1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994 - - - -- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5989 ITEL CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-1658138 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2 North Riverside Plaza Suite 1900 Chicago, Illinois 60606 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code: (312) 902-1515 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 ____ At October 31, 1994 there were 30,798,010 shares of Common Stock, $1.00 par value, of the registrant outstanding. 1 2 PART I. FINANCIAL INFORMATION ITEL CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS) SEPTEMBER 30, 1994 (UNAUDITED) CONSOLIDATED SUPPLEMENTAL INFORMATION ---------------------------------------------- ------------------------------ SEPTEMBER 30, DECEMBER 31, ALL 1994 1993 ANIXTER OTHER -------------- -------------- ---------- ---------- (UNAUDITED) Current assets: Cash and equivalents $ 44,600 $ 29,900 $ 5,000 $ 39,600 Accounts receivable (net of allowances for doubtful accounts of $6,300 and $4,800, respectively) 323,700 230,200 320,100 3,600 Inventories, primarily finished goods 264,000 240,300 264,000 - Note receivable 169,500 - - 169,500 Other assets 5,200 6,300 4,400 800 ---------- ---------- ----------- ---------- Total current assets 807,000 506,700 593,500 213,500 Property, at cost 65,600 54,700 63,400 2,200 Accumulated depreciation (33,300) (27,800) (31,100) (2,200) ---------- ---------- ----------- ---------- Net property 32,300 26,900 32,300 - Goodwill (net of accumulated amortization of $44,000 and $39,500, respectively) 189,400 193,900 189,400 - Discontinued Rail car leasing assets - 1,193,600 - - Discontinued and assets held for sale, net 153,300 191,100 - 153,300 Marketable equity securities available-for-sale (cost of $75,600 and $163,000, respectively) 74,600 126,400 - 74,600 Investment in ANTEC 58,000 84,100 - 58,000 Other assets 5,600 18,200 3,000 2,600 ---------- ---------- ----------- ---------- $1,320,200 $2,340,900 $ 818,200 $ 502,000 ========== ========== =========== ========== See accompanying notes to the condensed consolidated financial statements. Supplemental consolidating data are shown for Anixter and All Other. Transactions between Anixter and All Other have been eliminated from the consolidated columns. 2 3 ITEL CORPORATION CONDENSED BALANCE SHEETS (IN THOUSANDS) SEPTEMBER 30, 1994 (UNAUDITED) CONSOLIDATED SUPPLEMENTAL INFORMATION ---------------------------------------- ------------------------------ SEPTEMBER 30, DECEMBER 31, ALL 1994 1993 ANIXTER OTHER ---------------- ---------------- ---------- ---------- (UNAUDITED) Current liabilities: Accounts payable $ 164,000 $ 128,800 $ 164,000 $ - Accrued expenses 74,000 93,700 62,000 12,000 Current maturities of long- term debt - Corporate 150,000 - - 150,000 ---------- ---------- ---------- ---------- Total current liabilities 388,000 222,500 226,000 162,000 Income taxes, net, primarily deferred 31,100 102,200 (17,500) 48,600 Discontinued Rail car leasing liabilities - 1,113,800 - - Other liabilities 19,700 20,300 16,200 3,500 Intercompany payable (receivable) - - 57,300 (57,300) Long-term debt - subsidiaries 266,000 188,300 266,000 - - Corporate 17,500 288,500 - 17,500 ---------- ---------- ---------- ---------- Total liabilities 722,300 1,935,600 548,000 174,300 Stockholders' equity: Common stock 31,200 33,000 300 30,900 Capital surplus 317,000 383,500 297,700 19,300 Retained earnings 256,400 22,400 (23,100) 279,500 Cumulative translation adjustments (6,000) (9,900) (4,700) (1,300) ---------- ---------- ---------- ---------- 598,600 429,000 270,200 328,400 Unrealized losses on marketable equity securities available- for sale (net of deferred income tax benefit) (700) (23,700) - (700) ---------- ---------- ---------- ---------- Total stockholders' equity 597,900 405,300 270,200 327,700 ---------- ---------- ---------- ---------- $1,320,200 $2,340,900 $ 818,200 $ 502,000 ========== ========== ========== ========== See accompanying notes to the condensed consolidated financial statements. Supplemental consolidating data are shown for Anixter and All Other. Transactions between Anixter and All Other have been eliminated from the consolidated columns. 3 4 ITEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE-MONTH PERIODS NINE-MONTH PERIODS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------------- ---------------------------- 1994 1993 1994 1993 -------- -------- -------- -------- Revenues $ 456,300 $ 342,400 $ 1,242,000 $ 968,900 Cost of operations (434,900) (328,000) (1,187,200) (929,400) Amortization of goodwill (1,500) (1,500) (4,500) (4,300) ----------- ----------- ----------- ----------- Operating income 19,900 12,900 50,300 35,200 Interest expense and other, net (4,700) (10,500) (18,700) (42,200) Non-recurring items, net - 64,000 48,200 64,000 Equity earnings in ANTEC 1,800 2,500 7,200 6,700 Marketable equity securities losses, principally writedowns - - (39,600) - ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 17,000 68,900 47,400 63,700 Income tax expense (6,300) (26,400) (17,200) (24,700) ----------- ----------- ----------- ----------- Income from continuing operations 10,700 42,500 30,200 39,000 Income (loss) from discontinued operations (net of related taxes) 205,000 (2,000) 203,700 (6,700) ----------- ----------- ----------- ----------- Income before extraordinary items 215,700 40,500 233,900 32,300 Extraordinary items - (10,900) - (10,900) ----------- ----------- ----------- ----------- Net income 215,700 29,600 233,900 21,400 Preferred stock dividends and amortization - - - (3,000) ----------- ----------- ----------- ----------- Income applicable to common stock $ 215,700 $ 29,600 $ 233,900 $ 18,400 =========== =========== =========== =========== Income per common and common equivalent share: Continuing operations $ .34 $ 1.40 $ .93 $ 1.23 Before extraordinary items $ 6.87 $ 1.33 $ 7.20 $ 1.00 Net income $ 6.87 $ .97 $ 7.20 $ .63 =========== =========== =========== =========== Weighted average common and common equivalent shares 31,441 30,407 32,556 29,175 =========== =========== =========== =========== See accompanying notes to the condensed consolidated financial statements. 4 5 ITEL CORPORATION SUPPLEMENTAL CONDENSED STATEMENTS OF INCOME THREE-MONTH PERIODS ENDED SEPTEMBER 30, (UNAUDITED) (IN THOUSANDS) ANIXTER ALL OTHER ----------------------- ----------------------- 1994 1993 1994 1993 ---- ---- ---- ---- Revenues $ 456,300 $ 342,400 $ - $ - Cost of operations (433,800) (326,300) (1,100) (1,700) Amortization of goodwill (1,500) (1,500) - - --------- --------- ---------- -------- Operating income (loss) 21,000 14,600 (1,100) (1,700) Interest expense and other, net (4,600) (5,200) (100) (5,300) Non-recurring items, net - - - 64,000 Equity earnings in ANTEC - - 1,800 2,500 --------- --------- ---------- -------- Income from continuing operations before income taxes 16,400 9,400 600 59,500 Income tax (expense) benefit (7,300) (5,200) 1,000 (21,200) --------- --------- ---------- -------- Income from continuing operations 9,100 4,200 1,600 38,300 Income (loss) from discontinued operations (net of related taxes) - - 205,000 (2,000) --------- --------- ---------- -------- Income before extraordinary items 9,100 4,200 206,600 36,300 Extraordinary items - - - (10,900) --------- --------- ---------- -------- Net income $ 9,100 $ 4,200 $ 206,600 $ 25,400 ========= ========= ========== ======== See accompanying notes to the condensed consolidated financial statements. Supplemental consolidating data are shown for Anixter and All Other. Transactions between Anixter and All Other have been eliminated from the consolidated columns. 5 6 ITEL CORPORATION SUPPLEMENTAL CONDENSED STATEMENTS OF OPERATIONS NINE-MONTH PERIODS ENDED SEPTEMBER 30, (UNAUDITED) (IN THOUSANDS) ANIXTER ALL OTHER ----------------------- ----------------------- 1994 1993 1994 1993 ---- ---- ---- ---- Revenues $1,242,000 $ 968,900 $ - $ - Cost of operations (1,184,000) (924,200) (3,200) (5,200) Amortization of goodwill (4,500) (4,300) - - ----------- ----------- -------------- ------------ Operating income (loss) 53,500 40,400 (3,200) (5,200) Interest expense and other, net (12,700) (16,100) (6,000) (26,100) Non-recurring items - - 48,200 64,000 Equity earnings in ANTEC - - 7,200 6,700 Marketable equity securities losses, principally writedowns - - (39,600) - -------------- -------------- ----------- ------------- Income from continuing operations before income taxes 40,800 24,300 6,600 39,400 Income tax (expense) benefit (18,200) (13,200) 1,000 (11,500) ---------- ---------- ----------- ----------- Income from continuing operations 22,600 11,100 7,600 27,900 Income (loss) from discontinued operations (net of related taxes) - - 203,700 (6,700) ------------- ------------- ---------- ----------- Income before extraordinary items 22,600 11,100 211,300 21,200 Extraordinary items - - - (10,900) ------------- ------------- ------------- ------------ Net income (loss) $ 22,600 $ 11,100 $ 211,300 $ (10,300) ============= ============= ============= ============ See accompanying notes to the condensed consolidated financial statements. Supplemental consolidating data are shown for Anixter and All Other. Transactions between Anixter and All Other have been eliminated from the consolidated columns. 6 7 ITEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) NINE-MONTH PERIODS ENDED SEPTEMBER 30, ---------------------------- 1994 1993 ------ ------ Operating activities: Income from continuing operations $ 30,200 $ 39,000 Adjustments to reconcile income from continuing operations to net cash used by continuing operating activities: Depreciation 7,000 6,100 Amortization of goodwill 4,500 4,300 Deferred income tax expense 16,400 27,400 Non-recurring items (48,200) (64,000) Marketable equity securities losses, principally writedowns 39,600 - Other, net 900 6,000 Changes in assets and liabilities, net of effects of acquisitions and asset purchases (84,000) (66,100) ----------- ----------- Net cash used by continuing operating activities (33,600) (47,300) Discontinued operations, net 48,500 114,200 ----------- ----------- Net cash provided by operating activities 14,900 66,900 Investing activities: Sales of marketable equity securities 47,800 - Purchases of property, net (12,000) (5,500) Sale of ANTEC common stock, net 82,800 90,000 Receipts from and (advances to) Q-TEL 12,500 (2,600) Other, net - 3,400 ----------- ----------- Net investing activities 131,100 85,300 ----------- ----------- Net cash provided before financing activities 146,000 152,200 Financing activities: Borrowings 787,800 542,000 Reductions in borrowings (845,500) (701,600) Proceeds from issuance of common stock 7,700 20,700 Purchases of treasury stock (77,600) (300) Other, net (3,700) (8,100) ----------- ----------- Net financing activities (131,300) (147,300) ----------- ----------- Cash provided 14,700 4,900 Cash and equivalents at beginning of period 29,900 21,000 ----------- ----------- Cash and equivalents at end of period $ 44,600 $ 25,900 =========== =========== See accompanying notes to the condensed consolidated financial statements. 7 8 ITEL CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation: The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in Itel Corporation's ("Itel") Annual Report on Form 10-K for the year ended December 31, 1993. The condensed consolidated financial information furnished herein reflects all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the condensed consolidated financial statements for the periods shown. Principles of consolidation: The condensed consolidated financial statements include the accounts of Itel and its subsidiaries (collectively "the Company") after elimination of intercompany transactions. Reclassification: The 1993 consolidated financial statements and related notes have been reclassified to reflect ANTEC Corporation ("ANTEC") as an equity investment (see Note 5). The restatement of ANTEC is intended to improve the comparability of the Company's consolidated financial statements due to the materiality of such decrease in the Company's ownership of ANTEC and had no effect on income from continuing operations or net income. In addition, due to the sale of the Company's remaining interests in its railcars (see Note 3), the Company's investment in its Rail car leasing business has been reclassified in the consolidated financial statements as discontinued operations for all periods presented. NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION Continuing operations paid interest, including interest allocated to discontinued operations, of approximately $41.7 million and $83.1 million for the first nine months of 1994 and 1993, respectively. Continuing operations paid approximately $2.8 million and $3.0 million principally for foreign and certain state taxes for the first nine months of 1994 and 1993, respectively. In a non-cash transaction during the nine months ended September 30, 1994, the Company received $169.5 million in notes receivable as part of the consideration for the sale of its fleet of railcars (see Note 3). 8 9 NOTE 3. DISCONTINUED AND ASSETS HELD FOR SALE In 1994, Itel continued to make significant strides in a strategy initiated more than three years ago. That strategy is to focus Itel on realizing the substantial growth opportunities of its principal operating unit, Anixter Inc. ("Anixter"). Most of Itel's other assets are being monetized in a manner aimed at maximizing value for Itel's shareholders. In line with this strategy, on July 25, 1994, Itel sold 99.5% of its remaining interests in its railcars for $35 million in cash and $169.5 million in notes receivable for an aggregate purchase price of $204.5 million. The notes receivable were not due until the end of 1998; however, the buyer prepaid all the notes and related interest in October 1994. The Company's remaining interest in the railcars was sold in October for cash of approximately $1 million. The net gain on the sale of the Company's entire interest in railcars was approximately $205 million. The total cash proceeds of approximately $205 million will be used to: (1) repay the $150 million Corporate senior bank term ("Term Loan"); (2) pay the related income tax liability of approximately $25 million caused by the sale which remained after utilization of the Company's NOL and ITC carryforwards; and (3) other general corporate purposes including the purchase of the Company's common stock. The finance business of Signal Capital Corporation ("Signal Capital") has been included as assets held for sale since acquisition in 1988. Subsequent to the purchase, Itel sold or liquidated portions of the portfolio including $855 million in 1989, $78 million in 1990, $157 million in 1991, $82 million in 1992, $80 million in 1993 and $32 million through September 30, 1994. The $143 million net portfolio at September 30, 1994 represents approximately 10% of the original acquired Signal Capital portfolio. The acquired Signal Capital portfolio is being liquidated and no material amounts of new loans or investments are being made by Signal Capital. Proceeds were used to repay indebtedness. The Company has had and continues to have discussions with third parties for the sale of substantial portions of the acquired Signal Capital portfolio of loans and leases. The Company continues to reduce the acquired Signal Capital portfolio in an orderly manner that maximizes its value to Itel shareholders. Absent such transactions, which the Company continues to pursue, such orderly liquidation is expected to continue over approximately the next two years. NOTE 4. MARKETABLE EQUITY SECURITIES LOSSES In the second quarter of 1994, the Company wrote down the value of its investment in marketable equity securities by $34.4 million. Also in the first quarter of 1994, the Company recorded a $5.2 million pre-tax loss on the sale of its investment in Catellus Development Corporation ("Catellus"). 9 10 NOTE 5. NON-RECURRING ITEMS The non-recurring item in 1994 reflects a $48.2 million pre-tax gain on the ANTEC Offering relating to the May 1994 public offering of shares of common stock of ANTEC (the "ANTEC Offering"). Itel provided income taxes relating to the recognized pre-tax book gain. Itel sold 4.0 million shares of ANTEC common stock at $21.75 per share. Net proceeds from the ANTEC Offering were approximately $83 million. As a result of the ANTEC Offering, Itel's ownership of ANTEC common stock was reduced from 53% to 33%. Non-recurring items in 1993 reflect an $84.5 million pre-tax gain on the 1993 initial public offering of shares of common stock of ANTEC ("ANTEC Initial Offering"). Itel provided income taxes relating to the recognized pre-tax book gain. Itel and ANTEC sold approximately 4.0 million and 5.4 million shares of ANTEC common stock, respectively, at $18 per share. Net proceeds from the ANTEC Initial Offering to Itel, after considering the redemption by ANTEC of preferred shares owned by Itel, were approximately $97 million. The non-recurring pre-tax gain on the ANTEC Initial Offering was offset by a $20.5 million non-recurring pre-tax loss in 1993 principally relating to the write-down of miscellaneous investments and certain non-operating assets to net realizable value. Approximately $19.1 million of this non-recurring pre-tax loss related to the liquidation of the Company's equity investment in Q-TEL. The remaining written-down equity investment and loans due from Q-TEL were liquidated during the later half of 1993 and 1994 without further gain or loss. NOTE 6. SUMMARIZED FINANCIAL INFORMATION OF ANTEC The Company has a 33% investment in ANTEC and accounts for ANTEC under the equity method. The following summarizes the financial information for ANTEC: 10 11 ANTEC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31, 1994 1993 ---------------- ---------------- (UNAUDITED) (IN MILLIONS) Assets: Current assets $ 201.5 $ 138.8 Property, net 12.5 5.6 Goodwill 101.8 92.3 Other assets 12.2 7.0 -------- -------- $ 328.0 $ 243.7 ======== ======== Liabilities and Shareholders' Equity: Current liabilities $ 82.9 $ 68.3 Long-term debt 71.7 18.0 Shareholders' equity 173.4 157.4 -------- -------- $ 328.0 $ 243.7 ======== ======== ANTEC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS) THREE-MONTH PERIODS NINE-MONTH PERIODS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 1994 1993 1994 1993 ---- ---- ---- ---- Revenues $ 138.1 $ 112.4 $ 414.9 $ 317.0 ======== ======== ======== ======== Operating income $ 9.6 $ 5.9 $ 30.2 $ 16.0 ======== ======== ======== ======== Income before income tax expense $ 8.3 $ 4.9 $ 27.5 $ 13.0 ======== ======== ======== ======== Net income $ 4.6 $ 2.5 $ 15.2 $ 6.7 ======== ======== ======== ======== Company's share of net income $ 1.8 $ 2.5 $ 7.2 $ 6.7 ======== ======== ======== ======== 11 12 NOTE 7. PRO-FORMA FINANCIAL RESULTS The following unaudited pro forma condensed consolidated financial information of the Company reflects the condensed consolidated results of continuing operations as if the sales of the Rail car leasing business and 20% of Itel's investment in ANTEC had occurred on December 31, 1992. The unaudited pro-forma condensed consolidated financial information is not necessarily indicative of the consolidated results of continuing operations as they might have been had the sales been consummated on the assumed dates. PRO-FORMA CONDENSED CONSOLIDATED SUMMARY OF INCOME (UNAUDITED) NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1994 1993 ---------------------------- ---------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenue $ 1,242.0 $ 1,328.6 Cost of operations, including amortization of goodwill (1,191.7) (1,282.8) --------- --------- Operating income 50.3 45.8 Interest expense and other, net (6.7) (41.1) Non-recurring items, net - 64.0 Equity earnings in ANTEC 5.1 6.4 Marketable equity securities losses, principally writedowns (39.6) (25.0) --------- --------- Income from continuing operations before income taxes 9.1 50.1 Income tax expense (3.1) (20.3) --------- --------- Income from continuing operations $ 6.0 $ 29.8 ======== ======== Preferred stock dividends $ - $ (3.0) ======== ======== Income from continuing operations per common and common equivalent share $ .18 $ .89 ======== ======== Weighted average common and common equivalent shares 32.5 30.1 ======== ======== 12 13 Pro-forma adjustments in the nine months ended September 30, 1994 reflect: (1) the interest savings arising from the assumed $260 million payment of debt at the average historical rate of 6.13% from the proceeds of the sales, (2) the reversal of the $48.2 million pre-tax gain on the sale of ANTEC, (3) the reduction of equity earnings in ANTEC from $7.2 million to $5.1 million and (4) the related net reduction of income tax expense. Pro-forma adjustments for the year ended December 31, 1993 reflects: (1) the reclassification of the results of operations of Itel's Railcar leasing business from continuing operations to discontinued operations, (2) the reclassification of the results of operations of ANTEC from the consolidated method to the equity method of accounting, (3) the interest savings arising from the assumed $260 million payment of debt at the average historical rate of 4.93% from the proceeds of the sales and the related increase in income tax expense and (4) the reduction of equity earnings in ANTEC from $8.4 million to $6.4 million. 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL LIQUIDITY AND CAPITAL RESOURCES SALE OF RAIL CAR LEASING BUSINESS: In 1994, Itel continued to make significant strides initiated more than three years ago. That strategy is to focus Itel on realizing the substantial growth opportunities of its principal operating unit, Anixter. Most of Itel's other assets are being monetized in a manner aimed at maximizing value for Itel's shareholders. In line with this strategy, on July 25, 1994, Itel sold 99.5% of its remaining interests in its railcars for $35 million in cash and $169.5 million in notes receivable for an aggregate purchase price of $204.5 million. The notes receivable were not due until the end of 1998; however, the buyer prepaid all the notes and related interest in October 1994. The Company's remaining interest in the railcars was sold in October for cash of approximately $1 million. The net gain on the sale of the Company's entire interest in railcars was approximately $205 million. The total cash proceeds of approximately $205 million will be used to: (1) repay the $150 million Term Loan; (2) pay the related income tax liability of approximately $25 million caused by the sale which remained after utilization of the Company's NOL and ITC carryforwards; and (3) other general corporate purposes including the purchase of the Company's common stock. ANTEC OFFERING: In May 1994, Itel completed a public offering of shares of common stock of ANTEC. Itel sold 4.0 million shares at $21.75 per share. Net proceeds from the ANTEC Offering were approximately $83 million. As a result of the ANTEC Offering, Itel's ownership of ANTEC common stock was reduced from 53% to 33%. LIQUIDATION OF SIGNAL CAPITAL: Signal Capital has been classified as assets held for sale since its acquisition in 1988. Subsequent to the purchase, Itel sold or liquidated portions of the portfolio including $855 million in 1989, $78 million in 1990, $157 million in 1991, $82 million in 1992, $80 million in 1993 and $32 million through September 30, 1994. The $143 million net portfolio at September 30, 1994 represents approximately 10% of the original acquired Signal Capital portfolio. The acquired Signal Capital portfolio is being liquidated and no material amounts of new loans or investments are being made by Signal Capital. The Company has had and continues to have discussions with third parties for the sale of substantial portions of the acquired Signal Capital portfolio of loans and leases. The Company continues to reduce the acquired Signal Capital portfolio in an 14 15 orderly manner that maximizes its value to Itel shareholders. Absent such transactions, which the Company continues to pursue, such orderly liquidation is expected to continue over approximately the next two years. CASH FLOW: Consolidated net cash used by continuing operating activities was ($33.6) million for the first nine months of 1994 compared to ($47.3) million for the same period in 1993. Cash used by continuing operating activities decreased due primarily to significantly improved earnings, after elimination of non-recurring items and losses on marketable equity securities, offset somewhat by increased working capital investment resulting from a 28% increased sales volume at Anixter. Consolidated cash provided for net investing activities was $131.1 million for the first nine months of 1994 versus $85.3 million for the same period in 1993. Consolidated investing activities in 1994 include approximately $82.8 million of proceeds from the ANTEC Offering and approximately $47.8 million from the sale of the Company's investment in Catellus. The 1993 period includes approximately $97.0 million of proceeds from the ANTEC Initial Offering. Consolidated cash used for net financing activities was ($131.3) million for the first nine months of 1994 in comparison to ($147.3) million for the first nine months of 1993. The consolidated net financing activities in 1994 and 1993 reflect significant repayment of subordinated and senior debt using proceeds from the ANTEC public offerings and the 1994 sale of the Company's investment in Catellus. The consolidated net financing activities in 1994 also include $77.6 million of treasury stock purchases. Cash from discontinued operations, net was $48.5 million for the first nine months of 1994 versus $114.2 million for the same period in 1993. Cash from discontinued operations in both periods reflects cash received principally from the reduction of Signal Capital assets which are held for sale and, in 1994, the receipt of $35 million on the sale of the Company's remaining interest in its railcar leasing business. Based upon discussions with financial analysts and similar disclosures provided by competitors of Itel's businesses, the Company considers operating income before amortization of goodwill and operating income plus depreciation and amortization of goodwill ("cash flow") to be meaningful and readily comparable measures of Itel's relative performance. On this basis, cash flow of Anixter was $64.9 million and $50.6 million for the nine months ended September 30, 1994 and 1993, respectively. FINANCINGS: In March 1994, the Company increased Anixter's secured revolving line of credit to $345 million, lowered the interest rate spreads and extended the expiration to 1997. The revolving line of credit is non-recourse to Itel and may be extended for two additional one-year periods at the option of the lenders. 15 16 At September 30, 1994, $150 million was available under the bank revolving lines of credit at Anixter, of which $61 million was available to Itel for general corporate purposes. On November 10, 1994, Itel obtained a $115 million senior bank term loan ("Corporate Loan") from a group of banks. The Corporate Loan is secured by the Company's investments in the capital stock of Anixter and ANTEC. The Corporate Loan matures annually as follows: 1995 - none; 1996 - $29 million; and 1997 - $86 million. DEBT MATURITIES AND REPAYMENTS: In the first nine months of 1994, the Company retired $100 million of the Term Loan. This loan is secured by the Company's investments in the capital stock of Anixter, ANTEC and Signal Capital and its investment in marketable equity securities. In October 1994, the Company repaid the remaining $150 million Term Loan with proceeds from the sale of Itel's Railcar leasing business. In the first nine months of both 1994 and 1993, the Company retired approximately $221 million of the face value of subordinated debt at Itel. NET OPERATING LOSS CARRYFORWARDS: To the extent of certain taxable income realized by the Company, liquidity is enhanced by potential tax benefits. As of December 31, 1993, the Company had cumulative net operating loss ("NOL") carryforwards for Federal income tax purposes of approximately $345 million expiring principally in 1995 through 2007, and investment tax-credit ("ITC") carryforwards of approximately $16 million expiring in 1994 through 2001. Certain of these carryforwards have not been examined by the Internal Revenue Service and, therefore, may be subject to adjustment. The availability of NOL and ITC carryforwards to reduce the Company's future Federal income tax liability is subject to various limitations under the Internal Revenue Code of 1986, as amended. The July sale of Itel's fleet of railcars will generate a taxable gain for Federal income tax purposes of approximately $500 million, which currently is expected to fully exhaust the aforementioned carryovers (see Note 2 of the Notes to the Condensed Consolidated Financial Statements). OTHER LIQUIDITY CONSIDERATIONS: Certain debt agreements entered into by Itel's subsidiaries contain various restrictions including restrictions on payments to Itel. Such restrictions have not had nor are expected to have an adverse impact on Itel's ability to meet its cash obligations. 16 17 CAPITAL EXPENDITURES AND ACQUISITIONS Consolidated capital expenditures were $12.3 million and $7.3 million for the first nine months of 1994 and 1993, respectively. RESULTS OF OPERATIONS In July 1994, Itel sold substantially all its remaining interests in its fleet of rail cars. Results of operations reflect the Rail car leasing business as discontinued operations. In May 1994, Itel sold in a public offering 4.0 million shares of common stock of ANTEC. As a result of the ANTEC Offering, Itel's ownership of ANTEC common stock was reduced from 53% to approximately 33%. Itel now reports ANTEC in its consolidated financial statements, for all periods presented, as an equity investment. QUARTER ENDED SEPTEMBER 30, 1994: Income from continuing operations for the third quarter of 1994 was $10.7 million compared with $42.5 million in the third quarter of 1993. Results in 1993 include an $84.5 million pre-tax gain on the ANTEC Initial Offering and a ($20.5) million non-recurring pre-tax loss principally relating to the write-down of the Company's equity investment in Q-TEL. Net income was $215.7 million and $29.6 million in the third quarter of 1994 and 1993, respectively. Income from discontinued operations in 1994 reflects a $205.0 million after-tax gain from the sale of the Company's Rail car leasing business. The Company retired or called for redemption a significant amount of its subordinated and senior debt resulting in an extraordinary net loss of ($10.9) million in 1993. Anixter's revenues during the third quarter of 1994 increased 33% to $456.3 million from $342.4 million in 1993 resulting from the continued growth of the U.S. business and continued penetration in the expansion countries. Revenues by Anixter's major markets are presented in the following table. 17 18 QUARTERS ENDED SEPTEMBER 30, --------------------------------- 1994 1993 ---------------- --------------- (IN MILLIONS) North America $ 364.8 $ 278.4 Europe 76.0 57.8 Asia and Latin America 15.5 6.2 ------- ------- $ 456.3 $ 342.4 ======= ======= The Company's consolidated operating income increased 54% to $19.9 million for the third quarter of 1994 from $12.9 million for the third quarter of 1993 and consolidated operating income before amortization of goodwill increased 49% to $21.4 million for the third quarter of 1994 from $14.4 million for the third quarter of 1993. Anixter operating income before amortization of goodwill increased 40% to $22.5 million in 1994 from $16.1 million due primarily to significantly improved sales volume in North America. Operating income (loss) before amortization of goodwill by Anixter's major markets is presented in the following table. QUARTERS ENDED SEPTEMBER 30, ---------------------------------- 1994 1993 ---------------- --------------- (IN MILLIONS) North America $ 21.0 $ 17.9 Europe 1.6 - Asia and Latin America (.1) (1.8) -------- ------- $ 22.5 $ 16.1 ======== ======= Consolidated net interest expense and other for the third quarter of 1994 declined to $4.7 million from $10.5 million in 1993 due primarily to the use of proceeds from the continued monetization of Itel's non-core assets to significantly reduce high-cost subordinated debt. NINE MONTHS ENDED SEPTEMBER 30, 1994: Income from continuing operations for the first nine months of 1994 was $30.2 million compared to $39.0 million in the first nine months of 1993. Results in 1994 include a $48.2 million pre-tax gain on the ANTEC Offering and a ($34.4) million pre-tax charge associated with the write-down of the Company's investment in marketable equity securities. Results in 1994 also include a pre-tax loss of ($5.2) million relating to the sale of the Company's investment in Catellus. Results in 1993 include an $84.5 million pre-tax gain on the ANTEC Initial Offering and a ($20.5) million non-recurring pre-tax loss principally relating to the write-down of the Company's equity investment in Q-TEL. Net income was $233.9 million and 18 19 $21.4 million in the first nine months of 1994 and 1993, respectively. Income from discontinued operations in 1994 reflects a $205.0 million after-tax gain from the sale of the Company's Rail car leasing business. The Company retired or called for redemption a significant amount of its subordinated and senior debt resulting in an extraordinary net loss of ($10.9) million in 1993. Anixter's revenues during the first nine months of 1994 increased 28% to approximately $1.2 billion from $1.0 billion in 1993 resulting from the continued growth of the U.S. business and continued penetration in the expansion countries. Revenues by Anixter's major markets are presented in the following table. NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1994 1993 ---------------- -------------- (IN MILLIONS) North America $ 979.6 $ 780.3 Europe 224.7 172.2 Asia and Latin America 37.7 16.4 --------- -------- $ 1,242.0 $ 968.9 ========= ======== The Company's consolidated operating income increased 43% to $50.3 million for the first nine months of 1994 from $35.2 million for the first nine months of 1993 and consolidated operating income before amortization of goodwill increased 39% to $54.8 million for the first nine months of 1994 from $39.5 million for the first nine months of 1993. Anixter operating income before amortization of goodwill increased 30% to $58.0 million from $44.7 million due primarily to significantly improved sales volume in North America. Operating income (loss) before amortization of goodwill by Anixter's major markets is presented in the following table. 19 20 NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1994 1993 ---------------- --------------- (IN MILLIONS) North America $ 55.2 $ 47.7 Europe 4.3 1.3 Asia and Latin America (1.5) (4.3) ------ ------ $ 58.0 $ 44.7 ====== ====== Consolidated net interest expense and other for the first nine months of 1994 declined substantially to $18.7 million from $42.2 million for the first nine months of 1993 due primarily to the use of proceeds from the continued monetization of Itel's non-core assets to significantly reduce high-cost subordinated debt. The impact of interest rate swaps and caps on interest expense, net for the nine months ended September 30, 1994 and 1993 was to increase interest expense by approximately $5.9 million and $8.4 million, respectively. 20 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27, Financial Data Schedule (b) Reports on Form 8-K On November 7, 1994, Itel filed a Report on Form 8-K relating to Item 2, Disposition of Assets, to describe Itel's agreement to sell 99.5% of Itel's remaining interests in Itel's fleet of railcars to SCAP Associates, L.L.C. for $35 million in cash and $169.5 million in notes receivable. 21 22 SIGNATURES Pursuant to the requirements 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. ITEL CORPORATION Date: November 14, 1994 By: /s/ Rod F. Dammeyer ----------------------------------- Rod F. Dammeyer President and Chief Executive Officer Date: November 14, 1994 By: /s/ John P. McNicholas, Jr. ------------------------------------ John P. McNicholas, Jr. Vice President - Controller and Chief Accounting Officer