investment securities at December 31, 1994 and 1993 approximated fair value because of the short maturity of these investments.
COMMERCIAL PAPER AND OTHER DEBT
See "Derivative Financial Instruments" for further information regarding fair value and derivative financial instruments.
In February, 1994, Financial and ITT replaced their credit lines supporting commercial paper with $7 billion of credit lines with 65 domestic and foreign banks. Financial's lines were comprised of a Three-Year Competitive Advance and Revolving Credit Facility Agreement and a 364-Day Competitive Advance and Revolving Credit Facility Agreement in the amounts of $1 billion and $3 billion, respectively. The three-year agreement requires Financial to maintain stockholder equity of not less than $750 million. Lines of credit were maintained with various domestic and foreign banks amounting to $4,678,148,000 and $3,386,732,000 at December 31, 1994 and 1993, respectively. Of such amounts, $4,639,532,000 and $3,336,183,000 were unused at December 31, 1994 and 1993, respectively, of which $4,600,000,000 and $3,315,000,000, respectively, supported commercial paper outstanding. Approximately $1,000,000,000 of the lines of credit were under irrevocable multi-year revolving credit agreements and approximately $3,600,000,000 of the lines of credit were under irrevocable credit agreements of one year or less. The remaining $78,148,000 may be terminated by Financial or withdrawn by the banks at any time and are generally supported by payment of annual commitment fees. Commitment fees during 1994, 1993 and 1992 amounted to $4,862,000, $5,678,000 and $4,476,000, respectively. Financial may be exposed to market risk in the event of nonperformance by the banks on irrevocable lines of credit. Because nonperformance by a significant number of banks is not anticipated, the Company does not expect a material adverse effect on its results of operations or financial position. Subsequent to December 31, 1994, ITT Corporation entered into revolving credit facilities totaling $11 billion. A portion of these facilities, at least equal in amount to Financial's commercial paper outstanding, is allocated to Financial for the purpose of supporting commercial paper.
DERIVATIVE FINANCIAL INSTRUMENTS
Financial uses derivative financial instruments, primarily interest rate swaps, as a part of an overall hedging program to manage fluctuations in interest rates and preserve net interest margin. The Company is an end-user and does not utilize derivative financial instruments for speculative purposes.
The Company accrues the pay amounts and receive amounts related to each interest rate swap with the net settlement amounts recorded as an adjustment to interest expense. Premiums received or paid, including initial and termination amounts where the liability remains outstanding, are deferred, included in other assets, and are amortized over the original term of the derivative contract as an adjustment to interest expense. Where the liability and the derivative financial instrument are terminated, the gain or loss on the derivative contract is recognized immediately as an adjustment to interest expense.
An interest rate exchange agreement where by Financial pays the fixed rate and receives the floating rate would relate to commercial paper or floating rate term debt and thereby create a fixed rate funding. An agreement where by Financial pays the floating rate and receives a fixed rate would relate to fixed rate term debt and thereby create a term floating rate funding. An agreement where Financial pays one index rate and receives another index rate typically modifies commercial paper or floating rate term debt to an index that is a better match to the yield on assets. Interest rate caps are purchased to reduce the impact of increases on floating rate debt during periods of rising interest rates. These caps are generally identified with assets where Financial's ability to increase the yield is by contract also limited.
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Notes to Financial Statements (Continued) ==========================================================================
In addition, a purchased interest rate cap with a notional principal amount of $100,000,000 was in effect as of December 31, 1994. The cap is used to mitigate the risk of rising interest rates on Financial's variable rate obligations.
At December 31, 1994, Financial held no derivative financial instruments as hedges for anticipated transactions.
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The carrying amount of commercial paper at December 31, 1994 and 1993 approximated fair value due to the short maturity of the instruments. The average yield of the commercial paper outstanding at December 31, 1994 and 1993 approximated the current market rate for like maturities.
Fair value of term debt was determined by discounting the projected cash flows using quoted market rates. Where quoted market rates were not available, fair value of term debt was determined using estimated interest rates at which Financial could issue similar debt with like remaining maturities.
The notional amounts of derivative financial instruments do not represent amounts exchanged by the parties and, thus, are not a measure of Financial's exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amount and the other terms of the derivatives' contracts.
The fair value of derivative financial instruments generally reflects the estimated amounts that the company would receive or (pay) (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for most of the Company's derivative financial instruments.
Financial is exposed to market risk in the event of nonperformance by the counterparties. The Company has policies regarding financial stability and credit standing of its major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Company.
INCOME TAX
The accounts of Financial and its United States subsidiaries are included in the consolidated Federal income tax return of ITT. ITT's policy is generally to allocate to Financial current tax benefits and charges on the basis of statutory U.S. tax rates applied to Financial's taxable income or loss included in the consolidated return.
Deferred income tax assets and liabilities are the tax effect related to recording revenues and expenses in different periods for financial statements and tax purposes.
No deferred tax liability has been recognized for the federal income tax payable upon distribution of retained earnings of certain subsidiaries, $227,505,000 at December 31, 1994, since Financial does not anticipate a net tax obligation to be incurred on these earnings.
RETAINED EARNINGS AND CAPITAL SURPLUS
At December 31, 1994, Financial had a net capital contribution receivable from ITT amounting to $136,837,000. The receivable from ITT is included in Due from Affiliates on the balance sheet of Financial.
In December, 1993, Financial declared and accrued its fourth quarter dividend to ITT in the amount of $207,285,000. The dividend payable is included in Due to Affiliates on the December 31, 1993 balance sheet of Financial. The dividend was paid to ITT in 1994.
Due to the reduction in retained earnings resulting from the fourth quarter, 1992 reserve actions, Financial received from ITT a capital contribution of $612,219,000, including 4,808,267 shares of Alcatel Alsthom stock valued at $425,735,000 as of December 31, 1992. This contribution was a receivable carried in Other Assets at year-end 1992, and was received in the first quarter of 1993. The Alcatel Alsthom stock is included in Other Assets on the December 31, 1993 balance sheet of Financial.
Under the most restrictive of Financial's term agreement provisions covering restricted payments, consolidated retained earnings and capital surplus at December 31, 1994 aggregating $1,131,123,000 were unrestricted as to the payment of dividends.
A support agreement between ITT and the Company was executed on February 9, 1993, whereby ITT agreed to retain, directly or indirectly, ownership of a majority of the shares of capital stock of the Company having voting power for the election of directors and will assure that the consolidated debt to equity ratio (excluding depository institutions) of the Company at the end of each calendar quarter will not exceed 6.75 to 1. The agreement also provides for ITT to make loans to the Company on a subordinated basis up to $300,000,000 in the event that the Company lacks sufficient cash, other liquid assets or credit facilities to meet an obligation to pay principal of, or premium or interest on any commercial paper or other short-term debt obligation for money borrowed. Furthermore, the proceeds of any loan thereunder may only be used by the Company to meet such payment obligations. Any loan from ITT will be repayable upon demand anytime after the business day following the 29th day after such loan was made, provided there is no default in the payment by the Company of any indebtedness for money borrowed. Interest on the outstanding amount of any loan shall be at the fluctuating rate per annum equal to the announced prime rate of Chase Manhattan Bank, N.A. In addition, the agreement provides for ITT to assure that the Company will maintain unused committed bank lines of credit to back up 100% of its outstanding commercial paper. The agreement shall remain in full force and effect for so long as any debt for borrowed money by the Company is outstanding unless terminated by either party. Either party may terminate the agreement upon notice to the other party of not less than 60 nor more than 90 days prior to such termination, but in no event shall such termination be earlier than July 31, 1994. This agreement superseded a similar agreement executed on July 31, 1992.
Financial information pertaining to ITT is available in its periodic reports filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
EXTRAORDINARY ITEM
In conjunction with the sale of the domestic unsecured consumer small loan portfolio, Financial decided to retire a portion of its fixed rate term debt. Fixed rate term debt was issued to finance this portfolio. In anticipation of these retirements and the related premiums, Financial recognized an extraordinary pre-tax loss at June 30, 1993, of $75 million ($49.5 million after-tax). In an invitation dated July 26, 1993, as supplemented on August 5, 1993, Financial offered to purchase between 25% and 35% of each of twelve series of securities aggregating $1.9 billion in outstanding principal amount. As a result of the invitation, Financial purchased, during the third quarter of 1993, $528.3 million principal amount of securities with interest rates ranging from 7% to 11%. The funds for the retirements were obtained from operations and from the issuance of other debt.
COMMITMENTS AND CONTINGENCIES
Rental expenses included in the statement of consolidated income for the years ended December 31, 1994, 1993 and 1992 were $2,647,000, $1,199,000 and $798,000, respectively.
Financial and its subsidiaries have been named as defendants and as potential defendants in various lawsuits and threatened litigation which include allegations regarding Financial's insurance sales practices. After consideration of established reserves, management believes that the outcome of such litigation, and other contingencies, will have no material adverse impact on the Company's results of operations or its financial position.
INDUSTRY INFORMATION
For purposes of segment reporting, management considers Financial to operate in the finance industry.
Notes to Financial Statements (Continued) ==========================================================================
UNAUDITED QUARTERLY FINANCIAL DATA
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
ITT FINANCIAL CORPORATION
by TERENCE L. PAYNE .................................... (Terence L. Payne) SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
March 31, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
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