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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[/x/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission file number: 1-7141
PS GROUP, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2760133
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4370 LA JOLLA VILLAGE DRIVE, SUITE 1050
SAN DIEGO, CALIFORNIA 92122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 546-5001
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- --------------------------- -----------------------------------------
Common Stock - $1 par value New York Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: none.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value (based on the closing price on the New York Stock
Exchange-Composite Transactions) of the voting stock held by non-affiliates of
the registrant on March 22, 1994 was $66,492,364*.
* Assumes Berkshire Hathaway Inc. and its subsidiaries owning stock in the
Company are not affiliates of the Company. Berkshire Hathaway Inc. and these
subsidiaries have filed a Form 13-D dated April 25, 1990, and amendments
thereto, dated September 17, 1990, October 12, 1990, December 14, 1990 and
January 28, 1991.
The number of shares of common stock outstanding as of March 22, 1994 was
6,065,969.
Portions of Part I and Part II are incorporated by reference from registrant's
Annual Report to Stockholders for the fiscal year ended December 31, 1993. Part
III is incorporated by reference from registrant's Proxy Statement for its 1994
stockholders' meeting.
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PART I
ITEM 1. BUSINESS
The principal businesses of PS Group, Inc. (the "Company") are aircraft
leasing (conducted directly), fuel sales and distribution, oil and gas
production and development, and metallic waste recycling (all conducted through
subsidiaries). On March 14, 1994 the Company sold its travel management
business formerly conducted by its 85% owned subsidiary, USTravel Systems Inc.
The Company was incorporated in Delaware in 1972 (under the original name PSA,
Inc.) as the successor to a California corporation originally incorporated in
1945. The Company has its principal executive offices at 4370 La Jolla Village
Drive, Suite 1050, San Diego, California, 92122; telephone number (619) 546-
5001. As of December 31, 1993 the Company's corporate staff consisted of 13
full-time employees who conduct the Company's aircraft leasing operations as
well as its executive and administrative activities.
AIRCRAFT LEASING
The Company's aircraft investments consist of 21 wholly-owned and seven
partially-owned jet aircraft. No additional aircraft have been acquired for
lease since 1989, nor are any purchases currently contemplated. All of the
Company's wholly-owned aircraft have been pledged pursuant to various financing
arrangements.
Currently the Company has 16 aircraft on lease to USAir, Inc. ("USAir") under
leases that expire at various times between 1998 and 2004. Six of the aircraft
are McDonnell Douglas MD-80s and 10 are British Aerospace 146-200s. USAir
contributed approximately 80% of the Company's aircraft lease revenues in 1993.
The Company owns and leases to Continental Airlines, Inc. ("Continental") one
MD-80 aircraft and one Boeing 737-300 aircraft under leases that expire at the
end of 2007 and has a one-third interest in seven Boeing 737-200 aircraft which
are leased to Continental under leases that expire in 1996. The Company also
owns and leases to America West Airlines, Inc. ("America West") one Boeing 737-
300 aircraft under a lease that expires in 2006. Two Boeing 747-100 freighter
aircraft formerly leased to Pan American World Airways ("Pan Am") are held for
sale. Both 747s were converted from passenger to full freighter configuration
following their return from Pan Am. See "Recent Developments."
All of the Company's leases are net leases, which provide that lessees will
bear the direct operating costs and the risk of physical loss of the aircraft,
pay taxes, maintain the aircraft, indemnify the Company against any liability
suffered as the result of any act or omission of the lessee, maintain casualty
insurance in
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an amount equal to the specific amount set forth in the lease (which may be less
than market value) and maintain liability insurance naming the Company as an
additional insured. In general, substantially all obligations connected with the
operation and maintenance of the leased aircraft are assumed by the lessee and
minimal obligations are imposed upon the Company. The leases also typically
provide that in those limited instances where the lessees have the voluntary
right to terminate the lease, the lessee is obligated to pay the Company a
stipulated sum which is designed to retire any existing indebtedness relating to
the aircraft and otherwise provide the Company with the same economic value it
would have received had the lease continued.
Aircraft leases entered into by the Company met the Company's requirements for
an acceptable rate of return, but also carried greater risk since the Company's
lessees tended to be less creditworthy than some of their competitors. See
"Recent Developments." The Company does not foresee an expansion of this line
of business in the future.
In 1993 aircraft leasing contributed $35.9 million to the Company's
consolidated operating revenues, or approximately 23% of total revenues from
continuing operations.
RECENT DEVELOPMENTS. Continental successfully completed a reorganization and
emerged from bankruptcy in April 1993. As a result of its successful
reorganization Continental is one of the lowest operating cost airlines in the
United States. Continental has also begun a new, low fare service called
CalLite focused primarily in the Eastern part of the United States. Although
Continental's emergence from bankruptcy is a good sign no prediction can yet be
made about Continental's long-term prospects. While Continental was in
bankruptcy the Company negotiated amended leases for all of the aircraft owned
by the Company and operated by Continental (including the seven 737-200 aircraft
in which the Company owns a one-third interest). Pursuant to the agreements
reached, Continental assumed all of the leases to which the Company is a party.
America West continues to operate under the protection of the bankruptcy laws
of the United States. However, America West has reported four successive
quarters of both operating and net profits. On February 24, 1994 the America
West Board of Directors announced that it had selected Am West Partners, L.P. as
the lead investor in the company's bankruptcy reorganization. The Am West
Partners bid would provide America West with $100 million of new long-term
unsecured debt and $120 million of new equity in exchange for a minority
ownership interest in a reorganized America West. Certain creditors of America
West have announced that they may submit a competing plan of reorganization.
America West leases one 737-300 aircraft from the Company, which lease has been
assumed by America West in its bankruptcy proceeding.
Following the cessation of operations by Pan Am on December 4, 1991, two 747-
100 aircraft were returned to the Company in early 1992. At the time of
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return both aircraft were in a passenger configuration, although each had been
previously modified, at the US Government's expense, to be convertible into
cargo configuration in case of a national emergency.
In February 1992 the Company committed to have the two ex-Pan Am 747s
converted to full freighter status by The Boeing Company ("Boeing"). The
Company also entered into an agreement with Boeing for the marketing of the
aircraft. Conversion of both aircraft is now complete.
Used aircraft values continued to decrease during 1993. As a result the
Company -- which wrote-down the value of the two 747-100s at the end of 1991 and
1992 by approximately $5.8 million and $9.9 million, respectively -- took a
further write-down of those aircraft at the end of 1993 of approximately $17
million. While the necessity for write-down is disappointing and the marketing
period for the 747 freighters is likely to be lengthy (because of current lack
of demand and competing aircraft on the market), the Company believes that,
absent conversion to freighter, the 747s could not have been sold in passenger
configuration and would have had to be scrapped.
When the lease for the 737-300 aircraft was assumed by America West the
Company deferred six months of rentals which are now being repaid with interest,
over the remaining term of the lease. The monthly rental rate was also reduced
although the agreement with America West calls for three reset dates -- one each
in 1994, 1996 and 1998 -- when the rent can be increased if market rates are
higher than the rent then being paid. The Company expects the 1994 reset to
yield an increase in monthly rent but no assurance can be given that such an
increase will occur.
When Continental assumed the leases covering the seven older 737-200 aircraft
(in which the Company has a one-third interest) the lease terms were extended to
1996 (from 1992 and 1993) and the rent was significantly reduced. In 1992 three
months of rent payments were deferred on these 737-200 aircraft to be repaid
over the remaining lease terms. The aircraft owners also agreed to loan to
Continental certain amounts, not to exceed $845,000 per aircraft (one third of
which is the responsibility of the Company), to fund certain aircraft
modifications which will be repaid by Continental generally over the remaining
lease term. When Continental assumed the leases of the 737-300 and the MD-80
leased to it, the Company agreed to a rent moratorium for those aircraft of
approximately $2.3 million which is now substantially repaid. The Company has
also agreed to fund various aircraft modifications totalling approximately
$844,000 for both aircraft, which would be repaid over a 48 month period
starting after the modifications are completed.
Because of the large number of aircraft leased to USAir, the Company has
previously expressed concern regarding USAir's recent losses and weakening
financial condition. A continuing deterioration of USAir's financial condition
could have a material adverse impact on the Company, particularly because ten of
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the aircraft leased to USAir are currently grounded by USAir (although all rent
payments are current). The USAir leases provide significant cash flow to the
Company. During 1992 and early 1993 USAir reached agreement with its employees
(both union and non-union) for wage and work rules concessions designed to help
lower USAir's operating costs. In the latter part of 1993 some of the wage
concessions "snapped back" to prereduction levels. In early 1993 USAir
received an equity infusion of approximately $400 million from British Airways.
USAir also entered into certain service coordination agreements with British
Airways that are designed to improve USAir's traffic. At the time of its
initial investment British Airways stated its intention to invest up to an
additional $450 million in USAir if US Government approvals were obtained. In
March 1994 British Airways reported that it will delay further investments in
USAir pending USAir's ability to cut costs and improve its financial
performance. Although USAir continued to record losses for 1993 those losses,
on a comparative basis, were substantially less than 1992. However USAir has
announced that it expects a larger pretax loss for 1994 than it reported in
1993. USAir is under pressure in some of its markets from certain other lower
cost competitors and in late 1993 announced that it would take steps in various,
under-500-mile markets, to improve its operating costs to compete more
effectively. An important component of USAir's long-term viability will be
negotiation with employees for further wage and work rule concessions that will
allow USAir to remain competitive with other airlines some of which have lower
operating costs than USAir. The ten BAe 146-200 aircraft leased to USAir by the
Company remain out of service. USAir is attempting to sell or sublease these
aircraft worldwide. The information relating to USAir and reported herein by
the Company was obtained primarily from published media reports. The Company
refers readers to public information regarding USAir for further details
relating to USAir's financial condition.
The ultimate impact of (i) the sale of the two 747-100 freighters, (ii) the
bankruptcy of America West, (iii) Continental's long-term prospects following
reorganization and (iv) the effect of USAir's deteriorating financial condition
on the Company is unknown. It is possible that the 747-100 freighter aircraft
will be sold without further losses and that all of the current aircraft leases
will remain with the existing carriers. On the other hand, further economic
deterioration of the Company's lessees could result in the return of some or all
of the aircraft to the Company or the negotiation of lease terms less favorable
to the Company. In particular if USAir's financial condition should deteriorate
to a point where it sought protection from its creditors it is almost certain
USAir would reject the leases for the ten BAe 146 aircraft it leases from the
Company. If the aircraft were returned, the Company would be required to find
purchasers or new lessees for the aircraft. To the extent that sales prices
were less than the Company's carrying value or less favorable lease rates were
obtained, the Company would be negatively affected. To the extent the value of
a particular aircraft was less than the outstanding debt on that aircraft, the
aircraft could be returned to the lender and the Company's equity in such
aircraft written off. In some cases aircraft debt is recourse to the Company in
which case the Company could be liable to the
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lender for any deficiency between the value of the aircraft and the outstanding
debt .
Management believes that the current aggregate underlying asset values as
indicated by current published values of the Company's aircraft are at least
equal to the carrying value. However, if permitted the Company believes USAir
would seek to reject all of its leases for BAe 146 aircraft (currently 18 in
number) including the ten owned by the Company. If this were to happen the
sudden large number of such aircraft on the market would likely reduce the
market value of the Company's ten BAe 146s below the Company's carrying value.
PS TRADING - FUEL SALES AND DISTRIBUTION
PS Trading, Inc. (PST), which is wholly-owned by the Company, is headquartered
in Dallas and also has sales staff in California and Arizona. PST contributed
$106.9 million to the Company's 1993 consolidated operating revenues or
approximately 68% of total revenues from continuing operations.
PST's operations are divided into three divisions: aviation fuel sales,
wholesale marketing and facility services. Each of these divisions is integral
to the Company's core business - marketing and distribution of refined petroleum
products.
A renewed commitment to the core business began in January 1991 as PST's
management focused its efforts on developing a professional field sales team to
assist PST with expansion of its wholesale marketing division. Efforts to
continue expanding this business are expected to continue during 1994. PST's
wholesale division is located in Sacramento, California and is responsible for
developing sales of unbranded gasoline, diesel and aviation fuels in the western
United States. PST's wholesale division is targeting retailers along with
certain institutional and commercial users such as police departments and ground
transportation companies. PST's marketing strategy has proven to be successful
thus far and the wholesale division is currently PST's fastest growing segment
with sales increasing in 1993 approximately 35% over 1992.
Unbranded motor fuel sales are currently highly competitive. As PST's
customer base develops, higher volumes are expected to result in lower fuel
costs from suppliers thus enhancing PST's competitiveness in wholesale markets.
The majority of PST's petroleum products are currently being purchased from the
major oil companies. PST has been gradually reducing purchases from the smaller
independent refiners who have been hurt by the imposition of strict new
environmental laws.
PST's traditional base business has been aviation fuel sales. PST has
diversified its customer base in this area to become less dependent on sales to
the scheduled airline industry. PST's aviation division which is located in
Dallas, Texas is responsible for developing sales to domestic and international
airlines,
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cargo carriers, commuter airlines and government agencies throughout
the United States. In addition, this group is responsible for developing and
providing support for the aviation charter market including sales to in-house
flight departments of several large corporations.
PST owns or leases limited fuel storage facilities or pipelines in several
locations including San Francisco, Oakland and Los Angeles. During 1993 the
quantities of third-party owned fuel flowing through PST's storage and pipeline
facilities increased slightly. During 1994 PST plans on leasing a fuel storage
terminal at Portland, Oregon and is attempting to sublease an under-utilized
storage facility it owns located on the Oakland International Airport.
ECONOMIC AND COMPETITIVE FACTORS AFFECTING PST. Virtually every refiner and
reseller of refined petroleum products who sell in PST's market areas
(including other large distributors and major oil companies) is a competitor or
potential competitor of PST for the sale of its products. Many of these
companies have greater financial resources and broader marketing capabilities
than PST. In some instances competitors, especially refiners, may have lower
costs for the refined petroleum products they sell and may thus be in a
favorable position to offer product prices to PST's customers lower than those
PST can offer.
EMPLOYEES. PST had 24 employees at December 31, 1993, none of whom are
covered by union contracts.
STATEX - OIL AND GAS PRODUCTION AND DEVELOPMENT
The Company's oil and gas operations are conducted by Dallas-based Statex
Petroleum, Inc. (Statex), which is 80% owned by the Company and 20% owned by the
two managers of Statex. Statex's primary business activity is the application
of secondary recovery processes (primarily water injection and, to a more
limited extent, use of higher yielding polymer injection) to enhance production
from older oil producing properties which have been depleted of their natural
reservoirs. Typically this involves injecting water at key locations to
repressure the reservoir and moving the crude oil to producing wells. Statex
also augments the water injection with polymers to increase the recovery
efficiencies. Statex concentrates its efforts in areas and reservoirs which
have a proven history of economically attractive secondary recovery operations.
Currently, the main focus is in North Texas.
During 1993 Statex continued to expand its largest project, increasing
recovery efficiency by converting two older producing wells to injection wells,
as well as maintaining the injection of polymers. It also continued to increase
water injection volumes into a property purchased in 1991. In anticipation of
the abandonment of another project, Statex recorded a $1.8 million write-off in
1993 when the project failed to respond to water injection. At the end of 1993
gross production from all of Statex's enhanced production fields remained at
1,500
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barrels of oil per day which is approximately the same as production
levels at the end of 1992. During 1994 Statex will seek to further increase the
recovery efficiencies in its existing projects.
A total of 8 producing wells were drilled in 1993. In addition, several
older producing wells were converted to water injection to increase the
secondary recovery efficiency. Polymers continue to be injected for the same
purpose.
The following table sets forth, by states, well ownership and producing
acreage as of December 31, 1993:
<TABLE>
<CAPTION>
Gross Wells Net Wells Producing Acres
-------------------------------------------------------
Oil Gas Oil Gas Gross Net
---- --- --- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama 2 0 1.00 0 320.0 160.0
Louisiana 0 2 0 0.04 22.5 2.9
New Mexico 1 0 0.07 0 120.0 8.2
North Dakota 1 0 1.00 0 304.1 304.1
Oklahoma 3 14 0.09 6.16 6,566.0 1,878.5
Texas 87 4 76.55 1.60 8,934.9 6,594.1
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TOTAL 94 20 78.71 7.80 16,267.5 8,947.8
</TABLE>
The following table sets forth, by states, undeveloped acreage ownership as
of December 31, 1993:
<TABLE>
<CAPTION>
Acres
--------------------------------
Gross Net
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<S> <C> <C>
Oklahoma 26 26
Texas 5,851 1,661
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TOTAL 5,877 1,687
</TABLE>
For further information with respect to the oil and gas properties see Page
12 of the Company's 1993 Annual Report to Stockholders.
The following tables set forth information related to oil and gas
production and wells drilled for the years ended December 31, 1993 and
December 31, 1992:
<TABLE>
<CAPTION>
1993 1992
--------------------
<S> <C> <C>
Average Sales Price:
Oil (Per BBL) $17.64 $20.03
Gas (Per MCF) 2.02 1.68
Average Production Cost
per Equivalent BBL $ 9.93 $10.72
</TABLE>
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<TABLE>
<CAPTION>
1993 Gross Producing and Net Producing and
Dry Wells Drilled/(1)/ Dry Wells Drilled/(2)/
--------------------------------------------------------------------------------------
Total Producing Dry Total Producing Dry
-------- ---------- -------------------------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells 0 0 0 0 0 0
Development Wells 8 8 0 7.1 7.1 0
1992 Gross Producing and Net Producing and
Dry Wells Drilled/(1)/ Dry Wells Drilled/(2)/
--------------------------------------------------------------------------------------
Total Producing Dry Total Producing Dry
------- ---------- ---------------------------------- ---------- ---------------------
Exploratory Wells 0 0 0 0 0 0
Development Wells/(3)/ 6 6 0 6 6 0
</TABLE>
(1) A gross well is a well in which a working interest is owned. The number of
gross wells is the total number in which a working interest is owned.
(2) A net well is deemed to exist when the sum of fractional ownership working
interests in gross wells equals one. The number of net wells is the sum of
the fractional working interests owned in gross wells expressed as whole
numbers and fractions thereof.
(3) Does not include 3 gross (3 net) non-producing injection wells drilled in
1992.
As of December 31, 1993 Statex was not participating in the drilling and/or
completion of any wells. As of December 31, 1992 Statex was participating in
the drilling and/or completion of 3 gross wells (2 net wells).
Statex's operations are subject to all risks inherent in the exploration
for and production of oil and gas, including blowouts, cratering and fires,
which could result in damage to or destruction of oil and gas wells or
formations, producing facilities or property, or could result in personal injury
or loss of life. Such an event could result in substantial cost to Statex and
could have a material adverse effect upon its financial condition if Statex is
not fully insured against such risk. Statex carries substantial insurance
coverage but may not be fully insured against such risks.
REGULATION. Statex's operations are affected from time to time in varying
degrees by political developments and federal and state laws and regulations.
In particular, oil and gas production operations and returns are affected by tax
and other laws relating to the petroleum industry, changes in such laws and
constantly changing administrative regulations. In addition, oil and gas
operations are subject to interruption or termination by governmental
authorities for ecological and other considerations.
Additionally, in most, if not all, areas where Statex conducts activities,
there are statutory provisions regulating the production of oil and gas. These
provisions allow administrative agencies to promulgate rules in connection with
the operation and production of both oil and gas wells, including the method of
developing new fields, spacing of wells and the maximum daily production
allowable for both oil and gas wells.
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ECONOMIC AND COMPETITIVE FACTORS AFFECTING STATEX. Statex is engaged
primarily in the production and sale of crude oil and natural gas directly from
the well to remarketers. Statex has literally hundreds of competitors most of
which are larger and have greater resources than Statex. Oil and natural gas
are fungible commodities and as such the prices Statex receives for its products
are directly related to the open market price for such products at the time of
sale. These prices generally fluctuate and are for the most part controlled by
the laws of supply and demand. The price for oil is particularly driven by
worldwide production and demand. Statex has virtually no control over the
establishment of prices for its products.
To the extent there should be an oversupply of product and resulting lower
prices Statex's revenues would be negatively impacted.
EMPLOYEES. Statex had 9 employees as of December 31, 1993. None of the
employees are covered by union contracts.
RECONTEK - METALLIC WASTE RECYCLING
Recontek, Inc. (Recontek) is involved in the recycling of metal-laden
hazardous and non-hazardous wastes from the electronics, aerospace and metal-
finishing industries. Recontek's recycling facility, located in Newman,
Illinois, received a consolidated permit to operate from the Illinois
Environmental Protection Agency (the "IEPA") and the United States Environmental
Protection Agency (the "EPA") in 1989 and subsequently opened the facility in
November 1990.
The plant accepts certain types of waste sludges and solutions, from which
are extracted metals, metal compounds, non-metallic products and distilled
water, using a hydrometallurgical process. The extracted products are then sold
to industry for commercial use and the distilled water is re-used in a closed-
loop system within the plant.
Since generators of hazardous waste are faced with potential future
liability for cleanup if they dispose of (e.g. landfilling, deep well injection,
etc.), rather than recycle their wastes, Recontek's recycling concept is
believed by Recontek to be an important benefit. However, to date Recontek's
process has not been economically successful, in part due to the limited types
and volume of waste that Recontek has been able to recycle and the higher
operating costs associated with Recontek's recycling process. It is still to be
determined whether waste generators will pay the fees required by Recontek's
higher cost process in order to minimize potential future liability. The
difference between Recontek's recycling fees and the cost of hazardous waste
disposal has recently been exacerbated due to (i) substantial unused landfill
and incinerator capacity, (ii) efforts by waste generators to minimize the
amount of waste created and (iii)
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recession induced reductions in plant
utilization, and thus lower waste output, by some waste generators.
Refer to Note 4 of the Notes to the Consolidated Financial Statements in
the Company's 1993 Annual Report to Stockholders for a discussion of a $56.4
million write-down of the assets relating to Recontek made in 1992.
During 1993 Recontek operated on a limited basis two process lines, one for
copper hydroxide/copper sulfate wastes and the second for zinc oxide wastes.
The zinc line began operating for the first time in August 1993, following 18
months of development and pilot studies. The development related to the zinc
oxide processing initially focused on extracting nearly pure zinc from zinc
electrolyte through the process of electrowinning in a cell house. It was
determined that this step could not be successfully and safely implemented in
the time frame desired and also would require substantial capital expenditures
to produce the quality of zinc metal desired. Therefore the zinc process line
is producing a zinc sulfide that, while commercially saleable, does not produce
the same revenues as pure zinc metal. The copper hydroxide/copper sulfate line
was successfully restarted in 1993 by utilizing processing techniques verified
during the zinc line development and pilot studies. While recycling copper
wastes has proven chemically feasible, revenues from recycling have suffered
because of the low volumes recycled.
Plans for 1994 include the start-up of process lines for cupric chloride
waste and zinc chloride waste. The chemistry and mechanical processes
associated with these lines have been tested, however, there is no assurance
that they can be commercially successful.
Economic success at the Newman plant will require continued copper
processing and the operation of the yet-to-be-determined process line(s) which
may target waste streams heretofore not accepted at the facility. The
continuation of the zinc oxide line will depend, in large part, on the results
of the current processing of 750 tons of waste from a Kentucky cleanup site.
This decision will also take into account the amount of similar waste available
in the Midwest, the per ton recycling fee that can be commanded, and the quality
and marketability of the products produced by this process.
Based on the limited progress to date, there can be no assurance that
Recontek will be able to develop a commercially feasible business either by
itself or in conjunction with third parties. As required by the Company's Bank
Credit Agreement, Recontek continues to operate at a level which will not result
in total pretax losses and capital expenditures exceeding $300,000 per month.
Absent additional capital expenditures, the Newman facility cannot process
sufficient volumes of waste to produce revenues equaling or exceeding expenses
and there can be no assurance that additional capital expenditures will result
in the ability to process such volumes.
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While Recontek attempts to attract enough business to justify modifications
to reach "breakeven" at the Newman facility, real future economic success for
Recontek will depend upon sufficiently developing the recycling process to the
point where the construction of additional facilities is justified. Currently,
Recontek holds permits to build plants in Arizona and Indiana. Siting agreements
have also been reached with communities in Wisconsin and Washington and permits
to operate are being pursued in these two states as well. Recontek has not
developed plans to build and operate these other facilities and there can be no
assurance that it will do so.
If progress at the Newman facility does not continue and/or little or no
interest is being shown by third parties as to investing in or purchasing
Recontek, the Company may close the plant. In that event, the remaining assets
of Recontek would be written-off and provision would be made for "closure" as
required by Recontek's Part B permit. The total expense related to the Newman
plant closure is not expected to exceed $2.5 million. The Newman plant was
partially financed by the sale of $15 million of Resource Recovery Bonds. The
Company has provided cash collateral of $15 million to guarantee payment of
these bonds. If the Newman plant is closed the bonds will accelerate and the
$15 million will be utilized to make the required repayment.
Recontek's business is principally driven by two significant federal
environmental statutes, the Resource Conservation and Recovery Act ("RCRA"),
which establishes a system for controlling hazardous waste from "cradle to
grave" and sets stringent licensing and operating standards for both generators
and treatment, storage and disposal firms, and the Comprehensive Environmental
Resources, Compensation and Liability Act of 1980 ("CERCLA"), which addresses
the cleanup of hazardous waste sites and establishes financial liability for
these sites. The liquid and solid metallic wastes targeted for recycling by
Recontek are classified as "hazardous" by the EPA and analogous state agencies.
Recontek believes that the regulatory requirements of RCRA and comparable state
laws have caused the total cost of other methods of handling metallic hazardous
waste to increase to a point where it could be attractive to use a recycling
process. By recycling waste rather than disposing of it, a generator of waste
would minimize its potential liability for environmental contamination created
by the other methods for disposing of hazardous waste.
REGULATION. RCRA's regulatory system is designed to prevent future waste
problems and imposes criminal and civil liability for failure to comply with its
requirements. RCRA requires that any party that generates, transports, treats,
stores or disposes of hazardous waste comply with strict standards set by
governmental agencies. Companies engaged in a bona fide recycling business are
exempt from certain of RCRA's requirements with respect to their recycling
operations, though they still are subject to RCRA with respect to the storage of
hazardous waste that occurs prior to recycling. Owners and operators of
treatment, storage or disposal facilities (including Recontek since its stores
waste prior to processing) are required to obtain "Part B" permits from the EPA
and
11
<PAGE>
appropriate state agencies. Obtaining such permits is a very lengthy
process. The "Part B" permitting process is designed to require a facility to
demonstrate its ability safely to handle, dispose of or store hazardous wastes.
The EPA may delegate jurisdiction to enforce RCRA to appropriate state
agencies. With respect to the Newman facility, for example, the IEPA has been
given the authority to enforce, and grant permits pursuant to RCRA. The Newman
facility operates under a "Part B" permit issued by the IEPA under delegated
authority from the EPA. This permit allows the storage of hazardous waste in
the recycling process.
The Newman permit expires in 1999 and provides for a "demonstration period"
that was originally scheduled to expire in November 1991 but has been extended.
Recontek must demonstrate to the IEPA that it produces products with economic
value and that it is otherwise meeting the regulatory requirements (which
include showing that its processes are not unduly hazardous) to be considered a
bona fide recycler in Illinois. Failure to demonstrate these things
satisfactorily may lead to (i) revocation of Recontek's "Part B" permit, which
would result in the cessation of Recontek's operations at Newman, or (ii)
modification of the permit in ways that would increase the IEPA's regulatory
authority over the processing activities of the Newman facility, which could
have a material adverse effect on Recontek's business. In conjunction with its
efforts to demonstrate that it is a bona fide recycler, Recontek has submitted
annual recycling reports to the IEPA for 1991, 1992 and 1993 which detail
Recontek's recycling activities. Although Recontek believes it is a bona fide
recycler, to date the IEPA has issued no determination that Recontek has
successfully demonstrated that it is a bona fide recycler and Recontek has no
assurance it will do so. If Recontek encounters additional significant
unanticipated operating difficulties or statutory compliance problems with
respect to its Newman facility, such experience could have an adverse impact on
Recontek's ability to obtain regulatory approvals in the other states in which
it may seek to construct a recycling facility.
In March 1991 Recontek received a pre-enforcement notice from the IEPA
alleging various violations of the IEPA regulations. In December 1991 Recontek
notified the IEPA that it had stored amounts of hazardous waste in excess of
permitted volumes. At that time the IEPA also informed Recontek that the IEPA
was reviewing whether certain uses by purchasers of sodium chloride produced by
Recontek were permitted under applicable regulations. By letter dated January
21, 1992 the Illinois Attorney General ("IAG") informed Recontek of its intent
to pursue these and other matters in a formal enforcement action. By letter
dated March 6, 1992 the IAG informed Recontek of its determination that certain
"product" had been stored in unauthorized locations and its intent to pursue
that and related matters in an enforcement action. In early 1994 Recontek and
the IAG reached a tentative settlement of all outstanding regulatory violations
alleged by the IAG and the IEPA to have been committed by Recontek. The
settlement provides that the parties will enter into a consent decree in which
Recontek admits no wrongdoing but (i) will pay a total civil penalty of $99,000
to
12
<PAGE>
the IEPA and (ii) agrees to abide by the IEPA's regulations in the future.
The final documentation is currently being reviewed by the IAG and the IEPA.
Recontek expects the consent decree to be finalized and filed with the
appropriate court in the near future.
Recontek's Newman facility must also comply with air quality standards. The
"Part B" permit for the Newman facility requires Recontek to demonstrate, to the
extent it expands operations, that any increased production will not cause the
facility to exceed air quality emission levels specified on its air quality
emissions permit. Recontek currently believes that it will be able to comply
with such standards, but there can be no assurance to that effect.
In the future, Recontek may be required to obtain additional permits or
approvals or undertake other measures to retain existing permits and approvals
at any or all of its then existing facilities if new environmental legislation
or regulations are enacted or existing environmental laws or regulations are
amended, interpreted or enforced differently. Although Recontek cannot predict
the extent to which any legislation or regulation that may be enacted or
interpreted or enforced differently in the future may affect its operations, it
is possible that changes in the current environmental laws or regulations, or
change in the current interpretation or enforcement thereof, could have a
material adverse effect on Recontek's operations.
If hazardous substances are handled or stored improperly, community
members, employees and others could be exposed to potentially serious harm. The
permit under which the Newman facility processes hazardous wastes contains
certain conditions and restrictions designed to prevent the release of hazardous
substances and to ensure such substances are safely handled. Failure by
Recontek to comply with such conditions and restrictions and other regulatory
requirements could result in the revocation of the permit, cessation of
operations, payment of substantial fines and/or liabilities to third parties.
Although only licensed hazardous waste transporters are utilized to transport
waste from generator sites to Recontek's plant to the extent that such
transporters were contracted for by Recontek any liability of such hazardous
waste transporters for a release of waste might also be deemed a liability of
Recontek.
To the extent any hazardous waste received by Recontek was not fully
recycled and any residual hazardous waste remained, Recontek would be required
to dispose of such waste. In such event any future environmental liability that
attached to such waste could be deemed to be a liability of Recontek.
COMPETITION. Recontek has defined its market niche as the recycling of
inorganic metallic hazardous waste solutions and sludges. Within this market,
Recontek is aware of limited competition in its targeted geographical areas,
although Recontek does compete with entities that treat and dispose of, or
partially recycle, metallic hazardous waste. If another party was able to
recycle hazardous waste without storing such waste within the meaning of the
13
<PAGE>
appropriate regulations, it might be able to engage in business without
obtaining a "Part B" permit and might thus become a significant competitor,
since it would not need to comply with the lengthy and costly regulatory
requirements of the "Part B" permitting process. Recontek does not believe,
however, that it is possible at this time to commence the type of recycling
operations conducted by Recontek without storage and therefore without obtaining
such a "Part B" permit. Recontek believes there will continue to be significant
competition in the future, and other entities in both the public and private
sectors are engaged in research related to hazardous waste processing and
handling.
There are, however, certain factors which hinder entry into Recontek's
business. In order to operate, a company must first find a site which meets
stringent EPA requirements and obtain approval from the community in which it
wishes to locate. Such approval is difficult to obtain and involves a lengthy
process of community education, lobbying and public hearings to overcome the
prevailing concerns and attitudes that people have regarding hazardous waste.
Before construction can commence, a site must be obtained and a permit must be
issued by the EPA and/or appropriate state agencies.
There can be no assurance that the technology currently used and under
development by Recontek will be more effective or economical than other
technologies currently being developed by other entities. There also can be no
assurance that larger firms with significantly greater financial resources, as
well as larger research staffs and facilities, will not develop competitive
processes and enter Recontek's existing and potential markets. In addition,
there can be no assurance that potential customers of Recontek will not develop
or acquire their own internal hazardous waste recycling processes.
Recontek competes directly with landfill operators who dispose of, rather
than recycle, hazardous waste. If the disparity between costs to waste
generators for disposal of waste in landfills versus the costs for recycling
charged by Recontek are great enough, the use of landfill disposal versus
recycling becomes more attractive to waste generators. Failure to be able to
compete effectively on costs may cause waste generators to elect use of
landfills rather than recycling, which has the potential to have a material
adverse effect on Recontek.
Recontek intends to rely on confidentiality agreements and the common law
protection of trade secrecy to attempt to prevent disclosure by employees and
former employees of non-public information concerning its proprietary processes.
Recontek has no patents and has not filed any applications for patents with
respect to its proprietary processes. Competitors desiring to engage in the
same business may independently develop similar technology or otherwise obtain
access to Recontek's trade secrets or other information about Recontek's
processes.
EMPLOYEES. As of December 31, 1993 Recontek had 47 employees, none of whom
are covered by union contracts.
14
<PAGE>
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS
For financial information about business segments, see Pages 6 through 16
of the Company's 1993 Annual Report to Stockholders, which information is
incorporated herein by reference.
ITEM 2. PROPERTIES
EXECUTIVE OFFICES AND OTHER GROUND FACILITIES
The Company's executive offices and principal administrative offices are
located at 4370 La Jolla Village Drive, Suite 1050, San Diego, California 92122.
The Company leases its executive offices consisting of approximately 6,950
square feet for a period ending in 1998 with two five year options. Annual
average base rent for the Company's executive offices is approximately $195,000.
Recontek owns 13 acres in Newman, Illinois upon which is located a
hazardous waste recycling facility of approximately 66,000 square feet. The
Newman site and attendant improvements are subject to a mortgage securing the
repayment of approximately $15 million in resource recovery revenue bonds due in
2009 issued by the City of Newman, Illinois. Closure of the recycling facility
(see "Recontek - Metallic Waste Recycling") would result in prepayment of the
bonds, which are backed by a letter of credit which would then be called. The
Company has guaranteed the letter of credit and would be required to reimburse
the issuing bank for the amount paid out under the letter of credit.
PST owns a building located at 17742 Preston Road, Dallas, Texas 75252.
PST occupies approximately 8,000 square feet for use as its administrative
offices.
Statex leases approximately 5,000 square feet for executive offices at 1801
Royal Lane, Suite 110, Dallas, Texas 75229 at an approximate annual rental of
$34,000. For information regarding Statex oil and gas properties see "Business
- - Oil and Gas Production."
The Company believes that its present properties are adequate for its
business in light of its current operations.
(continued on next page)
15
<PAGE>
FLIGHT EQUIPMENT
The aircraft owned by the Company as of March 30, 1994 are listed in the
following table.
<TABLE>
<CAPTION>
Type of Aircraft Number Owned
---------------- ------------
<S> <C>
McDonnell Douglas MD-80 7 (a)
British Aerospace BAe146-200 10 (b)
Boeing 747-100 2 (c)
Boeing 737-200 7 (d)
Boeing 737-300 2 (e)
</TABLE>
Notes:
(a) Six MD-80s are leased to USAir for terms expiring from 1998 to 2004. One
is leased to Continental for a term expiring at the end of 2007.
(b) These aircraft are all leased to USAir for terms expiring in 2000.
(c) These aircraft are held for sale. They were formerly leased to Pan Am.
(d) The Company owns a one-third interest in each of these aircraft.
United States Airlease and Airlease, Ltd. each also own a one-third
interest. All seven aircraft are leased to Continental for terms
expiring in 1996.
(e) One aircraft is leased to Continental for a term expiring at the
end of 2007. One aircraft is leased to America West for a term expiring
in 2006.
ITEM 3. LEGAL PROCEEDINGS
For a discussion of the Company's involvement as a creditor in certain
bankruptcy proceedings see "Business - Aircraft Leasing." For a discussion of
certain regulatory enforcement matters relating to Recontek see "Business -
Metallic Waste Recycling - Regulation."
In 1992 three related lawsuits were filed against the Company, its
directors and officers by stockholders in the United States District Court for
the Southern District of California and a fourth lawsuit was filed in the United
States District Court for the Central District of Illinois (the Illinois Case).
All of the Southern District of California cases were consolidated into a single
case (the California Case). Both the California Case and the Illinois Case were
purported class actions alleging that the defendants made materially false and
misleading statements in public statements in filings with the Securities and
Exchange Commission and other reports, or omitted in such materials information
necessary to make them not misleading, and that the defendants are therefore
liable to the plaintiff class for declines in the price of the Company's common
stock during a defined class period.
16
<PAGE>
In the fall of 1992 the Company obtained dismissals of both the California
Case and Illinois Case. In each instance, however, the court granted the
plaintiffs leave to file an amended petition. In December 1992 the California
Case and the Illinois Case were consolidated in the Southern District of
Illinois (the Consolidated Case). In July 1993 the plaintiffs filed an amended
complaint in the Consolidated Case. In September 1993 the defendants filed a
motion to dismiss the consolidated complaint. This motion was denied in
February 1994. The defendants filed an answer to the complaint and discovery in
the case is now proceeding.
The damages sought by the plaintiffs are for an unspecified amount. The
Company believes the claims made in the Consolidated Case, are without merit.
The Company expects to defend vigorously against all such claims and to obtain a
favorable judgment. However, the ultimate outcome of this litigation is unknown
at the present time. Accordingly, no provision for any liability that might
result has been made in the Company's Consolidated Financial Statements. If it
is finally determined that the Company has liability in the Consolidated Case,
the Company believes such liability will not have a material adverse effect on
the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None.
(continued on next page)
17
<PAGE>
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names, ages and certain additional
information concerning the executive officers of the Company.
<TABLE>
<CAPTION>
Age on
March 5, Positions with the Company
Name 1994 and Principal Occupation
- -------------------- -------- --------------------------
<S> <C> <S>
Lawrence A. Guske 49 Vice President - Finance and
Chief Financial Officer of the
Company (since 1987).
Previously Vice President and
Controller of the Company
(1978-1987).
Johanna Hinds 45 Vice President and Controller of
the Company (since 1988).
Dennis C. O'Dell 50 Vice President, General Counsel
and Secretary of the Company
(since 1988).
Charles E. Rickershauser, Jr. 65 Chairman of the Board (since
1991) and Director (since 1984).
Previously a partner in the law
firm of Fried, Frank, Harris, Shriver
and Jacobsen (1986-1990);
Chairman of the Board & CEO
of the Pacific Stock Exchange
(1979-1986).
George M. Shortley 53 President and Chief Executive Officer
(since 1989) and a Director of the
Company (since 1988). Previously
Executive Vice President of the Company
(1985-1989). Previously Chief Financial
Officer of the Company (1979-1987) and
Senior Vice President - Finance (1980-
1985).
18
</TABLE>
<PAGE>
There are no family relationships between any of the Company's
executive officers. Each of the Company's executive officers are elected
annually and serve at the pleasure of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange and the
Pacific Stock Exchange. The following table sets forth for the periods
indicated the high and low sales prices of the Company's Common Stock as
reported by The Wall Street Journal for the New York Stock Exchange - Composite
--- ---- ------ -------
Transactions.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
1993:
First Quarter.... 16 9
Second Quarter... 12 1/2 9 7/8
Third Quarter.... 12 5/8 10 1/4
Fourth Quarter... 15 1/2 10 1/8
1992:
First Quarter.... 35 1/4 23 3/4
Second Quarter... 25 1/4 12 3/4
Third Quarter.... 18 1/2 13 3/4
Fourth Quarter... 15 3/4 8
</TABLE>
During the first quarter of 1992 the Company paid a cash dividend of $.15
per share outstanding. As a result of an accord reached with the Company's bank
lenders the Company is currently prohibited from paying dividends. There can be
no assurance that the Company will pay a dividend at any time in the future. As
of March 11, 1994, there were 6,065,969 shares of the Company's common stock
outstanding and the approximate number of holders of record was 1,774.
ITEM 6. SELECTED FINANCIAL DATA
The information called for by Item 6 is incorporated by reference from Page
1 of the Company's 1993 Annual Report to Stockholders.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The information called for by Item 7 is incorporated by reference from Pages
6 through 19 of the Company's 1993 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The information called for by Item 8 is incorporated by reference from Pages
20 through 39 of the Company's 1993 Annual Report to Stockholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Part III, Items 10 through 13, is incorporated
by reference from the Company's definitive Proxy Statement which will be filed
with the Securities and Exchange Commission on or prior to April 15, 1994.
Certain information concerning the Executive Officers of the Company is included
in Part I, supra. See "Additional Item. Executive Officers of the Company."
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. Financial Statements: See Index to Financial Statements and Financial
Statement Schedules, Page F-1.
2. Financial Statement Schedules: See Index to Financial Statements and
Financial Statement Schedules, Page F-1.
3. Exhibits: See Index to Exhibits following Page F-6.
(b) Reports on Form 8-K
Current Report on Form 8-K dated (earliest event reported) November 9,
1993 reporting under Item 5 an agreement in principle to sell the Company's
travel management business operated by its subsidiary, USTravel Systems
Inc.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned thereunto duly authorized.
DATED: March 30, 1994.
PS GROUP, INC.
(Registrant)
By: /s/ Lawrence A. Guske
---------------------------------------------
LAWRENCE A. GUSKE
Vice President - Finance
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated. Each person whose signature
appears below hereby authorizes George M. Shortley, Lawrence A. Guske and Dennis
C. O'Dell, and each of them, as attorneys-in-fact, on his or her behalf,
individually and in each capacity stated below, to sign and file any amendment
to this Form 10-K Annual Report.
22
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ C. E. Rickershauser, Jr. Chairman of the Board March 30 , 1994
- ----------------------------- ----
(C. E. Rickershauser, Jr.)
/s/ George M. Shortley President, Chief March 30 , 1994
- ----------------------- ----
(George M. Shortley) Executive Officer
Director
/s/ Lawrence A. Guske Vice President - March 30 , 1994
- ---------------------- Finance and Chief ----
(Lawrence A. Guske) Financial Officer
(principal financial
officer)
/s/ Johanna Hinds Vice President and March 30 , 1994
- ------------------ Controller (principal ----
(Johanna Hinds) accounting officer)
- ---------------------- Director March , 1994
(Howard P. Allen)
/s/ Robert M. Fomon Director March 30 , 1994
- -------------------- ----
(Robert M. Fomon)
/s/ J. P. Guerin Director March 30 , 1994
- ----------------- ----
(J. P. Guerin)
/s/ Donald W. Killian, Jr. Director March 30 , 1994
- --------------------------- ----
(Donald W. Killian, Jr.)
/s/ Gordon C. Luce Director March 30 , 1994
- ------------------- ----
(Gordon C. Luce)
23
<PAGE>
PS GROUP, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
[ITEM 14(A)]
<TABLE>
<CAPTION>
Page Reference
----------------------------
Annual
Report to
Form 10-K Stockholders
------------ --------------
<S> <C> <C>
Report of Ernst & Young, independent auditors 39
Consolidated statements of financial position at
December 31, 1993 and 1992 20
Consolidated statements of operations for each of
the three years in the period ended
December 31, 1993 21
Consolidated statements of cash flows for each of
the three years in the period ended
December 31, 1993 22
Consolidated statements of stockholders' equity for
each of the three years in the period ended
December 31, 1993 23
Notes to consolidated financial statements 24
Supplementary information:
Quarterly financial information (unaudited) 34
Oil and gas operations (unaudited) 35
Consent of Ernst & Young, independent auditors F-2
Schedules for each of the three years in the
period ended December 31, 1993:
Schedule II - Amounts receivable from
related parties and employees F-3
Schedule V - Consolidated property and
equipment F-4
Schedule VI - Consolidated accumulated
depreciation of property and equipment F-5
Schedule X - Supplementary statement of
operations information F-6
</TABLE>
All other schedules and any pro-forma financial statements are omitted since
the required information is not present or is not present in amounts sufficient
to require submission of the schedules, or because the information required is
included in the financial statements and notes thereto.
The consolidated statements of financial position of PS Group, Inc. at
December 31, 1993 and 1992 and the related statements of operations, cash flows
and stockholders' equity and the report of Ernst & Young, independent auditors,
are set forth on the pages indicated above in the Annual Report to
Stockholders of PS Group, Inc. for the year ended December 31, 1993 and are
incorporated herein by reference.
F-1
<PAGE>
CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of PS Group, Inc. of our report dated February 18, 1994, except for Notes 2 and
3, as to which the date is March 14, 1994, included in the 1993 Annual Report to
Stockholders of PS Group, Inc.
Our audits also included the financial statement schedules of PS Group, Inc.
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 2-97926) pertaining to the Employee Incentive Stock
Option Program and the Incentive Stock Option Plan of PS Group, Inc. and (ii)
the Registration Statement (Form S-8, No. 33-45608) pertaining to the Recontek,
Inc. 1987 Employment Stock Option Plan of PS Group, Inc. of our report referred
to above, with respect to the consolidated financial statements and schedules of
PS Group, Inc. incorporated by reference and included in the Annual Report (Form
10-K) for the year ended December 31, 1993.
/s/ Ernst & Young
ERNST & YOUNG
San Diego, California
March 28, 1994
F-2
<PAGE>
PS GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM
RELATED PARTIES AND EMPLOYEES
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<TABLE>
<CAPTION>
Balance at Balance at end of
beginning Deductions period
of period Additions ------------------ ---------------------
---------- --------- Collected Other Current Noncurrent
------------------ ---------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
B. Andrew Wilkinson/a/ $400,886 $37,316 $438,202
Dhar Carman/a/ 400,886 37,316 438,202
Year ended December 31, 1992:
B. Andrew Wilkinson/a/ 375,000 25,886 $400,886
Dhar Carman/a/ 375,000 25,886 400,886
Year ended December 31, 1991:
B. Andrew Wilkinson/a/ 375,000 375,000
Dhar Carman/a/ 375,000 375,000
- -------------------
</TABLE>
/a/ 9% notes receivable from Messrs. Wilkinson and Carman (who are
officers of Statex Petroleum, Inc.) due December 31, 1994 in connection with
their purchase from PS Group, Inc. of 20% of Statex (secured by their stock
in Statex). For financial statement purposes those notes were fully reserved
during 1993.
F-3
<PAGE>
PS GROUP, INC. AND SUBSIDIARIES
SCHEDULE V - CONSOLIDATED PROPERTY & EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Balance at
beginning Additions Retirements Other end of
of year at cost or sales changes year
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993:
Property & equipment $ 48,943 $ 1,430 $ (7,809) $ 42,564
Aircraft leased under
operating leases 247,544 247,544
--------------------------------------------------------------------
$296,487 $ 1,430 $ (7,809) $290,108
====================================================================
1992:
Property & equipment $ 91,254 $ 4,653 $(18,950) $(28,014)/1/ $ 48,943
Aircraft leased under
operating leases 224,567 22,977 /2/ 247,544
--------------------------------------------------------------------
$315,821 $ 4,653 $(18,950) $ (5,037) $296,487
====================================================================
1991:
Property & equipment $ 79,945 $14,191 $ (2,882) $ 91,254
Aircraft leased under
operating leases 224,567 224,567
--------------------------------------------------------------------
$304,512 $14,191 $ (2,882) $315,821
====================================================================
</TABLE>
- -----------------
/1/ Recontek write-down.
/2/ Reclassification of financing lease to operating lease.
F-4
<PAGE>
PS GROUP, INC. AND SUBSIDIARIES
SCHEDULE VI - CONSOLIDATED ACCUMULATED DEPRECIATION
OF PROPERTY & EQUIPMENT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance
at Balance
beginning Additions Retirements Other at end
of year at cost or sales changes of year
------------ --------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
1993:
Property & equipment $ (21,735) $ (2,394) $4,610 $ (19,519)
Aircraft leased under
operating leases (84,689) (13,837) (98,526)
---------------------------------------------------------------------
$(106,424) $(16,231) $4,610 $(118,045)
=====================================================================
1992:
Property & equipment $ (29,361) $ (4,661) $9,069 $3,218/1/ $ (21,735)
Aircraft leased under
operating leases (72,296) (12,393) (84,689)
---------------------------------------------------------------------
$(101,657) $(17,054) $9,069 $3,218 $(106,424)
=====================================================================
1991:
Property & equipment $ (24,595) $ (6,259) $1,493 $ (29,361)
Aircraft leased under
operating leases (60,279) (13,478) $1,461/2/ (72,296)
---------------------------------------------------------------------
$ (84,874) $(19,737) $1,493 $1,461 $(101,657)
=====================================================================
</TABLE>
___________________
/1/ Recontek write-down.
/2/ Reclassification to assets held for sale.
F-5
<PAGE>
PS GROUP, INC. AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY STATEMENT
OF OPERATIONS INFORMATION
YEAR ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1992 1991
---------------------------
<S> <C> <C> <C>
Charged to costs and expenses:
Maintenance and repairs expense $1,161 $1,749 $5,178
===========================
</TABLE>
F-6
<PAGE>
INDEX TO EXHIBITS
(3)(i) Articles of Incorporation and Bylaws.
(a) Restated Certificate of Incorporation. (Incorporated by reference
to Exhibit (3)(a) to the Company's Current Report on Form 8-K
dated Nov. 18, 1986.)
(b) Certificate of Amendment of Certificate of Incorporation.
(Incorporated by reference to Exhibit (3)(b) to the Company's
Current Report on Form 8-K dated November 18, 1986.)
(c) Certificate of Amendment to Certificate of Incorporation dated
May 24, 1990. (Incorporated by reference to Exhibit 3(c) to the
Company's 1990 Annual Report on Form 10-K.)
(d) Certificate of Amendment to Certificate of Incorporation dated
June 12, 1992. (Incorporated by reference to Exhibit 3(d) to the
Company's 1992 Annual Report on Form 10-K.)
(3)(ii) Bylaws (as amended through May 28, 1993).
(4) Instruments defining the rights of security holders, including
indentures:
(a) Rights Agreement between the Company and Bank of America, N.T. &
S.A. dated as of June 30, 1986. (Incorporated by reference to the
Company's Current Report on Form 8-K dated July 14, 1986.)
(b) Amendment dated September 15, 1988 to Rights Agreement between
the Company and Bank of America. (Incorporated by reference to
the Company's Current Report on Form 8-K dated September 12,
1988.)
(c) Amendment dated September 16, 1990 to Rights Agreement between
the Company and Bank of America. (Incorporated by reference to
the Company's Current Report on Form 8-K dated September 16,
1990.)
(d) Amendment dated December 14, 1990 to Rights Agreement between the
Company and Bank of America. (Incorporated by reference to the
Company's Current Report on Form 8-K dated December 14, 1990.)
(10) Material contracts:
(a) 1984 Stock Incentive Plan of PS Group, Inc. (Incorporated by
reference to Exhibit (19)(a) to the Company's report on Form 10-Q
for the quarter ended June 30, 1985.)
(b) Amendment to 1984 Stock Incentive Plan for PS Group, Inc., as
approved by the Stockholders May 21, 1987. (Incorporated by
1
<PAGE>
reference to Exhibit (10)(g) to the Company's 1987 Annual Report
on Form 10-K.)
(c) Form 1, Form 2, Form 3, and Form 4 of Option Agreement effective
November 17, 1984. (Incorporated by reference to Exhibit (19)(h)
to the Company's report on Form 10-Q for the quarter ended June
30, 1985.)
(d) Form of Incentive Stock Award Agreement. (Incorporated by
reference to Exhibit (10)(h) to the Company's 1985 Annual Report
on Form 10-K.)
(e) Retirement Plan for Corporate Officers of PSA, Inc. (now PS
Group, Inc.) and Participating Subsidiaries effective March 12,
1984, amending and restating the Retirement Plan for Corporate
Officers of Pacific Southwest Airlines. (Incorporated by
reference to Exhibit (10)(l) to the Company's 1983 Annual Report
on Form 10-K.)
(f) Employment Agreement dated September 16, 1985, between the
Company and George M. Shortley. (Incorporated by reference to
Exhibit (10)(n) to the Company's 1985 Annual Report on Form 10-
K.)
(g) Amendment dated March 14, 1988 to Employment Agreement between
the Company and George M. Shortley. (Incorporated by reference to
Exhibit (10)(n) to the Company's 1987 Annual Report on Form 10-
K.)
(h) Employment Agreement dated January 15, 1988 between the Company
and Lawrence A. Guske. (Incorporated by reference to Exhibit
10(q) to the Company's 1988 Annual Report on Form 10-K.) This
Agreement is substantially identical in all material respects to
Employment Agreements between the Company and Dennis C. O'Dell
and Johanna Hinds, respectively.
(i) Amendment dated April 1, 1989 to Employment Agreement between the
Company and Lawrence A. Guske. (Incorporated by reference to
Exhibit 10(q) to the Company's 1989 Annual Report on Form 10-K.)
This Amendment is substantially identical in all material
respects to Amendments to Employment Agreements between the
Company and Dennis C. O'Dell and Johanna Hinds, respectively.
(j) Description of Bonus Plan for certain officers of the Company.
(Incorporated by reference to Exhibit 10(r) to the Company's 1990
Annual Report on Form 10-K. )
(k) Credit Agreement dated as of November 5, 1990 among the Company,
Bank of America NTSA, as agent, and various banks. (Incorporated
by reference to Exhibit 10(s) to the Company's 1990 Annual Report
on form 10-K.)
(l) First Amendment to Credit Agreement dated March 25, 1991 among
the Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(t) to the Company's 1990
Annual Report on form 10-K.)
(m) Credit Agreement between the Company and USTravel Systems Inc.
(Incorporated by reference to Exhibit 10(u) to the Company's 1990
Annual Report on form 10-K.)
2
<PAGE>
(n) Agreement dated December 14, 1990 between Berkshire Hathaway Inc.
("Berkshire") and the Company relating to Berkshire's acquisition
of the Company's Common Stock. (Incorporated by reference to
Exhibit 10(v) to the Company's 1990 Annual Report on form 10-K. )
(o) Form of Indemnification Agreement. (Incorporated by reference to
Exhibit 10(w) to the Company's 1990 Annual Report on Form 10-K as
filed on Form 8 Amendment thereto dated May 29, 1991. )
(p) Second Amendment to Credit Agreement dated April 26, 1991 among
the Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(r) to the Company's 1991
Annual Report on Form 10-K.)
(q) Third Amendment to Credit Agreement dated January 2, 1992 among
the Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(s) to the Company's 1991
Annual Report on Form 10-K. )
(r) Fourth Amendment to Credit Agreement dated April 9, 1992 among
the Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(t) to the Company's 1991
Annual Report on Form 10-K.)
(s) Fifth Amendment to Credit Agreement dated April 9, 1992 among the
Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(u) to the Company's 1991
Annual Report on Form 10-K.)
(t) Sixth Amendment to Credit Agreement dated March 29, 1993 among
the Company, Bank of America NTSA, as agent, and various banks.
(Incorporated by reference to Exhibit 10(t) to the Company's 1992
Annual Report on Form 10-K.)
(u) Arrangement for Pension benefit for Chairman of the Board of the
Company. (Incorporated by reference to Exhibit 10(u) to the
Company's 1992 Annual Report on Form 10-K.)
(v) Asset Purchase Agreement by and among USTravel Systems Inc.,
Certain of its Subsidiaries, PS Group, Inc., and MTH Acquisition
Corp. dated March 14, 1994 providing for the sale of the
Company's travel management business.
(12) Computation of Ratios.
(13) 1993 Annual Report to Stockholders.
(22) Subsidiaries.
(23) Consent of Independent Auditors (see page F-2 of Item 14(a),
incorporated by reference) .
3
<PAGE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Matters relating to executive compensation plans and arrangements can be found
within the index to exhibits as follows: (10)(a), (10)(b), (10)(c), (10)(d),
(10)(e), (10)(f), (10)(g), (10)(h), (10)(i), (10)(j) and (10)(u).
4
<PAGE>
EXHIBIT (3)(ii)
PS GROUP, INC.
1993 Annual Report on Form 10-K
BYLAWS OF
PS GROUP, INC.
(AS AMENDED THROUGH MAY 25, 1993)
<PAGE>
BYLAWS OF
PS GROUP, INC.
(AS AMENDED THROUGH MAY 25, 1993)
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I Offices 1
ARTICLE II Meetings of Shareholders 1
ARTICLE III Directors 4
ARTICLE IV Officers 9
ARTICLE V Seal 11
ARTICLE VI Form of Stock Certificate 11
ARTICLE VII Representation of Shares of
Other Corporations 12
ARTICLE VIII Transfers of Stock 12
ARTICLE IX Lost, Stolen, or Destroyed
Certificates 12
ARTICLE X Record Date 13
ARTICLE XI Registered Shareholders 13
ARTICLE XII Fiscal Year 13
ARTICLE XIII Notices 14
ARTICLE XIV Amendments 14
ARTICLE XV Indemnification 15
</TABLE>
(i)
<PAGE>
BYLAWS OF
PS GROUP, INC.
(A DELAWARE CORPORATION)
(AS AMENDED THROUGH MAY 28, 1991)
ARTICLE I
OFFICES
The registered office of this Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware, and the name of the
resident agent in charge thereof is The Corporation Trust Company.
The Corporation may also have offices at such other places, either
within or without the State of Delaware, as the Board of Directors (the "Board")
may from time to time designate or the business of the Corporation may require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. Place of Meetings. Meetings of shareholders shall be held
-----------------
at such time and place, within or without the State of Delaware, as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2. Annual Meetings. Annual meetings of shareholders shall be
---------------
held on the fourth Tuesday of May, if not a legal holiday, and if a legal
holiday, then on the next secular day following, at 10:00 a.m., or at such other
date and time set by the Board and stated in the notice of the meeting, at which
the shareholders shall elect a Board, and transact such other business as may
properly be brought before the meeting.
SECTION 3. Special Meetings. Special meetings of shareholders, for
----------------
any purpose or purposes, unless otherwise prescribed by applicable law or by the
Certificate of Incorporation, may be called by the Chairman of the Board (or, if
the Board does not appoint a Chairman of the Board, the President) and shall be
called by the Chairman of the Board (or, if the Board does not appoint a
Chairman of the
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Board, the President) or Secretary at the request in writing of a majority of
the Board, or if, and only if, the special meeting is to be called for the
purpose of removing a director or directors for cause, at the request in writing
of shareholders owning a majority in amount of the entire capital stock of the
Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting and the business
transacted at any such special meeting of shareholders shall be limited to the
purposes set forth in the notice. Shareholders may not request the call of a
special meeting for any purpose other than as provided herein.
SECTION 4. Shareholder Lists. The officer who has charge of the
-----------------
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of shareholders, a complete list of shareholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of each
shareholder and the number of shares registered in the name of each shareholder.
Such list shall be open to the examination of any shareholder, for any
purpose germane to the meeting, during ordinary business hours, for a period of
at least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or at the place of the meeting, and the list shall also be available at
the meeting during the whole time thereof, and may be inspected by any
shareholder who is present.
SECTION 5. Notice of Meetings. Written notice of each meeting of
------------------
shareholders, whether annual or special, stating the place, date and hour of the
meeting shall be given to each shareholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
SECTION 6. Quorum and Adjournment. The holders of a majority of the
----------------------
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum for holding all meetings of
shareholders, except as otherwise provided by applicable law or by the
Certificate of Incorporation. If it shall appear that such quorum is not
present or represented at any meeting of shareholders, the Chairman of the
meeting shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present
or represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. The Chairman of the meeting may determine
that a quorum is present based upon any reasonable evidence of the presence in
person or by proxy of shareholders holding a majority of the outstanding votes,
including without limitation, evidence from any record of shareholders who have
signed a register indicating their presence at the meeting.
2
<PAGE>
SECTION 7. Voting. In all matters, the vote of the holders of a
------
majority of the capital stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of applicable law or
of the Certificate of Incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
SECTION 8. Proxies. Each shareholder entitled to vote at a meeting
-------
of shareholders may authorize in writing or by any other means as is provided in
Section 212 of the Delaware General Corporation Law another person or persons to
act for him by proxy, but no proxy shall be voted or acted upon after eleven
months from its date, unless the person executing the proxy specifies therein
the period of time for which it is to continue in force.
SECTION 9. Judges of Election. The Board may appoint a Judge or
------------------
Judges of Election for any meeting of shareholders. Such Judges shall decide
upon the qualification of the voters and report the number of shares represented
at the meeting and entitled to vote, shall conduct the voting and accept the
votes, and when the voting is completed shall ascertain and report the number of
shares voted respectively for and against each position upon which a vote is
taken by ballot. The Judges need not be shareholders, and any officer of the
Corporation may be a Judge on any position other than a vote for or against a
proposal in which he shall have a material interest.
SECTION 10. Notice of Shareholder Business. At an annual meeting of
------------------------------
the shareholders, only such business shall be conducted as shall have been
brought before the meeting (a) by or at the direction of the Board of Directors
or (b) by any shareholder of the Corporation who complies with the notice
procedures set forth in this Section 10. For business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 30 days nor
more than 60 days prior to the meeting; provided, however, that in the event
that less than 40 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be received not later than the close of business on the 10th day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made. A shareholder's notice to the Secretary shall
set forth as to each matter the shareholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the shareholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the shareholder and (d) any
material interest of the shareholder in such
3
<PAGE>
business. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 10. The Chairman of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that businss was not
properly brought before the meeting in accordance with the provisions of this
Section 10, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
SECTION 11. Consent Solicitation Procedure. In order that the
------------------------------
corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which date
shall not be more than ten (10) days after the date upon which the resolution
fixing the record date is adopted by the Board of Directors. Any stockholder of
record seeking to have the stockholders authorize or take corporate action by
written consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors shall promptly, but in
all events within ten (10) days after the date on which such a request is
received, adopt a resolution fixing the record date. If no record date has been
fixed by the Board of Directors within ten (10) days of the date on which such a
request is received, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is required by applicable law, shall be the first date
on which a signed written consent setting forth the action taken or proposed to
be taken is delivered to the corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or any officer or agent
of the corporation having custody of the book in which proceedings of
stockholders meetings are recorded, to the attention of the Secretary of the
corporation. Delivery shall be by hand or by certified or registered mail,
return receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by applicable
law, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the date on which the Board of Directors adopts the resolution taking such
prior action.
ARTICLE III
DIRECTORS
SECTION 1. Powers. The Board shall have the power to manage or
------
direct the management of the property, business and affairs of the Corporation,
and except as expressly limited by law, to exercise all of its corporate powers.
The Board may establish procedures and rules, or may authorize the Chairman of
any meeting of
4
<PAGE>
shareholders to establish procedures and rules, for the fair and orderly conduct
of any shareholders meeting, including without limitation, registration of the
shareholders attending the meeting, adoption of an agenda, establishing the
order of business at the meeting, recessing and adjourning the meeting for the
purposes of tabulating any votes and receiving the result thereof, the timing of
the opening and closing of the polls, and the physical layout of the facilities
for the meeting.
SECTION 2. Number. The Board shall consist of one or more members in
------
such number as shall be determined from time to time by resolution of the Board.
Until otherwise determined by such resolution, the Board shall consist of seven
members. Directors need not be shareholders, and each director shall serve
until his successor is elected and qualified or until his death, retirement,
resignation or removal.
SECTION 3. Nominations. Nominations of candidates for election as
-----------
directors of the Corporation may be made by the Board or by any shareholder
entitled to vote at a meeting at which one or more directors are to be elected
(an "Election Meeting").
Nominations made by the Board shall be made at a meeting of the Board
or by written consent of directors in lieu of a meeting, not less than thirty
days prior to the date of an Election Meeting. At the request of the Secretary
of the Corporation, each proposed nominee shall provide the Corporation with
such information concerning himself as is required, under the rules of the
Securities and Exchange Commission, to be included in the Corporation's proxy
statement soliciting proxies for his election as a director.
Not less than thirty days prior to the date of an Election Meeting any
shareholder who intends to make a nomination at the Election Meeting shall
deliver a notice to the Secretary of the Corporation setting forth (i) the name,
age, business address, and residence address of each nominee proposed in such
notice, (ii) the principal occupation or employment of each such nominee, (iii)
the number of shares of capital stock of the Corporation which are beneficially
owned by each such nominee and (iv) such other information concerning each such
nominee as would be required, under the rules of the Securities and Exchange
Commission, in a proxy statement soliciting proxies for the election of such
nominees. Such notice shall include a signed consent to serve as a director of
the Corporation, if elected, of each such nominee.
In the event that a person is validly designated as a nominee and
shall thereafter become unable or unwilling to stand for election to the Board,
the Board or the shareholder who proposed such nominee, as the case may be, may
designate a substitute nominee.
If the chairman of the Election Meeting determines that a nomination
5
<PAGE>
was not made in accordance with the foregoing procedures, such nomination shall
be void.
SECTION 4. Class Division and Term. The Board shall be and is
-----------------------
divided into three classes, Class I, Class II, and Class III, which shall be as
nearly equal in number as possible. Each director shall serve for a term ending
on the date of the third annual meeting following the annual meeting at which
such director was elected; and until his successor shall have been elected and
qualified; provided, however, that each initial director in Class I shall hold
office until the annual meeting of stockholders in 1979; each initial director
in Class II shall hold office until the annual meeting of stockholders in 1980;
and each initial director in Class III shall hold office until the annual
meeting of stockholders in 1981.
In the event of any increase or decrease in the authorized number of
directors, (i) each director then serving as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his prior death, retirement, resignation, or removal, and (ii)
the newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board among the three classes of directors
so as to maintain such classes as nearly equal as possible.
SECTION 5. Vacancies and Newly Created Directorships. Any vacancy in
-----------------------------------------
the Board caused by death, resignation, removal or otherwise, or through an
increase in the number of directors of a class, shall be filled by a majority
vote of the remaining directors of the class in which such vacancy occurs, or by
the sole remaining director of that class if only one director remains, or by
the majority vote of the remaining directors of the other two classes if there
be no remaining members of the class in which the vacancy occurs. A director so
elected to fill a vacancy shall serve for the remainder of the then present term
of the office of the class to which he was elected.
SECTION 6. Initial Meeting. The Board shall meet as soon as
---------------
practicable after the annual election of directors and notice of such first
meeting shall not be required.
SECTION 7. Regular Meetings. Regular meetings of the Board shall be
----------------
held without call or notice at such time and place as shall from time to time be
fixed by standing resolution of the Board.
SECTION 8. Special Meetings. Special meetings of the Board may be
----------------
called at any time, and for any purpose permitted by law, by the Chairman of the
Board, the President or by the Secretary on the request (whether written or
oral) of any two members of the Board, which meetings shall be held at the time
and place designated by the person or persons calling the meeting. Notice of
the time and place
6
<PAGE>
of any such meeting shall be given to the Directors by the Secretary, or in case
of his absence, refusal or inability to act, by any other officer. Any such
notice may be given by mail, by private express courier service, by telegraph,
by telecopier, by telephone, by personal service, or by any thereof as to
different Directors.
Notice to a Director by mail or by private express courier service
shall be deemed to have been given if addressed to such Director at the address
shown upon the records of the corporation for such Director (or as may have been
given to the corporation by such Director for purposes of notice) and deposited
in a United States Post Office or delivered to such private express courier
service, as the case may be, at least forty-eight hours before the time of the
meeting. Any other written notice shall be deemed to have been given at the
time it is personally delivered to the recipient or is delivered to a common
carrier for transmission, or actually transmitted to the recipient by the person
giving the notice by electronic means. Oral notice shall be deemed to have been
given at the time it is communicated, in person or by telephone or wireless, to
the recipient or to a person at the office or home of the recipient who may
reasonably be expected to communicate the notice to the recipient.
A notice need not specify the purpose of any special meeting of the
Board of Directors. Whenever any Director has been absent from any meeting of
the Board of Directors for which notice has not been dispensed with, an entry in
the minutes of such meeting to the effect that notice has been duly given shall
be conclusive and incontrovertible evidence that due notice of such meeting was
given to such Director.
SECTION 9. Quorum. At all meetings of the Board a majority of the
------
whole Board shall be necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the Directors present at
any meeting at which there is a quorum shall be the act of the Board, except as
may be otherwise specifically provided by applicable law or by the Certificate
of Incorporation or by these Bylaws. Any meeting of the Board may be adjourned
to meet again at a stated day and hour. Even though no quorum is present, as
required in this Section, a majority of the Directors present at any meeting of
the Board, either regular or special, may adjourn from time to time until a
quorum be had, but no later than the time fixed for the next regular meeting of
the Board. Notice of any adjourned meeting need not be given.
SECTION 10. Fees and Compensation. Each Director and each member of
---------------------
a committee of the Board shall receive such fees and reimbursement of expenses
incurred on behalf of the Corporation or in attending meetings as the Board may
from time to time determine.
SECTION 11. Meetings by Telephonic Communication. Members of the
------------------------------------
Board or any committee thereof may participate in a regular or special meeting
of such Board or committee by means of conference telephone or similar
communications
7
<PAGE>
equipment by means of which all persons participating in the meeting can hear
each other, if the standing resolutions fixing the time and place of a regular
meeting or if the notice of the time and place of any regular or special meeting
provides for such participation. Participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
SECTION 12. Qualification of Directors. No person can be elected a
--------------------------
director of this Corporation (whether by vote of the shareholders or the
directors) if, were he or she to be elected a director, less than a majority of
the total number of directors would be Outside Directors. If such a person is
nominated for director, no votes cast for his or her election shall be counted
and, for this purpose, the announcement of the results of any election of
directors, shall be delayed pending the determination by the Board referred to
below. An Outside Director is a person who is not: (a) an officer or employee
of the Corporation or any relative of an officer or employee; (b) a Related
Person (as that term is defined in Article X of the Corporation's Certificate of
Incorporation) or an officer, director, employee, associate or affiliate of a
Related Person, or a relative of any of the foregoing; or (c) a person having a
direct or indirect material business relationship with the Corporation. The
Board shall be empowered to determine in its sole and absolute discretion
whether a person is or is not an Outside Person within the meaning of the
foregoing.
SECTION 13. Committees. The Board may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the Directors of the Corporation. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee and if the Board has
not designated one or more alternates (or if such a designation has been made,
in the absence or disqualification of such alternate(s)), the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board to act at the meeting in the place of any such absent or disqualified
member or alternate. Any such committee, to the extent provided in the
resolution of the Board shall have and may exercise all the powers and authority
of the Board in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have the power or authority in
reference to amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the shareholders the sale, lease or
exchange of all or substantially all of the Corporation's property and assets,
recommending to the shareholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the Bylaws of the Corporation; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
8
<PAGE>
SECTION 14. Action Without Meetings. Unless otherwise restricted by
-----------------------
applicable law or by the Certificate of Incorporation or by these Bylaws, any
action required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without meeting if all members of the Board or of
such committee consent thereto in writing as the case may be, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Action shall be taken by the shareholders only at annual or special meetings of
shareholders and shareholders may not act by written consent.
ARTICLE IV
OFFICERS
SECTION 1. Appointment and Salaries. The Board shall appoint the
------------------------
executive officers who shall include a President, one or more Vice Presidents
(one or more of whom may be designated as Executive Vice Presidents or as Senior
Vice Presidents), a Secretary, a Controller, and a Treasurer. The Board may
also appoint a Chairman of the Board and the Board or the President may appoint
such other officers (including Assistant Vice Presidents, Assistant Secretaries,
Assistant Treasurers and Assistant Controllers) as the Board or they may deem
necessary or desirable. The Board shall fix the salaries of all officers
appointed by it. Unless prohibited by applicable law or by the Certificate of
Incorporation or by these Bylaws, one person may be elected or appointed to
serve in more than one official capacity.
SECTION 2. Removal and Resignation. Any officer may be removed,
-----------------------
either with or without cause, by the Board or, in the case of an officer not
appointed by the Board by the Chief Executive Officer (or if the Board does not
appoint a Chief Executive Officer, the President). Any officer may resign at
any time by giving notice to the Board or to the Chief Executive Officer (or if
the Board does not appoint a Chief Executive Officer, the President), or to the
Secretary of the Corporation. Any such resignation shall take effect at the
date of receipt of such notice or at any later time specified therein; and,
unless otherwise specified in such notice, the acceptance of the resignation
shall not be necessary to make it effective.
SECTION 3. The Chairman of the Board. The Board may, at its
-------------------------
election, appoint a Chairman of the Board. If such an officer be elected, he
shall, if present, preside at all meetings of the shareholders and of the Board
of Directors and shall have such other powers and duties as may from time to
time be assigned to him by the Board of Directors.
SECTION 4. The President. Subject to such powers, if any, as may be
-------------
given by the Board to the Chairman of the Board, if there is such an officer,
the
9
<PAGE>
President shall be the chief executive officer of the Corporation with the
powers of general manager, and he shall have supervision over and may exercise
general executive powers concerning all of the operations and business of the
Corporation, with the authority from time to time to delegate to other officers
such executive and other powers and duties as he may deem advisable. If there
be no Chairman of the Board or if he is absent, the President shall preside at
all meetings of the shareholders and of the Board, unless the Board appoints
another person who need not be a shareholder, officer, or director of the
Corporation, to preside at a meeting of shareholders.
SECTION 5. The Vice President. In the absence of the President (or,
------------------
if the Board does not appoint a President, the Chief Executive Officer) or in
the event of his inability or refusal to act, the Vice President (or if there be
more than one Vice President, the Vice Presidents in the order of their rank or,
if of equal rank, then in the order designated by the Board or the Chief
Executive Officer (or, if the Board does not appoint a Chief Executive Officer,
the President) or, in the absence of any designation, then in the order of their
appointment) shall perform the duties of the President (or, if the Board does
not appoint a President, the Chief Executive Officer) and when so acting, shall
have all the powers of and be subject to all the restrictions upon the President
(or, if the Board does not appoint a President, the Chief Executive Officer).
The rank of Vice Presidents in descending order shall be Executive Vice
President, Senior Vice President, Vice President, and Assistant Vice President.
The Vice President shall perform such other duties and have such other powers as
the Board may from time to time prescribe.
SECTION 6. The Secretary. The Secretary shall attend all meetings of
-------------
the Board and all meetings of the shareholders and record all the proceedings of
the meetings of the Corporation and of the Board in a book to be kept for that
purpose and shall perform like duties for the committees when required. He
shall give, or cause to be given, notice of all meetings of shareholders and
special meetings of the Board. He shall have custody of the corporate seal of
the Corportion and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be attested
by his signature or by the signature of such Assistant Secretary. The Board may
give general authority to any other officer to affix the seal of the Corporation
and to attest the affixing by his signature. The Secretary shall perform such
other duties and have such other powers as the Board or the Chief Executive
Officer (or, if the Board does not appoint a Chief Executive Officer, the
President) may from time to time prescribe.
SECTION 7. The Treasurer and the Controller. The Treasurer and the
--------------------------------
Controller shall each have custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the
10
<PAGE>
Board. Either the Treasurer or the Controller may disburse the funds of the
Corporation as may be ordered by the Board or the Chief Executive Officer (or,
if the Board does not appoint a Chief Executive Officer, the President), taking
proper vouchers for such disbursements, and shall render to the Board and Chief
Executive Officer (or, if the Board does not appoint a Chief Executive Officer,
the President) an account of transactions and of the financial condition of the
Corporation. The Treasurer and the Controller each shall perform such other
duties and have such other powers as the Board or the Chief Executive Officer
(or, if the Board does not appoint a Chief Executive Officer, the President) may
from time to time prescribe.
SECTION 8. Assistant Officers. An Assistant Officer shall, in the
------------------
absence of the officer to whom he is an assistant or in the event of such
officer's inability or refusal to act (or, if there be more than one such
assistant officer, the assistant officers in the order designated by the Board
or the Chief Executive Officer (or, if the Board does not appoint a Chief
Executive Officer, the President) or, in the absence of any designation then in
the order of their appointment), perform the duties and exercise the powers of
such officer. An Assistant Officer shall perform such other duties and have
such other powers as the Board or the Chief Executive Officer (or, if the Board
does not appoint a Chief Executive Officer, the President) may from time to time
prescribe.
ARTICLE V
SEAL
It shall not be necessary to the validity of any instrument executed
by any authorized officer or officers of the Corporation, that the execution of
such instrument be evidenced by the corporate seal, and all documents,
instruments, contracts, and writings of all kinds signed on behalf of the
Corporation by any authorized officer or officers thereof shall be as effectual
and binding on the Corporation without the corporate seal, as if the execution
of the same had been evidenced by affixing the corporate seal thereto.
ARTICLE VI
FORM OF STOCK CERTIFICATE
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of, the Corporation by the President or a
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by him
11
<PAGE>
in the Corporation. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of the issue.
ARTICLE VII
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The Chief Executive Officer or any other officer or officers
authorized by the Board or the President are each authorized to vote, represent,
and exercise on behalf of the corporation all rights incident to any and all
shares of any other corporation or corporations standing in the name of the
corporation. The authority herein granted may be exercised either by any such
officer in person or by any other person authorized so to do by proxy or power
of attorney duly executed by said officer.
ARTICLE VIII
TRANSFERS OF STOCK
Upon surrender to the Corporation or a transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction upon its books.
ARTICLE IX
LOST, STOLEN, OR DESTROYED CERTIFICATES
The Board may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen, or destroyed, upon the making of an affidavit
of the fact by the person claiming the certificate of stock to be lost, stolen,
or destroyed. When authorizing such issue of a new certificate or certificates,
the Board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of
12
<PAGE>
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
ARTICLE X
RECORD DATE
The Board may fix in advance a date, which shall not be more than
sixty days nor less than ten days preceding the date of any meeting of
shareholders, or the date for the payment of any dividend, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, or a date in connection with obtaining such
consent, as a record date for the determination of shareholders entitled to
notice of, and to vote at, any such meeting and any adjournment thereof, or
entitled to receive payment of any such dividend, or to any such allotment of
rights, or to exercise the rights in respect of any such change, conversion or
exchange of capital stock, or to give such consent, and in such case such
shareholders, and only such shareholders as shall be shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting and any adjournment thereof, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, or to give such
consent, as the case may be, not withstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid.
ARTICLE XI
REGISTERED SHAREHOLDERS
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, save as expressly provided by applicable law.
13
<PAGE>
ARTICLE XII
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board.
ARTICLE XIII
NOTICES
SECTION 1. Manner of Notice. Whenever under the provisions of the
----------------
statutes or of the Certificate of Incorporation or of these Bylaws notice is
required to be given to any Director, committee member, officer, or shareholder,
it shall not be construed to mean personal notice, but such notice may be given,
in the case of shareholders, in writing, by mail, by depositing the same in the
post office or letterbox, in a postpaid sealed wrapper, addressed to such
shareholder, at such address as appears on the books of the Corporation, or, in
default of other address, to such shareholder at the General Post Office in the
City of Wilmington, Delaware, and, in the case of Directors, committee members
and officers, by telephone, or by mail or by telegram to the last business
address known to the Secretary of the Corporation, and such notice shall be
deemed to be given at the time when the same shall be thus mailed or telegraphed
or telephoned.
SECTION 2. Waiver of Notice. Whenever any notice is required to be
----------------
given under the provisions of the statutes or of the Certificate of
Incorporation or of these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
ARTICLE XIV
AMENDMENTS
The Board shall have the power to make, adopt, alter, amend and repeal
from time to time bylaws of this corporation, subject to the right of the
shareholders entitled to vote with respect thereto to adopt, alter, amend, and
repeal bylaws made by the Board; provided, however, that bylaws shall not be
adopted, altered, amended, or repealed by the shareholders of the Corporation,
except by the vote of the holders of not less than sixty-six and two-thirds
percent (66-2/3%) of the outstanding shares of Common Stock.
14
<PAGE>
ARTICLE XV
INDEMNIFICATION AND INSURANCE
SECTION 1. Right to Indemnification. Each person who was or is a
------------------------
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
or inaction in an official capacity or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by the laws of Delaware, as the
same exist or may hereafter be amended, against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgements, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
Section 2 hereof, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation. The right to indemnification conferred
in this Article shall be a contract right and shall include the right to be paid
by the Corporation the expenses incurred in defending any such proceeding in
advance of its final dispositon; provided, however, that, if the Delaware
General Corporation Law requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director of officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding; shall be made
only upon delivery to the Corporation of an undertaking, by or on behalf of such
director of officer, to repay all amounts so advanced if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
this Section or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the Corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
SECTION 2. Right of Claimant to Bring Suit. If a claim under Section
-------------------------------
1 of this Article is not paid in full by the Corporation within thirty days
after a
15
<PAGE>
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has failed to meet a standard of conduct which
makes it permissible under Delaware law for the Corporation to indemnify the
claimant for the amount claimed. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the circumstances
because he or she has met such standard of conduct, nor an actual determination
by the Corporation (including its Board of Directors, independent legal counsel,
or its stockholders) that the claimant has not met such standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
failed to meet such standard of conduct.
SECTION 3. Non-Exclusivity of Rights. The right to indemnification
-------------------------
and the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
SECTION 4. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability, loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Delaware law.
SECTION 5. Expenses as a Witness. To the extent that any director,
---------------------
officer, employee or agent of the Corporation is by reason of such position, or
a position with another entity at the request of the Corporation, a witness in
any action, suit or proceeding, he shall be indemnified against all costs and
expenses actually and reasonably incurred by him or her or on his or her behalf
in connection therewith.
SECTION 6. Indemnity Agreements. The Corporation may enter into
--------------------
agreements with any director, officer, employee or agent of the Corporation
providing for indemnification to the full extent permitted by Delaware law.
16
<PAGE>
EXHIBIT (10)(v)
PS GROUP, INC.
1993 Annual Report on Form 10-K
ASSET PURCHASE AGREEMENT
by and among
USTRAVEL SYSTEMS INC., CERTAIN OF ITS SUBSIDIARIES,
PS GROUP, INC.
and
MTH ACQUISITION CORP.
MARCH 14, 1994
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
<S> <C>
1. Definitions.......................................................... 1
(a) the term "to the knowledge of".................................. 1
(b) the term "set forth on the Closing Balance Sheet"............... 2
(c) "Action"........................................................ 2
(d) "Additional Assumed Obligations"................................ 2
(e) "Affiliate"..................................................... 2
(f) "Agency Franchisees"............................................ 2
(g) "Airline Identification Plates"................................. 2
(h) "Annual Statements"............................................. 2
(i) "ARC"........................................................... 2
(j) "ARC Handbook".................................................. 2
(k) "ARC Traffic Documents"......................................... 2
(l) "Assumed Contracts"............................................. 2
(m) "Assumed Obligations"........................................... 2
(n) "Benefit Plan".................................................. 2
(o) "Business"...................................................... 3
(p) "Buyer's Chief Financial Officer"............................... 3
(q) "Buyer Indemnified Persons"..................................... 3
(r) "Buyer Losses".................................................. 3
(s) "CERCLA"........................................................ 3
(t) "Closing"....................................................... 3
(u) "Closing Balance Sheet"......................................... 3
(v) "Closing Date".................................................. 3
(w) "Code".......................................................... 3
(x) "Contract Rights"............................................... 3
(y) "Employee Notes"................................................ 3
(z) "Environmental Laws"............................................ 3
(aa) "ERISA"......................................................... 3
(ab) "Excluded Assets"............................................... 4
(bb) "Excluded Contractual Liabilities............................... 4
(cc) "Excluded Obligations".......................................... 4
(dd) "Governmental Authority"........................................ 4
(ee) "Governmental Order"............................................ 4
(ff) "Hazardous Materials"........................................... 4
(gg) "Holdback Amount"............................................... 4
(hh) "Installment Note".............................................. 4
(ii) "Interest Rate"................................................. 4
(jj) "Intellectual Property"......................................... 5
(kk) "Interim Statements"............................................ 5
(ll) "IRS"........................................................... 5
(mm) "Law"........................................................... 5
(nn) "Leases"........................................................ 5
</TABLE>
i
<PAGE>
<TABLE>
Page
<S> <C>
(oo) "Liabilities"........ ........................................... 5
(pp) "Liens".......................................................... 5
(qq) "Material Adverse Effect"........................................ 5
(rr) "Net Interest"................................................... 5
(ss) "Parent Cash Advance Amount"..................................... 6
(tt) "Permitted Liens"................................................ 6
(uu) "Person"......................................................... 6
(vv) "Principal Employees"............................................ 6
(ww) "Purchased Assets"............................................... 6
(xx) "Purchased Business"............................................. 6
(yy) "Purchase Price"................................................. 6
(zz) "Receivables".................................................... 6
(ac) "Schedule"....................................................... 6
(ad) "Seller Cash Advance Amount"..................................... 6
(ae) "Seller Indemnified Persons"..................................... 7
(af) "Seller Losses".................................................. 7
(ag) "Significant Client"............................................. 7
(ah) "Stipulated Amount".............................................. 7
(ai) "Stock Purchase Companies"....................................... 7
(aj) "Survival Date".................................................. 7
(ak) "Tangible Net Worth"............................................. 7
(al) "Tax" or "Taxes"................................................. 7
(am) "Trademark Offices".............................................. 7
(an) "Unassigned Assets".............................................. 7
(ao) "Unbooked Receivables"........................................... 7
(ap) "USTS New York".................................................. 7
(aq) "Undisclosed Contract"........................................... 8
(ar) "WARN"........................................................... 8
2. Transfer of Assets and Related Transactions........................... 8
(a) Transfer of Assets............................................... 8
(b) Assets Not Being Transferred..................................... 10
(c) Instruments of Conveyance and Assumption, Etc. .................. 11
(d) Power of Attorney; Right of Endorsement, Etc. ................... 11
(e) Further Assurances, Etc. ........................................ 12
(f) Assignment of Contracts, Rights, Etc. ........................... 12
(g) Post-Closing; Access to Information by the Buyer and the Seller.. 13
3. Assumptions by Buyer.................................................. 13
(a) Liabilities Being Assumed........................................ 13
(b) Liabilities Not Being Assumed.................................... 15
4. Purchase Price; Closing Balance Sheet; Closing........................ 17
(a) Purchase Price................................................... 17
(b) Payment of the Purchase Price.................................... 17
</TABLE>
ii
<PAGE>
<TABLE>
Page
<S> <C>
(c) Preparation and Acceptance of Closing Balance Sheet............. 17
(d) Time and Place of Closing....................................... 18
5. Representations and Warranties of the Seller Parties................. 18
(a) Organization of the Parent and the Seller; Qualification of the
Seller; Solvency of Parent...................................... 18
(b) Subsidiaries, Stock Purchase Companies and Agency Franchisees... 19
(c) Corporate Books and Records; Officers and Directors............. 20
(d) Authority....................................................... 20
(e) No Conflicts.................................................... 20
(f) Consents........................................................ 21
(g) Purchased Assets................................................ 21
(h) Financial Information; Books and Records........................ 21
(i) No Undisclosed Liabilities of the Stock Purchase Companies;
Reserves........................................................ 22
(j) Receivables..................................................... 22
(k) Furniture, Fixtures and Equipment............................... 22
(l) Acquired Assets................................................. 22
(m) Absence of Changes.............................................. 22
(n) Compliance with Laws............................................ 25
(o) Environmental................................................... 25
(p) Intellectual Property........................................... 27
(q) Tax Matters..................................................... 27
(r) Property........................................................ 28
(s) Insurance....................................................... 29
(t) Agreements; Etc. ............................................... 30
(u) Litigation, Etc. ............................................... 31
(v) Governmental Authorizations..................................... 31
(w) Labor Relations; Employees...................................... 32
(x) Employee Benefit Matters........................................ 32
(y) Client and Agency Franchisee Relations.......................... 34
(z) Suppliers....................................................... 34
(aa) ARC, IATAN, Etc. ............................................... 34
(bb) Brokers......................................................... 34
(cc) Related Party Transactions...................................... 34
(dd) Stock Purchase Companies........................................ 35
(ee) Disclosure...................................................... 36
(ff) Rule of Construction............................................ 36
(gg) Stock Purchase Company and USTS New York Balance Sheets......... 36
(hh) Unbooked Receivables............................................ 36
(ii) Principal Employees............................................. 37
(jj) Franchisee Litigation........................................... 37
(kk) Parent Cash Advance Amount...................................... 37
</TABLE>
iii
<PAGE>
<TABLE>
Page
<S> <C>
6. Representations and Warranties of the Buyer............................ 37
(a) Organization; Good Standing; Qualification and Power.............. 37
(b) Authority......................................................... 37
(c) Consents.......................................................... 37
(d) Litigation........................................................ 38
(e) Brokers........................................................... 38
(f) Airlines Reporting Corporation.................................... 38
(g) Investment Representation......................................... 38
7. [SECTION 7 INTENTIONALLY OMITTED]...................................... 38
8. [SECTION 8 INTENTIONALLY OMITTED]...................................... 38
9. Post-Closing Agreements of the Parties................................. 38
(a) Purchase Price Adjustments........................................ 38
(b) Allocation of Proceeds............................................ 39
(c) Obligations of the Seller and the Subsidiaries.................... 40
(d) Sales Taxes....................................................... 40
(e) Employees......................................................... 40
(f) Name Changes...................................................... 40
(g) Additional Post-Closing Adjustments............................... 40
(h) Other Taxes....................................................... 41
(i) Tax Returns....................................................... 41
(j) Miscellaneous Tax Provisions...................................... 42
(k) Delivery of Property Received After Closing....................... 42
(l) Unpaid Expenses................................................... 42
(m) Other Unpaid Liabilities.......................................... 43
10. Confidential Information; Non-Competition by the Seller Parties........ 43
(a) Non-Disclosure.................................................... 43
(b) Non-Competition................................................... 43
(c) Savings Clause; Extraordinary Relief.............................. 44
11. Indemnification........................................................ 44
(a) Indemnification by the Seller Parties............................. 44
(b) Indemnification by the Buyer...................................... 46
(c) Third Party Claims................................................ 47
(d) Stipulated Amount................................................. 48
(e) Survival.......................................................... 48
12. Miscellaneous.......................................................... 48
(a) Expenses.......................................................... 48
(b) Binding Effect; Assignment by the Buyer; Survival................. 48
(c) Entire Agreement; Amendments...................................... 49
(d) Public Announcements.............................................. 49
</TABLE>
iv
<PAGE>
<TABLE>
Page
<S> <C>
(e) Severability...................................................... 49
(f) Dispute Resolution................................................ 49
(g) Attorneys' Fees................................................... 50
(h) Further Action.................................................... 50
(i) Headings.......................................................... 50
(j) Notices........................................................... 50
(k) Counterparts...................................................... 51
(l) Governing Law..................................................... 51
(m) Pronouns; Construction............................................ 51
(n) Waivers........................................................... 51
(o) Third Parties..................................................... 51
</TABLE>
v
<PAGE>
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (this "Agreement") made as of this 14th day of
March, 1994 by and among USTravel Systems Inc., a Delaware corporation (the
"Seller"), USTS Northwest, Inc., a Washington corporation, USTS Southwest, Inc.,
a Delaware corporation, USTS Affiliate Corporation, a Delaware corporation, USTS
Northeast, Inc., a Delaware corporation, USTS Southeast, Inc., a District of
Columbia corporation, USMotivation, Inc., a Delaware corporation (each
individually, a "Subsidiary" and collectively "the Subsidiaries"), PS Group,
Inc., a Delaware corporation and the majority stockholder of the Seller (the
"Parent") and MTH Acquisition Corp., a Delaware corporation (the "Buyer"). The
Parent, the Seller and the Subsidiaries are sometimes collectively referred to
herein as the "Seller Parties".
W I T N E S S E T H:
-------------------
WHEREAS, the Seller, the Stock Purchase Companies (as defined below), and
the Subsidiaries and the Agency Franchisees (as defined below) provide
comprehensive travel related services including travel management and travel
incentive programs to corporations and retail clients (the "Business"); and
WHEREAS, the parties hereto desire that the Seller and the Subsidiaries
sell to the Buyer and the Buyer purchase from the Seller and the Subsidiaries
substantially all of the assets, properties, goodwill, rights and business of
the Seller and the Subsidiaries relating to, used in or intended to be used in
the Business as a going concern, including, but not limited to all capital stock
of the Stock Purchase Companies owned by the Seller Parties (the "Purchased
Business"), on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants and agreements hereinafter set forth the
parties hereto do hereby agree as follows:
1. Definitions. As used in this Agreement the following terms have the
-----------
following meanings:
(a) the term "to the knowledge of" any Person shall mean and
include (A) actual knowledge and (B) (except as to matters referred to in
Sections 5(o) and 5(hh) hereof) that knowledge which a prudent business
Person could have obtained in the management of his business after making
due inquiry and after exercising due diligence with respect thereto. With
respect to the Seller Parties, the knowledge of any "executive officer" (as
such term is defined in Rule 405 promulgated by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended) of the
Seller, will be imputed to the knowledge of the Seller Parties.
<PAGE>
(b) the term "set forth on the Closing Balance Sheet" shall mean set
forth on the face of the Closing Balance Sheet as opposed to disclosed or
referenced in connection with the Closing Balance Sheet.
(c) "Action" means any claim, action, suit, arbitration, inquiry,
------
proceeding or investigation by or before any Governmental Authority.
(d) "Additional Assumed Obligations" shall have the meaning assigned to
------------------------------
it in Section 3(a) of this Agreement.
(e) "Affiliate" means (i) in the case of an entity, any Person who or
---------
which, directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, any specified Person (the
term "control" for these purposes means the ability, whether by ownership of
shares or other equity interests, by contract or otherwise, to elect a majority
of the directors of a corporation, to select the managing or general partner of
a partnership, or otherwise to select, or have the power to remove and then
select, a majority of those Persons exercising governing authority over an
entity) or (ii) in the case of an individual, such individual's spouse,
children, grandchildren or parents or a trust primarily for the benefit of any
of the foregoing.
(f) "Agency Franchisees" shall have the meaning assigned to it in Section
------------------
5(b)(vi) of this Agreement.
(g) "Airline Identification Plates" shall have the meaning assigned to it
-----------------------------
in Section 2(e) of this Agreement.
(h) "Annual Statements" shall have the meaning assigned to it in Section
-----------------
5(h)(i) of this Agreement.
(i) "ARC" means the Airlines Reporting Corporation.
---
(j) "ARC Handbook" shall have the meaning assigned to it in Section
------------
2(e) of this Agreement.
(k) "ARC Traffic Documents" shall have the meaning assigned to it in
---------------------
Section 2(e) of this Agreement.
(l) "Assumed Contracts" shall have the meaning assigned to it in Section
-----------------
3(a)(ii) of this Agreement.
(m) "Assumed Obligations" shall have the meaning assigned to it in
-------------------
Section 3(a) of this Agreement.
(n) "Benefit Plan" shall have the meaning assigned to it in Section
------------
5(x)(i) of this Agreement.
2
<PAGE>
(o) "Business" shall have the meaning assigned to it in the recitals to
--------
this Agreement.
(p) "Buyer's Chief Financial Officer" shall mean F.W. Webking, Jr.
-------------------------------
(q) "Buyer Indemnified Persons" shall have the meaning assigned to it in
-------------------------
Section 11(a) of this Agreement.
(r) "Buyer Losses" shall have the meaning assigned to it in Section
------------
11(a) of this Agreement.
(s) "CERCLA" means the Comprehensive Environmental Response, Compensation
------
and Liability Act of 1980, as amended through the date hereof.
(t) "Closing" shall have the meaning assigned to it in Section 4(d) of
-------
this Agreement.
(u) "Closing Balance Sheet" shall have the meaning assigned to it in
---------------------
Section 4(c) of this Agreement.
(v) "Closing Date" means March __, 1994.
------------
(w) "Code" shall have the meaning assigned to it in Section 5(q) of this
----
Agreement.
(x) "Contract Rights" shall have the meaning assigned to it in Section
---------------
2(a)(v) of this Agreement.
(y) "Employee Notes" means those obligations of employees of Seller, the
--------------
Subsidiaries or the Stock Purchase Companies to the extent reflected on the
Closing Balance Sheet, regardless of whether such obligations are evidenced in
written form.
(z) "Environmental Laws" means any Law in effect on or prior to the date
------------------
hereof, and any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, relating to the
environment, health, safety or Hazardous Materials, including CERCLA; the
Resource Conservation and Recovery Act, 42 U.S.C. (S)(S) 6901 et seq.; the
------
Hazardous Materials Transportation Act, 49 U.S.C. (S)(S) 6901 et seq.; the Clean
------
Water Act, 33 U.S.C. (S)(S) 1251 et seq.; the Toxic Substances Control Act. 15
------
U.S.C. (S)(S) 2601 et seq.; the Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq.;
------ -- ---
the Safe Drinking Water Act, 42 U.S.C. (S)(S) 300f et seq.; the Atomic Energy
-------
Act, 42 U.S.C. (S)(S) 2011 et seq.; the Federal Insecticide, Fungicide and
------
Rodenticide Act, 7 U.S.C. (S)(S) 136 et seq.; and the Federal Food, Drug and
------
Cosmetic Act, 21 U.S.C. (S)(S) 301 et seq.
------
(aa) "ERISA" shall have the meaning assigned to it in Section 5(x)(i) of
-----
this Agreement.
3
<PAGE>
(ab) "Excluded Assets" shall have the meaning assigned to it in Section
---------------
2(b) of this Agreement.
(bb) "Excluded Contractual Liabilities" means any contractual Liability
---------------------------------
from any of the Seller Parties to any of the other Seller Parties, and all
Liabilities relating to (i) any agreement between any of the Seller Parties and
the Principal Employees; (ii) those certain contracts referred to as Contract
Numbers 83784, 96370 and 5073 in the letter dated March 2, 1994 from Apollo
Travel Services set forth in Section 3(b)(xiv) of the Schedule except to the
extent set forth on the Closing Balance Sheet; and (iii) any agreement relating
to the acquisition of any other company or business by any of the Seller Parties
other than as set forth on the Closing Balance Sheet, including, without
limitation, any and all Liabilities arising under or relating to the agreements
set forth under the heading "Acquisition Contractual Relationships Summary" in
Schedule 5(t)(xvii); and (iv) any and all Liabilities arising under or relating
to any contracts, leases, agreements or commitments assigned to Buyer pursuant
to this Agreement to the extent that such Liabilities have accrued prior to and
including February 28, 1994, and are not set forth on the Closing Balance Sheet.
(cc) "Excluded Obligations" shall have the meaning assigned to it in
--------------------
Section 3(b) of this Agreement.
(dd) "Governmental Authority" means any United States federal, state or
----------------------
local or any foreign government, governmental, regulatory or administrative
authority, agency or commission or any court, tribunal, or judicial or
arbitral body.
(ee) "Governmental Order" means any order, writ, judgment, injunction,
------------------
decree, stipulation, determination or award entered by or with any
Governmental Authority.
(ff) "Hazardous Materials" means (a) petroleum and petroleum products,
-------------------
radioactive materials, asbestos in any form that is or could become friable,
transformers or other equipment that contains polychlorinated biphenyls, and
radon gas, (b) any other chemicals, materials or substances defined as or
included in the definition of "hazardous substances", "hazardous wastes",
"hazardous materials", "extremely hazardous wastes", "restricted hazardous
wastes", "toxic substances", "toxic pollutants", "contaminants" or "pollutants",
or words of similar import, under any applicable Environmental Law, and (c) any
other chemical, material or substance exposure which is regulated by any
Governmental Authority.
(gg) "Holdback Amount" shall have the meaning assigned to it in Section
---------------
4(b) of this Agreement.
(hh) "Installment Note" shall have the meaning assigned to it in Section
----------------
4(b)(ii) of this Agreement.
(ii) "Interest Rate" shall have the meaning assigned to it in Section
-------------
4(b)(i) of this Agreement.
4
<PAGE>
(jj) "Intellectual Property" shall have the meaning assigned to it in
---------------------
Section 2(a)(vii) of this Agreement.
(kk) "Interim Statements" shall have the meaning assigned to it in
------------------
Section 5(h)(i) of this Agreement.
(ll) "IRS" means the Internal Revenue Service.
---
(mm) "Law" means any federal, state, local or foreign statute, law,
---
ordinance, regulation, rule, code, order, other requirement or code of law.
(nn) "Leases" shall have the meaning assigned to it in Section 5(r) of
------
this Agreement.
(oo) "Liabilities" shall mean any and all debts, claims, liabilities and
-----------
obligations of any kind whatsoever and regardless of whether known or unknown to
any of the Seller Parties or to Buyer and regardless of whether disclosure of
the same would or would not be required to be made in accordance with generally
accepted accounting principles, whether accrued or fixed, absolute or contingent
or determined or determinable, including (by way of example and without
limitation of the scope of the preceding portion of this sentence) contractual,
tort, Tax or any other kind of liability and liabilities arising under any Law,
Action or Governmental Order.
(pp) "Liens" shall mean any lien, security interest, mortgage,
-----
conditional sale, retention of title, adverse claim, preferential arrangement,
charge, pledge and other similar encumbrance of any nature whatsoever, or
restriction of any kind, including any restriction on the use, voting, transfer,
receipt of income or other exercise of any attributes of ownership.
(qq) "Material Adverse Effect" shall mean any circumstance, change in, or
-----------------------
effect on the Purchased Business, the Purchased Assets, or the Seller Parties
that, individually or in the aggregate with any other circumstances, changes or
effects (a) is, or could reasonably be expected to be, materially adverse to the
business, operations, assets or Liabilities, prospects, results of operations or
the condition (financial or otherwise) of the Seller or the Seller and the
Subsidiaries, taken as a whole, or (b) may reasonably be expected to adversely
affect the ability of the Seller or any Subsidiary (or after the Closing, the
Buyer) to either operate or conduct all or any material portion of the Purchased
Business in the manner in which it is currently, or is anticipated to be,
operated or conducted or to benefit from the Purchased Assets, taken as a whole.
(rr) "Net Interest" means the net difference obtained by (i) calculating
------------
the sum of the interest earned each day (calculated at the Interest Rate) on
each and every cash advance by the Parent to the Seller during the period
beginning March 1, 1994 up to and including the Closing Date, (ii) calculating
the sum of the interest earned each day (calculated at the Interest Rate) on
each and every cash advance by the Seller to the Parent during the period
beginning March 1, 1994 up to and including the Closing Date,
5
<PAGE>
and (iii) subtracting the smaller of the two amounts of interest so earned from
the larger of the two such amounts.
(ss) "Parent Cash Advance Amount" means the net amount of cash proceeds,
--------------------------
if any, advanced by the Parent to the Seller for the period beginning March 1,
1994 up to and including the Closing Date. By way of example, if the Parent
shall have advanced $1 million to the Seller on March 1st and the Seller shall
have advanced $.5 million to the Parent on March 2nd (and no other cash advances
are made by either party prior to and including the Closing Date) the Parent
Cash Advance Amount shall be $.5 million.
(tt) "Permitted Liens" shall mean (i) Liens arising by operation of law
---------------
in the ordinary course of business that, individually or in the aggregate, are
not substantial in character or amount and do not in any material respect
detract from, or impair the value or interfere with the use of, any of the
Purchased Business or, taken as a whole, the Purchased Assets, (ii) any Lien
incidental to an Assumed Obligation to the extent such Lien is expressly
disclosed and identified as a Permitted Lien in Section 5(g) of the Schedule and
(iii) any Lien incidental to an Additional Assumed Obligation to the extent the
Additional Assumed Obligation is specifically assumed by the Buyer as provided
herein.
(uu) "Person" means any individual, partnership, firm, corporation,
------
association, trust, unincorporated organization or other entity, as well as any
syndicate or group that would be deemed to be a person under Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended.
(vv) "Principal Employees" shall mean Peter M. Sontag, Ralph Manaker,
-------------------
James R. Nugent, Jr. and Michael S. Hadlow.
(ww) "Purchased Assets" shall have the meaning assigned to it in Section
----------------
2(a) of this Agreement.
(xx) "Purchased Business" shall have the meaning assigned to it in the
------------------
recitals to this Agreement.
(yy) "Purchase Price" shall have the meaning assigned to it in Section
--------------
4(a) of this Agreement.
(zz) "Receivables" shall have the meaning assigned to it in Section
-----------
2(a)(ii) of this Agreement.
(ac) "Schedule" shall have the meaning assigned to it in Section 2(a)(v)
--------
of this Agreement.
(ad) "Seller Cash Advance Amount" means the net amount of cash proceeds,
--------------------------
if any, advanced by the Seller to the Parent for the period beginning March 1,
1994 up to and including the Closing Date. By way of example, if the Seller
shall have advanced $1 million to the Parent on March 1st and the Parent shall
have advanced $.5 million to
6
<PAGE>
the Seller on March 2nd (and no other cash advances are made by either party
prior to and including the Closing Date) the Seller Cash Advance Amount shall be
$.5 million.
(ae) "Seller Indemnified Persons" shall have the meaning assigned to it
--------------------------
in Section 11(b) of this Agreement.
(af) "Seller Losses" shall have the meaning assigned to it in Section
-------------
11(b) of this Agreement.
(ag) "Significant Client" shall have the meaning assigned to it in
------------------
Section 5(y) of this Agreement.
(ah) "Stipulated Amount" shall have the meaning assigned to it in Section
-----------------
11(d) of this Agreement.
(ai) "Stock Purchase Companies" shall have the meaning assigned to it in
------------------------
Section 2(a)(ix) of this Agreement.
(aj) "Survival Date" shall have the meaning assigned to it in Section
-------------
11(e) of this Agreement.
(ak) "Tangible Net Worth" means total assets less intangible assets and
------------------
total liabilities (excluding liabilities due to the Parent). Intangible assets
are defined as goodwill, assigned value of businesses acquired, patents,
copyrights, trademarks, commitment fees, arrangement fees and deferred franchise
expenses.
(al) "Tax" or "Taxes" means any and all taxes, fees, levies, duties,
--- -----
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any government or taxing authority, including,
without limitation: taxes or other charges on or with respect to income,
franchises, windfall or other profits, gross receipts, property, sales, use,
capital stock, payroll, employment, social security, workers' compensation,
unemployment compensation, or net worth; taxes or other charges in the nature of
excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes;
license, registration and documentation fees; and customs duties, tariffs, and
similar charges.
(am) "Trademark Offices" shall have the meaning assigned to it in Section
-----------------
2(a)(vii) of this Agreement.
(an) "Unassigned Assets" shall have the meaning assigned to it in Section
-----------------
9(g) of this Agreement.
(ao) "Unbooked Receivables" shall have the meaning assigned to it in
--------------------
Section 2(a)(ii) of this Agreement.
(ap) "USTS New York" means USTS New York, Inc., a Delaware corporation.
-------------
7
<PAGE>
(aq) "Undisclosed Contract" shall have the meaning assigned to it in
--------------------
Section 3(a) of this Agreement.
(ar) "WARN" shall have the meaning assigned to it in Section 5(w) of this
----
Agreement.
2. Transfer of Assets and Related Transactions.
-------------------------------------------
(a) Transfer of Assets. On the terms and subject to the conditions of
-------------------
this Agreement, at the Closing the Seller and each Subsidiary will, except as
provided in Section 2(b) hereof, sell, transfer, convey and assign to the Buyer
all the right, title and interest of the Seller and each Subsidiary in and to
the assets, properties, rights, goodwill and businesses, of every kind and
description, wherever located (as the same exist on the Closing Date), owned,
leased, used or held by the Seller and the Subsidiaries in connection with the
conduct of the Purchased Business, including, but not limited to, those assets,
properties and rights reflected in the Interim Statements and the following:
(i) Cash, etc. Cash and cash equivalents, prepaid items and
----------
deposits set forth on the Closing Balance Sheet.
(ii) Accounts Receivable. All of the Seller's and each
-------------------
Subsidiary's accounts, notes, and all other receivables of every nature or kind
("Receivables"), and whether or not on Seller's and each Subsidiary's books or
listed on the Closing Balance Sheet (it being expressly understood and agreed
that certain receivables such as hotel, car rental, cruise and tour receivables
("Unbooked Receivables"), are not booked; as to all such amounts, all
collections thereof after February 28, 1994 shall belong to the Buyer),
including the amount set forth on the Closing Balance Sheet as a receivable of
the Seller or any of the Subsidiaries from the Parent pursuant to that certain
tax sharing agreement between the Seller, the Subsidiaries and the Parent;
provided, however, that the Seller shall retain, as part of the Excluded Assets,
those receivables outstanding on February 28, 1994 and collected by the Buyer
after the Closing Date which are derived from airline override payments and are
in excess of the booked amount of airline override receivables set forth on the
Closing Balance Sheet and itemized in the list of Receivables attached to the
Closing Balance Sheet (and which will be forwarded by Buyer to Seller promptly
upon receipt by Buyer).
(iii) Business Information. All of the Seller's and each
--------------------
Subsidiary's records, files and data relating to the Purchased Business and
the operation thereof, including, but not limited to, all computer software
programs, purchasing and sales records, maintenance records, personnel and
payroll records, accounting records and all materials related thereto, client
lists, correspondence files, and all other existing records as the Buyer may
reasonably require in its conduct of the Purchased Business subsequent to
Closing in a manner similar to that previously conducted by the Seller and the
Subsidiaries;
8
<PAGE>
(iv) Claims, Rights and Choses in Action. All claims, rights
-----------------------------------
and choses in action of the Seller and the Subsidiaries against third parties
arising out of or in connection with the Purchased Business;
(v) Contract Rights, Etc. All rights of the Seller and the
---------------------
Subsidiaries in, to and under all contracts, leases, subleases, licenses,
franchises, commitments, agreements, policies (or binders) of insurance and
purchase and sales orders relating to the Purchased Business, including, but not
limited to, those which are set forth in Section 5(t) of the Disclosure Schedule
attached hereto (the "Schedule") or which do not meet the disclosure thresholds
set forth in Section 5 hereof but are related to the Purchased Business, or are
incidental to Additional Assumed Obligations (the "Contract Rights"). Without
limiting the generality of the foregoing, the Contract Rights include any
noncompete or nondisclosure agreements, oral or written, with any present or
former employee, officer or director of the Seller or any Subsidiary (excluding
the Principal Employees), or any Person who previously sold a business to the
Seller or any Subsidiary;
(vi) Other Tangible Assets. All tangible assets owned, used, or
----------------------
held by the Seller and the Subsidiaries in connection with
the Purchased Business, whether in the possession of the Seller or any of the
Subsidiaries, Agency Franchisees or third parties, including, but not limited
to, inventory, supplies, ticket stock, furniture, fixtures, vehicles, equipment
and leasehold improvements;
(vii) Intellectual Property. All rights of the Seller and the
---------------------
Subsidiaries and of the Parent anywhere in the world to the extent applicable to
the Purchased Business in and to (A) inventions, whether or not patentable,
whether or not reduced to practice, and whether or not yet made the subject of a
pending patent application or applications, (B) ideas and conceptions of
potentially patentable subject matter, including, without limitation, any patent
disclosures, whether or not reduced to practice and whether or not yet made the
subject of a pending patent application or applications, (C) national (including
the United States) and multinational statutory invention registrations, patents,
patent registrations and patent applications (including all reissues, divisions,
continuations, continuations-in-part, extensions and reexaminations) and all
rights therein provided by international treaties or conventions and all
improvements to the inventions disclosed in each such registration, patent or
application, (D) trademarks, service marks, trade dress, logos, trade names and
corporate names, whether or not registered, including all common law rights, and
registrations and applications for registration thereof, together with the
goodwill of the business symbolized by such marks, including, but not limited
to, all marks registered in the United States Patent and Trademark Office or
with the appropriate state authorities, the trademark offices of the states and
territories of the United States of America, and the trademark offices of other
nations throughout the world (collectively, the "Trademark Offices"), and all
rights therein provided by international treaties or conventions, (E) copyrights
(registered or otherwise) and registrations and applications for registration
thereof, and all rights therein provided by international treaties or
conventions, (F) proprietary computer software, including, without limitation,
the Maestro, Reprise and Prelude computer programs and reporting systems, source
codes, operating systems and
9
<PAGE>
specifications, data, data bases, files, documentation and other materials
related thereto, (G) trade secrets and confidential, technical and business
information (including, without limitation ideas, flow charts, logic diagrams,
formulas, compositions, patterns, devices, methods, techniques, processes,
inventions, and conceptions of inventions whether patentable or unpatentable and
whether or not reduced to practice), (H) whether or not confidential, technology
(including know-how and show-how), operational processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data, copyrightable works, financial, marketing and
business data, selling, pricing and cost information or procedures, business and
marketing plans and client and supplier lists and information, (I) copies and
tangible embodiments of all the foregoing, in whatever form or medium, (J) all
rights to apply for and obtain patents and to register trademarks and
copyrights, (K) all agreements relating to the foregoing including, but not
limited to, all licenses, franchises and employment agreements, and (L) all
rights to sue or recover and retain damages and costs and attorneys' fees for
present and past infringement or misappropriation of any of the foregoing. The
foregoing, which shall be assigned by separate instruments in form suitable for
filing with the Trademark Offices where necessary, is collectively referred to
herein as "Intellectual Property";
(viii) Intangible Assets. All of Seller's and each Subsidiary's
-----------------
intangible assets; and
(ix) Capital Stock Purchase. All of the capital stock in CMO,
----------------------
Inc. a Georgia Corporation, Doug Fox Parking, Inc., a Washington corporation,
and The Fox Travel Institute, Inc., a Washington corporation (collectively, the
"Stock Purchase Companies"), owned by the Seller Parties and the corporate
minute books and stock record books of the Stock Purchase Companies.
For convenience of reference, the assets, properties, rights and businesses of
the Seller and the Subsidiaries to be transferred, conveyed and assigned to the
Buyer are hereinafter collectively called the "Purchased Assets."
(b) Assets Not Being Transferred. Anything contained in Section 2(a)
----------------------------
hereof to the contrary notwithstanding, there are expressly excluded from the
Purchased Assets the following:
(i) the equity securities, corporate minute books and stock
record books of the Seller, USTS New York and the Subsidiaries and any other
documents which the Seller and the Subsidiaries are required by Law to retain in
their possession;
(ii) all rights in favor of the Seller Parties created under or
pursuant to this Agreement; and
(iii) all rights and obligations of any of the Seller Parties
under the contract and agreement described in Item 3 of Section 5(t)(ix) of the
Schedule.
10
<PAGE>
For convenience of reference, the foregoing assets and rights of the Seller
and the Subsidiaries not to be transferred, conveyed and assigned to the
Buyer are hereinafter collectively called the "Excluded Assets".
(c) Instruments of Conveyance and Assumption, Etc. At the Closing, the
----------------------------------------------
Seller Parties will deliver, or cause to be delivered to the Buyer such deeds,
bills of sale, endorsements, stock powers, assignments (and all relevant
consents, to the extent required, thereto), releases and other good and
sufficient instruments of sale, assignment, conveyance, transfer and release, in
form and substance reasonably satisfactory to the Buyer, as shall be effective
to vest in the Buyer all of the Seller's and each Subsidiary's right, title and
interest in and to the Purchased Assets, to the extent such rights are
transferable under the circumstances, free and clear of all Liens other than
Permitted Liens. The bill of sale delivered at Closing, which transfers, among
other things, furniture, fixtures, equipment, leasehold improvements and other
personal property, has attached to it a list of such assets as of December 31,
1993. The parties hereto agree that such list will be updated to February 28,
1994 and will be attached to the Closing Balance Sheet and thereafter may be
substituted by the Buyer for the list attached to the bill of sale delivered at
Closing. Simultaneously therewith, the Seller and each Subsidiary shall take
all steps as may be reasonably necessary to put the Buyer in possession and
operating control of all of the Purchased Assets and the Purchased Business. At
the Closing, the Buyer will deliver to the Seller and each Subsidiary such
instruments of assumption, in form and substance reasonably satisfactory to the
Seller Parties, as shall be necessary to evidence the assumption by the Buyer of
the Assumed Obligations.
(d) Power of Attorney; Right of Endorsement, Etc. Effective upon the
---------------------------------------------
Closing, the Seller and each Subsidiary hereby constitutes and appoints the
Buyer, its successors and assigns, the true and lawful attorney of the Seller
and each Subsidiary with full power of substitution, in the name of the Buyer,
or the name of the Seller or the Subsidiaries, on behalf of and for the benefit
of the Buyer, to collect all Receivables and payments in respect of Contract
Rights and other items being sold, transferred, conveyed and assigned to the
Buyer as provided herein, to endorse, without recourse, checks, notes and other
instruments relating to the Purchased Assets in the name of the Seller and the
Subsidiaries, and to institute and prosecute, in the name of Seller and the
Subsidiaries and at the expense of the Buyer, all proceedings which the Buyer
may deem proper in order to collect, assert or enforce any claim, right or title
of any kind in or to the Purchased Assets, and to do all such acts and things in
relation thereto and with respect to the matters described in the first sentence
of Section 2(e) hereof, as the Buyer may deem advisable; provided, however, that
such actions shall at all times be subject to Section 9(a)(ii) and Section
11(c)(iii) hereof. The Seller and each Subsidiary agree that the foregoing
powers are coupled with an interest and shall be irrevocable by the Seller and
each Subsidiary. The Buyer shall retain for its own account any amounts
collected pursuant to the foregoing powers subject to Section 9(a)(ii), and the
Seller and each Subsidiary shall hold in trust for the benefit of, and promptly
pay to the Buyer, if and when received, any amounts which shall be received by
the Seller or any Subsidiary after the Closing in respect of any Receivables,
Contract Rights or other of the Purchased Assets. The Buyer shall hold in trust
for the benefit of, and promptly pay to the Seller
11
<PAGE>
and each Subsidiary, if and when received, any amounts which shall be received
by the Buyer after the Closing in respect of Excluded Assets and after
reassignment in regard to any Receivables reassigned to the Seller or the
appropriate Subsidiary pursuant to Section 9(a)(ii) hereof.
(e) Further Assurances, Etc. The Seller Parties and their respective
------------------------
successors and assigns will, at any time and from time to time after the
Closing, do, execute, acknowledge and deliver, or cause to be done, executed,
acknowledged or delivered, all such further acts, deeds, assignments, transfers,
conveyances, powers of attorney or assurances as may be reasonably required for
the better transferring, assigning, conveying, granting, assuring and confirming
to the Buyer, or for aiding and assisting in the collection of or reducing to
possession by the Buyer, any of the Purchased Assets or to vest in the Buyer all
of the Seller's and each Subsidiary's right, title and interest in and to the
Purchased Assets. The Buyer will, at any time and from time to time after the
Closing, do, execute, acknowledge and deliver, or cause to be done, executed,
acknowledged or delivered, all such further acts, assumptions or assurances as
may be reasonably required for the better assuming by the Buyer of the Assumed
Obligations and the Additional Assumed Obligations. Buyer and Seller Parties
agree to take all steps necessary to process an application for ARC approval of
a change in ownership for each of the Seller, the Stock Purchase Companies and
the Subsidiaries promptly after closing with ARC as called for in ARC's Industry
Agents' Handbook (October, 1993) (the "ARC Handbook") to include but not be
limited to the following:
(i) Buyer will secure a bond or irrevocable letter of credit
satisfactory to ARC;
(ii) Buyer and Seller Parties will complete and execute
Applications for Approval of a Complete Change in Ownership Entity Involving New
Principals in accordance with Section 60.12 of the ARC Handbook.
(iii) Seller Parties and Buyer will conduct and agree as to an
inventory of all ARC Traffic Documents and Airline Identification Plates (both
as defined in Section 80 of the ARC Handbook) in the possession of any of the
Seller Parties as of February 28, 1994; and
(iv) Buyer and Seller Parties will complete and execute the
form of verification of ARC Traffic Documents in accordance with the
instructions set forth in Section 60.22 of the ARC Handbook.
Buyer and Seller Parties will each pay their own expenses incurred by them in
connection with the foregoing.
(f) Assignment of Contracts, Rights, Etc. Anything contained in this
-------------------------------------
Agreement to the contrary notwithstanding, the execution of this Agreement shall
not constitute an assignment or attempted assignment of any contract, license,
franchise, lease, sublease, commitment, agreement or order or any claim or right
or any benefit arising thereunder or resulting therefrom if an assignment or
attempted assignment
12
<PAGE>
thereof, without the consent of a third party thereto, would constitute a breach
thereof or in any way adversely affect the rights of the Buyer thereunder. The
Seller Parties shall use their respective reasonable best efforts to obtain the
consent of such third parties to any of the foregoing to the assignment thereof
to the Buyer in all cases in which such consent is required for sale,
conveyance, assignment, assumption or transfer. If such consent is not obtained
or if, notwithstanding such consent, an assignment or attempted assignment
thereof would be ineffective or would adversely affect the rights of the Seller
or the Subsidiaries thereunder so that the Buyer would not, in fact, receive all
such rights, the Seller Parties will cooperate with the Buyer in any
arrangements necessary or desirable to provide for the Buyer the benefit
thereunder, including enforcement for the benefit of the Buyer of any and all
rights of the Seller and each Subsidiary against the other party thereto arising
out of the breach or cancellation thereof by such other party or otherwise. The
expenses of such enforcement shall be borne by the Buyer. If and to the extent
that such arrangements cannot be made, the Buyer shall not have any Liability
with respect to such contract, lease, sublease, franchise, commitment, agreement
or order, any other provision of this Agreement or any assumption agreement
executed by the Buyer to the contrary notwithstanding and the parties agree to
make such adjustments to the Purchase Price as may be required by Section 9(g)
hereof. If and to the extent that such arrangement can be made, the Buyer shall
be liable for the corresponding Liabilities under such contract, lease,
sublease, franchise, commitment, agreement or order.
(g) Post-Closing; Access to Information by the Buyer and the Seller.
---------------------------------------------------------------
Those books and records which are to remain in the possession of the Seller and
the Subsidiaries, which are not being transferred to the Buyer pursuant to this
Agreement and which relate to the Purchased Assets or the Purchased Business,
shall be preserved and maintained by the Seller and each Subsidiary for seven
years from the Closing. The Seller and each Subsidiary shall give to the Buyer
and its authorized representatives, during normal business hours, such access to
such books and records retained by the Seller and each Subsidiary and which
relate to the Purchased Business as may be reasonably required by the Buyer.
The Buyer shall be entitled, at its own expense, to make extracts and copies
thereof and the Seller and each Subsidiary shall cooperate with the Buyer in
connection with accomplishing the same. Prior to disposing of any such books
and records after the end of said seven year period, the Seller and each
Subsidiary shall offer to the Buyer the right to obtain the originals of such
books and records at the Buyer's cost and expense. The Buyer shall give to the
Seller, the Subsidiaries and their authorized representatives, during normal
business hours, such access to the books and records relating to the Purchased
Assets and the Purchased Business being transferred to the Buyer as may be
reasonably required by the Seller and the Subsidiaries. The Seller and the
Subsidiaries shall be entitled, at their own expense, to make extracts and
copies thereof and the Buyer shall cooperate with the Seller in connection with
accomplishing the same.
3. Assumptions by Buyer.
--------------------
(a) Liabilities Being Assumed. Except as otherwise expressly provided
-------------------------
herein and subject to the terms and conditions of this Agreement, simultaneously
with the sale,
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transfer, conveyance and assignment to the Buyer of the Purchased Assets, the
Buyer will assume in writing the following Liabilities of the Seller and the
Subsidiaries, and only the following Liabilities:
(i) those Liabilities of the Seller and each Subsidiary incurred in
connection with the operation of the Purchased Business and which (A) are
outstanding on February 28, 1994 and remain outstanding at the Closing,
including accounts payable, accrued compensation and other accrued Liabilities
(including accrued vacation and holiday pay and payroll deductions) of the
Seller and the Subsidiaries, but in all such cases only to the extent as the
same are set forth on the Closing Balance Sheet or (B) are outstanding on the
Closing Date and are current Liabilities of the same type set forth on the
Closing Balance Sheet which were incurred in the ordinary course of business and
consistent with past practices in the period from February 28, 1994 to the
Closing Date. Notwithstanding the foregoing the Buyer shall also assume
Liabilities of the Seller and the Subsidiaries, in an amount not to exceed
$50,000, in respect of retroactive premium charges relating to workmen's
compensation or health coverages maintained by Seller and the Subsidiaries in
calendar year 1994;
(ii) those Liabilities of the Seller and each Subsidiary under all
contracts, leases, subleases, commitments, franchises, agreements and orders in
existence on the Closing Date other than the Excluded Contractual Liabilities,
but in all such cases only to the extent the same are listed in Sections 5(r)
and 5(t) of the Schedule and are related to the Purchased Business or which are
not required to be listed thereon because they do not meet the disclosure
thresholds set forth in Section 5 hereof but are related to the Purchased
Business, and which are assigned to the Buyer pursuant to Section 2(a) hereof,
or in respect of which the Buyer receives the benefit thereunder pursuant to
Section 2(f) hereof (the "Assumed Contracts");
(iii) those Liabilities of the Seller pursuant to those certain
promissory notes of the Seller listed in Section 3(a)(iii) of the Schedule to
the extent such promissory notes are assumable in accordance with Section 2(f)
hereof and are set forth on the Closing Balance Sheet;
(iv) all Liabilities of the Parent with respect to the letters of
credit and guarantees listed in Section 3(a)(iv) of the Schedule to the extent
assumable in accordance with Section 2(f) hereof. To the extent the Liabilities
described in this Section 3(a)(iv) are not assumable by the Buyer, the Buyer
shall, as soon as possible after Closing, cause replacement letters of credit or
guarantees to be issued in such manner as shall indemnify the Seller Parties
with respect thereto without regard to the provisions of Section 11(d) hereof;
and
(v) any Liabilities to the extent they arise out of the Buyer's
operation of the Purchased Business after Closing.
For convenience of reference, the Liabilities of the Seller Parties being
assumed by the Buyer as aforesaid are hereinafter collectively called the
"Assumed Obligations."
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<PAGE>
If the Buyer obtains knowledge of a contract, lease, sublease,
franchise, commitment, agreement or order relating to the Purchased
Business or Purchased Assets which (1) existed at the Closing, (2) is not
an Assumed Obligation, (3) does not constitute an Excluded Obligation
pursuant to Section 3(b) below, and (4) is capable of being performed by
the Buyer (an "Undisclosed Contract"), the following shall apply:
(A) If all Undisclosed Contracts involve payment and/or detriments, in the
aggregate of less than $25,000, the Buyer shall assume such
Undisclosed Contracts to the extent of the Liabilities under such
Undisclosed Contracts which relate to the operation of the Purchased
Business by Buyer on or after Closing.
(B) If all Undisclosed Contracts involve payments and/or detriments in the
aggregate of $25,000 or more, upon the payment by the Seller Parties
to the Buyer of an amount reasonably estimated or determined by Buyer
to be equal to the damages in excess of $25,000 the Buyer will incur
by the assumption of such Undisclosed Contracts, the Buyer shall
assume such Undisclosed Contracts to the extent of the Liabilities
under such Undisclosed Contracts which relate to the operation of the
Purchased Business by the Buyer on or after Closing.
The Liabilities assumed pursuant to these paragraphs (A) and (B) are
hereinafter referred to as "Additional Assumed Obligations".
To the extent that the Buyer assumes any Additional Assumed Obligations
following the Closing, the Buyer will deliver to the Seller and each
Subsidiary, as applicable, such instruments of transfer and assumption, in
form and substance reasonably satisfactory to the Seller Parties, as shall
be necessary to evidence the assumption by the Buyer of such Additional
Assumed Obligations.
(b) Liabilities Not Being Assumed. Except for those Liabilities
-----------------------------
specifically assumed in writing by the Buyer pursuant to Section 3(a) hereof,
the Buyer is not assuming any other Liabilities whatsoever such as (by way of
example and without limitation of the scope of the preceding portion of this
sentence), the following:
(i) any Liabilities (other than Assumed Obligations or Additional
Assumed Obligations) of any nature whatsoever which arose or were incurred on or
before the Closing, or which are based on events occurring on or before the
Closing, notwithstanding that the date on which the claim, demand or Liability
arose is after the Closing;
(ii) Any Liabilities with respect to any environmental matter;
(iii) any Liabilities for any Taxes, whether relating to the
Purchased Business or any other operation or business of the Seller or any
Subsidiary, other than Taxes set forth on the Closing Balance Sheet;
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<PAGE>
(iv) any Liabilities for fees, costs and expenses relating to or
arising out of the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby, including legal and accounting fees and
expenses;
(v) any Liabilities to the Seller's or any Subsidiary's clients or
any other third party with respect to tort claims arising out of the Seller's or
any Subsidiary's conduct of the Purchased Business prior to Closing;
(vi) any Liabilities of any of the Seller Parties to, or with
respect to any Liability of, the Parent, any stockholders or Affiliates of the
Parent, or the Seller;
(vii) any Liabilities of the Seller Parties under this Agreement
or with respect to or arising out of the transactions contemplated hereby;
(viii) any Liabilities of the Seller or the Subsidiaries for
borrowed money or any Liabilities pursuant to any guarantees or similar
arrangements relating to indebtedness of the Parent or any Affiliate of the
Parent to any bank or other commercial lender;
(ix) any Liabilities of any of the Seller Parties to any of the
other Seller Parties;
(x) any Liabilities (A) relating to employees of the Seller
Parties, except to the extent such Liabilities are accrued and set forth on the
Closing Balance Sheet, or (B) not accrued for on the Closing Balance Sheet
(including future Liabilities);
(xi) any Liability to any Agency Franchisee, to any Governmental
Authority or to any other Person relating to any failure to comply with any
franchise regulation or disclosure requirements;
(xii) any Liabilities relating to any of the Excluded Contractual
Liabilities;
(xiii) any Liabilities for any sales, use or similar transfer tax
arising out of the transactions contemplated hereby;
(xiv) any Liabilities relating to any Actions, pending or
otherwise, against any of the Seller Parties; and
(xv) any other Liability of any nature whatsoever.
For convenience of reference, the Liabilities not being assumed by the Buyer as
aforesaid are hereinafter collectively called the "Excluded Obligations." Each
of the Seller Parties shall take any and all action which in its or the Buyer's
reasonable discretion, may be appropriate to prevent any Person from having
recourse in any material respect against
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<PAGE>
the Purchased Business or against the Buyer as transferee thereof with respect
to any Excluded Obligations.
4. Purchase Price; Closing Balance Sheet; Closing.
----------------------------------------------
(a) Purchase Price. The aggregate purchase price for the Purchased
---------------
Business, including the Purchased Assets (the "Purchase Price") to be paid to
the Seller by the Buyer shall be the sum of (i) $43,150,000, subject to
adjustment as provided in Section 9(a) and 9(g) hereof and (ii) the assumption
by the Buyer of the Assumed Obligations and the Additional Assumed Obligations,
if any.
(b) Payment of the Purchase Price.
------------------------------
(i) At the Closing the Buyer shall (A) pay to the Seller by delivery
of immediately available funds by certified check or by wire transfer to an
account designated at least three days prior to the Closing by the Seller the
amount of $41,250,000 plus any Parent Cash Advance Amount or minus any Seller
Cash Advance Amount, as the case may be, and further, plus or minus any Net
Interest owed to the Parent or Seller, as the case may be, and (B) deliver to
Seller the Installment Note. The balance of the Purchase Price, $1,500,000 (the
"Holdback Amount"), which is subject to adjustment as provided in Section 9(a)
hereof, together with interest thereon as calculated below, shall be paid by the
Buyer to the Seller in the manner described in the immediately preceding
sentence on the fifth day following the final determination of the Seller's
Tangible Net Worth. Interest on the Holdback Amount shall accrue at the rate of
the 30 day LIBOR rate, as quoted at the end of the day prior to the Closing
Date, plus 1% (the "Interest Rate").
(ii) Installment Note. At the Closing, the Buyer shall deliver to the
----------------
Seller an installment note (the "Installment Note"), in the amount of $400,000.
The Installment Note shall bear interest at six percent per annum. The
Installment Note shall be payable on the first anniversary of the Closing and
shall be assigned to Ralph Manaker at the Closing.
(c) Preparation and Acceptance of Closing Balance Sheet. Within 30 days
----------------------------------------------------
after the date of Closing, the Buyer's Chief Financial Officer shall prepare and
deliver to the Parent a draft consolidated balance sheet respecting the Seller
and the Subsidiaries ("Closing Balance Sheet"), reflecting the tangible assets
and the liabilities of the Seller which constitute the Purchased Assets and the
Assumed Obligations, as of the close of business on February 28, 1994. Such
Closing Balance Sheet shall be prepared in a manner consistent with this
Agreement and the methods heretofore consistently adopted by the Seller with
respect to the preparation of the Annual Statements and Interim Statements,
shall be prepared in accordance with generally accepted accounting principles
(except to the extent necessary to reflect the exclusion of Excluded Assets and
Excluded Obligations), and shall be certified by the Buyer's Chief Financial
Officer. Notwithstanding the immediately preceding sentence, the Closing Balance
Sheet shall have no notes or other disclosures of Liabilities other than
Liabilities set forth thereon. There shall be attached to the Closing Balance
Sheet (i) an itemized list of all accounts
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<PAGE>
receivable set forth on the Closing Balance Sheet, (ii) a computation of the
Tangible Net Worth of the Seller and (iii) the updated list of assets referred
to in Section 2(c) of this Agreement. Upon receipt of the Closing Balance
Sheet, the Parent shall thereafter have a period of up to 15 days to review the
Closing Balance Sheet and to consult with representatives of the Buyer with
respect thereto. In the absence of any written objection by the Parent with
respect to the computation of the Tangible Net Worth as set forth in the Closing
Balance Sheet within such 15 day period, the Parent shall be deemed to have
accepted the Closing Balance Sheet and the same shall become final and binding
upon the parties hereto. In the event of any dispute with respect to the
computation of Tangible Net Worth of Seller set forth in the Closing Balance
Sheet, the Parent and the Buyer, agree to submit the matter to dispute
resolution in accordance with the procedure set forth in Section 12(f) hereof.
(d) Time and Place of Closing. The closing of the transactions
-------------------------
contemplated hereby (the "Closing") shall take place on the Closing Date at a
mutually acceptable location in Dallas, Texas.
(5) Representations and Warranties of the Seller Parties. As an
----------------------------------------------------
inducement to the Buyer to enter into this Agreement and to consummate the
transaction contemplated hereby, the Seller Parties jointly and severally
represent and warrant to the Buyer as follows:
(a) Organization of the Parent and the Seller; Qualification of the
---------------------------------------------------------------
Seller; Solvency of Parent.
- --------------------------
(i) Each of the Parent and the Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all necessary corporate power and authority to own, operate or
lease the properties and assets now owned, operated or leased by it and, in the
case of the Seller, to carry on the Purchased Business as it has been, is
currently and is anticipated to be conducted by the Seller.
(ii) Section 5(a) of the Schedule sets forth lists of
jurisdictions in which the Seller does business and is qualified or licensed to
do business. The Seller is duly licensed or qualified to do business and is in
good standing in each jurisdiction in which the properties owned or leased by it
or the operation of its business makes such licensing or qualification necessary
or desirable, except where the failure to be so licensed, qualified or in good
standing will not have a Material Adverse Effect. All corporate action taken by
the Parent and all corporate and shareholder actions taken by the Seller have
been duly and validly authorized and have not been revoked or modified, and
neither the Parent nor the Seller has taken any action that in any respect
conflicts with, constitutes a default under or results in a violation of any
provision of its Certificate of Incorporation or By-laws. True and correct
copies of the Certificate of Incorporation and By-laws of the Seller, each as in
effect on the date hereof, have been delivered by the Seller to the Buyer. No
action by any shareholders of the Seller Parties, which has not otherwise
heretofore been taken, is required in connection with this Agreement or the
consummation of the transactions contemplated hereby.
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<PAGE>
(iii) The Parent, without regard to the receipt of any of the
proceeds of the transaction contemplated hereby, is solvent and has a
positive tangible net worth of not less than $115,000,000, and no receipt
or disposition of such proceeds by Parent or any Affiliate thereof shall
operate as a fraudulent conveyance with respect to any creditor of any of
the Seller Parties.
(b) Subsidiaries, Stock Purchase Companies and Agency Franchisees .
--------------------------------------------------------------
(i) Section 5(b)(i) of the Schedule sets forth the names,
jurisdictions of organization and ownership structure of each Stock Purchase
Company and each Subsidiary of the Seller.
(ii) Except as set forth in Section 5(b)(ii) or Section 5(b)(v) of
the Schedule, other than the Subsidiaries and the Stock Purchase Companies,
there are no other corporations, partnerships, limited liability companies,
joint ventures, associations or other entities in which the Seller owns, of
record or beneficially, any direct or indirect equity or other interest or any
right (contingent or otherwise) to acquire the same. The Seller is not a member
of (nor, except as set forth in Section 5(b)(v) below is any part of the
Business conducted through) any partnership and, except as set forth in Section
5(b)(ii) of the Schedule, the Seller and the Subsidiaries are not participants
in any trade association or similar arrangement material to the conduct of the
Business.
(iii) Each Stock Purchase Company and each Subsidiary (A) is a
corporation duly organized and validly existing and in good standing under the
laws of its jurisdiction of incorporation, (B) has all necessary power and
authority to own, operate or lease the properties and assets now owned, operated
or leased by such Subsidiary and to carry on its business as it has been, is
currently and is anticipated to be conducted by such Subsidiary and (C) is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the properties owned or leased by it or the operation of
its business makes such licensing or qualification necessary or desirable.
(iv) All corporate actions, as applicable, taken by each Stock
Purchase Company and each Subsidiary have been duly authorized and no Subsidiary
has taken any action that in any respect conflicts with, constitutes a default
under or results in a violation of any provision of its certificate or articles
of incorporation or by-laws. True and complete copies of the certificate or
articles of incorporation and by-laws, in each case as in effect on the date
hereof, of each Stock Purchase Company and each Subsidiary have been delivered
by the Seller Parties to the Buyer.
(v) Except as set forth in Section 5(b)(v) of the Schedule, no
Stock Purchase Company or Subsidiary is a member of (nor is any part of its
business conducted through) any partnership nor is any Subsidiary a participant
in any joint venture.
(vi) Section 5(b)(vi) of the Schedule sets forth the name and
principal place of business of each of the Seller's, each Stock Purchase
Company's and
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each Subsidiary's franchisees (each, an "Agency Franchisee"). Section 5(b)(vi)
of the Schedule also sets forth a list of all franchise and affiliation (or
similar) agreements (whether written or oral) between the Seller, each Stock
Purchase Company or any Subsidiary and each Agency Franchisee, true and complete
copies of which have heretofore been furnished by the Seller to the Buyer.
(vii) To the knowledge of the Seller Parties, each of the Agency
Franchisees is in compliance with all of its contractual obligations to the
Seller, each of the Stock Purchase Companies and each of the Subsidiaries.
(c) Corporate Books and Records; Officers and Directors . The minute
----------------------------------------------------
books of the Seller, the Stock Purchase Companies and the Subsidiaries contain
and properly reflect all proceedings of the stockholders, Boards of Directors
and all committees of the Boards of Directors thereof. Complete and accurate
copies of all such minute books and of the stock register of the Seller, each
Stock Purchase Company and each Subsidiary have been provided by the Seller and
the Subsidiaries to the Buyer. Section 5(a) of the Schedule sets forth a true
and complete listing of each of the officers and directors for each of the
Seller, the Stock Purchase Companies and the Subsidiaries.
(d) Authority . The execution, delivery and performance of this Agreement
----------
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of each of the Seller
Parties, and this Agreement is, and the bill of sale and other instruments of
sale, transfer, conveyance, assignment and assumption to be executed and
delivered by the Seller Parties to the Buyer at the Closing will each be, a
valid and binding obligation of each of the Seller Parties, as applicable,
enforceable against each of them in accordance with their respective terms
(subject, as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or similar Laws affecting creditor's
rights generally) and effectively vest or will effectively vest in the Buyer all
of the Seller's and each Subsidiary's right, title and interest in and to the
Purchased Assets, free and clear of all Liens, other than Permitted Liens.
(e) No Conflicts . Subject to the receipt of the consents and approvals
-------------
referred to in Section 5(f) hereof, neither the execution, delivery and
performance of this Agreement or bill of sale and other instruments of transfer,
conveyance, assignment or assumption nor the consummation of the transactions
contemplated hereby or thereby, nor compliance with any provision hereof or
thereof does or will (i) conflict with or result in a breach of any provision of
the articles or certificate of incorporation or by-laws of any of the Seller
Parties or any of the Stock Purchase Companies, (ii) cause a breach or default
(or give rise to any right of termination, cancellation or acceleration (except
as set forth in Section 3(a)(iii) of the Schedule) or result in the creation of
any Lien binding upon the Purchased Assets or the Purchased Business after the
Closing) under any of the terms, conditions or provisions of any note, bond,
lease, mortgage, indenture, license, franchise, permit or other instrument or
agreement binding upon any of the Seller Parties or any of the Stock Purchase
Companies, the Purchased Assets or the Purchased Business, (iii) violate any
Law, writ, judgment, injunction or decree applicable to any of the Seller
Parties or any of the Stock Purchase Companies, the
20
<PAGE>
Purchased Assets or the Purchased Business, or (iv) cause or give any Person
grounds to cause (with or without notice, the passage of time or both) the
acceleration of any of the Assumed Obligations.
(f) Consents . Except as set forth in Section 5(f) of the Schedule, no
---------
consent or approval (including state tax clearances) by, or any notification of
or filing with, any Person (governmental or private) is required in connection
with the execution, delivery and performance by the Seller Parties of this
Agreement or any instrument herein referred to or the consummation by the Seller
Parties of the transactions contemplated hereby or thereby.
(g) Purchased Assets . The Seller and each Subsidiary has and shall
-----------------
convey, transfer, sell and assign to the Buyer good and marketable title to all
of the Purchased Assets, free of any Liens, other than Permitted Liens, subject
further to the obtaining of consents and approvals referred to in Section 5(f)
of the Schedule. Section 5(g) of the Schedule lists all Liens with respect to
the Purchased Assets and specifically designates which Liens are intended to
constitute Permitted Liens required to be scheduled therein. Immediately
following the Closing, the Buyer will be able to conduct the Purchased Business
as presently conducted by the Seller and the Subsidiaries. Except for Permitted
Liens as described in Section 5(g) of the Schedule, the Seller and the
Subsidiaries own or have a right to use all the Purchased Assets used or
intended to be used with respect to the Purchased Business, without payment to,
or interference from, any other party, and have not received any notice of
conflict with the asserted rights of others. All of the Purchased Assets
material to the Purchased Business are in good operating condition and repair,
ordinary wear and tear excepted, and are suitable for the purposes for which
they are used and intended.
(h) Financial Information; Books and Records .
-----------------------------------------
(i) True and complete copies of (A) the audited consolidated and
unaudited consolidating statements of financial position of the Seller (and
certain Subsidiaries, in the case of consolidating balance sheets) for each of
the three fiscal years ended as of December 31, 1990, December 31, 1991, and
December 31, 1992, the related audited consolidated and unaudited consolidating
statements of operations (and certain Subsidiaries, in the case of consolidating
balance sheets), the related audited and unaudited consolidated statements of
cash flows and the related audited consolidated statements of changes in
stockholders' deficit, together with all related notes and schedules thereto,
accompanied by the reports thereon of the Seller's certified public accountants
(collectively referred to herein as the "Annual Statements") and (B) the
unaudited consolidated and consolidating statements of financial position and
statements of operations of the Seller (and certain Subsidiaries, in the case of
consolidating balance sheets) as of or for the year ended December 31, 1993, and
the related consolidated statements of cash flows of the Seller, together with
all related notes and schedules thereto (collectively referred to herein as the
"Interim Statements") have been delivered by the Seller Parties to the Buyer and
are set forth in Section 5(h)(i) of the Schedule. The Annual Statements and the
Interim Statements (C) were prepared in accordance with the books of account and
other financial records of the Seller and the Subsidiaries, (D)
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present fairly the consolidated financial condition and results of operations of
the Seller and the Subsidiaries as of the dates thereof or for the periods
covered thereby, (E) have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with the past practices of
the Seller and (F) include all adjustments that are necessary for a fair
presentation of the consolidated financial condition of the Seller and the
Subsidiaries and the results of the operations of the Seller and the
Subsidiaries as of the dates thereof or for the periods covered thereby, subject
as to the Interim Statements, to year-end adjustments which are not material in
nature.
(ii) The books of account and other financial records of the Seller and
the Subsidiaries: (A) set forth all items of income and expense and all assets
and Liabilities required to be set forth therein applied on a basis consistent
with the past practices of the Seller and the Subsidiaries, (B) are complete and
correct, and do not contain or reflect any material inaccuracies or
discrepancies, and (C) have been maintained in accordance with good business and
accounting practices.
(i) No Undisclosed Liabilities of the Stock Purchase Companies; Reserves .
--------------------------------------------------------------------
There are no Liabilities of any Stock Purchase Company, other than Liabilities
(A) disclosed in Section 5(i) of the Schedule or (B) which will be set forth on
the Closing Balance Sheet. Reserves will be set forth on the Closing Balance
Sheet in amounts that have been established on a basis consistent with the past
practices of the Seller, the Stock Purchase Companies and the Subsidiaries and
in accordance with generally accepted accounting principles.
(j) Receivables . Except to the extent, if any, reserved for on the
------------
Closing Balance Sheet and except as set forth in Section 5(j) of the Schedule,
all Receivables set forth on the balance sheet included in the Interim
Statements and to be included on the Closing Balance Sheet (i) arose from, and
the Receivables existing as of the date hereof will have arisen from, business
transactions with Persons who are not Affiliates of the Seller Parties and in
the ordinary course of the business consistent with past practice and (ii)
constitute or will constitute, as the case may be, only valid, undisputed claims
of the Seller or a Subsidiary not subject to claims of set-off, off-set or other
defenses or counterclaims other than normal cash discounts accrued in the
ordinary course of the business consistent with past practice.
(k) Furniture, Fixtures and Equipment . All of the furniture, fixtures
----------------------------------
and equipment used in the Purchased Business is in good condition, ordinary wear
and tear excepted, and is suitable and usable for the purposes for which it is
intended.
(l) Acquired Assets . Except as disclosed in Section 5(l) of the
----------------
Schedule, each of the Purchased Assets (including the benefit of any licenses,
leases or other agreements or arrangements) acquired since the date of the
Interim Statements has been acquired for a consideration of not greater than the
fair market value of such asset at the date of such acquisition except for
assets with an aggregate acquisition cost of not more than $25,000.
(m) Absence of Changes . Except as set forth in Section 5(m) of the
-------------------
Schedule, since the date of the Interim Statements the Purchased Business has
been operated in the
22
<PAGE>
ordinary course consistent with past practices. As amplification and not in
limitation of the foregoing, except as otherwise provided or set forth in this
Agreement, since the date of the Interim Statements with respect to the
Purchased Business there has not been (other than in the ordinary course of
business and consistent with past practices):
(i) any Material Adverse Effect;
(ii) any casualty, damage, destruction or loss (whether or not covered
by insurance) with respect to the Purchased Business which in the aggregate have
a replacement cost of more than $100,000;
(iii) any Liability incurred in connection with the Purchased Business,
or any transaction, contract, commitment, lease, sublease, franchise or
agreement entered into by the Seller or any Subsidiary in connection with the
Purchased Business, other than such items incurred or entered into in the
ordinary course of business and consistent with past practice;
(iv) any labor trouble affecting the Purchased Business which could
have a Material Adverse Effect;
(v) any license, sale, transfer, pledge, mortgage, hypothecation,
franchise or other disposition of any tangible or intangible asset relating to
the Purchased Business other than in the ordinary course of business;
(vi) any failure to maintain the Purchased Assets in accordance with
good business practices and in good operating condition (ordinary wear and tear
excepted);
(vii) any Lien granted or suffered to exist on the Purchased Assets,
other than Permitted Liens;
(viii) any failure by the Seller, any Stock Purchase Company or any
Subsidiary to pay (A) any creditor any amount in excess of $10,000 in the
aggregate owed to such creditor when due, or (B) to all creditors of the Seller,
the Stock Purchase Companies and the Subsidiaries an aggregate of $100,000 when
due, except, in the case of either clause (A) or clause (B) above, to the extent
any such amount is the subject of a bona fide dispute and reserved against on
the balance sheet included in the Interim Statements;
(ix) any capital expenditure or commitment for any capital expenditure
in excess of $25,000 individually or $100,000 in the aggregate and not
specifically set forth in Section 5(m)(ix) of the Schedule.
23
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(x) any sale, transfer, lease, sublease, license or other
disposition of assets, real, personal or mixed (including, leasehold
interests and intangible assets) with a book value of $25,000 individually
or $100,000 in the aggregate, and not specifically set forth in Section
5(m)(x) of the Schedule;
(xi) any merger, consolidation or acquisition by or with respect to the
Seller, any Stock Purchase Company or any Subsidiary of an interest in or to any
Person or any acquisition of a substantial portion of the assets or business of
any Person or any division of line of business thereof, or other acquisition of
any material assets of any Person;
(xii) any issuance of purchase orders or other agreement to make
purchases involving exchanges in value in excess of $25,000 individually or
$125,000 in the aggregate, and not specifically set forth in Section 5(m)(xii)
of the Schedule;
(xiii) any amendment, modification or restatement of the certificate or
articles of incorporation or the by-laws (or other organizational documents) of
the any of the Seller Parties;
(xiv) except as set forth in Section 5(m)(xiv) of the Schedule,
termination, discontinuation, closing or disposition of any offices, facilities
or other business operations or lay-off of any employees (other than lay-offs of
less than 50 employees in any six-month period in the ordinary course of
business, consistent with past practices) or implementation of any early
retirement, separation or other program providing early retirement window
benefits within the meaning of Section 1.401(a)-4 of the Treasury Regulations
(including Temporary Regulations) promulgated by the United States Department of
Treasury with respect to the Code or other federal tax statutes;
(xv) any amendment, modification or consent to the termination of any of
the Seller's, any Stock Purchase Company's or any Subsidiary's rights under any
of the Agreements described in Section 5(t) hereof;
(xvi) any write down or write up (or failure to write down or write up in
accordance with generally accepted accounting principles, consistent with past
practices) the value of any inventories or Receivables or revaluation of any of
the Purchased Assets;
(xvii) any change in any method of accounting or accounting practice or
policy used by the Seller or any Subsidiary, other than changes required by
generally accepted accounting principles or as disclosed in Section 5(m)(xvii)
of the Schedule;
(xviii) any disclosure of any secret or confidential Intellectual Property
or permit to lapse or go abandoned any Intellectual Property (or any
registration or grant thereof or any application relating thereto) to which, or
under which, the Seller or any Subsidiary has any right, title, interest or
license, which disclosure, lapse or abandonment had or would likely have a
Material Adverse Effect;
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(xix) except as set forth in Section 5(m)(xix) of the Schedule and except
in accordance with contractual obligations, including the arrangements relating
to the conditions precedent to the consummation of the transactions contemplated
by this Agreement, any general uniform increase in the compensation of employees
of the Seller or any Subsidiary in connection with the Purchased Business
(including, any increase pursuant to any bonus, pension, profit-sharing or other
plan or commitment) or any increase in compensation payable to any officer,
employee, consultant or agent of any thereof, or the execution of any employment
contract with any such officer of employee, or the making of any loan to, or
engagement in any transaction with, any officers or directors of the Seller or
any Subsidiary engaged in the conduct of the Purchased Business;
(xx) any change in the manner in which the Seller or any Subsidiary
extends discounts or credit to clients or otherwise deals with clients in the
Purchased Business or any commitments involving commissions or rates charged to
clients which adversely affects the ability of the Seller or any Subsidiary to
operate the Purchased Business;
(xxi) any other transaction or action in connection with the Purchased
Business by the Seller or any Subsidiary other than in the ordinary course of
business and consistent with past practice; or
(xxii) any agreement or understanding, whether in writing or otherwise,
for the Seller or any Subsidiary to take any of the actions specified in items
(i) through (xxi) above.
(xxiii) any transaction between Parent and any of the Principal Employees
except as set forth in Section 5(m)(xxiii) of the Schedule.
(n) Compliance with Laws . Except as set forth in Section 5(n) of the
---------------------
Schedule, the Seller, the Stock Purchase Companies and the Subsidiaries have
each conducted and continue to conduct the Purchased Business in accordance with
all Laws and Governmental Orders applicable to the Seller or any Subsidiary or
any of the Purchased Assets or the Purchased Business, including all Laws
relating to franchising, and neither the Seller nor any Subsidiary is in
material violation of any such Law or Governmental Order.
(o) Environmental .
--------------
(i) None of the Seller, the Stock Purchase Companies or the
Subsidiaries has used, stored, treated, transported, manufactured, handled,
produced or disposed of any Hazardous Materials on, under, at, from, or in any
way affecting any of their respective owned, leased or operated (or previously
owned, leased or operated) properties or assets, or otherwise, in any manner
which violated any applicable Environmental Law and to the knowledge of the
Seller Parties, no prior owner or operator of such property or asset of any
tenant, subtenant, prior tenant or prior
25
<PAGE>
subtenant thereof has used Hazardous Materials on, from or affecting such
property or asset, or otherwise, in any manner which violated any applicable
Environmental Law.
(ii) None of the Seller, the Stock Purchase Companies or the
Subsidiaries has any Liabilities, assessed or unassessed, no pending claims have
been made against the Seller, any Stock Purchase Company or any Subsidiary and
no presently outstanding citations or notices have been issued against the
Seller, any Stock Purchase Company or any Subsidiary, which in the case of any
of the foregoing have been or are imposed by reason of or based upon any
provision of any applicable Environmental Laws, including, but not limited to,
any such Liabilities relating to or arising out of or attributable, in whole or
in part, to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, presence or handling of any Hazardous Materials by the
Seller, any Stock Purchase Company or any Subsidiary, to the Seller's knowledge,
any predecessors in interest in connection with or in any way arising from or
relating to the Seller, any Stock Purchase Company or any Subsidiary or any of
their respective properties, or relating to or arising from or attributable, in
whole or in part, to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, presence or handling of any such substance, by any
other Person at, on or under any of the real property used or previously used by
the Seller, any Stock Purchase Company or any Subsidiary.
(iii) There are no Actions by any Governmental Authority or third party
pending or, to the knowledge of the Seller Parties, contemplated under any
Environmental Laws to which the Seller, any Stock Purchase Company or any of the
Subsidiaries is or will be named as a party, nor are there any consent decrees,
other decrees, administrative orders or other orders, or other administrative or
judicial requirements, outstanding under any Environmental Law with respect to
the Seller, any Stock Purchase Company or any Subsidiary.
(iv) To the knowledge of the Seller Parties, there are no conditions,
facilities, procedures or any other acts or circumstances which could give rise
to claims, expenses, losses, Liabilities or Actions by a Governmental Authority
against the Seller, any Stock Purchase Company or any of the Subsidiaries in
connection with any Hazardous Materials present at or disposed of from the real
property currently used by the Seller or any of the Subsidiaries.
(v) To the knowledge of the Seller Parties, neither polychlorinated
biphenyls nor asbestos-containing materials is present on or in the property
currently used by Seller, any Stock Purchase Company or any of the Subsidiaries.
(vi) To the knowledge of the Seller Parties, the real property currently
used by Seller, any Stock Purchase Company or any of the Subsidiaries contains
no underground storage tanks, or underground piping associated with underground
storage tanks, used currently or in the past for management of Hazardous
Materials.
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(vii) The Seller, the Stock Purchase Companies and the
Subsidiaries have obtained all permits, licenses and other authorizations
and have made all registrations and given all notifications that are
required under Environmental Laws with respect to the Purchased Business,
and are in material compliance with all terms and conditions of such
permits, licenses and other authorizations.
(p) Intellectual Property. Section 5(p) of the Schedule is an
---------------------
accurate and complete list of all of the Intellectual Property which the Seller,
any Stock Purchase Company or any Subsidiary owns or has the right to use. The
Seller, one of the Stock Purchase Companies or one of the Subsidiaries has full
ownership thereof or the right to use such rights, in each case as described in
Section 5(p) of the Schedule and the Seller Parties have no knowledge that the
conduct of the Business as now operated conflicts with, or infringes, any rights
or franchises of any Person in any manner. Section 5(p) of the Schedule sets
forth an accurate summary of any license or other agreement pursuant to which
the Seller or any Subsidiary has granted rights with respect to the Intellectual
Property, or pursuant to which the Seller, any Stock Purchase Company or any
Subsidiary enjoys rights in any Intellectual Property of any Person. No current
or former shareholder, director, officer, consultant, employee or Affiliate of
the Seller, any Stock Purchase Company or any Subsidiary has any right, title or
interest in any of the Intellectual Property described in Section 5(p) of the
Schedule other than such right which such Person may enjoy as a shareholder of
the Seller. The Seller has delivered to the Buyer true, complete and correct
copies of all correspondence, memoranda and other written advice from the
Seller's counsel or from the Trademark Offices describing or discussing the
Intellectual Property or the availability of protection for the Seller's or any
Subsidiary's programs or products. The Seller Parties agree to execute all
documentation deemed necessary by the Buyer to facilitate transfer of the
Intellectual Property and obtain and enforce the Intellectual Property in all
countries. The Seller Parties agree to execute or cause to be executed any
priority documents which may be required in order for Buyer to claim priority
based on any intellectual property rights owned, extant, originated, conceived,
reduced to practice, under contract or created by Seller, any Stock Purchase
Company or any Subsidiary, whether in tangible or intangible form, prior to the
transaction contemplated hereunder.
(q) Tax Matters. (i) All returns and reports in respect of Taxes
-----------
required to be filed with respect to the Seller, each Stock Purchase Company and
each Subsidiary have been timely filed; (ii) all Taxes required to be shown on
such returns and reports or otherwise due and all other Taxes with respect to
which any of the Seller, the Stock Purchase Companies and the Subsidiaries could
be liable under Reg. (S) 1.1502-6 or any similar provision of state, local, or
foreign law have been timely paid; (iii) all such returns and reports are true,
correct and complete; (iv) except as set forth in Section 5(u) of the Schedule,
no adjustment relating to such returns has been proposed by any Tax authority
and, to the knowledge of the Seller Parties, no basis exists for any such
adjustment; (v) except as heretofore disclosed in writing by the Seller Parties
to the Buyer, there are no pending or, to the knowledge of the Seller Parties,
threatened actions or proceedings for the assessment or collection of Taxes
against the Seller, any Stock Purchase Company or any Subsidiary or any
corporation that was included in the filing of a return with the Seller, the
Stock Purchase Companies or the Subsidiaries on a
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consolidated, combined or unitary basis; (vi) the Seller, the Stock Purchase
Companies and the Subsidiaries have made all payments of estimated Taxes
required to be made under Section 6655 of the Internal Revenue Code of 1986, as
amended (the "Code") and any comparable provision provided for under the laws of
any nation, state or locality; (vii) all Taxes required to be withheld,
collected or deposited by or with respect to the Seller Parties as may affect
the Purchased Business have been timely withheld, collected or deposited, as the
case may be, and, to the extent required, have been paid to the relevant taxing
authority; (viii) except as set forth in Section 5(q) of the Schedule, no claim
has ever been made by an authority in a jurisdiction where any of the Seller,
the Stock Purchase Companies or the Subsidiaries does not file reports and
returns that it is or may be subject to taxation by that jurisdiction; (ix)
except as set forth in Section 5(q) of the Schedule, there are no security
interests or liens on any of the assets of any of the Seller, the Stock Purchase
Companies or the Subsidiaries that arose in connection with any failure (or
alleged failure) to pay any Tax; (x) Section 5(q) of the Schedule lists all
federal, state, local, and foreign income Tax returns (including consolidated
federal income tax returns) filed with respect to any of the Seller, the Stock
Purchase Companies or the Subsidiaries for taxable periods ended on or after
December 31, 1987, indicates those returns that have been audited, and indicates
those returns that currently are the subject of audit; (xi) except as set forth
in Section 5(q) of the Schedule, none of the Seller, the Stock Purchase
Companies or the Subsidiaries has waived any statute of limitations in respect
of Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency; (xii) none of the Seller, the Stock Purchase Companies or the
Subsidiaries has filed a consent under Code Sec. 341(f) concerning collapsible
corporations; (xiii) none of the Seller, the Stock Purchase Companies or the
Subsidiaries has made any payments, is obligated to make any payments, or is a
party to any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible under Code Sec. 280G; (xiv) none
of the Seller, the Stock Purchase Companies or the Subsidiaries has been a
United States real property holding corporation within the meaning of Code Sec.
897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii);
(xv) each of the Seller, the Stock Purchase Companies and the Subsidiaries has
disclosed on its federal income Tax returns all positions taken therein that
could give rise to a substantial understatement of federal income Tax within the
meaning of Code Sec. 6661; (xvi) except as set forth in Schedule 5(q) of the
Schedule, none of the Seller, the Stock Purchase Companies or the Subsidiaries
is a party to any Tax allocation or sharing agreement or policy; and (xvii) none
of the Seller, the Stock Purchase Companies, or the Subsidiaries has any
liability for the Taxes of any person other than the Seller, the Stock Purchase
Companies, and the Subsidiaries (A) under Reg. (S) 1.1502-6 (or any similar
provision of state, local, or foreign law), (B) as a transferee or successor,
(C) by contract, or (D) otherwise.
(r) Property . Section 5(r) of the Schedule contains an accurate
--------
summary of a detailed list and a description of the category and amounts
recorded on the Interim Statements of all real property and tangible properties
and assets owned (which, as to owned properties and assets, have an individual
book value of more than $25,000) or leased (which, as to leased properties,
require payments in excess of $25,000 per lease per annum) by the Seller and the
Subsidiaries and used in the Purchased Business and which constitute Assumed
Obligations, including a statement as to whether there is any
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<PAGE>
requirement of consent of the lessor to the assignment thereof. True, complete
and correct copies (or, in the case of oral leases or subleases, descriptions)
of all such leases and subleases ("Leases") have been furnished or made
available to the Buyer. Each of such Leases is in full force and effect as to
the Seller and each Subsidiary; all rents and additional rents due to date under
each of such Leases have been paid or adequate provision therefor has been made
in the Interim Statements; the Seller and each Subsidiary under each of such
Leases where it is the lessee is in peaceable possession and is not in default
thereunder and no waiver, indulgence or postponement of the lessee's obligations
thereunder has been granted by the lessor; and there exists no default or
occurrence, condition or act by the Seller, any Stock Purchase Company or any
Subsidiary or, to the knowledge of the Seller Parties, by others which, with the
giving of notice and/or the lapse of time, would constitute a default under any
of such Leases. The Seller, each Stock Purchase Company and each Subsidiary has
a valid and subsisting leasehold interest under the Leases to which it is a
party enforceable against the lessor in accordance with the term thereof
(subject, as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratrium or similar laws affecting creditor's
rights generally).
(s) Insurance .
----------
(i) Except as set forth in Section 5(s)(i) of the Schedule, all
material assets, properties and risks of the Seller, each Stock Purchase Company
and each Subsidiary are, and for the past five years (or if the Person in
question has been in existence for less than five years, the period of time
since its organization) have been, covered by valid and (except for policies
that have expired by their terms in the ordinary course and which have been
replaced by substitute coverage) currently effective insurance policies or
binders of insurance (including general liability insurance, property insurance
and workers' compensation insurance) issued in favor of, or for the benefit of,
the Seller, a Stock Purchase Company or a Subsidiary, as the case may be, in
each case with responsible insurance companies, in such types and amounts and
covering such risks as are consistent with customary practices and standards of
companies engaged in businesses and operations similar to those of the Seller or
such Stock Purchase Company or Subsidiary, as the case may be.
(ii) With respect to each insurance policy held by the Seller, the
Stock Purchase Companies and the Subsidiaries: (A) the policy is legal, valid,
binding and enforceable in accordance with its terms and, except for policies
that have expired by their terms in the ordinary course and which have been
replaced by substitute coverage, is in full force and effect; (B) none of the
Seller, the Stock Purchase Companies, or the Subsidiaries is in breach or
default (including any breach or default with respect to the payment of premiums
or the giving of notice), and no event has occurred which, with notice or the
lapse of time or both, would constitute such a breach or default or permit
termination or modification, under the policy; (C) no party to the policy has
cancelled, or given notice of an intent to cancel, any provision thereof; (D) to
the knowledge of the Seller Parties, no insurer on the policy has been declared
insolvent or placed in receivership, conservatorship or liquidation; and (E)
except as set forth in
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Section 5(s)(ii) of the Schedule, is assignable to the Buyer in connection with
this Agreement.
(iii) Section 5(s)(iii) of the Schedule sets forth all risks
against which the Seller, any Stock Purchase Company or any Subsidiary is self-
insured or which are covered under any risk retention program in which the
Seller or any Subsidiary participates .
(t) Agreements; Etc. Except as set forth in Section 5(t) of the
-----------------
Schedule, none of the Seller, the Stock Purchase Companies or the Subsidiaries
is, with respect to the Purchased Business or the Purchased Assets, a party to,
the Purchased Assets are not bound by, and the Assumed Obligations will not
include, any written or oral, formal or informal, (i) sales representative or
similar contract or any other contract relating to the payment of a commission
(other than with respect to employment agency commissions), (ii) collective
bargaining agreement or contract with or commitment to any labor union, (iii)
continuing contract for the future purchase or sale of products, materials,
supplies, equipment or services used in connection with the Purchased Business,
which in any such case was (A) not the result of an arms-length transaction with
a third party at market rates, terms and conditions, (B) is not terminable upon
not more than 30 days notice without penalty and (C) which requires payments
thereunder in any such case of $50,000 or more, (iv) contract or commitment for
the employment of any officer, employee or consultant or any other type of
contract or understanding with any officer, employee or consultant which is not
terminable upon not more than 30 days notice without penalty and which requires
payments thereunder in any such case of $50,000 or more, (v) agreements or
commitments providing for benefits under any Benefit Plans, (vi) indenture,
mortgage, promissory note, loan agreement, guarantee or other agreement or
commitment for the borrowing of money or for a line of credit, (vii) contract or
commitment for charitable contributions individually or in the aggregate in
excess of $50,000, (viii) contract or commitment for capital expenditures which
are in any such case in excess of $25,000, or a leasing transaction of a type
required to be capitalized in accordance with Statement of Financial Accounting
Standards No. 13 of the Financial Accounting Standards Board, which in any such
case involves the payment of $10,000 or more and will relate to or affect the
Purchased Business after Closing, (ix) agreement which restricts the Seller or
any Subsidiary in any material respect from engaging in or disclosing
information with respect to any aspect of the Purchased Business anywhere in the
world or otherwise limits the manner in which it may engage in the Purchased
Business, (x) secrecy or nondisclosure agreement (whether the Seller or any
Subsidiary is the beneficiary or the obligor thereunder) relating to any
material proprietary information in connection with the conduct of the Purchased
Business, (xi) mortgage, pledge, security agreement, deed of trust, conditional
sales agreement, financing statement or other document granting a Lien upon any
of the Purchased Assets which will affect the Purchased Business after the
Closing other than Permitted Liens, (xii) broker, distributor, dealer,
franchise, agency, marketing, market research consulting and advertising
contracts and agreements, which are not cancelable without payment of a penalty
on not more than 30 days notice and which involve payments thereunder in any
such case of $50,000 or more, (xiii) agreements (other than Leases or client
contracts) with any Governmental Authority which the Seller or any Subsidiary is
a party; (xiv) agreements between or among the
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<PAGE>
Seller or any Subsidiary on the one hand and any Affiliate of the Seller on the
other hand; (xv) agreements relating to Intellectual Property; (xvi) agreements
relating to real property ownership or occupancy; or (xvii) except for client
contracts and other contracts involving payments in the aggregate of less than
$100,000, any other agreement, contract, commitment, arrangement or instrument
that is material to the Purchased Business, and could relate to or affect the
Purchased Business after the Closing. The Seller and each Subsidiary has in all
respects performed all the material obligations required to be performed by it
to date in regard to the Purchased Business and the other parties to any such
agreement, contract, commitment, lease, sublease, franchise, instrument or
obligation have in all respects performed all the material obligations required
to be performed by them to date, and neither the Seller nor any Subsidiary is in
default or alleged to be in default in any material respect under any such
agreement, lease, sublease, franchise, contract, commitment, instrument or
obligation, and there exists no event, condition or occurrence which, after
notice and/or lapse of time would constitute such a default by the Seller, any
Subsidiary or any of the other parties thereto of any of the foregoing. The
Seller Parties have furnished to the Buyer true, complete and correct copies of
all documents (or descriptions of oral arrangements or summaries in respect of
agreements subject to confidentiality restrictions) described in Section 5(t) of
the Schedule.
(u) Litigation, Etc. Except as set forth in Section 5(u) of the
---------------
Schedule (which, with respect to each Action disclosed therein, sets forth: the
parties, nature of the proceeding, date and method commenced, amount of damages
or other relief sought and, if applicable, paid or granted), there are no
Actions by or against the Seller or any of the Subsidiaries (or any of their
respective directors, officers, employees or agents), or affecting any of the
Purchased Assets, pending or, to the knowledge of the Seller Parties,
threatened. None of the matters disclosed in Section 5(u) of the Schedule has
affected, or could reasonably be expected to affect, the legality, validity or
enforceability of this Agreement or the consummation of the transactions
contemplated hereby. Except as set forth in Section 5(u) of the Schedule, none
of the Seller, the Stock Purchase Companies, the Subsidiaries nor any of the
Purchased Assets is subject to any Governmental Order (nor, to the knowledge of
the Seller Parties, are there any such Governmental Orders threatened to be
imposed by any Governmental Authority) which has had or would likely have a
Material Adverse Effect.
(v) Governmental Authorizations . The Seller, each Stock Purchase
---------------------------
Company and each Subsidiary has all licenses and permits issued by Governmental
Authorities materially necessary in the conduct of the Purchased Business and,
except as disclosed in Section 5(v) of the Schedule, such licenses and permits
are in full force and effect, no material violations are or have been recorded
in respect of any thereof and no proceeding is pending or threatened to revoke
or limit any thereof. Section 5(v) of the Schedule contains a true, complete and
correct list of all the aforesaid governmental licenses and permits, consents,
orders, decrees and other compliance agreements, including proposed remediation
agreements, arrangements and plans, under which the Purchased Business is
operating or bound (or proposed to be operated and bound), and the Seller and
each applicable Subsidiary has furnished to the Buyer true, complete and correct
copies thereof.
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(w) Labor Relations; Employees . Section 5(w) of the Schedule
--------------------------
contains a list of the Persons employed as of November 8, 1993, by name and
job title in the Purchased Business by the Seller, each Stock Purchase
Company and each Subsidiary. The Seller Parties have also heretofore
provided to the Buyer a true and complete summary as of February 6, 1994
relating to each employees' base compensation. Except as set forth in
Section 5(w) of the Schedule or as otherwise heretofore disclosed in
writing by the Seller Parties to the Buyer, (i) no Seller Party is a party
to any collective bargaining agreement or other labor union contract
applicable to Persons employed by the Seller, any Stock Purchase Company or
any Subsidiary and currently there are no organizational campaigns,
petitions or other unionization activities seeking recognition of a
collective bargaining unit which could affect the Seller, any Stock
Purchase Company or any Subsidiary; (ii) there are no unfair labor practice
complaints pending or threatened against the Seller, any Stock Purchase
Company or any Subsidiary before the National Labor Relations Board or any
other Governmental Authority or any current union representation questions
involving employees of the Seller or any Subsidiary; (iii) the Seller, each
Stock Purchase Company and each Subsidiary is currently in compliance in
all material respects with all applicable Laws relating to the employment
of labor; (iv) the Seller, each Stock Purchase Company and each Subsidiary
has paid in full to all their respective employees or adequately accrued
for in accordance with generally accepted accounting principles all wages,
salaries, commissions, bonuses, benefits and other compensation due to or
on behalf of such employees and, to the extent unpaid, the same will be set
forth on the Closing Balance Sheet; (v) there is no claim with respect to
payment of wages, salary or overtime pay that has been asserted or is now
pending or, to the knowledge of the Seller Parties, threatened before any
Governmental Authority with respect to any Persons currently or formerly
employed by the Seller or any Subsidiary; (vi) none of the Seller, the
Stock Purchase Companies or the Subsidiaries is a party to, or otherwise
bound by, any consent decree with, or citation by, any Governmental
Authority relating to employees or employment practices; (vii) there is no
charge or proceeding with respect to a violation of any occupational safety
or health standards that has been asserted or is now pending or, to the
knowledge of the Seller Parties, threatened with respect to the Seller, any
Stock Purchase Company or any Subsidiary; (viii) there is no charge of
discrimination in employment or employment practices, for any reason,
including age, gender, race, religion or other legally protected category,
which has been asserted or is now pending or, to the knowledge of the
Seller Parties, threatened before the United States Equal Employment
Opportunity Commission, or any other Governmental Authority in any
jurisdiction in which the Seller, any Stock Purchase Company or any
Subsidiary has employed or currently employs any Person; (ix) the Seller,
each Stock Purchase Company and each Subsidiary are in compliance with the
requirements of the Americans with Disabilities Act; and (x) the Seller and
each Subsidiary are in compliance with the requirements of the Workers
Adjustment and Retaining Notification Act ("WARN") and have no Liabilities
pursuant to WARN.
(x) Employee Benefit Matters .
-------------------------
(i) Section 5(x) of the Schedule lists all employee benefit plans
(as defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) and all bonus pay, stock option, restricted stock,
deferred and
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<PAGE>
incentive compensation, supplemental retirement, stock purchase, severance,
vacation pay, sick pay or other plans, programs or arrangements, whether funded,
insured or self-funded, written or oral to which the Seller, any Stock Purchase
Company or any Subsidiary contributes, has an obligation to contribute,
maintains or sponsors (the "Benefit Plans"). The Seller, each Stock Purchase
Company and each Subsidiary has furnished the Buyer with true and correct copies
of (A) all Benefit Plans, (B) each summary plan description and summary of
material modification, (C) the most recently filed IRS Form 5500, and (iv) the
most recently received IRS determination letter.
(ii) None of the Benefit Plans which is a "pension plan" (as
defined in Section 3(2) of ERISA) (the "Pension Plans") is a "multiemployer
plan" as defined in Section 3(37) of ERISA, or is subject to the requirements of
Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code. Seller has
not incurred any Liability under Title IV of ERISA including any Liability in
connection with the termination, or reorganization of any pension plan subject
to Title IV of ERISA, or withdrawal from any multiemployer plan, and no fact or
event exists which could give rise to any such Liability. Each Pension Plan that
is intended to be "qualified" within the meaning of Section 401(a) of the Code
has received a determination letter from the IRS that it is so qualified, and no
fact or event has occurred since the date of such determination letter that
could adversely affect the qualified status of any such Pension Plan. Neither
the Seller nor any Subsidiary has not incurred any Liability for any penalty or
tax under Sections 4971, 4972, 4975, 4979, or 4980 of the Code or Section 502 of
ERISA.
(iii) All of the Benefit Plans have been maintained in compliance
with all provisions of applicable law. In particular, and without limiting the
generality of the foregoing, each of the Benefit Plans which is a "welfare plan"
(as defined in Section 3(1) of ERISA) ( the "Welfare Plans") has at all times
been in compliance with the provisions of Section 4980B of the Code. None of the
Welfare Plans provides or promises post-retirement health or life benefits to
current employees or retirees of the Seller or any Subsidiary.
(iv) All contributions, premiums or payments required to be made
with respect to any Benefit Plan have been made on or before their due date. All
contributions and payments with respect to Benefit Plans that are required to be
or have been made by the Seller or any Subsidiary with respect to periods ending
on or before the respective dates of the balance sheets included in the Annual
Statements and the Interim Statements (including periods from the first day of
the current plan or policy year to such dates) are properly accrued thereon or
have been properly made, and such payments with respect to periods ending on or
before the Closing Date have been, or will be made or accrued before the Closing
Date on the books and records of the Seller, each Stock Purchase Company and
each Subsidiary, all in accordance with the appropriate plan, actuarial report,
collective bargaining agreements, insurance contracts or arrangements or as
otherwise required by ERISA or the Code.
(v) None of the Seller, the Stock Purchase Companies or the
Subsidiaries has made any oral or written representations to the employees of
the Seller
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that the Buyer will maintain any Benefit Plan which is similar or any way
comparable to those maintained by the Seller, any Stock Purchase Company or any
Subsidiary. Each Benefit Plan has at all times complied in all material
respects with the applicable requirements of ERISA, the Code and any other
applicable law governing such Benefit Plan.
(y) Client and Agency Franchisee Relations . Section 5(y) of the
--------------------------------------
Schedule sets forth a list of all current clients of the Seller, the Stock
Purchase Companies and the Subsidiaries who account for $1,000,000 or more of
gross revenue to the Seller and the Subsidiaries (taken as a whole) during the
period from December 31, 1992 through December 31, 1993 (each a "Significant
Client"). Except as disclosed in Section 5(y) of the Schedule, neither the
Seller nor any Subsidiary has received any notice from any Significant Client,
nor is the Seller or any Subsidiary aware, that any Significant Client or any
Agency Franchisee has ceased, or will cease, to use the services of the Seller
or any Subsidiary, or has substantially reduced, or will substantially reduce,
the utilization of such services at any time.
(z) Suppliers. Except as disclosed in Section 5(z) of the Schedule,
---------
none of the Seller, the Stock Purchase Companies or the Subsidiaries has
received any notice, nor is the Seller, any Stock Purchase Company or any
Subsidiary aware, that any supplier will not sell supplies and other goods or
services to the Seller or any Subsidiary at any time after the date hereof on
terms and conditions substantially similar to those used in its current sales to
the Seller and the Subsidiaries, subject only to general and customary price
increases.
(aa) ARC, IATAN, Etc. To the extent necessary for the conduct of the
---------------
Purchased Business, (i) the Seller, the Stock Purchase Companies and the
Subsidiaries are members in good standing of and have paid all current
obligations to ARC and the International Air Transportation Association Network,
and (ii) each of the Seller, the Stock Purchase Companies and the Subsidiaries
are in compliance with the Agent Reporting Agreement set forth in the ARC
Handbook.
(bb) Brokers . No Seller Party has, nor have any of their officers,
-------
directors, stockholders, employees or other agents on its behalf, employed any
broker or finder or incurred any Liability for any brokerage fees, commissions
or finders' fees in connection with the transactions contemplated hereby, except
for such fees, arrangements or commissions as the Seller Parties shall hereby be
exclusively responsible for after the Closing.
(cc) Related Party Transactions . Except (i) as set forth in Section
--------------------------
5(cc) of the Schedule (which Section of the Schedule is hereby expressly
excluded from the exception set forth in Section 5(ff) hereof), (ii) for
compensation to regular employees of the Seller, the Stock Purchase Companies
and the Subsidiaries, and (iii) purchase money notes listed in Section 2(a)(iii)
of the Schedule, no current or former director, officer, employee, partner or
stockholder or any Affiliate of the Seller Parties, is a party to any
transaction with the Seller, any Stock Purchase Company or any Subsidiary with
respect to the Purchased Business (including, any contract, agreement or other
arrangement providing
34
<PAGE>
for the furnishing of services by, or rental of real or personal property from,
or otherwise requiring payments to, any such director, officer, employee,
partner or stockholder or such affiliate) other than contracts, agreements and
arrangements which are or were on terms not less favorable than those otherwise
obtainable in arm's length transactions. All contracts, agreements or
arrangements referred to in this Section 5(cc) are terminable or cancelable at
the Closing without Liability to the Buyer unless such Liability is expressly
assumed by the Buyer.
(dd) Stock Purchase Companies .
-------------------------
(i) Corporate Existence. Each of the Stock Purchase Companies is a
-------------------
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation. Each Stock Purchase Company has all requisite
corporate power, franchisees, licensees, permits and authority to own its
properties and assets and to carry on its business as it has been and is being
conducted. Each Stock Purchase Company is qualified to do business as a foreign
corporation and is in good standing in each state, nation or other jurisdiction
wherein the character of the properties owned or held under lease by it or the
nature of the business transacted by it makes such qualification necessary.
(ii) Capitalization of the Stock Purchase Companies. The authorized
----------------------------------------------
and outstanding capital stock of each of the Stock Purchase Companies is as set
forth in Section 5(a) of the Schedule and no other shares of capital stock of
any of the Stock Purchase Companies are issued and outstanding. All of the
issued and outstanding shares of capital stock of the Stock Purchase Companies
have been duly and validly issued in accordance and compliance with all
applicable laws, rules and regulations and are fully paid and nonassessable.
There are no options, warrants, rights, calls, commitments, plans, contracts or
other agreements of any character granted or issued by any of the Stock Purchase
Companies which provide for the purchase, issuance or transfer of any shares of
the capital stock of any of the Stock Purchase Companies, nor are there any
outstanding convertible securities granted or issued by any of the Stock
Purchase Companies, and none is authorized. None of the Stock Purchase Companies
is obligated or committed to purchase, redeem or otherwise acquire any of its
capital stock. All presently exercisable voting rights in each of the Stock
Purchase Companies are vested exclusively in its outstanding shares of common
stock, each share of which is entitled to one vote on every matter to come
before such Stock Purchase Company's shareholders, and there are no voting
trusts or other voting arrangements with respect to any of the Stock Purchase
Companies' capital stock.
(iii) Books and Records. Each of the Stock Purchase Companies keeps its
-----------------
books, records and accounts (including, without limitation, those kept for
financial reporting purposes and for tax purposes) in accordance with good
business practice and in sufficient detail to accurately and fairly reflect the
transactions and dispositions of its assets, liabilities and equities. The
minute books of each of the Stock Purchase Companies contain complete and
accurate records of all of its shareholders' and directors' meetings and of all
action taken by such shareholders and directors. The meetings of directors and
shareholders referred to in such minute books were duly called
35
<PAGE>
and held, and the resolutions appearing in such minute books were duly adopted.
The signatures appearing on all documents contained in such minute books are the
true signatures of the persons purporting to have signed the same. The stock
certificate books and stock transfer ledgers of each of the Stock Purchase
Companies are correct and complete and reflect accurately the number of shares
of stock held by its shareholders.
(iv) The Shares. Each of the Seller Parties owns as its property
----------
the number of shares of capital stock in the Stock Purchase Companies as set
forth in Section 5(a) of the Schedule attached hereto. Such shares constitute
all of the outstanding shares of capital stock of Doug Fox Parking, Inc. and The
Fox Travel Institute and 50% of the outstanding shares of capital stock of CMO,
Inc. Such shares will at Closing be free and clear of any Lien, adverse claim or
encumbrance of any kind whatsoever, and upon Closing, the Buyer will acquire
good and marketable title to such shares, free and clear of any Lien, adverse
claim, charge or encumbrance. No written or oral agreement or understanding has
been made by any of the Seller Parties with respect to the disposition of the
shares of capital stock or the Stock Purchase Companies, or any rights therein,
in any manner other than by this Agreement, and all of the Seller Parties have
full right, power and authority to enter into this Agreement and to sell the
shares to be sold by them hereunder.
(ee) Disclosure . Neither this Agreement, the Schedule, the Exhibits
-----------
nor any other agreement, document, instrument, certificate or statement
furnished to the Buyer by or on behalf of the Seller Parties in connection
with the transactions contemplated hereby or thereby contains or will
contain any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
(ff) Rule of Construction . Except as otherwise expressly provided
---------------------
herein, any disclosures made on any part on the Schedule shall be deemed to
have been made on all parts of the Schedule to the extent all such
disclosures are adequately cross referenced.
(gg) Stock Purchase Company and USTS New York Balance Sheets . True
--------------------------------------------------------
and complete copies of (i) December 31, 1993 balance sheets of each of The
Fox Travel Institute, Inc., CMO, Inc. and USTS New York and (ii) a Schedule
K-1 on IRS Form 1065 for 1992 for Doug Fox Parking, Inc. have been
delivered by the Seller Parties to the Buyer. Such balance sheets (A) were
prepared in accordance with the books of account and other financial
records of such companies, (B) present fairly the financial condition of
such companies as of the dates thereof, (C) have been prepared in
accordance with generally accepted accounting principles applied on a basis
consistent with past practices and (D) include all adjustments that are
necessary for a fair presentation of the financial condition of such
companies; and USTS New York has no material assets.
(hh) Unbooked Receivables . To the knowledge of any of the Seller
---------------------
Parties, no event has occurred which would materially reduce the revenues
of the Seller and the Subsidiaries from Unbooked Receivables.
36
<PAGE>
(ii) Principal Employees. Other than as provided for in this
-------------------
Agreement, there will be no ongoing relationship or transactions between
the Parent and any of the Principal Employees after the Closing Date.
(jj) Franchisee Litigation. To the knowledge of Seller Parties,
---------------------
there are not and have never been any Actions brought by any Agency
Franchisee against the Seller Parties (or any of their respective
directors, officers, employees or agents).
(kk) Parent Cash Advance Amount. The Parent Cash Advance Amount is
--------------------------
$1,400,000.
6. Representations and Warranties of the Buyer. As an inducement to the
-------------------------------------------
Seller Parties to enter into this Agreement and to consummate the transactions
contemplated hereby, the Buyer represents and warrants to the Seller Parties as
follows:
(a) Organization; Good Standing; Qualification and Power. The Buyer
----------------------------------------------------
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted and to be conducted after the Closing, to execute and
deliver this Agreement, to perform its respective obligations hereunder, and to
consummate the transactions contemplated hereby.
(b) Authority. The execution, delivery and performance of this
---------
Agreement and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Buyer, and this Agreement is, and the instruments of assumption to be executed
and delivered by the Buyer to the Seller at the Closing will each be, a valid
and binding obligation enforceable against the Buyer in accordance with their
respective terms (subject, as to the enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium or similar laws affecting
creditor's rights generally). Neither the execution, delivery and performance of
this Agreement or such instruments nor the consummation of the transactions
contemplated hereby or thereby, nor compliance with any provision hereof or
thereof, will (i) conflict with or result in a breach of any provision of the
Certificate of Incorporation or By-Laws of the Buyer, (ii) cause a breach or
default (or give rise to any right of termination, cancellation or acceleration
upon any of the assets or properties of the Buyer) under any of the terms,
conditions or provisions of any note, bond, lease, mortgage, indenture, license
or other instrument or agreement to which the Buyer is materially bound or (iii)
violate any Law, writ, judgment, injunction or decree materially applicable to
the Buyer or any of its assets or properties or (iv) cause or give any Person
grounds to cause (with or without notice, the passage of time or both) the
maturity of any obligations of the Buyer to be accelerated or increased.
(c) Consents. Except as set forth on Section 6(c) of the Schedule, no
--------
consent or approval by, or any notification of or filing with any Person
(governmental or private) is required in connection with the execution, delivery
and performance by the Buyer of
37
<PAGE>
this Agreement or any instrument of assumption herein referred to or its
consummation of the transactions contemplated hereby or thereby which has not
been obtained.
(d) Litigation. Except as disclosed in a writing given to the Seller
----------
by the Buyer prior to the Closing Date, no claim, action, proceeding or
investigation is pending or, to the knowledge of the Buyer,threatened, which
seeks to delay or prevent the consummation of, or which would be reasonably
likely to materially adversely affect the Buyer's ability to consummate, the
transactions contemplated by this Agreement.
(e) Brokers. The Buyer has not, nor have any of its officers,
-------
directors, stockholders, employees or other agents on its behalf, employed any
broker or finder or incurred any Liability for any brokerage fees, commissions
or finders' fees in connection with the transactions contemplated hereby, except
for such fees, arrangements or commissions as the Buyer shall hereby be
exclusively responsible for after the Closing.
(f) Airlines Reporting Corporation. Buyer knows of no reason why ARC
------------------------------
would reject a change in ownership application (according to the instructions
contained in the ARC Handbook) on the basis of either Buyer's corporate
structure or its owners, officers or directors.
(g) Investment Representation. Buyer is acquiring the capital stock of
-------------------------
the Stock Purchase Companies owned by the Seller Parties for its own account for
investment and not with a view to the resale or distribution thereof.
7. [SECTION 7 INTENTIONALLY OMITTED]
8. [SECTION 8 INTENTIONALLY OMITTED]
9. Post-Closing Agreements of the Parties.
--------------------------------------
(a) Purchase Price Adjustments. The Purchase Price payable pursuant to
--------------------------
Section 4 hereof shall be subject to adjustment after Closing based upon the
determination of (1) the Seller's Tangible Net Worth as of February 28, 1994, as
set forth in the Closing Balance Sheet, (2) the aggregate amount of Receivables
initially assigned to Buyer hereunder which are reassigned to the Seller and the
Subsidiaries and (3) any excess reserve for bad debts to be paid to the Seller
by the Buyer, in each case in accordance with the provisions of this Section
9(a). For purposes hereof, the parties hereto agree that the following
procedures shall apply in connection with the adjustment of the Purchase Price:
(i) Within thirty days following the Closing, the Buyer shall
deliver to the Parent a certification of Tangible Net Worth calculated in
accordance with Section 4(c) hereof, attested to by the Chief Financial Officer
of the Buyer, setting forth the Seller's Tangible Net Worth as of the close of
business on February 28, 1994. To the extent that the aggregate amount of such
Tangible Net Worth shall exceed the sum of $2,000,000, the Buyer shall be
obligated to pay to the Seller upon acceptance by the Parent of the Closing
Balance Sheet pursuant to Section 4(c) hereof the net excess of
38
<PAGE>
such amount as an increase in the Purchase Price, plus interest accrued thereon
at the Interest Rate from the Closing Date. In the event that the Tangible Net
Worth as reflected in such computation shall be less than $2,000,000, such
deficient amount (computed as aforesaid) shall be reflected as a reduction in
the Purchase Price and the Buyer shall reduce by such amount (together with
interest thereon at the Interest Rate from the closing Date) the Holdback
Amount, otherwise payable to Seller pursuant to Section 4(b) above; provided,
however, that in the event that such reduction in the Purchase Price exceeds the
Holdback Amount, such excess, plus interest accrued thereon at the Interest Rate
from the Closing Date shall be promptly paid by the Seller Parties to the Buyer.
In connection with the delivery and acceptance of the Closing Balance Sheet as
provided for in Section 4(c) hereof, when the determination of Tangible Net
Worth becomes final and binding any payment due to the Seller Parties or the
Buyer, as the case may be, pursuant to this Section 9(a)(i) shall be payable by
wire transfer of the appropriate sum to an account designated by the Seller or
the Buyer, as the case may be, not later than the fifth day following the final
and binding determination of the Seller's Tangible Net Worth.
(ii) To the extent that any Receivables of the Seller or any
Subsidiary set forth on the Closing Balance Sheet shall remain uncollected by
the Buyer for a period of 120 days after the Closing Date (or such later
permitted date for collection by the Buyer of such Receivables as specified in
Section 9(a)(ii) of the Schedule), and after giving effect to the application of
reserves established on an aggregate (and unallocated) basis with respect to
such uncollected Receivables by the Buyer in the Closing Balance Sheet, such
uncollected Receivables shall be reassigned by the Buyer to the Seller and,
concurrently with such reassignment, the Seller shall refund to the Buyer the
amount of such uncollected Receivables (being the then current balance thereof,
net of any remaining reserve for bad debts) on the date of such reassignment by
wire transfer of funds to such account as shall be designated by the Buyer
(which refund shall be reflected as an adjustment to the Purchase Price). To the
extent the reserve for bad debts exceeds the amount of such uncollected
Receivables, such excess shall be paid by the Buyer to the Seller. Thereafter,
the Buyer agrees to use its reasonable efforts to cooperate with the Seller and
its representatives in connection with the Seller's efforts to collect such
Receivables. In addition, in respect of Receivables assigned by the Seller to
the Buyer pursuant to Section 2(a)(ii) hereof (and regardless of whether such
Receivables are thereafter reassigned to Seller pursuant to this Section
9(a)(ii)), the Buyer agrees that (A) the Buyer shall use its reasonable efforts
to promptly collect payment of all Receivables after Closing and (B) all post-
Closing payments made to the Buyer by any Person having any obligation with
respect to such Receivables shall, in the absence of instructions from
customers, be applied by the Buyer for the benefit of the Seller in respect of
such Receivables in the order of the earliest date of invoice. Notwithstanding
anything else contained herein to the contrary, the Buyer shall have no right to
compromise or modify Receivables (other than to apply reserves) prior to the
reassignment of any thereof.
(b) Allocation of Proceeds. In the event the Buyer, the Seller or any
----------------------
Subsidiary receives any checks or other remittances after the date of Closing,
the proceeds of which relate to income which is partly the property of the Buyer
and partly
39
<PAGE>
the property of the Seller or any Subsidiary pursuant to the provisions of any
subsection of this Section 9, the party receiving such checks shall endorse and
deposit such checks and promptly remit to the other party its share of such
proceeds, together with a description of the source and allocation of each such
remittance.
(c) Obligations of the Seller and the Subsidiaries . The Seller and
----------------------------------------------
each Subsidiary hereby agree that they shall pay or discharge all Liabilities
incurred by the Seller Parties which relate to the Purchased Assets which are
not Assumed Obligations or Additional Assumed Obligations.
(d) Sales Taxes. The Seller shall pay any sales, use or other similar
-----------
transfer taxes payable in connection with the transfer of Purchased Assets
pursuant to this Agreement and shall timely file all required tax returns with
respect thereto. Copies of all such returns shall be submitted to Buyer within
10 days after filing such returns.
(e) Employees. Except as excluded pursuant to Section 3(b), in
---------
connection with the consummation of the transactions contemplated hereby, the
Buyer agrees that it or one of its Affiliates will, subsequent to Closing, honor
all agreements, contracts, policies or arrangements of the Seller and its
Subsidiaries providing generally for benefits to its employees associated with
the Purchased Business (excluding Benefit Plans, in respect of which Buyer
agrees to provide substantially equivalent benefits under Buyer or Affiliate
plans to all such employees after Closing) to the extent that such benefits are
accrued for and set forth on the Closing Balance Sheet and constitute Assumed
Obligations or Additional Assumed Obligations, and that all current employees of
the Seller and the Subsidiaries associated with the Purchased Business will be
offered employment with Buyer or its affiliates on terms substantially
equivalent to those in effect for such Persons on the date of Closing. Buyer
reserves the right at anytime after the Closing to change its employment
policies, including, but not limited to, employee benefit policies.
(f) Name Changes. The Seller and its Subsidiaries agree that promptly
------------
following the Closing, they shall take all actions reasonably necessary to
change the names of such entities to names not resembling their present names in
order to permit the Buyer or any of its Affiliates to use the corporate names or
trade names of the Seller and the Subsidiaries or any variant thereof. In
addition, the Seller and the Subsidiaries shall discontinue the use by such
entities of corporate names, trade names, trade marks and other Intellectual
Property transferred to the Buyer pursuant to the terms of this Agreement.
(g) Additional Post-Closing Adjustments. In the event that any of the
-----------------------------------
Purchased Assets to be sold, transferred, conveyed or assigned pursuant to
Section 2 hereof are not effectively transferred or assigned to the Buyer for
any reason whatsoever ("Unassigned Assets") or the Seller Parties are not able
to obtain the benefit of a particular Purchased Asset for the Buyer pursuant to
Section 2(f) hereof, then, unless otherwise previously agreed in writing by the
parties, upon the written request of the Buyer to the Seller Parties, the
parties hereto agree to negotiate in good faith to compute the net present value
of the benefit foregone by the Buyer as a result of its inability to
40
<PAGE>
use the such Unassigned Assets (the "Lost Value"). In the event that the
parties hereto cannot agree as to the Lost Value of the Unassigned Assets in
question within thirty days of the Buyer's written request described in this
Section 9(g), then the parties shall submit the matter to dispute resolution in
accordance with the procedure set forth in Section 12(f) hereof. The
determination pursuant to Section 12(f) shall be final and binding upon all of
the parties hereto. The amount of Lost Value as determined by the parties or by
the arbitrator shall be paid by the Seller Parties to the Buyer within five
business days of such determination in immediately available funds by certified
check or wire transfer pursuant to instructions supplied by the Buyer to the
Seller Parties.
(h) Other Taxes. Except as otherwise provided in this Agreement, (i)
-----------
the Seller Parties shall be responsible for and pay all Taxes levied or imposed
upon, or in connection with, the Purchased Assets or the conduct or operation of
the Purchased Business on or before the Closing Date (including, without
limitation, any obligation to contribute to the payment of a Tax determined on a
combined, consolidated or unitary basis with respect to a group of corporations
that includes or included the Seller, the Stock Purchase Companies or the
Subsidiaries and any federal or other income Taxes resulting from any gain or
other income recognized by the Seller Parties, the Seller, the Stock Purchase
Companies, or the Subsidiaries or any other member of the Seller Parties'
affiliated group in connection with the transactions contemplated by this
agreement or a Code Section 338 election or a deemed Code Section 338 election),
except for any Taxes assumed by the Buyer pursuant to Section 3(a)(i)(B) of this
Agreement (which shall not include any (x) federal or state income taxes or (y)
sales, use or similar transfer taxes due as a result of the transfer of the
Purchased Assets hereunder); (ii) the Buyer shall be responsible for and pay all
Taxes levied or imposed, upon, or in connection with, the Purchased Assets or
the conduct or operation of the Purchased Business after the Closing Date; and
(iii) the Seller Parties and Buyer will each be responsible for their own income
and franchise Taxes, if any, arising from the transactions contemplated by this
Agreement except as provided in 9(h)(i) above.
(i) Tax Returns. The Seller Parties shall be responsible for the
-----------
timely filing (taking into account any extensions received from the relevant Tax
authorities) of all Tax returns required by Law to be filed in respect of the
Purchased Assets or the Purchased Business on or prior to the Closing Date. All
Taxes indicated as due and payable on such returns shall be paid or will be paid
by the Seller Parties as and when required by Law, except for such Taxes as may
be contested by the Seller Parties in good faith and by appropriate proceedings.
The Buyer shall timely file (taking into account any extensions received from
the relevant Tax authorities) all Tax returns required by law to be filed in
respect of the Purchased Business or the Purchased Assets after the Closing
Date, it being understood that all Taxes indicated as due and payable on such
returns shall be paid or will be paid by the Buyer as and when required by Law,
except for such taxes as may be contested by the Buyer, in good faith and by
appropriate proceedings. Parent will include the income of the Seller, the Stock
Purchase Companies and the Subsidiaries (including any deferred income triggered
into income by Reg. (S) 1.1502-13 and Reg. (S) 1.1502-14 and any excess loss
accounts taken into income under Reg.
41
<PAGE>
(S) 1.1502-19) on the Parent consolidated federal income returns for all periods
through the Closing Date and pay any federal income Taxes attributable to such
income. The income of the Stock Purchase Companies will be apportioned to the
period up to and including the Closing Date and the period after the Closing
Date by closing the books of the Stock Purchase Companies as of the end of the
Closing Date.
(j) Miscellaneous Tax Provisions. Except as otherwise provided in
----------------------------
this Agreement, any interest and penalties arising in connection with Taxes due
under this Section 9 shall be the responsibility of the party required to timely
file correct Tax returns concerning such Taxes. Control of any legal or
administrative proceedings concerning any such Taxes, and entitlement to any
refunds or awards with respect to any such Taxes, shall rest with the party
responsible for payment therefor under this Section 9 (without regard to any
other Section of this Agreement); provided, however, that, with respect to Taxes
-------- -------
that must be combined or joined with one or more other Tax issues which one
party desires to contest, except in the case of income, ad valorem, personal
property or franchise Taxes, control of such proceedings shall rest with the
party having the larger amount of Taxes in dispute, and the party in control may
not adjust, compromise or settle Taxes which are contested by or on behalf of
the other party without the consent of the other party. Notwithstanding the
existence of any contracts, agreements, or intercompany account systems under
which any of the Seller, the Stock Purchase Companies, or the Subsidiaries has,
or may at any time in the future have, an obligation to contribute to the
payment of any portion of a Tax (or pay any amount calculated with reference to
any portion of a Tax) determined on a consolidated, combined, or unitary basis
with respect to an affiliated group or other group of corporations of which any
of the Seller, the Stock Purchase Companies, or the Subsidiaries is or was a
part, neither the Parent nor any other member of Parent's affiliated group shall
be entitled to recover any amounts from any of the Buyer, the Stock Purchase
Companies, or the Subsidiaries under any such arrangement on or after the
Closing Date.
(k) Delivery of Property Received After Closing. From and after the
-------------------------------------------
Closing, the Seller Parties shall promptly transfer and deliver, or cause to be
transferred and delivered, to the Buyer, from time to time, all Purchased Assets
that were not delivered or transferred to the Buyer at or prior to the Closing
and cash and other property of the Buyer that the Seller Parties or any of their
Affiliates may receive relating to the Purchased Business as conducted after the
Closing. From and after Closing, the Buyer shall promptly transfer and deliver,
or cause to be transferred and delivered, to the Seller Parties, from time to
time, all Excluded Assets that are received by the Buyer or any of its
Affiliates and cash and other property of the Seller Parties that the Buyer or
any of its Affiliates may receive relating to the Purchased Business as
conducted after the Closing.
(l) Unpaid Expenses. (i) If the Seller Parties fail to pay or cause to
---------------
be paid at or prior to the Closing, or thereafter when due and payable, any
Liabilities (other than the Assumed Liabilities) incurred by the Seller Parties
or any of their Affiliates in connection with any of the Purchased Assets or the
Purchased Business (except as contested in good faith), the Buyer may itself
make or cause to be made, such payment,
42
<PAGE>
in which case the Seller Parties shall upon demand reimburse the Buyer for the
amount of such payment and the amount of its reasonable expenses incurred in
connection with such payment or (ii) if the Buyer fails to pay or cause to be
paid any Assumed Obligations when due and payable (except as such may be
contested in good faith), the Seller Parties may themselves make or cause to be
made, such payment, in which case the Buyer shall upon demand reimburse the
Seller Parties for the amount of such payment and the amount of its reasonable
expenses incurred in connection with such payment.
(m) Other Unpaid Liabilities. In order to protect Buyer from any
------------------------
Liability whatsoever to any Person to whom any Liability (other than an Assumed
Obligation or an Additional Assumed Obligation) remains owing by the Seller or
any of the Subsidiaries following the Closing, the Parent agrees with Buyer that
the Parent will pay when liquidated and due any and all such remaining
Liabilities of the Seller or any of the Subsidiaries.
10. Confidential Information; Non-Competition by the Seller Parties.
---------------------------------------------------------------
(a) Non-Disclosure. The Seller Parties acknowledge that the Buyer
--------------
would be irreparably damaged if the Seller Parties' confidential knowledge of
the Purchased Business were disclosed to or utilized on behalf of others in
competition in any material respect with the Purchased Business as the same is
being sold to the Buyer; accordingly, each of the Seller Parties agrees that it
will not and will use its reasonable best efforts to require (i) its Affiliates,
employees, officers and directors, and (ii) agents and consultants not to
disclose any confidential or proprietary information relating to the Purchased
Assets or the Purchased Business to any Person, or make use of any such
confidential or proprietary information for its own purpose or for the benefit
of any Person, except the Buyer. For the purpose of this Section, the term
"confidential or proprietary information" shall mean all non-public information
which is known to the Seller Parties or to their respective agents and
consultants which relates to matters such as pricing information.
Notwithstanding the foregoing the Seller Parties may use confidential or
proprietary information with respect to Excluded Assets.
(b) Non-Competition. Each of the Seller Parties hereby acknowledges
---------------
and recognizes the highly competitive nature of the business of the Seller and
the Subsidiaries and accordingly agrees that, in consideration of the premises
contained herein and the substantial economic benefit that the Seller Parties
will receive upon consummation of the transactions contemplated hereby, and to
induce the Buyer to enter into this Agreement, it will not, throughout North
America, from and after the Closing until the fifth anniversary thereof (i)
directly or indirectly engage in any Competitive Business (as hereinafter
defined), whether such engagement shall be as an employer, owner, partner, co-
venturer, shareholder or other participant in any Competitive Business, (ii)
assist others in engaging in any Competitive Business in the manner described in
the foregoing clause (i), or (iii) induce or otherwise solicit or attempt to
induce or solicit employees of the Buyer to terminate their employment with the
Buyer or engage in any Competitive Business. As used in this Section,
"Competitive Business" shall mean and include any business which, directly or
indirectly, is involved in the same or substantially similar
43
<PAGE>
businesses to that of the Purchased Business. The parties hereto further
acknowledge that (i) the scope and duration of the foregoing covenants are
reasonable under the circumstances and have been the subject of significant
negotiation among the parties hereto and their respective counsel and (ii) no
specific allocation of Purchase Price has been made to this agreement contained
in this Section 10(b). The foregoing restriction shall not prohibit the Seller
Parties from (x) owning or acquiring up to 10% of the outstanding equity
securities of any publicly held company as a passive investor not involved
directly or indirectly in the management of such entity or (y) acquiring of an
entity where the above described Competitive Business is either an immaterial
part of the business of such entity.
(c) Savings Clause; Extraordinary Relief. It is the desire and intent of
------------------------------------
the parties that the provisions of this Section 10 shall be enforced to the
fullest extent permissible under the laws and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, if any particular
provision of this Section 10 shall be adjudicated to be invalid or
unenforceable, such provision shall be deemed amended to delete therefrom the
portion thus adjudicated to be invalid or unenforceable, such deletion to apply
only with respect to the operation of such provision of this Section 10 in the
particular jurisdiction in which such adjudication is made. In addition, in the
event of a breach or threatened breach of this Section 10, the Buyer shall be
entitled to an injunction restraining it or them, as the case may be, from such
breach.
11. Indemnification.
---------------
(a) Indemnification by the Seller Parties. The Seller Parties jointly
--------------------------------------
and severally shall indemnify, defend and save the Buyer, and its officers,
directors, affiliates, employees, shareholders, agents, attorneys, controlling
persons, successors, predecessors and assigns (collectively, the "Buyer
Indemnified Persons"), and each of them, harmless from, against, for and in
respect of the following (collectively "Buyer Losses"):
(i) any and all Liabilities relating to any of the Purchased Business
or Purchased Assets, which arose or were incurred on or before the Closing Date,
or which are based on events occurring on or before the Closing Date,
notwithstanding that the date on which the claim, demand or Liability arose is
after the Closing Date (regardless of whether the existence of any such
Liability (x) is or was at any time known to the Buyer or (y) constitutes or
does not constitute a breach of any representation or warranty of any of the
Seller Parties), other than the Assumed Obligations and the Additional Assumed
Obligations;
(ii) any and all damages, losses, Actions or causes of action sustained
or suffered by the Buyer Indemnified Persons, or any of them, with respect to
the existence of any liability covered by Section 11(a)(i) above;
(iii) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Buyer Indemnified Persons, or any of them,
with respect to any of the Excluded Obligations;
44
<PAGE>
(iv) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Buyer Indemnified Persons, or any of
them, arising from a breach of any representation or warranty of the Seller
Parties contained in or made pursuant to this Agreement or any instrument
of transfer or conveyance or other document delivered by the Seller Parties
hereunder;
(v) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Buyer Indemnified Persons, or any of them,
and arising from a breach of any covenant or agreement of the Seller Parties
contained in or made pursuant to this Agreement or any instrument of transfer or
conveyance delivered by the Seller Parties hereunder;
(vi) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Buyer Indemnified Persons, or any of them,
as a result of non-compliance by the Seller Parties with any tax clearance
requirements (including Liabilities required to be discharged in connection
therewith) or the provisions of the "bulk sales laws" of any state or foreign
jurisdiction which may be applicable to the transactions contemplated hereby;
(vii) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Buyer Indemnified Persons, or any of them,
as a result of non-compliance by the Seller or the Subsidiaries with the
provisions of the franchise laws of any state or foreign jurisdiction which may
be applicable to the transactions contemplated hereby in respect of any act,
event or occurrence which transpired or occurred at or prior to the Closing;
(viii) any and all Liabilities for or in respect of claims for
brokerage or finders' fees arising out of this Agreement or the transactions
contemplated hereby by any Person who was or claims to have been engaged by the
Seller Parties; and
(ix) any and all Liabilities for or in respect of sales, use or
similar transfer taxes payable in connection with the transactions contemplated
hereby;
(x) any and all Liabilities, Actions or causes of action sustained
or suffered by the Buyer Indemnified Persons, or any of them, with respect to
the failure to obtain the consent of any Person to the assignment to the Buyer
of any lease or any other contract relating to the Purchased Business;
(xi) any and all Liabilities, Actions or causes of action sustained
or suffered by the Buyer, Indemnified Persons, or any of them, with respect to
any claim by any Person that any of the transactions effected pursuant to or in
connection with this Agreement constituted a fraudulent conveyance or fraudulent
transfer;
(xii) any and all Liabilities for or in respect of Taxes that are the
responsibility of the Seller Parties pursuant to Section 9 of this Agreement;
and
45
<PAGE>
(xiii) any and all reasonable costs and expenses (including reasonable
attorneys', accountants' and other professional fees and expenses) incurred
by the Buyer Indemnified Persons, or any of them, in connection with any
Action, demand, claims, assessment or judgment incident to any of the
matters indemnified against under Sections 11(a)(i) through (xii) hereof.
No demand, Action or cause of action shall be brought against the Seller
Parties under or pursuant to Section 11(a)(iv) after the Survival Date,
except with respect to breaches as to which the Buyer Indemnified Persons,
or any of them, at any time prior to the Survival Date, shall have given
the Seller Parties written notice, with reasonable specificity, of the
existence of any such demand, Action or cause of action under this
Agreement.
(b) Indemnification by the Buyer . The Buyer shall indemnify, defend and
-----------------------------
save the Seller Parties and their respective officers, directors, affiliates,
employees, shareholders, agents, attorney, controlling persons, successors,
predecessors and assigns (collectively, the "Seller Indemnified Persons")
harmless from, against, for and in respect of the following (collectively,
"Seller Losses"):
(i) the Assumed Obligations and the Additional Assumed Obligations;
(ii) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Seller Indemnified Persons, or any of them,
and arising from a breach of any representation or warranty of Buyer contained
in or made pursuant to this Agreement or any instrument of assumption or
agreement or other document delivered by the Buyer hereunder;
(iii) any and all damages, losses, Liabilities, Actions or causes of
action sustained or suffered by the Seller Indemnified Persons, or any of them,
and arising from a breach of any covenant or agreement of the Buyer contained in
or made pursuant to this Agreement or any instrument of assumption delivered by
the Buyer hereunder;
(iv) any and all Liabilities for or in respect of claims for brokerage
or finders' fees arising out of this Agreement or the transactions contemplated
hereby by any Person who was or claims to have been engaged by the Buyer;
(v) any and all Liabilities for which a claim is made against the
Seller Parties by ARC arising out of transactions processed (or which should
have been processed) through the ARC settlement system after February 28, 1994,
provided that with respect to Liabilities arising out of transactions processed
(or which should have been processed) prior to the Closing Date, such
Liabilities arose in the ordinary course of business consistent with past
practices and in compliance with the ARC Handbook; or
(vi) any and all reasonable costs and expenses (including reasonable
attorneys', accountants' and other professional fees and expenses) incurred by
the Seller
46
<PAGE>
Indemnified Persons, or any of them, in connection with any Action, demand,
claim, assessment or judgment incident to any of the matters indemnified against
under Sections 11(b)(i) through (v) hereof.
(c) Third Party Claims . The obligations and liabilities of the
-------------------
indemnifying persons hereunder with respect to claims resulting from the
assertion of liability by third parties shall be subject to the following terms
and conditions:
(i) The indemnified persons shall give prompt written notice to the
indemnifying persons of any assertion of liability by a third party which might
give rise to a claim by the indemnified persons against the indemnifying persons
based on the indemnity agreements contained in Sections 11(a) or 11(b) hereof,
stating the nature and basis of said assertion and the amount thereof, to the
extent known.
(ii) In the event any action, suit or proceeding is brought against
the indemnified persons, with respect to which the indemnifying persons may have
liability under the indemnity agreements contained in Sections 11(a) or 11(b)
hereof, the action, suit or proceeding shall, upon the written agreement of the
indemnifying persons that they are obligated to indemnify under the indemnity
agreements contained in Sections 11(a) or 11(b) hereof, be defended by, or any
claim administered pursuant to the direction of, (including all proceedings on
appeal or for review which counsel for the defendant shall deem appropriate) the
indemnifying persons. The indemnified persons shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified persons unless (x) the employment of
such counsel shall have been authorized by the indemnifying persons in writing
in connection with the defense of such action, suit or proceeding, (y) the
indemnifying persons shall not have agreed, promptly after the notice to them
provided in subsection (i) above, that they are obligated to indemnify under the
indemnity agreements contained in Sections 11(a) or 11(b) hereof or (z) such
indemnified person shall have reasonably concluded on the advice of such
indemnified person's legal counsel that (a) such action, suit or proceeding
involves to a significant extent matters beyond the scope of the indemnity
agreements contained in Sections 11(a) or 11(b) hereof, or (b) there may be
defenses available to it (or them) which are different from or additional to
those available to the indemnifying persons, in any of which events the
indemnifying persons shall not have the right to direct the defense of such
action, suit or proceeding on behalf of the indemnified persons and that portion
of such fees and expenses reasonably related to matters covered by the indemnity
agreements contained in Sections 11(a) or 11(b) hereof shall be borne by the
indemnifying persons; provided, however, that in the case of clause (ii)(z)
-------- -------
above, the fees of such counsel shall be paid by the indemnifying party only to
the extent they relate to such different or additional defenses. The
indemnified persons shall be kept fully informed of such action, suit or
proceeding at all stages thereof whether or not they are so represented. The
indemnifying persons shall make available to the indemnified persons and their
attorneys and accountants all books and records of the indemnifying persons
relating to such proceedings or litigation and the parties hereto agree to
render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such action,
suit or proceeding.
47
<PAGE>
(iii) The indemnifying persons shall not make any settlement of any
claims (except for settlements which involve only the payment of money)
without the written consent of the indemnified persons, which consent shall
not be unreasonably withheld.
(d) Stipulated Amount . Notwithstanding anything contained in Sections
------------------
11(a) and 11(b) hereof to the contrary, no indemnifying person shall have any
obligation to indemnify any indemnified person pursuant to Sections 11(a)(i),
11(a)(ii), 11(a)(iv) 11(a)(vii), 11(a)(xii) (to the extent applicable to
Sections 11(a)(i), 11(a)(ii), 11(a)(iv) or 11(a)(vii)), 11(b)(ii) and 11(b)(vi)
(to the extent applicable to Section 11(b)(ii)) hereof, unless and until the
Buyer and the Buyer Indemnified Persons or the Seller and the Seller Indemnified
Persons, as the case may be, shall have incurred Buyer Losses or Seller Losses,
as the case may be, in an aggregate amount in excess of $500,000 (the
"Stipulated Amount"), whereupon the indemnified persons shall be entitled to
indemnification under Section 11(a) or 11(b) hereof from the indemnifying party
for the aggregate amount of all such Buyer Losses or Seller Losses, as the case
may be, without regard to the Stipulated Amount.
(e) Survival . All representations and warranties contained in this
---------
Agreement and the indemnities herein contained in Section 11(a)(iv) hereof with
respect thereto shall survive the Closing hereunder until the second anniversary
of the date hereof regardless of any investigation made at any time with respect
to any of the foregoing or any information the parties may have with respect
thereto, at which time such representations and warranties shall expire and be
terminated and extinguished. The foregoing notwithstanding, the representations
and warranties made in the following sections of this Agreement and the
indemnities herein contained with respect thereto shall survive as follows: as
to (i) Sections 5(b) (except 5(b)(iii)), 5(d), 5(e), 5(f), and 5(g) they shall
survive without limitation and as to (ii) Sections 5(a), 5(b)(iii), 5(n), 5(o),
5(q), 5(w) and 5(x) they shall survive until the end of the applicable statute
of limitations. The last date on which any such representation or warranty
shall survive in accordance with the preceding provisions of this Section 11(e)
is referred to herein as the "Survival Date."
12. Miscellaneous.
-------------
(a) Expenses . Except as otherwise provided herein, the Seller Parties
---------
shall bear their own costs and expenses including brokerage incurred in
connection with this Agreement and the transactions contemplated hereby. Except
as otherwise provided herein, the Buyer shall bear its own costs and expenses
including brokerage incurred in connection with this Agreement and the
transactions contemplated hereby.
(b) Binding Effect; Assignment by the Buyer; Survival . This Agreement
--------------------------------------------------
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns. Anything contained herein to the contrary
notwithstanding, this Agreement shall not be assignable by the Seller Parties.
The Buyer may assign its rights under this Agreement to any Affiliate of the
Buyer, provided, however; that the Buyer shall remain primarily liable with
respect to its obligations hereunder. Unless specifically
48
<PAGE>
provided in this Agreement to the contrary, the provisions of this Agreement
shall survive the Closing.
(c) Entire Agreement; Amendments . This Agreement and the other writings
-----------------------------
referred to herein or delivered pursuant hereto which form a part hereof contain
the entire understanding of the parties with respect to its subject matter.
There are no restrictions, promises, warranties, covenants or undertakings other
than those expressly set forth herein or therein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to its
subject matter. This Agreement may be amended or changed only by a written
instrument duly executed by each of the parties hereto.
(d) Public Announcements . Except as required by Law, neither Parent nor
---------------------
Buyer shall make, or cause to be made, any press release or public announcement
in respect of this Agreement or the transactions contemplated hereby or
otherwise communicate with any news media without the prior written consent of
the other party. The parties shall cooperate as to the timing and contents of
any such press release or public announcement.
(e) Severability . If any term or other provision of this Agreement is
-------------
invalid, illegal or incapable of being enforced by any Law or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner in order that the
transactions contemplated hereby are consummated as originally contemplated to
the greatest extent possible.
(f) Dispute Resolution . In the event that any dispute between the Seller
-------------------
Parties, or any of them, on one hand, and Buyer, on the other hand arises
concerning any matter pertaining to this Agreement or the transactions
contemplated herein, the parties shall first endeavor, in good faith, to
promptly resolve the dispute through informal negotiation. If the parties are
unable to resolve such dispute within a ten (10) day period (or such other
period as the parties may agree in writing), the parties shall submit the matter
to the Atlanta office of Judicial Arbitration & Mediation Services, Inc.
("JAMS") for binding resolution by a private judge affiliated with JAMS (which
judge shall be selected by the parties or, if the parties are unable to agree,
by JAMS). JAMS shall arrange the following matters, taking into account the
nature of the dispute and the parties' interest in resolving all disputes
fairly, quickly, and efficiently:
(i) Only in the event the parties cannot agree, the alternative dispute
resolution proceeding to be conducted;
(ii) The date, time, and location of the proceeding, and the filing of the
prehearing positions statements; and
49
<PAGE>
(iii) The names of the parties who shall attend the proceeding
and, if appropriate, the names of any representatives of the parties
who shall attend the proceeding.
Discovery in the forms permitted by the Federal Rules of Civil Procedure
then in effect shall be allowed in connection with such proceeding to the
extent consistent with the purpose of the proceeding and as allowed by the
judge conducting the proceeding. Such judge is authorized to render awards
of monetary damages, direction to take or refrain from taking action, or
both. Judgment upon the award rendered in any such proceeding may be
entered in any court of competent jurisdiction, or application may be made
to such court for judicial acceptance and enforcement of the award and
direction. Any such award or direction shall be binding on the parties to
the proceeding and final, except that for appeals on the grounds that the
award or direction were obtained through fraud. Such proceeding shall be
confidential and, except if a special trial proceeding is held, no
stenographic or other record need be made of any such proceeding other than
a memorandum of understanding setting forth the elements of any settlement
or award reached.
(g) Attorneys' Fees . If any legal action or other proceeding is brought
----------------
for the enforcement of this Agreement, or because of an alleged dispute, breach,
default or misrepresentation in connection with any of the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
(h) Further Action . Each of the parties hereto shall use all reasonable
---------------
efforts to take, or cause to be taken, all appropriate action, do or cause to be
done all things reasonably necessary, proper or advisable under applicable Law,
and execute and deliver such documents and other papers, as may be required to
carry out the provisions of this Agreement and consummate and make effective the
transactions contemplated by this Agreement.
(i) Headings . The section and paragraph headings contained in this
---------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(j) Notices . All notices, claims, certificates, requests, demands and
--------
other communications hereunder will be in writing and will be deemed to have
been duly given if delivered personally, on the day of such delivery, or if
mailed, three days after being mailed (by registered or certified mail, postage
prepaid) as follows:
50
<PAGE>
If to the Buyer, to:
MTH Acquisition Corp.
1401 Rockville Pike, Suite 300
Rockville, Maryland 20852
Attention: President
If to the Seller Parties, to:
PS Group, Inc.
4370 La Jolla Village Drive
Suite 1050
San Diego, California 92122
Attention: President
or to such other address as the Person to whom notice is to be given may have
furnished to the other in writing in accordance herewith.
(k) Counterparts . This Agreement may be executed in any number of
-------------
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(l) Governing Law . This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of Delaware applicable to contracts made
and performed therein.
(m) Pronouns; Construction . Any reference to the masculine gender shall
-----------------------
be deemed to include the feminine and neuter genders unless the context
otherwise requires. All references in this Agreement to "including" or
"included" or any variation thereto shall be deemed to be followed by "without
limitation" whether or not so expressed.
(n) Waivers . Any party to this Agreement may, by written notice to the
--------
other parties hereto, waive any provision of this Agreement. Except as provided
in the preceding sentence, no action taken pursuant to this Agreement, including
without limitation any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach.
(o) Third Parties . Nothing herein expressed or implied is intended or
--------------
shall be construed to confer upon or give to any person other than the parties
hereto and their successors or permitted assigns, any right or remedies under or
by reason of this Agreement.
*
51
<PAGE>
*
*
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
THE BUYER:
---------
MTH ACQUISITION CORP.
By: /s/ Murray T. Holland
--------------------------
Name: Murray T. Holland
-----------------
Title: President
-----------------
THE PARENT:
----------
PS GROUP, INC.
By: /s/ George M. Shortley
-----------------------
Name: George M. Shortley
------------------
Title: President
-------------
52
<PAGE>
THE SELLER:
----------
USTRAVEL SYSTEMS INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
THE SUBSIDIARIES:
----------------
USTS NORTHWEST, INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
USTS SOUTHWEST, INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
USTS AFFILIATE CORPORATION
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
53
<PAGE>
USTS NORTHEAST, INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
USTS SOUTHEAST, INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
USMOTIVATION, INC.
By: /s/ Ralph Manaker
------------------
Name: Ralph Manaker
---------------
Title: President
-------------
54
<PAGE>
EXHIBIT (12)
PS GROUP, INC.
COMPUTATION OF RATIOS
The debt to equity ratios set forth on page 1 of the Company's 1993 Annual
Report to Stockholders are derived by dividing stockholders' equity into total
debt for each year.
<PAGE>
EXHIBIT (13)
PS GROUP, INC.
PS GROUP, INC. 1993 ANNUAL REPORT ON FORM 10-K
CONSOLIDATED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
PS GROUP, INC. (NYSE Symbol: PSG), PSG operates four principal business
segments - fuel sales and distribution, aircraft leasing, oil and gas production
and development, and metallic waste recycling. On March 14, 1994 the assets of
USTravel Systems Inc. (USTravel), PSG's travel management segment, were sold.
Accordingly travel management is shown as a discontinued operation.
<TABLE>
<CAPTION>
FOR THE YEAR 1993 1992* 1991* 1990* 1989*
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Revenues from continuing
operations $157,622 $145,189 $177,128 $161,703 $169,585
Income (loss) from
continuing operations
before extraordinary item
and change in accounting (14,135) (55,372) (7,630) 2,352 13,577
Loss from discontinued
operation (7,235) (12,210) (16,311) (12,382) (10,574)
Extraordinary item (433) (56)
Cumulative effect of
change in accounting 2,900
---------------------------------------------------------------
Net income (loss) (18,470) (67,582) (23,941) (10,463) 2,947
Income (loss) per
common share:
Continuing operations (2.33) (9.28) (1.39) .42 2.07
Discontinued operation (1.20) (2.05) (2.99) (2.23) (1.61)
Extraordinary item (.08) (.01)
Cumulative effect of
change in accounting .48
---------------------------------------------------------------
Net income (loss)
per share (3.05) (11.33) (4.38) (1.89) .45
Cash dividends per common
share .15 .60 .60 .60
Capital additions 1,430 4,653 14,191 22,978 65,841
AT YEAR END
- --------------------------------------------------------------------------------------------------
Total assets 382,090 431,157 516,845 596,137 597,697
Total debt 178,159 205,719 230,140 275,050 244,108
Stockholders' equity 121,899 140,243 190,685 217,903 252,874
Stockholders' equity per
share 20.10 23.22 34.90 39.89 41.47
Debt to equity ratio 1.46 to 1 1.47 to 1 1.2 to 1 1.26 to 1 .97 to 1
</TABLE>
COMPARABILITY
- --------------------------------------------------------------------------------
Results from continuing operations between years are not comparable for the
following significant reasons: (i) in 1989, PSG's oil and gas subsidiary was
shown as a discontinued operation while in 1990 it became a business segment,
(ii) in 1990 and 1989, write-downs of $15 million and $5 million, respectively,
in the carrying value of PSG's marketable securities were charged to operations,
(iii) in 1993, 1992 and 1991, gains (net of losses) of $2.5 million, $3 million
and $13.7 million, respectively, were recorded on marketable equity securities'
transactions, (iv) in 1993, 1992 and 1991, PSG recorded write-downs of $17
million, $9.9 million and $31.2 million, respectively, related to 747 aircraft
previously leased to airlines which have declared bankruptcy, and (v) in 1992,
PSG wrote-down the assets related to its metallic waste recycling operation by
$56.4 million. (All amounts discussed are pretax.)
* Information for the years 1989 through 1992 has been restated to show travel
management as a discontinued operation.
- --------------------------------------------------------------------------------
1
<PAGE>
LETTER TO STOCKHOLDERS
During 1993, as in 1991 and 1992, the primary effort of PSG's management has
been to satisfy obligations under our Bank Credit Agreement (after a series of
covenant defaults starting in 1991) while preserving the value of PSG's assets.
The alternative would have been foreclosure on our assets by the banks which
would have had a calamitous effect on PSG. Through a combination of asset sales
(primarily marketable securities), borrowings secured by MD80 aircraft and use
of operating cash flow, the loan balance was reduced from a high of $163.7
million in 1991 to $23 million of borrowed funds and $23.2 million of letters of
credit by the end of 1993. In March 1994 we sold the assets of our travel
management business and utilized the proceeds to repay entirely all remaining
outstanding borrowed funds under the Bank Credit Agreement and also partially to
cash-collateralize letters of credit. Our Bank Credit Agreement obligations are
now reduced to furnishing only $6.3 million in additional cash collateral which
is due no later than September 30, 1994. We plan to satisfy this requirement by
one of several alternatives discussed later. This will leave PSG free of the
recurring bank loan "crises" of recent years. Our only debt will be that (i)
which is fully backed by cash collateral or (ii) which is placed directly on
various aircraft, approximately $20 million of which is recourse to PSG.
During the past few years, well-publicized difficulties in the air travel
industry contributed to losses in our travel management business and required
write-downs in our aircraft leasing business, which together with the almost
complete write-off of our metallic waste recycling business, were the major
causes of a reduction in stockholders equity from $41.47 per share at the end of
1989 to $20.10 per share at the end of 1993.
On the assumption that all of PSG's aircraft lessees pay their obligations when
due, PSG could expect to have a positive annual cash flow from operations after
all expenses in 1994 and succeeding years in excess of $10 million. However,
recent adverse publicity with respect to USAir raises the possibility of USAir
being able to reject its leases. Since the ten BAe-146's leased to USAir are
not in operation, it is likely that USAir would reject these leases if it could
and return the aircraft. If this occurred, PSG's annual cash flow would be
negatively impacted by approximately $6.7 million as it is unlikely PSG would be
able to put these aircraft in service if USAir has not done so. PSG's book
value would also be negatively impacted. (See page 19.) Therefore, PSG's
future is significantly dependent on that of USAir, which is uncontrollable by
PSG.
PSG'S 1993 RESULTS
In 1993, PSG recorded a net loss of $18.5 million ($3.05 per share), compared to
a net loss of $67.6 million ($11.33 per share) in 1992. Of the 1993 net loss,
$10 million ($1.65 per share) related to a write-down in the carrying value of
our two 747-100 freighter aircraft held for sale.
2
<PAGE>
- -------------------------------------------------------------------------------
The following table reflects (in thousands) components of PSG's pretax loss for
1993, 1992 and 1991 (before discontinued operations and taxes) by major business
segment, including marketable securities transactions:
<TABLE>
<CAPTION>
1993/(a)/ 1992/(a)/ 1991/(a)/
-----------------------------------
<S> <C> <C> <C>
Fuel sales and distribution (PS Trading) $ 1,326 $ 1,252 $ 1,125
Aircraft leasing/(b)/ (8,644) 1,044 (12,847)
Oil and gas production and distribution
(Statex Petroleum)/(c)/ (1,336) 2,939 3,438
Metallic waste recycling (Recontek)/(d)/ (7,642) (70,156) (11,251)
Marketable securities/(e)/ 5,757 8,156 20,197
Interest on debt/(f)/ (7,368) (7,146) (9,119)
Corporate and other/(g)/ (3,723) (4,485) (2,174)
</TABLE>
(a) Refer to the consolidated financial statements for more information.
(b) Includes aircraft write-downs of $17 million in 1993, $9.9 million in 1992
and $31.2 million in 1991.
(c) Includes a write-down of $1.8 million in 1993.
(d) Includes a write-down of $56.4 million in 1992.
(e) Includes interest and dividend income as well as gains and losses on
security transactions.
(f) Excludes interest on aircraft lease financings which is included in the
aircraft leasing category. Includes foreign exchange losses of $3.9
million, $2 million and $1.4 million in 1993, 1992 and 1991, respectively.
(g) Reflects the sale of the flight training operation in early 1992.
Interest expense (excluding aircraft financings) is shown separately so the
reader can better determine the results of each line of business without the
effect of how it is financed.
TRAVEL MANAGEMENT
In March of 1994, we sold the assets of our travel management business. PSG
will not know the precise amount of its net proceeds until all of the post-
closing adjustments have been made to the February 28th balance sheet of the
travel management company. However, we expect it will be approximately $40
million. We expect to report, in the first quarter of 1994, an after-tax net
gain from the sale of the travel management business of approximately $15
million ($2.47 per share).
We decided to sell the travel management business principally for three reasons:
(i) the results of operations of this business have never met our expectations;
(ii) the proceeds from the sale of this business, with one transaction, repaid
all of our remaining outstanding bank debt and provided nearly enough proceeds
to cash collateralize the remaining PSG letters of credit; (iii) in order to
"globalize" the travel management business, as well as enhance its management
information systems capabilities, additional investments of $15 million to $20
million would in all likelihood have been required. Because of past financial
performance, we were not prepared to make this kind of additional investment.
- -------------------------------------------------------------------------------
3
<PAGE>
PS TRADING AND STATEX PETROLEUM
PS Trading had a profit of $1.3 million before interest and taxes and slightly
improved its results over 1992. We are anticipating continued improvement in
both revenues and profit for PS Trading in 1994. Statex Petroleum lost $1.3
million before interest and taxes in 1993 as a result of a $1.8 million write-
off of a water flood project that failed to respond to water injection and
average oil prices that were more than $2 per barrel lower than in 1992.
RECONTEK
At the time of our Annual Meeting in May of 1993, we believed that by the time
this letter was written a clear direction in establishing the future of Recontek
and its Newman recycling facility would be obvious. Such is not the case.
Since the time of the June 1993 downsizing of the Newman operations and the
accompanying change in plant management, substantial progress has been made in
the processing of zinc and copper-based hazardous waste. The current employees
of Recontek have proven that they are capable of successfully recycling limited
amounts of certain types of metal-laden hazardous waste and producing saleable
end products. The major challenge for Recontek today is to obtain sufficient
customers (particularly copper customers) who generate the types of waste
Recontek can recycle to increase the volume of inbound waste to the point where
cash operating expenses are covered and the potential for small profit is seen.
That point in time has not as yet been achieved, however, we believe that the
losses currently being incurred are acceptable in light of the potential for the
future. We do not find pretax losses of approximately $300,000 per month
acceptable for the long-term, but believe it is in our shareholders best
interest to incur losses of that magnitude for some months in the future while
the marketing activity is intensified.
See pages 14 through 16 regarding additional discussion of Recontek.
REFINANCING
At December 31, 1992, amounts outstanding under PSG's Bank Credit Agreement
totaled $97.1 million. As of the date of this letter, that amount has been
reduced to $6.3 million. This reduction has been accomplished through the
repayment of $69.5 million of borrowed funds, a $4.9 million reduction in the
amount of outstanding letters of credit and cash collateralization of letters of
credit of $16.4 million. The $69.5 million reduction in borrowed funds was
accomplished through the refinancing of five MD80 aircraft in June of 1993,
proceeds from the sale of USTravel in March of 1994, the sale of marketable
securities and the use of operating cash flow. The cash collateralization of
outstanding letters of credit has been accomplished through use of proceeds from
the sale of USTravel. The remaining cash collateral will come from the sale of
marketable securities,
4
<PAGE>
- ------------------------------------------------------------------------------
the use of operating cash flow and, to the extent necessary, the encumbering of
a 737 aircraft discussed below.
In connection with the five MD-80 aircraft refinanced in June of 1993, $59.7
million was borrowed, of which $25.1 million was used to repay then existing
secured debt and $29.9 million was paid to the bank group. This refinancing
eliminated all of PSG's foreign exchange exposure which had resulted in losses
of $3.9 million in 1993.
PSG is pursuing a proposed financing to borrow $13.5 million to be secured by a
737-300 aircraft. With the consummation of this borrowing the estimated net
proceeds of approximately $12.8 million will be used to cash collateralize any
remaining amounts under the Bank Credit Agreement, and make the estimated $5
million payment to the Internal Revenue Service discussed on page 19. Any
remaining cash proceeds will be used to increase PSG's working capital.
Sincerely,
/s/ Charles E. Rickershauser, Jr. /s/ George M. Shortley
CHARLES E. RICKERSHAUSER, JR. GEORGE M. SHORTLEY
Chairman of the Board President and Chief Executive Officer
March 14, 1994
- --------------------------------------------------------------------------------
5
<PAGE>
FUEL SALES AND DISTRIBUTION
- -----------------------------------------------------------------------------
PS Trading, Inc. (PST) operates three business segments: aviation fuel sales,
wholesale marketing and facility services.
AVIATION FUEL SALES - PST's primary business focus until 1991 was sales to the
scheduled airline industry. Although commercial airlines remain important
customers of PST, the marketing emphasis has been redirected to customers that
offer prospects for higher margins -- albeit on lower sales volumes. In some
cases PST has in recent years elected not to rebid existing large volume
contracts with airlines that PST had been supplying for several years. This
strategy is beginning to pay off with PST's success at selling incremental
volume at higher margins to corporate, charter and cargo operators. During 1994
PST's marketing strategy will be to enhance profit margins through such sales
opportunities while striving to exceed PST's high standards of performance and
service levels.
WHOLESALE MARKETING - PST's newest business unit posted improved results during
1993. Sales volume of refined petroleum products to commercial, military,
municipal and to reseller accounts increased 35% over 1992. Marketing efforts
in 1993 concentrated on California, Nevada and Arizona. During 1994 PST will
begin shipping diesel fuel via common carrier pipeline on a very limited basis
to a few selected cities. PST's diesel fuel will be stored in community storage
tanks owned by Santa Fe Pacific Pipeline Partners, L.P. As the wholesale
customer base continues to grow, PST will be in a position to distribute greater
quantities of diesel fuel to more cities. These increased pipeline shipments
will gradually reduce PST's cost of fuel and provide for greater profitability
and new sales opportunities. Much of 1994 will be devoted to improving sales
capabilities by hiring additional sales representatives, implementing a formal
sales training program and developing additional sales tools that will enable
field sales personnel to provide outstanding customer service.
FACILITY SERVICES - PST owns or leases limited fuel storage facilities or
pipelines in several locations including San Francisco, Oakland and Los Angeles.
During 1993 the quantities of third party owned fuel flowing through PST's
storage and pipeline facilities increased slightly. During 1994 PST plans on
leasing a fuel storage terminal at Portland, Oregon and is attempting to
sublease an under-utilized storage facility located on the Oakland International
Airport.
<TABLE>
<CAPTION>
OPERATING STATISTICS 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gallons of fuel sold (in thousands) /(a)/ 145,281 112,663 100,040 91,445 140,623
Average price per gallon (in cents) /(a)/ 73 75 73 86 66
Employees at year-end 24 21 18 18 20
Spot sales (in thousands of dollars) 819 4,999 97
</TABLE>
(a) Statistics exclude spot sales. Spot sales are one-time sales of large
blocks of fuel typically with de minimis margins.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
FUEL SALES AND DISTRIBUTION--CONTINUED
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA (in thousands) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $106,904 $85,450 $75,302 $84,756 $93,778
Operating expenses 105,578 84,198 74,177 82,689 92,118
------------------------------------------------------------
Income before interest and taxes 1,326 1,252 1,125 2,067 1,660
Identifiable assets at year-end 15,975 14,161 12,756 13,271 13,438
Net assets before debt at year-end/(b)/ 9,430 7,612 8,978 9,857 10,589
Capital additions 67 203 153 74 302
Depreciation and amortization 336 366 400 440 532
Income before interest and taxes as
a percent of revenues 1.2% 1.5% 1.5% 2.4% 1.8%
</TABLE>
(b) Identifiable assets less current liabilities.
- -------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL DATA FOR 1991 THROUGH 1993 AND KNOWN TRENDS
- -------------------------------------------------------------------------------
Between 1992 and 1993 operating revenues increased 25.1% due to a 29% rise in
gallons sold; the increase in gallons sold was partially offset by a 2.7%
decrease in the average price per gallon. Operating revenues in 1992 increased
13.5% over 1991 due to a 12.6% rise in gallons sold and a 2.7% increase in price
per gallon; these increases were partially offset by a $819,000 reduction in
spot sales. The increase in gallons sold during each year since 1990 is the
result primarily of enhanced marketing efforts.
Income as a percent of revenues varies because of changing margins on fuel
distribution contracts (largely due to competitive pricing which was even more
intensive in 1993) and the percentage of lower volume/higher margin customers.
Because of the narrow margins in this segment, fuel distribution can provide
significantly greater net profits only if revenues are substantially increased.
- --------------------------------------------------------------------------------
7
<PAGE>
AIRCRAFT LEASING AND SALES
- --------------------------------------------------------------------------------
The aircraft leasing business represents PSG's largest capital investment and
its largest source of cash flow.
All of PSG's leases are net leases, which provide that lessees will bear the
direct operating costs and the risk of physical loss of the aircraft, pay taxes,
maintain the aircraft, indemnify PSG against any liability suffered as the
result of any act or omission of the lessee, maintain casualty insurance in an
amount equal to the specific amount set forth in the lease (which may be less
than market value) and maintain liability insurance naming PSG as an additional
insured. In general, substantially all obligations connected with the operation
and maintenance of the leased aircraft are assumed by the lessee and minimal
obligations are imposed upon PSG. The leases also typically provide that in
those limited instances where the lessees have the voluntary right to terminate
the lease, the lessee is obligated to pay PSG a stipulated sum which is designed
to retire any existing indebtedness relating to the aircraft and otherwise
provide PSG with the same economic value it would have received had the lease
continued.
Since PSG engages only in long-term leases, both the short and long-term
operating results of PSG's lessees are vitally important to PSG's operations and
future results. PSG's three airline lessees are USAir, Inc. (USAir),
Continental Airlines, Inc. (Continental) and America West Airlines, Inc.
(America West). Contrary to calendar years 1991 and 1992, PSG gave no
significant rent concessions to its lessees during 1993 and all lessees remained
fully current on rent payments throughout the year. As a result of a continuing
weak market for used freighter aircraft, PSG took a further write-down as of
December 31, 1993 of $17 million on its two 747-100 freighter aircraft held for
sale. A summary of 1993 activity related to PSG's lessees and aircraft follows:
- - USAIR leases 16 of PSG's aircraft. These leases provide significant cash flow
to PSG. Because of the large number of aircraft leased to USAir, PSG has
previously expressed concern regarding USAir's recent losses and weakening
financial condition. A continuing deterioration of USAir's financial condition
could have a material adverse impact on PSG, particularly because ten of the
aircraft leased to USAir are currently grounded by USAir. During 1992 and
early 1993 USAir reached agreement with its employees (both union and non-
union) for wage and work rules concessions designed to help lower USAir's
operating costs. In the latter part of 1993 some of the wage concessions
"snapped back" to prereduction levels. In early 1993 USAir received an equity
infusion of approximately $400 million from British Airways. USAir also
entered into certain service coordination agreements with British Airways that
are designed to improve USAir's traffic. At the time of its initial investment
British Airways stated its intention to invest up to an additional $450 million
in USAir if US government approvals were obtained. In March 1994 British
Airways reported that it will delay further investments in USAir pending
USAir's ability to cut costs and improve its financial performance. Although
USAir continued to record losses for 1993 those losses, on a comparative basis,
were substantially less than 1992. However USAir has announced that it expects
a larger pretax loss for 1994 than it reported in 1993. USAir is under
pressure in some of its markets from certain other lower cost competitors and
in late 1993 announced that it would take steps in various, under-500-mile
markets, to improve its operating costs to compete more effectively. An
important component of USAir's
8
<PAGE>
AIRCRAFT LEASING AND SALES - CONTINUED
long-term viability will be negotiation with employees for wage and work rules
concessions that will allow USAir to remain competitive with other airlines
some of which have lower operating costs than USAir. The ten BAe 146-200
aircraft leased to USAir by PSG remain out of service. USAir is attempting to
sell or sublease these aircraft worldwide. The information relating to USAir
and reported herein by PSG was obtained primarily from published media reports.
PSG refers readers to public information regarding USAir for further details
relating to USAir's financial condition.
- - CONTINENTAL successfully completed a reorganization and emerged from
bankruptcy in April 1993. As a result of its successful reorganization
Continental is one of the lowest cost airlines in the United States.
Continental has also begun a new, low fare service called CalLite focused
primarily in the Eastern part of the United States. Although Continental's
emergence from bankruptcy is a good sign, no prediction can yet be made about
Continental's long-term prospects. Continental leases one MD-80 and one 737-
300 from PSG as well as seven older 737-200 aircraft in which PSG has a one-
third interest.
- - AMERICA WEST continues to operate under the protection of the bankruptcy laws
of the United States. However, America West has reported four successive
quarters of both operating and net profits. On February 24, 1994 the America
West Board of Directors announced that it had selected Am West Partners, L.P.
as the lead investor in the company's bankruptcy reorganization. The Am West
Partners bid would provide America West with $100 million of new long-term
unsecured debt and $120 million of new equity in exchange for a minority
ownership interest in a reorganized America West. Certain creditors of America
West have announced that they may submit a competing plan of reorganization.
America West leases one 737-300 aircraft from PSG, which lease has been assumed
by America West in its bankruptcy proceeding.
- - AIRCRAFT HELD FOR SALE. PSG's two 747-100 aircraft, formerly leased to Pan
American World Airways (Pan Am), were written-down by $17 million at the end of
1993 to their estimated market value. Both of these aircraft have been
converted by The Boeing Company from passenger to special freighter
configuration. Although the market for sales of used wide-bodied freighter
aircraft remains almost nonexistent at this time, PSG believes that its two
aircraft are among the more desirable freighters available on the used aircraft
market due primarily to (i) relatively low overall aircraft time, (ii)
completion of certain required maintenance for used aircraft and (iii) the
conversion to freighter having been performed by The Boeing Company thus making
the aircraft certifiable in virtually every country of the world. Due to the
weak market for these aircraft PSG is unable to project a time period within
which it expects the aircraft to be sold.
9
<PAGE>
AIRCRAFT LEASING AND SALES--CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING STATISTICS (at year-end) 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET AIRCRAFT LEASED/(a)/:
BAe 146-200 aircraft 10.0 10.0 10.0 10.0 10.0
MD-80 aircraft 7.0 7.0 7.0 7.0 7.0
737-200 aircraft 2.3 2.3 2.3 2.3 2.3
737-300 aircraft 2.0 2.0 2.0 2.0 2.0
747-100 aircraft 2.0 2.0
747-200 aircraft 2.0 2.0
-----------------------------------
Total aircraft 21.3 21.3 21.3 25.3 25.3
Aircraft leased under operating leases/(b)/ 16.3 16.3 15.3 15.3 15.3
Aircraft leased under financing leases/(b)/ 5.0 5.0 6.0 8.0 8.0
Aircraft leased under leveraged leases 2.0 2.0
AIRCRAFT HELD FOR SALE - 747-100 2.0 2.0 2.0
</TABLE>
(a) At December 31, 1993, PSG had a 100% interest in all aircraft except for a
33% interest in seven 737-200 aircraft.
(b) During 1992, a 737-300 aircraft was reclassified from a financing lease to
an operating lease.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (in thousands) 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues $ 35,920 $ 36,412 $ 46,200 $ 49,916 $ 45,900
Operating expenses 31,165/(c)/ 22,544/(d)/ 45,123/(e//)/ 12,599 12,482
-------------------------------------------------------------------------------------
Income before interest and taxes 4,755 13,868 1,077 37,317 33,418
Identifiable assets at year-end 302,341 324,719 338,034 382,921 399,401
Capital additions/(f)/ 56,799
Depreciation and amortization 13,837 12,394 13,478 12,386 12,386
Income before interest and taxes
as a percent of revenues 13.2% 38.1% 2.3% 74.8% 72.8%
</TABLE>
(c) Includes a write-down of $17 million for two 747 freighter aircraft to
estimated market value.
(d) Includes a write-down of $9.9 million for two 747 freighter aircraft to
estimated market value.
(e) Includes write-downs of $31.2 million for four 747 aircraft previously
leased to airlines which have declared bankruptcy.
(f) Capital additions include leveraged leases.
- --------------------------------------------------------------------
ANALYSIS OF FINANCIAL DATA FOR 1991 THROUGH 1993 AND KNOWN TRENDS
- --------------------------------------------------------------------
The reduction in revenues in each year since 1990 is principally the result of
the termination of the leases of four 747 aircraft, two of which had been leased
to America West and two of which had been leased to Pan Am, and the reduced rent
on the Continental and America West leases granted during 1991 and 1992. In
addition, the reduction reflects the reduced revenue recognition associated with
aircraft leased under
- --------------------------------------------------------------------
10
<PAGE>
AIRCRAFT LEASING AND SALES - CONTINUED
- -------------------------------------------------------------------------------
financing leases. The income declines from 1990 are a result of the reduced
revenues and the $17 million, $9.9 million and $31.2 million write-downs in
1993, 1992 and 1991, respectively, of 747 aircraft.
The ultimate impact of the sale of the two 747 freighter aircraft, and the
future prospects of Continental, America West and USAir on PSG is unknown. It
is possible that the 747-100 aircraft will be sold without further losses and
that all of the current aircraft leases will remain with the existing carriers.
On the other hand, (i) it is difficult to predict potential sales prices for the
two 747 freighters (which may be less than current book value) and (ii) further
economic deterioration of PSG's lessees could result in the return of some or
all of the aircraft to PSG or the negotiation of lease terms less favorable to
PSG. If the aircraft were returned, PSG would be required to find purchasers or
new lessees for the aircraft. To the extent that sales prices were less than
PSG's carrying value or less favorable lease rates were obtained, PSG would be
negatively affected.
Management believes that the current aggregate underlying asset values as
indicated by current published values of PSG's aircraft are at least equal to
the carrying value. However, if permitted PSG believes USAir would seek to
reject all of its leases for BAe-146 aircraft (currently 18 in number) including
the ten owned by PSG. If this were to happen the sudden large number of such
aircraft on the market would likely reduce the market value of PSG's ten BAe-
146s below PSG's carrying value.
11
<PAGE>
OIL AND GAS PRODUCTION AND DEVELOPMENT
- ------------------------------------------------------------------------------
PSG's oil and gas operations are conducted by Dallas-based Statex Petroleum,
Inc. (Statex), which is 80% owned by PSG and 20% owned by the two managers of
Statex. Statex's primary business activity is the application of secondary
recovery processes to increase the productivity of producing properties which
yield crude oil. Typically this involves injecting water into reservoirs which
have been depleted of their natural pressure. Since 1991, Statex has augmented
the water injection with polymers to increase the recovery efficiencies. Statex
concentrates its efforts in areas and reservoirs which have a proven history of
economically attractive secondary recovery operations. Currently, the main
focus is in North Texas.
During 1993 Statex continued to expand its largest project, increasing recovery
efficiency by converting two older producing wells to injection wells, as well
as maintaining the injection of polymers. It also continued to increase water
injection volumes into a property purchased in 1991. In anticipation of the
abandonment of another project, Statex recorded a $1.8 million write-off in 1993
when the project failed to respond to water injection. At the end of 1993 gross
production from all of Statex's enhanced production fields remained at 1,500
barrels of oil per day which is approximately the same as production levels at
the end of 1992. During 1994 Statex will seek to further increase the recovery
efficiencies in its existing projects.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
OPERATING STATISTICS 1993 1992 1991 1990
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Proved reserves:
Crude oil (Mbbls) 6,856 8,438 8,776 7,235
Natural gas (MMcf) 3,737 4,849 6,164 5,714
Undeveloped oil and gas acreage:
Gross/(a)/ 5,877 6,303 9,187 16,383
Net/(b)/ 1,687 2,070 3,654 9,860
Producing wells:
Gross/(a)/ 114 126 140 129
Net/(b)/ 87 96 104 88
Production:
Crude oil (Mbbls) 446 435 447 392
Natural gas (MMcf) 467 559 646 623
Wells drilled:
Gross/(a)/ 8 9 13 13
Net/(b)/ 7 9 13 11
Average price during year:
Crude oil - per barrel $17.64 $20.03 $20.71 $ 23.66
Natural gas - per thousand
cubic feet $ 2.02 $ 1.68 $ 1.46 $ 2.12
Year-end price:
Crude oil - per barrel $12.50 $18.00 $18.20 $ 27.05
Natural gas - per thousand
cubic feet $ 2.15 $ 2.00 $ 1.60 $ 1.57
Employees at year-end 9 9 9 9
</TABLE>
Mbbls = thousands of barrels MMcf = millions of cubic feet
(a) Gross refers to the total amount owned by all participants.
(b) Net refers to Statex's ownership interest in the gross amount.
- --------------------------------------------------------------------------------
12
<PAGE>
OIL AND GAS PRODUCTION AND DEVELOPMENT--CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (in thousands) 1993 1992 1991 1990
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 8,907 $10,483 $10,367 $10,816
Operating expenses 10,283 7,526 7,041 5,824
--------------------------------------
Income (loss) before interest and taxes (1,376) 2,957 3,326 4,992
Identifiable assets at year-end 22,175 26,232 25,072 22,438
Net assets before debt at year-end/(c)/ 20,950 24,814 23,789 19,928
Capital additions 1,360 2,237 6,208 2,782
Depreciation, depletion and amortization 1,957 2,013 1,905 2,019
</TABLE>
(c) Identifiable assets less current liabilities.
- --------------------------------------------------------------------
ANALYSIS OF FINANCIAL DATA FOR 1991 THROUGH 1993 AND KNOWN TRENDS
- --------------------------------------------------------------------
Revenues for 1993 were 15% lower than 1992 due primarily to lower oil prices in
1993 and one-time revenue settlements that occurred in 1992. The 1992 revenues
were slightly higher than in 1991 due to the one-time revenue settlements; these
were partially offset by lower production of oil and gas and lower oil prices.
Operating expenses for 1993 were significantly higher than in 1992 due to a $1.8
million write-off of an oil field which did not respond to water flood
enhancement and $.7 million of losses on the sales of oil and gas properties.
Higher operating expenses during 1992 reflected the increased costs of Statex's
waterflood projects. Adverse weather limited production and also increased
costs during 1992.
Statex became a principal business segment in 1990. Effective December 31,
1988, PSG discontinued reporting its oil and gas business as a separate segment
due to the sale of 70% of Statex's net assets and the adoption by management of
a plan to dispose of the remaining assets. In 1990 PSG decided to retain
Statex's remaining properties.
- --------------------------------------------------------------------------------
13
<PAGE>
METALLIC WASTE RECYCLING
- -------------------------------------------------------------------------------
Recontek, Inc. (Recontek) is involved in the recycling of metal-laden hazardous
and non-hazardous wastes from the electronics, aerospace and metal-finishing
industries. Recontek's recycling facility, located in Newman, Illinois,
received a consolidated permit to operate from the Illinois Environmental
Protection Agency and the USEPA in 1989 and subsequently opened the facility in
November 1990.
The plant accepts certain types of waste sludges and solutions, from which are
extracted metals, metal compounds, non-metallic products and distilled water,
using a hydrometallurgical process. The extracted products are then sold to
industry for commercial use and the distilled water is re-used in a closed-loop
system within the plant.
Since generators of hazardous waste are faced with potential future liability
for cleanup if they dispose of (e.g. landfilling, deep well injection, etc.),
rather than recycle their wastes, Recontek's recycling process is believed by
Recontek to be an important benefit. However, to date Recontek's process has not
been economically successful, in part due to the limited types and volume of
waste that Recontek has been able to recycle and the higher operating costs
associated with Recontek's recycling process. It is still to be determined
whether waste generators will pay the fees required by Recontek's higher cost
process in order to minimize potential future liability. The difference between
Recontek's recycling fees and the cost of hazardous waste disposal has recently
been exacerbated due to (i) substantial unused landfill and incinerator
capacity, (ii) efforts by waste generators to minimize the amount of waste
created and (iii) recession induced reductions in plant utilization, and thus
lower waste output, by some waste generators.
Refer to Note 4 of the Notes to the Consolidated Financial Statements for a
discussion of a $56.4 million write-down of the assets relating to Recontek made
in 1992.
During 1993 Recontek operated on a limited basis two process lines, one for
copper hydroxide/copper sulfate wastes and the second for zinc oxide wastes.
The zinc line began operating for the first time in August 1993, following 18
months of development and pilot studies. The development related to the zinc
oxide processing initially focused on extracting nearly pure zinc from zinc
electrolyte through the process of electrowinning in a cell house. It was
determined that this step could not be successfully and safely implemented in
the time frame desired and also would require substantial capital expenditures
to produce the quality of zinc metal desired. Therefore the zinc process line
is producing a zinc sulfide that, while commercially saleable, does not produce
the same revenues as a pure zinc metal. The copper hydroxide/copper sulfate
line was successfully restarted in 1993 by utilizing processing techniques
verified during the zinc line development and pilot studies. While recycling
copper wastes has proven chemically feasible, revenues from recycling have
suffered because of the low volumes recycled.
Plans for 1994 include the start-up of process lines for cupric chloride waste
and zinc chloride waste. The chemistry and mechanical processes associated with
these lines have been tested, however, there is no assurance that they can be
commercially successful.
- --------------------------------------------------------------------------------
14
<PAGE>
METALLIC WASTE RECYCLING -- CONTINUED
- --------------------------------------------------------------------------------
A marketing research effort is being undertaken to identify additional metallic
waste streams that are currently being generated in the marketplace. The
emphasis of this research is to determine niche markets that are not currently
being served effectively and that generate wastes containing metals with higher
intrinsic value. After selection of a target market(s), a reasonable amount of
time will be required to conduct laboratory testing, locate sources of the waste
feedstocks and construct the process lines. There can be no assurance that this
effort will result in any expanded recycling capabilities.
Economic success at the Newman plant will require continued copper processing
and the operation of the yet-to-be-determined process line(s) which may target
waste streams heretofore not accepted at the facility. The continuation of the
zinc oxide line will depend, in large part, on the results of the current
processing of 750 tons of waste from a Kentucky cleanup site. This decision
will also take into account the amount of similar waste available in the
Midwest, the per ton recycling fee that can be commanded, and the quality and
marketability of the products produced by this process.
Based on the limited progress to date, there can be no assurance that Recontek
will be able to develop a commercially feasible business either by itself or in
conjunction with third parties. In particular Recontek's current recycling
capabilities are constrained both by limited types of hazardous waste that can
be recycled and by the volume that the existing Newman plant can process. As
required by PSG's Bank Credit Agreement, Recontek continues to operate at a
level which will not result in total pretax losses and capital expenditures
exceeding $300,000 per month. Absent additional capital expenditures, the
Newman facility cannot process sufficient volumes of waste to produce revenues
equaling or exceeding expenses and there can be no assurance that additional
capital expenditures will result in the ability to process such volumes.
While Recontek attempts to attract enough business to justify modifications to
reach "breakeven" at the Newman facility, real future economic success for
Recontek will depend upon sufficiently developing the recycling process to the
point where the construction of additional facilities is justified. Currently,
Recontek holds permits to build plants in Arizona and Indiana. Siting
agreements have also been reached with communities in Wisconsin and Washington
and permits to operate are being pursued in these two states as well. Recontek
has not developed plans to build and operate these other facilities and there
can be no assurance that it will do so.
If progress at the Newman facility does not continue and/or little or no
interest is being shown by third parties as to investing in or purchasing
Recontek, PSG may close the plant. In that event, the remaining assets of
Recontek would be written-off and provision would be made for "closure" as
required by Recontek's Part B permit. The total expense related to the Newman
plant closure is not expected to exceed $2.5 million. The Newman plant was
partially financed by the sale of $15 million of Resource Recovery Bonds. PSG
has provided cash collateral of $15 million to guarantee payment of these bonds.
If the Newman plant is closed the bonds will accelerate and the $15 million will
be utilized to make the required repayment.
- --------------------------------------------------------------------------------
15
<PAGE>
METALLIC WASTE RECYCLING - CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING STATISTICS (at year-end) 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees 47 161 173 146
SELECTED FINANCIAL DATA (in thousands) 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------
Operating revenues $ 134 $ 64 $ 348 $ 18
Operating expenses 7,776 71,080 /(a)/ 13,912 5,143
-------------------------------------------------
Loss before interest and taxes (7,642) (71,016) (13,564) (5,125)
Identifiable assets at year-end 884 1,202 /(c)/ 40,478 28,654
Net assets before debt at year-end/(b)/ (345) 212 /(c)/ 36,527 26,486
Capital additions - 2,202 6,841 15,947
Depreciation and amortization - 2,491 1,655 411
</TABLE>
/(a)/ Includes write-down of assets of $56.4 million.
/(b)/ Identifiable assets less current liabilities.
/(c)/ After write-down (see a).
- --------------------------------------------------------------------
ANALYSIS OF FINANCIAL DATA FOR 1991 THROUGH 1993 AND KNOWN TRENDS
- --------------------------------------------------------------------
As more fully described above, Recontek has been in a start-up phase since its
recycling plant opened in November 1990. The financial results are reflective
of this start-up phase, and in June 1993, operations at Recontek were scaled
back in order not to exceed a pretax loss of $300,000 per month as stipulated in
PSG's Bank Credit Agreement. Recontek has had no significant revenues.
Expenses consist primarily of the cost of operating its plant in Newman. In the
fourth quarter of 1992, Recontek's assets were written-down by $56.4 million
leaving only approximately $1 million of assets. Because of this write-down and
the current policy of expensing capital improvements at Recontek, there were no
capital additions nor any depreciation expense in 1993.
- --------------------------------------------------------------------------------
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Refer to pages 6 through 16 of this Annual Report for a description of each of
PSG's principal business segments, an analysis of financial data from 1991 to
1993 and a discussion of known trends.
REVENUES (EXCEPT FROM SEGMENTS). Interest and dividend income varied in each
year primarily as a result of the annual changes in the amounts of outstanding
cash, marketable securities and notes receivable and the interest rates earned.
Investment gains in each year resulted from the sale of a portion of the
marketable securities held in PSG's portfolio. In the fourth quarter of 1991,
the sale of one security resulted in a $20.1 million gain; this gain was
partially offset by a marketable securities write-down of $6.2 million.
The decrease in other revenues in each year from 1991 to 1993 is the result of
the sale of PSG's flight training business in February 1992. Included in other
revenue in 1992 is a $1 million gain from the sale of this business.
COSTS AND EXPENSES. The annual increase in cost of products sold from 1991 to
1993 is primarily a reflection of the growth in sales volume of PST. The
decrease in cost of services provided in each year from 1991 to 1993 is largely
due to the sale of the flight training business discussed above. Depreciation,
depletion and amortization decreased from 1991 to 1992 due largely to the sale
of the flight training business and the termination of depreciation on the two
747 aircraft which are held for sale. The decrease in depreciation between 1992
and 1993 is because Recontek recorded no depreciation expense in 1993 after its
fixed assets were written-off in 1992. General and administrative expenses
decreased from 1992 to 1993 due to reduced operations at Recontek and a one-time
reduction in PSG's corporate employee benefits expense. The 1992 write-down of
Recontek is described in Note 4 of the Notes to the Consolidated Financial
Statements. The aircraft write-downs relate, in 1993 and 1992, to two 747-100
aircraft held for sale which were written-down to the estimated market value at
each year-end and, in 1991, the loss related to those two 747s plus two 747-200
aircraft formerly leased to America West. In 1991, the two 747-200s were
written-down to zero when the aircraft were turned over to the aircraft lenders
pursuant to non-recourse financing arrangements and the two 747-100s, which were
returned to PSG, were written-down to year-end estimated market value. Interest
expense varied each year due to changes in the level of outstanding debt and
changes in the average interest rate. Included in interest expense are yen
foreign exchange losses of $3.9 million, $2 million and $1.4 million in 1993,
1992 and 1991, respectively. All yen denominated debt was repaid in June 1993.
CREDIT FOR TAXES. Refer to Notes 1 and 9 of the Notes to the Consolidated
Financial Statements for an explanation of the elements included in the credit
for taxes and for a discussion of the effects of adopting the Financial
Accounting Standards Board's Statement No. 109, "Accounting for Income Taxes."
17
<PAGE>
FINANCIAL CONDITION
Refer to the Consolidated Statements of Cash Flows which reflects the various
components of PSG's operating, financing and investing activities.
At December 31, 1993 PSG's principal source of liquidity was cash and cash
equivalents of $5 million, which was a $7.4 million reduction from December 31,
1992. The major components of this change in cash flow are as follows:
Cash flows from operating activities: PSG's primary source of cash was
------------------------------------
provided by operating activities. While PSG recorded a net loss in 1993, the
elimination of non-cash items resulted in positive cash flow from operations of
$14.7 million.
Cash flows from financing activities: The net reduction in debt in 1993 was
------------------------------------
approximately $31.4 million after subtracting the effect of a new debt
financing of $59.7 million discussed later.
Cash flows from investing activities: During 1993 PSG generated approximately
------------------------------------
$19.6 million principally from the sale of marketable securities, the
collection of notes receivable, and to a much lesser extent, the sale of oil
and gas property. Future periods are not expected to reflect these high levels
of investment sales and note collections. Capital expenditures were
approximately $1.4 million in 1993.
Discontinued operation: During 1993, the net cash provided to fund USTravel's
----------------------
operations totalled approximately $9 million.
In mid-1993 PSG refinanced five MD-80 aircraft. Out of the proceeds of the new
$59.7 million debt, PSG repaid existing aircraft debt in the amount of $25.1
million and repaid $29.9 million of borrowed funds under the Bank Credit
Agreement described in Note 3 of the Notes to the Consolidated Financial
Statements. The debt repaid included a note denominated in yen, which when
repaid, eliminated all of PSG's foreign exchange exposure.
All the net proceeds received from the sale of USTravel on March 14, 1994 (see
Note 2 of the Notes to the Consolidated Financial Statements) were applied
against the Bank Credit Agreement. With the application of these net proceeds,
all borrowed funds (approximately $21.1 million) were repaid and approximately
$16.4 million was applied to provide a cash collateral account to secure the
$22.7 million of outstanding letters of credit. The Bank Credit Agreement
requires that any remaining uncollateralized letters of credit be cash
collateralized by September 30, 1994. PSG expects to receive approximately $2
million of additional funds as a result of post-closing adjustments related to
the sale of USTravel. If any letters of credit remain uncollateralized, those
funds, net of transaction expenses, will be used for that purpose.
18
<PAGE>
PSG is pursuing a proposed financing to borrow $13.5 million to be secured by a
Boeing 737-300 which is on long-term lease to America West and which is
currently pledged under the Bank Credit Agreement. With the consummation of
this borrowing, the estimated net proceeds of $12.8 million will be used, if
necessary, to complete the collateralization of the remaining letters of credit
and to pay federal income taxes related to an IRS audit which is expected to be
finalized in early 1994 for the years 1988 through 1991. The estimated
liability of approximately $5 million has been accrued as part of PSG's tax
liability and is included in deferred income taxes (see Note 9 of the Notes to
the Consolidated Financial Statements). Any remaining cash proceeds from the
proposed financing will be used to increase PSG's working capital.
With the full collateralization of the letters of credit under the Bank Credit
Agreement, PSG will seek a new credit facility to replace the existing letters
of credit and provide the capability to issue additional letters of credit. PSG
will request that the new replacement credit facility reduce the level of
required cash collateral deposits for both replacement and new letters of
credit. No assurance can be given that either a new credit facility providing
for letters of credit or the new debt financing of the 737-300 previously
mentioned, will be finalized.
PSG's aircraft lease portfolio represents a large portion of PSG's long-term
assets and net investment. This aircraft lease portfolio also generates a
significant portion of the net cash flow of PSG. The lease portfolio of 21.3
equivalent aircraft are dominated by 16 aircraft leased to USAir including ten
BAe-146 aircraft that are grounded. Refer to pages 8 through 11 for a
discussion of USAir. If USAir's financial condition should deteriorate to a
point where it sought protection from its creditors it is almost certain USAir
would reject the leases for the ten BAe-146 aircraft it leases from PSG. If
USAir were to cease paying all rent to PSG, PSG's annual net cash flow would be
reduced by approximately $7.7 million. If USAir were to cease paying rent on
the ten BAe-146 leased to it, PSG's annual net cash flow would be reduced by
approximately $6.7 million. In addition, if the ten BAe-146 aircraft were
returned, PSG would likely sustain a major loss on disposition of these aircraft
which had a net book value of approximately $82.8 million at the end of 1993.
The recourse debt applicable to these ten aircraft totals approximately $20.4
million and the non-recourse debt totals approximately $23.6 million at December
31, 1993.
PSG believes that, absent a failure by USAir to meet its lease obligations to
PSG, its cash and cash equivalents plus projected cash flow are adequate to meet
the operating and capital needs of PSG in both the short and long-term except
for (i) any payment resulting from the IRS audit referred to above and (ii)
Recontek's financing requirements for the construction of any additional
recycling facilities. PSG's planned capital additions for 1994 are $1.4
million.
19
<PAGE>
PS GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1993 AND 1992
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992*
--------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,007 $ 12,399
Marketable securities, pledged 4,001 1,166
Accounts receivable, pledged 17,089 16,006
Notes receivable, pledged 4,345 7,632
Current portion of aircraft leases,
pledged 4,905 4,522
Prepaid expenses and other current
assets, pledged 3,598 4,012
Net investment in discontinued
operation, pledged 15,313
--------------------
Total current assets 54,258 45,737
Oil and gas property and other
equipment, at cost, pledged 42,564 48,943
Less accumulated depreciation,
depletion and amortization (19,519) (21,735)
--------------------
23,045 27,208
Aircraft under operating leases, at
cost, pledged 247,544 247,544
Less accumulated depreciation (98,526) (84,689)
--------------------
149,018 162,855
Investment in aircraft financing
leases, pledged 104,881 107,862
Aircraft held for sale, pledged 34,317 38,250
Other assets, substantially pledged 16,571 31,463
Net investment in discontinued
operation, pledged 17,782
--------------------
$382,090 $431,157
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,762 $ 5,834
Accrued interest 4,510 4,075
Other accrued liabilities 9,090 7,223
Current portion of long-term
obligations 38,672 56,618
--------------------
Total current liabilities 56,034 73,750
Long-term obligations 139,487 149,101
Deferred income taxes 34,491 49,015
Other liabilities and minority interest 30,179 19,048
Commitments and contingencies
Stockholders' equity:
Preferred stock, 1,000 shares
authorized, none issued
Common stock, par value $1 per
share, 10,500 shares authorized,
6,065 shares issued and
outstanding (6,039 in 1992) 6,065 6,039
Additional paid-in capital 98,407 98,307
Retained earnings 17,427 35,897
--------------------
Total stockholders' equity 121,899 140,243
--------------------
$382,090 $431,157
====================
</TABLE>
*Restated as described in Note 1.
- ------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
20
<PAGE>
PS GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS EXCEPT PER SHARE AMOUNT)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992* 1991*
---------------------------------
<S> <C> <C> <C>
Continuing operations:
Revenues:
Fuel sales and distribution $106,904 $ 85,450 $ 75,302
Aircraft leasing 35,920 36,412 46,200
Oil and gas 8,907 10,483 10,367
Metallic waste recycling 134 64 348
Interest, dividends and net
investment gains 5,757 8,156 20,197
Other 4,624 24,714
--------------------------------
157,622 145,189 177,128
--------------------------------
Cost and expenses:
Cost of products sold 112,509 88,441 77,843
Cost of services provided 7,121 12,930 29,879
Depreciation, depletion and
amortization 16,247 17,763 20,030
General and administrative expenses 5,649 8,308 7,869
Recontek write-down 56,371
Aircraft write-downs 17,000 9,933 31,223
Interest expense 20,767 19,969 23,043
--------------------------------
179,293 213,715 189,887
--------------------------------
Loss from continuing operations before
taxes, minority interest and
cumulative effect of change in
accounting (21,671) (68,526) (12,759)
Credit for taxes (7,495) (13,024) (3,001)
--------------------------------
Loss from continuing operations before
minority interest and cumulative
effect of change in accounting (14,176) (55,502) (9,758)
Minority interest in net loss of
subsidiaries 41 130 2,128
--------------------------------
Loss from continuing operations before
cumulative effect of change in
accounting (14,135) (55,372) (7,630)
Loss from discontinued operation, net
of tax (7,235) (12,210) (16,311)
Cumulative effect of change in accounting 2,900
--------------------------------
Net loss $(18,470) $(67,582) $(23,941)
================================
Loss per share:
Continuing operations $(2.33) $(9.28) $(1.39)
Discontinued operation (1.20) (2.05) (2.99)
Cumulative effect of change in
accounting .48
--------------------------------
Net loss $(3.05) $(11.33) $(4.38)
================================
Shares used in determination of loss
per share 6,057 5,967 5,463
================================
</TABLE>
*Restated as described in Note 1.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
<PAGE>
PS GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND
1991
(IN THOUSANDS)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992* 1991*
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $(11,235) $(55,372) $ (7,630)
Non-cash items:
Depreciation, depletion and 16,247 17,763 20,030
amortization
Cumulative effect of change in (2,900)
accounting
Recontek write-down 56,371
Aircraft write-downs 17,000 9,933 31,223
Marketable securities transactions (2,706) (3,430) (13,710)
Deferred taxes and other (586) (10,802) (353)
Changes in non-cash working capital
affecting cash from operating
activities:
Other current assets (1,456) 5,117 (715)
Other current liabilities 357 (6,312) 1,877
----------------------------------
Net cash provided from operating 14,721 13,268 30,722
activities
----------------------------------
Cash flows from financing activities:
Debt related:
Additions to long-term obligations 59,715 47,000
Reductions in long-term obligations (91,114) (26,018) (94,447)
Settlement of forward contract (1,657)
Equity related:
Stock options exercised 126 651
Cash dividends (788) (3,277)
----------------------------------
Net cash used in financing activities (31,273) (27,812) (50,724)
----------------------------------
Cash flows from investing activities:
Capital additions (1,430) (4,653) (14,191)
Proceeds from disposition of property
and equipment 410 11,838 692
Proceeds from disposition of marketable
securities 10,346 10,080 54,233
Changes in notes receivable and other 8,795 6,385 1,325
Purchase of minority-held Recontek (2,688)
shares
----------------------------------
Net cash provided from investing 18,121 23,650 39,371
activities
----------------------------------
Discontinued operation:
Loss from operations (7,235) (12,210) (16,311)
Deferred taxes (3,399) (5,489) (7,759)
Decrease in net assets 1,673 3,651 13,823
----------------------------------
Net cash used in discontinued (8,961) (14,048) (10,247)
operation
----------------------------------
Net increase (decrease) in cash and cash
equivalents (7,392) (4,942) 9,122
Cash and cash equivalents at beginning 12,399 17,341 8,219
of year
----------------------------------
Cash and cash equivalents at end of year $ 5,007 $ 12,399 $ 17,341
==================================
</TABLE>
*Restated as described in Note 1.
- -----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
22
<PAGE>
PS GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-In Retained
Shares Amount Capital Earnings
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1990 5,463 $5,463 $80,955 $131,485
Net loss (23,941)
Cash dividends ($.60 per share) (3,277)
-------------------------------------------
Balance at December 31, 1991 5,463 5,463 80,955 104,267
Net loss (67,582)
Common stock issued 576 576 17,352
Cash dividends ($.15 per share) (788)
-------------------------------------------
Balance at December 31, 1992 6,039 6,039 98,307 35,897
Net loss (18,470)
Common stock issued 26 26 100
-------------------------------------------
Balance at December 31, 1993 6,065 $6,065 $98,407 $ 17,427
===========================================
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts of
PSG and its subsidiaries. As more fully described in Note 2, USTravel is shown
as a discontinued operation. Amounts for 1991 and 1992 have been restated to
show USTravel as a discontinued operation. The minority interest of
subsidiaries reflected in the Consolidated Statements of Operations represents
the minority portion of Recontek (prior to February 1992) and the minority
portion of Statex.
CASH EQUIVALENTS - For purposes of these statements, PSG considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
DEPRECIATION AND AMORTIZATION - Depreciation to estimated residual values is
computed on the straight-line basis over the estimated useful lives of the
related assets, which are generally 15 to 18 years for leased aircraft and from
3 to 30 years for other property and equipment.
ACCOUNTING FOR OIL AND GAS PRODUCING ACTIVITIES - PSG follows the successful
efforts method of accounting for oil and gas exploration and development costs,
as described below:
LEASE ACQUISITIONS - PSG defers the costs of acquiring unproven oil and gas
leases until they are either assigned or sold to other parties or retained by
PSG for possible future development. An allowance for the abandonment of
unproven leases is provided using the straight-line method over the life of
the leases.
EXPLORATION AND DEVELOPMENT COSTS - The costs of drilling and equipping all
development wells are capitalized. The costs of drilling exploratory wells
are initially deferred. If proved reserves are discovered, the costs of the
wells are capitalized. If proved reserves are not discovered, the costs of
drilling the wells, net of any salvage value, are charged to expense.
DEPRECIATION, DEPLETION AND AMORTIZATION - Depletion of producing leases is
computed for individual fields using the unit-of-production method based on
estimated proved reserves. Depreciation and amortization of wells and related
equipment is computed using the unit-of-production method, based on proved
developed reserves.
MARKETABLE SECURITIES - Debt and equity securities are carried at the lower of
written-down cost or market. Included in 1993, 1992 and 1991 results of
operations are realized investment gains of $2,877,000, $1,764,000 and
$19,955,000, respectively. These gains were determined on a specific
identification basis.
AIRCRAFT HELD FOR SALE - Two 747-100 freighter aircraft are classified as
aircraft held for sale. These aircraft are carried at their estimated market
value.
24
<PAGE>
NET LOSS PER SHARE - Net loss per share is based on the weighted average number
of common shares outstanding during the period.
CREDIT FOR TAXES - Effective January 1, 1993, PSG adopted FASB Statement No.
109, "Accounting for Income Taxes." Under Statement 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Prior to the adoption of Statement 109, income taxes were
determined using the deferred method whereby income and expense items that were
reported in different years in the financial statements and tax returns were
measured at the tax rate in effect in the year the difference originated. As
permitted by Statement 109, PSG has elected not to restate the financial
statements of prior years. The cumulative effect of the change in accounting
shown for 1993 was a gain of $2,900,000 - $.48 per share, although the effect of
the change on the results of operations for the year ended December 31, 1993 was
not material.
Investment tax credits are accounted for using the flow-through method.
2. SALE OF USTRAVEL
On March 14, 1994 the travel management business operated by USTravel was sold.
Proceeds from the sale, totaling approximately $40 million, will result in an
estimated $15 million after-tax gain to be recorded in the first quarter of
1994. Operating revenues of the discontinued travel management segment were
$110,875,000, $117,799,000 and $120,679,000 in 1993, 1992 and 1991,
respectively.
The amounts shown for discontinued operation on the accompanying consolidated
statements of operations are net of tax credits of $2,981,000, $5,420,000 and
$7,653,000 in 1993, 1992 and 1991. Included in the net income tax benefit from
discontinued operations were deferred tax credits of $3,399,000, $5,409,000 and
$7,759,000 for the years 1993, 1992 and 1991. These deferred taxes related to
differences in the recognition of revenue and expense for tax and financial
statement purposes. The major differences were in the treatment of
depreciation, amortization of intangibles and bad debts.
Interest expense charged to the discontinued operation by PSG under the terms of
a revolving credit agreement with USTravel was $4,989,000, $4,798,000 and
$5,425,000 in 1993, 1992 and 1991.
3. LONG-TERM OBLIGATIONS AND LIQUIDITY
PSG has a Bank Credit Agreement which was originally entered into on November 5,
1990 and has subsequently been amended several times. No further borrowings are
permitted under this agreement. Restrictions in the Bank Credit Agreement
prohibit PSG from
25
<PAGE>
- -----------------------------------------------------------------------------
paying any dividends and limit pretax losses by Recontek to $300,000 per month.
See Note 4 for a description of the write-down of Recontek's assets made in
1992.
At December 31, 1993 the utilization under the Bank Credit Agreement totaled
$46.2 million. This was composed of $23 million of direct borrowings and $23.2
million of outstanding letters of credit.
With the sale of USTravel on March 14, 1994 discussed in Note 2, all remaining
borrowed funds under the Bank Credit Agreement were repaid and cash collateral
was provided for all but $6.3 million of the outstanding letters of credit. PSG
is required to provide cash collateral for the remaining letters of credit not
later than September 30, 1994. PSG contemplates providing this cash collateral
through some combination of operating cash flow, the expected placement of debt
on a 737-300 aircraft and the sale of marketable securities.
Long-term obligations at December 31, excluding current maturities, consist of
the following (in thousands):
<TABLE>
<CAPTION>
1993 1992
---------------------
<S> <C> <C>
Loans secured by ten BAe-146 aircraft; bearing interest at
12% to 12.5%; due 2000 $ 40,614 $ 43,981
Loans secured by five MD-80 aircraft; bearing interest at
8.1% to 10.7%; due 1998 and 1999 45,624
Loans secured by two MD-80 aircraft; bearing interest at
9.6% and 11.9%; due 2004 and 2006 23,719 24,567
Payment obligation certificates secured by three MD-80
aircraft; bearing interest at 7.7%; repayable in
Japanese yen; repaid in 1993 17,683
Note payable secured by one Boeing 737 aircraft; bearing
interest at 11.2%; due 2006 14,530 14,859
Resource Recovery Bonds secured by letter of credit;
interest reset weekly (3.2% at December 31, 1993);
due 2009 (see Note 4) 15,000 15,000
Bank Credit Agreement 30,500
Other 2,511
---------------------
$139,487 $149,101
=====================
</TABLE>
PSG paid interest of $21,415,000, $22,888,000 and $29,673,000 in 1993, 1992 and
1991, respectively (including interest allocated to the discontinued operation).
Principal payments on existing long-term obligations in each of the four years
after 1994 are as follows: $13,973,000 in 1995; $17,969,000 in 1996; $22,410,000
in 1997; and $19,626,000 in 1998.
- -----------------------------------------------------------------------------
26
<PAGE>
4. Recontek
In February 1992 PSG exchanged 422,000 shares of PSG common stock for all of the
remaining outstanding shares of Recontek common stock not already owned by PSG.
The transaction resulted in an increase of $16,868,000 in stockholders' equity
and goodwill on the Consolidated Statement of Financial Position.
In the fourth quarter of 1992 PSG wrote-down the assets related to Recontek by
$56.4 million. The decision to make this write-down was a result of (i) the
requirement under the Bank Credit Agreement (see Note 3) that operations be
scaled back considerably at Recontek, (ii) the delays in the development of the
recycling processes at Recontek's Newman, Illinois facility; (iii) projected
losses from the Newman facility (without major capital improvements); and (iv)
the continuing overall uncertainty about Recontek's ultimate economic viability.
The write-down reduced Recontek's noncurrent assets to $1 million.
If progress at the Newman facility does not continue and/or little or no
interest is shown by third parties as to investing in or purchasing Recontek,
PSG may close the plant. In that event, the remaining assets of Recontek would
be written-off and provision would be made for "closure" as required by
Recontek's Part B permit. The total expense related to the Newman plant closure
is not expected to exceed $2.5 million. The Newman plant was partially financed
by the sale of $15 million of Resource Recovery Bonds. PSG has provided cash
collateral of $15 million to guarantee payment of these bonds. If the Newman
plant is closed the bonds will accelerate and the $15 million will be utilized
to make the required repayment.
5. SECURITIES LITIGATION
In 1992 three related lawsuits were filed against PSG, its directors and
officers by stockholders in the United States District Court for the Southern
District of California and a fourth lawsuit was filed in the United States
District Court for the Central District of Illinois (the Illinois Case). All of
the Southern District of California cases were consolidated into a single case
(the California Case). Both the California Case and the Illinois Case were
purported class actions alleging that the defendants made materially false and
misleading statements in public statements in filings with the Securities and
Exchange Commission and other reports, or omitted in such materials information
necessary to make them not misleading, and that the defendants are therefore
liable to the plaintiff class for declines in the price of PSG's common stock
during a defined class period.
In the fall of 1992 PSG obtained dismissals of both the California Case and
Illinois Case. In each instance, however, the court granted the plaintiffs
leave to file an amended petition. In December 1992 the California Case and the
Illinois Case were consolidated in the Southern District of Illinois (the
Consolidated Case). In July 1993 the plaintiffs filed an amended complaint in
the Consolidated Case. In September 1993 the defendants filed a motion to
dismiss the consolidated complaint. This motion was denied in February 1994.
The defendants filed an answer to the complaint and discovery in the case is now
proceeding.
27
<PAGE>
- -----------------------------------------------------------------------------
The damages sought by the plaintiffs are for an unspecified amount. PSG
believes the claims made in the Consolidated Case, are without merit. PSG
expects to defend vigorously against all such claims and to obtain a favorable
judgment. However, the ultimate outcome of this litigation is unknown at the
present time. Accordingly, no provision for any liability that might result has
been made in the accompanying Consolidated Financial Statements. If it is
finally determined that PSG has liability in the Consolidated Case, PSG believes
such liability will not have a material adverse effect on PSG's financial
condition.
6. PREFERRED SHARE PURCHASE RIGHTS PLAN
PSG has a Preferred Share Purchase Rights Plan (sometimes called a "poison
pill"). Pursuant to the Plan one preferred share purchase right (Right) has
been issued for and trades with each outstanding share of common stock. Each
Right entitles the holder to buy 1/100th of a share of junior participating
preferred stock, Series D, at an exercise price of $100 per Right. The Rights
can be redeemed at any time by PSG for $.05 per Right prior to a party becoming
an "Acquiring Person" (as defined in the Plan and described below). The Rights
become exercisable and separately transferable only if a party becomes an
Acquiring Person or announces a tender offer for 30% or more of PSG's common
stock. Upon becoming exercisable the Rights also permit a holder (other than an
Acquiring Person), (i) in the event PSG is merged with another company, to
receive a number of shares of common stock of the surviving company having a
market value of twice the exercise price of each Right or (ii) in the event a
party becomes an Acquiring Person or in the event of self-dealing by a control
shareholder, to receive a number of shares of PSG stock having a market value of
twice the exercise price of each Right. PSG has reserved 90,000 shares of
junior participating preferred stock, Series D, for issuance if necessary. The
Plan defines an Acquiring Person as any party that acquires 20% or more of PSG's
common stock, except that Warren E. Buffet, Berkshire Hathaway Inc. or their
affiliates only become Acquiring Persons if they acquire 45% or more of PSG's
common stock.
7. COMMON STOCK OPTIONS
Changes in stock options outstanding during 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Options Option
Outstanding Prices
----------- ---------------
<S> <C> <C>
Balance at December 31, 1991 19,800 $13.90- 29.75
Assumed 221,200 3.41- 23.89
Exercised (154,000) 3.41- 8.53
Canceled (19,000) 3.41- 23.89
-----------
Balance at December 31, 1992 68,000 3.41- 29.75
Exercised (26,400) 3.41- 8.53
Canceled (18,500) 3.41- 8.53
-----------
Balance at December 31, 1993 23,100 3.41- 29.75
===========
</TABLE>
- ----------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
At December 31, 1993 and 1992, 19,100 and 44,200 options, respectively, were
exercisable. There were 209,200 shares available for grant at the end of both
1993 and 1992. The options assumed relate to the Recontek Stock Option Plan
that was assumed in February 1992 when PSG acquired all of the remaining
outstanding shares of Recontek not already owned by PSG.
8. AIRCRAFT LEASES AND AIRCRAFT HELD FOR SALE
At December 31, 1993 PSG leased jet aircraft to three commercial airlines under
agreements accounted for as operating or financing leases. During the fourth
quarters of 1993, 1992 and 1991, PSG wrote-down its investment in two 747-100s
(which have been converted to freighter aircraft) by $17 million, $9.9 million
and $5.8 million, respectively. These two aircraft are currently held for sale.
Included in other long-term liabilities at December 31, 1993 is $24.2 million
($11.8 million at December 31, 1992) relating to the freighter conversion
program and this amount is payable from future sales proceeds. PSG is unable to
predict when these aircraft will be sold, thus the aircraft and related
liability are carried as long-term.
During the third quarter of 1991, PSG wrote-off its $25.4 million investment in
two 747-200 aircraft previously leased to America West when America West
rejected the leases after filing bankruptcy. The aircraft were returned to
lenders.
The future minimum lease payments scheduled to be received on aircraft currently
under lease are (in thousands):
<TABLE>
<CAPTION>
Operating Financing
Leases Leases
---------------------------------
<S> <C> <C>
1994 $ 26,642 $ 11,926
1995 26,642 11,976
1996 26,642 12,318
1997 25,172 14,983
1998 23,194 12,835
Later years 46,680 76,606
---------------------------------
Total $174,972 $140,644
=================================
</TABLE>
<TABLE>
<CAPTION>
1993 1992
-------------------------
<S> <C> <C>
Information on financing leases (in thousands):
Total investment $109,786 $112,384
Unguaranteed residual values (included
in total investment) 28,240 28,240
Unearned income 59,098 68,472
</TABLE>
Aircraft under operating leases are depreciated to estimated residual values
which aggregate approximately $41.3 million, or approximately 18% of original
cost. Rent payments from USAir represent a major portion of total aircraft
lease revenue. USAir has suffered major losses in the last few years and is
attempting to reduce its costs to remain
- --------------------------------------------------------------------------------
29
<PAGE>
competitive. There will be a material adverse impact on PSG if USAir fails in
this attempt and ceases to pay rent on some or all of the aircraft leased to it.
9. CREDIT FOR TAXES
As discussed in Note 1, PSG adopted FASB Statement No. 109 effective January 1,
1993.
The credit for taxes from continuing operations was comprised of (in thousands):
<TABLE>
<CAPTION>
Liability Deferred Deferred
Method Method Method
1993 1992 1991
------------------------------------
<S> <C> <C> <C>
Current taxes:
Federal $ 38 $ 62 $ 48
State 142 3 3
Deferred taxes (7,675) (13,089) (3,052)
------------------------------------
$(7,495) $(13,024) $(3,001)
====================================
</TABLE>
PSG paid income taxes of $152,000, $71,000 and $88,000 in 1993, 1992 and 1991,
respectively. In addition, refunds of prior years' income taxes of $67,000,
$1,258,000 and $1,580,000 were received in 1993, 1992 and 1991, respectively.
There is a Federal tax net operating loss carryforward of $83,797,000 at
December 31, 1993, which expires beginning in 2005. A Separate Return
Limitation Year (SRLY) net operating loss carryforward in the amount of
$5,132,000 (related to Recontek) expires in 2005. A California net operating
loss carryforward of $16,761,000 is available for years beginning after 1993 and
starts expiring in 1995. The amount of unused investment tax credit for tax
return purposes at December 31, 1993 is $12,981,000, which expires in 2000
through 2002.
A reconciliation between the amount computed by multiplying loss from continuing
operations before taxes and minority interest by the statutory Federal rate, and
the amount of reported taxes is as follows:
<TABLE>
<CAPTION>
Percent of Pretax
Loss
---------------------------------------
Liability Deferred Deferred
Method Method Method
1993 1992 1991
---------------------------------------
<S> <C> <C> <C>
Statutory Federal rate (35)% (34)% (34)%
Increase (reductions) in taxes resulting from:
Non-benefit for write-downs 14
State and foreign taxes net of Federal income
tax benefit 1 2
Losses of subsidiary not consolidated for tax 8
Other (1) 1
---------------------------------------
(35)% (19)% (24)%
=======================================
</TABLE>
30
<PAGE>
- -------------------------------------------------------------------------------
Significant components of PSG deferred tax liabilities and assets for Federal
and state income taxes as of December 31, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation $ 99,691
Other 8,431
----------
Total deferred tax liabilities 108,122
Deferred tax (assets):
Aircraft write-downs (13,628)
Financing leases (6,102)
Net effect of tax benefit transfer agreement (3,529)
Recontek write-down (18,263)
Net operating loss carryforward (16,856)
Capital loss carryforward (3,346)
Investment tax credit carryforward (12,981)
AMT credit carryforward (6,571)
Other (5,768)
----------
Total deferred tax (assets) (87,044)
Valuation allowance 13,928
----------
Net deferred tax (assets) (73,116)
----------
Net deferred tax liability $ 35,006
==========
</TABLE>
The valuation allowance against deferred tax assets relates primarily to capital
losses for which future realization is uncertain. Included with other current
liabilities on the accompanying Consolidated Statement of Financial Position is
$515,000 of the net deferred tax liability.
Deferred taxes from continuing operations result from timing differences in the
recognition of revenue and expense for tax and financial statement purposes.
The sources of these differences for 1992 and 1991 under the deferred method
were as follows (in thousands):
<TABLE>
<CAPTION>
Deferred Deferred
Method Method
1992 1991
--------------------
<S> <C> <C>
Depreciation and depletion $(18,867) $ 12,562
Recontek write-down (9,507)
Aircraft write-downs 6,205 (12,782)
Net operating loss carryforward 3,253 (3,030)
Marketable securities transactions 4,049 477
Financing and leveraged leases 78 (1,792)
Net effect of tax benefit transfer agreements (265) (411)
Foreign currency translation 661 59
Intangible drilling costs 236 511
Amortization of start-up costs 523 392
Other 545 962
--------------------
$(13,089) $ (3,052)
====================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
- -------------------------------------------------------------------------------
The Internal Revenue Service is in the final stages of auditing PSG's
consolidated tax returns covering the years 1988 through 1991. The IRS has
preliminarily proposed a different amortization period for intangibles. It is
expected that the tax deficiency and accrued interest will be approximately $5
million. This liability has been accrued in deferred taxes. The IRS audit will
also reduce the net operating loss carryforwards as well as increase the tax
basis of intangibles.
10. BUSINESS SEGMENTS
PSG operates four principal business segments - fuel sales and distribution,
aircraft leasing, oil and gas production and development, and metallic waste
recycling.
Revenues from USAir, Inc. equaled 18%, 20% and 17% of total revenues in the
years 1993, 1992 and 1991, respectively.
Fuel sales and distribution revenues from one airline customer amounted to 11%,
13% and 15% of total revenues in 1993, 1992 and 1991. Similar revenues from
another airline amounted to 14% of total revenues in 1993. Because of the low
margins in this segment, the loss of individual customers likely will not have a
material effect on consolidated operating results.
Revenues; income (loss) before interest, taxes, minority interest and cumulative
effect of change in accounting; depreciation, depletion and amortization;
identifiable assets; and capital additions for each of PSG's principal business
segments for the three years ended December 31, 1993 are included under
"Selected Financial Data" on pages 6 through 16 of this Annual Report and are an
integral part of these Consolidated Financial Statements. A reconciliation of
this Selected Financial Data for the principal business segments follows (in
thousands):
<TABLE>
<CAPTION>
1993 1992 1991
-----------------------------------
<S> <C> <C> <C>
REVENUES FROM CONTINUING OPERATIONS:
Principal business segments $151,865 $132,409 $132,217
Corporate and other 5,757 12,780 44,911
-----------------------------------
Total $157,622 $145,189 $177,128
===================================
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INTEREST, TAXES, MINORITY INTEREST
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING:
Principal business segments $ (2,938) $(52,939) $ (8,036)
Corporate and other 2,034 4,382 18,320
-----------------------------------
Total $ (904) $(48,557) $ 10,284
===================================
DEPRECIATION, DEPLETION AND AMORTIZATION:
Principal business segments $ 16,130 $ 17,264 $ 17,439
Corporate and other 117 499 2,591
-----------------------------------
Total $ 16,247 $ 17,763 $ 20,030
===================================
</TABLE>
- -------------------------------------------------------------------------------
32
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992 1991
---------------------------------
<S> <C> <C> <C>
IDENTIFIABLE ASSETS:
Principal business segments $341,375 $366,314 $416,340
Corporate and other 25,402 47,061 80,237
Discontinued operations 15,313 17,782 20,268
---------------------------------
Total $382,090 $431,157 $516,845
=================================
CAPITAL ADDITIONS:
Principal business segments $ 1,427 $ 4,642 $ 13,202
Corporate and other 3 11 989
---------------------------------
Total $ 1,430 $ 4,653 $ 14,191
=================================
</TABLE>
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the Consolidated
Statement of Financial Position, when it is practicable to estimate such value.
In cases where quoted market prices are not available, fair value is based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flow. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the financial
instrument. Statement 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
PSG.
The following methods and assumptions were used by PSG in estimating fair value
disclosures for its financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amounts approximate fair value
because of the short maturity of these items.
MARKETABLE SECURITIES: The fair value for marketable securities is based on
quoted market prices.
NOTES RECEIVABLE: The fair value for notes receivable are estimated using
discounted cash flow analyses, using interest rates which might be offered if
the notes were renegotiated currently.
DEBT INSTRUMENTS: The carrying value of PSG's borrowings under its Bank
Credit Agreement represents fair value since repayment occurred in March 1994.
The fair value of PSG's other debt is estimated using discounted cash flow
analyses, based on management's best estimate of current market rates for
similar types of borrowing arrangements.
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
LETTERS OF CREDIT: The fair value of letters of credit is calculated by
discounting the fees on the letters of credit using the interest rate in PSG's
Bank Credit Agreement.
The estimated fair value of PSG's financial instruments at December 31, 1993 and
1992 (in thousands) is as follows:
<TABLE>
<CAPTION>
1993 1992
------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,007 $ 5,007 $ 12,399 $ 12,399
Marketable securities 8,901 9,818 16,541 16,516
Notes receivable 9,310 9,683 19,303 20,410
------------------------------------------------
$ 23,218 $ 24,508 $ 48,243 $ 49,325
================================================
Financial liabilities:
Debt instruments $178,159 $182,017 $205,720 $203,379
================================================
Unrecognized financial instruments:
Letters of credit - $ 4,871 - $ 4,877
================================================
</TABLE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
1993 QUARTERS First Second Third Fourth
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Continuing operations:
Revenues $41,411 $39,410 $38,397 $ 38,404
Gross profit (loss) 6,333 5,108 4,562 (11,258)
Net loss from continuing operations (922) (2,133) (686) (10,394)
Net loss from discontinued operation (517) (424) (2,063) (4,231)
Change in accounting 2,900
-------------------------------------------
Net income (loss) 1,461 (2,557) (2,749) (14,625)
Income (loss) per share:
Continuing operations (.15) (.35) (.11) (1.71)
Discontinued operation (.09) (.07) (.34) (.70)
Change in accounting .48
-------------------------------------------
Net income (loss) .24 (.42) (.45) (2.41)
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE>
<TABLE>
<CAPTION>
1992 QUARTERS First Second Third Fourth
- ----------------------------------------------------------------------------------
Continuing operations:
<S> <C> <C> <C> <C>
Revenues $33,438 $30,496 $38,852 $ 42,403
Gross profit (loss) 7,195 5,951 5,969 (59,364)
Net loss from continuing operations (433) (1,637) (1,166) (52,136)
Net loss from discontinued operation (1,973) (2,869) (3,431) (3,937)
-------------------------------------------
Net loss (2,406) (4,506) (4,597) (56,073)
Loss per share:
Continuing operations (.08) (.27) (.19) (8.64)
Discontinued operation (.34) (.48) (.57) (.65)
-------------------------------------------
Net loss (.42) (.75) (.76) (9.29)
</TABLE>
Gross profit (loss) is income (loss) from continuing operations before interest
expense, general and administrative expenses, minority interest, credit for
taxes and cumulative effect of change in accounting. In the fourth quarter of
1992, PSG wrote-down Recontek's assets by $56.4 million. In the fourth quarters
of 1993 and 1992, write-downs of $17 million and $9.9 million, respectively,
were recorded related to two 747-100 aircraft previously leased to Pan Am and
currently held for sale.
13. OIL AND GAS OPERATIONS (UNAUDITED)
CHANGES IN ESTIMATED NET PROVED DEVELOPED AND UNDEVELOPED RESERVES BASED ON
INTERNAL RESERVE REPORTS (IN THOUSANDS):
<TABLE>
<CAPTION>
Oil Gas
(Bbls)* (Mcf)*
--------------------
<S> <C> <C>
December 31, 1990 7,235 5,714
Revisions of previous estimates 294 978
Extensions, discoveries and other additions 831
Purchases of reserves in place 864 149
Sales of reserves in place (1) (29)
Production (447) (648)
--------------------
December 31, 1991 8,776 6,164
Revisions of previous estimates 122 (678)
Sales of reserves in place (26) (78)
Production (434) (559)
--------------------
December 31, 1992 8,438 4,849
Revisions of previous estimates (977) (525)
Extensions, discoveries and other additions 2 90
Sales of reserves in place (161) (210)
Production (446) (467)
--------------------
December 31, 1993 6,856 3,737
====================
* Bbls = barrels; Mcf = one thousand cubic feet.
35
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
Net proved developed reserves at December 31, 1991 5,763 6,164
====================
Net proved developed reserves at December 31, 1992 5,298 4,849
====================
Net proved developed reserves at December 31, 1993 4,665 3,737
====================
</TABLE>
CAPITALIZED COSTS AND COSTS INCURRED (IN THOUSANDS) - The aggregate costs at
December 31, 1993, 1992 and 1991 relating to oil and gas producing activities
(all of which are in the continental United States) are presented below for
capitalized costs and costs incurred.
<TABLE>
<CAPTION>
1993 1992 1991
--------------------------------
<S> <C> <C> <C>
Capitalized costs:
Proved properties $ 34,457 $ 41,057 $ 40,247
Unproved properties net of allowance for
abandonments 5 8 3
--------------------------------
Total 34,462 41,065 40,250
Accumulated depreciation, depletion and
amortization (14,533) (17,394) (16,589)
--------------------------------
Net capitalized costs $ 19,929 $ 23,671 $ 23,661
================================
Costs incurred:
Property acquisition costs $ 10 $ 25 $ 848
Exploration costs, including unsuccessful wells 8 12 7
Development costs 1,324 2,155 5,285
--------------------------------
Total expenditures $ 1,342 $ 2,192 $ 6,140
================================
</TABLE>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES (IN THOUSANDS) - The
results of operations for oil and gas producing activities (excluding general
and administrative expenses and interest costs) for the years ended December 31,
1993, 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
-------------------------------
<S> <C> <C> <C>
Oil and gas revenues $ 8,907 $10,483 $10,367
Production costs (5,501) (5,409) (4,418)
Exploration costs (8) (12) (457)
Depreciation, depletion and amortization (1,954) (2,007) (1,828)
-------------------------------
Income before income tax expense 1,444 3,055 3,664
Income tax expense (491) (1,226) (1,443)
-------------------------------
Income from operations for producing activities $ 953 $ 1,829 $ 2,221
===============================
</TABLE>
36
<PAGE>
Standardized Measure of Discounted Future Net Cash Flows (IN THOUSANDS)
Pursuant to Statement of Financial Accounting Standards No. 69, all publicly
traded enterprises having significant oil and gas producing activities are
required to present a standardized measure of the discounted future net cash
flows relating to proved oil and gas reserve quantities, as well as the changes
in significant components of the standardized measure from prior periods. There
are numerous uncertainties inherent in estimated quantities of proved reserves
and in projecting the future rates of production and timing of development
expenditures. The future cash inflows determined from such reserve data
represent estimates only. Moreover, the present values should not be construed
as the current market values of PSG's oil and gas reserves or the costs that
would be incurred to obtain equivalent reserves. A market value determination
would include many additional factors including (i) anticipated future increases
or decreases in oil and gas prices and production and development costs; (ii) an
allowance for return on investment; (iii) regulatory actions; (iv) the value of
additional reserves, not considered proved at the present time, which may be
recovered as a result of further exploration and development activities; and (v)
other business risks. The tables below present the required information
relating to PSG's proved oil and gas reserves as of December 31, 1993, 1992 and
1991. The future cash inflows are calculated using the market price of oil and
gas at the end of the year presented.
<TABLE>
<CAPTION>
1993 1992 1991
----------------------------------
<S> <C> <C> <C>
Future cash inflows $ 98,741 $167,669 $172,351
Future production costs (56,036) (82,945) (73,257)
Future development and abandonment costs (7,346) (8,866) (7,917)
----------------------------------
Future net cash inflows before income tax/(a)/ 35,359 75,858 91,177
Future income tax expenses (7,347) (18,307) (29,954)
----------------------------------
Future net cash flows 28,012 57,551 61,223
Discount factor at 10% (15,531) (27,548) (26,641)
----------------------------------
Standardized measure of discounted future
net cash flows $ 12,481 $ 30,003 $ 34,582
==================================
</TABLE>
(a) The discounted present value at 10% of future net cash inflows before
income taxes was $15,254, $36,831 and $48,159 as of December 31, 1993, 1992
and 1991, respectively.
<TABLE>
<CAPTION>
1993 1992 1991
------------------------------
<S> <C> <C> <C>
Year-end market price used for
future cash inflows:
Crude oil - per barrel $12.50 $18.00 $18.20
Natural gas - per thousand cubic feet 2.15 2.00 1.60
</TABLE>
37
<PAGE>
The following are the principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31, 1993, 1992
and 1991:
<TABLE>
<CAPTION>
1993 1992 1991
--------------------------------
<S> <C> <C> <C>
Standardized measure at beginning of the year $ 30,003 $34,582 $ 49,170
Revenues less product costs for the year (3,385) (4,194) (5,869)
Net change in sales prices net of production costs (15,264) (5,296) (29,250)
Purchases of reserves in place 3,998
Extensions and discoveries 130 4,913
Changes in estimated future development costs 669 (1,560) (1,008)
Costs incurred that reduced future development
costs 520 1,304 1,301
Revisions of previous quantity estimates (2,946) 45 2,446
Accretion of discount 3,683 4,816 7,076
Net change in income taxes 4,055 5,104 8,015
Sale of reserves in place (800) (167) (18)
Changes in production rates (timing) and other (4,184) (4,631) (6,192)
--------------------------------
Standardized measure at end of year $ 12,481 $30,003 $ 34,582
================================
</TABLE>
38
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
PS GROUP, INC.
We have audited the accompanying consolidated statements of financial position
of PS Group, Inc. as of December 31, 1993 and 1992, and the related consolidated
statements of operations, cash flows, and stockholders' equity for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PS Group, Inc. at
December 31, 1993 and 1992, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes.
/s/ Ernst & Young
San Diego, California
February 18, 1994,
except for Notes 2 and 3, as to which the date is
March 14, 1994
39
<PAGE>
PS GROUP, INC.
DIRECTORS AND OFFICERS
DIRECTORS
PS GROUP, INC.
Charles E. Rickershauser, Jr.
Chairman of the Board of
PS Group, Inc.
George M. Shortley
President & Chief Executive
Officer of PS Group, Inc.
Howard P. Allen
Chairman of the Executive
Committee, SCEcorp and
Southern California Edison
Company
Robert M. Fomon
President, Robert M. Fomon
and Company (a private
investment company)
J.P. Guerin
Private Investor
Donald W. Killian, Jr.
Attorney-at-Law, of Counsel to Call, Clayton & Jensen
Gordon C. Luce
Independent Financial
Advisor
OFFICERS
PS GROUP, INC.
Charles E. Rickershauser, Jr.
Chairman of the Board
George M. Shortley
President & Chief Executive Officer
Lawrence A. Guske
Vice President - Finance &
Chief Financial Officer
Johanna Hinds
Vice President & Controller
Dennis C. O'Dell
Vice President, General
Counsel & Secretary
OFFICERS
PS TRADING, INC.
Douglas A. Jones
President
OFFICERS
STATEX PETROLEUM, INC.
B. Andrew Wilkinson
President & Chief Operating
Officer
Dhar Carman
Executive Vice President & Chief Financial Officer
40
<PAGE>
PS GROUP, INC.
INVESTOR INFORMATION
COMMON STOCK TRANSFER AND
DIVIDEND DISBURSING AGENT & REGISTRAR
- -------------------------------------
Questions regarding stockholder's accounts should be directed to:
Chemical Trust Company of California
450 West 33rd Street, 8th Floor
New York, New York 10001
Attention: Shareholders' Relations
800-356-2017
Common Stock listed on the New York and Pacific Stock Exchanges. Symbol: PSG
CORPORATE OFFICES
- -----------------
4370 La Jolla Village Drive, Suite 1050
San Diego, California 92122
619-546-5001
AUDITORS
- --------
Ernst & Young
501 West Broadway, Suite 1200
San Diego, California 92101
ANNUAL MEETING
- --------------
May 24, 1994 at 11:00 a.m.
Marriott Hotel - La Jolla
4240 La Jolla Village Drive
La Jolla, California 92037
<TABLE>
<CAPTION>
<S> <C> <C>
MARKET PRICES OF COMMON STOCK
- --------------------------------
High Low
------ ------
1992:
First quarter 35 1/4 23 3/4
Second quarter 25 1/4 12 3/4
Third quarter 18 1/2 13 3/4
Fourth quarter 15 3/4 8
1993:
First quarter 16 9
Second quarter 12 1/2 9 7/8
Third quarter 12 5/8 10 1/4
Fourth quarter 15 1/2 10 1/8
</TABLE>
DIVIDENDS ON COMMON STOCK
- -------------------------
No cash dividends were declared in 1993. Refer to Note 3 of the Notes to the
Consolidated Financial Statements for a description of the restriction on the
payment of future cash dividends.
INVESTOR RELATIONS
- ------------------
As of March 11, 1994 there were 1,774 holders of record of PSG's common stock.
PSG will supply to stockholders, upon written request and without charge, a copy
of PSG's annual report on Form 10-K for the year 1993.
41
<PAGE>
EXHIBIT (22) SUBSIDIARIES
PS GROUP, INC.
1993 ANNUAL REPORT ON FORM 10-K
(as of March 30, 1994)
<TABLE>
<CAPTION>
Jurisdiction
Name of Corporation of Incorporation
- ------------------- ----------------
<S> <C>
PS Trading, Inc. California
PS Overseas Finance N.V. Netherlands Antilles
Recontek, Inc. Delaware
Statex Petroleum, Inc.* California
</TABLE>
* The Company owns an 80% interest in Statex.
