<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
COMMISSION FILE NUMBER 0-21822
ADVANCE ROSS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-3878407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
233 SOUTH WACKER DRIVE, SUITE 9700 60606-6502
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (312) 382-1100
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
--------------------------------------------- ---------------------------------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.01 PAR VALUE)
(Title of class)
5% CUMULATIVE PREFERRED STOCK ($25 PAR VALUE)
(Title of class)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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/
State the aggregate market value of the voting stock held by nonaffiliates*
of the Registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
The value on March 13, 1995 was $73,721,756.
The Registrant had 3,435,020 common shares outstanding at March 13, 1995.
Documents incorporated by reference -- Portions of the Registrant's Proxy
Statement for the Registrant's Annual Meeting of Shareholders currently
scheduled to be held on June 5, 1995 are incorporated by reference into Part III
of this Report.
Index to Exhibits -- page 38
* Based on reported beneficial ownership by all directors, officers, and
beneficial owners of more than 5% of the Registrant's voting stock; however,
this determination does not constitute an acknowledgment of affiliate status
for any of these holders.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 7
Item 3. Legal Proceedings........................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....... 9
Item 6. Selected Financial Data..................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 10
Item 8. Financial Statements and Supplementary Data................................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 13
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 13
Item 11. Executive Compensation...................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 13
Item 13. Certain Relationships and Related Transactions.............................. 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 14
SIGNATURE PAGE.......................................................................... 16
LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBIT................. 17
INDEX TO EXHIBITS....................................................................... 38
</TABLE>
Unless otherwise indicated, the "Company," as used in this Annual Report,
refers to Advance Ross Corporation, its predecessors and subsidiaries.
All monetary amounts other than earnings per share and prices of shares are
in thousands.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
THE PRIMARY BUSINESS: TAX-FREE ACTIVITIES
Overview
The primary business of Advance Ross Corporation (the "Company") is the
operation of a value-added tax ("VAT") refund system serving travelers shopping
in Europe. This business is conducted through the Company's wholly-owned
subsidiary, Europe Tax-free Shopping AB ("ETS"), and operates under the logo
"Tax-free for Tourists." ETS is the largest VAT refund service in Europe. The
Company acquired ETS on November 2, 1992.
ETS's business is based upon serving (i) travelers, by making purchases
less expensive through ETS's convenient, efficient and reliable VAT refunds; and
(ii) retailers, by promoting the benefits of tax-free shopping, thereby
enhancing the retailers' business and simplifying the retailers' administrative
burden. ETS's business is also based upon (i) VAT's role as a vital component of
the tax policy of most European (and many other) countries; and (ii) tourism,
international travel and retail being among the world's largest industries.
ETS began its operations in 1980 in Sweden. Since then, ETS has expanded
throughout Europe and currently provides VAT refunds in 17 European countries at
refund points at most international airports, ferry terminals and border
crossings.
Value-added Tax (VAT)
VAT is a tax which is charged on the added value at each stage of
production of an item and is finally borne by the end purchaser. For the
consumer, the tax is similar to a sales tax. VAT is an important government
revenue source in many countries throughout the world, including most of Europe.
In Europe, VAT is included in the retail sales price displayed in stores; the
typical VAT rate ranges from 15 to 25 percent. However, export goods are
generally exempted from VAT, including purchases by foreign travelers who take
their purchased goods out of the country. Although foreign travelers pay VAT
when they make their purchases, they are entitled to a refund when they leave
the country with the purchased goods, satisfying the export exemption. Thus,
ETS's refund system represents an effective price discount to the tourist, which
discount is not borne by the retailer.
Not all foreign travelers are entitled to a VAT refund. Generally,
residents from countries within a trade bloc are not entitled to VAT refunds
from other countries in that trade bloc. The two major trade blocs affecting
ETS's business are the European Union which, as of December 31, 1994, included
12 countries, and the European Free Trade Association which, as of December 31,
1994, included seven countries. Thus, for example, a German tourist traveling to
France is not entitled to a VAT refund since Germany and France are both part of
the European Union. On January 1, 1995, Austria, Finland and Sweden joined the
European Union and withdrew from the European Free Trade Association. See
"International Considerations" for a discussion of the European Union and
European Free Trade Association.
How the ETS System Works
ETS has established affiliations with over 90,000 retail outlets in 17
European countries. The retailers display ETS logos and flags, which promote the
opportunity for tax-free shopping and identify the stores using the ETS System
for VAT refunds.
When a traveler eligible for a VAT refund makes a purchase, his or her
payment includes VAT. At an ETS-affiliated retailer, the traveler would receive
at the time of purchase an ETS Tax-free Shopping Cheque (the "Cheque") for the
amount of the refund, which is the VAT on the sales amount less the ETS service
charge. The salesperson then informs the traveler how to cash the Cheque. On the
traveler's departure from the country with the goods, the Tax-free Shopping
Cheque is stamped by Customs, certifying the purchase as export goods. The
traveler then goes to the nearby ETS refund point and cashes the Cheque. Refunds
are
1
<PAGE> 4
typically paid in cash, but can also be paid by check or credited to a bank or
credit card account, if the customer so prefers. ETS has its own or contract
agent refund points at most international airports, ferry terminals and border
crossings.
The cashed Cheque is registered in the ETS computer system. ETS then bills
the retailer for the full amount of the VAT collected, which represents the
customer's refund plus ETS's service charge. The sale can then be recorded by
the retailer as a tax-free export and, thus, becomes VAT-exempt for the
retailer, i.e., no VAT is paid by the retailer on that purchase.
Marketing the ETS System
The success of the ETS System depends on, among other things, the volume of
travelers obtaining Tax-free Shopping Cheques. Effective marketing of the ETS
System is an important ingredient in generating this volume. ETS's basic
marketing strategy is to focus on those tourists who have already chosen to
visit a particular market. This means that sales and promotional activities in
the stores are essential components of ETS's marketing efforts. In addition to
signage and flags displaying the "Tax-free for Tourists" logo placed in
affiliated stores, ETS trains store personnel in using the ETS System and
promoting the System to international visitors.
Successful marketing efforts benefit retailers by promoting larger sales
volume, benefit tourists by making them aware of and providing to them easy and
convenient VAT refunds, and benefit ETS by increasing the volume of VAT refunds
on which it earns its service charge.
ETS seeks to affiliate a wide range of retailers, emphasizing those which
appeal particularly to international travelers, including tourist-oriented
stores and boutiques. There, one finds the type of goods sold at price levels at
which the VAT refund represents a significant discount for the customer and
provides an incentive for the retailer to promote tax-free shopping to its
customers. In addition, ETS publishes a number of city and country shopping
guides which promote the shops affiliated with ETS, provide useful tourist
information and explain the ETS System. In 1993, the Company began marketing its
services through U.S. travel agents and tour operators.
Tourism and Shopping Patterns
ETS is dependent on the volume of tourism and tourist shopping in the
European countries in which it operates. Tourism is one of the world's largest
industries and has been a growth sector since the Second World War. From 1984
through 1994, world tourism arrivals grew at a compound annual rate of 5.1
percent and international tourist receipts grew at a compound annual rate of
11.4 percent according to the World Tourism Association.
The positive trend in world tourism is expected to continue. Improved and
more accessible communications, increased standards of living for many groups of
people around the world and greater interest in ever-expanding travel
opportunities should bring even more business to the travel and tourism
industry. There are about 95 million European country arrivals a year by
tourists eligible for VAT refunds. Slightly less than half are from countries
outside Europe.
Shopping is a leading part of travelers' activities. The average tourist
spends between 10 and 30 percent of his or her expenditures in a country in
local shops or department stores. The shopping volume on which tourists are
eligible to reclaim their VAT in the European markets in which ETS operates was
estimated by ETS to be around $6.9 billion in 1994. The shopping volume on which
eligible tourists reclaim their VAT in these markets was estimated by ETS to be
approximately $3.9 billion. The retail sales on which ETS refunded VAT was about
$1.7 billion of this amount.
Current and Future Operations
ETS holds leading market positions for VAT refunds in all 17 markets in
which the Company operates. ETS operations in both the United Kingdom and France
are conducted by 50-50 joint ventures with Fexco International Ltd. The U.K.
joint venture has concessions for cash refunds at London's Heathrow and
2
<PAGE> 5
Gatwick airports, the main exit points for tourists. In 1993, ETS began
operations in Spain, Greece, Slovenia and Hungary. In 1995, ETS plans to begin
operations in at least three more countries, including Switzerland. It generally
takes up to three years for new operations to begin to be profitable. See
"International Considerations -- VAT Levels and Regulations" below.
Other Tax-free Activities
In addition to its VAT refund operations, ETS is involved in the sale of
duty-free perfumes and cosmetics at a shop at Landvetter Airport, outside
Gothenburg, Sweden. This business contributes to the profitability and cash flow
of ETS. The majority of the store's customers are Swedish citizens. The lease at
the airport was renewed in 1994 and expires in 1998. The rent on the lease is
based upon a percentage of the revenues from the store. ETS also operates
another shop at Landvetter Airport selling unique Swedish goods. See
"International Considerations -- Duty-free Regulation."
Patents and Trademarks
The "Tax-free for Tourists" logo is a significant trademark. No patents or
trademarks are used in connection with the duty-free perfume and cosmetics and
gift stores.
Seasonality of Business
ETS's business is closely tied to the "tourist season" in Europe and is,
accordingly, highly seasonal. The months of January, February, March, April and
December are the least active for ETS. From May, the start of the traditional
tourist season in Europe, ETS has historically operated at a generally
accelerating rate of profit, peaking in about August and September and then
declining in October and November.
Financial Liquidity
ETS pays to the traveler a VAT refund net of a service charge and then
bills the retailer for the full amount of the VAT collected, which represents
the customer's refund plus ETS's service charge. On average, the invoices to the
retailers are paid within 40 days. ETS borrows funds on a short-term basis to
finance working capital requirements, particularly during the peak months of
tourist travel.
Employees
The Company's tax-free businesses, including both VAT refund operations and
the duty-free perfume and cosmetics and gift stores in Sweden, employed
approximately 280 people on a full-time basis at December 31, 1994.
Raw Materials/Inventory
In connection with the operation of the duty-free stores, inventory is
purchased from various manufacturers of perfume and cosmetics. No problems are
foreseen in purchasing inventory.
Competition
Competition to the ETS System comes from two sources. First, a tourist has
the option in most countries to fill out and submit by mail the government
customs/rebate forms. These forms are stamped by Customs as tourists are leaving
a country. The travelers are then required to mail or otherwise return the forms
to the stores where the goods were purchased in order to obtain a refund. There
are several ways by which stores then refund the VAT. The stores generally mail
refunds to travelers' home countries, often by way of check denominated in a
foreign currency, which must then be converted. Alternatively, the stores may
effect the refund through use of the traveler's credit card account. Credit card
VAT refunds are commonly used in France and Belgium. In general, the foregoing
constitutes passive competition and involves a relatively cumbersome and
time-consuming procedure. Moreover, the certainty and convenience of the ETS
System
3
<PAGE> 6
and its cash refunds distinguish ETS. A second source of competition is
companies that compete with ETS as VAT refund operators on a local level. None
of these companies competes with ETS on a pan-European basis.
International Considerations
Economic Factors -- The continued success of ETS is dependent upon, among
other things, the volume of tourism in Europe and the strengths of the economies
in the countries of origin of ETS's major customer groups. From an operating
viewpoint, the ideal economic environment for ETS is a politically and
economically stable world with strong economic growth outside Western Europe and
relatively weak European currencies. For example, growth in the U.S. and
Japanese economies, and a stronger U.S. dollar and Japanese yen should have a
positive impact on ETS sales because of the higher purchasing power of U.S. and
Japanese travelers. See "Currency Fluctuations" below.
European Union -- The European Union (the "EU" or the "Union," formerly the
European Community) was founded in 1956 and included Belgium, Denmark, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain
and the United Kingdom as of December 31, 1994. In 1960, the European Free Trade
Association ("EFTA") was established as an alternative trading bloc. As of
December 31, 1994, the EFTA countries included Austria, Finland, Iceland,
Liechtenstein, Norway, Sweden and Switzerland. As further discussed below, as of
January 1, 1995, Austria, Finland and Sweden joined the EU and withdrew from
EFTA.
On January 1, 1993, the international borders within the European Union
disappeared for many purposes. Departure control of travelers and goods now
takes place at the final point of departure from the EU. This means that EU
Member States have to coordinate customs procedures and passenger controls at
the exits from the Union. Customs validation of goods for export is now carried
out when the traveler leaves the Union, not when he or she leaves the Member
State where the goods were purchased for another Member State. This regime
affects the procedure of certification of travelers who have been shopping in an
EU country other than the one from which they depart. The Company believes that
ETS's unique pan-European presence is an important convenience to travelers and
a competitive advantage for ETS.
Three EFTA countries, Austria, Finland and Sweden, joined the EU effective
January 1, 1995. Norway voted against EU membership. The decision by these three
countries will adversely affect sales in 1995. ETS will be adversely affected
since EU resident travelers to these three EFTA countries and travelers from
these three countries who shop in EU countries will no longer be entitled to VAT
refunds. Management estimates that such sales represented approximately 9 and 11
percent of ETS's sales in 1994 and 1993, respectively. It is expected, however,
that the Company's expansion efforts, both to countries not served by ETS and by
greater activity with non-affected tourists will at least, in part, offset this
prospective loss.
VAT Levels and Regulations -- ETS's business is subject to a number of
factors specifically related to VAT including the continuation of the VAT refund
system under hospitable regulations. In particular, the level of VAT is crucial
to the size of the service charge which ETS can charge the shopping tourist. The
higher the VAT, the more opportunity there is for a satisfactory margin for ETS.
On average, ETS charges just over one-fifth of the VAT as a service charge. This
service charge covers ETS's costs of making the refund, marketing the tax refund
opportunity to tourists and administering the whole process of funding and
recouping amounts paid to the tourist as well as giving a return on the
investments which ETS has made.
VAT rates and administrative rules for travelers seeking VAT reimbursement
vary across Europe. The EU's minimum VAT rate is 15 percent with individual
country rates varying between 15 and 25 percent. The Nordic countries have
relatively high VAT rates of between 22 and 25 percent. In these countries, the
VAT refund programs are well-established and frequently used. The rules stating
a minimum purchase amount to qualify for VAT refund are also favorable in these
countries making it possible to use the refund option for relatively small
purchases. Austria also has a well-developed VAT refund system and a VAT level
of 20 percent. The other EU countries generally range form 15 to 20 percent. The
EU has a stated objective to even out its Members' VAT levels in the long term
as part of increasing integration among the Member States.
4
<PAGE> 7
If the government-set minimum size of purchase eligible for VAT refund is
set too high, ETS's revenues would be adversely affected. As of January 1, 1994,
minimum traveler purchases per store necessary to qualify for VAT refunds ranged
from a low of $12 in Sweden to $340 in France. There were reductions in the
minimum purchase amounts in Italy on January 1, 1993 from $600 to $200 plus the
VAT and, in Spain, on January 1, 1993 from $600 to $100.
Political Factors -- ETS's business is also affected by political unrest
and war. Tourism was adversely affected in 1991 as a result of the Gulf War
although a number of tourists revised their travel plans and visited Northern
Europe.
Currency Fluctuations -- The day-to-day operations of ETS are not
materially affected by fluctuations in local currencies because ETS does not
maintain a large cash balance in any one country, and working capital loans are
obtained in major local currencies.
Fluctuations in the U.S. dollar versus the Swedish krona, German deutsche
mark and other European currencies can affect the financial results of ETS. A
strong dollar (weak dollar) versus the Swedish krona and German deutsche mark
will reduce (increase) the dollar value of reported operating results of ETS.
Counter to this impact, (i) a strong dollar (weak dollar) will generally lead to
more (less) American and other dollar-oriented purchases in Europe, and (ii) the
debt used to acquire ETS is denominated in Swedish kronor and German deutsche
marks.
Duty-free Regulation -- The EU has limitations on the amount of duty-free
cosmetics and perfume purchases that EU citizens may make and has indicated that
it plans to eliminate all duty-free shopping by EU citizens in 1999. This fact,
in combination with Sweden joining the EU, would have a negative impact upon
sales at ETS's store at Landvetter Airport, outside Gothenburg, Sweden, at that
time.
POLLUTION CONTROL EQUIPMENT
Overview
The Company designs, manufactures and installs electrostatic precipitators
for industrial pollution control purposes through its subsidiary, PPC
Industries, located in Longview, Texas. PPC also designs and installs patented
biofiltration pollution control installations. PPC represented about 14 and 13
percent of the Company's net sales and services in 1994 and 1993, respectively.
Raw Materials
Raw materials for the manufacture of electrostatic precipitators are
obtained on a purchase order basis and are available in adequate supply from a
variety of suppliers, primarily in the basic steel industry.
Seasonality of Business
The sales of electrostatic precipitators and biofiltration systems are not
significantly seasonal.
Payment Terms
Most units are manufactured under contracts which require the purchaser to
make a down-payment of 10 percent at the time of execution of the sales contract
and to make progress payments as materials are purchased and work is performed.
Usually, the customer will retain 10 percent of the purchase price until
acceptance of the unit, which is typically less than a year from date of
completion.
Customers and Distribution
The electrostatic precipitators are sold by Company personnel directly to
the users of the products, which are a variety of customers. During the last
three years, the Company's customers were primarily wood products companies and
independent power producers.
5
<PAGE> 8
Electrostatic precipitators are capital equipment that is purchased only as
needed by the Company's customers. The manufacture of electrostatic
precipitators is to customer specifications; no units are manufactured for
inventory. The financing of the Company's sales of electrostatic precipitators
has been through internally generated funds.
No customer accounted for more than 10 percent of consolidated net sales
and services in 1992, 1993 or 1994.
Patents and Trademarks
In 1992, the Company entered into a U.S. license agreement covering 44
states for a patented biofiltration technology designed to eliminate hazardous
material odors caused by manufacturing processes. The technology uses
micro-organisms to biologically filter air which contains pollutants resulting
from industrial waste. The technology is expected to be used in various
industries, such as wood products, sewage, brewery, chemicals, metal finishing,
food, bakery, paint, paper, printing, plastics and other industries where the
manufacturing process creates significant odors. The Company's initial biofilter
installations have been in the wood products and food industries.
Government Contracts
No material part of the pollution control business is subject to
renegotiation of profits or termination of contracts at the election of the
Federal Government.
Competition
The market for electrostatic precipitators is highly competitive.
Competition is based on a combination of price, service and product quality.
Research and Development
Expenditures with respect to the pollution control business for research
and development are not material.
Environmental Regulations
Compliance with federal, state and local regulations and laws which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, is not
expected to have a material effect upon the capital expenditures, earnings and
competitive position of the Company's pollution control business.
Employees
As of December 31, 1994, the Company employed approximately 40 people in
its pollution control business.
Backlog
The sales backlog of pollution control equipment, as of December 31, 1994
and 1993, was $5,008 and $1,800, respectively. All of the current backlog is
expected to be delivered in 1995.
6
<PAGE> 9
GENERAL AND OTHER BUSINESS INTERESTS
The Company, through its wholly-owned subsidiary, Uintah Basin, Inc., is
the general partner and 25 percent owner of Uintah Basin Limited Partnership.
The Limited Partnership owns approximately 19,220 acres of land in Uintah
County, Utah. Twenty-three core holes have been drilled on this property. In all
instances, oil shale was intersected. Subsequent geologic evaluations have
indicated oil shale deposits which range in depth from 200 feet to 1,300 feet.
However, no estimate was made of how much, if any, of this resource could be
economically recovered.
The Company also owns 4.8 percent of GeoWaste Incorporated ("GeoWaste"), a
publicly held company. GeoWaste is in the business of owning, operating,
acquiring and developing non-hazardous solid waste landfills. In addition,
GeoWaste has stated that it may own, operate or acquire collection,
transportation, transfer and related environmental service operations if such
business will enhance the long-range success of its landfill business.
There are seven employees at the Company's corporate headquarters located
at 233 South Wacker Drive, Chicago, Illinois 60606.
ITEM 2. PROPERTIES.
The corporate headquarters of the Company are located at 233 South Wacker
Drive, Chicago, Illinois, in approximately 5,000 square feet of office space,
held under a lease expiring September 1, 2004.
The Company's tax-free activities lease approximately 49,000 square feet in
facilities throughout Europe. The space is used for office administration and
for conducting duty-free operations. Most of the space is rented on a short-term
basis, usually less than five years, at annual rates which may include
escalation clauses. At three locations, the rent is based upon a percent of the
revenues generated at that location; rent for several other locations is a base
amount plus a percentage of revenue.
The Company's pollution control equipment plant and sales office are
located in Longview, Texas, on 6.72 acres owned in fee. The plant contains
approximately 44,000 square feet of manufacturing and office space.
The Company sold land and a building in California in September 1994.
The property of Uintah is described in Item 1. above.
ITEM 3. LEGAL PROCEEDINGS.
Litigation and Environmental Matters
Washington State Department of Transportation v. Washington Natural Gas
Company et al. (United States District Court Eastern District of Washington).
The Company was one of three defendants in a lawsuit filed by the Washington
State Department of Transportation ("WDOT") claiming approximately $6 million
(allegedly incurred in cleaning up coal tar which WDOT encountered while
building a highway in Tacoma, Washington, in the mid-1980s) of joint and several
liability against each of the defendants for violations of the Comprehensive
Environmental Response Compensation and Liability Act 42 U.S.C. 9601. The claims
against the Company were based upon the allegations that the Company owned or
operated a coal gasification facility, directly or through corporate
subsidiaries, in the relevant location during the period from 1910 through 1924.
The lawsuit was tried in November 1992 and, in December 1992, judgment was
entered in favor of the defendants and against the plaintiff, finding no
liability on the part of the Company. That case has been appealed by WDOT, and
oral arguments were completed in April 1994. No rulings have been made to date
with respect to the appeal.
On May 10, 1994, WDOT filed a state court action against the same three
defendants who were named in the United States District Court lawsuit referenced
above, and a fourth defendant. This lawsuit is in the Superior Court for the
County of Pierce, State of Washington. It is in most respects virtually
identical to the federal lawsuit, but is based on state environmental statutes
rather than federal law. As in the previous lawsuit, the claimed damages are for
approximately $6 million incurred in cleaning up coal tar from WDOT's highway
7
<PAGE> 10
right-of-way. On June 10, 1994, this lawsuit was stayed pending resolution of
the federal lawsuit by the United States Court of Appeals for the Ninth Circuit.
The Washington Department of Ecology ("DOE"), in December 1992, identified
the Company as a potentially liable person ("PLP") for cleanup costs at the
Tacoma Coal Gasification Site in Tacoma, Washington ("Site"). This Site includes
part of the property involved in the WDOT case described above, and is part of
the much larger Commencement Bay Superfund site, at which the United States
Environmental Protection Agency and DOE are now coordinating cleanup activities.
A number of other PLPs have been identified, and the DOE is in the process of
conducting a limited site investigation to implement interim source control
measures and to remediate any contaminated sediments. Since the cleanup
activities for the Site have not yet been determined, and since the Company's
potential share, if any, of the cleanup costs is not known, the Company's
potential liability cannot now be quantified. The Company has advised the DOE
that it is not responsible for any of the alleged contamination and that its
liability, if any, is de minimis, although it does plan to cooperate with the
DOE at least in the limited site investigation stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
<PAGE> 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The sole class of common equity of the Company is traded on the NASDAQ
National Market System (trading symbol AROS). The following table sets forth,
for the calendar periods indicated, the range of high and low last reported
sales prices of the Company's common shares as reported by NASDAQ.
The prices per share have been adjusted to reflect the two-for-one stock
split declared on January 10, 1994.
<TABLE>
<CAPTION>
LOW HIGH
1994 PRICES PRICES
---------------------------------------------------------------- ------ ------
<S> <C> <C>
First Quarter................................................... $15 3/8 $22 1/4
Second Quarter.................................................. 14 3/4 30 1/4
Third Quarter................................................... 18 3/4 29 1/4
Fourth Quarter.................................................. 18 1/2 24
<CAPTION>
1993
----------------------------------------------------------------
<S> <C> <C>
First Quarter................................................... $ 6 1/2 $ 9 1/4
Second Quarter.................................................. 6 5/8 8 3/8
Third Quarter................................................... 8 10 1/1
Fourth Quarter.................................................. 9 1/4 18 5/8
</TABLE>
As of December 31, 1994, there were 3,267 shareholders of record owning the
outstanding common stock and 555 shareholders of record owning the outstanding
5% cumulative preferred stock.
The Company did not pay any dividends on its common stock in 1994 or 1993.
While the Company has not been paying any dividends on its common stock and
although there can be no assurance that any dividend will be paid in the future,
the payment of dividends will be considered from time to time.
ITEM 6. SELECTED FINANCIAL DATA (THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS).
The earnings per share data have been adjusted to reflect the two-for-one
stock split declared on January 10, 1994.
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales and services......................... $66,503 $50,288 $11,041 $ 5,870 $ 3,314
Income before equity in profit (loss) of
unconsolidated affiliates.................... 7,472 4,659 612 7,289 2,664
Equity in profit (loss) of unconsolidated
affiliates................................... 874 428 57 (19) (2)
------- ------- ------- ------- -------
Net income..................................... 8,346 5,087 669 7,270 2,662
Earnings per share data:
Primary...................................... 1.93 1.29 .18 1.97 .68
Fully diluted................................ 1.93 1.19 .17 -- --
Working capital................................ 20,398 10,366 5,538 21,603 12,908
Total assets................................... 64,120 51,061 50,160 26,258 17,483
Long-term obligations.......................... 8,087 8,584 11,234 44 --
Cash dividends per share:
Preferred stock.............................. 1.25 1.25 1.25 1.25 1.25
</TABLE>
Net sales and services increased from 1990 to 1991 as a result of increased
volume and larger pollution control equipment contracts. The increases in 1992
and 1993 are primarily attributable to the results of ETS which was acquired
November 2, 1992. The increase from 1992 to 1993 also reflects higher pollution
control equipment sales. The increase from 1993 to 1994 reflects both higher
sales at ETS and higher pollution control equipment sales.
9
<PAGE> 12
The increases in net income, working capital and total assets in 1991 were
primarily the result of the sale of an investment in NaTec Resources, Inc.
common stock in April 1991 for a gain of $11,727 before income taxes. The stock
was sold to an unrelated party.
The decrease in working capital and the increases in total assets and
long-term obligations in 1992 were primarily the result of the acquisition of
ETS in November 1992 from an unrelated party. The increases in net income and
working capital in 1993 were primarily the result of earnings and cash flow
generated from ETS. The increases in net income, working capital and total
assets in 1994 reflect the continuing increase in earnings and cash flow from
ETS and improved performance at PPC. Working capital and total assets also
increased due to higher receivables as ETS's business was stronger later in the
year than in prior years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS).
Overview
The acquisition of ETS in November 1992 marked a strategic change in the
business of the Company. Until then, the Company's business was designing,
manufacturing and installing electrostatic precipitators for pollution control
purposes. The acquisition of ETS highlights management's focus on seeking to
enhance shareholders' investment by growing internally and through acquisition
in selected tourism-, travel-, and retail-related service businesses.
Fluctuations in the dollar versus the Swedish krona, German deutsche mark
and other European currencies can affect the financial results of ETS. A strong
dollar (weak dollar) versus the Swedish krona and German deutsche mark will
reduce (increase) the dollar value of reported operating results of ETS. Counter
to this impact, (i) a strong dollar (weak dollar) will generally lead to more
(less) American tourist purchases in Europe, and (ii) the debt used to acquire
ETS is denominated in Swedish kronor and German deutsche marks. The ideal
economic environment for ETS is a politically and economically stable world with
strong economic growth outside Western Europe and relatively weak European
currencies.
Operations
Sales in 1994 increased by $16,215 to $66,503, or 32.2%, compared to
$50,288 in 1993 due to strong performance in both tax-free activities and
pollution control products. Gross profit in 1994 increased by $8,608 to $23,204,
or 59.0%, from $14,596 in 1993 due to the higher level of sales and an increase
in gross margin. Gross margin increased to 34.9% from 29.0%. As further
discussed below, 1993 results were negatively affected by a change in the
estimated lives of software and computer equipment, and a charge for the
unamortized cost of a technology license. Excluding the impact of these two
items, gross profit and gross margin in 1993 would have been $15,618 and 31.1%,
respectively.
Operating income in 1994 increased by $6,644 to $16,113, or 70.2%, from
$9,469 in 1993 due to higher sales and higher gross margin. Operating margin
increased to 24.2% from 18.8%. Adjusted for the above-cited software change and
technology license charge, 1993 operating income and operating margin would have
been $10,491 and 20.9%, respectively. Selling, general and administrative
expenses were 10.7% of sales compared to 10.2% in 1993. Higher marketing and
sales expenses at ETS and higher levels of incentive compensation due to the
strong performance of the Company were offset by lower professional fees.
Interest expense in 1994 declined by $591 to $1,499 due to lower interest
rates and lower debt. Other income was flat as a $341 increase in interest
income was offset by a loss on the sale of real estate in California and higher
bank charges and currency losses in the tax-free activities. Equity earnings in
unconsolidated subsidiaries increased by $446. The Company's results were
affected by amortization of goodwill of $969 and $951 in 1994 and 1993,
respectively, from the ETS acquisition.
The Company's effective tax rate increased to 46.8% from 31.9% in 1993.
This increase resulted primarily because income taxes are currently payable in
certain highly taxed European countries, such as Germany and Italy, which have a
significant portion of the Company's taxable income that cannot be offset by
losses
10
<PAGE> 13
incurred in other European countries or the United States. Consolidated net
income was $8,346 in 1994 compared to $5,087 in 1993.
As discussed above, the Company's 1993 results were negatively affected by
the shortened estimated lives of software and computer equipment ($495 net of
income tax) and by charging to expense the unamortized cost of a technology
license ($225 net of income tax). Because of rapid changes in computer
technology, the Company's ETS subsidiary elected in the 1993 fourth quarter to
depreciate all computer equipment over three rather than five years and to
expense software rather than amortize the cost over five years, which was the
previous policy. As of year-end 1993, the Company had only nominal sales using
its multi-year license for a patented biofiltration technology designed to
eliminate odors caused by manufacturing processes. While the Company is hopeful
for the longer-term prospects for this technology, at that time the Company
believed that near-term sales were likely to be limited; therefore, the
unamortized cost of this license was charged to expense.
The results of ETS's operations in 1992 are reflected in the Company's
consolidated financial statements for only the two-month period of November and
December. Over half of 1992 consolidated sales was a result of ETS's operations
during November and December 1992. The Company's 1992 performance was negatively
impacted by two nonrecurring charges, totaling approximately $525, reflecting
legal costs incurred in connection with the litigation and environmental matters
discussed in Item 3, and costs associated with the terminated acquisition of
Environmental Services of America, Inc.
Because of the impact of the acquisition of ETS on the Company's results
for 1992 and 1993, a comparison of the financial results between 1993 and 1992
and earlier years is not meaningful.
Financial Position
At December 31, 1994, the Company had cash and cash equivalents totaling
$13,539 and long-term debt, resulting from the acquisition of ETS, of $6,707
compared to $10,142 and $7,497, respectively, at December 31, 1993. The
Company's working capital at December 31, 1994 was $20,398. The Company believes
it has ample funds and access to financing to continue its operations in the
manner currently conducted.
Capital expenditures for 1995 are expected to be approximately $1,400.
Capital expenditures for 1995 are expected to be financed by funds from
operations. If any acquisitions are completed, additional financing may be
required.
ETS's business is closely tied to the "tourist season" in Europe and is,
accordingly, highly seasonal. The months of January, February, March, April and
December are the least active for ETS. From May, the start of the traditional
tourist season in Europe, ETS has historically operated at a generally
accelerating rate of profit, peaking in about August and September and then
declining in October and November. ETS borrows funds in local currencies on a
short-term basis to finance working capital requirements during these peak
months of tourist travel. As of December 31, 1994, the Company had no amounts
outstanding under any such short-term facilities compared to $5,503 outstanding
at December 31, 1993.
Inflation affects the Company's revenues, costs of operation and interest
received from short-term investments. Revenues are affected as the amount of VAT
tax fluctuates with sales prices and as prices on products sold are increased to
maintain gross margins.
Tax-free Activities
The Company's tax-free activities include the operation of ETS's VAT refund
business and two duty-free retail stores at Landvetter Airport, outside
Gothenburg, Sweden. For 1994, ETS had sales of $56,917, an increase of 30.4%
over 1993 sales of $43,655, and pre-tax income of $15,525, an increase of 76.0%
over 1993 pre-tax income of $8,819. Gross margin increased to 35.1% in 1994 from
30.3% in 1993 and operating margin increased to 29.3% in 1994 from 25.3% in
1993. Interest expense declined by $597 due to lower interest rates and lower
levels of debt, and interest income increased by $317 from higher cash balances.
Equity earnings in unconsolidated subsidiaries increased by $448.
11
<PAGE> 14
Certain stand-alone financial information for ETS is presented below to
provide a better understanding of its historical performance. Specifically, the
table below shows, in Swedish kronor ("SEK"), gross revenues and net income of
ETS reconciled to U.S. generally accepted accounting principles ("GAAP"), for
the three most recent fiscal years. The 1992 financial information reflects all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the unaudited information for the approximately ten-month period
prior to the acquisition. The figures show the results of ETS as if the
acquisition had not occurred and, accordingly, do not include charges for
amortization of goodwill, interest on debt incurred in connection with the
acquisition and other items relating to the transaction.
<TABLE>
<CAPTION>
(IN SEK, 000'S OMITTED)
(UNAUDITED)
-----------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Revenues........................................... 438,618 342,110 243,365
Net income under U.S. GAAP......................... 76,936 45,000 25,337
</TABLE>
International tourism to Europe in 1992 recovered from 1991 levels which
were adversely affected by the Gulf War. For the year 1992, ETS was able to
increase its market share for VAT refunds in many European countries. In
addition, during 1992, ETS's operation of the perfume and cosmetic store at
Landvetter Airport saw continued expansion mainly due to an increased store
area, effective marketing efforts and attractive price levels of items. The
trend toward greater tourism within Europe continued, notwithstanding fewer
arrivals of Eastern European tourists.
In 1993, ETS revenues continued to increase primarily due to the continued
increase in the number of tourists, efforts to make the retailers and tourists
aware of the ETS system, lower minimum purchase requirements for VAT refund
eligibility in Italy and strong currencies in the United States, Japan and
Germany. The increased sales and improved margins contributed to increased
profits in 1993.
ETS revenues continued to grow in 1994 primarily as a result of strong
growth in Japanese and Russian tourist shopping especially in Italy, Germany and
Finland and sales in new markets including Spain, Greece, Slovenia and Hungary.
Net income increased in 1993 and 1994 due to revenue growth, margin
improvement, as start-up operations became more profitable, offset by a higher
tax rate due to strong performances in high tax countries. Net income of ETS
also increased in 1993 from 1992 due to a $1,578 one-time cost incurred in 1992
for moving administrative offices in Lubeck, Germany, to Vienna, Austria. The
Vienna office now services both the German and Austrian operations of ETS.
Austria, Finland and Sweden joined the EU effective January 1, 1995. Norway
voted against EU membership. The decision by these three countries will
adversely affect sales in 1995. ETS will be adversely affected since EU resident
travelers to these three EFTA countries and travelers from these three countries
who shop in EU countries will no longer be entitled to VAT refunds. Management
estimates that such sales represented approximately 9 and 11 percent of ETS's
sales in 1994 and 1993, respectively. It is expected, however, that the
Company's expansion efforts, both to countries not served by ETS and by greater
activity with non-affected tourists will at least, in part, offset this
prospective loss. See also "International Considerations" in Item 1.
Pollution Control Products
Sales for 1994 for the Company's PPC Industries unit were $9,586
representing a 44.5% increase from 1993 sales of $6,633. This increase was
primarily the result of an increase in demand for precipitators primarily from
the wood products industry and one large project in the biofiltration technology
operation. Sales in 1993 increased 31.9% from the 1992 sales of $5,029. This
increase was primarily the result of one large contract. Gross margin in 1994
was 33.8% compared to 20.6% and 33.3% in 1993 and 1992, respectively. The lower
1993 margin was due primarily to the expensing of the unamortized cost of a
technology license, which accounted for 5.0% of the reduced gross margin, and
increased costs associated with the development of a
12
<PAGE> 15
product line based on the biofiltration technology. Gross margins in 1994
returned to the level achieved in 1992.
Income before taxes in 1994 for PPC Industries was $3,033, an increase of
$1,852 from the $1,181 ($1,514 before the expensing of the unamortized cost of
technology license) earned in 1993. Income before taxes increased due to the
44.5% increase in sales combined with the increased gross margin. Net income
before taxes in 1993 declined 16.8% from $1,419 in 1992, which was due primarily
to the expensing of the unamortized cost of a technology license.
Accounting Pronouncements
In the first quarter of 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." There was no cumulative effect on continuing
operations.
The Company does not have any material postretirement or postemployment
benefits that would be recorded under Statements of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," or No. 112, "Employers' Accounting for Postemployment Benefits."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data regarding quarterly results of
operations, set forth under the caption "Selected Quarterly Financial Data
(Unaudited)" listed in the index contained in Item 14(a), are filed in response
to this Item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from the Proxy Statement for the 1995 Annual
Meeting of Shareholders, section entitled "Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from the Proxy Statement for the 1995 Annual
Meeting of Shareholders, section entitled "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Proxy Statement for the 1995 Annual
Meeting of Shareholders, section entitled "Ownership of Voting Securities."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from the Proxy Statement for the 1995 Annual
Meeting of Shareholders, section entitled "Certain Transactions."
13
<PAGE> 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) The following is a list of Exhibits filed as part of Form 10-K:
<TABLE>
<S> <C>
3(d) Amended and Restated Certificate of Incorporation of the Company.
Incorporated by reference to Appendix B of Form S-4 filed on April
14, 1993 (File No. 0-21822).
3(e) Bylaws of the Company. Incorporated by reference to Appendix C of
Form S-4 filed on April 14, 1993 (File No. 0-21822).
10(a)(7) Copy of Employment Agreement with Harve A. Ferrill, dated November
14, 1990. Incorporated by reference to Item 14(3) 10(a)(7) to Form
10-K for the year ended December 31, 1990 (File No. 0-770).
10(a)(8) Copy of Amendment #1 to Employment Agreement with Harve A. Ferrill,
dated July 24, 1991. Incorporated by reference to Item 14(3)
10(a)(10) to Form 10-K for the year ended December 31, 1991 (File No.
0-770).
10(a)(9) Copy of Amendment #2 to Employment Agreement with Harve A. Ferrill,
dated January 1, 1992. Incorporated by reference to Item 14(3)
10(a)(11) to Form 10-K for the year ended December 31, 1991 (File No.
0-770).
10(a)(10) Copy of Amendment #3 to Employment Agreement with Harve A. Ferrill
dated March 14, 1994.
10(a)(11) Copy of warrant certificate granting 100,000 warrants, each
redeemable for one share of the Company's common stock, to Allen &
Company Incorporated. Incorporated by reference to Item 14(3)
10(a)(8) to Form 10-K for the year ended December 31, 1990 (File No.
0-770).
10(a)(12) Amendment to Warrant Certificate of Allen & Company Incorporated,
dated December 1, 1992. Incorporated by reference to Item 10(a)(20)
to Form 10-K for the year ended December 31, 1992 (File No. 0-770).
10(a)(13) Share Purchase Agreement by and between Bankrupt Estate of I. M.
Invent AB, represented by the appointed Receiver, Mr. Per Ivan
Lundberg and Grundstenen AB, a Swedish corporation to be renamed
Europe Tax-free Shopping Holding AB. Incorporated by reference to
Item 7 (c)(28.1) to Form 8-K, dated November 2, 1992 (File No.
0-770).
10(a)(14) Escrow Agreement by and among the Bankrupt Estate of I.M. Invent AB,
represented by the appointed Receiver, Mr. Per Ivan Lundberg,
Grundstenen AB and Skandinaviska Enskilda Banken. Incorporated by
reference to Item 7(c)(28.5) to Form 8-K, dated November 2, 1992
(File No. 0-770).
10(a)(15) Loan Agreement by and between Grundstenen AB and Skandinaviska
Enskilda Banken. Incorporated by reference to Item 7(c)(28.3) to Form
8-K, dated November 2, 1992 (File No. 0-770).
10(a)(16) Loan Agreement by and between Europe Tax-free Shopping Deutschland
GmbH and Skandinaviska Enskilda Banken. Incorporated by reference to
Item 7(c)(28.4) to Form 8-K, dated November 2, 1992 (File No. 0-770).
10(a)(17) Form of Stock Option Agreement by and between ETS and certain members
of its management. Incorporated by reference to Item 7(c) (28.2) to
Form 8-K, dated November 2, 1992 (File No. 0-770).
</TABLE>
14
<PAGE> 17
<TABLE>
<S> <C>
10(a)(18) Stock Option Plan, dated October 26, 1992. Incorporated by reference
to Item 8(4.2) to Form S-8, dated March 24, 1993 (File No. 0-770).
10(a)(19) Consulting Agreement with Hamilton Capital Partners, dated November
2, 1992. Incorporated by reference to Item 10(a)(19) to Form 10-K for
the year ended December 31, 1992 (File No. 0-770).
10(a)(20) Agreement with Hamilton Capital Partners, dated August 5, 1992.
Incorporated by reference to Item 10(a)(21) to Form 10-K for the year
ended December 31, 1992 (File No. 0-770).
10(a)(21) Form of Stock Option Agreement by and between the partners of
Hamilton Capital Partners and Advance Ross Corporation. Incorporated
by reference to Item 7(c)(28.6) to Form 8-K, dated November 2, 1992
(File No. 0-770).
10(a)(22) Copy of Letter Agreement by and between William W. Staudt, dated
December 31, 1994, amending certain terms of the Stock Option
Agreement by and between Advance Ross Corporation and William W.
Staudt, dated November 2, 1992.
10(a)(23) Form of Advance Ross Corporation Stock Option Plan Agreement.
Incorporated by reference to Item 8 (4.3) to Form S-8, dated March
24, 1993 (File No. 0-770).
10(a)(24) Form of 1993 Advance Ross Corporation Stock Option Plan Agreement.
Incorporated by reference to Exhibit 4.1 to Form S-8, dated January
27, 1994 (File No. 33-74620).
10(a)(25) Copy of Employment Agreement with Paul G. Yovovich, dated June 15,
1993. Incorporated by reference to Item 10(a)(24) to Form 10-K for
the year ended December 31, 1993 (File No. 0-21822).
10(a)(26) Copy of Employment Agreement with Randy M. Joseph, dated November 7,
1994.
11 Statement re: Computation of per share earnings.
21 Subsidiaries of the Company.
23 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K for the fourth quarter of 1994 -- None.
(c) Exhibits -- see Item 14(a)(3) above.
(d) Financial statement schedules -- the response to this portion of Item
14 is submitted as a separate section of this report.
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ADVANCE ROSS CORPORATION
By /s/ RANDY M. JOSEPH
-------------------------------------
Randy M. Joseph
Vice-President, Chief Financial
Officer and
Treasurer (Principal Financial and
Accounting Officer)
March 30, 1995
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ HARVE A. FERRILL /s/ ROGER E. ANDERSON
----------------------------------------- -----------------------------------------
Harve A. Ferrill Roger E. Anderson
Director, Chairman of the Board of Director
Directors March 30, 1995
and CEO (Principal Executive Officer)
March 30, 1995
/s/ PAUL G. YOVOVICH /s/ DUANE R. KULLBERG
----------------------------------------- -----------------------------------------
Paul G. Yovovich Duane R. Kullberg
Director, President (Chief Operating Director
Officer) March 30, 1995
March 30, 1995
/s/ THOMAS J. PETERSON /s/ HAROLD E. GUENTHER
----------------------------------------- -----------------------------------------
Thomas J. Peterson Harold E. Guenther
Director Director
March 30, 1995 March 30, 1995
/s/ HERBERT S. WANDER
-----------------------------------------
Herbert S. Wander
Director
March 30, 1995
</TABLE>
16
<PAGE> 19
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
FORM 10-K -- ITEMS 14(A)(1) AND (2)
LIST OF FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBIT
The following consolidated financial statements of Advance Ross Corporation
and subsidiaries are included in response to Item 8:
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report....................................................... 18
Consolidated Balance Sheets -- December 31, 1994 and 1993.......................... 19
Consolidated Statements of Income -- Years Ended
December 31, 1994, 1993 and 1992................................................. 20
Consolidated Statements of Changes in Shareholders' Equity -- Years Ended
December 31, 1994, 1993 and 1992................................................. 21
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1994, 1993 and 1992................................................. 22
Notes to Consolidated Financial Statements......................................... 23
Selected Quarterly Financial Data (Unaudited)...................................... 34
The following consolidated financial statement schedule of Advance Ross Corporation
and subsidiaries is included in response to Item 14(d):
Schedule II -- Valuation and Qualifying Accounts................................... 35
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
The following exhibit of Advance Ross Corporation and subsidiaries is included in
response to Item 14(c):
Item 21 -- Subsidiaries of the Company............................................. 36
Summarized financial information for unconsolidated subsidiaries is presented
herein in footnote 4 because these affiliated companies constitute significant
subsidiaries of Advance Ross Corporation on an aggregate basis.
</TABLE>
17
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Advance Ross Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Advance
Ross Corporation and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
Our audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Advance Ross Corporation and
subsidiaries at 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. Also, in
our opinion, such financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 13, 1995
18
<PAGE> 21
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $13,539 $10,142
Accounts receivable, less allowances:
1994 -- $1,813; 1993 -- $1,289............................................... 22,871 15,839
Inventory...................................................................... 1,117 911
Prepaid expenses............................................................... 975 794
Other current assets........................................................... 4,398 2,704
------- -------
Total current assets....................................................... 42,900 30,390
COST IN EXCESS OF NET ASSET VALUE OF ACQUIRED BUSINESSES --
Net of amortization:
1994 -- $2,169; 1993 -- $1,194 (Notes 1 and 2)............................... 15,793 16,489
LICENSE AND TRADEMARKS --
Net of amortization:
1994 -- $263; 1993 -- $132................................................... 364 433
------- -------
Total intangibles.......................................................... 16,157 16,922
OTHER ASSETS (Note 4)............................................................ 3,067 2,451
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................................... 84 84
Buildings and improvements..................................................... 351 351
Machinery and equipment........................................................ 5,057 3,379
------- -------
Total property, plant and equipment........................................ 5,492 3,814
Less allowance for depreciation and amortization............................... 3,496 2,516
------- -------
Property, plant and equipment -- net....................................... 1,996 1,298
------- -------
TOTAL............................................................................ $64,120 $51,061
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 5)................................................. $ 5,503
Current portion of long-term debt (Note 6)..................................... $ 1,677 2,999
Accounts payable............................................................... 2,715 2,432
Accrued compensation........................................................... 4,649 2,088
Income taxes (Note 7).......................................................... 3,949 2,211
Other current liabilities...................................................... 9,512 4,791
------- -------
Total current liabilities.................................................. 22,502 20,024
LONG-TERM DEBT (Note 6).......................................................... 6,707 7,497
OTHER LIABILITIES................................................................ 1,380 1,087
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred stock, $1 par value per share; authorized, 1,000,000 shares;
issued, none (Note 8).......................................................
5% cumulative preferred stock, $25 par value per share; callable at $27.50
per share plus accumulated dividends; authorized, 200,000 shares; issued,
20,247 shares, including 1,273 shares and 135 shares held in treasury in
1994 and 1993, respectively (Note 8)........................................ 506 506
Common stock, $.01 par value; authorized, 12,000,000 shares; issued,
3,784,254 shares, including 336,734 shares and 442,008 shares held in
treasury in 1994 and 1993, respectively (Notes 8 and 9)..................... 38 38
Capital in excess of par value................................................. 3,547 3,139
Retained earnings.............................................................. 34,310 25,987
Treasury stock, at cost........................................................ (1,654) (2,146)
Foreign currency translation adjustment........................................ (3,216) (5,071)
------- -------
Total shareholders' equity................................................. 33,531 22,453
------- -------
TOTAL............................................................................ $64,120 $51,061
======= =======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
TAX-FREE SALES AND SERVICES...................................... $56,917 $43,655 $ 6,012
POLLUTION CONTROL EQUIPMENT SALES................................ 9,586 6,633 5,029
------- ------- -------
NET SALES AND SERVICES........................................... 66,503 50,288 11,041
COSTS OF PRODUCTS AND SERVICES................................... 43,299 35,692 8,057
------- ------- -------
Gross profit................................................... 23,204 14,596 2,984
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..................... 7,091 5,127 2,265
------- ------- -------
16,113 9,469 719
AMORTIZATION OF COST IN EXCESS OF NET ASSET VALUE OF ACQUIRED
BUSINESS....................................................... (969) (951) (243)
INTEREST EXPENSE................................................. (1,499) (2,090) (486)
OTHER INCOME (EXPENSE) -- Net (Note 10).......................... 401 411 974
------- ------- -------
INCOME BEFORE INCOME TAXES AND EQUITY IN PROFIT
OF UNCONSOLIDATED AFFILIATES................................... 14,046 6,839 964
PROVISION FOR INCOME TAXES (Note 7).............................. 6,574 2,180 352
------- ------- -------
INCOME BEFORE EQUITY IN PROFIT OF UNCONSOLIDATED AFFILIATES...... 7,472 4,659 612
EQUITY IN PROFIT OF UNCONSOLIDATED AFFILIATES
(Note 4)....................................................... 874 428 57
------- ------- -------
NET INCOME....................................................... $ 8,346 $ 5,087 $ 669
======= ======= =======
EARNINGS PER COMMON SHARE:
Primary........................................................ $ 1.93 $ 1.29 $ .18
======= ======= =======
Fully diluted.................................................. $ 1.93 $ 1.19 $ .17
======= ======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Primary........................................................ 4,312 4,046 3,709
======= ======= =======
Fully diluted.................................................. 4,312 4,248 3,709
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
CAPITAL IN CURRENCY
PREFERRED COMMON EXCESS OF RETAINED TREASURY TRANSLATION
STOCK STOCK PAR VALUE EARNINGS STOCK ADJUSTMENT TOTAL
--------- ------ ---------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1992.......... $ 506 $ 38 $3,139 $ 20,281 $ (619) $23,345
Net income........................ 669 669
Foreign currency translation
adjustment...................... $ (3,638) (3,638)
Dividends on 5% cumulative
preferred stock of $1.25 per
share........................... (25) (25)
Treasury stock acquired........... (1,526) (1,526)
----- ---- ------ -------- -------- -------- -------
BALANCE, DECEMBER 31, 1992........ 506 38 3,139 20,925 (2,145) (3,638) 18,825
Net income........................ 5,087 5,087
Foreign currency translation
adjustment...................... (1,433) (1,433)
Dividends on 5% cumulative
preferred stock of $1.25 per
share........................... (25) (25)
Treasury stock acquired........... (1) (1)
----- ---- ------ -------- -------- -------- -------
BALANCE, DECEMBER 31, 1993........ 506 38 3,139 25,987 (2,146) (5,071) 22,453
Net income........................ 8,346 8,346
Foreign currency translation
adjustment...................... 1,855 1,855
Dividends on 5% cumulative
preferred stock of $1.25 per
share........................... (23) (23)
Exercise of stock options......... 408 510 918
Treasury stock acquired........... (18) (18)
----- ---- ------ -------- -------- -------- -------
BALANCE, DECEMBER 31, 1994........ $ 506 $ 38 $3,547 $ 34,310 $ (1,654) $ (3,216) $33,531
===== ==== ====== ======== ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 24
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.................................................... $ 8,346 $ 5,087 $ 669
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization.............................. 1,990 2,791 635
Provision (benefit) for deferred income taxes.............. 927 (123) 33
Equity in profit of unconsolidated affiliates.............. (874) (428) (57)
Loss on sale of real estate................................ 118
Changes in operating assets and liabilities, net of effect
of acquisitions:
(Increase) in accounts receivable........................ (5,058) (4,450) (3,410)
(Increase) decrease in inventory......................... (95) 99 (178)
(Increase) decrease in prepaid expenses.................. (108) 477 268
(Increase) decrease in other assets...................... (1,408) (2,045) 822
Increase in accounts payable............................. 15 1,144 684
Increase (decrease) in accrued compensation.............. 2,299 1,004 (292)
Increase (decrease) in income taxes payable.............. 1,638 (61) (488)
Increase in other liabilities............................ 4,407 962 1,735
------- ------- --------
Net cash flows from operating activities............ 12,197 4,457 421
INVESTING ACTIVITIES:
Purchase of property, plant and equipment..................... (1,468) (936) (447)
Proceeds from sale of real estate............................. 291
Investment in unconsolidated affiliate........................ (5) (63) (242)
Acquisition -- net of cash and cash equivalents acquired...... (26,925)
Purchase of product license................................... (564)
------- ------- --------
Net cash flows from investing activities............ (1,182) (999) (28,178)
FINANCING ACTIVITIES:
(Decrease) increase in short-term borrowings -- net........... (5,949) (1,299) 2,332
(Decrease) increase in long-term debt......................... (3,151) 13,181
Purchase of treasury stock.................................... (18) (1) (1,526)
Exercise of stock options..................................... 743
Dividends paid................................................ (23) (25) (25)
------- ------- --------
Net cash flows from financing activities............ (8,398) (1,325) 13,962
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.... 780 (433) (543)
------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................... 3,397 1,700 (14,338)
CASH AND CASH EQUIVALENTS -- Beginning of year.................. 10,142 8,442 22,780
------- ------- --------
CASH AND CASH EQUIVALENTS -- End of year........................ $13,539 $10,142 $ 8,442
======= ======= ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 25
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Reorganization -- On June 16, 1993, Advance Ross Corporation (the
"Company") reorganized its corporate structure through the formation of a
holding company, Advance Ross Holding Company ("Holdco"), which has changed its
name to Advance Ross Corporation. At the time of the reorganization, the common
and preferred stock of the Company was converted into common and preferred stock
of Holdco on a share-for-share basis. The par value of the common stock was
changed to $.01 per share from $.10 per share.
Description of Business -- The Company's operations are conducted in two
industry segments: (i) tax-free activities, which consist of refunding
value-added taxes to travelers shopping in Europe and operating two duty-free
retail stores, and (ii) the manufacture of pollution control equipment.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Advance Ross Corporation and subsidiaries. Significant
intercompany transactions and account balances have been eliminated.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments, with an original maturity of three months or less when purchased,
to be cash equivalents.
Investments -- Investments in unconsolidated affiliates are accounted for
under the equity and cost methods.
Inventory -- Inventory is carried at the lower of first-in, first-out
(FIFO) cost or market. Substantially all of the Company's inventory is finished
goods.
Cost in Excess of Net Asset Value of Acquired Businesses -- The majority of
the cost in excess of net asset value of acquired businesses is attributable to
a business acquired in 1992 and is being amortized over 20 years using the
straight-line method. The Company reviews the recoverability of the cost in
excess of net asset value of the acquired business based upon anticipated future
operating results of the acquired business on a nondiscounted basis compared
with scheduled amortization. The cost in excess of net asset value of a business
acquired in 1970 is not being amortized because, in the opinion of management,
no diminution in value has occurred.
Property, Plant and Equipment -- Property, plant and equipment includes the
cost of land, buildings, machinery and equipment, and significant improvements
thereto. Provisions for depreciation are computed using accelerated depreciation
for financial reporting purposes.
Revenue Recognition -- Commission revenue on value-added tax refunds is
recognized upon receipt of the value-added tax voucher from the traveler, and
the Company recognizes revenue on duty-free sales when the products are
purchased by the customer.
Sales of pollution control equipment are accounted for under the
percentage-of-completion method. Under this method, estimated profits are
included in income as work on the contract progresses. Total estimated costs at
completion are adjusted periodically based on the most recent information, and
the cumulative effects of changes in total estimated costs at completion are
recognized in the period determined; losses, if any, are recognized fully when
identified.
Income Taxes -- Effective January 1, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires the provision of deferred income
taxes for temporary differences between financial and tax reporting under the
liability method and adjustment of previously deferred taxes for changes in tax
rates. In addition, the accounting standard requires the recognition of future
tax benefits, such as net operating loss carry-forwards, to the extent that
realization of such benefits is more likely than not. Implementation of SFAS No.
109 did
23
<PAGE> 26
not have a material effect on the Company's financial statements. In previous
years, income taxes were accounted for in accordance with Accounting Principles
Board Opinion No. 11.
The Company files a consolidated tax return in the United States with its
domestic subsidiaries, but the international subsidiaries pay taxes at the local
level and the provision for income taxes is based on separate local tax
computations. On a consolidated basis, this practice may result in the Company
paying taxes even though it may not have consolidated pretax income or in paying
taxes in excess of pretax income, if some of its subsidiaries are profitable
while others are not.
Foreign Currency Translation Adjustments -- The functional currency for
each of the Company's international operations is the applicable local currency.
The translation of the applicable foreign currency into U.S. dollars is
performed for balance sheet accounts using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using average rates
of exchange prevailing during the period. Adjustments resulting from such
translation are included as a separate component of shareholders' equity as
foreign currency translation adjustment.
Earnings Per Common Share -- Earnings per common share is computed under
the treasury stock method using the weighted average number of common shares and
dilutive common stock equivalent shares outstanding during the year divided into
net earnings after deducting dividends attributable to preferred shares.
All references in these financial statements to earnings per share amounts
have been restated to give retroactive effect to the two-for-one stock split
declared on January 10, 1994.
Concentration of Credit Risk -- The Company does not have any material
concentration of accounts receivable or credit risk.
Accounting Pronouncements -- The Company does not have any material
postretirement or postemployment benefits that would be recorded under SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," or
SFAS No. 112, "Employers' Accounting for Postemployment Benefits."
Reclassifications -- Certain 1993 and 1992 amounts have been reclassified
to conform with the 1994 presentation.
2. ACQUISITION
On November 2, 1992, the Company acquired all of the capital stock of
Europe Tax-free Shopping AB ("ETS"), a Swedish corporation. ETS, through various
subsidiaries, provides refunds of value-added tax to tourists in 17 countries
throughout Europe and operates two duty-free retail stores at Landvetter
Airport, outside Gothenburg, Sweden.
The purchase price was 150,000 Swedish kronor ("SEK") or approximately
$28,600 including expenses of the transaction. Payment was financed by using
on-hand cash and temporary investments of approximately $15,400 and obtaining
two seven-year term loans through a Swedish bank totaling SEK 75,000 ($13,200).
In connection with the transaction, European management of ETS was granted
options to purchase 227,284 and 106,956 shares of the Company's common stock at
prices of $8.1875 and $6.25 per share, respectively. Additional options to
purchase 334,236 shares of the Company's common stock at $6.25 per share were
issued as part of the acquisition.
The acquisition has been accounted for using the purchase method and,
accordingly, the net assets and results of operations are included in the
consolidated financial statements, for reporting purposes, beginning in November
1992. The purchase price and expenses associated with the acquisition exceeded
the fair values of the ETS net assets by $19,412, and such amount has been
included net of amortization in cost in excess of net asset value of acquired
businesses -- net on the consolidated balance sheets.
The following unaudited proforma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of 1992, after
giving effect to certain adjustments, including amortization of cost in excess
of net asset value of acquired business, interest expense on the acquisition
debt, interest income lost as a result of redeeming a portion of cash and
temporary investments in order to finance
24
<PAGE> 27
the acquisition, and related tax effects. The proforma adjustments were based
upon available information and upon certain assumptions that the Company
believed were reasonable in the circumstances.
These proforma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the acquisition
been made as of such date or of results which may occur in the future.
<TABLE>
<CAPTION>
1992
-------
<S> <C>
Net sales and services.............................................. $46,898
Net income.......................................................... 2,026
Primary earnings per common share................................... $ 0.57
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The following summarizes costs and estimated earnings on uncompleted
pollution control equipment contracts at December 31:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Costs incurred on uncompleted contracts...................... $3,950 $2,208
Estimated earnings........................................... 3,513 2,183
------ ------
7,463 4,391
Less billings to date........................................ 7,322 4,349
------ ------
Total................................................. $ 141 $ 42
====== ======
Included in accompanying balance sheets under the following
captions:
Other current assets -- costs and estimated earnings in
excess of billings on uncompleted contracts............. $ 640 $ 179
Other current liabilities -- billings in excess of costs
and estimated earnings on uncompleted contracts......... (499) (137)
------ ------
Total................................................. $ 141 $ 42
====== ======
</TABLE>
Accounts receivable include $41 and $277 of retainage under long-term
construction contracts at December 31, 1994 and 1993, respectively.
4. OTHER ASSETS
Other assets at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Investments in unconsolidated affiliates..................... $2,727 $1,668
Other........................................................ 340 783
------ ------
Total................................................. $3,067 $2,451
====== ======
</TABLE>
The investments in unconsolidated affiliates at December 31, 1994 and 1993
include a 50% investment in Fexco Tax-free Shopping Ltd. ("Fexco"), a 50%
investment in European Data Processing Ltd. and a 50% investment in Europe
Tax-free Shopping France S.A. The Company also held 1,076,776 common shares
(4.8%) of GeoWaste Incorporated ("GeoWaste") and a 25% interest in Uintah Basin
Limited Partnership ("Uintah") at December 31, 1994 and 1993.
The investments in Fexco, European Data Processing, Europe Tax-free
Shopping France S.A. and Uintah are accounted for under the equity method. The
investment in GeoWaste is accounted for under the
25
<PAGE> 28
cost method. Summary financial information for the unconsolidated affiliates
accounted for under the equity method is as follows:
<TABLE>
<CAPTION>
UNCONSOLIDATED
AFFILIATES
--------------------
1994 1993
------- -------
<S> <C> <C>
Current assets........................................... $13,915 $11,964
Noncurrent assets........................................ 3,251 3,155
Current liabilities...................................... 10,671 11,962
Noncurrent liabilities................................... 1,936 693
Shareholders' equity..................................... 4,558 2,464
Revenues................................................. 11,236 11,516
Net income............................................... 1,904 1,056
</TABLE>
Based on published bid prices, the shares of GeoWaste owned by the Company
had a market value of approximately $538 and $740 at December 31, 1994 and 1993,
respectively. Such market values are not necessarily indicative of the amounts
realizable upon sale. The common stock of GeoWaste may require effective
registration under the Securities Exchange Act of 1933 prior to public sale or
distribution.
5. SHORT-TERM BORROWINGS
The Company's wholly-owned subsidiary, ETS, borrows under short-term lines
of credit and overdraft facilities with various local banks in its respective
subsidiaries' countries. These arrangements generally have a fixed term of one
year and are renewable annually by each bank. The funds are used to finance
seasonal working capital requirements. At December 31, 1994, there were no
borrowings under these arrangements. At December 31, 1993, such short-term
borrowings were $5,503 at a weighted average interest rate of 6.80%.
At December 31, 1994, $5,160 was unused under the various borrowing
agreements. Certain of the agreements are guaranteed by a subsidiary company.
6. LONG-TERM DEBT
Long-term debt at December 31 is as follows:
<TABLE>
<CAPTION>
1994 1993
------ -------
<S> <C> <C>
Term loan, equivalent of SEK 44,286 in 1994 and SEK 62,000
in 1993, denominated in SEK 22,143 and 5,879 German
deutsche marks in 1994 and SEK 31,000 and 8,231 German
deutsche marks, in 1993................................... $6,787 $ 8,496
Term loan, 2,465 German deutsche marks in 1994 and 3,452
German deutsche marks in 1993............................. 1,597 2,000
------ -------
8,384 10,496
Less current maturities..................................... 1,677 2,999
------ -------
Total................................................ $6,707 $ 7,497
====== =======
</TABLE>
Long-term debt consists of two floating interest rate term loans with a
Swedish bank. The SEK 44,286 term loan has an alternative currency provision,
which allows the Company to denominate the loan in two currencies upon notice to
the lender. At both December 31, 1994 and 1993, the loan was denominated 50% in
SEK and 50% in German deutsche marks ("DM").
The SEK term loan and the DM term loan are repayable in seven equal annual
installments commencing on December 30, 1993, with the final payment on December
30, 1999. Two annual installments are included in current maturities at December
31, 1993, as the installment aggregating $1,499 due on December 30, 1993 was
paid in the month of January 1994, as permitted in the loan agreements. Interest
is payable in quarterly or semiannual installments at the Company's option
calculated at the designated Inter-Bank Market Rate plus
26
<PAGE> 29
1.2%. At December 31, 1994 and 1993, respectively, the designated Inter-Bank
Market Rate was 7.65% and 7.90% on the SEK borrowings and 5.15% and 6.75% on the
DM borrowings. In 1994, 1993 and 1992, the Company paid $1,476, $2,019 and $291
of interest, respectively. The loans are secured by a pledge of the shares of
ETS and certain other Company subsidiaries and are nonrecourse to the Company.
7. INCOME TAXES
The components of the consolidated income tax provision (credit) consist of
the following:
<TABLE>
<CAPTION>
1994
---------------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal......................................... $ 255 $ (46) $ 209
State........................................... 159 159
Foreign......................................... 5,233 973 6,206
------- ------ ------
Total...................................... $ 5,647 $ 927 $6,574
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
1993
---------------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal......................................... $ (242) $ (107) $ (349)
State........................................... (3) (3)
Foreign......................................... 2,548 (16) 2,532
------- ------ ------
Total...................................... $ 2,303 $ (123) $2,180
======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
1992
---------------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal......................................... $ 65 $ 33 $ 98
State........................................... 39 39
Foreign......................................... 215 215
------- ------ ------
Total...................................... $ 319 $ 33 $ 352
======= ====== ======
</TABLE>
In 1994, 1993 and 1992, the Company paid $2,718, $1,502 and $1,037,
respectively, in income tax.
Deferred income taxes arise because there are certain items that are
treated differently for financial accounting than for income tax reporting
purposes. An analysis of the deferred income tax assets and liabilities at
December 31, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets:
Tax loss carry-forwards.................................. $ 2,540 $ 2,486
Other.................................................... 447 303
Less valuation reserve................................... (1,660) (2,221)
------- -------
Total deferred tax assets........................... 1,327 568
Deferred tax liabilities:
Discretionary tax reserve................................ 980 569
Unrealized currency gains................................ 590 495
Other.................................................... 9
------- -------
Total deferred tax liabilities...................... 1,570 1,073
------- -------
Net deferred tax liabilities............................... $ (243) $ (505)
======= =======
</TABLE>
In 1994, the Company utilized $2,693 of preacquisition net operating loss
carry-forwards, arising prior to the acquisition of ETS, on which it realized
the tax benefit of $1,272 which reduced current income taxes payable. As
required by SFAS No. 109, the benefit of such preacquisition net operating loss
carry-forwards
27
<PAGE> 30
have been recognized as a reduction to the balance of cost in excess of net
asset value of acquired businesses as shown in the consolidated balance sheet.
At December 31, 1994, the Company has available approximately $6,200 in net
operating loss carry-forwards. Substantially all of the losses are available
indefinitely. Deferred tax assets of $2,540 resulting from net operating loss
carry-forwards have been partially offset by a valuation allowance.
At December 31, 1994, accumulated earnings in certain overseas subsidiaries
and affiliates totaled $14,719 for which no provision for United States income
taxes in excess of a foreign tax credit or foreign withholding taxes has been
made. Management, however, believes that the amount of unrecognized deferred tax
liability on these unremitted earnings would not be material.
A reconciliation of the Company's effective income tax rate to the
statutory federal income tax rate is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory rate........................................... 35.0% 35.0% 34.0%
State taxes, net of federal tax benefit.................. 0.7 2.6
Difference in effective foreign tax rates................ 10.1 (2.7) 2.4
Other.................................................... 1.0 (.4) (2.5)
---- ---- ----
Total.................................................. 46.8% 31.9% 36.5%
==== ==== ====
</TABLE>
8. CAPITAL STOCK
On June 16, 1993, the Company reorganized its corporate structure through
the formation of a holding company, Advance Ross Holding Corporation ("Holdco"),
which has changed its name to Advance Ross Corporation. At the time of the
reorganization, the common and preferred stock of the Company was converted into
common and preferred stock of Holdco on a share-for-share basis. The par value
of the common stock of Holdco is $.01 per share.
The 1,000,000 shares of authorized preferred stock, $1 par value, may be
issued in one or more series. The Board of Directors is authorized to determine,
by resolution, the designations, preferences and relative participating,
optional or other special rights and qualifications for each series provided,
however, that each new class of preferred stock shall not be preferred or senior
to the outstanding 5% cumulative preferred stock either as to dividends or as to
assets upon distribution.
On January 10, 1994, the Board of Directors declared a two-for-one common
stock split. The split was in the form of a 100% stock dividend payable to
holders of record as of January 24, 1994. All references in these financial
statements to numbers of common shares, stock prices and earnings per share
amounts have been restated to give retroactive effect to the stock split.
The Company has issued a warrant to purchase, at any time before December
1, 1997, 240,000 shares of the Company's common stock, at a purchase price of
$4.75 per share. The warrant was amended during 1992, increasing the number of
shares from 200,000 to 240,000 and eliminating certain anti-dilution provisions.
The number of shares of common stock issuable upon exercise of the warrant is
subject to adjustment to prevent dilution in certain specific circumstances.
9. STOCK OPTIONS
The Company has authorized the Advance Ross Corporation Stock Option Plans
(the "Plans"). Under terms of the Plans, 650,000 shares of common stock are
reserved for issuance at a price not less than the fair market value at the date
of grant. Options have been granted to Company officers for 455,000 shares at
prices of $5.00 to $20.25 per share, which were the fair market values at the
dates of grant.
During 1992, as part of the acquisition of ETS, the Company's Board of
Directors approved the issuance to employees of ETS of stock options on 227,284
and 106,956 shares at prices of $8.1875 and $6.25 per share,
28
<PAGE> 31
respectively, of the Company's common stock. These stock options become
exercisable at a rate of 20% per annum commencing on January 1, 1994. Additional
options on 334,236 shares of the Company's common stock were issued at $6.25 per
share as part of the acquisition of ETS. These stock options become exercisable
at a rate of 20% per annum commencing on November 2, 1993. Under terms of an
agreement with one of the parties to these options, the remaining 60% balance of
his options became exercisable on December 31, 1994.
Option activity in 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1994 1993
--------------------------- --------------------------
NUMBER OF NUMBER OF
SHARES OPTION PRICE SHARES OPTION PRICE
--------- --------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 1,131,846 $5.00 - 9.50 918,476 $5.00 - 8.1875
Granted.................... 5,000 20.25 213,370 7.50 - 9.50
Exercised.................. 105,274 5.00 - 9.50
--------- --------------- --------- --------------
Outstanding at end of year... 1,031,572 $5.00 - 20.25 1,131,846 $5.00 - 9.50
========= =============== ========= ==============
Exercisable at end of year... 688,326 $5.00 - 8.1875 291,848 $5.00 - 8.00
========= =============== ========= ==============
Available for future grant
under the stock option
plans...................... 195,000 200,000
========= =========
</TABLE>
10. OTHER INCOME (EXPENSE)
The components of other income (expense) are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Interest and dividends............................ $ 884 $ 543 $ 737
Other -- net...................................... (483) (132) 237
----- ----- -----
Total........................................... $ 401 $ 411 $ 974
===== ===== =====
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
Washington State Department of Transportation v. Washington Natural Gas
Company et al. (United States District Court Eastern District of Washington).
The Company was one of three defendants in a lawsuit filed by the Washington
State Department of Transportation ("WDOT"), claiming approximately $6,000
(allegedly incurred in cleaning up coal tar which WDOT encountered while
building a highway in Tacoma, Washington in the mid-1980s) of joint and several
liability against each of the defendants for violations of the Comprehensive
Environmental Response Compensation and Liability Act 42 U.S.C. 9601. The claims
against the Company were based upon the allegations that the Company owned or
operated a coal gasification facility, directly or through corporate
subsidiaries, in the relevant location during the period from 1910 through 1924.
The lawsuit was tried in November 1992 and, in December 1992, judgment was
entered in favor of the defendants and against the plaintiff, finding no
liability on the part of the Company. That case has been appealed by WDOT and
oral arguments were completed in April 1994. No rulings have been made to date
with respect to the appeal.
On May 10, 1994, WDOT filed a state court action against the same three
defendants who were named in the United States District Court lawsuit referenced
above, and a fourth defendant. This lawsuit is in the Superior Court for the
County of Pierce, State of Washington. It is in most respects virtually
identical to the federal lawsuit, but is based on state environmental statutes
rather than federal law. As in the previous lawsuit, the claimed damages are for
approximately $6,000 incurred in cleaning up coal tar from WDOT's highway
right-of-way. On June 10, 1994, this lawsuit was stayed pending resolution of
the federal lawsuit by the United States Court of Appeals for the Ninth Circuit.
The Washington Department of Ecology ("DOE"), in December 1992, identified
the Company as a potentially liable person ("PLP") for cleanup costs at the
Tacoma Coal Gasification Site in Tacoma, Washington (the "Site"). This Site
includes part of the property involved in the WDOT case described above,
29
<PAGE> 32
and is part of the much larger Commencement Bay Superfund site, at which the
United States Environmental Protection Agency and DOE are now coordinating
cleanup activities. A number of other PLPs have been identified and the DOE is
in the process of conducting a limited site investigation, to implement interim
source control measures and to remediate any contaminated sediments. Since the
cleanup activities for the Site have not yet been determined, and since the
Company's potential share, if any, of the cleanup costs is not known, the
Company's potential liability cannot now be quantified. The Company has advised
the DOE that it is not responsible for any of the alleged contamination and that
its liability, if any, is de minimis, although it does plan to cooperate with
the DOE at least in the limited site investigation stage.
The Company and its subsidiaries lease office and operating facilities and
various types of equipment under operating lease agreements. Most of the ETS
space is rented on a short-term basis, usually less than five years.
Total rental expense for all leases was $2,624, $2,128 and $621 for the
years ended December 31, 1994, 1993 and 1992, respectively.
At December 31, 1994, future minimum payments due under noncancelable
operating leases having an initial or remaining term of one year or more
consisted of the following:
<TABLE>
<S> <C>
1995................................................................. $ 282
1996................................................................. 368
1997................................................................. 341
1998................................................................. 262
After 1998........................................................... 937
------
Total........................................................... $2,190
======
</TABLE>
At three ETS locations in Europe, rent is computed as a percentage of net
revenue, as defined in the lease agreements; several other locations' rent is a
base amount plus a percentage of revenue.
12. PENSION AND THRIFT SAVINGS PLANS
The Company and its subsidiaries have a defined benefit pension plan
covering substantially all of their United States employees. The benefits are
based on years of service and the employee's compensation during the last five
years of employment. The funding policy is to contribute such amounts as are
necessary to provide for benefits attributed to service to date and those
expected to be earned in the future. These contributed amounts are sufficient to
meet the minimum funding requirements set forth in the Employee Retirement
Income Security Act of 1974, plus such additional amounts as the Company may
determine to be appropriate from time to time.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31, 1994 and
1993:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation.................................. $ 1,770 $ 1,694
======= =======
Accumulated benefit obligation............................. $ 1,826 $ 1,726
======= =======
Projected benefit obligation............................... $(2,175) $(2,122)
Plan assets at fair value.................................. 1,704 1,654
------- -------
Projected benefit obligation greater than plan assets...... (471) (468)
Prior service cost not yet recognized in net pension
expense.................................................. 8 45
Unrecognized transition amount............................. 1 1
Unrecognized net loss...................................... 375 411
Adjustment required to recognize minimum liability......... (35) (61)
------- -------
Pension liability.......................................... $ (122) $ (72)
======= =======
</TABLE>
30
<PAGE> 33
Net pension expense is composed of the following:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Service cost for benefits earned during the year....... $ 61 $ 70 $ 81
Interest cost on projected benefit obligations......... 150 139 121
Actual investment return on plan assets................ (134) (117) (104)
Net amortization and deferral.......................... 13 9 (20)
----- ----- -----
Net pension expense.................................... $ 90 $ 101 $ 78
===== ===== =====
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.00% at December 31, 1994
and 7.25% at December 31, 1993. The rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 5.00% at December 31, 1994 and 1993. The expected long-term rate
of return on plan assets in 1994 and 1993 was 8.00%.
Approximately 57% of the plan assets at December 31, 1994 is invested in a
mutual fund of securities guaranteed as to payment of principal and interest by
the United States government or its agencies or instrumentalities with the
balance invested in the Aetna Life Insurance Company pooled investment funds.
The Company has a Thrift Savings Plan with Aetna Life Insurance Company for
the Company's United States based employees. The participating employees may
make a basic contribution to the plan up to 6% of their base earnings and a
voluntary contribution to the plan up to 10% of their base earnings. The Company
makes a contribution equal to 125% of the employee's basic contribution. The
Company's contribution vests 20%, 40%, 60%, 80% and 100% at the end of two,
three, four, five and six years, respectively, of service. Total expense
recorded by the Company was $82, $69 and $57 for the years ended December 31,
1994, 1993 and 1992, respectively.
13. SEGMENT AND GEOGRAPHIC DATA
Prior to the acquisition of ETS, the Company operated in one industry
segment: the design, manufacture, distribution and installation of pollution
control equipment. The Company's operations now include a tax-free activities
segment, which consists of the refunding of value-added taxes to tourists and
the operation of two duty-free stores. Information relating to the tax-free
activities segment has been included since November 2, 1992, the date of
acquisition.
31
<PAGE> 34
Financial information relating to industry segments and classes of products
or service follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Net sales and services to unaffiliated customers:
Tax-free activities............................................ $56,917 $43,655 $ 6,012
Pollution control equipment sales.............................. 9,586 6,633 5,029
------- ------- -------
Total..................................................... $66,503 $50,288 $11,041
======= ======= =======
Income (loss) before income taxes and equity in profit of
unconsolidated affiliates:
Tax-free activities............................................ $14,646 $ 8,388 $ 513
Pollution control equipment.................................... 3,033 1,181 1,419
Corporate and other -- net..................................... (3,633) (2,730) (968)
------- ------- -------
Total..................................................... $14,046 $ 6,839 $ 964
======= ======= =======
Identifiable assets:
Tax-free activities............................................ $31,054 $21,481 $22,301
Pollution control equipment.................................... 2,263 1,303 2,872
Corporate and other............................................ 30,803 28,277 24,987
------- ------- -------
Total..................................................... $64,120 $51,061 $50,160
======= ======= =======
Depreciation and amortization:
Tax-free activities............................................ $ 874 $ 1,314 $ 202
Pollution control equipment.................................... 55 466 85
Corporate and other............................................ 1,061 1,011 348
------- ------- -------
Total..................................................... $ 1,990 $ 2,791 $ 635
======= ======= =======
Capital expenditures:
Tax-free activities............................................ $ 1,177 $ 823 $ 422
Pollution control equipment.................................... 169 57 23
Corporate and other............................................ 122 56 2
------- ------- -------
Total..................................................... $ 1,468 $ 936 $ 447
======= ======= =======
</TABLE>
Identifiable assets by industry segment are those assets that are used in
the Company's operations in each industry. Corporate assets are principally
cash, temporary investments and cost in excess of net asset value of acquired
businesses -- net.
32
<PAGE> 35
Financial information relating to foreign and domestic operations and
export sales follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Sales and services to unaffiliated customers:
United States.................................................. $ 9,586 $ 6,633 $ 5,029
Europe......................................................... 56,917 43,655 6,012
------- ------- -------
Total..................................................... $66,503 $50,288 $11,041
======= ======= =======
Export sales from United States to Canada........................ $ 270 $ 458 $ 1,156
======= ======= =======
Sales or transfers between geographic areas: None
Income (loss) before income taxes and equity in profit of
unconsolidated affiliates:
United States.................................................. $ (600) $(1,549) $ 451
Europe......................................................... 14,646 8,388 513
------- ------- -------
Total..................................................... $14,046 $ 6,839 $ 964
======= ======= =======
Identifiable assets:
United States.................................................. $33,066 $29,580 $27,859
Europe......................................................... 31,054 21,481 22,301
------- ------- -------
Total..................................................... $64,120 $51,061 $50,160
======= ======= =======
</TABLE>
*****
33
<PAGE> 36
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
Set forth below is a summary of the Company's unaudited quarterly results
for each quarter during 1994 and 1993. In management's opinion, these results
have been prepared on the same basis as the audited financial statements
contained elsewhere herein and include all adjustments, consisting of normal
recurring adjustments necessary for a fair presentation of the information for
the periods when read in conjunction with the financial statements and notes
thereto. All per share data have been adjusted for the two-for-one stock split
declared on January 10, 1994.
<TABLE>
<CAPTION>
1994
--------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales and services............................. $11,568 $15,838 $ 19,528 $19,569
Gross profit....................................... 3,073 4,952 8,441 6,738
Net income......................................... 219 1,518 3,986 2,623
Per share data:
Net income:
Primary....................................... .05 .35 .91 .60
Fully diluted................................. .05 .34 .91 .60
</TABLE>
<TABLE>
<CAPTION>
1993
--------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales and services............................. $ 8,377 $11,860 $ 15,833 $14,218
Gross profit....................................... 2,035 3,197 6,380 2,984
Net income (loss).................................. (256 ) 1,016 2,804 1,523
Per share data:
Net income (loss):
Primary....................................... (.08 ) .28 .72 .38
Fully diluted................................. (.08 ) .28 .72 .36
</TABLE>
34
<PAGE> 37
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
SCHEDULE II -- CONSOLIDATED SCHEDULE OF VALUATION AND
QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING CHARGED TO ADDITIONS ACCOUNTS END OF
DESCRIPTION OF PERIOD EXPENSE OTHER WRITTEN OFF PERIOD
------------------------------------------- ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts.......... $1,289 $590 $ 259 $ 325 $1,813
Allowance for real estate held for
sale.................................. 400 400(B)
-------- ------- ------- -------- --------
$1,689 $590 $ 259 $ 725 $1,813
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1993:
Allowance for doubtful accounts.......... $ 951 $492 $ (96) $ 58 $1,289
Allowance for real estate held for
sale.................................. 400 400
-------- ------- ------- -------- --------
$1,351 $492 $ (96) $ 58 $1,689
======== ======= ======= ======== ========
YEAR ENDED DECEMBER 31, 1992:
Allowance for doubtful accounts.......... $ 96 $ 903(A) $ 48 $ 951
Allowance for real estate held for
sale.................................. $ 400 400
-------- ------- ------- -------- --------
$ 400 $ 96 $ 903 $ 48 $1,351
======== ======= ======= ======== ========
</TABLE>
-------------------------
Note:
(A) Balance on the books of acquired company at the date of acquisition.
(B) Real estate was sold during the year.
35
<PAGE> 38
ITEM 21. SUBSIDIARIES OF THE COMPANY.
The parent company and Registrant is Advance Ross Corporation, incorporated
in Delaware. Subsidiaries and minority investment of the Registrant at December
31, 1994 are:
<TABLE>
<CAPTION>
STATE OR PERCENT OF
COUNTRY OF VOTING
INCORPORATION SECURITIES OWNED
--------------- ----------------
<S> <C> <C>
Subsidiaries:
Advance Ross Intermediate Corporation...................... Delaware 100%
U.S. Tax Refund Service, Ltd. ............................. Illinois 100
Advance Ross Sub Company................................... Delaware 100
Advance Ross Electronics Corporation....................... Illinois 100
Advance Ross Steel Company................................. Texas 100
Uintah Basin, Inc.......................................... Delaware 100
Investment in minority-owned company:
Uintah Basin Limited Partnership...................... Delaware 25
Europe Tax-free Shopping, Ltd. ............................ Delaware 100
Oaken Limited.............................................. Ireland 100
European Data Processing Ltd. ............................. Ireland 50
Europe Tax-free Shopping AB................................ Sweden 100
Sweden Tax-free Shopping AB................................ Sweden 100
Europe Tax-free Shopping KB................................ Sweden 100
Europe Tax-free Perfume AB................................. Sweden 100
Norway Tax-free Shopping A/S............................... Norway 100
Europe Tax-free Shopping Finland OY........................ Finland 100
Europe Tax-free Shopping A/S............................... Denmark 100
John Hall Trading GmbH..................................... Germany 100
Tax-free Shopping International ISI AB..................... Sweden 100
Europe Tax-free Shopping Service AB........................ Sweden 100
Europe Tax-free Shopping Canada, Inc....................... Canada 100
Europe Tax-free Shopping Slovenia.......................... Slovenia 100
Europe Tax-free Shopping Hungary........................... Hungary 100
Europe Tax-free Shopping Latvia............................ Latvia 100
Europe Tax-free Shopping Estonia........................... Lithuania 100
Europe Tax-free Shopping Souvenir AB....................... Sweden 100
Europe Tax-free Shopping Russia............................ Russia 100
Europe Tax-free Shopping Poland............................ Poland 100
Europe Tax-free Shopping Investment Ltd. .................. United Kingdom 100
Fexco Tax-free Shopping Ltd. .............................. United Kingdom 50
Centralbusy Ltd. .......................................... United Kingdom 50
Europe Tax-free Shopping UK Ltd. .......................... United Kingdom 50
London Tax-free Shopping Ltd. ............................. United Kingdom 50
Tourist Tax-free Shopping Ltd. ............................ United Kingdom 50
Transfer Services Ltd. .................................... United Kingdom 50
London Tax-free Ltd. ...................................... United Kingdom 50
UK Tax-free Shopping Ltd. ................................. United Kingdom 50
Europe Tax-free Shopping Deutschland GmbH.................. Germany 100
Europe Tax-free Shopping ETS Deutschland GmbH.............. Germany 100
Heimig GmbH & Co. KG....................................... Germany 100
Heimig GmbH................................................ Germany 100
Luxembourg Tax-free Shopping S.A. ......................... Luxembourg 100
Austria Tax-free Shopping Ges GmbH......................... Austria 100
International Shopping Guide Verlags GmbH.................. Germany 100
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
STATE OR PERCENT OF
COUNTRY OF VOTING
INCORPORATION SECURITIES OWNED
--------------- ----------------
<S> <C> <C>
Europe Tax-free Shopping Holland BV........................ Netherlands 100
Europe Tax-free Shopping Portugal Ltda. ................... Portugal 100
Europe Tax-free Shopping Denmark A/S....................... Denmark 100
Europe Tax-free Shopping Belgium N.V....................... Belgium 100
Europe Tax-free Shopping France S.A........................ France 50
Ventex S.A.R.L. ........................................... France 50
Europe Tax-free Shopping Spain S.A......................... Spain 100
Italy Tax-free Shopping S.R.L.............................. Italy 90
Europe Tax-free Shopping Greece S.A........................ Greece 60
</TABLE>
The operations of European Data Processing Ltd., Fexco Tax-free Shopping
Ltd., Europe Tax-free Shopping France S.A., Uintah Basin Limited Partnership and
their respective subsidiaries are accounted for by the Registrant on the equity
basis.
37
<PAGE> 40
ADVANCE ROSS CORPORATION
INDEX TO EXHIBITS
ATTACHED TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C>
Copy of Amendment No. 3 to Employment Agreement with Harve A. Ferrill, dated March
14, 1994.......................................................................... Page 45
Copy of Letter Agreement by and between William W. Staudt, dated December 31, 1994,
amending certain terms of the Stock Option Agreement by and between Advance Ross
Corporation and William W. Staudt, dated November 2, 1992......................... Page 50
Copy of Employment Agreement with Randy M. Joseph, dated November 7, 1994........... Page 64
Copy of statement re computation of per share earnings.............................. Page 67
Independent Auditor's Consent....................................................... Page 68
</TABLE>
38
<PAGE> 1
EXHIBIT 10.(a)(10)
ADVANCE ROSS CORPORATION
AMENDMENT NO. 3 TO
EMPLOYMENT AGREEMENT
THIS AMENDMENT NO. 3 TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into effective as of March 14, 1994 between Advance Ross Corporation, a
Delaware corporation (the "Company") and Harve A. Ferrill ("Ferrill").
WITNESSETH THAT:
WHEREAS, the parties hereto entered into an Employment Agreement on
November 14, 1990; and the parties hereto entered into Amendment No. 1 to such
Employment Agreement on November 14, 1990 and Amendment No. 2 to such
Employment Agreement effective January 1, 1992 (collectively, the "Employment
Agreement"); and
WHEREAS, the parties hereto wish to further amend the Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth below, the parties hereto agree as follows:
AGREEMENTS:
The parties hereto agree to amend the Employment Agreement by deleting
aforementioned Amendment No. 2 to the Employment Agreement in its entirety and
substituting in its place the following:
I. Supplemental Retirement Benefits
Ferrill shall be entitled to receive a supplemental retirement benefit from
the Company on the following terms and conditions:
1. Amount. The supplemental retirement benefit shall be an annual amount
equal to $125,000 payable in equal monthly installments as a single life
annuity commencing on the date Ferrill attains age 65, reduced by the sum of
(a) the actuarial equivalent of annual benefits payable from the Company's
defined benefit pension plan, payable as a single life annuity commencing on
the date Ferrill attains age 65, and (b) the actuarial equivalent of the annual
benefits payable from the Company's defined contribution plan attributable to
contributions from the Company (including earnings thereon, but not including
any amount described in Section 401(k) of the Code) payable as a single life
annuity commencing on the date Ferrill attains age 65.
2. Commencement Date and Form. The supplemental retirement benefit shall
commence to be paid on the date Ferrill's benefit under the Company's defined
benefit pension
-45-
<PAGE> 2
plan commences to be paid, but not earlier than the date Ferrill attains age
62. If the supplemental retirement benefit commences to be paid prior to the
date Ferrill reaches age 65, the supplemental retirement benefit shall be
reduced by the same factor as applies (or would apply) to Ferrill with respect
to the early commencement of Ferrill's benefit under the Company's defined
benefit pension plan. In the event Ferrill has a spouse on the date the
supplemental retirement benefit commences to be paid, Ferrill may elect to
receive the supplemental retirement benefit in a form other than the single
life annuity form, provided (a) the form is the actuarial equivalent of the
single life annuity form payable to Ferrill and (b) the Board of Directors
consents to such alternative form of payment. Regardless of whether Ferrill
has a spouse on the date the supplemental retirement benefit would commence to
be paid, Ferrill may receive the supplemental retirement benefit in the form of
a single sum payment if (a) Ferrill requests distribution in such form not
later than one year prior to the date the supplemental retirement benefit is
payable and payment in the form of a single sum is approved by the Board of
Directors, or (b) Ferrill requests such distribution following a "change in
control" (as defined in the Advance Ross Corporation Stock Option Plan
effective June 25, 1991).
3. Accrual and Vesting. The supplemental retirement benefit shall be
fully vested and nonforfeitable on the date Ferrill attains age 62 if Ferrill
is an employee of the Company on that date. The supplemental retirement
benefit shall be fully vested and nonforfeitable if Ferrill terminates
employment from the Company prior to the date he attains age 62 if the reason
for the termination of employment is death, Disability, a termination pursuant
to a notice to Ferrill by the Company of its intent to terminate his employment
for a reason other than Cause or the termination of the Employment Agreement
resulting in Ferrill's right to severance benefits pursuant to Section 6 of the
Employment Agreement. Ferrill shall forfeit his right to the supplemental
retirement benefit if he terminates employment from the Company prior to age 62
unless the termination of employment is due to death, Disability, a termination
pursuant to a notice to Ferrill by the Company of its intent to terminate his
employment for a reason other than Cause, or a termination of the Employment
Agreement resulting in Ferrill's right to severance benefits pursuant to
Section 6 of the Employment Agreement. Regardless of his age, Ferrill will
forfeit the supplemental retirement benefit if the termination of employment is
due to Cause.
4. Death Benefit. If Ferrill dies prior to the forfeiture of the
supplemental retirement benefit and prior to the payment or the commencement of
payment hereunder, the spouse to whom Ferrill is married on the date of his
death shall be entitled to a death benefit equal to 66-2/3% of the benefit
Ferrill would have received had Ferrill commenced to receive the supplemental
retirement benefit on the date before his death in the form of a joint and
66-2/3% survivor annuity. No other benefit or right shall exist with respect
to the supplemental retirement benefit or consulting right if a death benefit
is paid hereunder.
5. Funding. All payments for the supplemental retirement benefit shall
be from the general funds of the Company, and no special or separate fund shall
be established and no other segregation of assets shall be made to assure
payment. In the event Ferrill reasonably anticipates a change in control (as
defined in the Advance Ross Corporation Stock Option Plan effective June 25,
1991) of the Company and notifies the Board of Directors in writing to that
effect, the Company shall, at its expense, arrange for a trust to be
established and contribute thereto assets,
-46-
<PAGE> 3
including without limitation, an irrevocable standby letter of credit, pursuant
to which the supplemental retirement benefits shall be paid, subject to the
claims of the Company's unsecured creditors.
6. Terms and Conditions. For purposes of this Amendment, the following
terms shall apply:
(a) "Actuarial equivalent" shall mean, for purposes of calculating
the value of the benefits payable under the Company's defined benefit
pension plan, the Company's defined contribution plan, any single sum
payment and optional forms of benefit payment, the benefit having the same
value as the benefit which it replaces based upon the 1983 Group Annuity
Mortality Male Table and an interest rate of 7-1/4%. For purposes of
determining any adjustment for benefits commencing before age 65, the
actuarial equivalent shall be based upon the assumptions, factors or tables
provided for determining such value under the defined benefit plan of the
Company.
(b) "Joint and 66-2/3% survivor annuity" means a benefit payable
during the lifetime of Ferrill with the provision that 66-2/3% of such
monthly benefit shall be payable to his spouse commencing on the date of
death and ending on the last day of the month in which such spouse dies and
which is the actuarial equivalent of the supplemental retirement benefit
he would have received had he commenced to be paid the supplemental
retirement benefit in the form of a single life annuity on the day before
his death.
(c) "Single life annuity" shall mean a benefit payable during the
lifetime of Ferrill through the month of Ferrill's death.
(d) "Single sum payment" means a single sum payment of cash which
is actuarially equivalent to the supplemental retirement benefit paid as a
single life annuity.
II. Consulting Services
1. Consulting. If Ferrill's employment (without regard to this
Amendment) is terminated by the Company prior to the date Ferrill attains age
65, including, without limitation, a termination pursuant to a notice to
Ferrill by the Company of its intent to terminate his employment prior to the
date Ferrill would attain age 65, other than due to death, Disability or Cause,
the Company agrees to retain Ferrill as a consultant on the terms and
conditions set forth herein. If Ferrill's employment is terminated by Ferrill
for no reason or is due to death, Disability or Cause, the provisions of this
Amendment regarding Consulting Services shall be void and without effect. If
Ferrill's employment is terminated by Ferrill or by the Company for a reason
that results in Ferrill's right to severance benefits pursuant to Section 6 of
the Employment Agreement, the Company agrees to retain Ferrill as consultant on
the terms and conditions set forth herein but not earlier than the first
calendar month next following the month for which severance payments are paid
or are payable.
2. Term. If Ferrill has the right to perform and be compensated for the
provision of consulting services, he shall give 30 days' written notice of his
intent to provide such
-47-
<PAGE> 4
consulting services. The term for the provision of consulting services shall
begin on the date specified in the written notice from Ferrill, but shall not
be earlier than the date Ferrill accrues the right to provide consulting
services. The provision of consulting services shall terminate upon the
earlier of the date requested by Ferrill in writing and the date Ferrill dies,
becomes Disabled or attains age 65 unless the Company and Ferrill shall
otherwise agree in writing.
3. Compensation. For each calendar month through the month in which
Ferrill attains age 62 or the consulting term ends (whichever is earlier), the
Company shall pay Ferrill in consideration of the consulting services rendered
sixty percent (60%) of the monthly Base Amount Ferrill was receiving
immediately prior to his termination of employment (determined without regard
to any reduction in such Base Amount that would constitute a breach of the
Employment Agreement). For each calendar month following the month in which
Ferrill attains age 62 and continuing through the remainder of the consulting
term, the Company shall pay Ferrill in consideration of the consulting services
rendered forty percent (40%) of the monthly Base Amount Ferrill was receiving
immediately prior to his termination of employment (determined without regard
to any reduction in such Base Amount that would constitute a breach of the
Employment Agreement). Ferrill shall also receive continuously through the
consulting period medical, hospital, life and disability insurance in such
amounts and under such terms and conditions as other senior executive officers
of the Company shall receive such insurance. The Company agrees to reimburse
Ferrill for all reasonable direct expenses incurred by Ferrill in connection
with rendering of consulting services. The Company will provide Ferrill
reasonable office space and secretarial support during the consulting period.
4. Duties. During the consulting period, Ferrill shall consult with the
senior officers of the Company with regard to matters for which Ferrill is
reasonably qualified and experienced. The obligation to render consulting
services shall not exceed seven (7) business days each calendar month during
the consulting term through the month in which Ferrill attains age 62 and not
to exceed five (5) business days each calendar month after the month in which
he attains age 62 during the remainder of the consulting term.
III. General
1. This Amendment shall be construed consistently with the terms and
conditions of the Employment Agreement, and the terms and conditions of the
Employment Agreement including, without limitation, the definitions contained
therein and Section 15 of the Employment Agreement shall apply to this
Amendment.
2. Except as amended or otherwise provided in this Amendment, the
Employment Agreement remains unchanged and in full force and effect.
-48-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
HARVE A. FERRILL
-------------------------------
Harve A. Ferrill
ADVANCE ROSS CORPORATION
By:
------------------------------
a duly authorized signatory
-49-
<PAGE> 1
[ADVANCE ROSS CORPORATION LETTERHEAD]
EXHIBIT 10(a)(22)
December 31, 1994
Mr. William W. Staudt
Hamilton Capital Partners
50 Main Street
White Plains, NY 10606
Dear Bill:
This will confirm the agreements we have reached concerning your Stock
Option Agreement dated November 2, 1992, a copy of which is attached hereto and
incorporated herein as reference ("Option Agreement").
For valuable consideration, the receipt and sufficiency whereof is
hereby acknowledged, it is agreed that effective upon:
(i) your resignation as a director of Advance Ross
Corporation ("AROS") and
(ii) the execution and delivery of The Vacation Store
Operating Agreement between AROS and the Hamilton Group, Inc.
involving a start up venture,
the percentage of Option Shares with respect to which the Option is exercisable
shall be 100% (see Section 2 of the Option Agreement).
Except as otherwise indicated, capitalized terms used herein are
defined as set forth in the Option Agreement and, except as modified herein,
all the other terms and conditions of the Option Agreement shall remain in full
force and effect.
Please sign the enclosed copy of this letter indicating your agreement
with the terms set forth herein.
Sincerely,
Paul G. Yovovich
Paul G. Yovovich
President
AGREED AND ACCEPTED this
31st Day of December, 1994.
William W. Staudt
----------------------
William W. Staudt
-50-
<PAGE> 2
ADVANCE ROSS CORPORATION
STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the 2nd day of November, 1992 ("Grant
Date") by and between Advance Ross Corporation, a Delaware corporation
("Company"), and William W. Staudt ("Participant").
R E C I T A L S
WHEREAS, Participant will be providing certain services to the Company
and, by affording the Participant an opportunity to purchase shares of its
Common Stock, the Company believes it can promote the overall financial
objectives of the Company and its stockholders by motivating the Participant to
achieve long-term growth in stockholder equity in the Company.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
hereinafter set forth, and other good and valuable consideration, the Company
and Participant agree as follows:
1. Option Grant.
(a) Subject to the terms and conditions of this Agreement, the
Company hereby grants to the Participant the option ("Option")
to purchase an aggregate of 83,559 shares (the "Option Shares")
of the Company's Common Stock, $.10 par value per share, at the
purchase price of $12.50 per share (the "Option Price"). The
Option granted hereunder is designated as a nonqualified stock
option and the Option is not an Incentive Stock Option as
described in Section 422 of the Internal Revenue Code of 1986,
as amended.
(b) In the event the Company adopts a Stock Option Plan in
which a Committee of "disinterested" members of the Board of
Directors is appointed to administer said Plan, said Committee
shall also have the authority granted to it by this Agreement.
In the event there is no such Committee, references thereto
shall instead be deemed to read "the Company."
2. Exercise Schedule. The Option granted hereunder shall be
exercisable with respect to the Option Shares in accordance with the following
schedule:
<TABLE>
<CAPTION>
Percentage of Option
Shares with Respect to
Which the Option is
Exercisable
----------------------
<S> <C>
On and After November 2, 1993 20%
On and After November 2, 1994 40%
</TABLE>
-51-
<PAGE> 3
<TABLE>
<S> <C>
On and After November 2, 1995 60%
On and After November 2, 1996 80%
On and After November 2, 1997 100%
until termination of the Option Period
</TABLE>
3. Option Period. The exercise period of the Option shall
terminate six (6) years from the Grant Date (the "Option Period"), unless
sooner terminated as provided in this Agreement.
4. Method of Option Exercise. Participant shall exercise the
Option by delivering written notice of the Participant's intent to exercise the
Option with respect to a specific number of Option Shares to the Secretary of
the Company at the Company's principal office located at 111 West Monroe
Street, Chicago, Illinois 60603 (or such other office as the Company may
direct). Each such notice shall state the Participant's election to exercise
the Option and the number of Option Shares in respect of which it is being
exercised, be signed by the person or persons exercising the Option and, in the
event that the Option is being exercised by any person or persons other than
the Participant, be accompanied by proof, satisfactory to the Secretary of the
right of such person or persons to exercise the Option, and be accompanied by
payment, in cash or cashier's check, equal to the purchase price of the Option
Shares in respect of which the Option is being exercised. The Option shall not
have been exercised unless all the preceding provisions of this Section shall
have been complied with, and for all purposes of this Agreement, the date of
the exercise of the Option with respect to any particular shares shall be the
date on which such notice, proof (if required), and payment shall all have been
received by the Secretary. The certificate or certificates for the shares as
to which the Option shall have been so exercised shall be registered in the
name of the person or persons so exercising the Option and shall be delivered
to or upon the written order of the person or persons exercising the Option as
soon as practicable after receipt by the Secretary of such notice, proof (if
required) and payment. Such delivery shall be made at the principal office of
the Company, or at such other place as the Company shall have designated by
notice. The purchase price of any shares as to which Options shall be
exercised shall be paid in full at the time of the exercise.
5. Registration of Option Shares. Reasonably promptly after the
Company's Common Stock trades at an average price of $12.50 per share over any
20 consecutive day trading period, the Company will prepare and file, at its
expense, an S-8 registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Option Shares. The Company
shall use its best efforts to cause the registration statement to become
effective as soon as possible and will file such supplements and amendments to
the registration statement as may be necessary to keep the registration
statement in effect until the earlier of (a) Option Period expires, (b) the
Company is no longer a Reporting Company under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and (c) all the Option Shares have been
sold by the Participant. The Company will bear all the expenses incident
-52-
<PAGE> 4
to its performance of and compliance with the provisions of this Section,
including, without limitation, all such printing, legal, accounting, filing and
Blue Sky costs, but will have no obligation to pay any selling commissions.
The Company shall promptly deliver to the Participant three conformed copies of
the registration statement and, following effectiveness of the registration
statement, a reasonable number of prospectuses. In connection with the
registration statement, the Participant will furnish to the Company, in
writing, such information as is reasonably requested by the Company for use in
the registration statement or prospectus and will indemnify, to the extent
permitted by law, the Company, its officers and directors and each person who
controls the Company, against any losses, claims, damages, liabilities and
expenses resulting from any untrue or alleged untrue statement of material fact
or any omission or alleged omission of a material fact required to be stated in
the registration statement or prospectus or any amendment thereof or supplement
thereto or necessary to make the statements therein not misleading, but only to
the extent that such untrue statement or omission is contained in information
so furnished in writing by or on behalf of the Participant. For purposes of
determining the price of the Company's Common Stock:
(i) if the Common Stock is traded on a national or
regional securities exchange, the price for a particular day shall be
the closing sale price on the principal securities exchange on which
the Common Stock may then be traded or, if there is no such sale on
the day, then on the last previous day on which a sale was reported;
and
(ii) if the Common Stock is not listed on any securities
exchange, but is publicly traded and reported on NASDAQ, the price for
a particular day shall be the mean between the closing bid and asked
quotations in the over-the-counter market as reported by NASDAQ; but
if there is no bid and asked quotations in the over-the-counter market
as reported by NASDAQ on that day, then the mean between the closing
bid and asked quotations in the over-the-counter market as reported by
NASDAQ on the last previous day such bid and asked price was quoted.
6. Effect of Certain Changes.
(a) Anti-Dilution. In addition to the other provisions
set forth below in this Section 6, in the event of any Company stock
dividend, stock split, combination or exchange of shares,
recapitalization or other change in the capital structure of the
Company, corporate separation or division of the Company (including,
but not limited to, a split-up, spin-off, split-off or distribution to
Company stockholders other than a normal cash dividend), sale by the
Company of all or a substantial portion of its assets (if measured on
either stand-alone or consolidated basis), reorganization, rights
offering, share offering, partial or complete liquidation, or any
other corporate transaction or event involving the Company and having
an effect similar to any of the foregoing, then the
-53-
<PAGE> 5
Company shall adjust or substitute, as the case may be, the number of
Option Shares covered by this Option, the Option Price, and any other
characteristics or terms of the Option as the Committee shall deem
necessary or appropriate to reflect equitably the effects of such
changes to the Participant; provided, however, that any fractional
shares resulting from such adjustment shall be eliminated by rounding
to the next lower whole number of shares with appropriate payment for
such fractional share as shall reasonably be determined by the
Committee. The Committee may waive any limitation set forth in or
imposed pursuant to the terms and conditions of this Agreement so that
the Option, from and after a date prior to the effective date of any
event specified above or a Change in Control (as defined below), shall
be exercisable in full.
(b) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company (other than as a
result of an event described in Section 6(h)) or in the event of any
corporate separation or division, including, without limitation, a
split-up, a split-off or a spin-off, (1) the Committee shall waive any
limitations set forth in or imposed pursuant to the terms and
conditions this Agreement so that the Option, from and after a date
prior to the effective date of such dissolution or liquidation of the
Company or a corporate separation or division, as the case may be, as
specified by the Committee, shall be exercisable in full, and (2) the
Option shall be exercisable at the then Option Price solely for the
kind and amount of shares of stock and other securities, property,
cash, other consideration or any combination thereof receivable upon
such dissolution, liquidation, or corporate separation or division by
a holder of the number of shares of Common Stock for which such Option
might have been exercised immediately prior to such dissolution,
liquidation, or corporate separation or division, and (3) the Option
may terminate as of a date to be fixed by the Committee, provided that
not less than thirty (30) days written notice of the date so fixed
shall be given to the Participant, who shall have the right, during
the period of thirty (30) days preceding such termination, to exercise
the Option.
(c) Change in Control. If there is a Change in Control
of the Company (as defined herein) then (1) the Committee shall waive
any limitation set forth in or imposed pursuant to the terms and
conditions of the Plan or this Agreement so that the Option, from and
after a date prior to the effective date of such Change in Control, as
the case may be, as specified by the Committee, shall be exercisable
in full, (2) subject to the provisions of clauses (3) and (4) below,
effective with the date of such Change in Control, the Participant
shall be entitled, upon exercise of the Option, to receive, in lieu of
shares of Common Stock, shares of such stock or other securities,
property, cash, other consideration or any combination thereof
receivable upon such Change in Control, as the holders of shares of
Common Stock received pursuant to the
-54-
<PAGE> 6
terms of the Change in Control, except that the Committee may provide
that the Option may be cancelled as of the effective date of any such
Change in Control, provided that not less than thirty (30) days
written notice of the date so fixed for such cancellation shall be
given to the Participant; (3) the Committee may provide that any
Option otherwise exercisable on the date of any such Change in Control
may be purchased by the Company in an amount equal to the excess, if
any, of the aggregate fair market value per share of Option Shares (or
portion thereof) over the aggregate Option Price of the Option Shares
(or portion thereof) which the Committee determines to purchase; or
(4) the Committee may provide for any combination of (2) and (3)
above. For purposes of this Section 6(c), the aggregate fair market
value per share of Option Shares that the Committee determines to
purchase shall be determined by the Committee by reference to the cash
or fair market value, determined by the Committee, of the securities,
property or other consideration receivable pursuant to the Change in
Control described in this Section 6(c). The aggregate Option Price of
the Common Stock shall be determined by multiplying the number of such
shares by the Option Price. The Option may be purchased pursuant to
the provisions of this Section 6(c) only if and to the extent the
Option shall have been granted more than six (6) months prior to the
offer to purchase (except in the event of the Participant's permanent
and total disability or death as may be permitted under Rule 16b-3 of
the Exchange Act), neither the Participant nor any affiliate of the
Participant has any control respecting the offer, and that such
purchase is within the ninety (90) day period commencing with the
first purchases pursuant to the offer made to holders of options of
the Company.
(d) Company as Surviving Entity. In case of any
consolidation or merger of another corporation into the Company in
which the Company is the surviving corporation and in which there is a
reclassification or change (including a change in the right to receive
cash or other property) of the shares of Common Stock (other than a
change in par value, or from par value to no par value, or as a result
of a subdivision or combination, but including any change in such
shares into two or more classes or series of shares), the Committee
may provide that the portion of the Option then exercisable may be
exercised solely for the kind and amount of shares of stock and other
securities (including those of any new direct or indirect parent of
the Company), property, cash, other consideration or any combination
thereof receivable upon such reclassification, change, consolidation
or merger by the holder of shares of Common Stock for which the Option
might have been exercised.
(e) Change in the Common Stock. In the event of a change
in the Common Stock of the Company as presently constituted, the
shares resulting from any such change shall be deemed to be the Common
Stock within the meaning of this Agreement.
-55-
<PAGE> 7
(f) Company Discretion. To the extent that the foregoing
adjustments relate to stock or securities of the Company, such
adjustments shall be made by the Committee, whose determination in
that respect shall be final, binding and conclusive.
(g) Limit of Rights. Except as hereinbefore expressly
provided in this Section 6, the Participant shall have no rights by
reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increase or
decrease in the number of shares of stock of any class or by reason of
any dissolution, liquidation, merger, or consolidation or spinoff of
assets or stock of another corporation, and any issuance by the
Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to the Option. The grant of the
Option shall not affect in any way the right or power of the Company
to make adjustments, reclassifications, reorganizations or changes of
its capital or business structures or to merge or to consolidate or to
dissolve, liquidate, sell or transfer all or part of its business or
assets.
(h) "Change in Control" shall be deemed to have occurred
on the first to occur of any of the following events:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act)
of twenty-five percent 25% or more of either (A) the then
outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (B) the combined voting
power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however,
that the following acquisitions shall not constitute a Change
in Control of the Company: (1) any acquisition directly from
the Company (excluding an acquisition by virtue of the
exercise of a conversion privilege), (2) any acquisition by
the Company, (3) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company or (4) any
acquisition by any corporation pursuant to a reorganization,
merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses
(A), (B) and (C) of subsection (iii) of this subsection (h)
are satisfied; or
(ii) Individuals who, as of the Grant Date, constitute
the Board of Directors of the Company (the
-56-
<PAGE> 8
"Incumbent Board of the Company") cease for any reason to
constitute at least a majority of the Board of Directors of
the Company; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board of the Company shall be
considered as though such individual were a member of the
Incumbent Board of the Company, but excluding, for this
purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened
election contest (as contemplated by Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board of Directors of the Company;
or
(iii) Approval by the stockholders of the Company
of a reorganization, merger or consolidation, in each case,
unless, following such reorganization, merger or
consolidation, (A) more than seventy-five percent (75%) of,
respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or
consolidation, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B)
no Person (excluding the Company, any employee benefit plan
(or related trust) of the Company or such corporation
resulting from such reorganization, merger or consolidation
and any Person beneficially owning immediately prior to such
reorganization, merger or consolidation, directly or
indirectly, twenty-five percent (25%) or more of the
Outstanding Company Common Stock or Outstanding Voting
Securities, as the case may be) beneficially owns, directly or
indirectly, twenty-five percent (25%) or more of,
respectively, the then outstanding shares of common stock of
the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors and (C) at least a
majority of the members of the board of directors of the
corporation resulting from such
-57-
<PAGE> 9
reorganization, merger or consolidation were members of the
Incumbent Board of the Company at the time of the execution of
the initial agreement providing for such reorganization,
merger or consolidation; or
(iv) Approval by the stockholders of the Company
of the sale or other disposition of all or substantially all
of the assets of the Company, other than to a corporation,
with respect to which following such sale or other
disposition, (A) more than seventy-five percent (75%) of,
respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (B) no Person
(excluding the Company, any employee benefit plan (or related
trust) of the Company or such corporation and any Person
beneficially owning, immediately prior to such sale or other
disposition, directly or indirectly, twenty-five percent (25%)
or more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities, as the case may be) beneficially
owns, directly or indirectly, twenty-five percent (25%) or
more of, respectively, the then outstanding shares of common
stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and
(c) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent
Board of the Company at the time of the execution of the
initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company.
7. No Company Obligation. The Company shall have no duty or
obligation to affirmatively disclose to the Participant, and the Participant
shall have no right to be advised of, any material information regarding the
Company or an Affiliate at any time prior to, upon or in connection with the
exercise of the Option.
8. No Rights as Stockholder. The Participant shall have no
rights as a stockholder with respect to shares covered by the Option until the
date of issuance of a stock certificate for such shares; no adjustment for
dividends, or otherwise, shall be made if the record date therefor is prior to
the date of exercise of such Option.
-58-
<PAGE> 10
9. Requirements of Law. In the event that, upon exercise of the
Option, a registration statement under the Securities Act is not required to
have been filed pursuant to Section 5 hereof and is not otherwise in effect
with respect to the Option Shares, the Company shall not be required to issue
such Option Shares unless the Company has received evidence reasonably
satisfactory to it to the effect that the Participant is acquiring such Option
Shares for investment and not with a view to the distribution thereof, and
unless the certificate issued representing the shares of Common Stock bears the
following or similar legend:
"The shares of stock represented by this certificate (1) have
not been registered under the Securities Act of 1933 or under the
securities laws of any state and may not be sold or transferred except
upon such registration or upon receipt by the Company of an opinion of
counsel satisfactory to the Company, in form and substance satisfactory
to the Company, that registration is not required for such sale or
transfer; and (2) are subject to certain restrictions upon the transfer
thereof, and to certain rights and obligations, all as more specifically
set forth in a certain Advance Ross Corporation Stock Option Agreement,
a copy of which is available for inspection at the registered office of
the Company."
Any reasonable determination in this connection by the Company shall be final,
binding and conclusive. At such time as, in the opinion of counsel for the
Company, the above or similar legend is no longer required solely for
compliance with applicable securities laws, then the holders of such
certificates shall be entitled to exchange such certificates for certificates
representing a like number of shares but without such legend. The Company
shall not be required to sell or issue any shares under the Option if the
issuance of such shares shall constitute a violation of any provision of any
law or regulation of any governmental authority. The Company shall not be
obligated to deliver any shares of Common Stock upon exercise of an Option
until there has been compliance with any tax withholding requirements,
securities exchange listing or other requirements the Committee deems
appropriate or as provided in this Agreement.
Nothing in this Section 10 shall effect the Company's obligations to file an
S-8 registration statement in accordance with Section 6 hereof.
10. Nontransferability. The Option shall not be assigned,
transferred (except as herein provided), pledged or hypothecated in any way
(whether by operation of law or otherwise), other than by will or the laws of
descent and distribution. The Option is exercisable during a Participant's
lifetime only by the Participant or the appointed guardian or legal
representative of the Participant, and no Option shall be subject to execution,
attachment or similar process. Any attempted assignment, transfer, pledge,
hypothecation or other disposition contrary to the provisions hereof, and the
levy of any attachment or similar process upon the Option shall be null and
void and without effect. The Company shall
-59-
<PAGE> 11
have the right to terminate the Option in the event of any such assignment,
transfer, pledge, hypothecation, other disposition of the Option, or levy of
attachment or similar process, by notice to that effect to the person then
entitled to exercise the Option; provided, however, that termination of the
Option hereunder shall not prejudice any rights or remedies which the Company
or Affiliate may have under this Agreement or otherwise.
11. Nondisclosure. The Participant acknowledges that the
business, information, and techniques of and related to the Company are
valuable assets, the value of which may be destroyed by disclosure to anyone
outside the employ of the Company or its subsidiaries. The Participant further
acknowledges that it has acquired and hereafter will acquire valuable and
confidential information in connection with the Company and thus occupies a
position of trust and confidence with respect to trade secrets and Confidential
Information regarding the Company. Consequently, the Participant hereby agrees
that he will not, at any time, without the express written consent of the
Company:
(a) disclose, directly or indirectly, any Confidential
Information to anyone outside the employ of the Company or its
subsidiaries; or
(b) use, directly or indirectly, any Confidential
Information for the benefit of anyone other than the Company and its
subsidiaries.
The term "Confidential Information" as used herein means all information
of a business or technical nature disclosed to, learned or developed by the
Participant in the course of his involvement with the Company, which
information relates to the operations, methods, processes, operations,
services, proposals, technical improvements or prospective activities of the
Company. Said term shall further include any information which the Company or
its subsidiaries is, for any reason, obligated to retain in confidence, but
shall not include information so generally known as to be a part of the public
domain, or any information the disclosure of which is necessary to further the
purposes of this Agreement.
The obligations of the Participant under this Section 11 shall survive
termination of this Agreement or exercise of the Options and shall terminate
with regard to any Confidential Information only when it ceases to be
Confidential Information as defined hereinabove.
The Participant further agrees that upon expiration of his involvement
with the Company, upon written request of the Company, he will surrender to the
Company any books, lists, records, documents and other similar property
obtained by him or entrusted to him during his involvement with the Company or
an Affiliate or which were paid for by the Company or an Affiliate, it being
explicitly understood and agreed that all such books, records, lists,
documents, and other similar property are and shall remain the property of the
Company or an Affiliate.
-60-
<PAGE> 12
12. Remedies. The following provisions shall apply to the
provisions set forth in Section 12 of this Agreement:
(a) In the event of a violation by the Participant of the
covenant contained in Section 12 of this Agreement, the Participant
shall forfeit his right to the Option and any shares of Common Stock
received upon the exercise of an Option subject to this condition which
Participant still holds shall be sold to the Company at a price per
share equal to the lesser of (i) the then current price of the Stock as
determined in accordance with Section 6(i) or (ii), or if the Common
Stock is not publicly traded, on the basis of the good faith
determination of the Committee or (ii) the Option Price.
(b) Without limiting the right of the Company to pursue
all other legal and equitable remedies available for violation by the
Participant of the covenants contained in Section 12 of this Agreement,
it is expressly agreed that such other remedies cannot fully compensate
the Company for such a violation and that the Company shall be entitled
to injunctive relief (including temporary restraining orders after
reasonable notice prior to application therefor) to prevent any such
violation or continuing violation thereof, and the Participant hereby
consents to the granting of such relief (including temporary restraining
orders after reasonable notice prior to application therefor) by any
court of competent jurisdiction.
(c) It is the intent and understanding of the Company and
the Participant that if in any action before any court or agency legally
empowered to enforce the covenants contained in Section 12 of this
Agreement, any term, restriction, covenant or promise contained therein
is found to be unreasonable and accordingly unenforceable, then such
term, restriction, covenant or promise shall be deemed modified to the
extent necessary to make it enforceable by such court or agency.
(d) The covenants contained in Section 12 of this
Agreement shall continue in effect pursuant to, and to the extent
consistent with, their terms notwithstanding the termination of the
Consulting Agreement or other termination of this Agreement.
13. Withholding. The Participant and Company agree that the
Company shall have no obligation to issue or transfer shares of Common Stock
upon the exercise of the Option, unless and until the Participant or his
representative shall have satisfied the obligation of the Company and any of
its direct or indirect subsidiaries with respect to the withholding of federal,
state or local taxes, or in order to sustain a right of the Company or any of
its direct or indirect subsidiaries to a tax deduction under federal, state or
local law with respect to the exercise of an Option. The obligation of the
preceding sentence may be satisfied, in the sole discretion of the Committee,
by the Participant's or representative's tendering cash, or the Committee may
cause to be withheld from issuance or payment such number of shares of Common
-61-
<PAGE> 13
Stock, cash, or any combination of the foregoing as the Committee determines
necessary to satisfy the obligation of the Company or its Affiliates, or in
order to sustain a right of the Company or any of its Affiliates to a tax
deduction under federal, state or local law with respect to the exercise of an
Option. The Company shall agree to permit the Participant to tender cash or
other property, including shares of Common Stock, in satisfaction of any
withholding obligation, and Participant agrees that he shall have no right to
any Common Stock or cash hereunder unless and until such withholding obligation
shall be satisfied in the sole discretion of the Committee.
14. Condition of Engagement. Nothing herein shall be construed as
an obligation to retain Participant as a Director or Hamilton Capital Partners
as a consultant to the Company; all agreements with respect to such obligations
being set forth in the Consulting Agreement.
15. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon each successor and assign of the Company. All
obligations imposed upon the Participant or his Representative, and all rights
granted to the Company hereunder, shall be binding upon the Participant's or
the Representative's heirs, legal representatives, and successors.
16. Choice of Laws. This Agreement shall be governed by the laws
of the State of Delaware (other than its laws respecting choice of law).
17. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which shall
constitute but one and the same instrument.
18. Amendment. This Agreement may not be amended without the
written agreement of the Participant and the Company.
19. Validity. If any provision of this Agreement shall for any
reason be held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid or unenforceable provision were
omitted.
20. Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter thereof
and supersedes all prior agreements with respect thereto, including, without
limitation, the Letter Agreement, dated August 5, 1992, by and between the
Company and Hamilton Capital Partners.
21. Affiliate. For purposes hereof, the term "Affiliate" means
any individual, corporation, partnership, association, joint-stock company,
trust, unincorporated association or other entity (other than the Company) that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the Company.
-62-
<PAGE> 14
IN WITNESS WHEREOF, Company has caused this Agreement to be executed by
its duly authorized officer, and the Participant has hereunto set his hand and
seal, effective as of the date first written above.
William W. Staudt
------------------------------- ADVANCE ROSS CORPORATION
William W. Staudt
37 Studio Lane By: Harve A. Ferrill
Bronxville, NY 10708 -------------------
Harve A. Ferrill
President and CEO
Nov. 2, 1992
-------------------------------
Date
-63-
<PAGE> 1
[ADVANCE ROSS CORPORATION LETTERHEAD]
EXHIBIT 10(a)(26)
November 7, 1994
PERSONAL & CONFIDENTIAL
Mr. Randy M. Joseph
3660 N. Lake Shore Drive
Apt. 3502
Chicago, IL 60613
Dear Randy:
Following up on our discussions, this letter highlights the principal terms for
your joining Advance Ross as chief financial officer.
Title and Responsibilities: Vice president and chief financial
officer with appropriate
responsibilities as outlined in the
attached sheet.
Salary: $110,000 per year; our current
practice is to pay monthly in
advance.
Bonus: Participation in the executive bonus
plan, as determined by the board of
directors, beginning with
fiscal/calendar year 1995.
Benefits: Participation as provided in the
employee plans per their terms as
generally described in the booklet
given you.
Pre-paid Bonus: In recognition of the possibility
that you will forfeit an expected
January 1995 bonus payment from your
current employer, Advance Ross would
pay you $20,000 on February 1 as a
pre-payment of $10,000 from each of
your anticipated earned bonuses for
1995 and 1996. You will use your
reasonable best efforts to obtain
the bonus payment from your current
employer.
-64-
<PAGE> 2
Mr. Randy M. Joseph
Page 2
November 7, 1994
Options: A grant of options to purchase 5,000
shares of Advance Ross common stock
at an exercise price of the closing
stock price on your first day as an
employee. One-fifth of the grant
will vest on each of the first five
anniversaries of your employment.
All items will be covered in an
option agreement to be executed.
Termination: If within nine months of your
starting date at Advance Ross your
employment is terminated by Advance
Ross other than for cause, you shall
be paid one-half year's salary plus
an amount to provide health care
insurance for one year. If after
nine months following your starting
date your employment is terminated
by Advance Ross other than for
cause, or if within nine months of
your starting date your employment
is terminated other than for cause
following a change of control, you
shall be paid one year's salary plus
an amount to provide health care
insurance for one year.
Starting Date: November 21, or such earlier date as
is feasible, subject to your
discussions with your current
employer.
We're very excited about your coming aboard. Please indicate your agreement
with the terms by signing below.
Sincerely,
Paul G. Yovovich
---------------------
Paul G. Yovovich
President
PGY/kat
enclosure
Agreed to: Randy M. Joseph Date: 11/7/94
----------------- ---------
-65-
<PAGE> 3
ADVANCE ROSS CORPORATION
CHIEF FINANCIAL OFFICER - PRIMARY RESPONSIBILITIES
Overall responsibility for tax, accounting, financial reporting, budgeting and
treasury activities including:
1) filing of Federal, state and local income and franchise tax returns;
2) maintenance of books for U. S. entities, including PPC operations;
3) preparation of consolidated financial statements;
4) preparation and filing of 10-K and 10-Q reports and financial sections
of annual report;
5) preparation of annual operating budget;
6) preparation of consolidating monthly operating results and variance
analyses;
7) maintenance of records of pension plans;
8) oversight of preparation of proxy statement;
9) preparation of board and annual meeting minutes;
10) maintenance of primary contact with auditors and tax advisers;
11) oversight of various cash and investment accounts; and
12) participation in acquisition candidate review and transaction
structuring.
November 7, 1994
-66-
<PAGE> 1
EXHIBIT 11
ADVANCE ROSS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
STATEMENT RECOMPUTATION OF PER SHARE EARNINGS
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------------------------------------
1994 1993 1992
<S> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,423 3,342 3,511
Net effect of dilutive stock options - based on
the treasury stock method using average market price 889 704 198
------ ------ ------
TOTAL 4,312 4,046 3,709
====== ====== ======
Net income $8,346 $5,087 $ 669
Preferred stock dividends (23) (25) (25)
Reduction of interest expense due to application
of proceeds from exercise of options in excess
of 20% of shares outstanding 154
------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $8,323 $5,216 $ 644
====== ====== ======
PER SHARE EARNINGS $ 1.93 $ 1.29 $ 0.18
====== ====== ======
FULLY DILUTED:
Average shares outstanding 3,423 3,342 3,511
Net effect of dilutive stock options - based on the
treasury stock method using the period-end price,
if higher than average market price 889 906 198
------ ------ ------
TOTAL 4,312 4,248 3,709
====== ====== ======
Net income $8,346 $5,087 $ 669
Preferred stock dividends (23) (25) (25)
------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCK $8,323 $5,062 $ 644
====== ====== ======
PER SHARE EARNINGS $ 1.93 $ 1.19 $ 0.18
====== ====== ======
</TABLE>
The shares outstanding have been restated to give effect to the two-for-one
common stock split in January 1994.
-67-
<PAGE> 2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-74620 of Advance Ross Corporation on Form S-8 of our report dated March 13,
1995, appearing in the Annual Report on Form 10-K of Advance Ross Corporation
for the year ended December 31, 1994.
Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
March 30, 1995
-68-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 13,539
<SECURITIES> 0
<RECEIVABLES> 24,684
<ALLOWANCES> 1,813
<INVENTORY> 1,117
<CURRENT-ASSETS> 42,900
<PP&E> 5,492
<DEPRECIATION> 3,496
<TOTAL-ASSETS> 64,120
<CURRENT-LIABILITIES> 22,502
<BONDS> 6,707
<COMMON> 38
0
506
<OTHER-SE> 32,987
<TOTAL-LIABILITY-AND-EQUITY> 64,120
<SALES> 9,586
<TOTAL-REVENUES> 66,503
<CGS> 6,346
<TOTAL-COSTS> 43,299
<OTHER-EXPENSES> 568
<LOSS-PROVISION> 590
<INTEREST-EXPENSE> 1,499
<INCOME-PRETAX> 14,046
<INCOME-TAX> 6,574
<INCOME-CONTINUING> 8,346
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,346
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.93
</TABLE>
